By John Richardson
CHINA’S polypropylene (PP) net trade, which is imports minus exports, fell by 31% on a month-on-month basis in April to around 316,000 tonnes. That was to be expected given the 42% surge in net trade in Q1 2017 over the first quarter of last year.
But if you look at the period from January to April 2017, year-on-year, net trade was still up by 24% at 1.7m tonnes with local production 10% higher at approximately 7m tonnes.
This tells us that this key chemicals and polymers market continues to suffer from the indigestion I highlighted last month and remains in a destocking process.
Overseas producers and traders took a gamble in Q4 that hasn’t paid off. They assumed that oil prices would continue to climb this year towards $60/bbl. And they also assumed that the Chinese government would keep the lending tap fully open, resulting in a further acceleration in GDP growth. They thus decided to export a large number of cargoes to China for arrival during the first few months of this year.
Neither of these events has happened. It now looks increasingly likely that oil prices will be back to around $35/bbl by Q4 of this year for a variety of reasons. One reason crude could continue to fall is that China has tightened the lending tap. And I believe that China will continue to reduce the growth in credit during the rest of 2017 and into 2018.
China’s PP market, along with many other chemicals and polymers markets in China, will thus see a prolonged period of “hand to mouth” buying. Converters, aware that oil and so PP prices could well decline even further, are likely to buy only the bare minimum of what they need to run their plants.
Plus, PP processors are the kind of small-and-medium-sized enterprises that are struggling to afford and source trade finance because of the slowdown in credit growth.
The chart above is important as it shows that China’s apparent demand for PP was still up by 12% in January-April 2017 compared with the same period last year. Apparent demand is net trade plus local production, but is not real demand because it involves the kind of inventory distortions we have seen over the last few months.
We expect real demand growth in 2017 over 2016 to be 6%, leaving consumption in China by the end of this year at around 25m tonnes. This further underlines why we remain in destocking period.
In terms of China’s economy, let’s put this into perspective, though. China’s economy isn’t going to collapse. Far from it. What China’s leaders are doing is using the cushion of nominal GDP growth that has reached as high as 10% so far this year to take the pain now of economic reforms. Growth will decelerate from a high base, but will not collapse.
But I maintain my view that globally, the consensus view continues to underestimate the importance of a moderate China slowdown. Take away the global reflation that has been mainly driven by China’s decision in 2016 to re-inflate its lending bubble, and the end-result will be lower global economic growth than many people expect. We, I think, will end up with a return to global deflation.
And what is also worth taking note of is the chart below, from equity analyst Paul Satchell of Investec. This shows his Volume Proxy for June 2017. The Volume Proxy assesses price movements across 33 products and regions, including olefins, polymers and intermediates. As you can see, prices are on the decline across all three regions.
We might thus be into a prolonged global chemicals and polymers destocking process as oil prices continue to slide and as Chinese growth moderates.
Again, please, please be careful out there…..