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China, China and China: the three global polyolefin market drivers during the rest of 2021

China, Company Strategy, Economics, Europe, European economy, European petrochemicals, Indonesia, Malaysia, Middle East, Olefins, Philippines, Polyolefins, Singapore, South Korea, Taiwan, Thailand, US
By John Richardson on 11-Jul-2021

By John Richardson

TODAY’S SET OF slides, starting with the one above, underlines how a deep and constantly updated understanding of what is happening in China is a defining success factor for polyolefins producers and buyers in every country.

Even if you are, say, a converter in Brazil, you must understand, month by month, the pace of Chinese demand growth and the rate at which it is moving towards self-sufficiency in polypropylene (PP).

In the case of polyethylene (PE), self-sufficiency is not a significant opportunity or risk – depending on which side of the producer/buyer fence you sit.

Why does this even matter to a Brazilian converter, who, of course, has many other regional and domestic challenges worthy of focus, such as tight US supply resulting from the winter storms and fluctuations on the value of the Brazilian real?

Let me give my imaginary Brazilian converter the essential context.

The Chinese demand boom that has reshaped your business

As the chart above shows, China’s share of global demand has greatly increased over the last 20 years.

In 2000, its average share of global demand across the three grades was just 12%. In the case of PP, it was 15%.

The pivotal years were 2008 and 2009 when China overtook either Europe or the US – depending on the grade – to become the world’s biggest consumer.

Since then, China’s role in driving demand has been turbocharged by much greater domestic-for-domestic consumption.

Up until 2008-2009, the main driver of China’s economy was exports of finished goods. And, as we have seen this year as polyolefins demand growth has slowed down, exports remain extremely important for demand – especially in the case of PP.

But local demand drivers have led to a surge in consumption, the likes of which the world has never seen before. The drivers include rising personal wealth thanks to the property boom and China leading the world in internet sales.

The average internet sale is dropped 17 times before it is delivered because of long and complex logistics chains. This means that e-commerce companies such as  Alibaba do not skimp on protective packaging and a lot of the packaging is made from PE and PP.

China accounted for about 35% of global PE demand in 2020 – again an average across the three grades. The number for PP was 41%. This compared with 9% of PE and 10% for PP in the whole of South & Central America.

In other words, every minor fluctuation in Chinese polyolefins demand has major global consequences.

A great resin buying opportunity: weaker Chinese demand, more capacity

Now look at the breakout box on the right of the above line graph. In 2020, China’s role in driving global demand greatly increased over the previous year.

The reason for this might seem to contradict what I have just written. What drove the big year-on-year jump in China’s global shares was booming demand for Chinese exports. China exported many of the finished goods that met the rich world’s lockdown needs.

There was a big rise in petrochemicals imports in general to manufacture these exports – for instance, PP imports were up by 27% in 2020 versus 2019.

Strong Chinese consumption growth in 2020 was also the biggest single reason why the global polyolefins industry did so well.

But, as I warned might be the case last September, this was a bubble. The export bubble has burst because of the container freight and semiconductor shortages that have limited Chinese exports during. the first five months of 2021.

And perhaps we are also seeing a cycle out of spending on goods into consumption of more services in developed economies as lockdowns ease. Think here of less spending on game consoles and TVs that come packaged in PE and on washing machines made from PP and more spending on holidays.

You, as a buyer of resins in Brazil, have an opportunity to buy lots of cheap product from China and southeast (SEA) Asia where prices are at all-time lows versus all the other regions. This is provided you can find and afford the container space.

These low prices are the result of tight supply of container space that is making it hard for producers to export from the regions and a likely second negative year of polyolefins demand growth in SEA.

But weaker-than-expected Chinese demand is also a major factor behind the comparatively weak pricing in SEA and China.

So is the big surge in China’s high-density PE (HDPE) capacity in 2021, which is only a temporary market disruptor as under any reasonable scenarios China will need to import big volumes of HDPE up until 2031.

Not so with PP, as China could be completely self-sufficient in PP by 2026. This year, PP imports could be down by 28% versus 2020 on rising local capacity and weaker demand (HDPE imports look set to fall by 24%).

