Home Blogs Asian Chemical Connections Global HDPE demand prospects dim on a slower developing world and China

Global HDPE demand prospects dim on a slower developing world and China

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 on 20-Aug-2021

By John Richardson

THE DRAG ON global polyolefins growth from declining demand in the developing world will, I think, be much greater than I thought would be the case in March this year, when I did my last round of forecasts for 2021-2025 consumption.

The core of the problem is in my view low vaccination rates which are inflicting deep economic damage on poorer countries.

A few times a week I look at the Our World in Data global map showing the percentages of complete vaccinations by country, only to find that the developing world is only edging up. The region remains a huge distance from the 80-95% complete vaccination rates viewed as necessary for herd immunity.

Vaccination rates and developing world demand

For example, as of 18 August just 8.8% of the Indian population had been fully vaccinated, just one percentage point higher than at the beginning of August. India is the world’s second-most populous country.

Indonesia, the world’s fourth-most populous country, had a vaccination rate of only 10.7% as of 18 August. The needle on vaccination rates in Indonesia has also barely moved from the start of the month.

For several months now, there has been barely any change in vaccination rates in Africa except in Morocco, where, as of 18 August, the complete vaccination percentage was 32.5%. Every other African country’s vaccination rate remained stubbornly below 10%.

In the developed world, the level of vaccinations – which offers a guide to the likely severity of future outbreaks and lockdown measures – is almost irrelevant for assessing petrochemicals demand in general.

Even if the Delta variant were to force a renewed wave of lockdowns in richer countries, petrochemicals consumption would remain robust.

The cash-rich middle classes, supported by ample government stimulus because of low government borrowing costs, would still be able to spend bucket loads of money on durable and non-durable goods to relieve their boredom.

We mustn’t underestimate the impact of rising internet sales on polyethylene (PE) and polypropylene (PP) demand. Some $14bn of start-up money has flowed into food delivery companies in the West. Convenience and fashion often equal permanent changes in spending habits.

Further, it is estimated that the average internet sale is dropped 17 times before it is delivered because of long and complex supply chains. Whatever you buy online is likely to continue to arrive in lots of layers of protective PE and PP packaging.

We all obviously hope that the rich world will stay on top of the Delta variant, enabling economies to continue to open up.

This ideal outcome would, as I said, likely make no difference to internet sales.

But it would probably lead to a cycle out of demand for some goods and services related to staying at home and into more goods and services related to travel – eg increased spending on holidays and hotels, along with all the associated packaging materials.

Because the rich world is rich, I believe the net result of this cycle would have no net negative effect on consumption.

Everywhere, of course, demand for personal protective equipment, hygiene products and all the PE and PP needed for vaccination programmes is going to remain at elevated levels. But the rich world can afford more of all the above because it is rich.

The developing world is in a very different position. Low vaccination rates mean a rise in extreme poverty, fewer people reaching middle-income status and governments unable to fund big stimulus programmes because of high costs of borrowing in the developing world.

Healthcare systems are often weak in the developing world, forcing governments to impose severe lockdowns.

The lockdowns leave hundreds of millions of day-rate labourers unable to work – ergo more damage to PE and PP demand. If day-rate labourers don’t work, they don’t get paid. Day-rate labour dominates many developing-world workforces.

I therefore see it as reasonable to expect declining PE and PP consumption demand in the developing world until the region is adequately fully vaccinated. Let’s for argument’s sake use the Duke Global Health Innovation Center in Durham North Carolina’s estimate for when this will happen, which is 2023.

Our base case for PE and PP demand in 2021 sees V-shaped recoveries in demand in the developing world following steep declines in 2020 over 2019. But, following the above logic, downside scenarios can be built where recoveries don’t happen until 2023. We could see the same percentage growth declines in developing world demand in 2021 and 2022 as occurred in 2020.

