China exports deflation as it adds capacity

Margins Oct09.jpgChina will pump loans worth $1.3trn into its economy this year, equal to 1/3rd of GDP. Equally, by tying the yuan to the US$, China has achieved a major devaluation against major currencies such as the euro.
The result has been that China’s Q3 GDP rose less in “nominal” terms than in “real” terms. Normally one has to deduct inflation from the “nominal” figure. But in Q3, China’s “nominal” GDP growth was just 4.7%, but rose to 8.9% in “real” terms as a result of massive deflation.
When one looks at specific chemical industry statistics, the result is just as alarming. As the blog noted back in February, China allocated $58bn to accelerate the implementation of petrochemical expansion plans. And as ICIS news has reported, the new capacity is clearly not being delayed.
The two big projects for 2009, PetroChina Dushanzi and Fujian are now online. And there seems little reason to expect 2010’s big projects (Sinopec Tianjin, Sinopec Zhenhai) to be delayed. Including other smaller expansions, and PetroChina Fushun in H1 2011, China will have increased ethylene capacity by 6 million tonnes in 2.5 years.
The impact is shown in the excellent new ICIS Asian weekly polyethylene margin report above. The yellow bar shows regional ethylene margins (based on NEA export netback values into PE) are already down to just $105/t. As one experienced industry observer told the blog, “2002/3 conditions are beckoning” if Western demand does not recover quickly.

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