Published on February 19, 2014
Market participants expected a great start in the year 2014, however the year began with a bearish sentiment. The Chinese stock market saw a sharp decline. Industry players had started losing confidence in China’s petrochemical market as the methanol, PTA and natural rubber futures were plummeting.
Experts think that a downtrend of China chemicals is bound to happen. If the prices of concrete and steel go down to levels that existed 20 years ago then chances are that prices for chemicals will also drop.
Over the past ten years nearly all the commodities in China have increased significantly, including food, housing etc. This rise in price can be directly linked to the surging inflation. The government states that they issue 2-4 per cent of CPI every year. However, the actual figures are believed to be much higher. This is the reason behind the ever continuing price rise.
The new government has now begun to tighten currency issuance. M2 insurance growth rate has hit a new low OF 14-14.2 per cent in 2013. Analysts believe that the growth rate may fall below 13 per cent in 2014. Rigid monetary policy will help curtail inflation as money shortage in the market would lead to reduced commodity prices. Thus, from this perspective prices of key commodities might be lower in 2014 compared to the previous year.
Expanding production capacity will also help lower prices of commodities. The three factors that determine commodity prices are: currency, industrial monopoly and tight supply.
The emergence of private firms has adversely affected the growth of state-owned companies like Sinopec and PetroChina. A competitive environment is bound to bring down prices. Competition enables consumers to purchase good and cheap commodities. Thus, the rise of private firms will also lead to a sharp decline in prices of major commodities.
The third factor that determines commodity price is excess capacity. At present there are more and more products experiencing excess capacity. For example-
Ethylene oxide (EO) market- In 2013, ethylene oxide capacity was 34 per cent higher, standing at 2,220kt/a, but the consumption growth rate was below 10 per cent. Capacity expansion will see an additional capacity of 1,560kt/a, which is 60 per cent higher than the previous year. Analysts expect EO prices to drop by 10 per cent or more on average.
Propylene oxide (PO) market- In 2013 PO prices were high, which came as a surprise to industry players. The price hike took place primarily due to plants’ speculative activity. In 2014, capacity growth is expected to stand at 29 per cent, however growth rate higher than 10 per cent is rather unlikely.
Capacity expansion usually takes place in the second half of the year. Thus, PO prices may decline during this period. Industry players believe that a downtrend may start from the Spring Festival around.
Capacity expansion in China will pose a threat to market shares of Dow Chemicals, Shell and LyondellBasell . And as I mentioned earlier- competition is bound to make prices more reasonable.
Methanol market- In August 2013, China’s methanol market witnessed tremendous growth and rushed to a record high of over RMB 4,000/mt in December. However, it is difficult to keep a market firm without demand, which led to a decline in methanol prices.
Experts expect the market to continue on a downtrend in H1 2014 because of a variety of reasons, including stable increase in methanol capacity in the first half of 2014, while downstream markets like acetic acid, PTA and formaldehyde were lukewarm. Methanol futures have dropped below RMB 2,900/mt.
Meanwhile, prices of coal-based methanol will be lower as feedstock coal prices drop further. H2 2014 may witness a strong methanol demand with the commissioning of several MTO units.
To be continued...
