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China PP Demand Surprises On The Upside, But Oil Threat Remains

Business, China, Company Strategy, Economics, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins
By John Richardson on 03-Jul-2017


By John Richardson

CHINA’S PP market, provided oil prices don’t further collapse, seems to be pretty close to the end of a destocking cycle that stretches back to February of this year, when the post-Lunar New Year traditional surge in new import orders didn’t happen.

The reason is a further fall in net imports (imports minus exports) in May over April.  They were down by 8% to around 290,000 tonnes following a 31% fall in April over March. This was always going to happen given that in Q1 this year over the same period in 2016, net imports rose by no less than 36% to 1.3m tonnes.

The Q1 jump, which represented material arriving in January-March that had been booked in the fourth quarter of last year, was partly the result of overseas producers running their PP inventories down before they closed their calendar year financial books. This often happens.

But what gave Q1 imports extra momentum this year was the consensus belief that oil prices would continue to rise towards $60/bbl. Traders took a gamble that China’s plastic converters would buy ahead of their immediate demand for resin in order to hedge against higher PP prices in the future. Rising crude obviously means more expensive PP.

As we all know, though, the reverse has happened. And further, China’s economy is undergoing a moderate slowdown, which partly explains weaker crude prices – and has created anxiety that chemicals and polymers demand growth in general might be lower this year than had been forecast.

The Q1 surge in imports also came as domestic production rose by 12%. This left year-on-year first-quarter apparent demand growth (net imports plus local output) at 18% – three times more than the 6% real demand growth for the full-year 2017 over 2016 that ICIS Consulting was forecasting earlier this year. Real demand is demand adjusted for inventory distortions.

But as net imports have seen big declines in April and May so has the growth in apparent demand. Growth in domestic production has also edged down in April and May (these are the peak months for shutdowns for maintenance work in China in 2017), but the bigger factor behind the fall in apparent demand growth is the steep declines in net imports:

  • Apparent demand was up by 12% in January-April 2017 over the same period last year. It was then only 11% higher in January-May.

This suggests that, as I said at the beginning of this blog post, PP destocking might be close to its end if we see stronger or at least stable crude.

The even better news for global PP producers is that we have significantly increased our estimate for China’s real demand growth in 2017. We now expect the market to grow by 8% over 2016, which would leave consumption in the region of 26m tonnes by the end of this year.Previously, we had expected consumption would have been around 25m tonnes.

The reason for this more bullish view on demand is that we think that whilst Chinese GDP growth might well be slowing down on a slower expansion in credit, demand growth for both PP and PE has become decoupled from GDP. As I wrote last Friday, quoting a PE industry source:

“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.”

The same applies to PP because of its use in a wide variety of consumer goods and packaging applications.

But again please, please be cautious over crude oil


As I said on Friday, though, there is plenty of evidence to suggest that oil prices could very easily resume their decline of recent weeks – with prices of $35/bbl, or even lower, very possible by Q4 of this year. This would affect the behaviour of China’s PP buyers in two ways:

  1. They would hold back from PP resin purchases. Plastic processors would each month only buy the bare minimum of raw materials required to keep plants running, because of the expectation of lower PP prices in the future.
  2. Buying sentiment would be further dampened by what $35/bbl crude would say about the global economy. Oil prices at that level would represent weaker economic growth in the West as deflation returned. This would clearly mean weaker exports of China’s finished goods, even if domestic PP demand growth continued to surprise on the upside.

Further evidence of the length in crude markets emerged today. As Reuters writes:

June OPEC production was up by 280,000 barrels per day (bpd) to 32.72 million bpd, according to a Reuter’s survey, despite the group’s pledge to hold back output in an effort to tighten the market. “To put that in context, that is nearly a quarter of the 1.2 million barrels (per day) OPEC agreed to cut,” said Greg McKenna, chief market strategist at Australian futures brokerage AxiTrader, adding this increase was driven by higher output from Nigeria and Libya, who were exempted from the cuts.

OECD inventories remain close to all-time record highs, and as the chart above indicates, US oil and oil-product exports are also at an all-time high. This is the result of the shale-oil revolution with further export increases likely as the White House prioritises energy exports, as it tries, and probably fails, to fulfil its job-creation and economic growth promises.