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Evergrande payment default to weaken polymer prices in short term

On Wednesday, September 22, 2021 at 04:10 IST

The ‘unavoidable’ Evergrande payment default is likely to pull down spot polymer prices in China and the South East Asian (SEA) region in the near to short term, due to a mounting fear of a decline in consumption of finished products and disturbances in their exports.

The financial markets have encountered a number of setbacks in the last few weeks. Most recently, China’s real estate major Evergrande informed its lenders that it would not be able to pay interest falling due in September because of financial stress. Apart from this, contracted sales are likely to remain lower in the next 1-2 months with no progress in sight in terms of property and non-property asset disposals.

“There have been a number of setbacks which have led us to believe that a credit event seems unavoidable. The bottom line remains that the ability of Evergrande to generate sufficient liquidity in the near term through contracted sales and asset disposals has deteriorated considerably and in turn increased the likelihood of credit event occurring sooner rather than later,” said Kamil Amin, Strategist, UBS, in a report.

Evergrande debt woos rattled industrial commodities on Tuesday on the global exchanges with their prices down between 1-2 per cent on a wider market sell-off. Brent crude futures on the benchmark Nymex, for example, reported a decline of 1.12 per cent to trade at $74.68 a barrel.

Propylene prices in China have been hovering in a close range of 250 yuan for the last three months. In the east China market, propylene prices quoted at 7700 yuan last week, a marginal increase from its level of yuan 7500 a tonne on June 16 this year. In the last six months, however, the propylene prices show a decline of nearly 6 per cent from its level of 8200 yuan a tonne since April this year.

Similarly, polypropylene prices in east China was now at 7900 yuan a tonne now, a decline of 32 per cent from the level of 11,600 yuan a tonne seen in April this year.

China’s economy has already showed signs of slowdown in the last few months after a robust growth recorded in the last few quarters.

“China’s economy is export driven. Disruptions in exports have caused severe damage to the Chinese economy as shipment of goods from China to India, the European countries and the United States have declined sharply due to container unavailability and also a sharp increase in global freight rates. Over and above, the Evergrande payment default calls for the Chinese government’s immediate intervention. Any financial assistance offered to Evergrande would result in a negative impact on the economy. Not only will inflation climb, but Chinese goods will be uncompetitive in the world market which will cause a further weakness the country’s economy,” said an economist on condition of anonymity.

Meanwhile, UBS has estimated total liability of the Chinese property sector to the tune of around $4.7 trillion. Evergrande Group's total liability size stands at around $313 billion, which is nearly 6.5 per cent of the total liability of the Chinese property sector.

“A domino effect of credit events, given that both banks and non-banks with large exposures to Evergrande could potentially go under or be forced into restructuring. This would again create spill over into other Chinese financial assets and drive underperformance of financials in particular across both DM and EM credit/equity markets, led by those names with direct exposure either to Evergrande itself, its subsidiaries or its creditors,” said a UBS report.

Evergrande's liabilities are said to involve more than 130 banks and over 120 non-banking institutions, while the developer also hires 4 million people every year for project developments, something which could also lead to increased investor concerns around financial stability risks in China.


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