Industry Crib Sheet: China's Manufacturing Sector Retrenches

January 27, 2014

Renewable Energy to Pick Up before Taking Off Next Year

Petrochemical Prices Rise Due to Crude Oil Strength

IT Spending to Rebound After a Flat 2013

China's manufacturing sector continues to weaken as the country fights an economic slowdown and demand for its exports pares back. After a slight expansion of 50.5 in December, the HSBC China Flash Manufacturing PMI

compiled by Markit fell to 49.6 for January, dropping below the 50 marker separating expansion and contraction.

Manufacturing growth in the world's second-largest economy had been easing, but the contraction was the first in six months. Hongbin Qu, HSBC's chief economist for China and co-head of Asian economic research, said the "marginal contraction" was "mainly dragged by cooling domestic demand conditions." The flash PMI's new orders and new export business sub-index fell below the 50.

As Chinese manufacturers saw fewer orders, their production also slowed down (albeit it is still growing, as the 51.4 manufacturing output sub-index indicates). As a result, factory backlogs in China are shrinking and inventories are rising. Hiring at Chinese production facilities has also dropped.

Qu said the softening momentum in China's manufacturing sector "has weighed on unemployment growth" in the country. Beijing policymakers have been scaling back the country's industrial overcapacity amid slow global economic growth, in addition to tightening spending and ushering in reforms to generate growth domestically.

According to reports, China's economy grew by 7.7 percent in 2013, which beat the central government's 7.5 percent benchmark. However, it was the country's lowest GDP growth since the start of the millennium. A Reuters report

indicates that Chinese officials will once again target 7.5 percent growth for 2014. Bloomberg

, meanwhile, reports that with the 7.4 percent median estimate of 50 analysts it surveyed, China could dip to a 24-year low in growth.

The HSBC/Markit flash PMI is an advanced reading of China's manufacturing output for the month, based on 85 to 90 percent feedback from the 420 manufacturers that participate in the survey. Final January data will be published later this week. Official state data on the country's manufacturing activity will be released from Beijing on Feb. 1.

As conditions deteriorated in China, Markit's Eurozone Flash PMI

signaled strengthening economic recovery in Europe. The PMI registered 53.2, rising from 52.1 in December. It was the seventh straight month of growth, and the pace of expansion is at its highest since June 2011. Growth picked up in Germany and the rate of decline eased in France, while the rest of the region saw a strengthening upturn.

Eurozone manufacturers raised output to their highest level since April 2011, and they added payrolls for the first time since the beginning of 2012. New orders and new export orders are also showing the biggest gains since April 2011. Growth in Germany, which has shown the most resilience in the European recession, hit the highest level since June 2011.

Renewable Energy to Pick Up before Taking Off Next Year

The use of renewable energy sources for electricity production and heat generation is forecast by the U.S. Energy Information Administration

(EIA) to grow 3 percent this year but gain momentum in 2015 with 4.7 percent expansion.

Hydroelectric power, which makes up the biggest portion of the renewable energy pie, will grow by 2.2 percent in 2015, but nonhydropower renewables will pick up significant momentum with a 6.1 percent growth spurt. Nonhydropower renewables are solar, geothermal, biomass, wind, and liquid biofuels.

The EIA estimates that total U.S. wind power capacity will increase by 8.8 percent this year, to about 66 gigawatts, and then by 14.6 percent to more than 75 GW at the end of 2015. Electricity generation from wind is projected to increase by 2.2 percent  in 2014 and by 11.4 percent in 2015.

The agency noted that while utility-scale solar capacity more than doubled in both 2012 and 2013, it still makes up a small percentage of total U.S. generation. The EIA projects capacity to increase to a 0.4 percent share of the total U.S. electricity pie by 2015, with major solar power plant projects coming on line this year. At 85 percent share, photovoltaic (PV) solar dominates other solar technologies.

As battles around the Renewable Fuel Standard continue, the ethanol industry grew to a production volume of 920,000 barrels per day and is forecast to average 913,000 bbl/d in 2014. Biodiesel production grew to an 87,000 bbl/d average in 2013 but will drop to 84,000 bbl/d in both 2014 and 2015.

Long term, renewable energy consumption by the electric power sector will reach 4.5 quadrillion Btu in 2040, the EIA forecasts, with wind accounting for 39 percent of nonhydropower consumption and solar 7.5 percent. The EIA made the projections based on the assumption there are no major fuel-price and regulatory changes.

Petrochemical Prices Rise Due to Crude Oil Strength

In lockstep with higher energy prices, global petrochemical prices rose 4 percent in December to $1,406 per metric ton (mt). According to the Platts Global Petrochemical Index

(PGPI), crude oil prices went up 3 percent last month, while prices for naphtha feedstock climbed 4 percent. December petrochem prices were 4 percent higher than in December 2012.

Rising prices for petrochemicals are putting pressure on plastics, rubber, and nylon raw material prices, which impact nearly every durable and nondurable good industry. Worldwide petrochem prices bottomed out last March, at around $1,260/mt, and since have been on an upward trajectory.

Prices for olefins, the precursor to polyolefin plastics such as polyethylene and polypropylene, were up in December. Ethylene prices averaged $1,313/mt, while propylene prices averaged $1,396/mt. As a result, low-density polyethylene and polypropylene prices rose to $1,704/mt and $1,632/mt, respectively.

Meanwhile, prices for benzene, a precursor to styrene and polystyrene and ABS resins, jumped 10 percent to $1,367/mt due to tight supply. Capacity utilization among benzene plants has dropped to the 70 percent range as lower-cost natural gas (ethane) feedstocks have grown in popularity and taken away benzene demand.

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"The tight supply situation in benzene had a ripple effect across the global aromatics markets," said Jim Foster, Platts' senior petrochemical analyst. "We're now seeing record highs in January, and the downstream markets are following benzene higher. [P]rices for styrene in the U.S. hit five-year highs and are approaching record highs." Early this month, polystyrene resin makers announced a 3-cent/lb hike to current prices around $1.20/lb.

Toluene, a precursor to polyurethane and products like paint thinner, glue, and lacquers, rose 2 percent to $1,133/mt. Paraxylene, used in fibers and PET plastic bottles, edged up 1 percent to $1,353/mt.

IT Spending to Rebound After a Flat 2013 

Worldwide IT spending is projected to reach $3.8 trillion in 2014, a 3.1 percent increase from 2013, according to the latest forecast by Gartner. The IT research and advisory firm actually lowered its forecast by 0.5 percent because of a downward revision on 2014 spending growth in telecom services. Global IT spending merely grew last year, with a 0.4 percent expansion.

Enterprise software spending growth will be strong this year, accelerating to a 6.8 percent expansion from 5.2 percent growth last year. Customer relationship management and supply chain management (SCM) software will drive growth in the ERP arena, which will reach $320 billion as a market.

Richard Gorton, managing vice president at Gartner, said investment will be concentrated on analytic tools for SCM. He noted annual spending on such tools is expected to grow 10.4 percent this year. "The focus is on enhancing the customer experience throughout the pre-sales, sales, and post-sales processes."

Some $1.6 trillion of the $3.8 trillion in IT spending will be on telecom services, although growth will be just 1.2 percent. Still, that's a rebound from last year, when telecom services spending shrank by 0.5 percent. IT services will surpass $960 billion, while device purchases -- including PCs, mobile phones, and tablets -- will approach $700 billion. 

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