INSIGHT: Emerging markets pose questions for polymer producers

14 June 2011 14:25  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--To build or not to build? This is not the only question for polymer producers, who also need to think increasingly hard about exactly what to build as a result of major changes in the growth dynamics of emerging markets.

Long gone are the days, perhaps, when building a standard grade-only polymer plant in an advantaged feedstock location to export to China made total sense.

China has become much more self-sufficient in basic polymers and its government is moving away from a low-value export processing-focused growth model. No longer will it be as easy to, for instance, ship injection grade high-density polyethylene (HDPE) to China, which then ends up being re-exported as cheap food-storage containers.

But to make a blanket assumption that China is losing its export edge as wage and other costs increase would be very wrong.

Its industries are moving up the value chain, thereby demanding higher-value polymers.

The country has also invested so much money in certain manufacturing sectors that existing capacity and supply-chain capabilities put it miles ahead of other developing countries.

Take disposable baby’s nappies, or diapers, as a good example of this second point.

“India’s disposable diaper manufacturing industry is at least a decade behind that of China’s,” said an Asian-based business development manager with a global polymer producer.

“The components of the diapers are made in China and shipped to India for final assembly, where low-skilled labour can now be a little cheaper.

“Only around 25% of Indian families use throw-away nappies and so the growth-potential is enormous – but most of the benefits of this growth will be felt by China. There is, as a result, a great opportunity for selling a lot more non-woven polypropylene (PP) and super-absorbent polymers (SAPs) to China, which are used in the production of diapers.”

Lifestyles are changing as the poor become middle class. But this is an emerging-market definition of middle class – i.e. somebody who can afford disposable nappies for the first time, or food wrapped in plastic. This is a million miles from the luxury car and luxury holiday-going middle classes in the US or western Europe.

Not only is picking the right polymers to produce crucial, but so is keeping your cost-base sufficiently low to deal with what can be very restrained margins for finished-goods manufacturers.

Sometimes, though, more money can be made than you at first might think from taking advantage of the biggest collective shift in lifestyles that the world has ever seen.

Single-serve flexible plastic pouches, which contain a wide range of edible and non-edible consumer products, illustrate this argument.

"For consumer-goods manufacturers the margins on these pouches are very good as this is more about branding than value for money,” added the business development manager.

"The pouches are very cleverly marketed - at, for instance, a maid in India who cannot afford a whole bottle of shampoo.

“But she can afford one sachet at the weekend, for around one rupee a time, so she can feel like the Bollywood star used in the advertising campaign.

"It is a cash-flow issue for the people who buy these products. They should really buy a whole bottle of shampoo as this would work out cheaper in the long run, but they don't have enough money at any one time."

Low-density polyethylene (LDPE) coatings-grade demand has boomed as a result of the explosion in demand for single-serve pouches. This is thanks to its suitability for making the finished product. It is also said to be easier to process for converters with older, less sophisticated machinery than the alternative polymer that can be used – linear low-density polyethylene (LLDPE).

Building more LDPE coatings-grade capacity might therefore seem like one of the easiest-of-all choices for polymer producers as they wrestle with these shifting markets.

The danger, though, for anyone attempting to enter this particular sector is that firstly you might not have the technology-edge and secondly, you might be too late. Several established producers are reported to be already studying new LDPE capacity.

Business-development managers have to convince boards of directors that the world has changed, that the old models no longer apply in order to win investment arguments.

For LDPE this involves overcoming the perhaps outdated paradigm that its delta with the alternative LLDPE will constantly shift from very positive to parity, based on affordability.

Recent tight LDPE supply and strong demand has helped. But over the last few weeks price declines appear to be partly the result of the polymer becoming too expensive,  leading to demand destruction.

And in India, demand for the polymer declined by about 5% to around 250,000 tonnes in April-December 2010 because it became too costly, say industry sources.

Yet another complication is spending money on the quantity and quality of market intelligence necessary to spot changes in markets in a timely fashion before, as we’ve said, the competitors get there first and close-off the opportunity.

“A lot depends on having the right people on the ground. They need to understand the industry and have a broad-enough perspective to identify changes in consumer trends, and therefore what this might mean for polymer consumption,” said a business development manager with a second polymer producer.

A further factor for success can be working with governments, both local and central, in order to help deal with what CEOs refer to as the “mega-trends” in developing and in developed markets.

In the west, for example, this includes ageing populations. How can polymer science be put to better-use in medical applications that prolong the length and quality of life?

Sometimes, also, government regulations can come back to bite you.

For example, expandable polystyrene (EPS) demand-growth in China recently suffered a setback when new restrictions were reportedly introduced governing flame retardants.

This followed years of stellar-growth when companies making both the styrene and the polymer benefited from the drive to better-insulate buildings, thus saving energy. The voracious growth in energy demand in emerging markets - and all the issues of sustainability surrounding this growth - is another mega-trend identified by the CEOs. 

Chemical and polymer company share prices have rocketed of late, as has the appetite for new capacity.

Despite recent petrochemical price declines and what this might mean for the longer-term, many company executives and industry observers seem convinced that we are still heading for a “supercycle’. An argument is that tight supply and booming demand will benefit everyone.

But future growth could be a lot more nuanced and more complicated, creating clear distinctions between the winners and losers.

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: John Richardson
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