INSIGHT: Polyolefin market unsure where rebound will come from

22 February 2012 16:05  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--When a senior polyolefin industry executive tells you that 95% of China’s plastic processors are short of money, and that it is likely to stay that way for the rest of the year, you should probably listen.

“While the 95% don’t have enough money, the 5% - manufacturers of value-added plastic film etc – have plenty of money and are planning expansions,” he said.

This is the way the Chinese government wants it, he believes. Beijing wants the lower-value converters to shut down in the developed eastern and southern provinces and move inland, thus creating jobs in the poorer regions of China, and so these end-users are still being deliberately starved of credit.

Even the 50 basis point cut in bank-reserve requirements, which took place earlier this week, isn’t expected to significantly ease the credit plight of lower-value converters, as closing them down is as strategic to China as bringing-down property prices.

Some of processors, rather than moving inland, are shifting overseas, such as a Shanghai plastic-bag manufacturer who was recently visited by the industry executive.

“He is moving elsewhere in Asia in order to take advantage of cheaper labour costs, and more plentifully available labour – and to be closer to very-competitive Middle East suppliers of resin,” he added.

This is a remarkable turnaround for China. Who would have predicted, say, three years ago, that labour costs would have increased by so much China, and that the supply of labour would become so tight?

Some people did, including this particular executive, which points to the importance of seeing the bigger picture. Government policy, and its implementation, has to be very closely monitored in China because it is centrally planned.

The central government wants to stimulate domestic demand, in order to reduce the reliance on exports. And so, minimum wages are to be increased by 13% per year in 2011-2015 and there is to be a shift towards more collective bargaining in wage negotiations.

This will exert further pressure on the small and medium-sized enterprises, which make up most of the chemicals and polymer buyers in China.

Many workers have failed to return from the countryside to the eastern and southern provinces after the Lunar New Year holidays, making it difficult for plastics processors to increase their operating rates.

"We have been talking about this type of labour-supply problem for three years, but only now has it become really significant,” added the industry executive.

“Workers are remaining in their rural homes because of the success of government efforts to boost income levels in western China, plus the cost of living has risen by too much in the major cities, such as Beijing and Shanghai.”

The $64,000 question is what all of this will mean for the strength of polyolefin markets during the rest of 2012.

“I think volume-growth will be very strong – 1.5 times GDP (gross domestic product) for the commodity resins segment and 2 times GDP for higher-value grades,” said the executive.

This would be a tremendous turnaround from 2011, when ethylene derivative demand growth in general was around 0.5%, well below the 9.2% expansion in GDP. This was due to destocking, credit tightening and economic uncertainties.

Such a strong rebound suggests a fair amount of restocking at the commodity end of the business - as the higher-value off-takers, flush with cash, also raise their capacity. 

Volumes will not be the problem, insists the executive, but rather profitability for higher-cost producers of non-differentiated resins such as film-grade high-density polyethylene (HDPE).

But could volumes also be the issue? Up until the week ending 17 February, there were no indications of a flood of post-Lunar New Year buying because of credit shortages and the labour-cost and supply issues.

On the plus side, relative to 2009-2011, there is little new capacity due on-stream this year.

However, there are a few start-ups just around the corner that are affecting the sentiment of buyers.

Saudi Polymers is due to bring on-stream two 550,000 tonne/year HDPE plants and a 440,000 tonne/year polypropylene (PP) facility in the first quarter.

Qatar Petrochemical Co (QAPCO) is planning to bring its 300,000 tonne/year low-density PE (LDPE) unit on-stream in the first quarter of this year, delayed from the fourth quarter of 2011.

Plus, most importantly of all, ExxonMobil Chemical is scheduled to commission two 650,000 tonne/year PE lines during 2012 in Singapore. Some of that capacity is already on-stream

“No distributor in China is going to stock-up ahead of most of the ExxonMobil volume arriving into the market,” said a Singapore-based polyolefins trader.

In terms of pricing, there has yet to be the great “breakout” predicted by chemicals analysts post-Lunar New Year because of all the reasons we have cited. For the week ending 17 February, for example, pricing for all the grades of PE, as assessed by ICIS , was flat in Asia – other than LDPE which declined by $20/tonne (€15/tonne).

Pricing is what matters to the higher-cost producers as at current levels they are not making enough, if any, money. For instance, integrated Asian HDPE margins fell by $73/tonne for the week ending 17 February, according to the ICIS Weekly Asian PE Margin Report.

Thus, even if volumes rebound in 2012, the same situation could occur this year as in 2011: More market share going to the Middle East in China, as the South Koreans and even the North Americans - who are low-cost but not as cost competitive as the Middle East - lose out.

The chart below illustrates what happened last year:

Source of chart: Global Trade Information Services

The South Koreans, squeezed out of China, are reportedly trying to shift more material to Latin America, and even perhaps the US, where pricing is much better. Re-exports from China are also finding their way to Europe

Here is another $64,000 question: Will the weakness in China pricing drag the Americas and Europe down, or will it be the other way round?

($1 = €0.75)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: John Richardson
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