China Inflation Impact On Chemicals

By John Richardson

POLYETHYLENE (PE) prices were assessed stable-to-weaker by my colleagues at ICIS pricing late last week as Sinopec was reported to be evaluating a 10% reduction in operating rates.

Sinopec hardly ever cuts production on market conditions as its main objective is not to make a profit, but rather serve local manufacturing industry as a whole. And so if the reports of a rate-cut evaluation are accurate this would further underline the dire state of the PE market.

Polypropylene (PP) seems to be benefiting from tighter supply due to maintenance work in the Middle East and feedstock shortages everywhere. Nevertheless, downstream sentiment remains equally glum on the big gorilla filling the room: Inflation.

In the fibre intermediates chain, mono-ethylene glycol (MEG) and purified terephthalic acid (PTA) firmed very slightly early last week on more speculation by the traders.

Click here for some recent pricing history – ICISpricing19April2011.ppt 

However, our ICIS pricing colleagues tell us that later in the week activity declined on the release of the 5.4% consumer price inflation number for March – the highest in 32 months.

Chemicals and polymers producers in general have been struggling since the Chinese New Year to pass on further cost increases down all the production chains.

And very interestingly, the All China Federation of Industry and Commerce has urged all the industrial groups it represents to heed Beijing’s call not to raise prices. Twenty four of these groups attended a price conference last week in support of the Federation’s position, including representatives from the textile, agricultural, fishery, pharmaceutical and bakery industries.

Polyester producers have already been forced to cut their operating rates on complaints from apparel and non-apparel manufacturers that the cost-push, driven by high crude and cotton prices, has gone too far. We could now see a concerted push for cost reductions following the textile industry’s support of the Federation’s stance.

And with the agricultural film season almost upon us (it starts in May), could we see strong pressure from farmers for lower linear-low density PE (LLDPE) and low-density PE (LDPE) costs?

Unilever has separately been persuaded to put on hold 15% price increases by China’s National Development and Reform Commission (NDRC).

Finished-goods manufacturers have also been affected by rising wages costs, mandated by the central government in an effort to tackle the plight of those who have lost out during the stimulus-driven economic boom. These malcontents represent a major threat to social stability.

Inflationary pressure from rising input costs appears to be threatening the vital re-export trade (chemicals and polymer imports that are re-exported as finished goods).

Coastal factories are demanding higher prices for shipments, according to Dong Tao, a Hong Kong-based economist wit Credit Suisse, in this article in the New York Times. This is forcing the manufacturers to reject orders from Wal-Mart and other western retailers.

The sanguine view is that China’s inflation problem is only temporary as it is mainly the result of more expensive oil on the Middle East crisis and more expensive food due to weather-related shortages and logistics problems. Speculation, which could in theory be tackled by a regulatory clampdown, is also being blamed by some commentators.

But Patrick Chovanec, professor at Tsinghua University’s School of Economics and Management in Beijing, argues in this post from his blog that the causes of inflation are far more deep-rooted.

He has been warning since January 2010, as we have also been suggesting, that the huge economic stimulus package was a major inflationary threat.

China’s money supply has risen by 50% since the stimulus began with far too much money pouring into fixed-asset investment and too little into consumption, he says.

Inflation in China represents one of the biggest risks to the global economic recovery. Chemicals companies need to be prepared for the worst possible outcome.

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