China’s PE imports jump 26% as credit bubble peaks

China PE Apr14

Strange things are happening in China’s polyethylene (PE) market, as the chart shows:

  • Imports suddenly jumped 26% in Q1 (red column) versus last year (green)
  • This would be an extraordinary amount at any time, but especially now with the economy slowing
  • It comes at a time when China’s own production continued to increase, up 8%
  • As a result, implied demand was up 16% – impossibly high in relation to on-the-ground reports

Luckily, though, we can examine the detailed trade statistics from Global Trade Information Services.  These show that imports began to increase in November last year:

  • October had seen 690KT of imports, but then November saw 870KT and December 908KT
  • Then January jumped to 1.1MT, followed by 741KT in February and 786KT in March
  • Thus Q1 2013 imports totalled 2.6MT, versus 2MT in both 2013 and 2012

So now we know “what” has been happening, its easier to understand “why”.

The answer is very simple – China’s credit squeeze as the new leadership aims to burst the credit bubbles it inherited.  It has to slow credit growth, as described in detail in February’s Research Note.  But the real estate developers have become more and more creative in their search for ways of obtaining cash by the back door.

Thus readers will remember the deals that were being done in China’s auto market in October last year

Everyone’s offering 0% financing now and in some cases buyers end up with their car for free. How? The buyer pays for the car but with the guarantee of the money back in two  years. The seller invests the money in the shadow banking system where he hopes for returns of 60% a year or so before selling up and giving it back. Not bad.”

Metals markets have also been used for the same purpose:

In copper, traders have estimated that up to half of China’s imports have been used as collateral to raise cheap US dollar loans“.

Thus it isn’t rocket science to realise that PE is now being used for the same financing trade.  This can work in a number of different ways, but one common mechanism is as follows:

  • The potential lender buys a PE cargo on normal 180 days credit from an overseas seller
  • He then turns around immediately and sells the cargo on the Dalian futures market
  • Now he has cash to lend into the shadow banking market at interest rates of 60%
  • In turn, the property developer now has the cash to finish his building work

Buyers at last month’s ChinaPlas exhibition were seeing the same picture, as one leading trader told fellow blogger John Richardson:

They were talking about credit shortages, weak downstream demand and PE being used as collateral to buy condos and even luxury sports cars”

Of course, there are risks in this.  But China is coming to the end of one of the world’s great credit bubbles.  And when this type of bubble is underway, greed is a far more powerful emotion than fear.  Would you want to be known as the only person in the office who hasn’t done this type of clever deal?

Of course, it will not end well.  The government is unlikely to change its mind about bursting the bubble.  And of course, at some point, all this surplus PE will have to come back onto the market.  That will be very bad news for everyone connected to the PE business, whether buyers or sellers.

China’s polyester market flashes red warning signals

PTA Apr14b

China’s polyester market seems to be trying to tell us something quite important about the real state of China’s economy, as the chart above shows for the main raw material, PTA (terephthalic acid):

  • It focuses on the margin between PTA prices and naphtha feedstock (Singapore basis)
  • Normally this is a premium between $200/t – $300/t as shows by the ‘tramlines’
  • But it has now moved to a discount for only the second time in history
  • The first time was in 2008, as part of the prelude to the start of the economic Crisis

PTA has good forecasting ability, as the blog discussed 2 years ago for the Financial Times.  PTA’s warning of weakness then also proved timely, as this marked the moment when the country’s leadership began the transition to today’s new economic direction.

As we know now, that weakness was then temporarily arrested by allowing lending to accelerate.  But that does not seem likely to happen this time, if we are to believe the strong signals coming from Beijing.

Polyester is the mostly widely used fibre in the world, and has normally been very affordable.  Traditionally the first item that a rural migrant will buy on arriving in a city is a polyester tee-shirt or blouse.  As the migrants start earning money, they buy more tee-shirts.  Thus the market has grown steadily over decades.

But in 2008, of course, oil prices were heading towards record highs of $150/bbl, 5 times historical levels, as the subprime mania reached its height.  PTA highlighted how these prices could not be passed through to end-users.

