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China price pressures to remain weak on persistent weak demand
SINGAPORE (ICIS)–China’s consumer inflation rate is expected to remain weak in the near future on persistently weak domestic demand, raising worries about the risk of deflation as the nation’s economic recovery struggles to gain traction. This comes as the country’s consumer price index (CPI) rose by a mere 0.3% year-on-year in May, unchanged from April and well below the government’s 3% target. “Amid still-weak domestic demand, we expect CPI inflation to stay slightly above zero in the near term and producer price index (PPI) inflation to be slightly less negative on a low base,” Japan’s Nomura Global Markets Research said in a note. China’s headline inflation rate is projected to remain positive but stay mild under 1% until the third quarter of this year, said Ho Woei Chen, an economist with Singapore-based UOB Global Economics & Markets Research. “The deflation in the fourth quarter of 2023 will provide a low base for CPI to rebound more strongly in the last quarter of the year,” Ho said. UOB’s full-year forecast for China’s headline inflation is at 0.7% for 2024, compared with 0.2% in 2023, “but current trajectory suggests that the risk is to the downside”, she added. Meanwhile, factory gate prices continued their downward spiral, with the PPI falling for the 20th consecutive month in May. The PPI declined by 1.4% year on year in May, a slight improvement from the 2.5% drop in April. “The pace of PPI deflation is expected to ease but this had been slower than expected as oil prices stayed muted and overcapacity in some industries weighed on the prices of manufactured goods,” Ho said. “Increasing tariffs imposed on Chinese goods may further delay the price recovery.” The persistent low inflation is a stark contrast to the high inflation plaguing Western economies, further fueling fears of deflation as China grapples with sluggish consumer spending – a key obstacle to the country’s uneven recovery from the pandemic. While inflation is likely to remain low in the second quarter, it should begin to pick up in the second half of the year, Dutch banking and financial information services provider ING said in a note. “Although inflation is set to pick up this year as the drag from falling food prices fades, it is anticipated to remain well below target amid slowing consumption and weak demand pressures,” the World Bank said in its June Global Economic Prospects report released on 11 June. “Producer price pressures are also set to remain weak in the context of subdued activity and softening prices for commodities, particularly energy and metals.” China’s economic growth is projected to ease to 4.8% in 2024, down from 5.2 percent in 2023, as activity is expected to soften in the latter half of this year, according to World Bank estimates. While a potential uptick in goods exports and industrial activity, bolstered by a global trade recovery, is anticipated, this will likely be counterbalanced by weaker domestic consumption, it added. “We expect domestic and external demand to continue diverging over the near term, as the property fallout sustains and the economy rebalances itself,” Nomura said. “Export growth is likely to remain resilient in the near term, thanks to a low base, the resilient US economy, the global tech upswing, the price advantage of Chinese products and some front-loading ahead of scheduled or threatened tariff hikes.” Focus article by Nurluqman Suratman
US labor market cooling from overheated conditions – Fed
HOUSTON (ICIS)–The US labor market has cooled from its overheated conditions two years ago, but the Federal Reserve still wants more signs that inflation is approaching its goal of 2% before it starts lowering its benchmark interest rate, the chairman of the central bank said on Wednesday. Earlier, the Federal Reserve voted to maintain interest rates at 5.25-5.5%. It also lowered its forecast for future rate cuts to one quarter-point decline, down from three in its last forecast in March. The Fed also slightly increased its forecast for inflation. The US central bank has a dual mandate of promoting maximum employment and price stability. Earlier in the decade, the nation’s ultra-tight labor market contributed to wage inflation. The labor market remains strong, but it is gradually cooling and rebalancing, said Jerome Powell, Fed chairman. He made his comments during a press conference following the Fed’s interest rate announcement. Job openings remain high and exceed the number of unemployed people. Wages are running above a sustainable path, Powell said. Still, those job openings have fallen from even higher levels, he said. Increased immigration and higher rates of labor participation have helped restore balance in the job market. Powell said the current US labor market is comparable to the years immediately before the COVID-19 pandemic, when the unemployment rate reached multidecade lows. In addition to the cooling labor market, Powell highlighted the May consumer price index (CPI), a measure of inflation that was published earlier on Wednesday. Month on month, the CPI was unchanged. “We welcome today’s reading and hope for more like that,” Powell said. The Fed itself noted that inflation has made modest progress in recent months in approaching its 2% target. Still, Powell stressed that the Federal Reserve needs more signs that inflation is under control before it will start loosening monetary policy and lowering rates. In fact, when data like the CPI is released on the same day that the Fed publishes its economic forecasts, most members do not update their projections, Powell said. “You don’t want to be too motivated by a single data point.” The need for more data helps explain why the Fed increased its forecast for 2024 inflation while noting modest progress towards meeting the 2% goal. That progress took place in recent months. Progress needs to continue before the Fed is confident that it can start lowering interest rates without triggering an even faster rate of inflation.
