A FRISSON of excitement rippled through the global polyolefins markets last week when a rumour spread that China was finally back, that its pricing and demand had at long last started to rebound.
Maybe. But we must wait and see what this Friday’s ICIS Pricing assessments say about the direction of the world’s most important market.
During the week ending 12 August there were no signs of recovery, as my ICIS colleagues wrote in the Asia Pacific polyethylene (PE) report: “China’s PE import discussions were subdued this week with many traders showing little interest in US dollar-denominated cargoes on weak local yuan prices.”
Even if pricing increases during the current trading week, we must ask ourselves whether this is down to stronger demand or reduced supply.
“China’s overall refinery runs have declined sharply this year by the largest margins in history. Apparent crude demand so far in 2022 is well below 2021 levels,” wrote Logan Wright in a 5 August China report for the US-based Rhodium Group.
He added that even the lower apparent demand number was somewhat flattering as China had reduced exports of fuels in 2022 in order to ensure low and stable domestic energy costs.
It could be that less feedstocks from refineries are available for local ethylene, propylene, and then PE and polypropylene (PP) production.
This may help explain the big cuts in Chinese PE and PP operating rates. Another factor behind the rate cuts is very weak polyolefins profitability.
Weak local fuels demand points to a weak local economy. If the demand for fuels is weak, the same must apply to polyolefins.
China no longer interested in growth for growth’s sake
“China’s zero-COVID policy is an extreme reversal of policies that aimed to foment growth in the 1990s and 2000s even at the expense of the environment and the well-being of the labour force,” wrote Sara Hsu in an 8 August article for The Diplomat.
Hear, hear. As I’ve been warning since March, China has little choice but to stick with its zero-COVID policies because of what appear to be ineffective local vaccines, the political impossibility of importing foreign vaccines and low vaccination rates among the elderly.
If China were to scrap its zero-COVID approach, its healthcare system would be at risk of being overwhelmed by hospital admissions.
Until or unless China develop its own effective mRNA vaccines and vaccinates enough of the population, its economic recovery will continue to be stop/start based on the number of coronavirus cases. Another possibility is Omicron becomes less infectious, but there are no indications of this happening.
China is also no longer interested in growth for growth’s sake. Greater priority is being given to the impact of growth on levels of debt, income inequality and the environment.
If there is a local supply-led rise in PE and PP imports and pricing on reduced Chinese production, this won’t change the direction of travel.
But you don’t have to take my word for it. Instead, consider the ICIS data.
PE demand could be 5% lower in 2022 with net imports down by 3.2m tonnes
My 27 July post looked at what the latest data, for January-June 2022, said about China’s high-density polyethylene (HDPE) demand and net imports for the full-year 2022. I carried out the same exercise in PP on 31 July.
The chart below aggregates the latest demand data for all three grades of PE.
One can rightly argue that the slowdown in 2021 growth was inevitable after the boom year of 2020, when average growth over 2019 was 8%. This was due to China’s export-led recovery from the pandemic.
However, a decline in growth this year would point towards the big changes China has made to its economic growth model and the zero-COVID policy trap that policymakers seem unable to escape from.
As usual, the above chart includes three scenarios for consumption in 2022.
Scenario 1 assumes an average of minus 2% growth across the three grades, the same decline as we saw in 2021 over 2022.
Scenario 2 is based on the ICIS estimate of local production in January-June and the China Customs net import number annualised (divided by six and multiplied by 12). This points to a 4% decline in growth.
The worst-case outcome, Scenario 3, assumes a 5% contraction in growth.
Next consider the chart below on net imports.
China’s self-sufficiency continued to increase despite much lower operating rates in January-June 2022 than our forecasts for the full year.
ICIS estimated HDPE rate at just 79% in January-June compared with our full-year forecast of 84%.
January-June low-density PE capacity utilisation was placed at 78% as against our prediction for the full-year of 86%.
The linear-low density PE (LLDPE) operating rate was assessed at 83% in January-June against with our full-year estimate of 85%.
As mentioned above, these lower rates were likely the result of reduced availability of feedstock from refineries and poor PE profitability.
And yet net imports for January-July, when they are annualised, (this is Scenario 2 in the above chart) suggest that this year’s net imports for all three grades will still be 1.4m tonnes lower than in 2021.
Scenario 1, as with Scenario 2, assumes that operating rates for the rest of this year stay unchanged from January-June, leading to an average annual operating rate across the three grades of 80%.
Under Scenario 1, as in the earlier chart featuring just the demand, I assume consumption performs better at minus 2%. Net imports would be some 630,000 tonnes lower than in 2021.
Scenario 3 involves the average operating rate climbing an average of 85% for the full-year 2022, in line with our forecasts, with demand contracting by 5%. Net imports would be a full 3.2m tonnes lower than in 2021.
“But hold on,” I can hear you say, “this is only January-June. What about July and August?”
The net import data for July will only be released towards the end of this month, enabling us to further update the demand outlook.
In the meantime, the chart below is instructive.
I only consider HDPE and LLDPE price spreads over naphtha feedstock costs in the above chart because low-density PE (LDPE) spreads have been very strong this year. This is despite the likelihood that Chinese demand will fall by 4% in 2022 following a 5% decline in 2021.
The weak demand reflects big cutbacks in production driven by higher ethylene vinyl acetate (EVA) margins.
The lack of LDPE availability has combined with a flood of LLDPE, which competes in many of the same end-use applications. This has continued the LDPE demand destruction we saw in 2021. LDPE remains too expensive compared with LLDPE.
China’s LDPE spreads don’t therefore tell us how weak demand is.
Not so with HDPE and LDPE. The Average HDPE spread from January until 5 August 2022 were just $201/tonne compared with $405/tonne last year. The average LLDPE spread qas $252/tonne compared with $474/tonne in 2021.
This year’s spreads are the lowest on an annual basis since the ICIS price assessments began in January 2000.
Now let’s take a look at the final chart for today.
The continued narrow gap between the grey, red and blue lines tells you all you need to know. Up until the week ended 5 August 2022, the markets for these two polymers were still facing severe difficulties.
Why this type of data-crunching may become redundant
I have lived and breathed this kind of data analysis for many years as have, of course, most of the rest of us. This is how we get to understand the markets.
I don’t see this continuing for much longer. We are moving into a very different chemicals world, one driven by austerity, geopolitical chaos, record-high levels of inflation, challenging demographics and a very different China.
Just as China is moving away from growth for growth’s sake, so will the rest of the global economy. The chemicals industry will need to adjust.
Success will no longer be measured by each extra tonne sold at the right price and to the right location, which has been the rationale for traditional types of market analysis.
Watch this space for more on what this means for your business.