Asian Macro Economic Overview
MAKING AN accurate prediction for the wrong reasons is better than being wrong on both counts.
Most economists got it wrong on Asia. Now it’s up to China, and perhaps eventually India, to fill a gap left by the decline in Western consumption
"I said in 2004 that the second half of 2008 would mark the end of the up cycle for petrochemicals because of supply and demand fundamentals. But I didn't see the financial crisis coming," says a Southeast Asian-based petrochemical consultant.
Many of the macroeconomists were doubly wrong, predicting that Asia would not suffer a severe downturn, because of the decoupling theory.
So much for decoupling: Japan's economy will shrink by 6.2% in 2009, its worst performance since World War II, according to the International Monetary Fund in its latest World Economic Outlook, released in April.
Only three of the Asia-Pacific countries in the G20 will register positive growth this year - China at 6.5%, India 4.5% and Indonesia 2.5%, the IMF adds. The other Asia-Pacific nations in the G20 facing negative growth are Japan, South Korea and Australia.
Export-focused economies are being hammered the hardest, raising the question over the validity of their growth models.
Western growth could remain subpar for many years. So Asian economies heavily reliant on overseas trade are hoping that China and India will eventually fill the gap left by the retreat of the US and European consumer.
Singapore is a classic case. The island state's exports fell by 17% in March compared with the year before and GDP could shrink by as much as 9%. At least, though, the March fall in exports represented a decelerating decline, and trade with China was sharply up.
South Korea, too, saw a slowdown in the rate at which its economy contracted in Q1 over the fourth quarter last year, with this other export-dependent economy also benefiting from stronger trade with China.
Shipments have been boosted by the won depreciating against the US dollar by more than 30% since the start of the year.
The South Korean petrochemical industry exports around 50% of its polymer production to China - hence, a great deal rides on a sustained and accelerating recovery in Asia's most-important economy.
THE CHINA GROWTH CONUNDRUM
"My personal view is that the fundamentals are there. Q2-Q3 is supposed to be the peak production season in China and the government is keen to support GDP growth," says a senior Singapore-based executive with a leading Western commodity and specialty chemical producer.
"The new money-supply policy and subsidies to consumers - for example, discounts for rural residents who buy home appliances and rebates for new home buyers - are helping the market."
Housing sales by value rose by 36% in March, which, according to The Economist, is an important measure of recovery. Most of the job losses among migrant workers have been the result of a slowdown in construction, which began in 2007 when the government restricted credit growth.
Retail sales grew by 14.7% in March, over 11.5% in February, and Q1 GDP growth was still 6.1% - although this was less than half the level in mid-2007.
"This is healthy by the standards of any other country. The first-quarter number has led me to believe that the government will hit its target of 8% growth for the full year," the senior executive adds.
Prime Minister Wen Jiabao has, though, reportedly warned against "blind optimism" over the speed of the recovery, adding that risks remain from overcapacity in some industries, job losses and low investment in the private sector.
A boost in industrial production has left "the unresolved question of who is going to absorb (China's) excess capacity if the US is no longer willing to play the role," writes Michael Pettis on his blog, China Financial Markets.
China's trade surplus was $62.6bn in Q1 this year, versus $41.7bn for Q1 2008.
This is a sign that China is trying to export its way out of oversupply, adds Pettis, a professor at Peking's University of Guanghua School of Management, who formerly worked on Wall Street in trading, capital markets and corporate finance.
This supports anecdotal reports picked up from chemical traders and producers that some factories are being run hard in order to keep people in jobs.
Pressure is also being exerted on provincial officials to do their bit to achieve the government's overall growth target of 8%, resulting again in stories that raw materials and semi- and finished goods are being stockpiled.
China is also said to have bought large volumes of copper, iron ore and aluminum for the second half of the year - as well as raising the operating rates of aluminum smelters.
The local polyolefin industry might also be stocking up: more than 600,000 tonnes of polyethylene (PE) was imported in February, according to traders contacted by ICIS pricing - the biggest monthly volume since 2005.
A similar quantity - much of it from the West because of Middle East production problems and strong arbitrage - is expected to have been shipped in March.
Huge percentage increases in imports took place in January and February for most grades of PE and polypropylene (PP), according to China Customs. "Where's it all going? I think into the inventories of traders and distributors who are speculating on stronger prices in H2," says a market analyst with a global polyolefin producer.
So, if blind optimism has over-inflated expectations, China might end up adding to global deflationary pressures through very cheap reexports of finished goods.
US consumer spending is still weak so where would all this extra stuff go?
Private companies - the main engine of economic growth - are struggling to get financing while the state-owned enterprises receive a flood of loans, Pettis adds. There could be a poor return on money spent versus jobs creation. For example, CNY1 trillion ($14bn) is being spent in Henan province to create 650,000 jobs, he says.
If this same sum had been spent on giving workers salaries of CNY3,000 a month (more than twice the average salary of migrant workers) this would have been enough to pay the wages of 650,000 people for 43 years, he calculates.