Now we are seeing the same picture.  Ordinary Chinese simply cannot afford today’s oil price, now wealth effects created by the lending bubble are no longer available to boost their incomes.  Even worse is that the high cotton prices encouraged by China’s previous leadership mean that polyester/cotton blends are also expensive.

The previous leadership’s stimulus programme since late 2008 has also now led to a vast surplus of PTA capacity.  In turn, this is leading to a dramatic change in China’s trade, as shown by data from Global Trade Information Services:

  • China’s PTA imports halved in Q1 versus 2014 and were a quarter of 2012 levels
  • In volume terms they have fallen from 1.7MT in Q1 2012 to 400KT in Q1 this year
  • And in recent weeks China has begun to export serious quantities instead – 45KT in March alone

This confirms the blog’s suggestion in its recent Research Note that we will now see major exports of products such as PTA, particularly as the currency continues to fall.  This will make life very difficult indeed for those who assumed that China’s growth was sustainable, and who expanded their own capacity of PTA and other products.

The problem has been the illusion of the wealth effect.  As this disappears, and China’s real estate prices fall, it will slowly become clear that income and age range, not GDP growth, are the critical factors for assessing future demand levels.  The simple fact is that China is not a middle class country, and it was only the lending bubble that created an illusion that it was.

Benchmark product price movements since January 2014 are below, with ICIS pricing comments:
PTA China, down 12%. “Slower sales seen in the overall polyester markets in China have dampened market sentiment”
 US$: yen, down 3%
Brent crude oil, flat
Naphtha Europe, up 3%. “Demand from European petrochemicals buyers is minimal, although volumes continue to move to both Asia and the US”
S&P 500 stock market index, up 2%
HDPE US export, up 7%. “Demand for US material may improve if global prices rise as expected”
Benzene, Europe, up 7%. “ Raft of imports from Asia is likely to keep availability healthy in the near term”

Free China outlook webinar on Wednesday

China leaders smallThe blog’s recent Research Note on the likely impact of China’s economic reforms has attracted enormous interest.

As a result, it will hold 2 free webinars on Wednesday to discuss the outlook in more detail.

The webinars will be co-hosted with John Richardson, author of the Asian Chemical Connections blog – and co-author with the blog of Boom, Gloom and the New Normal.  They will focus on 4 key issues:

  • China’s lending bubble and its impact on chemical demand
  • Today’s problems of over-capacity and pollution
  • The demographic drivers
  • 7 key changes for the future

The webinars will be held live at

  • 15:00 Singapore time for Asian and Middle East audiences and then again at
  • 15:00 UK time (10:00 EST) for European and American audiences

Kindly sponsored by ICIS, they are free to join.  Please click here to register for the time that suits you best.


Interesting Quotes (7)

Quote marksEvery now and then, somebody in a senior position says something that really deserves to be noticed.  Often this is when they are in a state of Denial.  This was the case in the blog’s first post in the Interesting Quotes series, when CitiGroup CEO, Chuck Prince dismissed worries about subprime losses in August 2007, saying:

We see a lot of people on the Street who are scared.  We are not scared. We are not panicked. We are not rattled. Our team has been through this before.  We are “still dancing“”.

It is perhaps a sign of the times that several Interesting Quotes have now appeared in recent weeks – this time relating to China and its massive debt problems.  Perhaps encouragingly, three of the four are official statements, recognising that a massive problem exists.  Recognition is no guarantee that the debt problem can be solved.  But it is more hopeful than the state of Denial that existed amongst Western leaders in 2007-8.

President Xi Jinping‘s statement opening the 3rd Plenum is very clear about his view of the outlook:

The good meat is all gone; all that is left are hard bones to chew”.

So is last week’s statement from Premier Li Keqiang:

The downward pressure on economic growth remains. We can’t underestimate these difficulties. We won’t resort to strong short-term stimulus policies just because of temporary economic fluctuations.  A growth rate under this year’s 7.5% target is acceptable so long as sufficient employment is ensured.  We will focus more on medium- to long-term healthy development.”

