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China polyethylene: latest scenarios for 2022 demand and net imports

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By John Richardson on 02-May-2022

Following my post last week on my latest outlook for China’s polypropylene (PP) demand and net imports in 2022, see below my latest predictions for polyethylene (PE), including, as usual, a range of scenarios.

By John Richardson

ONE CAN ARGUE that PE exporters have had a very easy life over the last 20 years, as, despite all the talk about the “rise of the middle classes in the developing world”, the statistical reality is that it has been one country and country only that has mainly supported our industry. Yes, you’ve guessed it, it is of course China.

I am not saying that the other countries and regions haven’t been important. They obviously have. It is just that the quite spectacular demand growth we have seen over the last 20 years has primarily been driven by China, as the data from the ICIS Supply & Demand Database and that of the PE companies show.

It seems to be the rise of one middle class that’s delivered much of the strong incremental growth over the last two decades. And with some 400m people in China subject to Zero-COVID lockdowns of varying severity we need to be worried, as most of the 400m are in the richer provinces. In other words, many of these people are middle class.

As I have been arguing over the last couple of months, when the going gets tough, the tough need to get going. There are two things you need to do this in this incredibly challenging environment:

  1. Build downside scenarios for China’s PE growth and net imports in 2022, constantly revise the scenarios.
  2. Assume the worst for China, in the hope of being pleasantly surprised, and study Europe very closely. European production losses resulting from reduced supply of Russian oil, naphtha and natural gas could create stronger export opportunities that might make up for a disappointing China.

Why the Q1 China PE data doesn’t tell the real story

The Ukraine-Russia conflict didn’t begin until 24 February, most of the way through Q1. We have therefore not seen the full effect on China of the inflationary impact of the conflict.

And since the end of March, the Zero-COVID lockdowns have intensified, meaning that the 4% average demand growth across the three grades of PE detailed in the chart below may turn out to be too optimistic. The 4% growth is based on the China Customs department net imports for the first quarter added to the ICI estimates for local production, annualised into a full-year demand forecast.

“Just one number for demand, one forecast, has very limited use in business planning,” a PE industry executive told me many years ago. Nothing seems to have changed since then.

See me two alternative outcomes for China’s demand growth in 2022: flat growth over 2022 and minus 3%.  Flat growth assumes the lockdowns end within the next two months or so and minus 3% factors in the lockdowns lasting for most of the rest of this year.

Craig Botham, of Pantheon Macroeconomics estimated that the Chinese economy shrank by 0.5 percentage points in Q1 and would contract by another 0.6 percentage points in the second quarter, meaning it was already in recession, said the UK’s Daily Telegraph in this article.

This means that even if severe lockdowns are over by no later than the end of June, we might only see flat PE growth for the full year even though there would surely be a strong recovery in H2 as large quantities of pent-up retail spending are released.

A further reason to suspect flat growth for 2022 even with a H2 retail spending rebound, is that China’s economy is unlikely to get much support from exports because of the cost-of-living crisis in the West.

Minus 3% PE demand growth is built on the assumption that China sticks to the Zero-COVID lockdowns for most of this year. A worrying recent sign are new restrictions in Beijing involving school and restaurant closures, although Beijing has not so far been subjected to a full lockdown.

Now let take these demand growth assumptions and add them to different assumptions on local production to get to scenarios for this year’s PE net imports.

The forecast for an approximately 220,000 tonne-decline in total net imports in 2022 over last year is based on the 4% demand growth estimate, which, for reasons I’ve just described above, may prove to be too optimistic.  

Local operating rates averaged only 82% in Q1, well below our forecast for the full year. This was the result of deep operating cuts on logistics disruptions and negative margins caused by the lockdowns.

One can argue that operating rates may remain low as long as the severe lockdowns continue. But here is another scenario. China has invested many billions of dollars in new capacity. It runs new capacity hard and raises exports to compensate for weak local demand. It might be able to do so by making sure export logistics work efficiently.

If you need the detailed numbers behind the headline numbers provided in this blog, contact me at john.richardson@icis.com and we can discuss how ICIS can provide support.

Good luck, and, as always, stay safe out there.