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out there that the falls in crude are related to the slowdown in China’s economy as economic stimulus is further withdrawn.
- And as that stimulus is further withdrawn, the full extent of China’s oversupply up and down all its manufacturing chains is becoming obvious to the majority of people.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.