China Petroleum and Chemical Industry Federation, Sublime China Information (SCI)

"Petroleum and Chemical Industry Prosperity Index" refers to a monitoring indicator of micro prosperity cycle in petroleum, petrochemical and chemical industries, consisting of four sub-indices - "Prosperity index of petroleum and natural gas extraction industry", "Prosperity index of fuel processing industry", "Prosperity index of chemical raw materials and chemical products manufacturing industry", and "Index of rubber, plastic products and other polymer products". The measurement of prosperity indicators of "Petroleum and Chemical Industry Prosperity Index" is based on the potential output and economic benefits of the industry, including the micro-data of production and the data of industrial benefits. The micro-data of production includes: capacity utilization, product profitability, and finished product inventory level. The base data is collected by making regular studies and evaluation on more than 1 000 enterprises. Every month, China Chemical Reporter will publish "Petroleum and Chemical Industry Prosperity Index" of last month, immediately effective. The latest reading of the index shows that "Petroleum and Chemical Industry Prosperity Index"continued the slight decline in December 2022, and the prosperity range fell to the cold range. Details are as follows:

Prosperity overview of petroleum and chemical industry

In December 2022, the winter cooling caused the global energy prices to bottom out, while the demand was in the yearly off-season. As such, the increased cost and weakened demand dragged down "Petroleum and Chemical Industry Prosperity Index" slightly. The prosperity degree hit 94.81, down by 0.72 percentage points from 95.53 last month, and the prosperity range fell to the cold range, down by 12.58 percentage points from 107.39 last year (see Figure 1).

Figure 1  Range of "Petroleum and Chemical Industry Prosperity Index"

The tightening monetary policy and higher inflation raised the expectations on the slowdown in global economic growth. In China, PMI marked a month-on-month decline of 1.2 percentage points in November 2022, the second straight downward month. The production index and new order index reported the biggest reduction.

Industry-wide, "Prosperity index of petroleum and natural gas extraction industry" slightly increased on a month-on-month basis amid the winter cooling (see Table 1). "Index of rubber, plastic products and other polymer products" rose slightly, reflecting the resilient demand and also coinciding with the seasonal characteristics, but the year-on-year decline was more than 20 percentage points, hitting the all-time high. Also affected by the cooling weather, travel and going-out activities decreased, so "Prosperity index of fuel processing industry" lost record-breaking two percentage points on a month-on-month basis. The midstream chemical raw materials and products manufacturing industry was under pressure from both supply and demand sides, so "Prosperity index of chemical raw materials and chemical products manufacturing industry" fell by 1.36 percentage points.The month-on-month decline conforms to the seasonal characteristics, and the year-on-year decline is bigger than peers, so the industry is under great pressure.

Hot spot analysis and future prospect

1. Central banks raised interest rates by 50BP and players raised expectations on the economic recession 

On December 15, 2022, the Federal Reserve announced a hike of interest rates by 50BP in the FOMC meetings. This meant that it pared back their magnitude of rate hikes by 25BP in December, which was in line with market expectations. The rate hike was followed by central banks in the European Union, the United Kingdom, Switzerland, Norway, Hong Kong on the following day. In addition, the European Central Bank announced that it would roll out the balance sheet normalization plan from March 2023 by cutting 15 billion euros per month on average. This, subsequently, raised the expectations on economic recession. After the intensive meetings of interest rate hikes, the DXY continued to weaken, and hence, commodities and other assets fluctuated, which also triggered more concerns over economic recession. 

2. A series of policies issued at the end of 2022 to expand domestic demand

On December 14, 2022, the State Council issued Outline of the Strategic Plan for Expanding Domestic Demand (2022-2035). On December 16, the government was committed to giving priority to the recovery and expansion of domestic demand, enhancing consumption power, improving consumption conditions, and creating new consumption scenarios at the Central Economic Working Conference. At the same time, the government confirmed that it will maintain positive fiscal policy and prudent monetary policy in 2023. On December 22, the Central Bank added in the working meeting that it will give full play to the role of the market-oriented adjustment mechanism of deposit interest rates and provide stable-to-lower financing costs to enterprises. There were other policies issued with specific requirements for stabilizing the development of the real estate market, ensuring the delivery of buildings and people's livelihood, meeting the financing needs of the industry, and promoting industry restructuring and M &A. The intensive release of favorable policies has soothed market expectations and strengthened market confidence to some extent. With the gradual implementation of precise and differentiated epidemic control strategies, the Chinese market is expected to perk up after the Chinese New Year.

3. The cold spell hit the US this winter and natural gas price fell instead of rising

The most severe winter storm largely swept the United States on December 23, 2022, but the impact of this cold wave was much smaller than that of the cold wave in the first quarter of 2021, so the prices of crude oil and natural gas did not increase significantly. As the impact was waning, the prices of natural gas even fell sharply. This was because the temperature in Europe was higher in the same period and the natural gas inventory was maintained at a high level, leaving little pressure to replenishment. The prices of European TTF natural gas dropped by Euro 80/MWh. The expectation of economic recession led the price trend of the energy market over the supply and demand sides.

4. Future prospect

In a nutshell, the pressure of weakening demand, increasing supply and lower expectations still exists. The petrochemical industry, as an upstream industry, has suffered from lower profits year on year due to high cost and weak demand. The overall prosperity index has dropped significantly compared with the same period of last year.Despite the headwinds, the petrochemical industry has shown obvious resilience, and the decline has almost stopped month over month and become flat. The prosperity indexis expected to remain stable in January as it will take time for the implementation of precise and differentiated epidemic control strategies and fiscal and monetary policies, with little fluctuations on a month-on-month basis.

Appendix

Instructions of prosperity index

Production heat degree is the prosperity index calculated by the core algorithm of industry production heat based on the basic data of product price difference, operating rates and inventory. It reflects how enterprise managers adjust production and management. It is the most sensitive and proactive to reflect the production and operation of an enterprise. Its stability is lower than the cost-profit rate and inventory turnover rate.

Cost-profit rate is an important indicator reflecting the industry's investment-production level. It is the most sensitive and stable among performance indicators. In a micro business cycle, high cost-profit rate consistently proves high prosperity.

Inventory turnover rate refers to the turnover speed of inventory, reflecting the liquidity of inventory and whether the amount of capital is reasonable. It is the core indicator to measure an enterprise's capital utilization rate. Its stability and sensitivity are in the middle of production heat degree and cost-profit rate.

Disclaimers

The information, opinions and conjecture contained in this report only reflect the judgment of the Prosperity Index Research Group of China Petroleum and Chemical Industry Federation on the date/time of the release of this report. The relevant data of prices, inventories, and market conditions contained in this report may fluctuate. The Research Group may issue documents that are inconsistent with the information, opinions and conjecture contained in this report in other time. 

The contents and opinions in the report are for reference only. In any case, the members of the Research Group do not accept liability for any direct or indirect losses arising from the use of the report and its contents.