By Gao Jinghui, Li Haiyang, China Petroleum and Chemical Industry Federation, Sun Guangmei, Sublime China Information (SCI)

Key summary

● A recovery in demand is expected to kick off a new cycle of inventory replenishment

In June 2023, China's Petroleum and Chemical Industry Prosperity Index slightly declined month on month and remained in a relatively cold range. The reduction was consistent with the market rule for the following reasons. First, the prices of international commodities were facing downward pressure in the first half of 2023 on expectations of economic recession. Secondly, the pending issue of the US Debt limit in May 2023 affected liquidity significantly in the short term, which further forced the prices of commodities to decrease. Thirdly, major central banks, except the Federal Reserve, raised interest higher-than-expected rates, and the pressure on commodity price cuts continued to increase in June, imposing downward pressure on commodity prices too. 

June saw some positive changes in data. Index of Rubber, Plastic Products and Other Polymer Products registered positive growth month on month, with a sharp improvement in both production heat degree and inventory turnover rate. Prosperity Index of Fuel Processing Industry and Index of Chemical Raw Materials and Chemical Products Manufacturing Industry increased sharply, indicating that the upstream segment of the industrial chain was recovering, and the destocking cycle was coming to an end.

Market focus

● Global inflation cooling, major central banks raise interest rates beyond expectations

The global inflation data showed a significant decrease in June 2023. Compared to May, the US CPI decreased from 4.9% to 4%, the EU CPI decreased from 6.1% to 5.5%, Canada CPI decreased from 4.4% to 3.4%, and Australia CPI decreased from 7.8% to 7%. The Federal Reserve kept interest rates unchanged due to the Debt limit problem, while the European Central Bank, the Bank of England, the Federal Reserve of Australia, the Bank of Canada, and the Bank of Norway have raised interest rates, with the Bank of England and the Bank of Norway raising interest rates by 50 bps at a time.

Suggestions and notes

● Market forecast

Inventory indicators continue to improve, so expectations for restocking are gradually increasing.

● Risk alert

The International Meteorological Organization predicts that the probability of occurrence of a moderate-strength El Nino phenomenon will be as high as 90% in the second half of the year, thereby affecting agricultural products and energy supply in some regions.

Overview of China's Petroleum and Chemical Industry Prosperity Index

China's Petroleum and Chemical Industry Prosperity Index declined to 94.75 in June, down by 0.2 percentage points month on month. The level was lower than the normal range and classified to a relatively cold zone. The Index declined by 2.06 percentage points year on year (see Figure 1).

Figure 1 Movement of China’s Petroleum and Chemical Industry Prosperity Index     (historical average level = 100)

The Chinese economy continued its recovery in June, but the upward momentum remained weak. According to data from the National Bureau of Statistics, the manufacturing PMI rose to 49% during the month, up by 0.2 percentage points from May. It was still in the narrowing range. The supply and demand of properties in major cities continue to weaken, and the market resilience in first-tier cities was better than that in second and third-tier cities. In May, social financing increased by RMB1.56 trillion, a year-on-year decrease of RMB1.3 trillion. The credits increased by RMB1.36 trillion, a year-on-year decrease of RMB541.8 billion, which was lower than expected. International-wise, the higher-than-expected rate hikes by major central banks except the Federal Reserve resulted in the tightening of liquidity, which imposed downward pressure on the prices of commodity.  

China's Petroleum and Chemical Industry Prosperity Index fell sharply (see Table 1). Prosperity Index of Fuel Processing Industry dropped by 1.04 percentage points month on month as record-breaking high temperature in China dampened travelling demand. The decline was the biggest among the sub-industry indices. Prosperity Index of Chemical Raw Materials and Chemical Products Manufacturing Industry fell by 0.73 percentage points month on month, with the smallest reduction among the sub-industry indices. Index of Rubber, Plastic Products and Other Polymer Products increased by 2.02 percentage points month on month, and it moved from the overly cold zone to relatively cold zone, which showed a recovering sign of marginal improvement in demand.

Hot spot analysis and future prospect

1. Natural gas prices rebounded sharply due to more favorable factors

There were more tailwinds in the international crude oil market. As for supply, the OPEC+ meeting held on June 5 announced that Saudi Arabia would voluntarily trim production by1 million barrels/day in July. On the same day, Saudi Aramco raised its OCP (official contract price), which was higher than market expectations. On July 3, Saudi Arabia announced extending its plan of cutting production by 1 million barrels/day till August, while Russia also announced continuing its plan of trimming production by 500 000 barrels/day and reducing exports by the same amount in August to limit supply. Saudi Arabia and Russia’s decision reflected the consensus of OPEC+ on the maintenance of crude oil prices. The OPEC+ production cutback was a measure to fight against the expectation of oversupply possibly caused by the economic recession, and crude oil supply was in tightness recently.In terms of inventory, the US SPR (Strategic Petroleum Reserve) inventory decreased to 347.2 million barrels at the end of June. The ex-warehouse data showed that the US Department of Energy completed the target of releasing 26.2 million barrels set in February 2023.

Natural gas prices bottomed out and rebounded. The prices in Europe decreased sharply in the first half of 2023 due to the warm winter. On June 1, the main contract price of TTF (Dutch natural gas futures) even dropped to about Euro 23/megawatt. Power supply was under more pressure by the record-breaking high temperature in many regions of the Northern Hemisphere, so TTF prices bottomed out and rebounded. As of the end of June, the main contract pricere bounded to about Euro 34/megawatt, up by 33% compared with the beginning of the month.

Overall, the international energy supply is still highly fragile, as factors such as policy changes and climate anomalies in supplying countries may result in imbalance between energy supply and demand while low inventory pressure may lead to a rebound in energy prices.

2. The climate anomalies caused by the high likeliness of occurrence of El Nino in the second half of the year may lead to supply shortage 

The International Meteorological Organization as well as the National Oceanic and Atmospheric Administration predicted that the high likeliness of occurrence of El Nino in the second half of 2023 is a high probability event. The weather anomalies caused by the El Nino phenomenon may affect the supply of agricultural products and energy in some regions, leading to shortage of supply.

3. Prospects for the Prosperity of China's Petroleum and Chemical Industry

China's Petroleum and Chemical Industry Prosperity Index saw a month-on-month decrease in June and the year-on-year reduction was also widened. However, from the perspective of the structure of business indicators, the marginal improvement was significant. The inventory turnover rate of the whole industry rose month on month, and Index of Rubber, Plastic Products and Other Polymer Products registered a positive increase month on month, indicating that the demand recovery is triggering the Prosperity Index of the whole industry to bottom out and the recovery trend is on its track for sure. Looking forward to the third quarter, there will be more tailwinds over headwinds in the international energy market. The energy prices may rebound, as the cost issue that hindered China's Petroleum and Chemical Industry Prosperity Index in the first half of the year may be favorable to the market. In general, it is expected that China's Petroleum and Chemical Industry Prosperity Index will see an overall rebound.