By John Richardson
CHINA’S polyethylene (PE) imports jumped by 26% in the first quarter of this year over the same period in 2013, according to data from Global Trade Information Services (see the above chart).
This isn’t the result of a dip in domestic production that had to be made up by imports, as data from Chemease also indicates an 8% year-on-year growth in local output.
And it doesn’t appear as if the surge in imports is a statistical anomaly resulting from exceptionally weak shipments in Q1 2013. Here is why: Q1 2013 imports totalled 2.6m tonnes, versus 2m tonnes in each of the first quarters of last year and 2012.
What we can also see from the data is that imports started to rise from November of last year. In October, imports were at 690,000 tonnes and then rose to 870,000 tonnes in November and 908,000 tonnes in December.
January imports were 1.1m tonnes followed by 741,000 tonnes in February and 786,000 tonnes in March.
There is always a rise in imports towards the end of the year as producers try to beautify their financial results. Plus, of course, there is always an increase in imports in December and January ahead of the Lunar New Year.
But we feel that this still doesn’t adequately explain why shipments were so strong in Q1 when market sentiment was very weak. Also, as we said, local output was on the increase in the first quarter, which, at first glance, makes the this big increase in imports even harder to figure.
So, what was really going on? We worry that an increasing use of PE, or rather misuse of PE, in order to generate financing for other purposes is a big reason for the strong Q1 imports.
Why? Because hard-pressed investors are looking at inventive ways to bypass government efforts to let the air out of the credit bubble.
This can work in a number of different ways, but the key elements are as follows:
• A potential lender buys a PE cargo on normal 180 days credit from an overseas seller.
• He then immediately sells the cargo on the Dalian linear-low density PE (LLDPE) futures market, or into the physical market.
• Now he has cash to lend into the shadow banking market at interest rates of 60%.
• This gives a property developer cash to finish his project, which is no longer available via formal bank lending because of the government’s crackdown on credit.
But the government is now targeting these trade-finance practices as one of the world’s greatest-ever credit bubbles come to an end.
How will these economic reforms, ultimately, end?
“All the producers we spoke to at last month’s Chinaplas exhibition in Shanghai said that supply and demand would be fine in China over the next 3-4 years. They didn’t seem that worried about the economy,” said a polyolefins trader.
“But then the buyers turned up and it was an entirely different story. They were talking about credit shortages, weak downstream demand and PE being used as collateral to buy condos and even luxury sports cars. They were much less upbeat.”
Take your pick.