See below my latest post on high-density polyethylene (HDPE) film grade price differentials between China and selected other countries and regions (here is the previous one). From now on, I will run these posts every month rather than every week. Monitoring these differentials has become much more important since January 2021, when pricing patterns became very regional. Later this week, I will publish my latest post on polypropylene (PP) injection grade differentials between China and the same selection of other countries and regions.
By John Richardson
GLOBAL POLYOLEFINS markets remain in a historic state of de-globalisation, if this phrase makes sense. Since January 2021, China prices across all the grades have fallen to historically large discounts over pricing in many other countries and regions.
Or we can flip this the other way and say that never before has polyolefins in most of the rest of the world been so expensive relative to China.
The above chart, taking just HDPE film grade as an example, tells us that while price premiums in other selected countries and regions over China have fallen this year, they remain very high.
And in September-October this year, the steep April-August 2022 fall in premiums has been partly reversed.
These differentials matter because China’s overall HDPE demand growth is likely to be negative this year and in 2023 as imports continue to decline (watch out for my later post on scenarios for China’s HDPE demand and net imports in 2023).
Producers can compensate for weaker-than-expected China demand and imports, reflected in comparatively weak China pricing, by selling greater volumes elsewhere, while taking advantage of the markets with the highest netbacks.
The chart below shows actual HDPE film grade prices used in the above price differentials chart.
You can see from the trendlines that persistent China market weakness has, since April this year, been reflected in weaker pricing in the other selected countries and regions
But, as I said, premiums recovered in September and October of this year. And in 2020, premiums averaged just $36/tonne compared with $248/tonne in January 2021-October 2022.
The worst crisis since at least the 1970s
Ex-China markets obviously have their own demand and supply dynamics. But we must not underestimate the impact that the new China is having on the broader global economy and therefore these other HDPE markets.
A good example of this impact is this 27 October Financial Times article on Germany Mittelstand machinery manufactures. They are seeing their exports to China slow down because of China’s zero-COVID policies and the country’s Common Prosperity economic reforms.
Europe is also wrestling with record-high levels of inflation, driven by Russia’s invasion of Ukraine. Inflation, geopolitical tensions and the new China are dovetailing together to create the biggest global economic crisis since at least the 1970s.
Sticking with Europe as an example, the next chart shows northwest Europe (NWE) FD (Free Delivered) HDPE film-grade price premiums and discounts over CFR China.
This chart illustrates the point that some of the price benchmarks used to compile the first chart in this post go back a lot further than just January 2020.
Tight supply and firm demand in Europe versus a weak China market led to the NWE price premium for HDPE film grade price premium over China soaring to an all-time peak of $1,907/tonne in April last year.
A major factor behind the strength of overseas markets relative to China has been the high cost of container freight and the shortage of container space. This has left oversupply in north and southeast Asia essentially trapped in the regions.
The risk of China pulling down markets elsewhere
What happens next with container freight rates will be a key factor in determining the extent to which the still-high overseas premiums for the rest of the world versus China are maintained. As the next chart reminds us, freight rates have fallen this year on the weakening global economy.
The declines have occurred across all the routes from Asia to the West.
As the world economy is, as I said, facing its worst economic crisis since at least the 1970s – and with continued China weakness a key part of this crisis – this is a risk you need to consider: China’s polyolefins markets dragging the rest of the world down to the country’s very depressed levels.
Referring to the slide before the last slide, NWE HDPE film grade price premiums averaged $172/tonne in 2000-2021. This jumped to $668/tonne in January 2021-October 2022.
Assuming a return to a price premium over China in the range of $172/tonne over the next 12-18 months, what would the impact be on the European market? This is a downside scenario that I believe is worth modelling.
Earlier, I discussed why HDPE producers needed to keep a razor-like focus on changing regional price differentials. So do the buyers – the converters and brand owners.
As overseas prices across all the PE and PP grades fall closer to depressed China levels, the buyers have an opportunity to save millions of dollars on procurement costs by using ICIS data and analysis.
Please consider the above chart. Both producers and buyers can benefit from following all the global ICIS price benchmarks – along with our other data services – to monitor the mini dips and rallies in markets as we head towards the bottom of this downcycle.
You can even come out ahead in this downcycle if you correctly anticipate enough of the mini dips and peaks.