…..China’s purified terephthalic exports could easily rise to 1m tonnes this year.
By John Richardson
THE next phase of the Great Unwinding, which we have been warning about since 2011, is now well underway. If you have taken note of what the blog has been consistently saying, and as a result changed your approach, you will be in a solid position. If you didn’t, and instead listened to the wrong advice, you will be in a great deal of trouble.
Focusing today on just two aspects of this unwinding – trade tensions and deflation – US politicians will very soon be launching strong rhetoric about the recent devaluation of the Yuan. And the weakening of the Yuan has of course boosted China’s export competitiveness, providing it with an opportunity to export more of its deflation to the rest of the global economy.
It was clear last September, after the summer Yuan devaluation scare seemed to have receded, that there was no room for complacency. Jobs are at stake in China as it undergoes radical economic reforms. Real GDP growth has already dipped into negative territory in some provinces, as factories in oversupplied industrial sectors are closed down. Beijing will thus do everything it takes to protect employment in favoured industries.
Crucially, also, as James Gruber has been warning about since November 2014, China does not have ample reserves to bail itself out. This is just a fallacy. It is instead short of money. This might force China into a major devaluation, much bigger than the one that has scared everyone over the last few days.
What does this mean for the petrochemicals business? Imports will of course become more expensive, and, as I said, exports will become more competitive. In many products, imports, even without devaluation, were collapsing or had entirely disappeared because of the huge overinvestment that took place during the 2008-2014 stimulus programme.
Let’s look at PTA:
- Based on an average 2016 operating rate of 60%, which you might expect in an industry so heavily oversupplied as China’s PTA industry, this would still leave room for around 520,000 tonnes of imports in 2016. This would be hugely down from the 5.4m tonnes of imports seen in 2012, but hey, at least there would be some imports,
- But what if the PTA industry were to use a weaker Yuan, along with perhaps financial support from the government, to push rates much higher? Remember that these are modern, state-of-the-art plants, not the old, smaller scale plants that China wants to shut down. Actual PTA operating rates were thought to have been around 63% in 2015. If this operating rate is repeated in 2016, imports could almost vanish with exports at 1m tonnes. Push assumed rates only a little higher and the picture is quite shocking. Even if the Yuan were to bounce back in value, this is still a very valid scenario.
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