By John Richardson
CHINA’S PE import growth remains remarkably strong, as the above chart indicates. The May data show that as global supply across all three grades significantly increases this year, with LLDPE and LDPE seeing the biggest increases, China is helping to absorb a great deal of these extra tonnes.
The crucial question for the global PE industry is therefore this: Will China continue to display very strong import growth?
In January-May 2017, net PE imports (imports minus exports) were at around 4.7m tonnes – 19% higher, when you look at the exact numbers, compared with 4m tonnes during the same five months of last year.
Translate this to growth in apparent demand, which is net imports plus local production, and the year-on-year increase in January-May 2017 was 12% (again see the above chart).
This compares with our estimate that real demand growth for the three grades of PE – HDPE, LDPE and LLDPE – will average 5.7% in 2017 over 2016. This would leave consumption at around 27m tonnes by the end of this year.
If ICIS Consulting is anywhere close to being right, this implies that there has been overstocking in China.
One explanation for this is that traders sold a large number of PE cargoes to China in Q4 last year for arrival in the early months of 2017 on the assumption that oil prices would go higher. This would have delivered handsome profits as higher oil prices would have caused higher PE prices. But crude has of course been a lot weaker than most people expected.
And as usual, overseas producers, which were eager to close their financial accounts for the calendar year 2016 with low stock levels, heavily targeted China for export sales in Q4 – again for arrival in the early months of this year.
It could also have been wrongly assumed that plastic converters would buy ahead of their immediate demand for PE resin during early 2017, as higher oil prices would have meant rising PE prices.
The reverse might have instead happened, with converters holding back from buying PE resin on the assumption that tomorrow’s prices will be cheaper than todays.
This would explain overstocking and a reason why apparent demand needs to adjust downwards over the rest of this year, towards our real demand growth estimate of 5.7%.
Crude has bounced back over the last few trading sessions as the bulls fight back, but it seems very possible that prices will soon resume their fall towards $35/bbl by the end of this year. Global oil supply remains long, with demand weakening because of the moderate slowdown in the Chinese economy.
So, even if PE destocking isn’t already happening in China, it might happen soon. Plastic converters may hold back from resin purchases in the knowledge that PE will be cost less tomorrow than it does today. Import growth might thus slow very significantly.
What about booming internet sales, though?
But what if real demand growth surprises on the upside? There are anecdotal reports that LLDPE growth in China will, for instance, be at 9%-10% in 2017 over 2016. This would compare with our forecast of 7.5% growth to a market of around 10m tonnes.
The optimism springs from booming internet sales. As China shops like crazy on line, companies such as Alibaba need increasing quantities of PE for packaging. PE producers that can establish strong one-on-one relationships with Chinese internet sales companies might be in a particularly strong position.
The strength of internet sales growth has led to a firm belief across the global PE industry that even if GDP growth slows down in China, PE demand growth may not be adversely affected.
“PE growth in China is essentially decoupling from GDP because of mobile internet sales. In other words, even if GDP growth moderates a bit in Q2-Q4 this year – and I think it will – PE demand will not be adversely affected,” said an industry source.
But balance this against the global risk represented by $35/bbl crude
This feels like it is true. But it all comes back to crude. What would $35/bbl by the end of this year mean for the global economy? And how might China’s converters respond to a weaker global economy – and falling oil and so PE prices – even if PE demand growth in China remains robust?
The best news for the global PE industry would thus be stronger oil prices, and also more stability in crude markets and clarity of direction.
As promised on Wednesday, here is my forecast for HDPE injection grade prices and spreads in China based on the assumption that Brent crude does fall to $35/bbl.
Under this scenario, Brent crude averages $40/bbl and naphtha $357/tonne CFR Japan from June until December 2017. It falls to a 2017 low of $35/bbl in December. This would compare with an actual Brent price at an average of of $53/bbl in January-May, and naphtha at $487/tonne CFR Japan.
HDPE prices would average $766/tonne CFR China over actual prices of $1,100/tonne CFR China in January-May 2017.
Meanwhile, spreads would fall to $437/tonne in June-December from an average of $613/tonne in January-May. This takes into account the negative impact of a weaker global economy.
Please be very careful out there….