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Polyolefins pricing data suggest China still hasn’t recovered

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By John Richardson on 22-Jun-2022

By John Richardson

THERE IS a lot of distracting noise out there about China’s rate of recovery as the zero-COVID lockdowns are apparently relaxed.

Read one set of economic statistics and you can become convinced there’s a strong rebound in the economy and therefore polyolefins demand; read another group of numbers, with the right objective context, and you can be left with the feeling that all remains gloomy.

Rather than getting into the debate over which macroeconomic numbers and commentary give the real picture of what is happening in the world’s most important market, constant updates of the following two charts may well be more valuable.

The first chart shows the average polyethylene (PE) discount for CFR Vietnam prices, across the three grades, versus average overall southeast Asian (SEA) prices since we began our Vietnam assessments in September 2019.

Vietnam is SEA’s biggest import market but is, of course, tiny compared with the mighty China.

Because Chinese PE demand growth in 2022 looks as if it might slip into negative territory – and because Chinese capacity is further increasing this year, pushing self-sufficiency higher – market sources observe an increasing focus on the Vietnamese market by exporters as an alternative to China.

This could explain what you can see in the above chart – the rise in premiums in all overall SEA average PE prices compared to those in Vietnam since March.

In fact, in February this year, SEA over Vietnam prices were trading at a $16/tonne discount. Last month, they reached a record-high premium of $70/tonne. During the first three weeks of June, prices were at a premium of $69/tonne.

The problem is not just cargoes that have been sent directly to Vietnam instead of China, but also cargoes delivered to bonded warehouses on China’s coast that could not be sold by traders that have been re-exported to Vietnam.

We are seeing a similar pattern in the PP market as the second chart below shows.

The ICIS Vietnam PP quote began in December 2010. As you can see, so far this year, SEA PP price premiums have not reached a record high. But they climbed from $60/tonne in February to $83/tonne  During the first three weeks in June.

The trade data is too patchy to reach conclusions because of the slow release of monthly data by some countries. We cannot yet see whether there has been a big rise in exports to Vietnam versus declines to China.

But if the wisdom of crowds is anything to go by, there is consensus among the people I’ve spoken to that the fall in Vietnam prices relative to SEA prices reflects a significant shift in trade flows.

One can thus make the argument that until the SEA price premiums (or to put in another way, the Vietnamese discounts) return to more normal historic levels, the China market remains weak.

And I think it is beyond question what the chart below is telling us. This is an updated version of the chart published last week.

What you can see are CFR Japan naphtha costs per tonne versus average CFR China PE and PP prices, excluding low-density PE prices (LDPE), since November 2002 when our assessments began.

I have excluded LDPE prices because they are irrelevant. LDPE pricing and spreads have remained strong this year relative to the other grades because of exceptionally tight LDPE supply. But this doesn’t also mean strong LDPE demand. Instead, year-on-year China demand collapsed by 11% in January-April 2022.

The gap between CFR Japan naphtha costs and CFR China PE and PP prices has never been this narrow, as you can see in the above chart.

The narrow gap in 2022 does not just reflect the surge in oil prices (and therefore, of course, the costs for naphtha). During other periods of rapid increases in oil prices, PE and PP producers have been better able to pass on higher raw material costs to the converters.

In my view, the squeezed gap conclusively demonstrates that demand remains weak in China. The weak PE and PP producer pricing power also reflects big increases in Chinese and South Korean capacity.

If you are still not convinced, look at the chart below which shows average annual spreads between China PE and PP prices, again excluding LDPE, and naphtha from 2003 until 17 June this year.

Slam dunk, in my view again. Spreads have averaged just $268/tonne so far this year LDPE. The previous low of $374/tonne was in 2003.

I believe that China’s economy will only have recovered when we see the relationships between China PE and PP prices and naphtha costs return to historic norms. And there is a strong argument to be made that the same applies to Vietnam versus SEA PE and PP prices.

This tells us that there is no need to be confused by the contradictory Chinese macroeconomic numbers, as clarity is provided by ICIS polyolefins and other petrochemicals data.