German auto industry opposes EU tariffs on EVs from China
LONDON (ICIS)–Germany’s auto industry is opposed to tariffs on electric vehicles (EVs) from China, trade group German Association of the Automotive Industry said on Wednesday. The group, known as VDA in its German acronym, was reacting to a European Commission proposal of tariffs on battery electric vehicles (BEVs) from China after an investigation concluded they benefited from unfair subsidies. VDA said the proposed tariffs were not the right tool to strengthen the competitiveness of Europe’s auto industry. Instead, the tariffs would further escalate the risk of trade conflicts, to the detriment of Germany’s automakers, it said. “The fact is that we need China to solve global problems,” in particularly in dealing with the climate crisis, it said. China played a crucial role in a successful transformation towards electromobility and digitalization, and a trade conflict would jeopardize this transformation, the group said. However, VDA added that the extent of the subsidies China grants EV makers was “a challenge” for Europe and it called on China to make “constructive proposals” to settle the dispute. Germany ranks first in Europe and second after China globally in terms of EV production, and the bulk of German EV production goes into export, according to VDA data released this week. Industry observers have noted that Germany-based EV production relies on imports of materials and batteries from China. The US last month announced tariff hikes on Chinese imports of EVs, batteries and other materials, starting 1 August. In related news, the business climate in Germany’s automotive industry deteriorated in May amid fears about impacts on German automakers from the conflict with China, according to a recent survey by Munich-based ifo research. The automotive industry is a major global consumer of petrochemicals that contributes more than one-third of the raw material costs of an average vehicle. The automotive sector drives demand for chemicals such as polypropylene (PP), along with nylon, polystyrene (PS), styrene butadiene rubber (SBR), polyurethane (PU), methyl methacrylate (MMA) and polymethyl methacrylate (PMMA). Additional reporting by Graeme Paterson Please also visit the ICIS topic page Automotive: Impact on chemicals Thumbnail photo shows a Volkswagen EV; photo source: Volkswagen

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PODCAST: US and European R-PET markets attracting more imports in 2024
LONDON (ICIS)–Senior editors for Recycling, Emily Friedman and Matt Tudball take a look at how both the US and European R-PET markets are seeing more activity around imported material, and what that means for local recyclers in the US and the EU, including: The growing numbers of imports into the US Price competitiveness of imports vs. local material Balancing recycled content with cost-saving objectives How imports stack up against legislation in Europe
Canada rail labor union to hold new strike ballot
TORONTO (ICIS)–Canadian rail labor union Teamsters Canada Rail Conference (TCRC) will hold a new strike vote because an earlier mandate for industrial action will expire on 30 June, it said in an update. In early May, about 9,300 unionized conductors, train operators and engineers at rail carriers Canadian National (CN) and Canadian Pacific Kansas City (CPKC) voted for a strike as early as 22 May. However, Canada’s federal labor minister then referred the matter to the Canada Industrial Relations Board (CIRB) for a decision about a strike’s impacts on public safety and health. A legal strike or lockout cannot occur until a CIRB decision, and it is unclear when that decision will be made. TCRC said in its update that under Canadian labor law, the strike mandate from May is set to expire on 30 June. In order to be in a position to strike once the CIRB makes its decision, TCRC will therefore conduct a new strike ballot, beginning 14 June and running until 29 June, it said. WHEN COULD A STRIKE START?As the CIRB process is ongoing, the board has extended the deadline for affected industry trade groups to make submissions from 31 May to 14 June. After the CIRB decision, TCRC would have to give 72 hours’ notice before a strike can