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A deep dive into HDPE and PP: opportunities and challenges for H2 this year and 2022

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By John Richardson on 06-Jul-2021

By John Richardson

Executive summary

  • China’s petrochemicals demand boomed in H2 because of the surge in Chinese exports of finished goods that served lockdown needs in developed economies.
  • As lockdowns ease, most of the air has escaped from what was clearly always a bubble. For example, high-density PE (HDPE) demand is set to be 9% lower in the full-year 2021 compared with 2020 and polypropylene (PP) 8% lower.
  • China HDPE and PP growth is also being damaged by supply chain shortages, including shortages of container freight space and semiconductors. The shortages have slowed Chinese exports. Supply chain challenges first became apparent in February.
  • But relative to 2019 everything seems fine. This year’s HDPE growth looks likely to be positive over 2019, which was of course a pre-pandemic year. PP consumption is in line to grow by 2.6m tonnes in 2021 over 2019 – a 9% increase. This 2.6m tonnes exactly mirrors the expected shortfall in demand for 2021 versus our base case for this year. 
  • China’s HDPE and PP imports in 2021 are forecast to see respective 24% and 28% declines over last year on weaker demand and rising local production. Imports are also likely to be down over 2019. The biggest medium –to long term challenge for exporters remains rising Chinese self-sufficiency. PP is much more vulnerable to self-sufficiency than HDPE. China accounted for some 60% of total global net imports of HDPE in 2020 and 43% of global PP net imports.
  • Arbitrage opportunities will remain extremely strong during the rest of 2021 for shipping China and southeast Asia (SEA) polymers to other regions, as China and SEA will remain relatively very cheap. This will be the result of rising Chinese self-sufficiency and SEA demand that is forecast to see a second year of negative growth in 2021.
  • Brand owners can as a result save many millions of dollars on procurement costs. China and SEA HDPE and PP producers can make a lot of money from exports to other regions. Contact john.richardson@icis.com for the data and analytics to support your purchasing and selling strategies.

The end of the pandemic export-inflated bubble

ONCE AGAIN, please don’t say I didn’t warn you. The above chart – detailing half-year patterns in China’s HDPE demand growth since 2000 – underlines the value of my warning last year that the export-driven boom in consumption might not last.

The estimated 13% decline in demand in H1 this year versus the second half of 2020 would be the biggest half-year fall in consumption since 2000. This would even surpass falls in growth seen during H1 2008  (minus 12%) when the Global Financial Crisis was in full swing – and H2 2014 (minus 11%) when major destocking occurred because of the collapse of oil prices.

The extraordinary growth in China’s exports of finished goods, which we saw from May onwards last year, was the result of China supplying most of the goods the developed world wanted and needed during lockdowns.

This led to a boom in Chinese demand for petrochemicals in general. A big proportion of the petrochemicals required had to be imported – the “China in, China out” story. China’s HDPE imports rose by 14% in 2020 over 2019 to 9.1m tonnes.

Last year I warned that this super-hot growth could moderate because of the cycle out of spending on goods and into more consumption of services if lockdowns eased during 2021. This seems to be happening because high vaccination rates in Europe and the US are allowing economies to re-open.

Another hindrance for petrochemicals demand are the supply chain shortages I first flagged up in February. Container freight rates from Asia to the US and Latin American will remain very high for the rest of this year, according to this free-to-view ICIS news article.

I believe that until or unless the world is adequately vaccinated, container freight disruptions will continue. We are a long, long way from adequate vaccinations because of low inoculation rates in the developing world.

Perhaps, though, the bigger factor in declining HDPE and PP growth (see the later slides on PP) is the cycle out of goods and into services. But measuring the impact remains beyond us because of our poor downstream demand models. We need new and much more sophisticated models.

If the January-May 2021 demand trends for HDPE were to continue for the rest of this year, demand would be 9% lower than in 2020 – a 1.6m tonnes decline. This would also be an eye-wateringly high 3.3m tonnes smaller than our base case for demand in 2021.

But so what, eh? China’s HDPE consumption in 2020 would still be 3% – or around 430,000 tonnes – higher than in 2019. This would not be particularly strong growth, but it would be OK. Not too bad at all.

