China’s Widespread Inventory Problem

By John Richardson

THE extent of the inventory overhang in China has become more apparent thanks to a research note from Kunal Agrawal – Singapore-based refining and chemicals analyst with BNP Paribas.

Kunal’s note – based on a survey of polyethylene (PE), acrylonitrile butadiene styrene (ABS), polyvinyl chloride (PVC) and butadiene producers and traders – also supports many of our other arguments as to why this is going to be a very tough fourth quarter in China. It also adds some important extra detail.

The research has found that:

1.) The typical inventory cycle in China for commodity chemical products is about 50 days – split between 25-30 days of warehousing and about 14-21 days of shipping. The average inventory cycle currently stands at about 70-80 days

2.) Demand remains extremely weak because of minimal “buying forward” on fears over a major correction in crude prices

3.) Volumes have declined by 50-60% compared with 2010. The size of individual orders has also fallen by 40-50%

3.) Traders and converters are being asked to pay upfront for cargoes, as 60-day and 90-day letters of credit are often unavailable. This suggests that the LC problem, which we first covered earlier this week, is more widespread than we thought

4.) Tighter financing in general remains a huge impediment to business

5.) Some downstream convertors continue to face power-supply shortages

6.) Shortages of labour were also cited as another reason for weak demand. High inflation has led to workers moving from manufacturing regions back to their hometowns in order to save costs. In the Guangdong area, for instance, labour supply was said to be 40-50% tighter than usual.

And rather worryingly, Asian producers are still running at average operating rates of 95-100% as they engage in the familiar battle to maintain market share, the research note continues.

This is despite the extra pressure being placed on the China market from increased Middle East supply.

BNP Paribas agrees with us that “buying forward” in 2010 and earlier this year was a major factor behind strong apparent, or implied, demand growth – as was China’s economic stimulus. It describes the accumulation of stocks among chemicals traders and converters as “massive”.

These views are, like are own, based on surveys of those on the ground who should know what’s happening.

Such opinions remain in stark contrast to some of the public remarks made by senior executives during the European Petrochemical Association (EPCA) conference in Berlin earlier this week.

It would probably be more informative to discover what these top executives think privately.

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