begin. The CIRB may grant the rail carriers’ request for a 30-day extension, starting from the decision date, before the 72-hour notice can be served. The rail carriers have estimated that given the CIRB process, a strike will not start before mid-to-end July. The parties do not have to wait for the CIRB process to run its course. Instead, they can continue bargaining and reach an agreement at any time. However, TCRC said that since the strike was referred to the CIRB, the rail carriers “have completely withdrawn any commitment to negotiate”. The rail carriers have proposed binding arbitration, but TCRC has rejected this. IMPACT ON CHEMICALS The uncertainties around the timing of rail labor disruption are affecting Canadian chemical, fertilizers and other manufacturers. Canadian chemical producers rely on rail to ship more than 70% of their products, with some exclusively using rail, while in the fertilizers industry about 75% of all fertilizers produced and used in Canada is moved by rail. In the run-up to potential strikes, producers need to prepare, longer strikes can force them to curtail production or shut down plants, and after a strike ends it can take weeks for normal operations to resume. The impacts may be limited to some extent as the CIRB can order that rail shipments of certain essential products, for example water treatment chemicals, be maintained during the strike. Thumbnail photo source: Canadian National
ICIS VIEW: Uniper arbitration award could shape future EU gas supplies
Germany’s Uniper announces €13bn award in arbitration claim against Gazprom Export Recovering the award will likely determine gas supply dynamics in Europe in the longer-term Uniper may set precedent for other companies involved in similar arbitration claims LONDON (ICIS)–Uniper’s announcement it was awarded more than €13 billion in damages for non-supplied Russian gas volumes since mid-2022 raises complex questions. Given the sheer size of the award and the estimated 25 billion cubic meters that Uniper imported annually from Russia before Gazprom Export curtailed them, there is no doubt that the steps taken by Uniper to recover the award could impact future gas supplies to Europe at least in the mid term. The award made on 7 June came nearly three weeks after Austria’s OMV Gas Marketing and Trading, which has a long-term supply contract with Gazprom Export, said it had received a notice from an unnamed European company seeking to seize payments due to the Russian producer as part of a court ruling. It is unknown whether OGMT received the notice from Uniper or, whether in the light of the latest arbitration award, the German state-owned company would indeed seek to seize OGMT’s payments to Gazprom Export. Considering that Gazprom experiences financial difficulties, reporting its biggest losses in the last 20 years and that relations between Russia and western countries, including Germany, are frozen following Russia’s full-scale invasion of Ukraine, it is highly unlikely that Gazprom Export would pay the financial value of the award. FALLING PRODUCTION Nevertheless, Gazprom’s production has reportedly fallen to an all-time low in 2023, after it lost its European market share, cutting supplies to consumers such as Uniper in the wake of the invasion of Ukraine in 2022. This makes it mindful of the fact that low production could lead to shut-ins with irreversible damage to gas wells. The alternative for Uniper and Gazprom, therefore, might be to settle for an option where Gazprom would keep its production going while Uniper would receive the equivalent of the award’s financial value in natural gas deliveries. The issue may in fact gather momentum as various European stakeholders are now considering the possibility of continuing the transit of gas through Ukraine once the existing agreement expires on 1 January 2025. It may not be mere coincidence that just hours before Uniper announced the arbitration award, the German economy minister Robert Habeck said Europe was engaged in ‘intense’ work to keep gas flowing via Ukraine. TRANSIT Ukrainian officials have repeatedly insisted the country would not renew or sign a new contract, although there had been hints in recent months that individual European