By John Richardson
TOMORROW nearly always ended up being better than today for the polymers industry, thanks to the resilience of demand growth during the Economic Supercycle.
What also made life easy was the assumption that global free trade would, like economies, usually advance rather than retreat. Pretty much a level playing was firmly in place, meaning that no particular country or region was at a disadvantage in its access to overseas markets.
In this benign world, inter-polymer competition still existed, though, which meant that if you made the wrong choices in what you produced, you sometimes struggled. But on the whole growth for every type and grade of polymer was good because we were in an inflationary environment.
How times have changed. We really don’t know whether or not China can transform its economy, and, if it fails, you cannot rule out the possibility that China will economically stagnate by failing to escape its middle-income trap.
Free trade is in danger of unravelling. A critical issue for the polymers industry is how China will respond if it faces trade barriers. It will likely prioritise imports from those countries and regions with which it still enjoys good trading relationships.
Next comes the potential changes in inter-polymer competition. We are in a deflationary world. “Cheap enough is good enough might thus” might become the new guiding motto, resulting in a more one-sided polymers world where there are clear groups of winners versus losers.
Let’s look at what this could mean for high-density polyethylene (HDPE).
Our base-case scenario, as the chart above indicates, is that the global HDPE market will be tighter in 2020 compared with 2016, resulting in worldwide operating rates increasing to around 93% from 88%.
Much of this success will rest on China. Whilst North America will see its surplus rise to 2.4m tonnes from 1.5m tonnes, China’s deficit is set to increase to 5.7m tonnes from 5m tonnes.
This is a solid starting point for a series of scenario plans that need to include the possibility of, as I said, economic stagnation in China – along with greater self-sufficiency in HDPE as China seeks to further monetise its coal reserves. This would help it create some of the jobs it needs to make up for a slower economy.
Next comes the unravelling of free trade, and more differentiated trading relationships between China and the rest of the world. In such a situation, what could matter is where you produce more than what you produce.
How might greater inter-polymer competition play out for HDPE? Here just three scenarios:
- Flexible packaging gains even greater share from rigid HDPE containers. This is the result of savings on transportation costs as flexible packaging is lighter. This would benefit low-density and linear-low density PE extrusion grades, which are used in the flexible packaging sector.
- Chlorinated HDPE is increasingly being blended with polyvinyl chloride (PVC) in applications such as window frames, as chlorinated HDPE provides greater strength and weather resistance. But China has vast oversupply of PVC. Will 100% PVC become good enough as PVC will be so cheap versus HDPE? And might China want to maximise its PVC consumption in order to preserve jobs in PVC plants?
- And what about the oversupply in PP and how this might eat into the consumption of some grades of HDPE?
This clearly just scratches the surface. There are many, many potential outcomes for HDPE and other polymers as the New Normal develops.