Is there an inventory build-up of key commodities in China? In the
absence of data, there are no clear answers, but there are red flags.
■ Apparent demand (imports plus production less exports) for key
products are running significantly above trend. Economic growth, on the
other hand, while improving, is below trend. We see this not only in oil
imports, polyethylene (PE) and asphalt, but also in other commodities,
suggesting a consistent pattern and pointing to inventory build.
■ An economic acceleration in China in 2H09 is the consensus view –
traders in China appear to know too, and seem to be positioned for it, helped
along by easy credit conditions.
■ The risk here is that while consumption of key products will rise, the
“demand pull” on international commodity markets doesn’t keep pace.
Apparent demand could be lower than current monthly rates, despite
increased consumption. This could have a negative impact on pricing.
■ We see risks of this for polymers and oil. In polymers, China’s capacity is
set to rise rapidly in 2H09. For oil too, spare capacity is large, even with a
boost to US oil demand. The risks on China apparent demand, the
diminishing intensity of USD weakness, and possible reduction in inflation
expectations are factors that could push oil prices sharply lower through to
December. We are sellers of CNOOC and PetroChina. We prefer OGDC
and Sinopec. We like the Indian refiners as a trade. We are sellers of
petrochemical names in Taiwan.