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China PP Market Outlook for H2 And 2018

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By John Richardson on 07-Aug-2017


By John Richardson

AS IS the case with polyethylene (PE), China’s polypropylene (PP) market continues to catch up with the underlying realities of demand growth.

If you recall, in Q1 of this year PP net imports (imports minus exports) grew by no less than 36% over the same period last year 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.

The Q1 surge in imports also came as domestic PP production rose by 12%. This left year-on-year first-quarter apparent demand growth (net imports plus local output) at a very high 18%. This compared with the ICIS Consulting forecast for real demand growth of 8% for the full year 2017 over 2016. This would leave consumption by the end of the year at around 26m tonnes. Real demand growth is growth adjusted for inventory distortions.

China was clearly therefore suffering from overstocking – hence, the persistent fall in the growth of net imports on a month-on-month basis since the end of the first quarter. Net imports were down by 31% in April over March and by 8% in May over March.

In June of over May, imports by themselves fell by 9%. Net imports, though, saw a slight increase of 1%. But this was down to a sharp fall exports in June compared with May. This suggests less of a need to re-export unwanted imports – along with lower exports of domestic material.

Put this all together and you will then find that net imports in H1 2017 over the same period last year rose by 13% to 2.2m tonnes. With domestic production also up by 9.8% on the same H1 basis, this left apparent demand growth at 10.3% – much closer to our forecast for annual real demand growth.

What about the second half of this year and early 2018?

PP demand will continue to be weakened by processor shutdowns

If one was of a cynical nature, and some of my contacts can at times be of that nature, you would attribute some of this year’s efforts to clean up the environment as “window dressing” ahead of this autumn’s important 19th   National Congress political meeting.

“Air quality needs to improve to create a favourable social climate ahead of the meeting, especially in Beijing where the meeting is taking place. So that means lots of factories are being shut down, including some polyolefins converters,” one contact told me.

This implies that once the meeting is over some of these factories will re-open, thereby resulting in a recovery in demand for both PE and PP.

I however thank that the economic reformists are now firmly back in charge of policy direction – very probably for the long term.

The reformists know that China’s environmental challenges are so severe that there can be no major backtracking on efforts to reduce air pollution through forcing manufacturers to either upgrade their production processes or shut down.  Air will come first followed by the much harder challenges of soil and water pollution.

This also not just a domestic issue. China has signed up to the Paris climate deal. The US has withdrawn from the deal, and so China has the chance to set an example to the rest of the world through reducing its CO2 emissions. In so doing, China can gain international credibility, and thus geopolitical influence, at the expense of the US.

If you improve the energy efficiency of manufacturers – i.e. how much electricity they consume – you kill two birds with one stone. Most of China’s power plants are fuelled by coal. So if your improve energy efficiency, you lower the amount of coal burned by power stations and thus the amount of particulate matter they produce. Particulate matter is bad for air pollution. At the same time, you cut the CO2 emissions of the power stations.

And as my ICIS news colleague Angie Li points out in this article, a particular area of focus is the release of volatile organic compounds (VOCs) by plastic processing plants. VOCs, which also contribute to poor air quality, are released when resin is melted down and combined with additives. Processors are being required to either reduce their VOC emissions are shut down.

Manufacturing in general has also been the subject several rounds of environmental inspections. As my colleague writes in the same article:

The Chinese authorities are now on the fourth round of inspections under the campaign, and will cover the provinces of Sichuan, Jilin, Zhejiang, Shandong, Hainan, Tibet, Qinghai and Xinjiang.

The third round of inspections covered the provinces of Tianjin, Shanxi ,Liaoning, Anhui, Fujian, Hunan and Guzhou; while the second round spanned Beijing ,Shanghai, Hubei , Guangdong ,Chongqing, Shanxi ,Gansu; and the first round was conducted in Inner Mongolia, Heilongjiang, Jiangsu, Jiangxi ,Henan, Guangxi, Yun nan and Ningxia.

The inspections are expected to be completed in March next year, industry sources said.

No significant benefit from ban on recycled imports

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.

As I discussed last month, there is considerable excitement amongst global PE players about the boost that the ban may give to consumption of virgin PE resins. Last year, China imported 2.5m tonnes of scrap PE and so the excitement comes from the argument that some of this volume will be replaced by virgin, or prime, PE.

Industry sources also estimate that China imported around 1m tonnes of scrap PP in 2016.

But in our view:

  • Recycling import figures refer to the total volume of scrap material, but this translates to a much lower share of new recycled resins ready to be processed (usually in blends with virgin resin). The share can be as low as 20-30% with the rest burned.
  • Our estimate of post-consumer recycled PP material in China was thus 250,000 tonnes in 2016 compared with the 1m tonnes of imports. In other words, only 250,000 tonnes of virgin resin demand was lost to recycled material. This may turn out to be an underestimate, but we don’t believe it will be a major underestimate.

Still, though, the ban on recycled or scrap imports will have some kind of positive effect on virgin resin consumption.

But note that there was a big increase in scrap polymer imports in general during H1 because recyclers knew a change in regulations was on the way. This suggests no significant gain for virgin polymers consumption  during the rest of 2017.

What of 2018? Any gain will be limited to low value end-use applications as recycled material can only be used in low-value applications. PP virgin resin consumption will thus only be boosted in homo-polymer grades such as raffia and injection.

We also expect that local PP virgin resin producers will fill most of the gap created by the ban on scraps by increasing their export. We thus don’t expect any major gains for importers.

The global economy is the big wild card

China’s economy may only undergo a very moderate slowdown later this year and into 2018. This slowdown would be from a position of very strong growth in H1.

On this basis only, this makes our forecast of 8% growth in Chinese PP demand in 2016 seem very solid. Although this would be slightly down on the 10% growth in 2015 over 2016, 8% growth would still be tremendous.

And just look at how the Chinese market has grown over the last decade. In 2006, consumption was just 9.2m tonnes but last year it had grown to 26m tonnes. So even if the percentage growth in PP is lower than we expect this year and over the next few years, these lower increases will come from a much higher base.

Our base is thus for, as I said, 8% growth in PP demand in 2017. This implies a further moderation of apparent demand growth in H2, from the 10.3% that we saw in the first half of this year.

But you cannot overlook the risk of the contagion effect that I discussed last week. Even only a mild initial slowdown in China could cause major global problems – even perhaps a new global economic crisis. Imbalances in the global economy are such that nobody can afford to be complacent.

A new global crisis would of course then feed back to China, further damaging its own growth along with the rest of the emerging world.

A fall in oil prices and a return to global deflation would also have many other first  and second order effects on the PP industry and the petrochemicals and polymers industry in general.

This is why you need ICIS Consulting to help build your downside scenarios.