In the late 1970s and early 1980s, New York Mayor Ed Koch fronted a series of public service TV commercials asking parents: “Its 10pm. Do you know where your children are?”
The blog was reminded of this when checking China’s polyethylene (PE) import data on Global Trade Information Services for the January – May period, as shown in the chart above:
- 2014 imports (red column) were up a staggering 34% versus 2012 (blue) and 22% versus 2013 (green)
- They were over 1 million tonnes higher than in 2012
- Domestic production also continued to expand, up 17% versus 2012
- Total market demand was thus up an unbelievable 25% versus 2012
Nobody believes that China’s mature market can possibly be seeing this level of increased demand, especially when the wider economy is slowing. Some market segments are obviously doing better than others, but they cannot carry the whole market.
The real cause, as the blog first noted in May, is instead likely to be that PE imports have become part of China’s ‘collateral trade’ and are helping to finance the finals stages of its property bubble. This ‘collateral trade’ itself is not illegal in China and works as follows, as we described in last month’s China Compass Note:
- A company buys PE from an overseas supplier on 180 days payment terms
- They immediately sell the volume on the Dalian futures exchange
- Now they have money to invest in the property market at rates of up to 60%
- They can then ‘roll over’ the purchase after 180 days by selling to a Hong Kong-based company
- This company opens a letter of credit and can use the proceeds to ‘roll over’ the previous trade
Originally it was commodities such as copper and iron ore that were the main focus of the ‘collateral trade’. But the new leadership is clamping down hard on these areas, and there are suggestions that desperate developers have indulged in multiple fraud in some cases.
The downturn in the property market means companies are alleged to have sold the same product to several different people. Last week it was also revealed that tanks containing ”mixed aromatics“, probably mixed xylene, was also now under investigation for the same reason.
So now the ‘collateral trade’s’ focus seems to have shifted to include PE and polypropylene (PP):
- PP became involved once the Dalian futures contract opened in February
- PP imports have so far jumped 13% in 2014 versus 2013, according to GTIS data
- This is presumably the reason behind the astounding rise in Dalian volume to 13MT in June, as the chart shows (green line)
This switch to petchems suggests a sense of desperation is entering the ‘collateral trade’ as the property bubble bursts. The stimulus-led policies of the previous leadership are rightly regarded as having created a ‘lost decade’ for China, and as having exposed it to the danger cited 2 years ago by the World Bank in their China 2030 Report:
“China’s growth is in danger of decelerating rapidly and without much warning. That is what has occurred with other highflying developing countries, such as Brazil and Mexico, once they reached a certain income level, a phenomenon that economists call the ‘middle-income trap’.”
Producers now need to follow Mayor’s Koch’s example, and ask searching questions about the ultimate use of their product in China. The blog suspects they will find that a large volume is sitting in storage or bonded warehouses, and not being used for its proper purpose.
Producers also need to prepare a contingency plan for when this stored volume reappears on the market, probably in a disorderly fashion. The endgame of the world’s largest-ever credit bubble is not going to be pretty.