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China’s PP Import Decline: Did you See This Coming?

Business, China, Company Strategy, Economics, Polyolefins
By John Richardson on 11-May-2016


By John Richardson

THE smart people in the polypropylene (PP) business will have already adjusted their strategies in response to evidence, from 2009 onwards, that China was very aggressively expanding its PP capacities.

They would have tracked the rapid rate of project approvals, whilst also ignoring claims that many of these projects would never be built because of poor cost-per-tonne economics. The smart people will have ignored these claims because they would have realised that there was another agenda behind these projects beyond just plant-by-plant profitability. This agenda was the need to compensate for the Global Financial Crisis.

And when all of China’s new PP plants had been built in the peak 2009-2014 economic stimulus period, the clever people would have ignored claims that these plants wouldn’t run that hard – again because of poor standard cost-per-tonne economics. They will thus not be surprised at all by the increase in production in 2015. In 2014, China produced around 15m tonnes of PP, which in 2015 rose to approximately 18m tonnes, according to ICIS Supply & Demand Data Services– an increase of 18%, when you measure the exact data.

Excellent people on the ground in China will also have been on top of what remained very strong local PP demand growth in 2015. So they would have seen known that, despite this big increase in local output, demand for imports was resilient. They would thus have been pretty close to accurately forecasting of total 2015 imports which reached 4.8m tonnes, according to the China Customs department. This was only moderately down from 5m tonnes in 2014.

At the same time, though, the clever companies will have been building contingency plans for 2016, which needed to be built around these two risks:

  1. Local production might continue to rise. Despite continued robust local demand growth, this raised the threat of a sudden and very sharp retreat in imports.
  2. There could also be a further rise in Chinese PP exports as China continued to feel its way in export markets.

The smart people will thus not be that surprised by the chart at the beginning of this post, which shows that:

  • In Q1 of this year over the first quarter of 2015, imports fell to 1m tonnes from 1.3m tonnes.
  • This was the lowest Q1 import figure since 2009, when, of course, Chinese PP consumption was a great deal smaller.

The fall in imports occurred as local production once again increased: In Q1 2016, ICIS China estimates that it was at 4.2m tonnes compared with 3.7m tonnes in Q1 2015.

Exports were also up, albeit from a very small base – and they remain dwarfed by imports. Chinese PP exports were 58,000 tonnes in Q1 of this year, up from 40,000 tonnes during the first quarter of 2015.

This is not the end of the PP world as we know it, by any means. Demand growth in the rest of the emerging world remains robust, if volume-wise on an individual country basis a lot smaller than China.

Europe needs lots of PP imports, and there are reports of rising US PP imports – despite all the logistics constraints – because of a tight US market.

The smart global producers will have already shifted their sales and marketing strategies accordingly.

Longer term, other questions to consider are:

  • How aggressively will China push PP exports in the future, as the country as a whole seeks to compensate for lower growth at home through stronger manufacturing exports in general?
  • Will this create a deflationary effect on global PP markets, certainly in the lower-value grades, which, for the time being, is the main space in which China operates?
  • Will other producers be dragged be also dragged into this deflationary battle?
  • To what extent might the abundant availability of cheap propylene, which we expect to last for several more years, encourage higher operating rates at standalone PP plants?
  • Might even more standalone PP plants be built, especially in China, as China tries to raise its overall manufacturing exports?
  • In a deflationary world in general, could there be a fantastic opportunity for PP producers with the right mind set? Might they be able to grow consumption in end-use markets, at the expense of competing polymers such as polyethylene, acrylonitrile butadiene styrene and polyethylene terephthalate?
  • Or will market tightness in the US and Europe, and strong emerging market demand growth in general, help to keep the global market PP market reasonably well balanced?

We will help you answer all of these questions – and build the right strategies – through the ICIS Consulting single client work – and our multi-client reports, such as our new Study.

We also track, on a monthly basis, all the above dynamics in our monthly Asian, European and US PP Price Forecasting Reports.