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China LLDPE: New demand and net import outlook for 2023

China, Company Strategy, India, Indonesia, Middle East, Olefins, Polyolefins, Singapore, South Korea, Thailand, US
By John Richardson on 13-Dec-2022

GETTING ACCURATE economic and other data out of China has always been a problem with the problem seemingly getting worse in recent years.

What should we therefore do to understand what’s happening with chemicals and polymers demand in the world’s most important market?

The analysis that has stood the test of time in telling us what’s really happening in any market is spreads – the differentials between costs for tonnes of raw materials and prices of tonnes of chemicals and polymers.

Spreads are obviously not margins. But the ICIS spreads data go much further back than our margin numbers, which only begin in January 2014.

Spreads provide a long-term historical perspective on “producer selling power” – the ability of chemicals producers to pass-on their costs to customers.

As chemicals are the building blocks for all the manufacturing chains, the weaker the spreads the weaker are broader economies.

So far this year, CFR China linear-low density polyethylene (LLDPE) film grade price spreads have been the weakest on an annual basis over CFR Japan naphtha costs since we began our price assessments in 1993. It is the same in all the other grades of polyolefins.

This is not to do with high oil prices as the chart below confirms. During previous big run-ups in oil prices, LLDPE producers have been much better able to pass on their costs to converters. We can see this from the gaps between the orange and blue lines.

Here are our northeast Asian (NEA) LLDPE margins on an annual basis since 2014.

If you delve into the data behind this chart, you will find a synchronised downturn. Not only are LLDPE markets at an all-time low in 2022, but so are the markets for the coproducts from LLDPE production such as propylene, benzene, toluene, xylenes and C4 olefins.

The above chart represents a typical or average LLDPE complex in NEA. Some LLDPE plants will of course be to the left of this position on the cost curve, making rather than losing money – or at least losing less money than the $93/tonne you can see above. Other plants, to the right of the cost curve will be losing even more than $93/tonne.

We can to some extent attribute the weak LLDPE spreads and margins to global overbuilding. But the capacity overhang would be far less painful if demand hadn’t collapsed in China.

Here are some numbers to support the above argument:

  • Between 2000 and 2022, global annual LLDPE capacity surplus to demand averaged 6m tonnes. But in 2022, the ICIS Supply & Demand Database estimates that this has increased to 9m tonnes. This is largely because China, which accounts for 35% of global LLDPE consumption, will see 2022 growth at some minus 2%. At the beginning of this year, the expectation was that China’s demand would grow by 6%.

I believe we can thus conclude that until spreads and margins have recovered to their long-term historic averages, China’s economy will remain weaker than before the zero-COVID measures were introduced in March this year.

China’s LLDPE market in 2023

“Experts have warned Beijing to speed up the approval process for updated vaccines to combat new coronavirus variants as the disease sweeps across China after authorities eased heavy-handed pandemic controls,” wrote the Financial Times (FT) in a 12 December article.

Further evidence that China’s progression out of zero-COVID will not be easy came from a 6 December FT article, when the newspaper wrote that one-third of the 267m Chinese citizens 60 and over had not received a third vaccine dose needed for high levels of protection against Omicron.

Among those aged 80 and over, the under-protected rate surges to about 60 per cent, or 21m people, said the FT.

A study in the Lancet medical magazine concluded that people who had received three doses of China’s vaccines were nearly twice as likely to develop severe COVID as people who received three mRNA jabs. Those with the Chinese shots were also 50%t more likely to be hospitalised.

China has declined to import foreign-made mRNA vaccines.

“Training new ICU [intensive care unit] medics takes years. Only a small minority of Chinese doctors have seven-year medical degrees. Indeed, 42% of doctors do not have a university degree of any sort,” wrote the Economist in a 1 December briefing.

The magazine said that China had 4.3 ICU beds per 100,000 people. In comparison, this 1 September 2022 World Population Review study found that the US had 34.7 ICU beds per 100,000 people.

This leads me to agree with Capital Economics which predicts that China will see no economic benefits from the end of zero-COVID until 2024. So, don’t expect a big rebound in LLDPE spreads and margins in 2023.

Here are my revised scenarios for China’s LLDPE demand in 2023 following my earlier outlook that didn’t factor in the relaxation of the zero-COVID policies because at that time they were of course still in place.

I include a scenario where I am wrong (I of course hope I am wrong). In this outcome for 2023, growth rebounds to a positive 3% from minus 2% in 2022 as China successfully exits zero-COVID and the global economy improves. This Scenario 1 for 2023 would leave consumption at 15.3m tonnes.

Scenario 2 involves no successful transition from zero-COVID but better global economic conditions that would support Chinese exports that are worth around 20% of GDP. Demand growth would be minus 4%, leaving consumption at 14.3m tonnes.

Scenario 3, the worst of possible worlds, sees the effects of zero-COVID lingering and a worse global economy. Demand would fall by 6% to 14m tonnes.

Use these demand scenarios to build three different 2023 outcomes for spreads and margins. This could then be the basis for assessing your profitability under best, worse- and medium-case outcomes for next year.

Also see below my three scenarios for China’s LLDPE net imports in 2023.

Under Scenario 1, I assume 3% demand growth and operating rates at 85% – a repeat of this year. This would leave 2023 net imports at 4.7m tonnes, marginally down from this year’s 4.8m tonnes.

But assuming demand contracts by 4% and local plants run at 83% (Scenario 2), net imports would fall to just 3.9m tonnes. This lower operating rate is what ICIS predicts.

Scenario 3 involves plants running at 85% despite a 6% contraction in demand. This would be based on the drive to raise self-sufficiency and boost LLDPE experts, perhaps supported by continued yuan weakness against the US dollar. Net imports would fall to just 3.4m tonnes.

Constantly updated versions of these estimates are essential for the big LLDPE exporters in the Middle East, the US, South Korea, Singapore and Thailand because of this statistic: In 2021, China’s net imports accounted for 55% of total global net imports among the countries and regions that imported more than they exported.

The weaker China’s net imports are in 2023, the greater the competition in the world’s other big net import markets.

Conclusion: Making and saving money in the downturn

Here is an important reminder of how downturns work.

There will continue to be lots of price and demand volatility between different regions, and to a lesser extent between different grades of polyolefins, as this downcycle plays out.

You can make and save a lot of money by selling to the right markets at the right time and in the right volumes. This is where ICIS can help you with constantly updated analysis and data on all the global markets.

Contact me at john.richardson@icis.com and I will demonstrate how you can get a very strong return on investment in our expertise.