Why does this China import story matter so much to you as Brazilian converter? Because in 2020, ICIS estimates that China accounted for 66% of global net PE imports (60% in the case just of HDPE) amongst the countries and regions that imported more than they exported. It was 43% for PP.

Your US PE suppliers are heavily reliant on exports because of their recent capacity big additions. China is an important market for the US.

Weaker Asian and demand and extra supply in 2021 create a buying opportunity for you in 2021.

Over the longer term, you must keep a very close eye on every shift in Chinese self-sufficiency, especially in PP.

If China were to become completely self-sufficient in PP, the removal of 43% of global net imports – based on 2020 data – would represent another great buying opportunity!

Now let us move away from my imaginary Brazilian converter. Let’ s examine what the ICIS data is telling us about Chinese polyolefins demand in 2021 – and what base case and downside outcomes for Chinese demand would mean in a global context.

The chart below – and the data in this post – follows on from my post last Tuesday, which featured just HDPE and PP.

Realism rather than panic is the right approach

The above worst-case outcomes would be far from being the end of the world for producers, because last year was an exceptional year – as I said a bubble year – caused by the pandemic-driven export boom.

It is therefore useful to compare demand with the pre-pandemic year of 2019 to see what the downsides for 2021 consumption would be like – and the answer is extremely good. The underlying fundamentals of Chinese demand remain sound.

Let me now analysis the data in the above chart.

If the January-May 2021 trends in net imports and local production (apparent demand) were to continue for the full year, HDPE consumption would be 9% lower than in 2020 and 3.3m tonnes lower than our base case for 2021.

Now let us draw a comparison with 2019. Under the 2021 downside, HDPE demand would be 3% more than in 2019 – a gain of 430,000 tonnes. Very respectable growth indeed.

China’s low-density PE (LDPE) market has been heavily shaped over the last 17 months by tight LDPE supply – the result of better margins for ethylene vinyl acetate (EVA) and a lot of new linear-low density (LLDPE) supply.

LDPE and EVA can be produced in swing plants with producers swinging to EVA because of the better margins. LLDPE competes in many of the  same end-use markets as LDPE.

But the data still show some effects from the deflation of the export bubble.

The 2021 LDPE downside would see demand fall by 2% over last year. Consumption would be 400,000 tonnes lower than our base. The 2021 downside would also see demand 2% lower than 2019 – a reduction of 140,000 tonnes.

The downside for LLDPE demand in 2021 would be 1.1m tonnes smaller than our base case for this year. Demand growth would still, however, be positive over last year at 2%.

Versus 2019, our 2021 LLDPE downside would be 16% higher. This would represent a gain of 2.1m tonnes over 2019. This reflects booming demand for packaging in internet sales, which I discussed earlier.

There is a statistical symmetry about what could happen with PP demand. If the downside is correct for 2021, consumption would be 2.6m tonnes smaller than our base case for this year. But 2021 downside demand would also be 2.6m tonnes more than in 2019.

Downside 2021 demand growth would be minus 3% over 2020, but plus 9% over 2019.

Now look at the global implications of our base cases versus the downsides

Wow! This chart largely speaks for itself.

Let me still speak a little for the chart as the numbers are so, so important:

  • In summary, to make this easier to digest, under our base cases for Chinese 2021 PE demand across all three grades, global PE demand would this year reach 7m tonnes, when you look at the exact numbers. The downsides would leave global demand at exactly 114m tonnes.
  • Our base case of Chinese PP demand in 2021 would see global consumption reach 85.9m tonnes. The downside would result in global demand at 83.3m tonnes.

The above chart also shows comparisons with actual 2019 and 2020 figures.

The final chart is the killer chart – the most important chart in this post. Just look at the huge difference that the Chinese 2021 downsides would make to this year’s global percentage growth over 2020.

in this case, there is no need for any more words.

Conclusion: you need to understand China

I cannot stress enough the importance for producers and buyers everywhere to conduct this type of constant demand crunching on China.

As I have just demonstrated, this investment in data and data analysis is hugely worthwhile as events in China offer many challenges and opportunities.

ICIS is here to help support you with this work. For more details, contact me at john.richardson@icis.com.