"I am sure that longer term, China will get it right," the petrochemical consultant says. "The amount being spent on infrastructure in western China is the equivalent of the US Highways Act in the 1950s, inspired by Eisenhower. This could really open up these markets. I also believe that China will introduce very good national health care and pension schemes to unlock much more domestic-growth potential."
But as for the next 12-18 months, the consultant admits that growth in China is far too uncertain to call.
INDIA'S FOOD CRISIS
"Despite years of robust economic growth, India scored worse than nearly 25 sub-Saharan African countries and all of South Asia, except Bangladesh," says the Washington, D.C.-based International Food Policy Research Institute in its 2008 Global Hunger Index.
India is home to the world's biggest food-insecure population, with 200m falling into this category, the nonprofit organ-ization adds.
This is a world away from India's booming companies, luxury hotels, modern shopping centers and resulting big percentage increases in chemical and plastics sales.
"The Indian market has been fantastic. PE demand growth has remained very strong despite the economic crisis," says a source with a North American polyolefin player.
"India depends more on domestic consumption as it's less tied to export trade than China."
Indian chemical consumption - and its overall economy - remains much smaller than China's because of a lack of industrial development and the huge gap between the urban rich and rural poor.
Success in closing the gap might hinge on the outcome of the General Election, which was taking place as this feature went to press and is due to end on May 13.
Coalition politics can make implementing effective development policies a slow process, and one that ends up involving lots of compromises.
JAPAN'S DILEMMA
The collapse in global trade has hit Japan exceptionally hard because it was so heavily export-dependent.
Yet another big government stimulus package in Japan is aimed at breaking this long-standing dependence through boosting domestic consumption. But decades-old systemic problems of course are unlikely to be fixed over just the next few years, meaning that recovery will hinge on what happens globally.
"Current ethylene production reflects what's happening with the overall economy. Cracker operating rates of around 70% indicate that output is for the domestic market only," adds the petrochemical consultant.
Ethylene operating rates were at 100.3% in February 2008 but had fallen to 74.3% for the same month this year, estimates Mitsubishi Chemical.
This has resulted in output - when again the two months are compared - falling from more than 7m tonnes to 4.63m tonnes, adds Mitsubishi.
Japan's chemical and plastics industry is heavily tied into export trade - both directly through shipments of marginal tonnes of production, mainly to China, and indirectly through bigger-volume sales to manufacturing giants such as Toyota.
Lots of single product mergers during the 1990s and early 2000s - in polymers such as PE, PP and polyvinyl chloride (PVC) - helped boost efficiency.
The question now is whether the economic crisis will prompt more industry consolidation in Japan, South Korea and elsewhere in Asia.
In the meantime, at a macroeconomic level, the big hope is that China can return to double-digit GDP growth - and quickly.
Most economists got it wrong on Asia. Now it’s up to China, and perhaps eventually India, to fill a gap left by the decline in Western consumption
"I said in 2004 that the second half of 2008 would mark the end of the up cycle for petrochemicals because of supply and demand fundamentals. But I didn't see the financial crisis coming," says a Southeast Asian-based petrochemical consultant.
Many of the macroeconomists were doubly wrong, predicting that Asia would not suffer a severe downturn, because of the decoupling theory.
So much for decoupling: Japan's economy will shrink by 6.2% in 2009, its worst performance since World War II, according to the International Monetary Fund in its latest World Economic Outlook, released in April.
Only three of the Asia-Pacific countries in the G20 will register positive growth this year - China at 6.5%, India 4.5% and Indonesia 2.5%, the IMF adds. The other Asia-Pacific nations in the G20 facing negative growth are Japan, South Korea and Australia.
Export-focused economies are being hammered the hardest, raising the question over the validity of their growth models.
Western growth could remain subpar for many years. So Asian economies heavily reliant on overseas trade are hoping that China and India will eventually fill the gap left by the retreat of the US and European consumer.
Singapore is a classic case. The island state's exports fell by 17% in March compared with the year before and GDP could shrink by as much as 9%. At least, though, the March fall in exports represented a decelerating decline, and trade with China was sharply up.
South Korea, too, saw a slowdown in the rate at which its economy contracted in Q1 over the fourth quarter last year, with this other export-dependent economy also benefiting from stronger trade with China.
Shipments have been boosted by the won depreciating against the US dollar by more than 30% since the start of the year.
The South Korean petrochemical industry exports around 50% of its polymer production to China - hence, a great deal rides on a sustained and accelerating recovery in Asia's most-important economy.
THE CHINA GROWTH CONUNDRUM
"My personal view is that the fundamentals are there. Q2-Q3 is supposed to be the peak production season in China and the government is keen to support GDP growth," says a senior Singapore-based executive with a leading Western commodity and specialty chemical producer.
"The new money-supply policy and subsidies to consumers - for example, discounts for rural residents who buy home appliances and rebates for new home buyers - are helping the market."
Housing sales by value rose by 36% in March, which, according to The Economist, is an important measure of recovery. Most of the job losses among migrant workers have been the result of a slowdown in construction, which began in 2007 when the government restricted credit growth.
Retail sales grew by 14.7% in March, over 11.5% in February, and Q1 GDP growth was still 6.1% - although this was less than half the level in mid-2007.
