Home Blogs Asian Chemical Connections China’s PP market and Zero-COVID: why 2022 net imports could fall to just 300,000 tonnes

China’s PP market and Zero-COVID: why 2022 net imports could fall to just 300,000 tonnes

China, Company Strategy, Economics, Malaysia, Middle East, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand
By John Richardson on 28-Apr-2022

By John Richardson

THERE IS NOT MUCH point in carrying out economic stimulus if people can’t spend the extra money. This is the dilemma China faces as it maintains its Zero-COVID policy that it is now affecting some 400m citizens. This makes all the talk in recent weeks of a stimulus-led economic turnaround largely irrelevant.

At the height of the pandemic in the West, spending on durable goods went through the roof as the middle classes, their disposable income buoyed by not travelling and government handouts, bought lots of game consoles, computers, TVS and white goods etc.

Chinese consumers don’t appear to be able to do the same because of insufficient delivery drivers, as drivers are either confined to their homes or can’t get to some buildings due to travel restrictions. Delivery costs have also gone up.

As my ICIS colleague Zhibo Xiao writes in this excellent ICIS news article: ‘Prevention and control measures in some areas of east China have prolonged transportation cycles and resulted in a lack of drivers.

“Transportation fees in east China have generally increased by 50-100%, and in places such as Shanghai where coronavirus reoccurrence is severe, transportation fees even increased by two to three times.

“Moreover, in some regions, only vehicles with pandemic prevention passes are allowed to enter, which further reduces logistics efficiency and increases logistics costs.”

It is therefore hard to see much effect from the millions of dollars reportedly handed out by local governments in spending vouchers ahead of the Labour Day Holidays. The national holidays are from 1-4 May.

Some of this money comprises vouchers for discounts off tourism and fuel costs. People confined to their homes obviously won’t be able to use the vouchers.

So much, perhaps, for the time being at least, of further deflating the property bubble – a key element of the Common Prosperity economic reforms. Around 60 cities and towns are said to have relaxed lending and other restrictions on property. China’s real-estate sector accounts for some 30% of GDP, one of the highest percentages on record.

But despite relaxations of property rules in Zhengzhou, capital of Henan province, the Financial Times reports: “Compared with the same period last year, new home sales in Zhengzhou fell more than 30% cent in the six weeks from March 1 to mid-April, mirroring a nationwide trend.” Travel restrictions and declining household incomes are why sales have fallen, a Zhengzhou property agent told the FT.

And as The Economist says, the decision to boost in infrastructure spending will have a limited impact if Zero-COVID restrictions prevent work on new bridges, railways and roads.  

Once China has its latest pandemic outbreak under control, sure, whoosh, expect a big recovery in the economy as pent-up demand is released. You will struggle to get a table in any Shanghai restaurant for several months.

And the extra government stimulus is sure to have a positive effect, once the economy is functioning properly again, although how big will the stimulus be? Surely nothing on the scale of 2009 when China came to the rescue of the global economy during the Global Financial Crisis through a tripling, yes, tripling bank of lending during that year.

Why the stimulus seems unlikely to big as 2009 is because of the income inequality and bad debt problems, including the property bubble, left behind by the giant economic rescue package. Dealing with income inequality and bad debts are again part of the Common Prosperity economic reforms.

But the more immediate question is when China will relax its Zero-COVID policies. Perhaps, as one Shanghai resident says, this will be gradual as policies are adopted rather than suddenly abandoned.

Supporting this argument is that some Shanghai manufacturers have been allowed to re-open, including the automotive and chip sectors. But people in lockdown zones are unable to enter and exit, making it difficult for companies to resume operations, said the same ICIS news article linked to above.

As every day passes with major lockdown restrictions still in place, the less likely it is that we will see a strong economic recovery in 2022. We need to consider the risk that no big recovery will occur until next year.

And to stress again, any recovery will likely be driven by the domestic and not the export market. Even when Zero-COVID related supply chain problems have eased, it is hard to see how the recovery will be the result of exports because of the cost-of-living crisis in the West.

The province-level impact on China’s PP market

We need to dig deeper than these type of big picture conclusions. As I’ve long argued, people selling petrochemicals and polymers in China need to understand demand patterns at the provincial level. Hence the chart below, which is only for 2020 as this was the most recent per capita income and population data I could find.

The chart underlines the tremendous power of the ICIS Supply & Demand Database. Here, I’ve combined our data with official government statistics on per capita income levels by province and populations by province.

