Cosy Platitudes Are Not Enough

By John Richardson

DO you trust your government to always get it right?

The answer in the case of the West is “of course not”, but in China’s case the publicly-expressed assumption still holds that the economy is being effectively managed.

CEOs of chemicals and polymer companies might find it politically challenging to openly say “Beijing doesn’t entirely know what it is doing” on any particular policy – never mind on the management of the economy as a whole. (How can anyone entirely know what they are doing as this is such a complex and mammoth task?)

And so what passes for a genuine debate about the future direction of the world’s most-important chemicals market sometimes feels as if it is little more than repeated re-utterances of cosy platitudes.

The blog hasn’t got out of the wrong side of bed this morning. It just feels that a more serious debate needs to take place with chemicals-industry investors about some of the risks ahead.

Take the slowdown in polyolefin markets that we have been extensively reporting-on over the last five months.

We have yet to discover a broad top-level recognition that a significant slowdown is even taking place and what it might mean for the timing of the next peak in the petrochemicals cycle.

Is it that we are merely miss-informed and not talking to the right people? We genuinely hope so.

Inflation is likely to have already peaked in China and should moderate in the third quarter, said the International Monetary Fund in a report released last week.

This might be excellent news for chemicals and polymers demand in general (we use polyolefins as a reasonable proxy for the whole industry) as the government could be in a position to relax monetary conditions. Small and medium-sized enterprises (SMEs), the lifeblood of chemicals demand in China, are being severely squeezed by higher interest rates and bank-reserve requirements.

But a few quarters of lost growth would still be a few quarters of lost growth. Even if the IMF is right, won’t this lost growth push-back the peak of the next petrochemicals cycle beyond the current forecasts of 2014-2015? What should this mean for the timing of new projects?

If the IMF is wrong – and if any number of other economic challenges are worse than is generally assumed including the housing market – the consequences could be far more serious. We will look at the housing sector, which according to the IMF accounts for 12% of China’s GDP, in detail in a later post.

“Most chemicals investors don’t fully understand what’s happening and remain long on the sector,” a US-based chemicals analyst told us recently.

Nobody fully understands what’s happening – least of all the blog, you might think.

But cosy platitudes will not be enough to settle our concerns.

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