"This is healthy by the standards of any other country. The first-quarter number has led me to believe that the government will hit its target of 8% growth for the full year," the senior executive adds.
Prime Minister Wen Jiabao has, though, reportedly warned against "blind optimism" over the speed of the recovery, adding that risks remain from overcapacity in some industries, job losses and low investment in the private sector.
A boost in industrial production has left "the unresolved question of who is going to absorb (China's) excess capacity if the US is no longer willing to play the role," writes Michael Pettis on his blog, China Financial Markets.
China's trade surplus was $62.6bn in Q1 this year, versus $41.7bn for Q1 2008.
This is a sign that China is trying to export its way out of oversupply, adds Pettis, a professor at Peking's University of Guanghua School of Management, who formerly worked on Wall Street in trading, capital markets and corporate finance.
This supports anecdotal reports picked up from chemical traders and producers that some factories are being run hard in order to keep people in jobs.
Pressure is also being exerted on provincial officials to do their bit to achieve the government's overall growth target of 8%, resulting again in stories that raw materials and semi- and finished goods are being stockpiled.
China is also said to have bought large volumes of copper, iron ore and aluminum for the second half of the year - as well as raising the operating rates of aluminum smelters.
The local polyolefin industry might also be stocking up: more than 600,000 tonnes of polyethylene (PE) was imported in February, according to traders contacted by ICIS pricing - the biggest monthly volume since 2005.
A similar quantity - much of it from the West because of Middle East production problems and strong arbitrage - is expected to have been shipped in March.
Huge percentage increases in imports took place in January and February for most grades of PE and polypropylene (PP), according to China Customs. "Where's it all going? I think into the inventories of traders and distributors who are speculating on stronger prices in H2," says a market analyst with a global polyolefin producer.
So, if blind optimism has over-inflated expectations, China might end up adding to global deflationary pressures through very cheap reexports of finished goods.
US consumer spending is still weak so where would all this extra stuff go?
Private companies - the main engine of economic growth - are struggling to get financing while the state-owned enterprises receive a flood of loans, Pettis adds. There could be a poor return on money spent versus jobs creation. For example, CNY1 trillion ($14bn) is being spent in Henan province to create 650,000 jobs, he says.
If this same sum had been spent on giving workers salaries of CNY3,000 a month (more than twice the average salary of migrant workers) this would have been enough to pay the wages of 650,000 people for 43 years, he calculates.
"I am sure that longer term, China will get it right," the petrochemical consultant says. "The amount being spent on infrastructure in western China is the equivalent of the US Highways Act in the 1950s, inspired by Eisenhower. This could really open up these markets. I also believe that China will introduce very good national health care and pension schemes to unlock much more domestic-growth potential."
But as for the next 12-18 months, the consultant admits that growth in China is far too uncertain to call.
INDIA'S FOOD CRISIS
"Despite years of robust economic growth, India scored worse than nearly 25 sub-Saharan African countries and all of South Asia, except Bangladesh," says the Washington, D.C.-based International Food Policy Research Institute in its 2008 Global Hunger Index.
India is home to the world's biggest food-insecure population, with 200m falling into this category, the nonprofit organ-ization adds.
This is a world away from India's booming companies, luxury hotels, modern shopping centers and resulting big percentage increases in chemical and plastics sales.
"The Indian market has been fantastic. PE demand growth has remained very strong despite the economic crisis," says a source with a North American polyolefin player.
"India depends more on domestic consumption as it's less tied to export trade than China."
Indian chemical consumption - and its overall economy - remains much smaller than China's because of a lack of industrial development and the huge gap between the urban rich and rural poor.
Success in closing the gap might hinge on the outcome of the General Election, which was taking place as this feature went to press and is due to end on May 13.
Coalition politics can make implementing effective development policies a slow process, and one that ends up involving lots of compromises.
JAPAN'S DILEMMA
The collapse in global trade has hit Japan exceptionally hard because it was so heavily export-dependent.
Yet another big government stimulus package in Japan is aimed at breaking this long-standing dependence through boosting domestic consumption. But decades-old systemic problems of course are unlikely to be fixed over just the next few years, meaning that recovery will hinge on what happens globally.
"Current ethylene production reflects what's happening with the overall economy. Cracker operating rates of around 70% indicate that output is for the domestic market only," adds the petrochemical consultant.
Ethylene operating rates were at 100.3% in February 2008 but had fallen to 74.3% for the same month this year, estimates Mitsubishi Chemical.
This has resulted in output - when again the two months are compared - falling from more than 7m tonnes to 4.63m tonnes, adds Mitsubishi.
Japan's chemical and plastics industry is heavily tied into export trade - both directly through shipments of marginal tonnes of production, mainly to China, and indirectly through bigger-volume sales to manufacturing giants such as Toyota.
Lots of single product mergers during the 1990s and early 2000s - in polymers such as PE, PP and polyvinyl chloride (PVC) - helped boost efficiency.
The question now is whether the economic crisis will prompt more industry consolidation in Japan, South Korea and elsewhere in Asia.
In the meantime, at a macroeconomic level, the big hope is that China can return to double-digit GDP growth - and quickly.
quoted from: www.ICIS.com
