Market outlook: In China PE, not everyone can be a winner

24 May 2013 09:15  [Source: ICB]

Polyethylene (PE) demand growth in China will be flat or negative in 2013, say several producers and traders.

This is a far cry from the consensus confidence that dominated most petrochemical markets in China as recently as February. For the third year in a row, therefore, it seems possible that PE growth, and quite likely growth in other synthetic resins, will be out of kilter with the overall increase in GDP.

"Our customers see new energy coming into the picture from China's leaders," said a source with one major polyolefin producer.

"The converters think that the government is now very determined to deal with corruption, to deflate the property bubble and to slow the economy down. China can no longer be the growth engine of the world."

Chinese street Corbis Images

Corbis Images

China PE demand has disconnected from economic growth

China's new leaders would be in power for 10 years, possibly even longer, because even when the current President and Prime Minister step down in a decade's time, they will still yield a great deal of influence, he added.

As a result, they are playing what he calls the "long game" by patiently and persistently pressing ahead with economic reforms. These reforms include the crackdown on corruption.

"Most of the high-end restaurants are very quiet. In one high-end restaurant in Beijing, the chef told me that business had dropped by 80%," said the source.

"The direction from the Politburo to all the regional governments is very clear - don't spend money."

One might well wonder what on earth this has to do with PE demand beyond sales of kitchen storage containers and food wrapping. The fact, though, is that corruption is central to China's remarkable growth story over the past two decades, as surging investment in excessive infrastructure, high-end properties and industrial capacity has provided huge opportunities for graft.

"One customer said to me 'a little bit more corruption would be good for growth right now'," the source continued.

Converters are also convinced that less, rather than more, central government economic stimulus is on the way later this year, unlike some financial analysts who are holding on to the opposite view.

And the plastic processors think that more PE capacity is about to come, including the widely anticipated but officially unconfirmed increase in production at ExxonMobil's two 650,000 tonne/year metallocene-grade linear-low density PE (LLDPE) plants in Singapore.

This is leading to a "hand-to-mouth" resin purchasing policy, the source added.

"Instead of buying four containers at a time, they are buying two," he said.

But despite the bleak growth environment in China, cost-advantaged global producers continue to make fantastic money, as the Q1 results illustrated. The problem is that the bulk of that profitability is being derived from North American production.

HDPE margins

If US PE prices fall because of the end of first quarter maintenance work and the start-up of new capacities in the States, several sources worry that more exports might head to China.

US April contract negotiations for polyethylene (PE) ended with a flat settlement after producers postponed a proposed 4 cents/lb ($88/tonne) price increase until May, said ICIS in its US PE price report for the week ending 3 May.

Some buyers had been pushing for a price reduction, but a few crackers were still shut down, the report added.

"Buyers said they expect that to change in May, with many buyers saying they expect prices to start dropping this month and continue to drop further in June," it continued.

A further concern is that operating rates at South Korean crackers might be increased ahead of Asia's peak production season for finished goods, which runs from July/August until September.

If low-cost exports from the US increase and the South Koreans push rates higher, the second quarter could be a disaster for Asia's less competitive PE producers, warned the source with the polyolefin producer.

The chart illustrates that on a variable cost basis, integrated Northeast Asia high-density PE (HDPE) margins remain only slightly above break-even.

But a source with a second major polyolefin producer argued that demand in China, and elsewhere in Asia, remained strong in some downstream segments.

"The state of demand really depends on what application you are talking about," he said.

"For example, diaper film and food-packaging applications are going extremely well, but the garbage bag sector in China is still undergoing consolidation as converters in the higher labour cost coastal provinces relocate to countries such as Vietnam," he added.

"A lot of the family-owned converters in Asia are going through a transition period as sons and daughters take over," the source said.

"These sons and daughters have often been to top business schools in the West and so are making the right investment decisions," he added.

"The really smart converters are those who have focused on internal Asian markets where demand is unaffected by the problems in the West. They are doing well and are still buying good volumes.

"It is the less clever processors which are really struggling and so are buying resin on a hand-to-mouth basis."

And he argued, as many other people do, that "lifestyle changes" guaranteed continued strong demand growth in developing regions of Asia as millions more people shopped in supermarkets for the first time.

"There is still plenty of room for great growth in low-value packaging applications in, for instance, inland China, away from the developed coastal provinces, and in many parts of Indonesia," he said.

KEY FACTS

  • PE growth has decoupled from GDP in China
  • Battle against corruption may hit demand
  • Converters expect to experience less government stimulus
  • Additional PE capacity is expected to come onstream
  • Growth slows in other regional economies such as Taiwan

Southeast Asia in general is in the midst of an economic boom, although there are concerns that some of its economies are overheating. The IMF also warned about longer-term risks for the region, in a report released last week.

Several of the economies in Southeast Asia, and in Northeast Asia, are highly dependent on trade with China and are therefore being hurt by its economic slowdown.

For example, Taiwan has announced that its year-on-year Q1 2013 GDP growth had fallen to just 1.5%. This was less than half of the 3.7% growth recorded in the previous quarter and well below forecasts of 3.1%.

"By global standards, Taiwan is a smallish economy. But with its trade links to the rest of the world, it serves as a useful harbinger. And this is not good news," wrote The Financial Times' Beyondbrics blog, in a 30 April post.

"Taiwan's economy is heavily reliant on trade, particularly of electronic goods, leading many economists to worry about the impact of recent disappointing growth in China, where economic growth slowed to 7.7% [again in the first quarter]," added the post.

"Taiwan's first quarter stumble follows weaker-than-expected production and export figures that show demand for Asia's exported goods is unsteady," it said.

"Taiwan's export orders, which include orders for goods to be exported from Taiwanese-owned factories in mainland China, fell 6.6% in March."

For many years, China's marvellous economic growth story meant that everyone was a winner. This is no longer the case.

  • Additional reporting by Michelle Klump


By: John Richardson
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