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Petrochemical buyers, after a very difficult pandemic, can gain from China-driven deflation

Business, China, Company Strategy, Economics, European economy, European petrochemicals, Fibre Intermediates, India, Indonesia, Japan, Malaysia, Methanol & Derivatives, Middle East, Olefins, Philippines, Polyolefins, Singapore, South Korea, Styrenics, Taiwan, Thailand, US
By John Richardson on 06-May-2021

By John Richardson

BUYERS OF polypropylene (PP) and other polymers and petrochemicals have had an incredibly difficult pandemic.

Firstly, the converters and brand owners expected doom and gloom last March. At the time it seemed logical to expect a cratering of demand as the global economy pretty much imploded.

Just looking at forecasts for GDP, parallels were drawn with the Global Financial Crisis when collapses in growth led to a cratering of polymers demand. The US is a good example where PP demand declined by 12% in 2008 over 2007. Demand then fell by a further 5% in 2009 over 2008.

But what we all missed was the complete dislocation of polymers and petrochemicals demand from GDP. As economies registered historic declines, consumption went up.

PP demand went through the roof, firstly for food packaging and hygiene applications.

Then consumption for the durable goods made from PP also smashed through the rafters as we bought white goods (PP is used to make components of washing machines), consumer electronics (PP is used to make some electronic components) and carpets (PP fibres are used here).

The bored cash-rich middle classes in the developed world had money to spend to relieve the boredom of lockdowns – and they needed to convert their homes into offices.

What happens next with demand is hugely, hugely complicated. Nobody has a clue on how consumption should be measured in this new environment.

Major supply-chain disruptions began last March and are continuing. There are extreme shortages in everything from petrochemicals themselves to wooden pallets, tin drums, semiconductors and shipping containers.

Supply shortages and their implications for how petrochemicals markets are functioning will be the subject of my post on Monday. Suffice to say here that these shortages are likely to continue until at least the end of this year.

Some converters and brand owners may have had no idea that the collapse in transportation fuels demand would mean less propylene availability and so reduced supply of PP.

And nobody at any stage in the PP value chain predicted the US winter storms in February that at one point left 80% of PP supply offline.

Extreme PP price volatility has led to some very difficult conversations between purchasing managers, their immediate managers and CFOs.

But beyond managing today’s chaos, there is an opportunity for the buyers of PP, styrene monomer (SM), ethylene glycols (EG), paraxylene (PX)  and methanol – and perhaps even high-density PE (HDPE) and low-density PE (LDPE). This arises from the potential for much greater Chinese self-sufficiency.

Either 6m tonnes of China imports in 2026 or 939,000 tonnes of exports

Earlier this week, I looked at the potential for much greater SM self-sufficiency in China and how producers in the Middle East, southeast and northeast Asia ex-China highly who are dependent on exports to China needed to respond.

If you are an SM buyer, you can take the data in this post and consider this from your perspective. The same applies to the data in my earlier posts on potentially much greater Chinese self-sufficiency in EG, PX, HDPE, LDPE and methanol.

Now let us look at PP where a remarkably wide range of outcomes for Chinese imports are possible. This is unlike in SM and PX where much greater self-sufficiency is a certainty.

The ICIS Supply & Demand base case for China’s PP imports in 2021-2031 envisages the Old Normal staying in place as China continues to dominate the global import market.

Assuming an average local operating rate of 87% with no unconfirmed capacity going ahead, we see imports averaging 5.7m tonnes between 2021 and 2031.

Imports would be down to around 5m tonnes this year compared with 6.6m tonnes in 2020. But during the rest of the forecast period, imports would mainly be higher – would be back at around 6m tonnes in 2024-2026 – and would still be at 5.6m tonnes in 2031.

This is what happens if you raise the average operating rate to 90% and add all the capacity we have as unconfirmed – 8.4m tonnes/year (unconfirmed capacity is where projects lack approval, feedstock supply or financing etc):

  • Imports average just 844,000 tonnes in 2021-2031. This year’s imports would drop to 4.4m tonnes and would steeply decline until 2026 when China would stop all imports and become an exporter. China would remain an exporter from 2026 until 2031.