companies could be allowed to book capacity at the Ukrainian-Russian border. Nevertheless, Ukraine is not the only option that Uniper may have to import gas in lieu for its arbitration award. The company established a subsidiary in Turkey – Uniper Enerji – exactly a year ago and more recently increased its capital to Turkish lira 77 million (€2m). The sum may be small, but by increasing it from an initial TL53 million, the company is preparing itself to show it has sufficient funds to receive a licence from the Turkish regulator EPDK to import, export and trade gas. By positioning itself to import gas via Ukraine and Turkey would not necessarily mean Uniper would be able to use the physical molecules in Germany, considering the distance and high transmission cost. Imported volumes could be sold in southern and eastern Europe at highly discounted prices. Many companies active in this region had a bumper year in 2023, as they reportedly imported gas sourced in Turkey and potentially of Russian origin at heavily reduced prices and sold them at a premium on central European hubs. GERMAN LNG IMPORTS For gas supplies to Germany, Uniper may now find itself freer to turn to the LNG market to secure long-term volumes to meet its customers’ needs. For as long as the prospect of a resumption of Russian pipeline volumes that it is contractually obliged to take – or pay for – was on the horizon, the company would have feared being committed to too many long-term take-or-pay commitments. With this prospect having been removed, Uniper is theoretically free to sign new LNG import contracts to replace Russian pipeline volumes that should have run until the 2030s. Germany certainly has the capacity to facilitate this: in the aftermath of Russia’s invasion of Ukraine, the country rushed to secure LNG import infrastructure and now has four LNG import points – at Mukran, Brunsbuettel, Stade and Wilhelmshaven deploying up to six floating storage and regasification units (FSRUs). Yet, while Uniper’s German peers signed LNG contracts immediately after the crisis hit, Uniper was somewhat less bullish. OTHER BUYERS In May 2022, EnBW signed deals with Venture Global for a total of 1.9 million tonne per annum (mtpa) of US Gulf LNG, followed in 2024 with a further deal for 0.6mtp, with Abu Dhabi’s ADNOC. Also in Germany, RWE ended 2022 with the signing of a 2.25mtpa contract with US supplier Sempra. France’s ENGIE, another offtaker of Russian gas, meanwhile in 2022 locked down 1.75mtpa of LNG from US supplier NextDecade’s Rio Grande project. In Italy, ENI secured a beefed-up deal for Algerian pipeline gas. To date since the crisis hit, Uniper has locked down just 0.8mtpa of new long-term contractual LNG, for flexible volumes from the portfolio of Australia’s Woodside. The door may now be open for further long-term commitments to be signed. Uniper’s next actions will no doubt impact supply flows to Europe and potentially set a precedent for future steps by companies which have ongoing arbitration claims against Gazprom Export. By Aura Sabadus and ICIS analyst Rob Songer
PODCAST: Future of Asia recycled polymers to be shaped by legislation, waste management
SINGAPORE (ICIS)–Asia’s recycled polymers markets were sluggish for the most part of last year, and challenges early this year continue to dim the short-term outlook. In the last few years, legislation regarding recycling have been put in place across the region, but obstacles limiting growth in this sector remain. In this podcast, ICIS senior editor Arianne Perez and analysts Joshua Tan and Chua Xin Nee share their thoughts about current developments.
PODCAST: NE Asia propane-naphtha spread to widen again in Aug-Sept
SINGAPORE (ICIS)–Propane in northeast Asia is losing its advantage over naphtha as a cracking feedstock, but the spread is expected to widen again in August-September due to higher naphtha forecast prices. Propane price spread over naphtha below $50/tonne for first time since end-January NE Asia propane firm on year-to-date high China PDH plants run rates Crackers using imported propane require about two months to evaluate feedstock economics In this podcast, ICIS LPG analysts Yan Wang and Shihao Zhou discuss the current market dynamics and outlook.