Back to the future for PP demand

H1 this year is set to see only the sixth case of negative PP demand during any half-year since 2000, if the January-May 2021 trends again continue.

The 7% forecast decline in H1 2021 versus the second half of last year would be the second biggest since 2000. The biggest decline was 14% in H2 2014 when oil prices collapsed.

But don’t expect the history of 2015 to be repeated this year. In the first of half 2015, PP demand recovered to positive growth of 27% on cheap PP and a moderate rebound in crude prices. This time will be different, in my view, because of continued supply chain problems constraining Chinese exports and the cycle out of spending on goods and into services.

PP will continue to be affected by container-freight and semiconductor shortages. Lack of semiconductors is affecting autos, white goods and electronics production – three important PP end-use markets. Semiconductor supply is forecast to remain tight until next year.

But again, so what? Now that the air has poured out of the bubble, we have ended up with statistical symmetry: this year’s PP demand may be 2.6m tonnes smaller than our base case forecast for 2021, but 2.6m tonnes bigger than  in 2019.  In other words, we’d be just about back to square one.

As with HDPE, the pandemic demand bubble led to a big rise in PP imports. They increased by 27% in 2020 over 2019 to 6.6m tonnes despite an 11% rise in local capacity to 30.9m tonnes/year.

HDPE and PP imports set to fall by 24% and 28% in 2021

China’s rising HDPE and PP self-sufficiency looks likely to result in big declines in imports in 2021 versus last year – and declines in 2021 over 2019.

If we again annualise the January-May trends and assume local operating rates in line with those for last year, HDPE imports for the full-year 2021 would be down by 24% over 2020 at 6.9m tonnes. They would be also 14% lower than in 2019.

But I see the problem for HDPE exporters being only temporary despite the 14% increase in local capacity we are forecasting for 2021 over 2020 to 9.6m tonnes/year.

Our data suggest that even under a worst-case outcome, China would need to import 8.5m tonnes of HDPE next year because of quick absorption of local capacity and healthy demand growth. Over the long term, a worst-case outcome would see still see China’s HDPE imports at 10.9m tonnes in 2031.

This year’s PP imports look likely to fall by at least 28% over last year to 4.7m tonnes – and by 9% over 2019. But the 2021 decline could be worse than this as most of China’s new PP capacity is due onstream in the second half of this year. China is scheduled to raise its PP capacity by 13% in 2021 over 2020 to 34.9m tonnes/year.

As for the longer term. China’s PP imports would fall to just 3.2m tonnes in 2022 under a worst-case outcome. The same worst-case scenario would see China becoming a net exporter in 2026. In other words, imports would disappear in 2026 other than perhaps for some higher-value copolymer grades.

Why this matters so, so much for HDPE and PP is that, as with most petrochemicals, China dominates global demand for imports. In 2020, we estimate that China accounted for some 60% of total global net HDPE imports amongst countries and regions that imported more than they exported. In the case of PP, China was responsible for 43% of global net imports.

Big cost saving and money-making opportunity

The above slide is a reminder of the huge price differentials between China, SEA and the rest of the world. Here I just show the differentials between European injection grade PP and China and SEA injection grade PP. The pattern is similar across many other grades and regions compared with China and SEA.

I see differentials on this scale continuing for at least the rest of this year. This will be the result of rising Chinese supply, weaker Chinese growth relative to 2020, another year of falling demand in SEA and the container freight shortages limiting exports from Asia.

This is a huge opportunity for buyers of PE and PP outside Asia if they can find  and afford container space. Brand owners with the right purchasing strategies – using support from our data and analysis – can save many millions of dollars on their procurement budgets.

And from a producers’ perspective, we saw in January-May that inter-regional exports are still possible. China’s PP exports jumped to 792,197 tonnes in January-May compared with 152,543 tonnes in August-December 2020 – an increase of more than 400%.

The netbacks for Chinese producers in markets such as India, Pakistan, Bangladesh, Turkey, Brazil and Peru were spectacularly good. There will be many more opportunities for producers to make very good money across all the grades.

I hope this was useful. As always, stay safe and good luck out there.