NEW YORK (ICIS)--Beware of currency crises. They could well be isolated events and contained in their local markets. However, they can be indicative of economic policies - both internal and external - that have caused severe imbalances and that can spread across geographies and quickly.
Turkey’s plunging lira has roots in years of massive borrowing in foreign currency debt along with rising inflation amid inaction on raising interest rates high enough to curb that inflation.
The US Federal Reserve’s gradual but steady interest rate hikes and plans for further hikes are fuelling strength in the US dollar and draining liquidity in emerging markets.
Debtors have to pay higher interest rates. In addition, the appreciation in the US dollar makes it even more onerous to repay dollar-denominated debt.
The consequence of the US Fed tightening has been felt beyond Turkey, and in other markets with India, Brazil, Argentina and China suffering significant declines in their currencies.
Every US Fed tightening cycle “causes a meaningful crisis somewhere”, noted Deutsche Bank macro strategist Alan Ruskin back in May, as he highlighted the risks to emerging markets.
Rapidly falling currencies bear watching closely as they reflect cracks in the financial system and have the potential to spread to other regions as confidence tumbles.
Turkey’s lira latest and most severe plunge of 20% in a week was triggered by US President Trump’s threat to double steel and aluminium tariffs on the nation stemming from an ongoing political dispute.
In Turkey, buying power and overall demand for chemicals and polymers will take a severe hit from the plunging lira as well as cratering business confidence.
“The first ramification of the Turkey crisis is that the collapse of the lira raises questions over how Turkish importers will be able to afford the dollars to pay for some of the polyolefins imported since the crisis began,” said John Richardson, ICIS senior consultant, Asia, in his ICIS Asian Chemical Connections Blog.
TURKEY DEPENDENCE ON IMPORTS
Turkey is heavily dependent on polymer imports in particular, with PE imports in 2017 of 1.67m tonnes accounting for over 80% of total consumption, according to trade statistics in the ICIS Supply and Demand database.
For PP, imports in 2017 of 2.13m tonnes accounted for almost 95% of total consumption.
And for polyvinyl chloride (PVC), imports of 828,000 tonnes in 2017 represented more than 85% of total consumption.
Leading PE and PP exporters to Turkey include Saudi Arabia, Iran, Egypt, Belgium, South Korea and Singapore.
As the US ramps up massive amounts of PE capacity in particular from its multi-billion dollar investments in shale gas-based production, key export markets such as Turkey gain in importance, and even more so in the wake of China’s planned 2nd round of 25% tariffs on $16bn in US imports.
These China tariffs include high density PE (HDPE), most grades of linear low density PE (LLDPE), PP and PVC, and are slated to go into effect on 23 August when the US plans to implement its 2nd round of tariffs on $16bn in Chinese imports.
On 16 August, the US and China announced they will start trade talks in late August but it is unclear whether this would be before the 23 August set date for the 2nd round of tariffs.
Of Turkey’s 1.67m tonnes of PE imports in 2017, less than 2% came from the US. However, US players planned to ramp up PE exports to the country with all the new capacity coming on, with at least one major producer tagging Turkey as a key high growth export market.
STOCK MARKET REACTION
On 15 August, Turkey hit back by announcing a doubling of tariffs on US autos, cosmetics, alcohol and other imports. Tariffs on US autos will rise to 120%.
Fears of a widening front in the US trade wars finally hit the US equity market that day. Previously, for the most part US equity markets shrugged off potential negative impacts from tariffs, the strengthening dollar and currency crises elsewhere.
Chemical stocks of major US-based companies were hit hard on 15 August, reflecting trade concerns. Yet they have retained a good chunk of their strong gains over the past year.
As of the close of trading on 15 August, LyondellBasell is down about 9% from its 52-week high but still up about 28% in the past year. Westlake Chemical is down a more severe 24% from its 52-week high but also still up almost 36% in the past year.
US petrochemical companies have been enjoying not only their shale gas feedstock advantage, but also strong US economic growth and a synchronised global upswing that has boosted overall demand.
Yet the Turkey currency crisis along with rapidly falling currencies and slowing economies elsewhere, partly in reaction to US Fed tightening and to growing global trade tensions, add one more element of risk to the scenario.
By Joseph Chang