Home Blogs Asian Chemical Connections Decline of 2.1m tonnes in 2020 global polypropylene demand now seems best possible outcome

Decline of 2.1m tonnes in 2020 global polypropylene demand now seems best possible outcome

Australia, Business, China, Company Strategy, Economics, Europe, European economy, European petrochemicals, India, Indonesia, Japan, Malaysia, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Philippines, Polyolefins, Singapore, South Korea, Thailand, US
By John Richardson on 02-Mar-2020

By John Richardson

EVERY DAY that goes by when China is not entirely back at work the economic damage is multiplying. It already looks as if the best China can hope for is real as opposed to politically manufactured 2020 GDP growth of around 2.25%. And that assumes a rapid economic rebound from Q2, which of course is not guaranteed.

China might be as a result be pushing too hard to resume normal economic activity before the coronavirus outbreak has been brought under control. This may lead to a rebound in the number of new cases as large numbers of people once again gather in the same places.

Another issue is the reliability of the official Chinese data on the number of new cases because the methodology of identifying infections keeps changing. .

Now that the disease has gone global could healthcare systems in developing countries in Africa, Asia and the Middle East be overwhelmed? Is even the US in a strong position to cope following cutbacks in funding for dealing with pandemics?

The known unknowns and unknown unknowns are so many that the full implications of this crisis can only be guessed at. It is therefore very easy to be overwhelmed at times like this, to panic and do nothing.

But there is clarity in all this uncertainty. Regular readers of the blog were told a month ago that we were heading for a global recession – and with it very probably another financial crisis, something I have been warning about for years. If you took notice, you will now be well ahead in planning.

Operating rate cuts at your petrochemical plants should have already been prepared for if they haven’t taken place already. Creditors will have been classified according to their risk of default. Lenders will have been contacted to ensure your own credit lines remain adequate.

Sales targets will have already been adjusted downwards as demand will be down. Your best-case outcome should be declines in consumption in line with what took place in 2008 over 2007. Why the best case? Because this is a supply side shock that cannot be remedied by monetary stimulus, whereas in 2009 there was no supply side shock.

But that’s not the whole story. Far from it. Your teams on the ground should already be conducting market studies into where the opportunities lie in shifting production and sales efforts into areas of demand that will be supported by the virus-relief efforts. Take polyethylene (PE) as an example where medical packaging, shrink film and food-delivery container end-use applications have already seen growth in demand in China. Prepare for this shift in demand patterns becoming global.

The effect on polypropylene demand

Polypropylene (PP) and other polymers such as polyurethanes (PU) and polycarbonate (PC) that are heavily reliant on durable goods for their final consumption are at risk of suffering from more lost demand than PE, where more than 50% of its demand is in single-use applications.

Once China and the rest of the global economy has recovered, then the bounce back in daily consumption of stuff made from PE should be very quick. But the recovery in PP, PU and PC etc. is likely to take longer because of the disruptions to global manufacturing supply chains.

“Hold on, what are you talking about, my team on the ground is telling me that China is getting back to work.” Let us assume this is right, meaning you can 100% trust all the data and analysis you are receiving from China.

Let’s assume that Chinese factories and consumers will be back in full swing by Q2, there will be no secondary jump in infections and the global spread of the virus will be quickly contained. The disruptions to global manufacturing have been already been big enough to cause long lead times before everything gets back to normal in autos and electronics plants etc.

Closely study this New York Times article for your evidence. As the newspaper writes: More tonnage of container ships is idled around the world now than during the global financial crisis.

A remarkable one-seventh of all merchant seamen are Chinese, resulting in a global shortage of manpower because of Chinese quarantine measures. The heavy reliance of global supply chains on China will even in the best of circumstances mean long lead times before Chinese and overseas ports are working normally.

Spending on durable “big ticket” or expensive discretionary items such as autos will take a long time to recover because of the loss of consumer confidence, with the recovery taking even longer if there is a financial crisis. PP is heavily used in autos production.

We can therefore at the very least expect a global decline in PP demand in 2020 over 2019 in line with what occurred in 2008 over 2007 –  a 2.7% decline (see the above chart). Just for argument’s sake, I have also assumed 3.7% and 4.7% declines in 2020 growth in the other two other scenarios.

As with the PE business, you should also prepare for the possibility of PP becoming much more of a local business. A worsening shortage of global container freight movements could result in PP being stranded.

Extreme price volatility may also deter buyers from acquiring cargoes that take several months to arrive in key import markets such as China. Why buy a cargo from say the Middle East again when the PP price could change several times before arrival?

Price volatility might thus represent an opportunity for Asian PP exporters to gain market share in China, assuming they can find the container space.

Grade adjustments will also be important in PP. Take homopolymer grades that go into takeaway food containers. If, as I said, many millions of people are quarantined at home to contain the virus, there will booming demand for these containers for home deliveries of food. But here, PP will face strong competition from PE.

Your first instinct might still be to dismiss this as all doom and gloom rather than realism. But consider how the consensus is shifting. As the FT writes: A global recession in the first half of the year is “suddenly looking like a distinct possibility” said Erik Nielsen, chief economist at UniCredit. IMF predictions only a week ago of just a 0.1 percentage point hit to global growth now look too optimistic.