This makes it possible to calculate how many tonnes of polypropylene (PP) each province consumed in 2020. But please note that my approach assumes a 100% link between per capita income levels in US dollars and PP per capita consumption by province converted into tonnes.

It is not as straightforward as this because some provinces probably punch above their individual spending power weight in terms of per capita incomes versus PP consumption due to their finished-goods export-focused manufacturing capacity. Other provinces will punch will below their weight because of lack of manufacturing capacity.

Guangdong’s actual consumption might, for instance, have been higher than the 4.5m tonne estimate for 2020 because of its vast manufacturing capacity.

But I believe the general direction of the data is right as it shows that Zero-COVID policies are affecting both China’s economic heartland and the heart or bulk of its PP demand.

We can see this reflected in the official provincial GDP data for Q1 this on. Real GDP growth is likely to have been lower than the official numbers.

“Six provincial-level jurisdictions — all of which experienced a rise in infections in the January-to-March period — lagged behind the national GDP growth rate of 4.8%, local statistics bureaus said,” wrote Bloomberg in this article.

“That included Guangdong and Jiangsu provinces, two of the country’s biggest provincial economies, which grew 3.3 percent and 4.6 percent respectively,” the wire service added (as the above chart shows, these were also the biggest PP consuming provinces in 2020).

The other laggard province were Henan, Liaoning, Shanghai and Tianjin, Bloomberg added. Add the 2020 PP consumption of these six provinces together and it comes to around 13m tonnes of demand, 33% of China’s total demand in that year.

Understanding fluctuations in provincial-level PP demand during the rest of this year – using the above chart as a starting point – is so, so important as every extra tonne of production allocated to the right province will help to compensate for lost sales everywhere.

Logistics are defining demand in Zero-COVID China – the ability to move resins from polymer plants to converters. Understanding Zero-COVID restrictions in each province is also important.

Nationwide estimates of PP demand and net imports

But petrochemical producers – especially the overseas producers who lack regional Chinese distribution networks – still need big picture or nationwide forecasts.

Let’s start with my three latest outcomes for PP demand in 2022.

Scenario 1 is in line with the China customs net import data and our estimates for local production in Q1 annualised to the full year. Growth of 4% would be the same as my estimate for 2021 growth over 2020.

Let’s assume, say, the lockdowns continue into H2, but by Q4 China is more or less back to normal. This is my basis for my second scenario of 2% growth.

Scenario 3, minus 2% involves no recovery in 2022 as the lockdowns continue for most of the rest of this year.

Let’s next look at what these demand outcomes, combined with different levels of production, could mean for net imports.

Actual net imports in 2021 fell to 3.4m tonnes from 6.1m tonnes in 2022 on a big rise in local capacity and much better netbacks in overseas markets versus China, as prices elsewhere traded at record-high premiums over China.

Scenario 1 is again based on the actual data from Q1 – China Customs net imports and our estimates of local production. Net imports were down by 12% as local production rose by 9% compared with Q1 2020. As described above, this resulted in annualised demand growth of 4%.

China’s PP capacity is scheduled to increase by 12% this year following a 13% increase in 2021 over 2020. Three new plants came on-stream in Q1.

Nevertheless, our Q1 production data indicate that this year’s annual average operating might only be 81%, down from 86% last year. This seems likely to be result of the some 24% of Chinese PP capacity that was shut down in Q1 because of logistics difficulties and weak demand.

Let’s assume a slightly higher operating rate of 82% and demand growth of 2%. This year’s net imports would fall to 2.1m tonnes.

My third outcome assumes minus 2% growth and an 85% operating rate as logistics problems ease and as China pushes hard towards greater PP self-sufficiency. Net imports would fall to approximately 300,000 tonnes.

Conclusion: Building robust scenarios

You must not cut corners on this type of detailed analysis, as every extra tonne you sell to the Chinese province where it is needed or every extra tonne you allocate away from China to other countries could make all the difference.

It is the micro decisions on production and sales you make during the remainder of this year that allow you to win a very difficult and complex global PP market.

You must also consider the strength of Europe’s PP imports at a country-specific level as Europe faces less supply of Russian oil, naphtha and natural gas. Another focus should be on the impact of the food crisis on demand in the developing world ex-China.

For information on how we can help you build robust and constantly updated scenarios around all these and more variables, contact me at john.richardson@icis.com.