OREANDA-NEWS. April 07, 2011. Lack of credit and inflation are becoming even greater problems in China, which is reflected in polyolefin markets that remain very quiet, as per ICIS. Lack of credit continues to be problem for the small -and medium-sized companies (SMEs) due to the increases in bank-reserve requirements. Many of the converters, who are SMEs, are struggling to get sufficient working capital to operate at full capacity.

Cost pressures are another problem, resulting from an official inflation rate in China which is hovering around 5%. Also, speculators in eastern China are not able to open letters of credit to gamble in the market, affecting activity in both the physical market and the Dalian Commodity Exchange. Some of the strong volume growth seen last year was the result of the ease of speculation. Wage costs are also on the up in China, the result of official action to reduce social unrest caused by a widening gap between the rich and the poor.

Sectors such as packaging film, agricultural film and home appliance sectors are unable to pass on any further resin prices increases. This is part of the reason why polyethylene (PE) pricing has remained basically flat since the end of the Chinese New Year holidays.

Crude oil is one obvious cause of the inflationary problem afflicting the whole of Asia, along with rising food costs. The cost of food is, of course, tied to some extent to that of oil. But rising food prices are also the result of changing lifestyles as more and more Asians tuck into a diet containing much higher amounts of protein. A further trigger for inflation is the huge stimulus program launched in late 2008, resulting in the rapid and dangerous rise in asset prices, most notably in the property sector.

The stimulus package has contributed to the widening of the gap between the rich and the poor. And so ironically, a short term impact of the government being forced to raise wages is more inflationary pressure as it attempts to reduce inflation through higher interest rates and bank reserve requirements.

A climate of exceptional uncertainty has resulted in lack of buying activity in both PE and polypropylene (PP). But strangely enough while PE pricing has, as we have said, been pretty much flat since the CNY, PP has fared slightly better. PP pricing, however, has risen steadily since January even if buying right now is exceptionally thin. The current tightness in PP can be attributed to turnarounds in the Middle East and lost production in Japan (30% of PP production was down late last week because of the earthquake and tsunami, according to ICIS pricing. However, more than 50% of LLDPE capacity was also off line, suggesting that both polymers will be imported very shortly). ICIS blog suspects that an additional longer-term reason for tight PP supply is the structural shortage of propylene. This is due to the switch to lighter feeds in the US and continued strong demand growth for PP.