China Higher-Value Processors Exert More Pressure

Eurozone_crisis2.jpgBy John Richardson

ALTHOUGH overall Chinese polyethylene (PE) demand, as we feared would happen, has fallen back to Q1-Q3 2012 levels (current sentiment suggests that it could be even lower), higher-value segments of the industry continue to do very well.

It is, therefore, worth reflecting again in more detail on comments made by a source with a global polyolefins producer last month.

They tell us that:

*Polyolefins producers with the right technologies, and crucially with the right long-standing and carefully nurtured customer relationships, stand to do very well this year.

*But the higher-value segment comprises only around 10% of China’s market. The remainder will be a battle for profitability and market share which the Middle East producers, and perhaps the US if there are arbitrage opportunities, are sure to win. Overly upbeat comments made by certain Asian naphtha cracker operators to chemicals analysts earlier this year are going to ring very hollow.

*Higher-value plastic processors in Europe and elsewhere will be under more pressure from competitors in China. At the moment, it seems as if antidumping or safeguard duties are not an option for the Europeans. But if the Eurozone economy worsens, which we think is highly likely, this might well change. “Unfair” Chinese government financial support for manufacturers in general is likely to attract a lot more attention. We like the slide above, from management consultants Deloitte, which neatly summarises the challenges Eurozone businesses. Converters we spoke to in Europe last week explained how difficult conditions have become.

Here are the comments in full from the polyoefins industry source:

The fundamentals of the high-end PE films business remain good. I can make money even if the rest of the business fluctuates up or down by 5-10%.

“The high-end film manufacturers in China first took on the Australians, the Malaysians and the Indonesians and now have switched their focus to Europe.

“The European film manufacturers are complaining but cannot launch anti-dumping or safeguard duty claims. The reasons are that the markets are not big enough to justify the legal fees or get government support.

“Conventional thinking is that strong growth in China has to come to an end up, but when you talk to any customer below 50, they see things very differently. They think that the Chinese government will continue to provide them with very good support.

“For the high-end film manufacturers in China, into applications such as high moisture-barrier film for food and toothpaste packaging, they have absolutely no problem in accessing financing from the state-owned banks.

Plus the big brand-name finished goods manufacturers that are state-owned are instructed to buy from them.

“I think a reason could be because these higher-value film producers are exactly what the Chinese government wants to encourage: An industry that is move up the value chain, as part of China’s efforts to escape the middle-income trap.

“But the higher-value segment only comprises around 10% of the overall China PE market.

“The commodity end of the business is struggling though, for example, in the lower-value applications of high-density PE (HDPE).

“The consolidation process amongst lower-value converters is already played out in the US and Germany, but is still taking place in China.

“Smaller converters are closing down in China, or are merging, as a result of higher labour costs and other costs and a relative lack of government support.

“But the big commoditised converters are fine – they have plenty of cheap access to financing.”

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