Two months ago, on 8 May, the blog suggested that ‘Sell in May and Go Away” was likely to prove good advice this year. Since then, most major stock markets have fallen dramatically, with the S&P 500 down by 9%.
The proximate cause of the blog’s pessimism then was the onset of the Greek/eurozone crisis. And this, of course, is still getting worse not better. But from a chemical industry viewpoint, it is the chart above, and its implications for H2 demand, that is the real worry at mid-year.
China has been the mainstay of chemical industry demand for over a year. Now, it appears that both of its key drivers are reversing:
• The government is cutting back on its stimulus programme, with lending down 31% versus 2009 levels, as it worries about soaring property prices and social unrest
• Speculators are slowly realising that oil markets are over-supplied, and crude oil prices are now off 12% from their early May peak.
In turn, these two events have caused problems for Asian polyolefin markets. Speculators had taken full advantage of China’s lax lending policies to invest in oil-related product areas. As a result, trading in linear low density polyethylene (LLDPE) had soared on the Dalian futures market.
This can be seen in the above chart. It highlights how WTI crude prices (blue line) and LLDPE (red dotted line) had, most unusually, been trading virtually in parallel. Now, however, this relationship has broken down.
And now it is emerging, as long feared by the blog and other observers, that polyethylene (PE) inventories have indeed been driven by this speculation in crude. As my fellow blogger, John Richardson, notes this week, “Sinopec’s stock levels are reported to be at 700,000-800,000 tonnes compared with the usual 500,000 tonnes“.
He adds that this is due to Q1’s high level of PE imports, which reached 865KT in March, versus a 2009 average of 610KT. And this was in spite of a 100KT increase in China’s domestic production to 800KT.
With China’s auto sales falling 5% in June versus May, it seems unlikely that the torrid pace of stimulus-inspired demand growth will continue into H2. Equally, even the doziest pension fund will start to ask itself whether its ‘investment’ in crude oil futures has really provided the hoped-for diversification versus equity markets, when both are down similar amounts.
Some Iranian PE has already been re-exported from China, as the smarter traders seek to cut their losses. And if crude oil continues to fall towards the blog’s expected $60/bbl, then a further slowdown in demand can be expected, as the value chain destocks. As they say in football, 2009 could then easily become a ‘year of two halves’, where the seasonal upturn in H1 gives way to a much more difficult H2.