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China could become the world’s third-biggest PP net exporter in 2022-2040

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By John Richardson on 12-Oct-2022

By John Richardson

THIS IS A staggering slide. It is even more dramatic than the similar one I showed for high-density polyethylene (HDPE) in my 7 October post. China’s cumulative net imports of polypropylene (PP) might be as big as 91m tonnes in 2022-2040 – the ICIS base case. Or China’s total net exports during the same period may reach 90m tonnes.

Now let us unpick all three scenarios for China’s PP trade in 2022-2040:

  • Under Scenario 1 (net imports of 91m tonnes), our assumption is for annual average demand growth of 3% during this 19-year period. This would compare with actual average growth of 10% in 2000-2021. The sharp slowdown is because we are not expecting any repeat of previous bubble years such as 2009 when annual growth soared to 25%. The bubble years skewed the long-term average. This makes sense given the Common Prosperity policy shift, connected to which is the end of the real-estate bubble (the real estate bulb largely explains why PP demand grew by 25% in 2009 and then by 15% in 2020). We also assume that the annual average operating rate during the forecast period will be 82% compared with the actual rate of 90% in 2000-2021.
  • Scenario 2 (net imports of 50m tonnes) leaves demand growth unchanged from our base case. But I’ve raised capacity utilisation to 90%, in line with the 2000-2021 history. This reflects my view that China will continue to prioritise maximising PP and other chemicals production in order to reduce dependence on imports for geopolitical reasons – and to add value to China’s economy.
  • And there is the worst-case outcome for global exporters – Scenario 3, where China becomes a 90m tonne net exporter. This is based on demand growth falling to 2% and an operating rate at 84%, only modestly higher than our base case. Even if Common Prosperity is a success, PP demand growth may still surprise on the downside because of a major sustainability push. Improved sustainability is a cornerstone of Common Prosperity. China could build a world-beating PP recycling industry as consumption is eaten-away by re-use and redesign.

Note that net imports for the other countries and regions are unchanged in each of the three China scenarios. But if Scenario 3 occurred because of a long-term slowdown in China’s economy (annual growth at just 2%) there would be a big negative effect on other economies, reducing their demand and so need for imports. This impact is devilishly hard to model, so I didn’t even bother.

The need for both tactics and strategy

The above slide shows the extent to which the big global PP exporters – in Saudi Arabia, Abu Dhabi, South Korea, Singapore and Thailand – were dependent on China in 2000-2021.

The huge scale of China’s net imports has generated strong economies of scale through big average cargo sizes and through only needing to deal with one set of customs regulations. Contrast this with just the 14m tonnes of Africa net imports in2000-2021, across 54 countries and customs regions with much-smaller average cargo sizes.

Let’s think again about the first slide in this post. Under Scenario1, the 2022-2040 net import market would total 268m tonnes with Scenario 2 involving volumes shrinking to 227m tonnes. Scenario 3 would see the market at 177m tonnes.

Now consider this slide. Assuming Scenario 3 happens, China would be the third-biggest net exporter among the world’s biggest net exporters.

As the Chinese military strategist, Sun Tzu, wrote: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat”.

As detailed in the 7 October HDPE post, the major global PP exporters need to win in Europe, Africa, Turkey and the other big non-China net import markets as the size of the China pie diminishes. As the slide above shows, China could be among the big exporters.

This struggle needs to involve close attention to netbacks and supply and demand in, for example, all the countries in Africa and South & Central America. This is the only sensible tactical approach.

Meanwhile, in my view the only right strategy is to prepare for a global PP future defined by sustainability as “less is more” and “build to last” is accelerated by the New China, austerity and the global inflation crisis.

The PP world will never be the same again.