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China’s PP exports decline, but this is only a temporary reprieve for the other exporters

China, Economics, European economy, European petrochemicals, India, Middle East, Olefins, Polyolefins, Singapore, South Korea, Thailand
By John Richardson on 04-Nov-2022

By John Richardson

LIFE’S RICH TAPESTRY is all about variety, isn’t it? So, for the sake of embroidering a different pattern on the proverbial tapestry, let me include an optimistic note in this blog post, represented by the slide below.

Before I explain the above table, China’s polypropylene (PP) exports declined month on month from April until September this year. In April, they reached a year-to-date high of 218,366 tonnes and fell to just 48,037 tonnes in September. This will have taken some of the pressure off the world’s big and much more established PP exporters in Saudi Arabia, Abu Dhabi, South Korea, Thailand and Singapore.

The above table shows the effect of this decline on estimated full-year exports to China’s top 10 destinations in 2022.

The first column is the China Customs department export data for January-August, divided by eight and multiplied by 12 for each of these top destinations to get full-year estimates. The second column is full-year estimates, based on the January-September number – divided by nine and multiplied by 12.

The January-September data suggested full-year exports to these top ten destinations 75,543 tonnes fewer than the January-August numbers. And the January-September numbers implied total 2021 China exports to all destinations of 1.47m tonnes compared with January-August that indicated 1.58m tonnes.

China’s total exports in 2021 were 1.39m tonnes in 2021, up from just 424,746 tonnes in 2020.

The decline in Chinese exports from April this year is explained by the chart below – the latest in my series of posts on overseas PP injection grade price premiums over China. There are obviously lots of other grades of PP, but the ICIS Pricing data indicate similar patterns in the other grades.

The October 2022 premium over China edged higher to $148/tonne compared with $147/tonne in September. And as in high-density polyethylene (HDPE) film grade, September and October saw the end of the month-on-month steep declines in PP premiums that occurred between April and August this year.

Month-on-month October price trends were as follows: Turkey prices rose by $11/tonne and northwest Europe (NWE) prices were $3/tonne higher; Vietnam prices fell by $35/tonne, Pakistan prices were $31/tonne lower, southeast Asia (SEA) prices fell by $21/tonne, India prices declined by $20 and China prices were $13/tonne lower.

If we then separate India from the above index, we can see the following pattern.

India’s October premium over China fell very slightly to $134/tonne from $138/tonnne in September. But as with the broad index, Indian premiums in September and October halted a steep decline. In March this year, the premium was $321/tonne – a record-high since our price assessments began. In August, the premium had slipped to $109/tonne.

Let’s repeat the exercise for the Turkey prices that also help make up my broader index.

The Turkey price premium over China collapsed to $121/tonne in August this year from $474/tonne in April 2022. But in September and October respectively, the premiums rose to $133 /tonne and $166/tonne.

The “anti-Micawberism” campaign

But true to character, and as part of my “anti-Micawberism” campaign, the halt in the decline of premiums suggests that Chinese exports could start to climb again.

Export economics may receive further support from a continued decline in container freight rates. I can see no reason why freight rates won’t fall much closer to pre-pandemic levels because of the worsening global economic crisis.

The recent declines in China/East Asia-to-Europe freight rates also applies to the other routes from Asia. As freight rates continue to come down, this will enable the big PP exporters to relieve the oversupply in China by moving more volumes elsewhere.

This slide, from my 31 October post, also needs to be repeated. Even assuming our base case operating rate of just 78% for PP in China next year – which would be the lowest operating rate since 2000 – China becomes a net PP exporter in every realistic demand growth scenario for 2023.

This would be a huge, huge shift in the global PP market, the biggest I would have seen in the 25 years I’ve been analysing the business as China was very recently the world’s biggest PP net importer. In 2021, it accounted for more than 42% of total global net imports among the countries and regions that imported more than they exported.

Returning to the subjects of India and Turkey – along with major import markets – consider the slide below. The slide, from our ICIS Supply & Demand Database, shows 2023 estimates of the biggest PP net import markets (countries and regions where we expect imports to significantly exceed exports).

These will be the battlegrounds where Chinese producers will go toe-to-toe with the much more established PP exporters in the Middle East, SEA and northeast Asia. In my view, the global PP market will not bottom out in 2023. Even in 2024, market conditions may remain weak.

And here’s the thing: While rest-of-the-world PP price premiums over China will fluctuate much more than before the downturn as we go through an extended period of general extreme market volatility, there is the risk that demand destruction and increased competition will drag the premiums much closer to their long-term historic averages.

In the case of average SEA, Vietnam, Turkey, India and Pakistan and NWE premiums over China, they were just $54/tonne in 2020. This rose to $301/tonne in January 2021-October 2022.

The India and Turkey price quotes provide us with a much longer-term perspective of just how unusual the last 22-month period has been as the quotes started earlier.

The India November 2002-December 2020 price premium over China averaged just $36/tonne but rose to $210/tonne in January 2021-October 2022. Turkey’s July 2016-December 2020 premium was $53/tonne. Between January 2021 and October 2022, it was $389/tonne.

PP producers outside China should plan for what their profitability would look like if their local price premiums over China fell to long-term averages. Therein might lie the bottom of the market.