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.