China Economic Policies To Get Tougher

Electricityconsumption.pngBy John Richardson

THERE will, of course, be bright spots in petrochemicals markets as a result of factors independent of China’s new economic direction.

For example, as an aromatics trader points out, there are huge paraxylene (PX) capacity additions in Asia that will provide a great deal of support to reformer economics. In 2010-2013, he estimates that the region’s capacity will double from 12m tonnes/year to 24m tonnes/year.

And buyers of polyolefins will be in a very strong position over the next few months as new capacity is ramped-up in China and Singapore.

But the rest of this year will still be primarily about the new economic direction.

Demand growth is likely to remain depressed for the rest of 2013, and into next year which, we think, most petrochemicals markets participants are now coming to terms with.

Markets have, however, yet to factor into what we think, along with fellow blogger Paul Hodges, will be further measures designed to tackle the property-market bubble, corruption, over-investment and the environmental crisis. Such measures would further depress growth.

The above chart, from Paul’s blog, illustrates the impact of the new policy direction to date. Electricity consumption has slowed down on reduced economic stimulus, including bank lending.

There will be occasional bouts of restocking, as occurred towards the end of last year in polyethylene (PE), when chemicals and polymer buyers in China find their inventories exhausted and/or regain their confidence in a strong economic recovery. These won’t last long.

Watch out, though, for a sudden change of mood amongst China’s leaders. If the West suffers another major economic crisis aka Lehman Bros, or the cumulative impact of slower Western growth shows up in a dramatic reduction in exports, China might once again panic and throw stimulus money at the problem.

Such a dramatic change of direction would be great short-term good news for traders and producers.

In the long run, however the net effect would be harmful as rebalancing would take even longer and would be even more economically disruptive than is the case today.

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