By John Richardson
RARELY, IF EVER, have events felt so bafflingly complex in the global polyethylene (PE) business. Take as an example the chart below listing the factors that have reshaped demand since the beginning of the pandemic.
Let’s go through these factors one by one, box by box.
It is reasonable to assume, starting from the box in the top left-hand corner, that it will be many years before we are able to or want to get on planes without wearing face masks and with bottles of hand sanitiser in each of our seat pockets.
Face masks, made from non-woven polypropylene, come wrapped in low-density PE (LDPE) or linear low-density PE (LLDPE) films and the hand sanitiser bottles can be made from blow-moulding high-density PE (HDPE). These are just two examples of the many hygiene and medical-related end-uses for PE that have increased since the pandemic began.
Moving to the right, a lot of start-up money has flowed into new Western online-based food delivery companies as spending habits have changed during the pandemic. Convenience, cost and fashion might mean that the rich world stays permanently more in love with internet buying, leading to “baked in” much higher demand for PE packaging that ensures goods bought online arrive in one piece.
Or not, of course. The freedoms of the post-pandemic world may lead to a surge in good old-fashioned bricks and mortar shopping at the expense of the internet. And/or sustainability pressures could force a net fall in the amount of virgin PE packaging used to wrap internet sales, once post-pandemic, we have the breathing space to adequately deal with this issue.
Moving clockwise and down to the second box in column two, I see it at as inevitable that when we are finally fully on top of this crisis, there will be a long-term cycle out of spending on durable goods and into services.
During lockdowns last year – and in 2021 because of all the government stimulus sloshing around the West – rich and bored middle classes have been spending more money on game consoles, TVs and exercise machines etc because they haven’t been able to travel.
When “revenge tourism” and “revenge business travel” see a lasting uptick as we try and make up for lost experiences and new business relationships, we seem likely to buy fewer durable goods. Ergo, less demand for PE that wraps many durable goods and helps manufacture some goods.
BUT what we don’t know – and probably can never know – is whether there will be a net loss in PE demand from the cycle out of goods and into services, as when you get on a plane and arrive in Spain, Thailand or Bali you consume a lot of PE.
Moving clockwise again, on to the third box down in the right-hand column, it is just a question of time until there is a permanent shift to eating more in restaurants and less consumption of food bought in supermarkets. The latter has led to increased surface area demand for PE because of smaller package sizes.
The bottom box on column one makes me, I am sorry to say, plain angry. Our failure to adequately supply the developing word with vaccines and the human and physical infrastructure necessary to deliver vaccines is a completely unnecessary failure.
The updated chart below, from Our World in Data, makes sobering reading. Until vaccination rates get to around 80% in the developing world, PE demand growth will, I believe remain weak because of the “extreme poverty” and “middle income” effects.
A big unknown is when 80% or so will be reached. When that happens, whoosh, PE demand will take off in Africa and developing countries in Asia and Pacific. We can expect growth close to or in the double digits when this threshold is reached. But until then, PE demand growth looks set to remain below the long-term trend.
But the global PE demand and supply outlook is actually very, very simple
Moving clockwise to the final box (first column second box down), this is where the outlook becomes much more straightforward amidst all this seemingly impossible-to-fathom complexity.
Beijing will stick with Common Prosperity. This will result in each percentage point of new Chinese GDP growth resulting in reduced quantities of new demand for commodities in general as sustainability becomes a bigger priority. In HDPE, for instance, I see China’s demand growth averaging only 1% per year between 2021 and 2031 versus our base case of 3%.
As a reminder, this matters far more than any of the other boxes because China accounted for a staggering 35% of global PE demand in 2020, up from just 12% in 2000. In nearest and distant second place in 2020 was the Asia and Pacific region at 16%.
Global capacity has been added – and will, I believe, continue to be added on the premise of annual Chinese growth around 3% per annum across all the grades, rather than in the region of 1%. Hence, when container freight disruptions finally end, there will be plenty of spare supply to go around.
On the theme of global capacity, look at the chart below.
Now it is correct of course that China is not among the main US export markets. Before China comes Europe and South & Central America. But these extra US supplies will add to the overall length in the global PE market as Chinese demand growth falls below most people’s expectations – and as China increases self-sufficiency, especially in HDPE.
Conclusion: just a question of timing
The simple truth is that eventually supply will exceed demand, the very good recent margins for European and US PE producers will decline (see the chart below) and this will become a buyers’ market. The recent falls in European margins suggest that maybe the turning point is close at hand.
But “when?” is obviously the multi, multi, million-dollar question. This hinges on factors such as, I said, the timing of the return of container freight markets return to normal, enabling the resumption of unhindered flows of PE around the world. I shall discuss in detail in a post next week, this might happen sooner than many people suggest with supply chains shortages in general easing quicker than is commonly expected.
Another key determinant will be the return of US production to normal after an exceptional year of output losses from Winter Storm Uri and hurricanes.
As our excellent US-based Chemical Data team detail in their monthly PE reports, US exports must eventually be much higher than they are today to achieve acceptable operating rates because of the big increases in local capacity. Their close analysis of supply and demand – along with price forecasting – helps indicate when this tipping point could happen.
The chart below, provided by colleague Brian Pruett from Chemical Data, indicates that supply is already lengthening in the US.
He wrote of the chart on LinkedIn: “Industry data released today [10 November] for US/Canada HDPE resins for October is showing the highest days of supply of inventory since 4Q2008!
“What will this mean for HDPE prices this month? Stay tuned and learn more when CDI’s next Monthly Petrochemicals & Plastics Analysis is released in the evening on Monday, November 22nd,” Brian added.
We will also see need to an end of the current bull market in energy prices for PE markets to lengthen. When oil prices are on the rise, PE purchasers are forced to buy ahead of immediate needs in order to hedge against future higher resin costs. I shall also suggest next that oil is in adequate supply and that a market correction may happen fairly soon.
If you are a PE buyer this is a huge opportunity Contact me at john.richardsoin@icis.com for support on realising this opportunity.