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China Market Rally In Context

China, Company Strategy, Economics, Olefins, Polyolefins
By John Richardson on 22-May-2013


By John Richardson

ETHYLENE spot prices rose by $20-50/tonne in Asia last week on the back of stronger derivatives pricing, including a $5-25/tonne increase in polyethylene (PE), according to ICIS.

However, nobody is cracking open the champagne. As the chart above shows, despite a $51/tonne improvement in Northeast Asia’s variable cost integrated margins for the week ending 17 May, the region continues to struggle.

To a large extent, the recovery is said to have been driven by the rebound in crude prices last week as PE buyers in China, as usual, irrationally slightly increased their buying on the theory that the “real” cost of resin was higher. There was also a slight uptick in the number of intra-trade deals.

But after four consecutive days of gains, oil prices declined yesterday.

“The danger is that we will attempt to push PE prices up too quickly over the next few weeks, causing another big retreat by the processors. The absolute maximum that I think the converters can take is an increase of $100/tonne,” said a source with a major producer.

“The mood in Shanghai remains incredibly cautious because everyone thinks that Xi and Li really mean business and, therefore, there isn’t going to be any big economic stimulus later this year.

Labour cost pressures in Northeast China are also increasing and the gap with South China, which still remains more expensive, is narrowing and thus forcing an increasing number of processors to migrate to Bangladesh, Sri Lanka and Myanmar. In a couple of years’ time, people think that Northeast China will be as expensive as South China.

“The lower value processors in China, who have had lots of easy access to financing over the years and have had enjoyed guaranteed strong demand growth, are really struggling. During the boom years, they didn’t have to develop particularly strong skills and dabbled in too many diverse business sectors to be able to develop any such skills.”

Several sources are now looking back on the boom years and, for the first time, are seriously worrying about what really drove the huge increase in processing capacity.

Some of the extraordinary growth is now being attributed to corruption, as the disbursement of bank loans provided big opportunities for back-handers.

China has changed for good. Get used to it.