Boston, MA -- (SBWIRE) -- 01/07/2014 -- Slower growth in the domestic market will complicate problems of oversupply in some petrochemical segments and a large inventory overhang in the manufacturing sector, according to BMI's latest China Petrochemicals Report. At the same time, costs are mounting and competition is increasing, thereby squeezing margins of petrochemicals producers.

While the outlook for China's traditional economic growth drivers such as heavy industry and real estate construction remains cloudy, the outlook facing the more consumer-focused industries is relatively strong over the medium term. However, we caution that the inevitable bursting of the ongoing credit bubble could also serve to undermine the profitability of the consumer-focussed industries. We remain downbeat for 2014 with GDP growth forecast at 6.7%. The petrochemicals market will match the trends.

BMI believes that there are significant downside risks to polymers output in 2014 and we caution that there is a danger of contraction in plastics output, particularly if economic growth rates fall below 7-8% per annum. However, fears over China's shaky financial system, overvalued property market, and huge industrial overcapacity have been replaced by hopes that policymakers can engineer a recovery back above the 8% level. We maintain our view that there may be some negative surprises in store as the year progresses and the recovery comes up against the country's structural hurdles. Consequently, there is a very real prospect of over-supply in some segments with far-reaching consequences not only for domestic producers but also Asian producers who have expanded production in line with optimistic assessments of Chinese petrochemicals consumption. Consolidation and rationalisation are inevitable over the medium term, both in China and East Asia.

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BMI has updated the following forecasts/views:

- Demand for consumer-focused goods has helped support polyethylene (PE) demand, but this growth story is unlikely to be sustained throughout 2014.
- The launch of another stimulus plan in July 2013 has boosted investment in the construction sector (particularly infrastructure), supporting our view of faster construction growth in 2013 compared to 2012 levels. This has, accordingly, supported demand for polyvinyl chloride (PVC) and polypropylene (PP) used in construction materials. However, we do not believe that the recovery in infrastructure and construction activity will sustain into 2014.
- The launch of another stimulus plan in July 2013 has boosted investment in the construction sector (particularly infrastructure), supporting our view of faster construction growth in 2013 compared to 2012 levels. This has, accordingly, supported demand for PVC and PP used in construction materials.

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