Is the petrochemical economy hitting a second bottom?

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The economic data for October was released on November 14, showing that industrial production in China increased slightly while remaining stable, the service sector grew steadily, the growth rate of fixed asset investment picked up, market prices rose moderately, and imports and exports continued to accelerate. However, underlying concerns have also emerged, indicating that a downturn in the macroeconomy and a second recession could be on the way. The oil and chemical industries have traditionally shown a high degree of correlation with the macroeconomy. Does this indicate that another downturn in the petrochemical industry might be on the way? Specifically, in October, the added value of industrial enterprises above a certain scale across the country increased by 5.9% on a year-on-year basis; the total retail sales of consumer goods rose by 8.6%. Fixed asset investment increased by 5.7% in the first 10 months, with the growth rate accelerating by 0.3 percentage points compared to the previous three quarters, showing a slight recovery for two consecutive months. The total value of imports and exports in October increased by 22.9%, an increase of 5.7 percentage points compared to the previous month. At the same time, the manufacturing PMI in October was 50.2%, falling to its lowest level in two years; the scale of social financing amounted to 728.8 billion yuan, and new RMB loans totaled 697 billion yuan – both figures well below expectations. M2 money supply increased by 8% on a year-on-year basis, reaching its lowest level ever, which suggests that investment growth is unlikely to pick up in the short term, raising the risks of economic downturn and deflation. New orders, especially new export orders, declined sharply, indicating that the impact of trade frictions is already evident, and the rapid increase in exports driven by prior stockpiling efforts may be only a temporary phenomenon. It can be said that beneath the surface of overall stable data, underlying changes are taking place, and there have been some shifts in the economic development landscape. 　　Based on this, renowned economist Ren Zeping predicts that, affected by various internal and external factors such as the Federal Reserve’s interest rate hikes, the Sino-US trade war, fiscal consolidation, financial deleveraging, and real estate regulation, China’s macroeconomic situation will face a downward trend from the second half of 2018 through 2019, with another downturn expected by mid-2019. 　　In the petrochemical industry, thanks to the further advancement of **supply-side structural reforms and the sharp rise in prices of raw materials such as coal and oil, petrochemical product prices have seen remarkable increases since 2017. One sector after another has played a role in driving this trend, which has led to a clear recovery for the industry following years of downturns. The fact that the entire industry is expected to achieve record profits this year is good evidence of this. It can be said that in this round of economic recovery in China, the petrochemical industry has played a leading role, with impressive performance both in absolute terms and in relative terms. 　　However, with changes in the macroeconomic landscape, the operating environment for the petrochemical industry has also seen significant changes recently. One of the changes is related to international oil prices. Since October, as WTI prices were on the verge of breaking through $80 per barrel with speculation of further rises to $100 per barrel, the situation suddenly changed, leading to rare consecutive drops in prices. Especially on November 14, WTI crude oil futures dropped by over 8% during trading, falling below $56 per barrel for the first time this year. In just over a month, international oil prices dropped into a technical bear market, wiping out most of the gains made during the difficult two years prior. 　　Crude oil has always been more than just a commodity; it is also a mirror of international politics and economy, as well as a tool. The current international political and economic situation is highly volatile, with oil prices changing suddenly and unpredictably. Regardless of the reasons behind the sharp drop in oil prices, its impact will surely be profound. The most direct effect is felt across the entire oil and chemical industry chain, with price trends shifting from upward to downward. 　　Therefore, the current situation in the petrochemical industry is such that the weakening of the domestic macroeconomy will inevitably have an impact on this sector; meanwhile, the sharp drop in international oil prices has undermined the favorable conditions that previously supported the petrochemical industry, bringing an end to its prosperous environment. Faced with this situation, how should companies in this industry respond? Clearly, it’s time to prioritize wearing seat belts, carrying extra clothing, maintaining a strong physique, and building internal resilience. 　　In light of the economic situation, which remains stable but is subject to changes, the meeting held at the end of October by the Central Committee identified these trends and took preemptive measures. It not only emphasized the increasing downward pressure on the economy but also outlined measures to strengthen the ‘six stabilizations’ in order to help private enterprises and small and medium-sized businesses overcome their difficulties. Subsequently, various departments also introduced a series of measures to provide relief for the real economy. Therefore, although a second downturn in the industry economy could arrive quietly, we remain highly confident about the prospects. Source: China Chemical Industry News