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China PP Import Decline Challenges Global Markets

Business, China, Economics, Naphtha & other feedstocks, Olefins, Polyolefins, US
By John Richardson on 08-Jun-2016


By John Richardson

THE latest data on China’s polypropylene (PP) imports should set alarm bells ringing in polyolefin company board rooms:

  • China’s PP production was up by 14% in January-April 2016 versus the same four months last year, with imports falling by 20% on the same year-on-year basis. January-April imports in 2016 were at their lowest level in six years.
  • Northeast Asia and the Middle East volumes to China have fallen substantially, according to fellow blogger Paul Hodges.
  • This has pressured the US market, as these producers seek to replace lost volumes. US imports from NEA and the Middle East have increased to 25,000 tonnes this year from 9,000 tonnes in January-March 2015 (US Customs data is a month later than China’s).

The conventional thinking was that this could and would not happen, firstly because there was no way that China would build most of the PP projects that it had planned on paper.

Next came the idea that once these plants were built, they wouldn’t run that hard because they were far to the right of the traditional way of measuring cost curves.

When both these ideas were proved wrong, a third notion gained some credence from around the middle of last year: That as China pushed ahead with its economic reforms, traditional Western cost curve analysis would increasingly govern the way that chemicals plants in China were in general run, including many of these PP plants. This would lead to lower operating rates on poor individual plant economics.  The logic behind this third theory was that economic reforms meant that China was moving more towards being a Western-style market-driven economy.

Providing further support to this latest notion was that many of the new PP plants are privately owned, as opposed to being owned by state-owned giants PetroChina and Sinopec. This meant that they would be much more profit focused than their publicly-owned competitors, and so would have a further motive to keep operating rates low.

All of these theories ignored the crucial role that higher operating rates would play in supporting local government revenues and employment in certain regions of China.

This kind of thinking also overlooked how pushing PP operating rates higher would have a further benefit: Boosting export revenues as compensation for a weaker domestic economy. China’s PP imports were 29% higher year-on-year in January-April 2016 at 89,000 tonnes.

People also overlooked that many of the new coal-based PP plants are located in inland China, where the focus is to monetise local coal reserves because demand for coal from other industries is in decline

These new coal-based PP plants are often also isolated from competition, because they are a long way inland.

What happens next?  I can see no reason why China’s PP plants will not continue to run hard for the rest of this year and into 2017. This production will pay little regard to either the strength of China’s economy, or the strength of the wider global economy.

The next three crucial questions on the exam paper are as follows:

  1. To what extent will the innovation envelope be pushed outwards, leading to PP being increasingly substituted for other polymers such as high-density polyethylene, polyethylene terephthalate, polystyrene, and acrylonitrile butadiene styrene?
  2. To what degree will what is likely to be very cheap propane and propylene for several years to come support higher operating rates at propane dehydrogenation-based PP plants and  standalone PP plants? (These latter plants buy merchant propylene, as they are not integrated upstream to their own propylene supply).
  3. Might cheap propane and propylene even lead to capacity expansions in China?

A big prize is the US because switch to lighter cracker feedstocks has tightened its PP market there.

Traditionally, US logistics have represented a big import barrier because of the need to pay the labour costs of tearing open bags and dumping pellets into railcars for delivery to converter’s hoppers.  The US converters are too big in scale to take delivery by the bag load, and imports often arrive in containers in bags. It also said to be difficult for importers to get hold of railcars.

If China, though, pushes exports harder – along with more competition in the US from NEA and Middle East volumes displaced from China – might this change? Could price differentials be such that this barrier comes down, and/or could innovative ways be found around the logistics issue?