China Demand Worse Than Just Before CNY

PE14March3.jpgBy John Richardson

CHINA’S demand for polyethylene (PE) is lower than immediately ahead of the February Chinese New Year (CNY) break, said a Singapore-based polyolefins trader.

“For demand to be less than just before the New Year, when most traders had already pulled out of the market to avoid cargoes being stranded at ports during the holiday period, is remarkable. In the ten years I’ve been in this business, this has never happened before,” the trader added.

“Trading has come to a virtual halt. Re-exports have increased.” (Re-exports comprise resin shipped to China and held in bonded warehouses that has failed to find a home in the domestic market, which, as a result, is shipped to other countries).

“I got it wrong as I thought there would be a strong recovery after the holidays, but it didn’t happen because of policy uncertainty. Most other traders are in the same position. We all thought monetary conditions would remain favourable,” he said.

Restrictions on the property markets, reduced liquidity in the banking system and lower new lending in February, have reduced PE buying.

“People are worried that Beijing will have to take more measures to cap property prices, as what has happened so far is unlikely to work. They all think that eventually interest rates will have to be increased because overall inflation is also rising. This is further dampening activity.”

Asian PE pricing fell by in $20-40/tonne for the week ending 8 March, mainly because of weak demand, according to ICIS pricing (see above chart).

The People’s Bank of China (PB0C) is keen to take a more aggressive stance on inflation, whereas government agencies, such as the National Development and Reform Commission, are eager to maintain the recovery, according to this Reuters article.

But February inflation was at 3.2%, up from 2.0% in January, with the February rate close to the government’s maximum annualised target of 3.5%.

The risk is that if the cost of living continues to rise at this pace, the PBOC will win the battle, leading to an increase in interest rates earlier than Q4 – the current consensus forecast.

“A rise in interest rates would be a major blow to the market,” said the trader.

And even if pro-growth government agencies get their way for most of this year, the PBOC looks set to continue its policy of reducing liquidity as a tool to fight inflation.

A further reason to expect less credit in the system is that overall lending for January-February is ahead of the central bank’s annualised target, according to Reuters.

“Take January and February together and new loans are being extended at a 10 trillion RMB rate for the year [on an annualised basis), well above the RMB 8.5-9 trillion that Wang Jun, senior economist at the well-connected China Centre for International Economic Exchanges, believes the PBOC is tasked with for 2013,” wrote the wire service.

Measures to control the shadow-banking system also seem likely, as total new credit in 2012 hit an all-time high.

Rising inflation is partly China’s fault as a result of its politically motivated economic stimulus in May-October last year.

Another factor behind the rising cost of living – the surge in global oil prices – is beyond China’s control (unless China introduces emergency measures to raise subsidies on fuel prices).

“Today, gasoline is at RMB 9630/t and diesel at RMB 8810/t, compared to June 2008’s peaks of RMB6980/tonne and RMB 6520/tonne,” wrote fellow blogger Paul Hodges, in this post.

“China’s gasoline price for 90 RON is thus $4.60/US gallon ($1.20/litre), compared to current US prices of $3.75/gal. European prices are even higher at $8.00-$9.00/US gallon.”

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