By John Richardson
IF you study China’s petrochemicals markets on a regular basis they tell you something very important: That despite persistent efforts to tighten-up supply across several sectors in order to entice end-users into stock building, “hand-to-mouth” purchasing remains their policy.
For example, polypropylene (PP) import prices firmed on a heavy turnaround season in China two weeks ago only for domestic prices to once again retreat last week as converters complained of squeezed margins and persistently weak demand.
And in purified terephthalic acid (PTA), where operating rates in China are just 62-65% because of a heavy maintenance schedule, downstream polyester demand was last week characterised by our ICIS pricing colleagues as stable to weak. Demand has been either stable, or more often weak, throughout this year.
Rising crude has, of course, also exerted upward pressure on pricing thanks to the perception of tighter supply resulting from the renewed crisis in Iraq.
But as my ICIS pricing colleague, Clive Ong, wrote in his 20 June report on the Asian styrene market: “A number of market players believe that the market is inherently weak and prices could still drift lower in the near term.
“The lack of a rebound in the downstream styrenic resins sector, despite the imminent arrival of the traditional manufacturing season for exports in the third quarter, prompted many styrene players to adopt a cautious stance.”
And so why are markets mired in such persistent negative sentiment when yesterday saw the release of a very upbeat HSBC China purchasing managers’ index (PMI) for June? The flash PMI rose to 50.8 in June from May’s final reading of 49.4 – above the 50-point level that separates growth in activity from contraction. It was the first time since December that the PMI was in growth territory, and the highest reading since November, when it was also 50.8.
Because some data points matter more than others and for us, the single-most important set of data points relate to the property sector as it accounted for about 23% of China’s 2013 GDP. Most of the risk lies in China’s smaller cities – its third, fourth and fifth-tier cities – where real-state oversupply has soared because of the use of land sales as collateral to fund the 2009 economic stimulus package.
When you stop pumping more and more air into an investment bubble, the bubble will start to deflate. This is what we are seeing in China today, which has seen excess investment in not only real estate but also industrial capacity.
This dynamic was underlined by the New York-based China Beige Book, which, in its Q2 survey of China’s economy, found that only half of businesses reported higher investment – the smallest proportion since the survey was launched 10 quarters ago.
“Since investment has been the engine of the economy for the past seven years, this weakness has sweeping effects on sectors, regions and gauges of firm performance,” said Leland Miller, president of China Beige Book International.
Whilst the bubble is being deflated, the appetite for borrowing money will remain weak – another trend which was again underlined by the latest China Beige Book survey: It found that the number of businesses applying for bank loans had dropped in Q2 as fewer bankers reported increased lending to businesses. Hence, the reluctance of buyers of petrochemicals to commit to stock building. You don’t rush headlong into a dark tunnel when you don’t know what’s on the other side.
The problem is that the June flash PMI has added further support to the notion that “mini stimulus” measures introduced since April will make China’s economic adjustment process virtually pain free.
We worry that those who subscribe to this view are in for a nasty shock.