By John Richardson
FOR many, many years, seasonality has been a great guide to short term pricing patterns in Asian chemicals and polymer markets.
Take high-density polyethylene (HDPE) injection grade as just one example, which is used to make a wide range of finished goods, including pallets, crates and food containers:
- Over the last ten years, there has quite often been a pricing lull in June and July following the end of Asia’s peak turnaround season, during which plants are shut down for maintenance work.
- Then pricing has very often picked up in August and September as China’s peak manufacturing season has taken place. This is when China’s imports of chemicals and polymers increase as the country’s manufacturers of finished goods ramp-up production in time to meet orders from Western retailers for Christmas sales.
- Pricing usually declines before the end of the year once this peak season is over, with particularly steep pricing declines in October and November.
Note that you see exactly the same pricing pattern in many other chemicals and polymers.
Meanwhile, the economic environment for Asian producers has on the whole been very benign, with the obvious exception of the Global Financial Crisis and a few other more minor economic crises.
But we are now in a much more complex, volatile and uncertain world as a result of the end of the Economic Supercycle.
Sure, we might still see very familiar pricing patterns take place over the next few months, but don’t bet your entire sales and marketing strategy on this being the case.
The most immediate disruptive issue you need to consider is the possibility that Britain will vote to leave the EU on 23 June – this Thursday. Everybody is obviously guessing on the short term economic impact, but I would argue that a sharp correction in oil prices has to be a very strong possibility. Investors will flee to the safety of the dollar in the event of Brexit. And the oil market is well supplied, with the recent price rally almost entirely the result of a greater appetite amongst financial players to go long. Oil prices could easily fall to below $40/bbl.
How is this connected to the end of the Economic Supercycle? Because the extent of support for Brexit in Britain, my home country, is I feel, less to do with the real issues at stake andmore to do with a general feeling of economic discontent.
Another big uncertainty is the direction of economic reforms in China. To what extent did the renewed surge in credit during Q1 lead to speculative inventory building by traders in PE and in other polymers? We could be at risk of a destocking cycle, given that credit conditions have since tightened.
But let’s say that inventories are instead low up and down China’s chemicals supply chains. Nobody really knows of course because of the complexity, the length and the lack of transparency of these supply chains.
Let’s as I said, though, assume the best on inventory levels. The April and May renewed contraction in bank lending indicates that China’s economic reformers are back in control. Chemicals market buying sentiment could thus still be negatively affected as the faster that reforms occur, the greater the immediate and negative impact on GDP growth.
The strength of this year’s peak manufacturing season is obviously tied to the strength of economic growth in the West.
Economic weakness and uncertainty in the West were reflected in China’s May export data. Total exports in dollar-denominated terms fell by 4.1%, more than double April’s 1.8% fall and slightly worse than estimates for a 3.6% decline. For the first five months of the year, exports fell by 7.3% lower with exports down by 10.3% over the same period in 2015.
On Wednesday, I will take a close look at a very belated change of mood at the US Federal Reserve. It seems to be at long last recognising that the ageing of the Babyboomers is undermining the effectiveness of its long standing policy of ultra-low interest rates.
Meanwhile in Europe, the Brexit threat is just one symptom of wider public discontent over the failure of policymakers to tackle a secular decline economic growth. Friday’s post will reflect back on the Brexit vote, and will look forward to where Europe is heading.
Chemicals companies have to plan for all this complexity, volatility and uncertainty. This requires multiple scenarios for the direction of pricing and demand over the next few months, with the very real possibility that we could see traditional seasonal patterns turned completely on their head. We can help you build these scenarios.