Chemical markets are often rather good at providing important insights into wider economic trends. China's polyethylene market is no exception.
As the chart shows for the H1 period, based on trade data from Global Trade Information Services, demand has continued to slip:
• It was down 1% (red column) versus H1 2011 (green) , and down 3% versus H1 2010 (blue)
• China's own production has plateaued temporarily, up 4% versus 2010
• Imports were down 9%, and exports up 82%, versus 2010
One major learning is that PE demand seems unconnected with GDP. Many commentators have argued that China's PE demand will grow at 1.5x or even 2x GDP. But there is no evidence for this optimism over the past 2 years.
Equally, there is little evidence to support US optimism over its ability to export increased PE volumes due to its feedstock cost advantage from shale gas. In fact, the reverse is true, with China's imports from NAFTA down 59% versus 2010.
The data does, however, provide support for the idea that China's economy is much weaker than the published GDP figures suggest. Last month, the blog highlighted the problems developing in the city of Wenzhou, often a leading indicator for the rest of China.
It is in the affluent coastal province of Zhejiang. And now the provincial government has released a report which was summarised in the official China Daily newspaper as follows:
"Weak demand, rising labor costs and strained liquidity are ravaging enterprises in East China's Zhejiang province, a traditional stronghold of China's entrepreneurship, and forcing them to scale down or even halt production. The report, based on a month-long investigation and interviews with local government officials and businessmen, said that falling earnings, rising production costs and dwindling orders are now plaguing most of Zhejiang companies
"In Wenzhou alone, 60.43% of the industrial enterprises have scaled down or halted production. In the first five months of the year, the net profit of large companies dropped 23.8%, for medium companies decreased 18.3% and for small and micro enterprises declined 14.3%.
"The report warned that the bleak situation for Zhejiang's enterprises could snap their capital chains and threatens to cripple the credit system."