China a lot weaker than expected

Last year was a quite breathtakingly good year for Chinese PE and PP demand. After a weak H1, consumption came roaring back in the second half, thanks to booming exports of finished goods.

This was the “China in, China out” story that I documented at the time: rising PE and PP imports that were re-exported either as components of finished goods or as packaging of finished goods.

But as I warned about at the time, some kind of cooling-off in this breakneck level of growth was always likely to happen – because it was breakneck, above the usual rates of growth.

What I didn’t realise at the time was that container freight costs would go through the roof as availability of space tightened – and as too many containers were stranded in some ports with too few containers in other ports.

Neither did I realise that global supply of semiconductors would tighten because of the boom in Chinese electronics exports in H2 2020, a strong recovery in auto sales in Q4 last year and disruptions in semiconductor production.

The container freight and semiconductor shortages explain the 20% fall in China’s manufactured goods exports in H1 2021 versus H2 2020, with the decline also the result of an inevitable cooling-off in a spectacular growth in exports.

The decline in exports largely explains the 15% fall in China’s high-density PE (HDPE) demand in H1 2021 versus H2 2020, and 6% falls in low-density PE (LDPE), linear low-density PE (LLDPE) and PP consumption.

Expensive container freight is here to stay until at least mid-2022, according to Eytan Buchman, chief marketing officer at online freight shipping marketplace and platform provider Freightos. The semiconductor shortage also looks likely to last into next year.

It is therefore possible that the demand growth patterns we saw in China polyolefins in H1 2021 continue for the full year. I assume this will be the case for my new global forecasts for HDPE, PP, LDPE and LLDPE demand in 2021-2025.

Now let us look at my latest forecasts for global HDPE demand in 2021-2025. I will provide reforecasts for LDPE, LLDPE and PP in later posts.

The 29.7m-tonne threat to global HDPE demand

Last year, our excellent ICIS Supply & Demand Database estimated that global HDPE growth was 3% over 2019 to 49.9m tonnes. This was a great result when you consider that in 2008, during the Global Financial Crisis, global growth fell by 3%.

This year, however, my downside – which you can see in the slide immediately above – assumes a 3% rise in global demand against our base case for a 5% increase. The downside is based on the following:

  • China’s 2021 demand reaching just 16.2m tonnes versus our base case 19.4m tonnes (as mentioned above, 16.2m tonnes is calculated based on H1 2021 demand trends continuing for the full year). The downside would see consumption contract by 9% over 2020 versus our base case of an 8% increase. But the downside case then assumes the same China growth in 2022-2025 as the base case.
  • I’ve left developed world demand growth unchanged in both scenarios (the developed world is the US, Canada, Europe, Japan, South Korea, Taiwan, Australia New Zealand and Singapore). This is for the reasons described above.
  • In the developing world, I assume average declines in 2021 growth of 1% and flat growth in 2022. This compares with the base case averages of 5% in 2021 and 4% in 2022. The developing world comprises Africa, Asia & Pacific not including Australia, New Zealand and Singapore, Turkey, the Middle East and the Former Soviet Union. In 2023-2025, I assume slightly higher growth rates than our base case as the region bounces back.

All in all, my downside would see global HDPE demand growth average 3% in 2021-2025 versus our base case of 5%. Cumulative demand under the downside would be 29.7m tonnes smaller than the base case.

My downside might at first glance seem grim reading. But remember that we live in a divided world and the world looks likely to stay divided until at least the middle of 2022 because of very expensive container freight rates.

It is thus very possible that the China and southeast Asia markets remain oversupplied until the container freight issue is resolved because of an inability to export PE and PP surpluses to other regions. This is unless Asia sees some significant operating rate cuts.

Meanwhile, we could well see PE and PP prices much higher in the western hemisphere as the result of tighter supply and stronger demand.

But the longer these imbalances continue, the greater the risk of rebalancing with a negative impact on the entire  global HDPE business.

As always, please, please be careful out there.