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China Market Intelligence Still Contradicts PE Demand Rise

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By John Richardson on 27-Aug-2013


By John Richardson

The debate continues as to exactly why polyethylene (PE) apparent demand (domestic production plus imports) in China rose by 13% in January-June of this year compared with the same period in 2011.

Why the anxiety? Because most of the industry people that the blog speaks are still finding it difficult to match this growth with their gut feel of what is happening on the ground.

True, further evidence emerged last week of an economic rebound in China via the HSBC/Markit flash purchasing managers’ (PMI) index for August. The index was at 50.1 for August compared with a final reading of 47.7% in July. If the final August PMI, which is due to be released on 2 September, confirms the flash reading, then 50.1 would be a four-month-high.

But while the prices of some grades of PE strengthened further in Asia last week, sustaining a rally that began in May, China high-density PE (HDPE), linear-low density PE (LLDPE) and low-density PE (LDPE) film-grade prices declined (see the above chart). The price falls were the result of buyers retreating from the market in response to rapid increases, said ICIS.

And a Singapore-based PE trader told the blog, during our visit to Singapore last week: “I just can’t see how real demand could have possibly gone up by 13%, the market has been far too quiet for that, at least when I talk to my customers.

“All the end-users we deal with remain very cautious and are still unwilling to commit to big volumes. There has been a slight amount of ‘buying ahead’ because of concerns that supply, especially of LDPE, will get even tighter.

“But everybody we speak to continues to be very worried about the economy because of the weak state of export demand and all the domestic policy uncertainties.

“I am very bored, to be quite honest, sitting around waiting for something to happen. It is not as good as last year when business was fairly strong.”

One explanation about why this trader sees the market as so weak is that he deals mainly with re-export customers – i.e. converters who import resin in order to manufacture finished goods for export to the rest of Asia, the West and the remainder of the world. As India and Southeast Asia (more tomorrow) struggle with a new currency crisis, affordability of imports has become a big issue. Doubts also remain over the real strength of the recovery in the West.

The trader adds that wage costs for export-focused converters in southern and eastern China continue to increase, leading to further relocation of production overseas.

“The re-export business in China is really squeezed. Lots of processors have moved to Vietnam,” said a source with a major Western PE producer.

“And even Vietnam has become too expensive for some low-value converters. Overseas PE resin is, as a result, being shipped to Ho Chi Minh port in Vietnam and then trucked three hours inland to processors in Cambodia.”

Is the demand strength in China, therefore, a result of much-stronger local sales of plastic films and bags etc?

Andrew Liveris, CEO of Dow Chemical, thinks so. He told the Wall Street Journal on 25 that food safety concerns in China, including those surrounding the number of dead pigs floating down a river in Shanghai and rat meat being sold as lamb at some food stalls, were resulting in more people buying pre-packaged foods in supermarkets.

But a source with a second Western producer said: “It doesn’t make sense that the ‘dead pigs’ incident by itself could have had such an immediate and big affect on PE demand. It only happened in March and so there wasn’t enough time for any extra demand to work-through into the Dow sales figures.”

Perhaps, though, as income levels rise across China and as overall food-safety concerns increase, January-June 2013 saw one of those tipping points in PE demand growth that are impossible to model on any standard spread sheet. Such an increase in growth would further underline the importance of investing more in good people on the ground in China.

Comments from a source with a third PE producer, however, support our “two Chinas” blog post of a couple of weeks ago.

He said: “Your perception of China depends on where you visit and where you live.

“If you only visit the wealthier parts of Shanghai and Beijing, only visit big customers with ample cash flow, and you live in a place like Singapore, then you might get the wrong impression.

“But everyone should know that rich Shanghai and Beijing are not typical. More like the real picture are cities like Wuhan where a lot of businesses are short of money.

“The big converters are not typical, either. They have plenty of access to cash because of their relationships and/or are more ‘future proof’ because they have state-of-the-art machinery and good technology skills.

“The small customers, though, have poor sales and are still paying shadow-banking interest rates. These are the customers that account for the majority of commodity-grade PE sales in China.

“And optimism in Singapore, which of course, influences your view of the whole world, has largely been driven by the surge in property prices.

“But perhaps the biggest reason why real estate has been so strong in Singapore is Chinese money. Lots of Chinese businessmen have pulled money out of China in order to invest in Singapore. And why have they done that? They are worried about the Chinese economy.”

A contact with a Middle East producer added: “Our sales volumes in China so far this year are about the same as in January-August 2012.

“I don’t know if we can really trust the 13% number. How reliable is the government data? Even if the number is about right, we think it could be mainly because of stock-building amongst traders.”

Please, please be careful out there….