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The Planning Process Gets Harder

Business, China, Company Strategy, Economics, Europe, Styrenics
By John Richardson on 08-Dec-2011

By John Richardson

EARLIER this week we talked about the possibility that China might devalue the Yuan rather than allow it to further appreciate.

We have since been told by a senior chemicals industry source that this is exactly what the Chinese government is evaluating in case the worst of possible outcomes occurs – the break-up of the Eurozone.

Even if this is not being considered, the tone of this article from the China Daily, an official government mouthpiece, indicates that Western pressure for a rapid currency appreciation could easily backfire.

China has already seen the competitiveness of its manufacturing industry undermined by higher labour costs and now faces the threat of mass layoffs in the event of a Eurozone collapse.

Uncertainty over the direction of the Yuan is just one example of the difficulties chemicals companies face in planning their budget targets for 2012.

There are no guarantees anymore. Even continued strong GDP (gross domestic product) growth is no longer a certainty in China, according to this article from the Financial Times.

Last month, the government of the city of Guangzhou in southern China had to cancel or severely scale back its plans to auction land on four occasions. This was the result of lack of interest from private developers, who have been starved of capital as a result of a raft of measures introduced by Beijing to cool property prices.

The problem is that land sales account for 40 per cent of local authority revenues and without this income, city and provincial governments will struggle to fund the tried-and-tested route to boosting GDP growth: Building lots of bridges, roads, public buildings and airports etc – all of which generate chemicals demand.

A further difficulty is that local governments have used land to guarantee bank borrowing. If land values keep falling, these loans will turn bad, adding to China’s non-performing loans problem.

The central government is caught between a rock and a hard place as it needs to reduce property prices in order to keep the “sandwich generation” happy. But by so doing it might, as we’ve just described, severely weaken the economy.

And so what are the odds of GDP growth falling to 6 per cent next year from the consensus view of 8-9 per cent? Chemical companies might be wise to build 6 per cent, or even lower, into their “worst case” scenarios.

Meanwhile, the extent of demand weakness became even more apparent to the blog during its visit to Singapore last week. Acrylontrile butadiene styrene (ABS) demand had fallen by a full 10 per cent in 2011 over 2010 as a result of credit tightening, a decline in shipment of finished goods to the West, we were told by our colleagues a Chemease.

The high cost of butadiene, and to a lesser extent acrylonitrile, had also eaten into volumes to the benefit of high-impact polystyrene (HIPS), which can be used for some of the same applications, they added.

The blog would be interested to hear convincing arguments as to why next year will be better for ABS – and for all the other polymers.