China Markets And Commentators In Denial

Business, China, Company Strategy, Economics, Fibre Intermediates, Polyolefins, Styrenics

All

By John Richardson

SOME chemical market players remain in denial or have yet to grasp the real problem in China, as is the case with quite a few financial journalists.

Here is why:

  • A widely-held assumption is that we cannot read too much into the few sets of data that have been released so far this year on China’s economy, given the ability of the Lunar New Year to always distort the underlying picture. Thus, last week’s release of a disappointing HSBC flash purchasing managers’ index (PMI) for February, which was at a seven-month low, was dismissed by the optimists as mainly an indication of reduced activity ahead of the New Year  break (interestingly, though, some commentators pointed to strong January export figures as reliable evidence of the health of China’s economy. We argue that these figures might have also been distorted in other direction: Pre-buying ahead of a New Year that fell earlier in 2014 than 2013. More importantly, though, over-invoicing – one of the dodgy financial practises that the government wants get to rid of – could well have distorted the export figures on the upside).
  • The default position remains that all that Beijing has to do get the show on the road again is to introduce a little more stimulus and the PMIs, and all other data, will quickly bounce back.

But what if the weak PMI reflects the most important, and largely overlooked, issue in China’s economy today – CREDIT AVAILABILITY? We make no apologies for repeating ourselves and we will continue to do so until or unless we start seeing that the consensus view has shifted. We owe this to our contacts and friends in the chemicals industry as we want them to be prepared for the potential downside.

As reminder, this is why credit is so pivotal to understanding what’s going on in China today:

  • Total Social Financing (TSF) would have to expand at annual rate of 12% in 2014 if GDP growth is going to hit 7.5%, according to the Chinese Academy of Sciences. However, in January, on a year-on-year basis – a much-better measure than month-on-month – TSF grew by just 1.6% (TSF is lending via both the official banks and the shadow-lending system).
  • Sure, this is again only one set of data, and we have to wait for the full Q1 lending figures before making any firm judgements – and so it could be that Beijing relents and once again loosens the stimulus spigot.
  • But the Chinese Academy of Sciences has warned that if credit were to be expanded at 12% in 2014 then this would represent an increase  that “will cause massive macroeconomic risk, because non-performing loans will pile up faster and the goal of reducing the economy’s reliance on credit-fuelled expansion will recede even further into the distance.  To have more sustained and quality growth, we’ve got to let the growth rate go down.”
  • And all the signs are that on this occasion, China’s reformers really do mean business.

Last week, a broad range of chemicals and polymers pricing were in retreat in China, according to assessments made by ICIS pricing. Declines occurred in, for instance,  acrlyonitrile butadiene styrene (ABS) polyethylene (PE), polypropylene (PP), purified terephthalic acid (PTA) and mono-ethylene glycol (MEG).

It is good news that some of us are already with us on the view that credit availability is the thing that needs to be measured if we are to accurately assess the outlook for chemicals and polymers markets.

“In our view, the apparent demand weakness, though unwelcome, is not particularly surprising, given what we see as structurally poor demand fundamentals in major markets,” wrote Paul Satchell, UK-based chemicals analyst with investment bank Canaccord Genuity, in reference to global chemicals markets.

“Adding concerns over credit availability in China (where chemicals purchasers are typically small-and-mediums-sized enterprises rather than state-owned enterprises) to fragile demand elsewhere in Asia and Europe makes for an uncertain outlook for at least the next few months.”

Paul made this comments in his February Chemicals Volume Proxy report. This leading indicator gauges volumes, and thus demand, through weekly changes in 33 spot chemical prices in the US, Europe and Asia, as assessed by ICIS.

“The Volume Proxy has continued to weaken after Lunar New Year, he added [see the above chart that shows global declines, which have been led by China].

“Following an unusually insipid start to 2014, we see this as a very bearish signal. Post-New Year weakness would typically mean that purchasers entered the holiday period with excess inventory, or that underlying demand is weak,” said Paul.

“Given the soft early January, we find the excess inventory argument improbable. On that basis, poor demand fundamentals look to be the more likely explanation.”

And why is demand poor? Because its strength in China over the last five years has largely been the result of EXCESSIVE CREDIT CREATION.

PREVIOUS POST

China's Capital Flight Challenge

21/02/2014

By John Richardson CHINA’s economic statistics continue to take your breath aw...

Learn more
NEXT POST

Central Banks Chase The Inflation Illusion

25/02/2014

By John Richardson IT was Milton Friedman who famously said “inflation is alwa...

Learn more
More posts
Petrochemical feedstock purchasing managers: What to think about and what do next
27/03/2020

By John Richardson ALL THE old assumptions about how oil, feedstock and petrochemicals markets work ...

Read
Vital work to maintain petrochemicals supply for essential services must continue
26/03/2020

By John Richardson INDUSTRY associations around the world are lobbying governments about the importa...

Read
Polyethylene: How to plan sensibly as we face threat of new Global Depression
25/03/2020

By John Richardson I SINCERELY want to help you guys. That’s what I am here for. To this end, here...

Read
Coronavirus may take as much as two years to be brought under control
22/03/2020

By John Richardson The only honest answer is that none of us know how events will turn out because o...

Read
Coronavirus: The new ten-point guide for the petrochemicals industry
20/03/2020

By John Richardson EARLIER THIS month I provided you with a ten-point guide for the impact of corona...

Read
Container freight shortages will lead to regional petrochemicals trade and supply shortages
17/03/2020

By John Richardson THIS excellent chart highlights the lingering effects of the coronavirus outbreak...

Read
European polyethylene and coronavirus: Panic buying versus the real demand outlook
16/03/2020

By John Richardson NOW that the epicentre of the virus has moved to Europe, we need to think through...

Read
Big declines in Chinese polyethylene imports, a global recession and a financial crisis
13/03/2020

By John Richardson YOU MIGHT be hoping that sanity will be restored after the “most expensive spee...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more