Anyone not closely studying trade data is likely to make some very expensive mistakes over the next few years. The reason is that economics is no longer the sole driver for purchase decisions. Instead, political and social issues can be of greater importance.
The chart above of China’s polyethylene demand highlights this complexity, using Global Trade Information Services data:
- Total demand was flat in 2012 (green) versus 2011 (blue column)
- But it has jumped in 2013 (red) and is 14% above 2011 levels
- China’s own production continues to rise, and supplies 57% of total demand, even though it is high-cost
- Middle East imports supply 22% of demand, due to cost and the ‘oil for markets strategic corridor’
- High-cost NEA is 9% of demand, with Taiwan up 34% as political tensions ease with China
- Low-cost SEA is 8% of demand, with Thai volumes flat as new Singapore capacity arrives
- NAFTA is just 3% of demand: US volumes are down 16% despite the shale gas cost advantage
The trade data also provide important clues as to the sustainability of current demand levels.
- The key driver has been HDPE growth, up 18% to 3.1MT versus 2012. Iran and Saudi Arabia have been the big winners, each up over 30%
- LDPE is up 8% to 1.1Mt with S Korea, Saudi and Qatar big winners
- LLDPE/EVA is up just 2% at 1.7MT, with Singapore gaining share as its new capacity comes online
- Equally, the sudden surge in import volume suggests inventories were also built as crude oil prices rose
In turn, HDPE’s strength suggests the prime driver for the demand increase has been the revival in construction activity. This is closely allied to the shadow lending boom, which seems unlikely to continue into 2014. Also worth watching is LDPE’s gain, which goes counter to global trends. Whilst the slowdown in LLDPE volumes may indicate consumer concerns over food safety are easing.
Anyone now finalising budgets for 2014 therefore has some very difficult judgements to make. Will the November economic plenum really tackle the shadow banking bubble? If it does, construction could easily become a disaster area for HDPE sales.
Equally difficult to forecast is whether LDPE volumes will continue their recent revival and, if so, will this continue to be at LLDPE’s expense?
In turn, how might producers in the different geographies react to major changes in market demand?
Companies would be extremely short-sighted if they choose to ignore these far-reaching changes because they raise uncomfortable issues around the viability of current strategies.
Plus of course, it is no longer true that PE is primarily used in food packaging and hence immune from economic downturn. Industrial packaging (stretch film, stretch hood, protective film, liners, rotomolding etc) is now nearly as large as food packaging and clearly linked to economic activity. In addition, uncertain economic times slow growth rates in food packaging, as companies cut back on the capital spending needed to convert glass bottles and cans.
It all makes the blog very nostalgic for the SuperCycle years, when all one needed to forecast sales was a spread-sheet and the ability to decide on a ratio to an IMF forecast of GDP growth. Today, however, detailed Scenario planning is clearly essential, given the range of different outcomes that are possible.