Asian Polyethylene: Inventory Losses Threaten Survival

Business, China, Company Strategy, Economics, Oil & Gas, Polyolefins

ChinaPE16Jan2015

By John Richardson

HERE are some observations, from several discussions with market participants this week, about what is happening in China’s key polyethylene (PE) market:

  • If the oil price stays at $40-50 a barrel then payment collection from local customers, who kept going into the market to buy resin when they thought the crude market had bottomed out, is going to be a big issue for some domestic and overseas PE producers.
  • There is a major problem in China of smaller companies not managing cash flows well, and so manufacturing plants have already been taken over by banks.
  • The scale o the f turnaround in the  fortunes of some companies is quite shocking as crude has kept falling. For instance, I  heard of a case of one money that went from a positive turnover of $112 million to a loss of $1 million in the space of three months.
  • There is a growing acceptance out there that the falls in crude are related to the slowdown in China’s economy as economic stimulus is further withdrawn.
  • And as that stimulus is further withdrawn, the full extent of China’s oversupply up and down all its manufacturing chains is becoming obvious to the majority of people. The prospect of China exporting its deflation to the rest of the world is also being more seriously considered.

And here the wider implication of falling crude on the rest of Asia, again based on my discussions:

  • The extent of inventory losses is such that if the oil price stays a current levels, and ideally recovers a little, then most of Asia’s ex-China naphtha-based PE producers will survive. But if it drops to $30 or less some producers may have to consolidate.

The sad reality is that all of this was entirely avoidable if companies had not been convinced that there was no way that the oil price could fall that much below $100 a barrel. This analysis ignored what was really driving oil prices.

These problems could equally have been avoided if more companies had also studied the change in China’s economic direction. They should have realised, from December 2013, that the most-important policy tool that would be used in bringing about these changes would involve reducing the availability of credit. Deeper deflation was inevitable as lending growth declined.

The great news is that there are several Asian and global PE producers who have prepared for today’s events. They saw this coming largely because they have the right people on the ground in China. In today’s environment, these people are worth their weight in gold.

PREVIOUS POST

Chemical Sales, Capital Spending In A Weaker Oil-Price World

15/01/2015

By John Richardson THE above chart shows the top 23 of the latest ICIS Top 100 r...

Learn more
NEXT POST

China Would Be The Only Winner From A Price War

19/01/2015

By John Richardson IT IS dangerously wrong to still think of China as just a che...

Learn more
More posts
President Trump can only cause major economic damage by beating China, unless he has a time machine
12/09/2019

The views in this blog, are, as always, my own personal views and don’t reflect the views of I...

Read
Unsustainable boom in China auto market ends as sales of new vehicles move permanently lower
08/09/2019

By John Richardson THERE IS a big temptation when making forecasts of becoming too excited about the...

Read
Global PP demand could be 81.5m tonnes less than forecast in 2019-2028 as China Debt Supercycle ends
05/09/2019

By John Richardson SOME PEOPLE argue that despite the rapid rise in Chinese consumer debt over the l...

Read
China economic stimulus and PP: How global demand could have been 71m tonnes smaller
04/09/2019

By John Richardson CHINA came to the rescue of the global economy in 2009. This wasn’t for altruis...

Read
Hong Kong an example of rising political risk and the end of easy growth
02/09/2019

This blog expresses my opinions and not those of ICIS By John Ricuardson THE UNREST in Hong Kong wor...

Read
China imposes trade-war tariffs in US LDPE and raises tariffs on HDPE and LLDPE
27/08/2019

By John Richardson DON’T SAY I didn’t tell you. As I predicted, China has levied trade-war tarif...

Read
President Trump’s “better off without China” tweet not supported by the data
24/08/2019

The opinions in this blog post are, as always, my own and do not reflect the views of ICIS   By...

Read
How sustainability will upend the petrochemicals cost curve, creating new winners and losers
23/08/2019

By John Richardson THE FUTURE I described on Wednesday, of declining petrochemicals and polymers dem...

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