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Global PP demand in 2020 faces two potential major downsides

Australia, Business, China, Company Strategy, Economics, Europe, European economy, European petrochemicals, Singapore, South Korea, US
By John Richardson on 20-Apr-2020


By John Richardson

THE GOOD news might be that some 30% of global PP demand is into packaging applications, and, as we all know, single-use packaging demand has seen a major consumption boom as a result of panic buying in supermarkets.

But the bad news is that nobody has come up with an explanation about why we will not see a destocking process in H2 as hundreds of millions of people in in lockdown reach the point where their panic buying of food and other daily necessities reaches an end.

Anecdotally, there are signs of this already happening. For instance, a polymer producer who serves the European toilet paper market says he expects virtually no demand in H2. BOPP films are often used to wrap toilet paper.

Positively again, though, there are the cost and surface area theories. Think of PP demand into ice cream containers.

You go to a restaurant, which you are not doing now, and pick for your desert a small scoop of expensive ice cream from a giant tub. Now you are at home, eating much cheaper ice cream from smaller tubs.

Money saved might mean greater ice cream consumption. I for one am eating way too much comfort food as an antidote to the gloom (But as I am incredibly bored, I am also exercising more than I’ve done for years).

Because we are buying ice cream etc. in smaller tubs, smaller tubs equal more demand for PP – the surface area argument.

But another negative is that we simply don’t know the extent to which the 30% of global PP that goes into packaging finds its way into wrapping durable goods as most PP producers didn’t need to know before. In the Old Normal, quite a few producers handed over most of their PP resins to traders and to distributors and had little idea about where their resins ended up.

Another plus is booming demand for PP non-woven grades that are used to make face masks.

But non-wovens normally fall into the “others” category of end-use demand, meaning their consumption is not big enough to merit their own category. This tells us that, like isopropanol used for hand sanitisers which usually accounts for just 1% of global propylene demand, non-wovens consumption is rising from a very low base.

With a lot of luck, only as bad as the Great Depression

Face masks can thus never hope to make up for the lost demand in PP end-uses that, because they are big, do merit end-use categories of their own. These include the some 10% of PP that goes into the automotive sector, the 5% that goes into construction materials, 13% into electrical manufacturing and 10% into household appliances. There is in my view no chance of any recovery in durable goods this year.

And everything in the end, no matter what petrochemicals or polymer we are talking about, comes back to the scale of the economic damage. An IMF report last week implied that if we are lucky, we will get away with a hole in the global economy only as big as the Great Depression. I sadly don’t believe that we will be this lucky.

Some petrochemicals and polymers grow more in line with GDP than others – e.g. think of PVC demand that immediately suffers from a decline in growth, as construction activity is one of the first things to suffer during a recession. PVC demand normally bounces back as stimulus programmes are launched

Then think of propylene glycol that goes into consumer goods such as shampoo. You don’t stop washing your hair with shampoo during a recession in the rich world.

But the scale of what we are talking about is so big I am struggling to see how any petrochemicals and polymer will avoid negative growth in 2020 over 2019.

Think again of my example of propylene glycol used in shampoos. Those of us lucky enough to live in the rich world do not, as I said, stop washing our hair during any recession, no matter how deep.

But growth of shampoo demand in the developing world could be set back a generation. Many fewer people may emerge from poverty. By escaping extreme poverty, people can afford to buy modern-day consumer goods for the first time – including not just shampoo, of course, but also all the things made from PP.

In this respect it is worth reading this beautifully written FT piece from Ghana’s finance minister, Ken Ofori-Atta, who summarises how many developing countries, even in the best of times, are flying by the seats of their pants in an attempt to keep economic growth healthy. He writes:  Our economy is over 90 per cent informal, and the informal market is in lockdown. Growth in GDP, which was projected at 6.8 per cent, could fall to 1.5 per cent, according to our projections. How long can we sustain this?

Two different outcomes for 2020-2022 global PP demand

I keep coming back to the 2008 Global Financial Crisis as my reference point. In that year, global PP demand declined by 3% versus 2007.

This is economically much, much worse than the Global Financial Crisis. So, in in my  two PP demand outcomes for 2020 – Best Case and Worst-Case Scenarios – I assume that global demand over 2019 falls by either 5% or 6%. This would mean global demand is either 3.7m tonnes or 4.4m tonnes smaller than last year.

My thinking is based on the notion that even in the Best Case of outcomes, the biggest hole in the global economy since at least the Great Depression pretty much devastates PP demand into durable goods.

Growth in the developing world, including in the key China market, is set back a long way. Improvements in single-use packaging applications because of panic buying are not sustainable as they merely represent various rounds of restocking and destocking, which are exaggerated by great volatility in oil prices.

I must stress that my alternative outcomes should in no shape or form be taken as actual forecasts and are my personal views only

Much more detailed forecast work is now being done by our team of analysts and consultants. Contact me at john.richardson@icis.com and I can put you in touch with them. We can then work together on demand scenarios that help you better manage your business.