Asian and Middle East PP exporters lose ground in China but enjoy substantial US sales growth

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

By John Richardson

CHINA’S imports of polypropylene (PP) look set to fall to some 4.4m tonnes in 2021 – a 33% reduction over last year’s imports of 6.6m tonnes.

The China Customs department trade data for H1 2021 when annualised imply 4.7m tonnes of imports for the full year 2021.

But as around 60% of China’s new capacity in 2021 is due on stream in the second half of this year, it seems reasonable to expect a final import number lower than 4.7m tonnes. China’s capacity in 2021 is forecast by ICIS to increase by 13% over 2020 to around 35m tonnes/year.

Another factor behind my estimate of just 4.4m tonnes of imports this year is demand growth that looks likely to reach only 1% in 2021 over last year to a market of 32.2m tonnes. This would compare with 10% demand growth in 2020 over 2019.

The sharp slowdown in growth would be the result of China’s export-led recovery from the pandemic coming off the boil. China’s exports of manufactured goods were down by 20% in H1 2020 over H2 2021, very probably because shipments were driven lower by container freight and semiconductor shortages.

China accounted for 43% of global PP net imports amongst all the countries and regions that imported more than they exported in 2020, making it by far the most important import market. Europe and Turkey were in distant second and third place.

Hence, assessing China’s long-term levels of PP self-sufficiency is also crucial for producers in every region. It is perfectly possible that China will reach complete self-sufficiency in homopolymer grades of PP over the next 3-5 years, perhaps even sooner.

As regular readers of the blog will now, I’ve been flagging-up this risk since 2014. Watch out for my revised forecasts for China’s of PP net imports in 2021-2031.

Even our base case has become much more bearish since March this year.

Here, for the time being, is a previous post detailing our old base cases for 2021-2031 with my downsides.

Quantifying this in terms of China sales for the Big Six

Let us estimate what my predicted imports for 2021 could mean for the Big Six – China’s biggest PP import partners in 2020 – in terms of revenues. Last year, the six in order of size of import-market share, were South Korea, Singapore, Taiwan, the United Arab Emirates, Saudi Arabia and Thailand.

In 2020, prices for PP injection, raffia, BOPP film and random and block copolymer grade averaged $941/tonne CFR China. I multiplied this price by the number of tonnes China reported as imports from these six destinations to end up with the column on the left in the chart below, in millions of dollars.

Prices for the same five grades of PP averaged $1,187/tonne CFR China in January-July 2021. For argument’s sake – and of course this won’t happen – let’s assume that the average price for the full year 2021 is also $1,187/tonne CFR China.

Then let’s also assume that the Big Six achieve the same percentage shares of total Chinese imports in 2021 as they did in 2020. Multiply what would be lower imports from the six regions by $1,187/tonne CFR and you get the column on the right of the chart.

Wow! The table on the right of the chart indicates how much each of the Big Six would lose in sales to China this year versus 2020. South Korea would be $180m worse off down to Thailand in sixth place at a “mere” 70m tonnes of lost sales.

Diversified and more global sales strategies are essential

The good news is that while China’s 43% share of global net PP imports was very large in 2020, it wasn’t as much as polyethylene (PE), which was in the region of 60%.

Further goods news is that China has no realistic chance of getting significantly closer to PE self-sufficiency over the next ten years.

This means that PP exporters have a lot of room to grow exports to the regions and countries, such as Europe, Turkey, the US, Latin America and Africa, in compensation for China’s rising self-sufficiency.

But it certainly won’t be easy because of a new player in the global homopolymer export trade, which is China. Its exports in H1 2021 soared to 879,556 tonnes. This compared with 424,746 tonnes for the whole of last year.

Still, though, with the right access to data and the right data analysis (ICIS provides this!) there should be no need for capacity rationalisation. In fact, revenue gains can instead be made with the right sales strategies.

A case in point is the chart below, showing the revenue gains made  in the US by five of the China Big Six in H1 this year versus the whole of 2020.

To calculate these numbers, I firstly took the average US contract prices for injection, raffia, BOPP film and co-polymer grades in 2020 – which was $1,144/tonne delivered – and multiplied this price by the imports reported by the US Customs Department.

The average US price in January-June 2021 soared to $2,458/tonne delivered as imports from five of the Big Six increased. For example, the US imported 104,000 tonnes from South Korea during the first half of 2021 compared with 92,000 tonnes during the whole of 2020.

The United Arab Emirates (UAE) missed out, however, as you can from the chart. Its imports in H1 2021 only totalled just 80 tonnes versus 93 tonnes in 2020.

The table on the right of the chart shows that South Korea has already gone a substantial way to wiping out its potential lost revenues in China by raising sales to the US. Other than the UAE, the rest of the big China import players also appear to be well on the way towards making most, if not all, of lost China ground.

The US  PP market looks likely to remain tight during the rest of this year because of strong demand growth and constrained propylene feedstock supply, the result of pandemic-related refinery operating rate cuts.

Meanwhile, the Asian PP and PE markets look likely to remain weak, creating further very strong netback opportunities for moving cargoes from the east to the US in the case of PP and to Europe and Latin America in case of both PP and PE.

The data for US PP imports in H1 confirm that despite the recent high east-west freight and long-running logistics challenges of removing pellets from containers  into US railcars and then hoppers, the barriers are being overcome.

We can help Asian producers model their global PE and PP strategies in this very different environment – and we can support buyers in the West who have the opportunity to make major cost savings.

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