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Risks ahead for global polypropylene much greater than for polyethylene

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By John Richardson on 15-Dec-2020

By John Richardson

THERE SEEMS to be few risks ahead for the global polyethylene (PE) market over the next five years. The internet sales boom, despite all the talk about using less plastic for sustainability reasons, promises to provide strong support for consumption. The average internet sale is dropped 17 times before delivery, providing a strong motive to maximise protective packaging.

While the progress on vaccines looks likely to be a lot quicker than I had anticipated, the precautionary principle will likely provide continued firm support for PE into hygiene applications.

Until, or perhaps unless, we achieve global herd immunity, few people, companies or institutions will be willing to skimp on bottles of disinfectant made form high-density PE (HDPE) or disinfectant wipes packaged in linear-low density PE (LLDPE).

The risk, in my view, remains high that the developing world will be left behind on vaccines. It could take many years for an even spread of vaccinations and immunity, resulting on a resilient need for big volumes of hygiene products and personal protective equipment.

As I discussed earlier this month, global PE capacity as a percentage of demand might therefore end up being a lot lower than our base case in 2020-2025. Cumulative global demand during this period could end up at 39m tonnes more than our base case across all three grades.

There is a risk, however, and this could change the global picture significantly, of China running its PE capacity much harder than the consensus view holds as feasible. Capacity that right now is listed as unconfirmed may also happen.

In the worst-case outcome from an exporter’s perspective, China’s net imports might fall to 16.8m tonnes in 2021 from an estimated 18.9m tonne during 2020 (the 2020 estimate is based on annualising the import data for January-October this year). By 2025, net imports could slip to as low as 12m tonnes.

Still, the risks ahead for PE are a lot lower than those for the other half of the polyolefins business – polypropylene (PP).

A China-centric demand boom

Stronger-than-expected demand for PE is very much evenly spread globally, as of course shipping packaging around the world is often not economic. You don’t make money out of paying container- freight companies to move fresh air.

This explains why developed-world plastic converters, and thus their PE suppliers, have done remarkably well this year thanks to the trends I’ve highlighted above.

However, because PP goes into a far higher proportion of durable finished goods compared with PE – and because China completely dominates most global durable goods manufacturing chains – this year’s PP demand boom is very much China-centric.

Consider another excellent article by Trade Data Monitor: China’s exports of computers and other hi-tech electronics increased year on year by an astonishing 21.1% in November to a value of $86.1bn; exports of medical devices jumped by 38.4% to $1.6bn.

“Many Covid-related purchases won’t happen again and we eventually expect a global rotation from goods to services consumption as vaccine availability reduces the need for social distancing,” Louis Kuijs, head of Asia economics at Oxford Economics, told the Financial Times.

I partly agree. At some point, most people will reach the point where they have finished kitting out their homes as offices. They will also reach the stage when they have bought most of the new washing machines they need. Wear-and-tear on domestic appliances have increased because of more time being spent at home.

However, as already mentioned above, I don’t see a big decline in demand for personal protective equipment because of the precautionary principle.

We should expect demand for face masks to remain extremely high. Consumption of disposable medical gown will also view remain high. China makes most of the world’s face masks and disposable medical gowns. Face masks and disposable medical gowns are made from non-woven grades of PP.

Peak demand for computers, phone routers, data storage units, office furniture and washing machines has, however, led me to forecast a moderation of Chinese PP demand growth in 2021 and beyond.

Our base case sees China’s 2020 PP demand growth at 7.5%. But I see something in the region of 12% more likely, based on the latest data for apparent demand (local production plus net imports) and what my contacts are saying.

I see Chinese growth moderating to 7% next year on a decline in Chinese exports of durable goods. This would, however, still be higher than our base case 6%. I also see growth averaging at 6% in 2022-2025 versus our base case of 5%. My better outlook than our base case is built on the assumption of a stronger-than-expected domestic economy.

As mentioned, the surprise upside for PE is evenly spread globally. In the US, for instance, I am forecasting that demand growth across the three grades will average around 3% this year and 3% in 2021-2025. This compares with our base case of minus 1% in 2021 and a 2% average in in 2021-2025. I see similar upsides for Europe and Japan, Taiwan and South Korea.

It is a very different story for PP. Again using the US as an example, I see PP demand declining by 5% this year over 2020, only slightly better than our base case of a 6% decline. I also see persistently weak growth in 2021-2025.

So far this year, while demand for PP into packaging has been strong in the US, there has been a decline in local PP consumption into household appliances. This reflects China’s export dominance. The picture is similar in Europe and northeast Asia ex-China.

China self-sufficiency risk

The 10,000lb bear, growling rather bad temperedly in the corner of the room, is China’s rapid push towards PP self-sufficiency, which is proving much more effective than its drive to reduce dependence on PE imports.

One obvious reason is that you can make propylene in more ways than you can make ethylene.

China will continue to build a lot of steam crackers that make propylene and then PP. The crackers and PP plants will be world-scale, well-integrated with refineries and will be located in state-of-the-art industry parks.

China is also just about the only country in the world that will continue to add refinery capacity. Elsewhere, refineries will be shutting down because of declining fuels demand. This will mean plenty more Chinese refinery-sourced propylene to make more PP.

The coal-to-olefins and coal-to-propylene processes (two separate technologies) are no longer in favour in China for environmental and cost reasons. But you should expect more propane-dehydrogenation-to-propylene and then PP complexes because of continued global oversupply of propane.

And for economic value addition and supply security reasons that relate to geopolitics, do not underestimate how hard China’s PP plants will run.

This explains why Chinese PP net imports could fall to as low as 3.7m tonnes in 2021 from this year’s estimate of 6.1m tonnes, which is again based on the January-October data. In the worst-case outcome, China might be in a small net export position of 240,000 tonnes by 2023. Note that these forecasts assume my upside for Chinese demand growth.

Also be aware of the conventional view, which I believe is flawed, that China will remain an importer of co-polymer grades of PP. I don’t see any reason why China will not push hard, and push successfully, to fill its technology gap in this area as it tries to escape its middle-income trap. History suggests this will happen.

A large pinch of salt

You must therefore take the right-hand slide at the beginning of this blog post with a large pinch of salt, which I have compared with my earlier slide on PE on the left.

Most of the additional cumulative global PP demand I foresee in my upside for 2020-2025 would end up driven by China. Of the 24m tonnes of extra demand above our base case, 64% (15m tonnes) would reside with China. This reflects China’s total domination of global demand, a feature not just of PP, but of all petrochemical markets.

If am too optimistic on Chinese PP growth, then clearly the global downside will be big. One tail risk for the Chinese economy, which has shifted from a major risk because of the imminent change in US presidents, is a resumption of the trade war. China last month exported more goods in dollar value than any other country in history as its surplus with the US reached a new record high.

And as I have just pointed out China’s PP imports might collapse. China will account for an estimated 43% of total global net PP imports in 2020. This is among countries and regions that import more than they export. A self-sufficient China would pretty much undermine the business models of most of the global PP majors.

Still, the PP chart and its accompanying PE chart once again underline how, if we are going to better forecast demand for any polymer, we need “bottom-up” demand models. The changes in markets resulting from the pandemic are so profound, and I believe so long lasting, that we need much better models. The models need to be built all the way from the supermarket shelf to the polymer plant.