Winston Churchill, in a 1939 radio broadcast, said of Russia: “It is a riddle, wrapped in a mystery, inside an enigma”.
China’s polyethylene (PE) market is creating a comparable amount of head scratching as answers continue to be sought for extraordinary data on imports and domestic production during H1 2014.
Imports were up by 20% in H1 2014 compared with the same period last year, according to Paul Hodges, chairman of UK-based chemicals consultancy International e-Chem, based on his analysis of data from Global Trade Information Services.
The increase in the first half of 2014 over H1 2012 was an astonishing 33%, Hodges added.
One explanation is that last December, overseas producers are reported to have sold big volumes to China as they attempted to minimise their inventories ahead of the end of the calendar financial year.
A shortage of shipping space meant that these cargoes were delayed and so delivery only occurred in Q1.
This would logically have meant a surge in Q1 imports when these cargoes finally arrived, followed by a big dip in the second quarter as China returned to a normal level of import growth.
But this doesn’t appear to be the case: Q1 imports totalled 2.6m tonnes compared with 2.4m tonnes in the second quarter, said Hodges.
Another explanation is that the surge in imports was justified by a substantial slump in domestic production. There were widespread reports of a heavy turnaround season in March-June.
The problem with this argument is that domestic production was also up by 6% in H1 2014 over the first half of 2013, according to ICIS China data. Production was 17% higher when the same comparison is made between 2014 and 2012.
When you add all of this together, we are therefore left with apparent year-on-year demand growth (imports, minus exports plus domestic production) at 12%. There was a 25% increase in apparent demand in 2014 over 2012.
An alternative reason not to worry starts with the argument that China’s official GDP numbers have long been viewed as a dubious guide to what is really happening in the economy. The numbers are “man-made”, according to a comment attributed to Li Keqiang in 2007, who is now China’s prime minister.
Now it is in the interests of local government officials to under-report their province’s growth numbers because they have to be seen to be pressing ahead with economic reforms, continues this argument.
Previously, career suicide worked the opposite way as job security depended on over-reporting GDP growth during the investment-led “dash for growth” of 2001-2013.
This means that real demand growth for PE might be a lot higher than the headline official GDP numbers suggest, especially in the less-developed provinces of China that are rapidly playing catch-up with the eastern and southern provinces.
This could entirely explain the surge imports and domestic production amid declining headline GDP growth.
But total credit issuance grew by just 4% in H1 over the first half of last year, according to official government data.
This is way below what some experts believe is required if the overall economy is going to expand at the same rate as last year.
With financing so tight, how can total economic activity be strong-enough to absorb all of this extra PE?
Anecdotal evidence is strong that Chinese traders, and the end-users who often double as traders, are short of credit. They are also said to have lost their appetite for risk because of the government’s economic reforms.
IS THERE REALLY A MYSTERY?
Perhaps, though, there really is nothing mysterious or enigmatic about the data on PE in H1.
The steep rise in imports and domestic production could be entirely explained-away by reasons that have not been discovered.
Perhaps it could very simply be the case that China’s less-developed provinces are booming. Most of the extra PE volumes are, thus, not sitting in inventories, but have instead been absorbed by real demand growth.
“This has happened before, when actual demand growth has surprised just everyone on the upside,” said a source with a global polyolefins producer.
Another very common argument is that the volume of demand in China is so much greater now than it was back in 2000.
“Every percentage increase in demand requires a lot of extra tonnage to meet this extra demand than used to be the case,” said a source with a second global polyolefins producer.
High-density PE (HDPE) real consumption (adjusted for inventories) was, for example, only slightly above 2m tonnes in 2000, according to ICIS Consulting. This compares to slightly below 10m tonnes in 2013.
But the flipside of this argument is that HDPE consumption was already just above 8m tonnes in 2012 and slightly below 10m tonnes in 2013.
How can 2014 growth be genuinely as strong as the import and domestic production data indicate, when the comparisons are against the already high volumes of 2012 and 2013?