By John Richardson
WE’VE LIKELY NEVER been in a situation like this before as the chart below reminds us. Chemical and polymer spreads over feedstock costs don’t lie. They remain one of the single best measures of the strength of demand in any economy.
The monthly China polypropylene (PP) price spreads over CFR (cost & freight) Japan naphtha costs fell to just $217/tonne in March this year compared with the previous low of $346/tonne since we began our price assessments, which was in December 2019.
There’s been a modest rebound in spreads since March. Up until 19 August, the spread averaged $250/tonne. However, this was still $104/tonne lower than the earlier all-time low spread of $346/tonne.
Let’s next consider the chart below, illustrating annual average China PP price spreads over CFR Japan naphtha costs.
The average spread in 2022, again up until 19 August, was just $262/tonne. This compares with the previous annual record low of $430/tonne in 2003.
What applies to PP applies to many of the other chemicals and polymers prices tracked by ICIS in the key China market. Spreads over naphtha feedstock in 2022 have never been as low since our assessments began.
Variable cost margins have also reached record lows
Spreads are not margins, of course, as they don’t include the costs of utilities, and one tonne of naphtha doesn’t make one tonne of PP.
Instead, it takes about 3.3 tonnes of naphtha to make around half a tonne of propylene, with about one tonne of propylene needed to make a tonne of homopolymer PP. With copolymers, you must include additional ethylene feedstocks.
Also missing from spreads are the co-product credits gained every time you make a tonne of PP (C4 olefins and aromatics etc).
But what’s happening in spreads is also happening in margins. See below the weekly ICIS variable cost margin assessments for northeast Asia PP, which began in January 2014.
Propane dehydrogenation-based and naphtha-based producers have been unprofitable for most of this year with variable cost margins in negative territory. Liquefied petroleum gas (LPG)-based margins, where LPG is used as steam cracker, have remained positive but have still been at record lows in 2022.
The next chart puts the margin performance into an annual context, considering average annual margins across the three feedstocks.
The average margin from 1 January until 19 August 2022 was minus $7/tonne compared with the next lowest year – $209/tonne in 2021.
This year’s averages break down as follows: $2.2/tonne for PDH-based PP, minus $78/tonne for naphtha-based PP and $54/tonne for LPG-based PP.
Now let us look at what the latest ICIS data tell us about PP demand in China in 2022 versus last year. This chart is unchanged from what the January-June data indicated.
The best-case scenario for this year would require a very strong demand recovery in August-December, which would be reflected in a strong rebound in spreads and margins as they returned much closer to their historic averages.
This best-case outcome would see demand grow by 2% over last year to around 35m tonnes. However, if you annualise the January-July data (net imports and local production for these months, divided by seven and multiplied by 12), this points to a 1% decline in full-year 2022 demand.
Scenario 3 involves demand falling by 4% in 2022 over last year to around 33m tonnes. Most PP producers had expected demand to grow by around 5% in 2022.
A very effective pair of noise-reduction headphones: the ICIS data
There is so much noise out there, it is easy to become distracted. Take, for instance, the news that China is to pump a further $44bn of new stimulus into its economy, which, depending on the way you look at it, is either an awful lot of extra money or a waste of effort if consumer sentiment remains as weak as it is today.
For me, consumer sentiment is the thing. Faced the with the zero-COVID policy logjam and a property bubble that cannot be reflated, I don’t see how China can achieve a strong recovery during the remainder of the year – especially when you also include the negative impact of the droughts in some provinces.
But you don’t have to listen to me, just follow the ICIS data. The data clearly tell us, not just in PP but in many products as well, that a full recovery remains a long way off.