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China 2022 PE demand: latest data point towards a 2% contraction as confusion over outlook builds

Business, China, Japan, Malaysia, Middle East, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand, US
By John Richardson on 10-Jun-2022

By John Richardson

THIS IS A risk that most of us have never encountered before: Chinese consumers may be reluctant to open their wallets.

“Chinese consumers are rattled,” Mark Tanner, managing director at Shanghai-based research and marketing consultancy China Skinny, told Asia Financial.

“They are lacking confidence that they had before, partly due to the uncertainty around the highly transmissible Omicron being contained for long, but also as they are not feeling as good relative to other countries,” he said.

This poor sentiment might limit the effectiveness of “demand-side’ stimulus measures that have been recently announced, including lower sales taxes on autos and subsidies for replacing old household appliances with new appliances.

In all, 33 new stimulus measures were announced by China’s State Council at the end of May that will be introduced in six phases.

A further drag on what is normally strong Chinese consumer sentiment is the rise in unemployment, especially among young people.

Another article from Asia Financial, quoting a Bank of America report, said that China’s overall unemployment rate was forecast to hit a record high in the coming months with youth unemployment surging to 23%. This was the result of the impact of the coronavirus lockdowns on businesses.

But Bloomberg wrote in this article:

  • Beijing seemed to have contained its Covid outbreak for now, meaning the city should avoid the kind of lockdowns seen elsewhere.
  • China property bond issuances were being revived with support from the government. This could boost the flagging real-estate sector that drives some 30% of China’s GDP.

The Wall Street Journal also reported that Chinese regulators were preparing to conclude their investigation into Didi Global Inc. and restore the ride-hailing giant’s main apps to mobile stores as soon as this week. Maybe this is a sign that Beijing will ease pressure on the tech sector, reigniting another important source of growth.

But as I discussed in my 7 June post, the emergence from lockdowns might be a stop and start, one step forward and one step backwards process for political reasons, and because of the potential strain on the healthcare system from another major outbreak.

Confused? If so, you are not alone. The outlook for China has probably never been this uncertain, which is why you need a range of scenarios to cover what could happen next.

Three scenarios for China’s polyethylene demand in 2022

To this end, see the above chart. As with polypropylene (PP), what a difference a month has made. The January-April 2022 data for PE, when annualised (divided by four and multiplied by 12), suggests a much-worse outcome for the full year than the annualised January-March numbers.

In January-March, it appeared as if this year’s consumption across the three grades of PE would grow by an average of 4%, based on the China Customs department net import statistics and our estimate of local production. But January-April points towards growth at minus 2%.

April may turn out to be the cruellest month because the lockdowns were at their height during that month, so, for the reasons described above, we may see a strong rebound in growth. Equally, though, for the reasons described above, it is possible that China’s PE market deteriorates from hereon in.

Hence, my three scenarios to help with your planning process. I must again stress that these scenarios are just my personal views and are intended as an example of the deeper and wider scenario work we can provide for you at ICIS. My analysis suggests:

  • A best-case outcome of growth at a positive 2%, assuming major lockdowns end by no later than Q3 and there is a strong recovery in consumer spending and real estate. This would leave total consumption some 700,000 tonnes higher than last year.
  • A medium-case outcome, consistent with the January-April numbers, of minus 2%. This would leave demand around 550,000 tonnes shy of the 2021 total. This would involve major lockdowns ending by no later than Q3 and a more muted recovery in retail sales and real estate.
  • A worst-case outcome of minus 4% growth assumes significant lockdowns continuing for the rest of this year. This would result in total demand being 1.3m tonnes lower than in 2021.

We need to take these three demand assumptions, factor in different annual average operating rates, and consider the implications for China’s net PE imports.

As with PE demand, China totally dominates – and I mean totally dominates – the global net import market. In 2021, China accounted for more than 50% of global net imports among the countries and regions that imported more than they exported.

The above chart indicates that:

  • The best-case outcome from an importer’s perspective would see growth at a positive 2% and the local operating rate averaging 80% across the three grades. But because of big local capacity additions, particularly in high-density polyethylene (HDPE), this would still see total net PE imports some 900,000 tonnes lower than in 2021.
  • The next best result would see minus 2% growth and again an average local operating rate of 80%. Our estimate for local production in January-April suggests a full-year average operating rate of 80%. This would leave total net imports approximately 1m tonnes lower than last year.
  • The worst result would see minus 4% growth and an operating rate of 84% as local producers push output hard in order to boost exports as compensation for weak local growth, and to take advantage of a depreciated yuan versus the dollar. This would leave PE net imports around 2.9m tonnes lower than in 2021.

Conclusion: The missing data points

Regular readers of the blog will have noticed that I have become more economical with free data points over the last few months. In the case of this blog post, contact me if you need the numbers for each grade of PE and I can introduce you to our ICIS services.

I can also connect you with our excellent team of editors and analysts, especially our outstanding team in China, for more detailed on-the-ground support on what is happening in the world’s most important PE market.