Note that in both our base case for imports and my guesstimate of an alternative scenario, demand growth is at the same: an annual average of 4% per year.

Now let us look at what this could mean for China’s top six PP trading partners in 2020 in the period from 2021 until 2026.

Here I have assumed that these six countries gain the same percentage shares of total Chinese imports in 2021-2026 as they did in in 2020.

By just raising the average operating rate to 90% as we have no unconfirmed capacity listed until 2026:

  • China’s imports from South Korea, China’s leading source of imports in 2020, would fall from 824,702 tonnes in 2021 to 248,213 tonnes in 2025.
  • Second-placed Singapore would see imports by China fall from 532,106 tonnes in 2021 to 160,149 tonnes in 2025.

The watershed year is 2026 when 5.1m tonnes/year of unconfirmed capacity may come onstream in that year alone. If all these plants were to happen- and if operating rates were again at 90% – imports from every destination would fall to zero in 2026.

Why this kind of analysis matters so, so much is because we estimate that China accounted for 43% of total global net imports of PP in 2020, among countries and regions that imported more than they exported.

So, take China entirely out of the import equation, and, aside from just the direct effect on the major exporters, global supply might lengthen substantially.

Now a look at the final chart for today. This takes five of China’s top six PP trading partners in 2020 (data on the United Arab Emirates wasn’t available) and looks at exports to China as percentages of their total exports and exports to China as percentages of their total production.

Based on averages across the two percentage measures, the most exposed is Taiwan at 56% followed by Singapore at 35%, Thailand at 33%, South Korea at 31% and Saudi Arabia at 20%.

Your essential China toolkit: how to monitor what happens next

I must again stress that my alternative outlook for China’s PP imports in 2021-2031 should not be taken as a proper scenario. It is for demonstration purposes only to illustrate an extreme alternative. For proper scenario work, contact our team of consultants and analysts via me at john.richardson@icis.com.

I do personally believe, however, (and this is my view and not that of ICIS) that China will push very aggressively towards PP self-sufficiency for raw-material cost, economic value-addition and geopolitical reasons.

To these ends, I was told this week that China’s new coastal propane dehydrogenation-based PP plants have been built largely to serve the export market. With regards feedstock, they are taking advantage of globally long propane markets and their ability to trade propane.

A lot more coastal export-focused PP capacity is said to be on the way.

Clearly, the opportunities for purchasing managers at the converters and brand owners could be huge, provided they devote a razor-like focus on what is happening to Chinese imports. This will require quarterly reviews of how the short, medium and long-term outlook for Chinese imports has shifted.

You will need to consider the following three variables, with support from our data and analysis:

  1. The start-up of new plants in China and how they are operating. Plants may, of course, be delayed.
  2. This will be driven by the strength of China’s export trade (the “China in China out” story) and local consumption. The variables include how supply chain disruptions might disrupt Chinese exports and government efforts to control local debt and reduce regional income inequality. China is in my view four discrete economic regions: the rich southern and eastern coastal provinces, the booming provinces adjacent to the rich southern and eastern provinces, the struggling north eastern “rust belt” and the very poor far west. Each of these regions requires separate study to get to an overall view of China, in my opinion.
  3. Project intelligence: our close tracking of the projects, how close they are to final approval, and thus constantly updated commissioning dates.

Recycling? I have come to the view that the growth of this industry in China will only have a marginal impact on virgin PP supply and demand up until at least 2031.

You are a purchasing manager who needs to provide your CEO with an elevator pitch in one of those famously hard single PowerPoint slides. How do you boil this down to get the resources you need for this kind of research?

Here is your answer: “Today’s world of petrochemical inflation may switch to one of deflation because of rising Chinese self-sufficiency.”

This the headline done for you. Now your challenge and our challenge is the detail.