Middle East Petchem Producers Feel China Slowdown

By John Richardson

MORE evidence has emerged of a slowdown in demand for polyolefins in China following the sharp decline in March imports.

The Middle East is now feeling the pinch as a result of the impact of inflation and the reduced availability of credit.

“I visited a propane dehydrogenation (PDH)-to-polypropylene (PP) producer in Saudi Arabia last week. The company’s PP inventory level has risen from 25,000 tonnes at the end of February to 45,000 tonnes because of weak sales, primarily in China,” an industry observer told the blog.

“Inventory levels in general throughout Saudi are climbing. They are now above 30 days and once they reach about 40 days, we will start seeing the Middle East cut prices.”

What is interesting about the PP player’s stock-build is that it is has occurred since the Chinese New Year holidays. The blog has consistently heard reports of weak demand immediately following the end of the week-long holidays.

This is an exceptionally long period of time in the recent history of sustained and very strong growth.

The observer’s comments came shortly after extraordinarily forthright remarks from Torsten Penkuhn, the head of BASF’s petrochemicals business in Asia, in a fascinating interview with my colleague Will Beacham of ICIS Chemical Business.

“We feel that underlying GDP growth in China is around 9%, with chemical industry growth perhaps into double digits,” said the BASF man.

“But if you look at first-quarter results, you see 15-20% sales growth. So there is an underlying speculative element which comes from an anticipation of shorter availability of credit. There has been some pre-production by people worried about their credit lines being withdrawn.”

This helps explain why trader friends of ours are playing a lot more golf after achieving very good sales during the early part of Q1.

And it led to us to speculate, during our discussions with the industry observer, that chemical company results may remain pretty good – perhaps even very good – in the second quarter. This might be due to pre-production and pre-buying in China that took place to beat the credit clampdown.

“This would involve just kicking the can down the road to a time when the slowdown in China starts to show up in the financial results,” said the observer.

“Our views are in stark contrast to the views of just about every chemical company CEO during the Q1 results season,” he continued.

“But perhaps some of the CEOs are out of touch on what’s happening on the ground. Maybe they are sometimes the last people to see big changes in markets.”

Volatility in crude oil has continued this week, including a 5.5% fall on the Nymex yesterday, resulting in trading on the exchange being halted for the first time in two years.

Weaker growth prospects in China are one of the factors behind yesterday’s decline – and last week’s broad sell-off in commodities.

Increasing concern over demand destruction caused by high crude prices has also contributed to the rout in oil.

Further evidence of this destruction emerged yesterday when the International Energy Authority revised-down its global demand-growth estimate for crude.

The inflation news from China doesn’t get much better. Further credit tightening, higher interest rates and more restrictions on price increases seem likely.

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