Home Blogs Asian Chemical Connections China PE and PP downcycle a long, long way from being over

China PE and PP downcycle a long, long way from being over

China, Company Strategy, Polyolefins, Singapore, South Korea, Taiwan, Thailand
By John Richardson on 23-Mar-2023

By John Richardson

THE MUCH talked-about strong recovery in China’s polyethylene (PE) and polypropylene (PP) markets after this year’s Lunar New Year holidays (LNY) in January hasn’t happened.

As I’ve been warning since last December, while a moderate recovery was always on the cards, two factors discounted a strong rebound.

Last December was when the theory of a strong post-LNY recovery started gaining traction among traders, producers and buyers. This immediately followed the end of the zero-COVID policies.

Firstly, there is the huge scale of oversupply in global PE and PP, much of which is in China and Southeast Asia (SEA).

Let me deal with the concentration of oversupply in China and SEA later. For now, look at the chart I’ve shown before on the oversupply in global PE.

The chart tells us that global PE capacity exceeding demand is forecast to average 24m tonnes/year in 2022-2025, reaching 26m tonnes this year. This would compare with the 10m tonnes/year average between 2000 and 2021.

And as you can see from the operating rate trend-line, operating rates hit their lowest level since 2000 in 2022 and are forecast to stay very low until 2025.

Let’s next consider the global situation for PP.

Capacity exceeding demand is expected to be at 21m tonnes in 2023 and at a 2023-2025 average of 21m tonnes/year. Capacity exceeding demand averaged 8m tonnes/year in 2000-2022.

Operating rates are forecast to hit their lowest level since 2000 in 2023 with an anaemic recovery thereafter.

Even without being aware of the long-term slowdown in the growth of China’s economy (and many buyers are surely aware of this), resin purchasers will have seen similar charts such as this, making them aware that they are in an advantageous position.

Details of some of the Asia PE and PP start-ups

More on the demand context later. Let me next look at the specifics of PE and PP capacity coming onstream this year in China and SEA, with the help of this excellent ICIS Insight article from my colleague, Izham Ahmad – ably supported by inputs from Joanne Wang, Lucy Shuai and Jackie Wong.

“According to the ICIS Supply and Demand Database, about 1.5m tonnes/year of new PE capacities in China started up in February 2023. The data also showed about 700,000 tonnes/year of additional supply could be expected to come on stream by the end of Q1, which may further dampen the domestic market sentiment for Q2,” wrote Izham in the article.

New plant start-ups in SEA include Malaysia’s Pengerang Refining and Petrochemical (PRefChem). Production of linear low-density PE (LLDPE) has resumed at the plant with on-spec production of high- density PE (HDPE) expected March, according to market sources.

The plant has the capacity to produce 350,000 tonnes/year of LLDPE and 400,000 tonnes/year of HDPE.

Also seen over the last few weeks has been the start-up of the Long Son Petrochemical complex, Vietnam’s first integrated petrochemical complex.

The project has the capacity to produce 450,000 tonnes/year of HDPE, 500,000 tonnes/year of LLDPE, and 400,000 tonnes/year of PP, according to Thailand’s Siam Cement Group, the owner the complex.

Long Son started trial runs of its LLDPE and PP production units around January and was due to start commercial operations in the second quarter.

“But market sources said on-spec LLDPE has already been available in the local Vietnamese market since late-February,” Izham added.

“Asia PE capacity is expected to reach nearly 62m tonnes in 2023, up 8.3% year on year, according to ICIS analysts Amy Yu and Shariene Goh,” he said.

In PP, the PRefChem complex has a capacity of 900,000 tonnes/year, again according to the ICIS Supply & Demand Database.

In 2022, Malaysia was a net exporter of around 100,000 tonnes. But ICIS forecasts that this will increase to around 500,000 tonnes in 2023.

Long Son has a PP capacity of 400,00 tonnes/year. In 2022, Vietnam’s PP net imports were around 800,000 tonnes. They are forecast to decline to some 460,000 tonnes in 2023.

And then there is, of course, China where PP capacity is forecast by our database to increase by a further 13% in 2023.

The next chart will clearly be wrong because it is anyone’s guess at what operating rate China’s PP plants will run in 2023 – and how much of the 13% scheduled new capacity comes on-stream.

What’s holding back analysis of both the China PP and PE markets in 2023 is the absence of trade data. Some data on imports and exports were released this week for January-February, but numbers were missing for some months.

China’s PP demand growth is equally up in the air. Hence, I’ve given four scenarios for growth this year rather than my usual three.

But I do think that demand growth is unlikely to be more than 3%, for reasons I shall describe shortly.

The essential point of the above chart is that this is the direction of travel even it proves to be wrong.

China now has so much capacity that only slight variations in operating rates will, I believe, eventually swing China into a net PP export position.

Note, though, that China will still need to import PP copolymer grades. 

