China PE overstocking rises to more than 1m tonnes as exporters continue to flood the market

Business, China, Company Strategy, Economics, Malaysia, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Singapore, US

By John Richardson

CHINA is heading for another good year of PE demand growth with estimates from several players of growth at around of 8%. This is in line with our forecast for 2019 growth of 7.7%.

But this is clearly not a market growing at 13%, which is what our estimates of local production plus net imports indicate year-on-year for January-August 2019.

If you assume our 7.7% annual growth rate is right, this implies that overstocking in HDPE, LDPE and LLDPE now stands at 1.1m tonnes (see the above chart for the breakdown into the different polymers). This is up from 942,000 tonnes in January-July.

The methodology here is simple and has, in my view, greater value that just relying on what producers and traders say about inventories, as of course word of mouth cannot always be relied upon. You take our annual estimates of demand growth, divide by 12 and multiply this by however number of months you are measuring. You then compare this with the latest numbers on local production plus net imports.

China’s PE inventories first reached high levels in late Q1. This explains flat or declining CFR China PE pricing spreads over naphtha costs since then.

What has happened is quite clearly this:

  • The China market remains the world’s standout global growth market as demand elsewhere suffers from the global economic slowdown. What continues to power Chinese consumption growth is single-use packaging for internet sales. Growth in online sales of cheap luxury goods and essential goods such as food remains strong.
  • But because so much material is being diverted to China from other markets we have ended up with substantial oversupply.
  • Global markets have reshuffled to take into account the extra tariffs imposed on US HDPE and LLDPE which are the result of the trade war. These now amount to 30% on each polymer. So, US material that would have otherwise gone to China has gone to Europe, Malaysia, Turkey and Vietnam etc. Saudi material that’s been edged out of Europe has gone in greater volume to China. Exports from Malaysia and Singapore to China are also substantially higher.

Now, let’s look at what the latest ICIS local production and China Customs data is telling us in more detail.

The October 1 clear sky campaign didn’t help

On a month-on-month basis, China’s PE production was down by an average 8% in August. The decline was greatest in LDPE where production fell by 13%.

These declines were very likely part of efforts to reduce pollution and create clear skies in time for China’s big 1 October party – the nationwide public holiday and parade in Beijing to mark the 70th anniversary of communist rule. Overall industrial production fell in August as factory closures and reduced operating rates across many industrial sectors came into force.

But exporters continued to scramble to place as much material as possible in China, August month-on-month PE net imports increased by an average 6% with HDPE seeing the strongest gain at 12%.

In January-August, year-on-year net imports increased by an astonishing 19% to 11.1m tonnes. LLDPE predictably saw the biggest increase at 23% to 3.7m tonnes. This reflects the fact that global oversupply in LLDPE is the most acute because of the scale of US capacity additions

Further weakening of naphtha-to-PE spreads

The latest chart on naphtha-to-PE spreads, which you can see above, shows that they have edged down a little further to a January-September average of $439/tonne.

But note that this year’s naphtha costs have only averaged $520/tonne. This is much, much cheaper than the last time spreads were lower than this, which was in 2012. In that year, spreads were at $353/tonnes and naphtha costs at a sky-high $954/tonne on far more expensive crude.

This therefore tells us, using very straightforward ICIS data and the right market intelligence, that the problem today has to be excess supply, as feedstock costs are relatively cheap.

It is inevitable, in my view, that spreads will test their 2012 low over the next year as increased US production combines with a weaker global economy.  They could well go lower. As we all know, spreads are a reasonable if imperfect proxy for PE industry profitability.


If Strait of Hormuz closed down: Effect on petrochemicals exports


By John Richardson NEITHER SIDE seems to want a war but at febrile times like th...

Learn more

Global manufacturing slowdown: Turn to China's polypropylene market for your explanation


By John Richardson THEY SADLY still don’t get it. All the clamour yesterda...

Learn more
More posts
China: temper your expectations of a H2 recovery for supply as well as demand reasons

By John Richardson CHINA IS gradually getting back to work, but only gradually because the governmen...

Petrochemical feedstock purchasing managers: What to think about and what do next

By John Richardson ALL THE old assumptions about how oil, feedstock and petrochemicals markets work ...

Vital work to maintain petrochemicals supply for essential services must continue

By John Richardson INDUSTRY associations around the world are lobbying governments about the importa...

Polyethylene: How to plan sensibly as we face threat of new Global Depression

By John Richardson I SINCERELY want to help you guys. That’s what I am here for. To this end, here...

Coronavirus may take as much as two years to be brought under control

By John Richardson The only honest answer is that none of us know how events will turn out because o...

Coronavirus: The new ten-point guide for the petrochemicals industry

By John Richardson EARLIER THIS month I provided you with a ten-point guide for the impact of corona...

Container freight shortages will lead to regional petrochemicals trade and supply shortages

By John Richardson THIS excellent chart highlights the lingering effects of the coronavirus outbreak...

European polyethylene and coronavirus: Panic buying versus the real demand outlook

By John Richardson NOW that the epicentre of the virus has moved to Europe, we need to think through...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more