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Success in the new HDPE world: Tactics must be accompanied by a whole new strategy

Business, China, Company Strategy, Economics, Environment, Malaysia, Middle East, Oil & Gas, Olefins, Polyolefins, Singapore, South Korea, Sustainability, Taiwan, Thailand
By John Richardson on 07-Oct-2022

By John Richardson

TACTICALLY, as the first chart below tells us, using just high-density polyethylene (HDPE) as an example (the same applies to other grades of PE and polypropylene), it is obvious what the major exporters in the Middle East and elsewhere must do as China’s self-sufficiency increases.

The exporters need to focus on import opportunities other than China, as China moves inexorably towards much-greater self-sufficiency.

This year is almost done, but the trends we have seen in 2022 will continue next year, without a doubt. China’s HDPE net imports will decline, decline and decline.

The big exporters must therefore, as the next chart tells us, maintain a razor-like focus on netbacks in China versus other markets. This must be accompanied by a deeper understanding of the supply and demand dynamics that will set future netbacks in every country.

These tactical necessities reflect a world that, I believe, will never return to the one below.

China’s net imports of HDPE accounted for a staggering 61% of the global total in 2000-2021 among the countries and regions that imported more than they exported. In distant second place was Africa at 13% followed by Turkey at 8%.

Economies of scale meant that cargo sizes bought by China were big, making logistics costs-per-tonne much lower than in moving smaller shipments to the 54 countries in, say, Africa. Africa etc. also presented much greater distribution challenges, along with all the different customs regimes.

But these difficulties in selling elsewhere were small potatoes because China’s net imports totalled 88m tonnes in 2000-2021 versus just 57m tonnes for the rest of the world put together. There was plenty of money to be made in jusr China for everyone.

Now, though, as Scenario 2 in the chart below suggests, we are entering a very different HDPE world.

The tactics among the HDPE exporters, if this second scenario comes anywhere close to being true, will be to focus much more on understanding netbacks and supply and demand in the non-China markets – while continuing to keep a close eye on China.

There will also be a battle for competitive advantage over who best manages the logistics and customs-regime challenges in regions such as Africa, South & Central America and Asia and Pacific.

Scenario 1, the base case in the excellent ICIS Supply & Demand Database, assumes cumulative China net imports of 118m tonnes in 2022-2040.

This is based on annual average demand growth of just 2% in 2022-2040, down from 10% in 2000-2021. The 2022-2040 local operating rate is assumed at 84% versus the actual 2000-2021 operating rate of 95%.

You might argue that I am too pessimistic in Scenario 2 of assuming demand growth of merely 1% per year in 2022-2040. But:

  • China’s Common Prosperity economic reforms represent the biggest policy reboot since Deng Xiaoping’s Southern Tour in 1992. We don’t know if the latest reforms will work. There can be no going back to the old debt-fuelled growth model, as this old model no longer works.
  • If Common Prosperity does work, HDPE demand growth could still fall to 1% a year, even in a thriving economy, because a cornerstone of the new direction is “less is more” – reducing the commodity intensity of the economy in order to better protect the environment. Virgin HDPE demand growth may be less than is commonly expected because of a major recycling push. “Reduce and re-use” may eat into consumption.

Operating rates may be higher than the 84% we assume for 2022-2040. As you can see, Scenario 2 modestly increases the 2022-2040 operating to 87% compared with actual 2000-2021 capacity utilisation of 95%.

I see local production being higher than we assume in the forecast period because:

  • China wants to reduce its reliance on raw material imports in general for economic and geopolitical reasons. This is a long-standing strategy, and I don’t envisage a change in direction. Local capacity additions may also be bigger than assumed in both Scenarios 1 and 2 (I used our base-case capacity additions for both scenarios), especially recycling capacities – for the same economic and geopolitical reasons.

Scenario 2 would see China’s cumulative 2022-2040 net imports at 49m tonne. Total global net imports would be 199m tonnes under this second scenario versus 268m tonnes under Scenario 1.

Focusing just on Saudi Arabia in the Middle East, the chart below is very instructive. It shows how Saudi Arabia’s dependency on China as a destination for HDPE exports increased between 2014 and 2021.

“Tactics without strategy is the noise before defeat”

The above sub-heading is the second half of a very famous quote, made some 2,500 years ago by the Chinese military strategist, Sun Tzu. The full quote is as follows: “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat”.

The Middle East and other major HDPE exporters need, as I said, to focus on the tactics of managing ever-shrinking Chinese HDPE import demand. They need to win in ex-China markets that are going to become much more competitive.

And if companies are to avoid Sun’s “noise before defeat”, strategies must reflect the growing global sustainability pressures (see the slide below).

China's net HDPE imports in 2021-2040 could be either 118m tonne of just 49m  tonnes. Anything close to this second scenario would require very different tactics and strategies.

Focusing on the Middle East again, the region has – along with plenty of oil and gas – another abundant source of energy: the Sun.

As my ICIS colleague, Nigel Davis, wrote in this 2 September ICIS Insight article: “The global drive towards net zero will fundamentally change the face of the chemical industry.

“Commitments to shareholders, customers and employees to reduce greenhouse gas emissions have created a wave of new thinking and technological change.

 “They will continue to do so. Chemical companies know that as the cost of carbon grows, and upstream suppliers and downstream customers start to do things differently, the operating environment shifts.”

The CEOs of BASF, SABIC and Linde recently announced that they had started construction of the world’s first demonstration plant for large-scale electrically heated steam cracker furnaces.

Using renewable electricity-based technology can potentially reduce steam cracker CO2 emissions by at least 90% compared to technologies commonly used today, according to the three companies.

Nigel added in the same article: “In Saudi Arabia, a collaborative approach to climate action is underpinning commitment to the fact that no new projects for SABIC will be approved without compliance to carbon neutrality, according to Al-Benyan” [the CEO of SABIC).

I believe, as we move into the next upswing after a very long and painful downturn, what’s required to win in this business will be very different from in the past. Will the Middle East win? Let’s wait and see.