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China’s HDPE prices recover but spreads tell the real story as prospects dim for next year

Business, China, Middle East, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand
By John Richardson on 30-Sep-2022

By John Richardson

THE LONG-TERM context is everything when chemicals and polymer prices increase in any given week, as the immediate theories attached behind price rises do not usually tell us a great deal.

So was the case last week in China when polyethylene (PE) import prices in general, including high-density PE (HDPE) injection grade, increased. In the case of HDPE injection grade, prices rose by $10/tonne.

Theories given for price rises across a broad range of PE grades were that China’s markets had finally bottomed out and/or stocking-up was taking place ahead of the Golden Week holidays, which take place between 1 and 7 October.

But as the chart above tells us, which features HDPE injection grade, the 1 January-23 September 2022 spread between China prices and CFR Japan naphtha costs was just $206/tonne, the lowest annual spread since our assessments began way back in 1990.

The $206/tonne is a minor improvement on the January-August 2022 spread of $200/tonne. But the previous lowest annual spread was $288/tonne in 2002. The average annual spread in 1990-2021 was $496/tonne.

Patterns are similar in other grades of HDPE and the grades of linear-low density (LLDPE). Spreads have never been this low in China before. Low-density PE (LDPE) spreads, after being kept comparatively high by tight supply, are also now heading down. Our northeast Asia PE margin assessments are at record lows.

But the latest data on China HDPE demand for all the grades suggests a slight improvement. Annualised January-July China Customs net imports and ICIS production estimates suggested 2022 demand would decline by 4%. But the January-August data indicated only a 3% decline (Scenario 2 in the chart below). As usual, I’ve provided two other scenarios.

The further moderate good news is that the January-August data indicated this year’s net imports would fall to around 5.6m tonnes (Scenario 2 in the chart below). The January-July numbers pointed to a decline to 5.5m tonnes. The chart below again provides two other scenarios for net imports in 2022, along with the context of what happened last year.

Note that the 77% operating rate in Scenarios 1 and 2 for 2022 is what was suggested by our estimate of January-August production (this would be the lowest annual operating rate since 2000, reflecting the weak state of the market). The 82% rate in Scenario 3 is the forecast in the ICIS Supply & Demand Database.

Let’s parse the data a little further. In every year since 2010, China HDPE imports have increased in August over July. In 2022, August imports totalled 552,864 tonnes versus 447,370 tonnes in July. Exports in August also fell to 21,101 tonnes from 36,646 tonnes in July.

The August pick-up in imports seems likely to be connected to stronger seasonal demand, including stocking up ahead of the Golden Week holidays. The fall in exports is probably connected to the narrowing of arbitrage as overseas prices fall closer to those in China.

If you add higher imports to lower exports in August versus July, this explains the improvement in the full-year 2022 outlooks detailed in the above charts.

Imports, which, are far more important than exports, have declined in most September-December periods since 2010 compared with the prior four months.

In other words, we can conclude that there has been no real improvement in demand, especially when we also include the context of the still record-low HDPE injection grade spread in 2022 over naphtha feedstock costs.

Next year is also not looking good. Sorry to say, but I cannot see any reasons why China’s chemicals markets in general will pick up in 2023. As always, I hope I am wrong.