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China’s PE Imports: Recycling Ban Adds To Uncertainty

Business, China, Company Strategy, Economics, Environment, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 28-Jul-2017


By John Richardson

FOR the time being at least, the year-on-year growth in China’s polyethylene (PE) net imports (imports minus exports) has fallen.

In January-May 2017, net imports were up by no less than 19%. However, the January-June increase is down to 11% to total imports of around 5.2m tonnes, with the reduction in line with what I had expected.

(It is important to note that I am referring here to only imports of virgin, or prime, grades of PE and not also recycled material. The importance of this distinction will become clear later on in this post.)

Imports surged in January-May, with growth especially strong in Q1, on expectations that oil prices would rise towards $60/bbl, thus forcing China’s plastic converters to buy ahead of their immediate demand for resin because of the likelihood that PE prices would be higher in the future.

But the weakness in crude markets created the opposite momentum, with processors instead buying only the bare minimum of PE necessary to keep their plants running. PE pricing has been either flat or declining for most of this year.

There were two other factors behind the surge in Q1 imports.

As usual, overseas producers were anxious to offload PE in Q4 2016 before they closed their calendar- year financial accounts. A large number of cargoes were therefore sold to traders during the fourth quarter, and these cargoes started to arrive in China during the early months of this year.

Another element of the logic behind stronger exports related to the overall Chinese economy. Most people assumed that the very strong credit growth we saw in 2016 would continue throughout this year, resulting in all of the PE shipments to China being quickly and comfortably absorbed by a booming economy.

As I discussed on Wednesday, H1 official GDP growth came in at an unexpectedly strong 6.9% and headline lending growth – total social financing – bounced back in June compared with May.

But the mood on the ground out there, when you talk to PE producers and traders, is somewhat more cautious about economic growth prospects for the rest of this year.

This reflects the reality that in real terms, credit growth has contracted so far this year – and this contraction is big – which I again discussed on Wednesday. The Chinese government also looks set to stick to its course of reining-in lending growth, especially speculative lending, during the rest of this year and into 2018.

Nobody I’ve talked to is expecting a sharp decline in China’s GDP growth. Any moderation  is expected to be only very mild in H2, and I agree with this view. But the anticipation of this slight slowdown has weakened PE market sentiment. This weaker sentiment further helps to explain the fall in the growth of imports.

What’s going to happen next

I expect that in July and August at least, growth in net PE imports will continue to moderate as a result of this weaker sentiment – and also because of strong growth in Chinese domestic production.

There is a lot of talk of a slowdown in local capacity additions as a result of postponements, or even cancellations, of new coal-based PE capacity.

This reflects weaker coal-based PE economics versus naphtha-based PE as a result of lower oil prices since late 2014. Coal-based players have also more recently seen their economics undermined by more stringent, and so more costly, environmental regulations.

But so far this year, we haven’t seen any sign of these delays. In January-June 2017, China’s local production was 5% higher at 7.7m tonnes compared with the same period last year.

The decline in import growth is behind a dip in year-on-year apparent demand growth – again for virgin resins only. In January-May 2017, apparent demand, which is net imports plus local production, was up by 12%. But in January-June, the increase was just 7% to a total market of around 12.9m tonnes.

I expect this trend to continue, at the very least over the next month or so. Apparent demand growth will further moderate towards our estimate for full-year 2017 demand growth of 5.7% over 2016.

This would leave consumption by the end of this year at around 27m tonnes. Real demand is demand that’s been adjusted to get rid of inventory distortions.

What of this week’s bounce in oil prices and the buying momentum this could create in the PE market?

I will give you my views in a later post. Suffice to say here, though, I don’t think anything has essentially changed.

The crude market remains fundamentally very long, and the bounce in prices will give US shale-oil producers an extra incentive to up their output. So expect a great deal more volatility in crude, with a big further downside potential.

Beyond August, however, a Chinese ban on imports of recycled PE could be good news for overseas producers of virgin PE resin. The ban might also provide a boost to local prime-resin producers.

Multiple Scenarios

On 18 July, the Chinese government informed the WTO that it will ban imports of scrap or recycled polymers in order to protect the health of workers in its recycling sector.

“We found that large amounts of dirty wastes or even hazardous wastes are mixed in the solid waste that can be used as raw materials. This polluted China’s environment seriously,” said China in its WTO filing.

The ban, which is due to come into force from 1 September 2017, will apply to all polymers – and other scrap materials such as paper. More on other polymer markets later, but I will meanwhile continue my focus on PE.

The impending ban on imports of scrap PE has raised the hope that this will provide a very timely boost to virgin imports. This is of course the year when substantial new prime PE capacity is being brought on-stream in the US, the Middle East and India, with production set to further increase in 2018-2020.

So, what might be the scale of the impact? As always, we need to start with the historical data.

In 2016, China imported around 2.5m tonnes of scrap PE, according to official government data. This was 29% lower than in 2015, with the reduction the result of restrictions on imports that were introduced under the Operation Green Fence legislation.

This compared with virgin resin net imports that last year totalled 4.7m tonnes. You can therefore see why overseas PE producers are getting excited over the benefits of the ban. The potential loss of some 2.5m tonnes of imports of recycled imports is no small deal.

But the domestic recycling industry might end up expanding in response to the ban on scrap imports. This would fit in with one of the government’s objectives of its 13th Five-Year-Plan (2016-2020), which is to expand green industries.

Local virgin PE producers could also increase their output to help fill the gap created by the loss of recycled imports.

Plus, you have to think of the negative effect of the ban on recycling jobs markets overseas. This could damage economic growth and so demand for PE demand in countries such as the US.

In 2016, China imported 7.3 million tonnes of waste plastics, valued at $3.7bn, accounting for 56% of world imports, according to Reuters.

“In any given year, approximately one-third of the scrap recycled in the United States is prepared for shipment to the export market, and China is the recycling industry’s largest customer,” said the US Institute of Scrap Recycling Industries, in a statement released after the ban was announced.

“This includes more than $1.9 billion in scrap paper (13.2 million tons) and $495 million in scrap plastics (1.42 million tons),” it added.

“More than 155,000 direct jobs are supported by the US industry’s export activities, earning an average wage of almost $76,000 and contributing more than $3 billion to federal, state, and local taxes. A ban on imports of scrap commodities into China would be catastrophic to the recycling industry,” said the institute.

And imports of recycled PE mainly go into low-value finished goods applications only. Much of the new global capacity in virgin PE is in higher-end grades, such as metallocene linear-low density PE.

Confused? You very likely are. In today’s New Normal world, forecasting chemicals and polymers markets in general has become much, much harder. This is why you need multiple scenarios – and the support of our team at ICIS Consulting.