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China polyolefins demand declines accelerate as supply chains remain the key challenge

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By John Richardson on 29-Jul-2021

By John Richardson

ONE OF THE golden rules that has nearly always applied over the last 20 years is that you never bet against the Chinese economy. Time and again, the doom mongers have been proved embarrassingly wrong.

But we now have enough data and anecdotal evidence from 2021 to conclude that the deceleration in demand growth for polyolefins points towards a cooling-off in in H1 2021 economic growth relative to the second half of last year.

What is also important to note is that even using the formerly flawed approach of year-on-year comparisons, we will start to see negative growth in H2 2021 versus H2 2020.

H1 2021 versus H1 2020 was always going to look good, provided China remained in control of the pandemic during the first half of this year. And this was of course the case.

H1 2021 year-on-year comparisons badly misled many analysts into thinking all was good with China’s economy and its polyolefins markets because of the flattering nature of the data.

But as we move through H2 2021 compared with H2 2020, we will start to see year-on-year evidence of weaker growth, as H2 2020 was when China enjoyed its big manufacturing export-driven economic boom.

On exports, here is the key stat you must bear in mind: H1 2021 exports were 20% down versus H2 2020.

We also know from independent analysis of the Chinese economy that growth remains lower than before the pandemic. Remember, never entirely rely on the official numbers and the official interpretation of these numbers which suggest otherwise.

The decline in polyolefins demand accelerates

Now let us look at the polyethylene (PE) and polypropylene (PP) consumption data for H1 2021 versus H2 2020.

The slowdown gathered pace in H1 2021 versus H2 2020 as compared with January-May 2021 over August-December 2020.

The fall in high-density PE (HDPE) demand rose from 14% to 15% with the linear-low density PE market swinging from positive growth of 2% to minus 6%. The declines in low density PE and PP remained more or less unchanged.

Now consider this chart.

The chart reminds us that the air has been taken out of the Chinese H2 2020 export-driven growth bubble.

If the H1 2021 trends were to continue for the full year, 2021 demand would still be better than in 2019 – a pre-pandemic year.

Still, if the H1 2021 trends were to continue for the whole year, total PE demand in 2021 would be 37.1m tonnes versus our base case for this year of 40.3m tonnes – a shortfall of 3.2m tonnes.

In PP, full-year 2021 demand would reach 32.3m tonnes compared with our base case of 34.5m tonnes, a shortfall of 2.2m tonnes.

Container freight and semiconductor shortages

I’ve been warning since February this year that container freight and semiconductor shortages would likely lead to a slowdown in China’s exports.

It stood to reason to expect some impact on China’s ability to get its products to overseas markets. As the data now show, I was right.

At that time, the container freight shortages were expected to sort themselves out by the end of the Lunar New Year holiday in late February, with the lack of semiconductors forecast to last for six months.

Since then, estimates of when the supply chain problems would end have been pushed further and further forward.

Last month, I argued that until or unless the world is fully vaccinated – and we are a huge distance from this happening – container freight disruptions would continue because of further pandemic outbreaks affecting port operations.

More containers and container ships are being built to alleviate pandemic-related shortages. But these investments won’t solve the problem if ports continue to be affected by quarantine measures.

The thing with the container business is that is always very finely balanced. It only takes minor disruptions to result in too many containers in some places and too few in others.

The latest betting is that the container freight crisis will be resolved in 2022. Possibly, but only if new systems are put in place that guard against risk the world might never be fully vaccinated.

What has changed my thinking is the spread of the much more transmissible Delta variant and faltering vaccination campaigns even in developed countries.

Governments and public health officials had hoped herd immunity might have been achievable through between 60%-70% of the global population being vaccinated, wrote the Wall Street Journal in a 25 July article.

But, quoting Mark Woolhouse, professor of infectious disease epidemiology at the University of Edinburgh, the WSJ said that 80-90% could be the new threshold. Other estimates suggest we must reach 95%!

“Because the herd immunity bar has been raised so high, it is not a question of when we will get there, but if we will get there,” Professor Woolhouse told the newspaper.

We also need to consider the developing world where full vaccination rates of populations are frighteningly low – for example, just 6% in India and Indonesia and only 0.3% in Indonesia.

A much deeper understanding of container freight markets has thus become a critical success factor for petrochemical companies.

In the case of this post, we will never be able to adequately understand Chinese petrochemicals demand in general without this deeper knowledge.

The good news, however, is that the semiconductor shortage may have already peaked thanks to the world’s largest producer, Taiwan Semiconductor Manufacturing Co, stepping up output by 12% in Q2. It plans to raise capacity by 60% in 2021.

Local-for-local versus export-based demand

But, as I said, very few people have made money betting against the strength of the Chinese economy.

It is very possible that a booming domestic economy in H2 could make a nonsense of my estimates for full-year 2021 polyolefins consumption. 2H H

Beijing has already relaxed the reserve requirement – the amount of money that banks must retain against their loan books – in order to reduce credit availability.

Lending conditions had tightened as the government took advantage of last year’s strong growth by stepping up its campaign against bad debts.

More stimulus measures may be on the way as China attempts achieve its 6% GDP growth target.

It is also important to separate PE from PP.  The strength of exports Is important for Chinese PE consumption because of the stretch film, shrink fill and other packaging used to package durable goods.

The majority of PE demand is, however, local-for-local – into domestic packaging end-use applications, along with spending on infrastructure which drives HDPE pipe-grade demand.

Two of China’s biggest consumer spending periods take place in H2 each year – the Golden Week holiday between 1-7 October and Singles’ Day on 11 November.

Internet sales may again set new records during these events. Large quantities of PE are required to package goods bought online.

My forecast for 2021 PP demand might be more likely to come true because its end-use demand falls more heavily into durable goods which are vulnerable to a continued slowdown in exports.

Please, please be careful out there. It has never been as complicated as this in the 24 years I’ve been covering this industry.

But amidst the complexity there are some simple truths, one of which is this: never before has an understanding of logistics, especially container freight, been as important for working out what’s going to happen next.