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China LDPE: Final review for 2021 and outlook for the rest of this year

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By John Richardson on 09-Feb-2022

Today I complete my series of posts on China’s polyolefins markets in 2021 with outlooks for 2022. This post focuses on low-density polyethylene (LDPE), following my earlier posts on polypropylene (PP), high-density PE (HDPE) and linear low-density PE (LLDPE).

By John Richardson

DO YOU want the good news or the bad news first? This is obviously a rhetorical question as I can’t hear your responses. So, let me start with bad news – the chart below.

According to my estimate, China’s LDPE demand fell by 6% last year over 2020 to 5.7m tonnes. This is based on China Customs net import data for 2021, the ICIS estimate of local production and my discussions with the market.

It is important to note, however, that 2021 may not have been as bad as I think. Our base case assumption in the ICIS Supply & Demand Database is that last year’s demand only contracted by 1% to 6m tonnes.

But assuming I am right, the 6% decline in growth in 2021 would be the biggest contraction in demand since 2000. I will explain the reasons for last year’s weak China LDPE market later. Firstly, let me give you some good news.

The chart on the left shows the rise of China as a driver of global LDPE demand since 2000. As with the three other grades of polyolefins, a big acceleration in China’s role occurred from 2009 because of Beijing’s huge economic stimulus package, the biggest in global economic history. The main result of the stimulus was a property bubble.

The boom in LDPE demand, as with the other grades of polyolefins, was mainly concentrated in China’s 10 richest provinces, the centre of the bubble. But compare the chart on the left with the chart on the right, showing the changes in percentage shares of global LLDPE demand.

In 2000, China accounted for 11% of global LDPE consumption. Last year, using my estimate for demand, this was at 29%. Note that this was two percentage points lower than 31% in 2020.

And crucially, Europe was in close second place with a share of 26% in 2021. This was a percentage point higher than in 2020 and reversed an otherwise almost constant slide in the region’s global share since 2000. Note that in our database, Europe includes the big developing market of Turkey.

Look at the contrast with LLDPE where China’s share jumped from15% in 2000 to 36% in 2021. Last year’s percentage share is again based on my estimate for LLDPE demand – growth of 1% over 2020.

China’s 36% share was more than double that of the second-placed North America , which had a 16% share. This tells us that in terms of demand, the global LDPE market is much less exposed to China than LLDPE.

The HDPE and PP markets are very similar to that of LLDPE. China dominates demand for these polymers with the second-placed regions at 2021 percentage shares less than half those of China.

Forecasts for China’s net LDPE imports in 2022

I am afraid I need to give you some more bad news. As China’s LDPE demand fell last year, imports declined; they were down by 10% at 3.1m tonnes year on year in 2021.

Why this mattered so, so much was that China accounted for no less than an estimated 64% of global net imports of LDPE in 2021. This is among the countries and regions that imported more than they exported.

China’s 3m tonnes of net imports in 2021 compared with just 730,000 tonnes of net imports by Asia and Pacific, 503,000 tonnes by South and Central America and 458,000 tonnes by Africa.

The chart below shows the import volumes from China’s top 10 LDPE trading partners in 2021 versus 2020.

Imports from Iran, Singapore, the United Arab Emirates and the US gained ground. In the case of the US, this was despite its overall exports being substantially lower because of production losses caused by the Texas winter storm and hurricanes.

Imports from Saudi Arabia lost the most ground followed by South Korea, with marginal declines for Qatar, Japan, Malaysia and Thailand.

What about China’s net LDPE imports in 2022? See the chart below.

Scenario 1, our base case, sees China’s net imports increasing over last year’s 3m tonnes to 3.2m tonnes in 2022.

This is based on a rebound in growth to a positive 4% from a decline in 2021 demand of 1%. My first downside scenario involves a -3% growth in 2022 and the second a -6% growth. Both the downside scenarios start with my lower assumption for 2021 demand than the ICIS base case.

All three scenarios assume operating rates of 91% as I don’t see China having any room to move rates higher than this. This is unlike in HDPE, LLDPE and PP where I see China having the capacity to push production much higher than we assume under our base cases.

As promised, let us now consider why LDPE demand was negative in 2021 and what could happen to consumption during this year.

LDPE demand in 2021 wasn’t just a story of Common Prosperity

Here is an important reminder of the three major objectives of the Common Prosperity policy pivot, which began in August last year:

  1. Deflating the real estate bubble
  2. Reducing income and wealth inequality through increasing the tax base and spending more on the poorer provinces
  3. Lowering carbon emissions, cleaning up plastic waste and reducing air, soil and water pollution

All three key features of the policy shift were negative for growth in all the grades of polyolefins in 2021. But specific to LDPE, consider the chart below.

LDPE and LLDPE films compete for many of the same end-use markets and can be blended with the proportions of blending dependant on performance versus cost. Blended applications include agricultural films.

The above chart shows that between 2000 and 2020, the average China CFR LDPE film grade price premium over CFR China LLDPE C4 film grade was $72/tonne. But last year, the average premium jumped to $301/tonne.

The final chart for today is a comparison is between ethylene vinyl acetate (EVA) and LDPE prices in China.

EVA and LDPE can be made in swing plants which switch between the production of either polymer when autoclave technologies are employed. Tubular LDPE plants only make LDPE.

The above chart confirms what my market contacts were telling me last year. Producers swung to more EVA production output because the returns on selling EVA were much better.

Between 2000 and 2020, the average CFR China price premiums for EVA containing 14-20% vinyl acetate comonomer feedstock over CFR China LDPE film was $330/tonne. This surged to an average of $1,154/tonne in 2021.

Depending on the vinyl acetate comonomer content, EVA is used in end-use markets such as foaming and footwear, wire & cable coatings, photovoltaic cells (solar cells) and hotmelt adhesives.

Booming demand for solar panels in China and India was said to have hit a wall of very limited new EVA capacity in 2021, resulting in, as mentioned, production swinging to EVA. This made LDPE expensive relative to LLDPE, destroying LDPE demand.

I believe that Common Prosperity will continue in 2022 because the Chinese government has no other choice, The old economic growth model no longer works. But perhaps some of the LDPE demand destruction caused by high prices will be reversed.

As you can see from the above charts, January 2022 saw a slight dip in LDPE price premiums over LLDPE and in EVA price premiums over LDPE, but the premiums remained close to historic highs.

ICIS, however, forecasts that global EVA capacity will increase by 14% in 2022 over last year with demand only 6% higher. In China, we expect 2022 capacity to increase by no less than 52% to 1.7m tonnes/year as demand rises by 9% to 2.2m tonnes.

So, we need to assess two countervailing forces – further downward pressure on China’s LDPE demand as Common Prosperity continues versus any boost to demand from improved affordability.

LDPE could become more affordable because of the big increase in EVA capacities against relatively modest rises in consumption.

Conclusion: Ever more complex markets

Petrochemicals markets in general are becoming ever more complex. As you can see from this brief look at LDPE, this market is certainly no exception.

And as soon as the ink is dry on this post, the above data will be out of date and of little use other than as a general guide.

This is why you need to stay close to our excellent ICIS analytics and editorial teams to keep up to date on LDPE and other markets.

ICIS data is nothing short of commercial gold dust, provided it is constantly supported by the right market intelligence.