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Consensus Misses The Point

Business, China, Company Strategy, Economics, Fibre Intermediates
By John Richardson on 24-Apr-2012

 By John Richardson

The consensus view on China remains that we have reached, or are near, the bottom of the decline in GDP (gross domestic product) growth.

This was how yesterday’s release of the preliminary HSBC China Manufacturing Purchasing Managers Index for April was interpreted.

Although the index contracted for the sixth month in a row, the rate of contraction had slowed down, in response to greater economic stimulus, said HSBC.

“The modest improvement in April’s flash PMI results, plus March’s better than expected new lending and industrial production growth numbers, suggests that Beijing’s earlier easing measures are starting to work. This, in turn, should help ease concerns of a sharp growth slowdown for China,” wrote the bank in a research note.

“In addition to the most recent (overall bank) reserve requirement ratio cut, delivered at the end of February, the People’s Bank of China has also since suspended bill issuance in open market operations, and lowered the reserve ratio for some rural financial institutions.

“Fiscal spending is also picking up, with its growth rate accelerating to 33.6% year-on-year in 1Q from 11.5% in 4Q last year.”

Another reduction in the reserve requirement is expected over the next few weeks.

But, as we discussed yesterday, the changes in the management of China’s economy are so fundamental and so extensive that any recovery in growth can only be modest.

Politics also remain a big issue. Fellow blogger Paul Hodges believes that the political crisis in China is such that the country’s leaders will be too pre-occupied to focus on the kind of economic stimulus package sufficient to achieve a big economic rebound.

And, as far as the Asian chemicals industry is concerned, 2012 earnings estimates will need to be revised down.

“Sure, there should be a recovery in profitability later this year, but a lot of this would be to do with a ‘base effect’, as Q4 was exceptionally bad in 2011,” said an industry observer.

Chemical product markets are also still telling us that demand remains weak. For instance:

*Monoethylene glycol (MEG) inventories in China rose by 20,000 tonnes last week, according to Becky Zhang of ICIS pricing. Stocks totalled 870,000 tonnes compared with the usual 400,000 tonnes. More than ten vessels were waiting off the coast of China to unload further cargoes. Some ships had been waiting for more than two weeks for tank space so that they could discharge their cargoes. This was supposed to be a bumper year for MEG.

*Purified terephthalic acid (PTA) prices recovered slightly in the early part of last week, added Becky. However, sentiment weakened towards the end of the week on a decline in buying interest from end-users. Polyester sales were not as strong as had been expected, despite this being the peak production season, which runs from April until May.