Some pressure likely on petrochemical prices in Asia as China steps up credit tightening measures

22-Jan-10

Prices of petrochemical products in Asia may start to feel some pressure as China has accelerated its credit tightening measures, as per ICIS. However, a price crash will be averted on estimation that demand will sustain in line with the recovery of the global economy. Based on media reports, Chinese banks have been ordered to stop new lending for the rest of January, as their loan portfolio ballooned in the first few weeks of 2010. This followed a series of interest rate hikes on the three- and one-year bills of the People’s Bank of China (PoBC), as well as an increase in the share of deposits that banks must place with the central bank. As import volumes into China reduce, increased supply could be available for the rest of Asia, which could pull prices down from current high levels. Hence some regional players in the polyethylene (PE) and polypropylene (PP) markets have held back purchases. Other players expect the market impact to be short-lived as they expect that a cautious stance may be an initial reaction that may slow trades initially, but it will be limited as overall demand is still very good. In 2009, China saw a GDP growth of 8.7% despite a global recessionary scenario on government efforts to prevent a hard landing for China. This led to some excesses in new lending, which nearly doubled to record highs of CNY 9590 bln (US$1400 bln). The credit boom prompted petrochemical product traders to engage in more speculative activities, which were most likely to be curtailed now that China has decided to mop up excess liquidity. If the rapid growth in lending was not restrained, this could lead to higher asset and commodity prices and cause the Chinese economy to overheat.