China’s slowdown hits PE imports from N America and NE Asia

China PE Jan15manufacturing slowdown is now well underway in China, as the latest official and unofficial Indices confirm.

The government is mitigating this via its policy of self-sufficiency – which means a steady reduction in the need for imports – as well as by increasing exports of higher value-added products such as polyethylene (PE).  PE is the largest volume plastic, used in a wide variety of food, agricultural and other applications.

Full-year data also confirms China’s strategic decision to focus its remaining import need on the Middle East and SE Asia (SEA), at the expense of imports from the West and NE Asia (NEA), as the chart based on data from Global Trade Information Services shows:

  • It highlights developments in total demand, Chinese production, imports and exports since 2009
  • Over the period, total demand has risen 41%, whilst domestic production has jumped 58%
  • As a result, imports have only grown 26%, whilst exports have soared 162% (from a small base)
  • Equally important is that imports from the Middle East and SE Asia have gained major market share
  • Imports from NE Asia, N America and Europe have been the key losers

This is very bad news, of course, for the proposed US expansions based on shale gas developments.  The return of oil prices to more normal levels has already undermined the economic logic for these developments.  China’s continuing pivot away from NAFTA imports only adds to my long-lasting concerns about the lack of export potential for the major volumes that would be involved.

The data is also revealing in terms of my worries last summer about the growing link between import demand and the ‘collateral trade’.  This has involved the use of vast quantities of PE, as well as copper, iron ore and some other commodities, as collateral for loans to finance speculation in the property sector:

  • H1 data had suggested that China’s total demand had suddenly jumped 12%
  • This was obviously impossible for such a mature product as PE
  • The key issue was a 20% rise in imports to 5MT
  • Clearly a significant import volume was being used as collateral, and not for industrial purposes

Since July, the unwinding of this mess has been underway: full year import volume was up just 4% versus 2013 at 9.5MT.  Sadly, many companies have as a result suffered costly write-downs on unsold imports as oil prices collapsed.

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