China’s Evolving Autos Market: What It Means For PP

By John Richardson

AutosChinaTHE tide of credit that lifted all boats in China meant that chemicals company CEOs could get away with clichés such as “the rise of the middle classes” and “increasing urbanisation” and later point to strong sales figures as support for their arguments.

But now the CEOs are going to have to work a lot harder to convince journalists and investors that they have the right strategies in place, as a result of the great credit drawdown - presuming, of course, that we ask them the right questions.

A classic example of a major end-use industry for many chemicals and polymers where this so evidently applies is autos – as we discussed yesterday.

And for one particular grade of polymer that goes into autos – impact copolymer polypropylene (PP) – concerns are building over whether new investments could amount to over-investments. Impact copolymer PP is used as the base material for producing filled and reinforced compounds for many automotive structural applications.

“Overseas producers have been building a great deal of both resin capacity and compounding capacity to serve China’s auto markets,” an industry source told the blog.

“A lot of these investments are in ‘value-added’ impact copolymer PP and I worry that, because autos growth has slowed down in China, the market might not be there for all this capacity.”

Several companies have already expanded – or plan to expand – their PP compounding capacities in China in order to serve the local autos market. Companies involved in this sector include Borouge, SABIC, LyondellBasell and Mitsui Chemicals.

But an industry observer felt that a lot more questions have to be answered  before pressing the panic button.

For example, he said that:

  • Investors and other industry observers need to take a close look at China’s impact copolymer import volumes, which we intend to do. It could be that new compounding capacity will merely be replacing imports.
  •  Because of quality issues, the foreign auto manufacturers will often only buy from overseas PP producers with the right impact copolymer technologies, as local suppliers cannot meet  specifications of GM, Honda etc. This particular polymers markets might therefore be  shielded from low-cost local competition.
  •  And given that companies such as Volkswagen are significantly increasing their production capacities in China, this could mean a lot more “captive demand” for the overseas PP producers.

But the observer added that China’s auto market had become a lot more complex resulting in, obviously, a lot more potential outcomes.

Impact copolymer PP might, for instance. still be dragged into the “race to the bottom” as automakers seek to lower costs to capture the only market that will see strong growth in China in the future:  The one for cars that sell at around $3,000 a time.

This could involve automakers lowering the PP compound specifications for future models made in China and demanding lower prices from their suppliers, leading to lower margins.

This might entail using less impact modifiers during compounding, which would, of course, weaken the performance of the final product.

“Ten to 20% of modifiers -  polyolefin elastomers – are normally added in the compounding process, but cost pressures might result in this being lowered to 5-10%,” said the observer.

There is another complication, however.  European automakers tend to use greater volumes of polycarbonate (PC)/acrylonitrile butadiene styrene (ABS) compounds, instead of impact copolymer PP, for their higher-end models.

These compounds are more expensive  than PP – and so a greater focus on costs might actually stimulate demand for high-specification impact copolymer PP.

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