Equally, state-owned news agency Xinhua has confirmed that the new leadership remains committed to bursting the real estate bubble:

The smart ones have got it. There is no sign of a monetary and fiscal policy shift. There is no hint of loosening the housing market either.  What China’s economy needs most is steady and deep reforms, which the decision-makers are determined to push even at the price of an economic slowdown, because they believe only through deep and comprehensive reforms can the Chinese economy embark on a new stable and healthy path.”

Of course, those who have done well out of the previous policy are still in Denial mode, like Chuck Prince.   Thus China’s richest man, Wang Jianglin and owner of property developer Dalian Wanda has argued:

There are only two possibilities to explain why people are predicting a collapse of Chinese real estate. Either they have ulterior motives or they have insufficient intelligence.” 

Its usually a bad sign when very wealthy people resort to abuse.  Why should they care?  Wang’s statement is thus unintentionally strong support for the view that China’s real estate market is about to come under major pressure.


Benchmark product price movements since January 2014 are below, with ICIS pricing comments:
PTA China, down 11%. “PTA inventories in China stood at 1.6m-1.7m tonnes, compared to typically healthy levels at 1m tonnes.  With credit tightening and difficulties in securing bank loans in the China markets, the majority of market participants were in agreement that there will not be a significant increase in demand in the near term.”
US$: yen, down 3%
Brent crude oil, down 2%
S&P 500 stock market index, down 1%
Naphtha Europe, up 3%. “The spring refinery maintenance season has left prompt European naphtha supply fairly balanced”
HDPE US export, up 6%. “Producers are not lowering export prices because their domestic demand is strong enough that they don’t need to participate in the export market”
Benzene, Europe, up 6%. “Many players are expecting a downward correction in the coming weeks in line with global numbers and domestic fundamentals”


China’s slowdown accelerates as IOUs substitute for credit

D'turn 5Apr14The end of Q1 seems a good moment to look back at the position of the benchmark markets in the IeC Downturn Monitor.  Compared to previous quarters, there has been surprisingly little movement:

  • Benzene has remained the most volatile, with supply outages temporarily pushing up prices (green line)
  • HDPE has trended higher, but these are mainly nominal prices as they are well above global levels (yellow)
  • The S&P 500 Index has been modestly positive (purple), as has naphtha (black)
  • The US$ has weakened slightly versus the Japanese yen, but now seems to be rising again (brown)
  • Brent crude oil has slipped over the past month (blue)
  • China’s PTA market has seen the biggest move, down 9% (red)

This seems to suggest markets are in a waiting period, unsure whether to push forward in the hope of better future demand.  This is clearly bad news, as Q1 is the seasonally strongest quarter this year, with Easter delayed until April.  So this indecision on the part of markets is a worrying sign.

Equally worrying is the continued downturn in China.  Its PTA market was easily the worst performer of 2013, with prices falling 16% from $1181/t to $997/t.  And the fall has accelerated in Q1, with prices down a further 9%, despite a minor rally in the past 2 weeks.

This is further evidence that the new leadership’s policies are starting to have a major impact on demand.  They appear to be clamping down hard on the shadow banking system, and credit is becoming increasingly hard to get.

The Wall Street Journal thus reports that many companies are now paying by IOU – a signed and company stamped ‘promise to pay’ in the future.  It goes on to suggest that these IOUs now account for over 16% of total money supply, and that their use is continuing to rise.

An even clearer sign is the downturn in the real estate market.  This has been a money-making machine for everyone concerned since urban property markets were liberalised in 1998.  But with prices now in the stratosphere, it seems that a major downturn has begun.  This has potentially enormous implications for Asian and global markets.

One simple statistic sums up the scale of the problem.  Dealogic report that Chinese property developers have accounted for 40% of all non-financial dollar bonds sold by companies across Asia (excluding Japan) so far in 2014.

If you would like to explore the subject in more depth, the blog has just written a detailed analysis on US investment site Seeking Alpha, under the title Investment In Chinese Real Estate No Longer Looks ‘Safe As Houses’.  Free to download, it suggests that the impact of the downturn will not only hit financial markets.

