Market intelligence: Strong China polyethylene growth defies market expectations

09 August 2013 09:26  [Source: ICB]

In early May, it was feared that polyethylene (PE) demand growth in China would be flat or declining in 2013, and yet the data for the first six months of this year tell a very different story.

PE apparent demand (local production and imports) instead rose by 13% in January-June 2013 compared with the same period in 2011, according to Global Trade Information Services and Chinese government statistics.

The increase has left several industry players and observers completely baffled, given the weak state of China's manufacturing sector. Explanations are now being sought, which include the increased use of plastics packaging as a result of food safety concerns, a clampdown on imports of waste or scrap PE, and restocking.

DEAD PIG BOUNCE?

Andrew Liveris, CEO of Dow Chemical, told the Wall Street Journal in a 25 July article that food safety concerns in China, including those surrounding the number of dead pigs floating down a river in Shanghai and rat meat being sold as lamb at some food stalls, were resulting in more people buying pre-packaged foods.

In March, thousands of dead pigs were found floating in the Huangpu River in Shanghai. One theory behind the incident was that farmers, unable to sell the pig carcasses for food because of tougher environmental regulations, had dumped them in the river.

OPERATION GREEN FENCE

Another factor behind the strong PE growth might be Operation Green Fence, a 10-month campaign launched by the Chinese government in February.

The campaign is aimed at reducing the amount of pollution contained in waste plastics in general, and waste textiles, metals and paper imported into China. The initiative involves setting a limit of 1.5% prohibitive, or allowable, contaminant in each bale of scrap material shipped to China.

The fact that it has become harder to import scrap PE into China might have boosted the demand for virgin PE resin. But a PE industry source, while accepting that a drop in imports of waste material might be a reason behind the very strong growth, believes that Operation Green Fence is unlikely to be a major factor.

China PE

"With the global economy doing badly, and more scrap being recycled in the developed world, there may not be incremental availability of scrap to feed the Chinese appetite," he said. "The Chinese regulations on environmental issues are there alright, but the Chinese know how to circumvent these rules. Definitely, Green Fence could have helped regulate scrap imports, but it may not be the full story."

SCRAP DATA INCONCLUSIVE

As everyone scrambles around for the explanations behind the remarkable growth figure, the latest data on scrap PE imports are inconclusive.

In January-May 2013, 1.23m tonnes of scrap PE was imported by China, down from the 1.43m tonnes during the same period last year, according to government statistics. But this level is consistent with the first six months of 2011 when imports were 1.24m tonnes.

A second industry source argues that the strong demand growth for PE virgin resin is largely the result of inventory re-building by traders and end-users. He contends that the 'dead pigs scare' occurred too late to positively affect PE demand over the last few months.

"Packaging films that went into the increased volume of packaged products sold as a result of the dead pigs would have been made at least six months earlier, if not more," he said. "A sudden spike in supermarket sales will, therefore, not translate into higher resin sales in the same quarter."

But Paul Hodges, chairman of UK-based chemicals consultancy International eChem, and author of the ICIS Chemicals & The Economy blog, points out that there have been many other food scares in China that pre-date the 'dead pigs' event.

"An informed guess might be that Chinese housewives are becoming more aware of contamination risks, eg milk powder, water pollution, etc." he said. "Companies like Unilever and Nestle have certainly talked about this, and about shortages of product developing. So this could be driving greater use of PE in food packaging."

At first glance, the sheer scale of the increase in demand seems to rule out the possibility that the issue is mainly about restocking.

STIMULUS IMPACT

But history might have repeated itself. In 2009, China launched a Yuan (CNY) 4,000bn ($650bn) stimulus package, along with around CNY 9,600bn in new bank lending to mitigate the impact of the global financial crisis. This led to massive inventory building in resins.

In the first quarter of 2013, monthly social financing (loans via the 'shadow' or unofficial finance sector and lending from state-owned banks) was CNY 2,100bn, higher than in any quarter since the introduction of the data in 2002.

Traders could have been tempted to stock up because they misinterpreted the ample availability of credit as a sign that China's new leaders were in favour of more economic stimulus. However, Beijing has made it clear, through the late June credit clampdown, that it intends to reduce rather than add to credit availability.

If China's GDP growth further declines and if China suffers a weak peak manufacturing season, there could be a prolonged de-stocking period in PE.

"Apparent demand, because it only measures local production and imports, is a crude measure of what is really happening," added the second industry source. "We don't know how much of this 13% increase is sitting in store rooms somewhere and how much has actually found its way into finished goods that have already been sold."

A factor prompting end-users to rush into the market could also be the reality, or perception, of tight supply.

Unconfirmed reports of a delay to the start-up of ­ExxonMobil's 1m tonne/year metallocene linear low density polyethylene (MLLDPE) complex in Singapore were said to be a factor behind strong sales in June.

And now PTT Global Chemical's low density polyethylene (LDPE) plant in Thailand will be shut for more than three months because of an outage, with Petlin (Malaysia)'s LDPE plant due to undergo a turnaround.

Rumours are also circulating of reduced production in Iran, delays to the start-up of new capacity in China and a low operating rate at the new ExxonMobil plant in Singapore, which is now said to be on-stream.

"The rumours don't have to be true to prompt buyers to stock up," admitted a Singapore-based trader.

In the final analysis, all the above amount to little more than theories about why PE demand growth has confounded the overall gloom in the economy.


By: John Richardson
+65 6780 4359



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