China’s Polyethylene Market Faces Long Destocking Process

Business, China, Company Strategy, Economics, Environment, Olefins, Polyolefins, US

China’s polyethylene (PE) imports surged and domestic production saw strong growth in Q1. This occurred as the economy slowed down on reduced availability of credit and the pollution clean-up. Even if global  producers saw this coming, they had no other choice but to raise exports to China late last year for arrival in Q1. This once again underlines major strategic weaknesses – an overdependence on China, and lack of demand management.

PE2

By John Richardson

PE inventories in China are said to be very high, although, as always, precise figures for inventories are impossible to come by. But every distribution channel is said to be full, and one industry source told me this week “every trader lost money in Q1”.

This is the result of a slowdown in lending growth since January that is, of course, also affecting China’s polypropylene markets – and a surge in Q1 PE imports and strong rise in local production. as we detail below.

Crucially, also, as the availability of credit has declined, interest rates have risen. As a reminder, the UK’s Daily Telegraph wrote on 4 May that last year’s re-inflation of the lending bubble led to:

A drastic decline in real interest rates from asphyxiating levels of 10% to the other extreme of minus 3%. This is now reversing. Real rates have spiked back up to 3.4%.

Reduced availability of lending and higher interest rates add up to lower economic growth for the rest of this year.

Linked to China’s resumption of its war on unsustainable debt levels is a pollution clean-up. This is crucial to understand – and, like the slowdown in credit, has been largely missed by consensus thinking.

Last year’s re-inflation of the credit bubble made air quality worse as more steel and aluminium etc. was produced. So as China reduces lending, steel and aluminium capacity will be shuttered. An unprecedented wave of environmental inspections are also taking which will lead to more factory closures across many industrial sectors. This will, of course, add to the downward pressure on GDP growth.

Here is the data on Q1 PE 2017 imports and local production versus Q1 2016:

  • Total PE imports rose to around 3m tonnes in Q1 from 2.4m tonnes. When you look at the exact numbers, this represents a 26% increase.
  • Q1 2017 net imports (imports minus exports? were at 2.9m tonnes, which was again 26% higher.
  • Meanwhile, domestic production also rose. It was 11% at 4m tonnes.
  • If you then calculate in apparent demand (apparent demand is net trade plus local production, this was 7m tonnes – 17% higher.

This big jump in apparent demand growth really matters because ICIS Consulting is only forecasting a real PE demand growth of 6% in 2017 over 2016. Real demand growth is growth adjusted for inventory distortions.

So we know what is likely to happen next: A prolonged destocking period as the Chinese PE sector deals with high stock levels and weaker-then-expected demand.

For overseas producers about to bring on-stream substantial amounts of new capacity – particularly linear-low density PE in the US – this should set alarm bells ringing. China’s LLDPE net imports were at 750,000 tonnes in Q1 – 28% higher than the first quarter of last year.

You will rightly argue that Q1 is often a strong quarter for PE imports in China. In the fourth quarter of each year overseas producers are anxious to reduce their finished-product inventories before they close their calendar-year financial accounts.

But what added further momentum to first quarter imports was new capacity. Mexican, Brazilian and Indian shipments to China are said to have increased as a result of recent start-ups.

This underlines how the global PE industry has become very dependent, too dependent, on China as a means of relieving unwanted inventory pressure. There is no other market like it, in terms of the volumes of its imports. The other emerging markets are tiny in comparison.

PE producers in Q4 of last year might thus have been aware that there was a substantial risk that China’s economy might slowdown at some point in 2017. But they simply had to arrange big volumes of exports to China in Q1 for arrival in the first quarter as alternative markets were insufficient to absorb their excess supplies.

I believe that this points to a major strategic weakness. The global PE industry needs to manage demand and supply very differently in the future.

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