China PP demand could fall by 1m tonnes in 2021 but prospects for PE look better despite a weak January-May

Australia, Business, China, Company Strategy, Economics, Environment, European economy, European petrochemicals, India, Indonesia, Japan, Malaysia, Middle East, Olefins, Philippines, Polyolefins, Singapore, South Korea, Sustainability, Taiwan, Thailand, US

By John Richardson

THE ABOVE chart confirms that China’s economic slowdown, which began in January-February, continued into May.

Remember that the only valid comparisons are between the first few months of this year and late 2020.

If you conduct year-on-year comparisons then of course growth will look better because for several months during January-May 2020, China was in a nationwide pandemic lockdown. There has been no nationwide lockdown so far this year.

What is instead crucial to understand is whether the tremendously strong growth momentum during H2 last year has been fully carried over into 2021. The ICIS polyolefins and other petrochemicals data since January- February 2021 show this is not the case.

One reason, as I have been highlighting since March, is the surge in container freight costs and the lack of availability of container space restricting Chinese exports.  Exports have also been negatively affected by the semiconductor shortage.

As I have again been highlighting since March, another factor behind the slowdown is the Chinese government’s efforts to reduce debts, greenhouse gas emissions and air, water and soil pollution.

Total Social Financing – a measure of new credit creation by both the state-owned banks and the more speculative private lenders – fell by 19% year-on-year in May 2021.

Year-on-year comparisons on this occasion do make sense because during January-May 2020, Beijing pumped lots of extra lending into the economy to compensate for the pandemic.

This year’s lending data tell us that, for the time being at least, the availability of new credit has returned to pre-pandemic levels.

China’s stronger commitment to the environment includes setting stricter limits on carbon emissions as it tries to fulfil its pledge to reach peak emissions by 2030 and carbon neutrality by 2060. This commitment helps explain power shortages in southern China that have reduced manufacturing output.

Drought conditions in Guangdong province have affected hydroelectricity plants. Coal-based power producers had wanted to increase output to meet the shortfall, and to cope with strong demand for air-conditioning during the hot summer months.

But electricity producers have been unwilling to do so fear of breaching government targets on carbon emissions, I’ve been told.

Adding to the momentum behind the slowdown is the pandemic-related loss of container handing capacity at the Yantian Terminal in Guangdong, the world’s third-biggest container port. Also affected are the nearby container ports of Nansha and Shekhou.

Handling capacity at all three terminals was only 70% of normal capacity as the blog went to press, with container ships having to wait 16 days to be loaded or unloaded.

The operators of Yantian said on 22 June that normal operations had resumed. But major shipping lines and industry analysts warn of significant delays and backlogs that could continue to affect global supply chains for weeks or months to come.

A broader crucial point here – as I discussed last Thursday and the previous Sunday – is this: until the whole world is adequately vaccinated, none of the world is adequately vaccinated.

More outbreaks of the pandemic, especially of vaccine-resistant strains, could lead to further global port disruptions. Because the container freight market is so badly out-of-balance, minor port problems can have big global effects.

The polyolefins data in the above chart is hugely valuable for measuring the growth of the overall Chinese economy because polyolefins are vital manufacturing building blocks.

You would be hard-pressed to find any industrial sector that doesn’t need polyolefins either as raw materials for finished products or as packaging.

Just as a reminder, apparent demand comprises China Customs department data on net imports and ICIS estimates of local production.

What this could mean for full-year 2021 polyolefins demand

Now we must be very careful here. To get to the downside full-year 2021 demand estimates above (see the light red bars) I simply divided the January-May data by five and multiplied by 12. This assumes economic conditions remain the same during the rest of this year.

This is a very questionable assumption given what happened in 2020. I was among many people who were in the depths of gloom in April last year because of the pandemic. We expected very low or even negative demand growth for Chinese petrochemicals.

But then, bang, suddenly everything changed. China’s factories came back online ahead of the rest of the world because it was the first major country to bring the pandemic under control.

This left China in the position to meet roaring demand for personal protective equipment and durable goods wanted by cash-rich middle-class people in the developed world who were under lockdowns.

Demand boomed for Chinese exports of face masks, hospital gowns, disposable medical gloves, washing machines, refrigerators, carpets, curtains, consumer electronics, tins of paint and office furniture.

What also supported China’s export-led recovery was its dominance of many global manufacturing chains. Despite significant increases in labour costs over the last decade, it still has logistics, infrastructure and market share advantages.

Can stronger exports in H2 prevent the downsides from happening? This is largely of out China’s hands as it depends on whether pandemic-related supply chain disruptions will continue to affect the global economy.

The disruptions do not just include container and semiconductor shortages. Truck drivers and labour  in general are in short supply, as are metals, minerals and lumber.

The fundamentals of petrochemicals demand are very good – better than before the pandemic. But will there be sufficient supply to meet this demand?

The downsides for polyolefins consumption also assume that Beijing will continue with its economic and environmental policies.

If history is any guide, it will launch another major economic stimulus programme and step back from its environmental policies if GDP growth is under significant threat.  This has happened on several occasions over the last decade.

But we need to consider whether domestic economic stimulus will be enough to compensate for what could well be continued difficulties in China getting its goods to overseas markets.

Experts now predict that global container-freight problems will last another six to nine months, assuming no further major disruptions. Semiconductors are expected to remain in short supply for at least another year.

Fixing global labour shortages depends on investments in retraining and the relaxation of immigration controls that have been introduced in response to the pandemic. In my country, Australia, labour is very tight as immigration has come to a complete halt.

Having said all the above, it is also important to remember that packaging demand in China is largely divorced from declines and increases in exports and GDP.

This is largely down to booming internet sales and the huge amount of packaging for home deliveries, which could offer great support to PE demand as the year further progress.

This is not so much the case in PP which is more dependent on the export sector.

I would therefore not be surprised if PE demand growth comes roaring back in H2 with PP growth still struggling

ICIS base cases for demand versus the downsides

I am again not saying the downsides for polyolefins growth – which you can again see repeated in the light blue bars in the chart above – will happen.

This chart is self-explanatory in its global implications. But just to labour the point in order to again encourage you do adopt the right scenario-based approach:

  • If the January-2021 trends were to continue for the rest of 2021, high-density PE (HDPE) demand for the full year would be 3.3m tonnes lower than our base-case forecast. Low-density PE demand would be 0.4m tonnes lower, linear-low-density PE demand 1.1m tonnes lower and PP demand 2.6m tonnes lower.

HDPE and PP imports in 2021 look set for big declines

Another important theme is what the latest data tell us about polyolefins imports. The two products at risk of big declines in 2021 are HDPE and PP.

Don’t say you haven’t been warned. I have been flagging up the risks of much greater Chinese self-sufficiency across a range of petrochemicals and polymers since 2014.

In the case of PP, it is worth noting that most of this year’s new capacity is yet to come onstream.

Some 1.8m tonnes/year of new capacity was commissioned in Q2 with ICIS expecting another 2.15m tonnes/year of startups in Q3. This indicates that 2021 imports may even be lower than the 4.7m tonnes estimated above.

The downside for imports needs to put into the context of what was a very, very strong year in 2020.

Too pessimistic? I certainly hope so. But there is no point planning for the second half of this year without a full awareness of the risks ahead. Hope is not a strategy.

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