Critically important for the chemicals industry is that a real estate downturn will also explode the myth of China as a vast middle class market.  Consumer spending has been buoyed by the wealth effect, not by incomes, as the blog highlighted in February.

Benchmark product price movements since January 2014 are below, with ICIS pricing comments:
PTA China, down 9%. “Supply growth continues to outpace demand growth, and the majority of market participants held a bearish market sentiment”
Brent crude oil, down 3%
US$: yen, down 2%
Naphtha Europe, up 1%. “Naphtha demand among the European petrochemicals sector has yet to pick up, with propane remaining the most popular alternative feedstock for cracking”
S&P 500 stock market index, up 2%
HDPE US export, up 6%. “Current prices are much too high to generate any interest from the global market, with even the Latin American market being supplied by lower-priced Asian material”
Benzene, Europe, up 8%. “Current regional tightness stems from a swathe of production problems in eastern and southern Europe and some talk of limited run rates among producers in western Europe”

Sentiment weakens as US stock markets wait for more QE

Index Mar14

Sentiment, as measured by the IeC Boom/Gloom Index has weakened considerably over the past 3 months as the chart shows:

  • It peaked at 12 in November, hitting its highest level since before the 2008 Crisis began (blue column)
  • It then drifted lower in December, before rallying back to 9 in the New Year
  • But now it has slipped back to 7, whilst the Boom component has dropped from 241 in June to 176 today
  • Yet the S&P 500 Index of the major US shares has just made a new all-time high at 1859 (red line)

This type of divergence is often an indicator that a long-sustained market move is coming to an end.  And certainly this move has been underway since 6 March 2009, so it might be considered overdue for ending.

Plus there are other signs that the great stimulus-inspired market boom is losing strength:

  • The Chinese currency suddenly dropped 1.4% versus the US $ over the past 9 days
  • This was its largest move since 2005, when it was unhooked from the US $
  • At the same time the Japanese yen rose versus the US $, despite the government’s attempts to weaken it
  • Presumably some speculators were taking profits and looking for an Asian ‘safe haven’

Nobody quite knows why this happened, but sudden moves like this are usually signs of bigger shifts underway in the tectonic plates of the global economy:

  • The Wall Street Journal reports, for example, that China’s central bank decided at its February 18 meeting to curb the flows of ‘hot money’, driven by speculators who have seen riding the currency higher since 2005
  • This will also help to make China’s exports more competitive, whilst leading to further economic and currency market pressure on countries who rely on exports to China
  • In a sign of China’s need to boost exports, the two major monthly surveys of China’s vast manufacturing sector both reported a further slowdown
  • Another factor is the US Federal Reserve’s decision to taper its stimulus programme.  This is reducing the total amount of dollars available to fund global trade and market speculation

Against this background, Wall Street has begun to assume that new Fed chairman, Janet Yellen, will soon realise the economy is not as robust as had been assumed, and will quickly resume the QE stimulus programme.  And they may well be right about this.

But the scale of the stimulus in China has been more than twice as large as that in the US, as discussed in the blog’s new Research Note.  So changes in China’s policy will likely have a much grater impact than anything that Yellen does in the near-term.

This may be what the divergence between the Boom/Gloom sentiment index and the S&P 500 is trying to signal.  As the New York Times warns:No doubt, the International Monetary Fund would get involved, but addressing a market panic reaching from Rio de Janeiro to Beijing would be the most complex of tasks.”

Benchmark product price movements since January 2013 are below, with ICIS pricing comments:
PTA China, down 25%. “Both PTA and downstream polyester producers in China are sitting on high inventories because of slow demand”
Benzene, Europe, down 6%. “The market remains fundamentally sluggish due to limited downstream demand”
Brent crude oil, down 2%
Naphtha Europe, down 1%. “Surplus cargoes are being absorbed by the US gasoline sector”
US$: yen, up 16%
HDPE US exportup 18%.  “Prices moved up slightly, based on limited availability and feedback from traders about targeted prices from producers”
S&P 500 stock market index, up 27%