East Asia and Pacific GDP growth to slow to 4.8% in 2024 – World Bank
SINGAPORE (ICIS)–Economic growth in the East Asia and Pacific (EAP) region is projected to slow to 4.8% in 2024 from 5.1% in the previous year, primarily due to a deceleration of activity in China, the World Bank said. Downside risks to regional outlook remain China 2024 GDP growth to slow to 4.8% Global growth to stabilize at 2.6% Excluding China, growth in the region is expected to accelerate to 4.6% this year from 4.3% in 2023, bolstered by a recovery in global trade, the World Bank said in its June World Economic Prospects report released on 11 June. Over the next two years, the overall EAP GDP growth is projected to continue moderating to 4.2% in 2025 and 4.1% in 2026, as a further slowdown in China, Asia’s biggest economy and the second largest in the world, offsets a modest pick-up elsewhere in the region. “Although risks to the regional outlook have become somewhat more balanced since January, they remain tilted to the downside,” the World Bank said “Downside risks include a proliferation of armed conflicts and heightened geopolitical tensions around the world, further trade policy fragmentation, and weaker- than-expected growth in China, with adverse spillovers to the broader region.” However, faster-than-anticipated US growth could provide a positive counterbalance to these risks, potentially boosting regional activity. CHINA GROWTH SLOWS GDP growth for China this year was revised up to 4.8% from 4.5% previously, primarily due to stronger-than-expected activity in the early part of the year, particularly, exports. The forecast represents a slowdown from the 5.2% pace of expansion recorded in 2023. Consumption, however, is expected to slow down significantly this year amid weak consumer confidence following a strong expansion in 2023. Overall investment growth will remain subdued, supported by government spending, notably on infrastructure, but dampened by continued weakness in the property sector. Real estate activity is not expected to stabilize until the end of the year despite measures to support the sector, such as lower borrowing costs and deposit requirements. Both new property construction starts and bank lending for real estate were continuing to decline since the start of the year. For 2025, China’s growth is projected to soften further to 4.1%, lower than the previous forecast of 4.3%, mainly due to a weaker outlook for investment. A further deceleration to 4.0% is expected in 2026 as potential growth is hampered by slowing productivity, softer investment, and increasing demographic challenges, according to the World Bank. “With the population falling for the second consecutive year in 2023, and amid a low and declining fertility rate, demographic headwinds are expected to intensify, dragging potential growth lower,” the multilateral institution stated. EX-CHINA GROWTH REBOUNDS In the EAP region excluding China, economic activity is projected to rebound this year, following below-average growth in the previous year. This growth will be driven by an upswing in global goods trade, benefiting exports and industrial activity, and offsetting the effects of slowing growth in China. The strongest acceleration in activity is expected in export-oriented economies such as Thailand and Vietnam in southeast Asia. Additionally, the ongoing global tourism recovery from the pandemic, which was delayed in some EAP countries, will continue to boost service exports in economies such as Cambodia and Thailand. GDP growth in the EAP excluding China next year is expected to edge up to 4.7% and further up to 4.8% in 2026, as global trade strengthens and growth rates across the region converge towards their potential. GLOBAL GROWTH FORECAST STABLE World economic growth is projected to remain at 2.6% in 2024, marking the first time in three years that the pace of expansion will be stable despite ongoing geopolitical tensions and high interest rates. A modest increase to 2.7% is expected in 2025-2026, supported by moderate growth in trade and investment, based on World Bank’s projection. “Global risks remain tilted to the downside despite the possibility of some upside surprises. Escalating geopolitical tensions could lead to volatile commodity prices, while further trade fragmentation risks additional disruptions to trade networks,” it said. “Pronounced trade policy uncertainty – already at its highest level compared with other years of major elections since 2000 – could portend further trade restrictions and weigh on global trade.” While global inflation is projected to ease, the pace of moderation is slower than previously anticipated, averaging 3.5% this year. Due to persistent inflationary pressures, central banks in both advanced economies and emerging markets are expected to maintain a cautious approach to monetary policy easing. Consequently, average benchmark policy interest rates are projected to remain roughly double the 2000-19 average over the coming years. Focus article by Nurluqman Suratman
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