China And Re-examining Your Customers

Business, China, Company Strategy, Economics, Polyolefins

In the first part of a two-part series on how chemicals companies need to respond to China’s economic reforms, we look at the “account receivables” challenge. Tomorrow we will look at new growth opportunities.

 

By John Richardson

ChinaYuanAS China’s credit wind down continues, and its overall economic reforms accelerate, chemicals companies need to look very hard at who they sell to, and the payment terms they offer to customers, in order toavoid some major unpaid invoice problems.

“Over the last three months, low value plastic converters have been forced to shut down through being deliberately starved of working capital. These include, for example, a lot of liner and plastic bag producers in the Shanghai and Guangdong provinces,” said a second source with a major polyolefins producer.

“Another problem is that investors have moved into manufacturing semi-finished goods, just to get their hands on the cash-flows to service property deals,” he added.

“This is a big reason for the oversupply we are seeing in the biaxially oriented polypropylene (BOPP) films sector in China.”

It was fairly technically easy to produce low quality BOPP film and the scale of each production line – 10,000-30,000 tonnes/year – guaranteed enough revenues to service property deals, said the source.

“This is less the case in PE where production lines tend to be smaller – for example, 10,000 tonnes for cross-stretch cling-film,” he added.

The BOPP film producers had been losing around Yuan 1,000 for every tonne they produced, but this didn’t matter because the increasing value of their real-estate investments had more than compensated for these losses, he said.

“Investors only got into the films business because of restrictions introduced over the last few years that have made it harder to borrow money directly for property, as the government has tried unsuccessfully to cool real estate down,” he explained.

“Speculators have borrowed money both offshore, where interest rates are lower than in China, and from Chinese state-owned banks, so they could set-up film lines. The alternative would have been to go to the shadow-banking sector where interest rates are up to 20% – a pretty stupid move.”

But he warned that new restrictions on credit supply to the real-estate sector could force some BOPP film producers out of business.

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