By John Richardson
MANY YEARS AGO, I was advised by a mentor to pick some chemicals or polymers to specialise in as this is such a big and complex industry. “Why not polyethylene (PE) and polypropylene (PP) as these are big sub-sets of our business?”, he suggested. That’s what I did. Thank you, you know who you are.
But, as today’s post will demonstrate, if you have full access to the ICIS pricing, margins, trade and supply and demand data, you don’t need specialist knowledge in any chemicals or group of chemicals to work out what is going on in China today. The data tell us that what applies to PE and PP just as much applies to styrene, for example.
Let me start, though, with the slide below which summarises what, in my view, are the macroeconomic realities that apply across the board – to every chemical and to every manufacturing and service sector.
Also see the three key issues below, with hyperlinks to background reading:
- China’s shift away from “growth for growth’s sake”. As it attempts to build a new economic growth model (we don’t know if this will work), lots of collateral damage should be expected, most notably the real-estate market, which, as the ICIS data show, has been a major driver of China’s extraordinarily strong chemicals demand growth since the property bubble began to inflate in 2009. In August this year, house prices in nearly 70 Chinese cities declined, according to Reuters.
- In the short- to medium-term, China’s zero-COVID policies will add further downward momentum to the economy. China cannot afford to scrap the policies because of the limited effectiveness of its vaccines.
- Rising chemicals self-sufficiency, the roots of which we can trace back to 2014 when the Chinese government decided to much more heavily in domestic capacity. When Beijing says it is going to do something, it usually does it.
Global styrene’s heavy dependence on Chinese demand
As in PE and PP, China completely dominates global styrene demand. China’s share of global demand grew from 10% in 36% in 2021. In second place in 2021 was Northeast Asia ex-China (Japan, South Korea and Taiwan) at 20% because of its large styrene derivatives capacities. But, as I shall detail in a later post, Northeast Asia ex-China’s position is under threat from derivatives capacity growth in China.
The next slide also looks similar to the ones I’ve been presenting on PE and PP since March this year.
Granted, the fall in CFR (Cost & Freight) China styrene price spreads over CFR Japan costs is not as pronounced in 2022 as in PE and PP. In CFR China high-density PE (HDPE) injection grade, price spreads in 2022 are the lowest since 1990.
The chart below, showing our weekly styrene margins, is however very grim. Northeast Asia (NEA) styrene margins have been negative for most of the weeks since the week ending 17 September 2022.
The above margin assessment is integrated as it includes the values of co-products from cracking naphtha in a steam cracker, with the assumption that the naphtha is purchased at market prices. Ethylene and benzene are the raw materials needed to produce styrene. Co-products for a styrene producer who cracks naphtha include propylene, C4 olefins, hydrogen and methane etc.
The chart below is even more worrying. From 1 January until 2 September 2022, NEA styrene margins averaged minus $40/tonne. The second weakest year since we began our assessments in 2014 was last year, when margins were a positive $100/tonne.
Weak margins are obviously the result of the macroeconomic fundamentals I outlined at the beginning, as is case with the chart below.
ICIS monthly assessments of Chinese styrene production in 2022 were unavailable as I wrote this post. So, I took our annual estimate of 2022 styrene production – from the ICIS Supply & Demand Database – and added this to the annualised China Customs net import number for January-July 2022 (divided by seven and multiplied by 12), to get to my estimate that China’s styrene consumption could fall by 1% in 2022.
Because I didn’t have any monthly production numbers, it might be that I’ve underestimated production in 2022. Demand in 2022 could be, as a result, stronger than I suggest. I feel this is unlikely, though, given the macroeconomic fundamentals.
A 1% fall in growth in 2022 would be the first annual decline in consumption since 1990.
China’s total dominance of global styrene import markets
The above sub-heading will again be familiar to those in the PE and PP industries except that in styrene, global dependence on Chinese imports is even greater. No less than 76% of cumulative global styrene net imports in 2000-2021 (this is just among the countries and regions that imported more than they exported) were driven by China.
Now for today’s killer statistics and chart. The January-July China Customs net import number, when again annualised, suggests that China’s styrene net imports in 2022 could be around 290,000 tonnes, down from 1.5m tonnes in 2021 and 2.8m tonnes in 2020.
The big decline in January-July net imports was partly down to a surge in exports. Exports in January-July 2022 were 472,835 tonnes compared with 227,137 tonnes in January-July 2021. South Korea is China’s biggest export destination so far in 2022 followed by the Netherlands, India and Turkey.
Some of these exports might have been re-exports of styrene that arrived in China but could not find a buyer because of the weak economy.
What seems clear is that a further big rise in Chinese capacity in 2022 is a factor behind the rise in exports and the fall in imports. This year’s capacity is due to increase by a further 23% following big increases in from 2013 until 2021.
Managing a business model in decline
I could go further by providing you with slides which show China’s biggest styrene import partners in 2020 and 2021 compared with January-July 2022, but I won’t.
By making further use of the excellent ICIS Supply & Demand Database, I have contrasted the competitive positions of Saudi Arabia and South Korea (two major styrene exporters) as China moves to what will surely soon be a net styrene export position. But I’ve again left the Saudi Arabia and South Korea slides out of this post.
If you are an ICIS subscriber, contact me at firstname.lastname@example.org and we can discuss further.
What is also missing from this post is comparative historic pricing – allowing netback analysis – for styrene in China versus the rest of the world.
We are living in an incredibly difficult economic environment, the worst I have seen in 25 years of analysing the chemicals industry. This crisis requires an integrated use of all our data sets from historic to forecast pricing to spread analysis, margins and supply and demand.
We need to manage the decline in a chemicals industry business model based on selling ever-greater volumes, as we build an entirely new business model. The new model must be based on selling services.
In managing decline, every tonne you don’t sell because you’ve rightly assessed there is no demand or margin – and every extra tonne you do sell because there is a viable market – will be so, so important. This is where we can help you.