CHEMICALS AND POLYMERS spreads data, the gaps per tonne between raw material and product prices, always need to be accompanied with the right market intelligence.
Hence, the chart below, which shows how well spreads for China CFR (cost & freight) low-density polyethylene (LDPE) spreads have held up over CFR Japan naphtha costs, doesn’t tell the real story.
Unlike in high-density polyethylene (HDPE) and polypropylene (PP), producers have had no trouble in passing on higher naphtha costs during 2022. As you can see up until June this year, spreads have held up very well. The average monthly spread between January 2000 and December 2021 was $599/tonne. In January-June this year, it was $588/tonne.
The next chart shows actual China LDPE prices versus naphtha costs since our assessments began. As you can again see, 2022 has followed the pattern of previous rapid run-ups in crude and therefore naphtha costs: LDPE producers operating in the China market have been comfortably able to pass on their extra costs to converters.
But the spreads data in the case of this polyolefin, unlike in all the other grades, isn’t helping us to understand what’s actually happening as the chart below illustrates.
Let me stress again that this is just my personal view of the market.
China’s LDPE demand in 2021 over 2020 fell by 5%, as you can see in detail if you subscribe to the ICIS Supply & Demand Database. In 2020 over 2019, demand contracted by 2%.
This could, in my view, be the third year in a row where we see negative growth in the world’s biggest LDPE demand market. My best-case outlook for 2022 sees demand falling by 4%, my medium case a 6% decline and my worst-case outcome an 8% contraction.
The medium-case outcome (Scenario 2) is based on the China Customs department net import data for January-May this year and the ICIS estimate for local production during the same months, divided by five and multiplied by 12 to get to a full-year estimate of demand.
As I discussed in my 29 June post on China’s HDPE market, the macroeconomic context behind the apparently weak LDPE market is the stop-start nature of relaxation of zero-COVID restrictions and what seems be a failure to date to boost the economy through more infrastructure spending.
My 29 June comments are supported by this 28 June CNBC article on the latest findings from China Beige Book, the independent China macroeconomic service. CNBC reported that China Beige Book found that:
- Chinese services and manufacturing businesses saw a slowdown in the second quarter from the first quarter, reflecting the prolonged impact of COVID controls.
- Orders for domestic consumption and overseas export mostly fell during Q2. Orders for textiles and chemicals processing were among the worst affected.
China’s Beige Book findings were based on more than 4,300 interviews in China in late April and the month ended June 15.
The employment situation wouldn’t likely start to increase until China stimulated its economy more in the autumn, China Beige Book Managing Director Shehzad H. Qazi said in an interview on CNBC’s Squawk Box Asia. He added that there was little sign that stimulus had so far kicked in, including in infrastructure.
I argue in my 29 June post that we may not see a pick-up in infrastructure spending later this year because the deflation of the property bubble has led to shortages in local government financing. Local governments have been tasked with boosting spending on new bridges, roads, etc.
I also worry that the stop-start nature of relaxing the zero-COVID lockdowns could continue because of claims that Chinese vaccines lack effectiveness against Omicron, and because of what are said to be low vaccination rates among the elderly.
So why is the LDPE spread data telling us something so different from the LDPE demand data?
The next chart helps to explain what makes LDPE different from HDPE, PP and linear low-density PE (LLDPE), which will be the subject of a later post. In these three other polymers, the spreads data align with a weaker demand outlook.
EVA prices at record-high premiums over LDPE
As you can again see, China and northeast Asian ethylene vinyl acetate (EVA) CFR China and CFR northeast Asia EVA price premiums have this year reached records, or are close, to record highs over CFR China LDPE.
This is reportedly the result of booming EVA demand in China, especially in the solar panels end-use market. EVA is used to make encapsulants for solar panels.
EVA is made in swing EVA/LDPE plants. Better demand and margins for EVA versus LDPE have led to producers swinging to more EVA production. This seems to explain why in January-May 2022 on a year-on-year basis, the ICIS estimate of China’s LDPE production shows a 9% decline.
The next chart might also be instructive. It shows how LDPE price premiums over LLDPE have reached record highs so far this year. LDPE competes in many of the same end-use markets with LLDPE.
We might therefore be able to conclude that LDPE demand has been damaged both by what is happening in the economy and by its high cost relative to LLDPE. Reduced LDPE supply, the result of production cutbacks, appears to be behind the high cost of the polymer – and so its strong spreads over naphtha.
A further problem for LDPE, which helps explain its negative growth in China in 2020 and 2021 is the gradual further encroachment of LLDPE into its end-use markets, especially metallocene grades of LLDPE.
And, finally, as always, see below my latest estimates for China’s net LDPE imports in 2022.
It might seem counter-intuitive that later this year, China might run its LDPE capacity at higher operating rates in an even weaker demand environment. But consider that producers might run harder to raise exports to compensate for a weak local market, with exports boosted by continued weakness of the yuan versus the US dollar.
Note that our estimate of local production in January-May was just 78%, part of the basis for Scenarios 1 and 2 for net imports in the full year 2022.
This 78% is much lower than our assumption in the ICIS Supply & Demand Database of an 86% operating rate, the basis for Scenario 2. Low production in January-May was the result of the weak demand described above.
As with HDPE and LLDPE, China accounted for more than 50% of global net imports of LDPE in 2021 amongst the countries that imported more than exported. So, of course, the above differences in 2022 net imports would make a big difference to the global market.
Conclusion: context is everything
The context behind every data point is essential, as this post illustrates. And you can only get the right context by using ICIS data along with the expertise our analysts and editors, including our excellent team in China.