To assume, as they say is “to make an ass out of u and me”. That was certainly the case last week, when financial markets assumed that China’s slightly better PMI index was a sign that its domestic economy was stabilising. They had temporarily forgotten the key message of February’s Research Note, namely that the government would aim to preserve growth levels and jobs by boosting exports.
This is a critical distinction. The leadership is giving no sign of intending to do any kind of major stimulus programme. It knows that domestic growth will inevitably head towards zero as it tackles the property bubble. But at the same time, China does need to preserve jobs. And the only possible means, on the scale required, is via exports.
China’s PTA market provides a good example of what is happening, as the chart of the blog’s benchmark prices shows:
- Slowing domestic demand combined with increasing capacity has taken prices down 12% this year (red line)
- ICIS suggests that June’s operating rates will be a further 10% below today’s 76% level as demand slows
- This slowdown is destroying import demand – yet until recently China was the world’s largest PTA importer
- Imports were just 500kt in January-April versus 2MT in 2012, according to Global Trade Information Services data
- Instead an export surge is underway, with 127kt exported in the same period – the first time this has ever happened
This change of strategy is most advanced in PVC. China used to be a major importer when its construction boom was at its peak, buying 255kt in January-April 2012. This year, its trade is balanced, with exports matching imports at 300kt.
China’s new strategy makes great sense – it aims to close down low-margin polluting businesses and instead expand higher-value exports. Thus it is investing heavily to create a technologically sophisticated auto industry, and car exports are poised to take off as the domestic market weakens:
- China’s gas deal with Russia rightly grabbed the headlines last week
- But Russia’s railway is now also ramping up its connections between China and Germany/Central Europe
- Links to India, Thailand, Vietnam and Indonesia are also planned for the next 2 – 3 years
- The aim is to create a ‘through route’ for China’s cars to key export markets
And whilst it is fashionable to mock the quality of China’s domestic car production, JD Power analysis shows manufacturers moving rapidly up the learning curve:
“Chinese domestic brands achieved tremendous improvement in vehicle quality in 2013, with four domestic brands—GAC Motor, Venucia, Roewe and Luxgen —performing above industry average. We have seen the gap with international brands continually narrow during the past 14 years.”
Meanwhile, as the chart also shows, an ominous calm has fallen in other Benchmark product markets. They have hardly moved in months.
But the blog is keeping a close eye on benzene, its favourite indicator (green line). its prices have suddenly weakened, as Asian demand disappoints. As we move into the seasonally weak Q3 period, this could prove an early warning sign that a new downturn lies ahead.
Certainly performance since New Year supports the blog’s own argument that the Demographic Scenario is far more likely to occur than policymakers’ Recovery Scenario. And even they are now warning of potential trouble ahead. Germany’s chancellor Merkel warned of “deceptive calm”, whilst as Bloomberg reports:
“24 hours of warnings where led by New York Fed chairman William Dudley’s acknowledgement that the slide in market volatility “makes me a little nervous”. Bank of England deputy governor Charles Bean said conditions were eerily reminiscent of the pre-Crisis era, whilst Bundesbank borad member Anreas Dombret said “we do see risks despite the fact the markets are calm“.
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
PTA China, down 12%. “Several producers are planning to shut their units in June because of squeezed margins, and slower off-take in the downstream markets”
Benzene, Europe, down 4%. “Ample import volumes arriving in Europe.”
US$: yen, down 3%
Brent crude oil, flat
S&P 500 stock market index, up 4%
Naphtha Europe, up 5%. “A recent spike in exports to Asia has been followed by a sharp drop”
HDPE US export, up 7%. “Globally, buyers are buying mostly on an as-needed basis, not wanting to build inventories on the assumption that prices will decline”