By John Richardson
CHINA’s polypropylene (PP) market has been consistently described as subdued throughout this year.
End-users in China have persistently complained, throughout the year, of credit shortages as a result of China’s economic reforms and so their resin buying patterns have been sporadic and hand-to-mouth.
How do we therefore explain the above chart, which shows a 2% increase in domestic production in January-April of this year compared with the same period in 2013?
And, as we discussed last Friday, imports are also up. The 11.3% year-on-year increase in imports, which is again shown in the above chart, is hard to understand in the context of weak market sentiment.
An explanation for the surprising data, which we have heard several times over the last week, is as follows:
- Aggressive sales-growth targets were set by some producers at the start of this year. These targets are not being achieved because of the slowdown in the Chinese economy and so this is colouring the mood of some market sources.
- But, in fact, whilst growth rate have indeed declined, just look at how big volumes are today compared with just a few years ago. Since 2005, for instance, PP consumption has roughly doubled to around 18m tonnes. So, even if percentage rates of growth have fallen, these much bigger bases of consumption are delivering tremendous benefits.
We don’t feel that this explanation adds up as, of course, the percentage increases we have just described are year-on-year and not over the best part of a decade.
How can 2014 be so much better than 2013 when on an incremental basis volumes haven’t increased by that much? And how can 2014 be so much better than last year when most of the indicators point to a slower economy?
Another theory, which we think might have a little more credibility, is that the slowdown in China is patchy. Some industrial sectors and provinces continue to boom, whereas some “old industries” and provinces struggle.
But when you dig into the data, this theory also begins to look a little shaky. A lot of the increases in imports have been in good old-fashioned plain vanilla homopolymer grades. Surely, if we can explain away the growth in PP by talking about successful economic rebalancing, we would have seen far more growth in higher-quality random and particularly block co-polymer grades?
Here is another theory, which we explored last week: The slight rise in domestic production and the surge in imports is down to speculation.
During February, when the Dalian Commodity Exchange launched its futures contract in PP, 191,000 contracts were sold (each contract is 5 metric tonnes), but in May this number had jumped to 2.69m contracts.
China is continuing its crackdown on speculation in general, with the focus right now on how traders have obtained multiple letters of credit for just one cargo of copper or aluminium imported via Qingdao.
Are polyololefins also used for this purpose, given how trading in many different commodities and even real estate are often connected via “circular trades?”
Even if this is not the case, the investigation into Qingdao might well lead to much-tougher trade finance conditions in general.
And so you must build into your contingency plans a significant gap between apparent demand for PP (imports, minus exports, plus industrial production) and real demand (the resin that is actually used to make things).