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No option but to bet on China

Business, China, Markets, Olefins, Polyolefins
By John Richardson on 31-Dec-2009

By Malini Hariharan

Even as market players celebrate the finish of what has been an unexpectedly good year there are not many who expect a repeat performance.

A key concern is Chinese demand which saved the industry in 2009. A massive government stimulus package boosted domestic consumption and imports of a wide range of petrochemicals.

But is this sustainable? And no is the answer that I am hearing. That of course makes betting on China a risky proposition.
Pic source: kafka4prez

“We expect Chinese demand to be good in the first quarter. But what will happen in the second quarter will depend on whether government stimulus will continue. Margins were good in 2009, but they will probably be squeezed next year,” says a South Korean polyethylene exporter.

David Jiang of Beijing-based Sinodata Consulting says the Chinese government can’t continue investing for growth.

“China faces an overinvestment problem in the coming years. Many industries face oversupply. Chemical companies are building plants for polyvinyl chloride (PVC), methanol or dimethyl ether (DME) despite low operating rates. The average industry operating for methanol and DME in H1 2009 was only 30-40%,” he points out.

These investments are mostly made on government funding and few promoters care if the projects will make money. “It is a government gift,” he adds.

Any deceleration in Chinese demand next year would coincide with the completion of more new projects in the country and elsewhere in the region. New capacities commissioned in 2009 are also expected to stabilize operations next year.

“We may be entering a period when supply would be easing. Will demand growth offset that? I kind of doubt it,” says Mazlan Razak of Dewitt & Co.

But there are also reasons to not be too pessimistic about 2010.

Firstly, the global economic outlook looks better next year. This means that on the demand side, things will pick up in the rest of the world, points out Mazlan.

And though the Chinese government is likely to go easy on its stimulus program, it is unlikely to allow the economy to slow down.

A rise in the yuan dollar exchange rate could draw money from overseas and keep the asset bubbles from bursting.

A stronger yuan would make imports attractive and support overseas players in the Chinese market, says the Korean exporter.

China has the resources to chase growth and it has regularly been surprising sceptics. Let’s hope it will once again do so.