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A flood of PP no matter how what the 2023-2025 demand growth

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By John Richardson on 08-Feb-2023

By John Richardson

THE GLOBAL ECONOMY appears to be getting better because of signs that inflation may have peaked in the West as some of the supply-chain pressures caused by the pandemic continue to ease.

Energy costs are also substantially down following their peak immediately after the Russian invasion of Ukraine.

Signs of an improved outlook are already translating into chemicals production, as my ICIS colleague, Nigel Davis, details in this 7 February ICIS Insight article.

“ICIS Senior Economist, Kevin Swift, says that in December global production of basic chemicals and synthetic materials (resins, elastomers and fibres) was up 1.1% month on month. This follows largely declining activity since March and falls of 1.5% in November and 0.3% in October,” wrote Nigel.

“Swift notes that while prospects for a recession in Europe may be receding, because of the warm winter and adequate energy supplies, the risks remain. The consensus among economists is for a mild recession in the US, Swift adds, while he expects China’s economy to improve with the lifting of COVID restrictions although property sector problems continue,” the article continued.

“The current ICIS forecast is for GDP growth of 1.7% in 2023 following a gain of 2.8% in 2022 and 5.8% in 2021. Real GDP growth in 2024 could be 2.8%,” added Nigel.

But as today’s charts illustrate, so much new capacity has been and will continue to be added in polypropylene (PP) that even significantly stronger-than-expected PP consumption growth wouldn’t make a major difference.

The same applies to polyethylene (PE), which I shall detail in a later post.

Let’s start with the ICIS base case of the global PP business in 2023-2025.

Assuming an annual average demand growth rate of 3.6% between 2023 and 2025, which includes a very strong bounce back in Chinese growth, this is how we see the industry playing out:

  • Capacity exceeding demand is forecast to be at 21m tonnes in 2023 and at a 2023-2025 average of 21m tonnes/year.
  • This year’s operating rate would be at 79% and a 2023-2025 average of 80%.
  • Capacity exceeding demand averaged 8m tonnes/year in 2000-2022 with the operating rate at 87%.

As usual, just for demonstration purposes only as this does not represent the proper scenario work that ICIS can conduct for you, see the chart below where I have raised the average annual demand growth rate to 4.4% in 2023-2025.

Let me provide some explanation first before displaying the chart.

This scenario involved raising our base-case growth in all the regions, aside from the Former USSR and China, by a percentage point per year.

I defined the regions as follows: the US and Canada, South & Central America including Mexico, Europe, the Middle East including Turkey, Africa, northeast Asia ex-China (Japan, South Korea and Taiwan), China, developing Asia and Pacific and Australia, New Zealand and Singapore.

I kept the Former USSR growth rates unchanged for obvious reasons. In the case of China, I left our base case demand growth rates unchanged because, as I said, they already factor in a strong bounce back.

China’s PP demand growth was only 1% last year versus earlier expectations of 6%. We are forecasting 7% growth in 2023, 8% in 2024 and 5% in 2025.

Now here is the chart.

The end-results would be as follows:

  • Capacity above demand would be 20m tonnes in 2023 and a 2023-2025 annual average of 20m tonnes.
  • The 2023 operating rate would remain at 79%, but the 2023-2025 average would rise to 81%.

In other words, even with global demand growth nearly a percentage point higher than our base case, the PP industry would still face record levels of oversupply.

As I highlighted in my 3 February post: “When it comes to new capacity due online in 2023-2025, steel in the ground is steel in the ground. Plants might be delayed for a few months, but because many will be at or near completion, commissioning must happen. “

China is the big, big grey area

You can of course argue that the Chinese PP demand might grow by more than 7% this year. Indeed, it might.

The table below reminds us why higher Chinese growth would significantly eat into oversupply.

But as ICIS economist Kevin Swift is quoted as saying above, problems with the Chinese property sector will continue.

ICIS data show that the double-digit rates of Chinese PP and PE demand growth that were often seen between 2009 and 2021 were down to the real-estate bubble.

 For reasons I have discussed in detail before, I believe the property bubble is over – for good.

The other big issue, which will only become clear in a few months’ time, is the strength of consumer and investor sentiment.

I believe that there is a significant chance that sentiment, and therefore spending, will not recover as strongly as some people assume.

This is because of the permanent end of the property bubble and reduced confidence in government policies following the abrupt end to zero-COVID.

Ok, then, what if am wrong? Here’s the third demand chart for today.

I have raised China’s 2023 demand growth to an eye-wateringly high 14% and have kept our base case growth of 8% in 2024 and 5% in 2025 intact. I have also repeated the elevated growth rates for other regions used for Upside One.

The end-results would be:

  • Global capacity in excess of demand at 18m tonnes this year and at a 2023-2025 annual average of 17m tonnes. As a reminder, this would compare with the 8m tonne/year average in 2000-2022,
  • Under this second upside, the operating rate would be at 82% this year and a 2023-2025 average of 83%. This would compare with the 2000-2022 average of 87%.

It doesn’t take a rocket scientist to conclude the following: Our industry has built way too much PP capacity, regardless of the likely strength of the economic recovery.