Why this matters so much as that, as in PE where the situation is nowhere near so dire, China used to completely dominate global PP net import markets as recently as 2021. In that year, 42% of global PP net imports went to China.

The painful demand realities

Some 60% of China’s PE demand goes into packaging, Therefore, as economic activity continues to pick-up, PE demand from packaging will see an improvement.

But in packaging, as with every other PE and PP end-use sector, demographics and debt shape demand.

Because household formation is declining every year because of the ageing population, this damages the growth in packaging demand related to buying or occupying new homes – eg the PE film that wraps a new sofa.

And what I believe is the permanent end of the debt-driven property bubble also has implications for packaging.

There will be less creation of new wealth from rising property prices and thus slower growth – perhaps even negative growth – in consumption of everything from luxury autos to luxury handbags and designer clothes. These products very often come packaged in PE.

“Beijing’s fiscal stimulus after the financial crisis played a key role in maintaining global demand, particularly for commodities but also for German manufacturing and European luxury goods. Much of it went into real estate and infrastructure, the country’s massive go-to growth sector,” wrote Kenneth Rogoff in this 18 March Financial Times article.

“Today, however, after years of building at breakneck speed, China is running into the same kinds of diminishing returns as Japan began to experience in the late 1980s (the famous ‘bridges to nowhere’) and the former Soviet Union saw in the late 1960s,” added Rogoff, a professor of economics and public policy at Harvard University and former chief economist at the IMF.

If China has reached the point of infrastructure saturation, the economic multiplier effect of each new bridge or road would provide less of a boost to PE and PP demand.

If the pace of infrastructure building slows down, this also means a lower economic multiplier effect – and, also, lower demand growth for the proportion of PE consumption that is accounted for by HDPE pipes.

The dynamics affecting PE packaging materials will, of course, also affect the grades of PP that go into packaging applications in China.

And specifically for PP, an important end-use sector is autos. I shall explore further in later posts the impact on China’s PP demand of the end of the property bubble, the ageing population and the rise of the second car market.

In short here, I strongly suspect that the extraordinarily strong growth in auto sales in 2009-2021 was the result of the wealth created by booming property prices, a more youthful population and what was then a less-developed second-hand car market.

Let me stress again, though, that as the year progresses, China’s demand for PE and PP will surely improve on resumed economic activity.

To repeat my analogy, the automobile (the Chinese economy) was travelling at 30km/hour during zero-COVID because large swatches of the economy were shut down.

The speed of the car must therefore pick up to, say, 60km/hour as people travel and shop more etc. But because of debts and demographics, the economy cannot return to 110km/hour.

And, crucially, 60km/hour is nowhere near fast enough to absorb PE and PP oversupply in 2023 – and very probably in 2024 and 2025 as well.

Spreads never lie – and they remain very weak.

Tracking actual price movements is obviously a key part of market analysis.

For example, the chart below shows the brief pick-up in China PE and PP prices for the week ending 3 February, which followed the end of the LNY holidays, compared with the week ending 27 January.

But price movements by themselves are of limited value without the context of the ICIS market intelligence. The next essential level is putting price movements into the context of feedstock cost movements.

For example, CFR Japan costs higher for the week ending 27 January . This might have been a factor in the rise of PE prices that occurred in the week ending 3 February.

Also important is the long-term context of PE price spreads, or differentials, over feedstock costs.

The above chart shows the annual spreads for three of the major grades of PE in China (the coloured bars) and the average PE spread (the line) since our price assessments began in 1993.

As you can see, the average spread between 1 January and 17 March this year was just $290, the lowest since our assessments began – and lower than last year’s average spread of $321/tonne, which was the previous record low.

This tells us that China’s PE market is weaker in 2023 than in 2022, despite the talk of a recovery.

Spreads are not margins. But they are reliable indicators of the supply and demand balance.

This allows us to conclude the following: Until the average China PE spread moves much closer to the long-term trend then there is no recovery. It really is as simple as this.

Between 2000 and 2021, before last year’s collapse, the annual spread averaged $532/tonne. This means that until spreads increase by 83% from their current levels, there will have been no recovery.

It is a similar story in PP.

The above chart shows average China spreads for two major grades of PP since our price assessments began much later in 2003 (the coloured bars) and the average spread, which is the line.

I doubt that the champagne corks will be popping at the news that the average spread so far this year is $3/tonne higher than last year’s record low of $258/tonne.

The undeniable logic is the same in PP as in PE. Until PP spreads recover much closer to their long-term average, there will have been recovery.

The average annual PP spread between 2003 and 2021 was $571/tonne. This means that spreads would have to increase by 119% from their current levels.

Buckle up as it is going to be incredibly difficult ride over the next two years as we head towards the bottom of this downcycle.

I then believe we will be entering a world of major consolidation, with the larger players enjoying more market share, as China’s PE and PP demand growth quite possibly turns negative.