By Li Haiyang, Gao Jinghui, China Petroleum and Chemical Industry Federation,
Sun Guangmei, Sublime China Information (SCI)
Key summary
There is a clear recovering sign amid higher expectations of inventory replenishments
In July 2023, China's Petroleum and Chemical Industry Prosperity Index registered month-on-month and year-on-year positive growth. Index of Rubber, Plastic Products and Other Polymer Products rose by more than four percentage points month on month and year on year, reflecting the recovering demand is providing strong support to the petrochemical industry. Riding on the tailwind, Index of Chemical Raw Materials and Chemical Products Manufacturing Industry reported a month-on-month increase of three percentage points and sharp narrowing of the year-on-year decline. Affected by high temperature and precipitation, demand for travelling was weakening, dragging down Prosperity Index of Fuel Processing Industry and hence Prosperity Index of Oil and Gas Extraction Industry.
According to prosperity indicators, the inventory turnover rate of the petroleum and chemical industry fell on the back of higher cost-profit ratio and production heat degree. In other words, the inventories increased. This may indicate that the petrochemical industry is replenishing inventory and hence there will be a new inventory cycle to run.
Market focus
The Fed raised rates again and markets expected the peaking of interest rate
The US Federal Reserve paused rate hikes in June 2023. On July 27, the Fed raised interest rates by another 25 basis points, fully consistent with market expectations. Global markets held different expectations on the Fed's decisions post the rate hike. European markets, including the UK, believed that it will not be an inevitable choice to raise rate further and expected a rate cut within the year. In Asia, interest rates rose in line with the Fed's rate hike. The divergence in market expectations will add volatility to the commodity prices.
Suggestions and notes
Market forecast
Demand will continue to recover in line with more intentions for inventory replenishment.
Riskalert
As the Fed could be close to the end of its hiking cycle, market expectations on the peak of interest rate will be divergent, which will lead to more volatility in commodity prices. Energy prices will have more upward momentum than downward momentum as driven by the climate.
Overview of China's Petroleum and Chemical Industry Prosperity Index
China's Petroleum and Chemical Industry Prosperity Index rebounded to 96.38 in July 2023, up by 1.63 percentage points month on month. The level was back to the normal range. The Index was 2.06 percentage points higher than July 2022, registering the first positive growth in 18 months (see Figure 1).
Figure 1 Movement of China’s Petroleum and Chemical Industry Prosperity Index (historical average level = 100)
The Chinese economy continued its slow recovery in July 2023. According to data from the National Bureau of Statistics, the manufacturing PMI rose to 49.3% during the month, up by 0.3 percentage points from June. It was still in the narrowing range. The supply and demand of properties in major cities remained subdued, with a significant year-on-year and month on month reduction in the newly-added supply area and the transaction area of new houses, and a reduction in the trading interest of second-hand houses. In June, social financing increased by RMB4.22 trillion, a year-on-year decrease of RMB985.9 billion and a month-on-month increase of RMB2.67 trillion. The growth gap between M2 and M1 widened, and both residential and corporate loans showed recovering signs. International-wise, market expectations have priced in the Fed's rate hike in advance. Major central banks have reached consensus that they could be close to the end of their hiking cycle in line with the falling of global inflation, so commodity prices are expected to rise rapidly in the second half of the year.
China's Petroleum and Chemical Industry Prosperity Index rose sharply by 1.63 percentage points month on month (see Table 1). Index of Rubber, Plastic Products and Other Polymer Products registered month-on-month growth of 4.96 percentage points, moving from the cold range to the normal range. Driven by the recovery on the demand side, Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry rose by 3 percentage points month on month, showing a marginal recovery, but it was still in the overly cold range. High temperature and precipitation continued to drag travelling demand, so Prosperity Index of Fuel Processing Industry decreased by 1.57 percentage points compared with the previous month, reflecting that the reduction was widened. Following the drop in Prosperity Index of Fuel Processing Industry, Prosperity Index of Oil and Gas Extraction Industry fell by 0.21 percentage points, but it was still in the relatively hot zone.
Hot topic analysis and future prospect
1. Energy prices rebound sharply, and crude oil prices are closely linked to the market fundamentals again
The commercial inventory of the US crude oil kept decreasing in July as a result of the termination of release of the US Strategic Petroleum Reserve (SPR), a reduction in OPEC+supply, and a drop in the US shale oil production, the inventory of finished oil in the US also decreased.
The reduced inventories drove up the futures contract prices of the US crude oil WTI, the US gasoline RB, and the US fuel HO continuously. In general, the international energy supply is still tightening. The prices of crude oil and finished oil are more likely to rise because of continuously decreasing inventories. This confirms that the pricing is again pegged to the market fundamentals, which will provide continuous cost support for the prices of petrochemical products.
2. Launch of major supportive policies to boost market confidence
In July, key policies supporting multiple fields were successively released, boosting market confidence much. To be specific, 13 departments including the Ministry of Commerce released the "Three-year Action Plan for Comprehensively Promoting the Construction of 15-minute Radius Livelihood Service Circles in Cities (2023-2025)"; the Ministry of Commerce has issued the "Notice of 13 Departments Including the Ministry of Commerce on Measures to Promote Home Consumption"; the Central Committee of the Communist Party of China and the State Council issued “Opinions on Promoting the Development and Growth of Private Economy”.
On July 24, the Political Bureau of the Central Committee held a meeting to analyze and study the current economic situation and work. The meeting pointed out the direction for economic development in the second half of the year and gave clear guidance on key areas such as implementing macroeconomic regulating precisely and effectively, strengthening countercyclical regulating, expanding domestic demand, promoting private investment, adjusting and optimizing the real estate market, and promoting the transformation of urban villages.
At the press conference of the National Development and Reform Office on July 14 and the enterprise symposium of the Ministry of Housing and Urban Rural Development on July 27, government departments gave positive guidance on residents' housing purchase needs, such as stock housing loans, interest rates of first home loans, down payment ratios, tax exemptions for improved housing replacement, and mortgages on second homes to be treated in the same way as a first mortgage, as long as the buyer has paid off the first loan.
The petrochemical industry has a wide range of application fields, covering clothing, food, housing, and transportation. Therefore, the launch of multiple major policies related to macroeconomics, people's livelihood, real estate, consumption, and investment not only boosts market confidence, but also provides strong support for the boom of the petrochemical industry.
3. Future prospect of Chin’s petroleum and chemical industry
In July 2023, China's Petroleum and Chemical Industry Prosperity Index registered month-on-month and year-on-year positive growth, as driven by cost, continuous demand recovery, and supportive policies. According to prosperity indicators, the inventory turnover rate of the petroleum and chemical industry fell on the back of higher cost-profit ratio and production heat degree. In other words, the inventories increased. This may indicate that the petrochemical industry is replenishing inventory. The tightness of energy supply may continue into the third quarter due to increased incidence of extreme weather events such as the Gulf of Mexico hurricane season and El Nino. Accordingly, the international oil prices will rise, but the volatility will be wider, which will have a lingering impact on the cost side of the petrochemical industry. In the short term, cost-driven factors will be dominant. This, coupled with the support from the recovering demand, is expected to continue to push up the petrochemical industry. However, as global central banks could be close to the end of their hiking cycle, there will be periodic liquidity shocks. Given the limited upward momentum on the demand side, the petrochemical industry will keep fluctuating in a normal range.
