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China’s booming polypropylene demand in 2020 and what could happen next year

Business, China, Company Strategy, Economics, India, Japan, Malaysia, Middle East, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand, US

By John Richardson

IT has been a year that just about nobody in the Asian polypropylene (PP) industry had expected back in the dark days of April. At that time, negative demand growth in China during 2020 seemed a strong possibility.

What instead has taken place is a solid recovery in the Chinese economy following the pandemic being brought under control. But we must be aware that local consumer spending remains behind where it was before the pandemic. The main driver behind the Chinese rebound has been strong growth in exports of manufactured goods.

We have now seen four months of very strong growth in year-on-exports in the context of the pandemic. October exports jumped by 11.4%, the strongest growth rate since May 2019. This follows the September’s increase, which, at 9.9%, had been the biggest increase so far this year.

This reflects China’s complete dominance of just about every global manufacturing chain. This has enabled it to more than compensate for the drops in its exports of the things we no longer need for our pandemic lifestyles by exporting more of the stuff we do need: face masks made from PP non-woven grades, for example, and laptops and household appliances made from copolymer grades of PP.

Chinese apparent PP demand (our estimate for local production plus the China Customs net import data) increased by 15% in January-September 2020 on a year-on-year basis. I fully expect this trend to continue for the rest of 2020. This would result in PP demand reaching 32.4m tonnes for the full-year 2020. This would be no less than 2.2m tonnes more than our current ICIS Supply & Demand base-case forecast, which, I am sure, will be revised upwards. This is worth yet another “Wow”.

Let us now break down my estimates for Chinese PP demand in 2020 as we move towards considering what is going to happen next year.

  • Local production is on track to increase from around 24.4m tonnes to 26.4m tonnes, based on our January-September estimates. This would represent a 7% increase when you look at the exact numbers.
  • Net imports look to be heading for an increase from 4.7m tonnes in 2019 to 6.1m tonnes for the full year 2020, if you again annualise the data for January-September. This would represent an increase of 28%, based on again calculating the exact numbers. This underlines how, as most of the rest of global economy flounders, China is powering ahead.

The above chart shows how China’s main PP trading partners have benefited so far this year. In percentage terms, India was the biggest year-on-year beneficiary, as its imports soared by 272% in January-September 2020. It is also important to note is the 82% increase in imports from Vietnam, a result of the new Hyosung plant coming on-stream in the country and the ever-closer economic and political relationship between Vietnam and China. South Korea maintained its position as China’s No1 trading partner with its shipments to China growing by 26%.

What’s going to happen next year

Sadly, though, it is not going to remain as good as this year. I am forecasting full-year 2020 growth in Chinese PP demand of 12 % over 2019. I don’t see this being sustained in 2021 as a result of declining growth in Chinese exports of manufactured goods.

There are multiple threats to Chinese exports. Let’s start with the increasing number of lockdowns in the West. Wave after wave of lockdowns are a feature of the New Normal. I believe we will not get on top of the virus for at least another 12 months. Be realistic about the arrival of an effective and globally distributed vaccine which is at least a year away, probably several years away. That is if we get such a vaccine at all.

Evaluate the success of Western government stimulus in supporting domestic spending. Stimulus will continue at unprecedented levels, but the success of stimulus will be patchy. In some cases, it will be less effective than hoped.

I am afraid we will still need face masks in big volumes for a good while longer. But at some point, and that point seems likely to arrive in 2021, most of us in the rich countries will have finished kitting out our homes as offices. This means a drop-off in demand for Chinese-made electronics.

The developing world ex-China is facing a major crisis. I don’t see economic conditions across Africa, Asia & Pacific and Central and Latin America improving in 2021 and they could easily get worse, damaging Chinese exports.

The crisis facing the developing world ex-China helps explain why China imported 366,653 tonnes of PP from India in January-September 2020 compared with just 92,211 tonnes during the same months in  2019. We are forecasting that India’s PP demand will decline by 6% in 2020 over last year to 5.1m tonnes, and so, quite obviously, local producers are having to sell more overseas.

Despite our base case forecast of a rebound to 15% growth in Indian PP demand in 2021, I see every chance of another year of very weak or even negative growth in India. This would reflect continued weakness in the broader Indian economy.

The Chinese domestic economy will, however, continue to recover from the pandemic. The big challenges China faces – e.g. a rapidly ageing population and a growing divide with the US – will take longer to fully play out.

Put this all together and I believe that my forecast of 12% Chinese growth in PP demand in 2020 may moderate to a 6% increase in 2021. But, hey, this would still be excellent, leaving demand by the end of next year at 34.4m tonnes.

We must also consider our forecast for a 13% rise in Chinese PP capacity in 2021 over this year to around 35.7m tonnes/year. Operating rates look set to average around 84% in 2020. I see this rising to 86% in 2021 as China maximises the economic value at its new, state-of-the-art world-scale plants and improves supply security.

Let’s do the maths. 86% of 35.7m tonnes/year of capacity gives you 2021 production totalling 30.7m tonnes. Take this together with my estimate of demand and you end up with net imports of just 3.7m tonnes, when you again look at the exact numbers. This would be 2.4m tonnes lower than my estimate for 2020, or 40% lower. This would be in line with China’s shift towards complete PP self-sufficiency.

We must also consider increases in PP capacity due to take place in Malaysia, South Korea and Vietnam.

In Malaysia, the Pengerang Refining and Petrochemical complex had been due to come on-stream in 2020, but commissioning has been delayed. The joint venture between Petronas and Saudi Aramco is now expected to fully come on-stream in 2021. ICIS forecasts that this will result in Malaysian PP net imports of 13,000 tonnes in 2020 turning into net exports of 313,000 tonnes in 2021.

In South Korea, new capacity from Hyundai Chemical and Ulsan PP is due to come on-stream next year. We forecast that this will result in South Korea’s net exports edging up from 2.9m tonnes in 2020 to 3.1m tonnes in 2021 with much bigger increases in subsequent years.

As I said, the Hyosung plan in Vietnam cam on-stream this year. Long Son Petrochemical is scheduled to commission 175,000 tonnes/year of PP in Vietnam in 2021, reducing the country’s net PP imports from 630,000 tonnes in 2020 to 517,000 tonnes in 2021.

The conclusions seem very clear. 2020 will have been a better-than-expected year for the Asian PP industry. But the evidence, I am afraid, points to a more difficult 2021.

As always, please be careful out there and if you need any more support in navigating PP markets, contact me at john.richardson@icis.com.