Weak China polypropylene demand in January-April indicates no big new economic stimulus

China, Company Strategy, Economics, Olefins, Polyolefins, US

By John Richardson

THE ABOVE chart should give you pause for thought if you believe that the Chinese economy is already recovering as a result of major new economic stimulus. This once again points to the value of chemicals and polymers as leading indicators of economic activity.

A recovery might be around the corner thanks to the 1 April reduction in VAT rates and the likelihood that the US and China will reach a deal on trade.

But the data on polypropylene (PP) tell us that financial markets have got ahead of themselves in their belief that a recovery has already arrived. Chinese equity markets are up by 30% so far this year.

China’s apparent demand for PP was 9.3m tonnes in January-April 2019. This is based on our estimate of local production in January until April, actual PP net imports in January-February and our forecasts for net imports in March and April.

This 9.3m tonnes compares with our base case forecast for demand of 9.6m – a 323,000 tonnes shortfall when you look at the exact numbers.

If this trend were to continue throughout 2019, China’s full-year PP demand growth would be just 2% compared with our base case prediction of 6%. This would follow a disappointing 2018 when growth is likely to have been around 4.7% versus or original expectation of 6.5%.

Local government debts are overwhelming

The weakness in PP demand reflects what is happening downstream in one of its major end-use applications. China auto sales fell by 11.3 in Q1 following a 12% fall in Q4 last year.

The weaknesses in PP and auto sales are mirrored in the broader economy. China is today expected to disclose official GDP growth at 6.3% for Q1 – the lowest in 27 years.

This is despite a big rise in Total Social Financing (TSF) in Q1. TSF is broad measure of lending and overall economic activity in China.

Last month I had suspected that most of the extra TSF had gone into shoring up companies with bad debts rather than into new economic activity. Now I am sure this is the case because of the weakness in PP demand, in auto sales and in GDP growth.

Further evidence supporting my argument is provided by several alarming articles in the Chinese financial press on the bad debt crisis. For example, Caixin writes as follows:

Local government debt, in particular the trillions of yuan of liabilities hidden in financing vehicles, is threatening to overwhelm dozens of authorities across the country.

The problem has taken on added urgency as 2019 marks the beginning of a three-year peak debt repayment period for local government financing vehicles, whose fundraising has spanned a wide range of channels including bond sales, bank and trust company loans, and asset management plans sold by financial institutions.”

It is also important to note major changes in how TSF is measured in China. Headline TSF was up by 48% in Q1 versus the first quarter of last year.

But this comparison is invalid because last September, the People’s Bank of China changed the way it measures TSF. Included for the first time were loan write-offs which means that, on a real basis, TSF hardly grew at all in Q1.

The tale of two polymers continues

The story is very different in polyethylene (PE). Our initial estimates indicate year-on-year apparent demand growth in China of around 10% in April-June 2019 . This follows a bumper 2018 when demand grew by around 9% compared with our earlier forecast of just 5.4%.

The tale of two polymers, which I highlighted in a speech to this month’s 8th ICIS World Polyolefins Conference, is thus continuing.

Whereas PP and other polymers that largely go into durable goods are heavily tied to GDP growth, demand growth for PE, which is mainly consumed in cheap single-use applications, is becoming increasingly divorced from increases and declines in economic growth.

What instead seems to be driving PE growth is booming online sales of daily necessities such as food.

 

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