When petrochemical prices fell to multi-year lows in November 2008 it was deemed a key indicator of deteriorating demand for Asian exports.
As the FT put it (our emphasis):
The drop in petrochemicals prices goes well beyond the fall in oil prices, suggesting that demand for plastics and synthetic textiles is extremely weak as the Asia-Pacific export-oriented nations, including China, suffer from reduced overseas orders
The cost of naphtha — the cornerstone of the petrochemical industry — fell last week to a five-year low of $284 a tonne in the far-east Asia market, down 76 per cent from July’s record high of $1,200 a tonne, according to Platts, the pricing agency.
Of course since then we’ve had a number of petchem related casualties – most prominently the filing for bankruptcy of the world’s third biggest chemicals company and refiner LyondellBasell.
But are we seeing a promising change of affairs? Note the following Bloomberg charts of Asian naphtha spot prices:
As can be seen, the market has been staging a small rally of late, leading the technicals to suggest a bottom could very well have been reached.
Reuters reports Asia naphtha swaps were trading stronger on Monday too with particular demand from South Korean petchem firms, and the return of Taiwanese company Formosa to the market.
This is positive news for Chinese and Asian manufacturing in general – especially given the level to which Asian industrial production has fell in the past quarter – down some 32 per cent according to JP Morgan, roughly double the rate of decline in the Americas and Europe.
Furthermore, Goldman Sachs’ chief economist Jim O’Neil sees yet more reason to be positive about China on the back of such commodity-based indicators. He tells the FT in an interview published Monday that the fourth quarter of 2008 may very well have been the worst for the world economy, with 2009 likely not going to be as bad. On a relative basis he’s specifically positive about the outlook for the BRICs, China and India in particular. As he explains:
If you look at what has really happened last year in the context of where it’s come from it was pretty obvious that in the event of a major slump in the most developed markets the BRIC markets would have a problem.
He adds that both China and India boasted PEs double that of western markets, suggesting inevitably they would have a stiff fall. But over a longer-term their performance still outshines the S&P. So when it comes to China he says (our emphasis):
One of my favourite ideas is investing in Chinese domestic demand-facing shares, if you look at the fiscal and monetary policy response in China that’s happened it’s huge. There is some evidence that monetary growth is already picking up in China, it’s interesting that commodity market indicators like freight indices and the Baltic freight one have started to turn around again. And I suspect that’s a sign of Chinese demand perhaps already starting to turn for commodities which will ultimately be very good for places like Russia.
While the world is still braced for some truly horrific export numbers out of China, O’Neil says he’s surprised by the attention the figures are getting:
For a country like China that at one stage was exporting more than 10 per cent of its gdp in exports just to the US, obviously exports are going to be very weak. What you really need to be looking at going forward with China is what’s going on with domestic demand and domestic economic policy and on that school I am very optimistic.
The Wall Street Journal reports Monday that the figures will show China’s exports in December falling 2.8 per cent from a year earlier to $111.16 bn , with imports in the month falling 21.3 per cent to $72.18 bn — citing a person familiar with the data.
The WSJ’s view is that it somewhat contradicts the idea of healthy domestic demand. As they explain:
The weak trade data, especially that of imports, showed China isn’t just suffering from a global economic slowdown but also from a deterioration in local demand, an engine that the authorities have hoped would keep the economy going and unemployment in check.
That dim view is echoed by CFR blogger Brad Setser who points out the brutality of the recent downturn in Asia from the point of view of Korean and Taiwanese exports. These, he says, look a lot like charts of financial variables after a bubble bursts, not charts of the level of exports — which isn’t good. He goes on to explain:
Almost all of Taiwan’s exports seem to go to China for final assembly. Korea though exports to both China (electronic components, steel, no doubt other products) and the US (cars). And there has been a very sharp fall in both Korean shipments to both the US and China. Then again, it seems that exports are down across the board. Europe doesn’t look much different.*
Of course, Jim O’Neil would say that the numbers fail to reflect the real point. Exports were always bound to drop, as were equities. “The idea these markets could go on forever was obviously something we never believed,” he tells the FT.
But presumably once global demand for Chinese and Asian goods does rebalance, the driving force will once again be domestic demand – which, while hurt, has the greatest potential to recover. Hence expect some bad numbers for a while out of Asia, but soon enough things will tick up again.
Other positive signs that China may have passed the worst of it include the uplift in Chinese crude imports in December which registered a 4 per cent rise on the month to about 3.38 mn barrels a day – that’s after falling to a yearly low in November. Furthermore, it looks like China has refocused on building up its strategic petroleum reserve again too while prices remain low.
So yes there’s doom and gloom, but there are also more than a handful of positive indicators to suggest the sudden contraction in Chinese and Asian industry may very well be set for a rebound fuelled by domestic demand.
As for the strength in naphtha, that’s a positive for refining spreads, a good indicator that crude too may be passed its weakest.
Related links:
Petrochemical prices fall to multi-year lows - FT Alphaville
China imports, exports tumble - WSJ
US investment guru sees future in China despite hard times – AFP