By John Richardson
MORE evidence that China will not remain as easy a sink for surplus polyolefin volumes - especially in the case of the higher-cost importers - is emerging.
"There are plans to open a bonded warehouse in Guangdong province to sell RMB material converted into US dollar product," a Singapore-based polyolefin trader told me yesterday.
Those who want to buy polyolefins for re-export as finished goods always prefer to buy overseas material priced in US dollars, as this is exempt from the full 17.5% rate of value-added tax (VAT).
The importers deliver this stuff into bonded warehouses ahead of collection for processing and re-export.
"If the manufacturers involved in the re-export trade were to buy RMB material they would only be exempt from 13 percentage points of the VAT," the trader added.
"As a result, it's always more expensive to buy local material for this purpose."
But if there are now plans to deliver Sinopec and PetroChina-sourced product into a bonded warehouse, the competitive landscape might have started to shift.
"How it works is once you have converted RMB-priced product into resin priced in US dollars, which has to involve the use of a bonded warehouse, it becomes exempt from the full rate of VAT - the same as the imports," continued the trader.
"The only drawback is that you cannot then re-price the polymer back into RMB."
China is rapidly increasing its polyolefin capacity, therefore making the option to supply into this re-export market more viable as it is no longer as dependent on overseas suppliers.
The country's polyethylene (PE) capacity is due to increase by 1.99m tonne/year in 2010 to 11.1m tonne/year, while its ability to produce polypropylene (PP) is to set to rise by 2.74m tonne/year to 12.7m tonne/year, according to Shanghai-based commodity information service, CBI.
It's easy to imagine much more local volume being delivered into bonded warehouses as China's capability to produce polyolefins continues to improve.
China's producers are able to minimise costs in ways not open to some of the higher-cost importers, such as those in South Korea and Japan who operate sub-world-scale naphtha-based cracker and derivative complexes.
Some exporters from Europe would also be vulnerable, while the US ethane gas advantage might be able to buy a number of its PE players a little more time.
The commodity-grade end of the business could end up even more firmly in the hands of the local Chinese producers and the Middle East players.