By John Richardson
CHINA’S POLYETHYLENE (PE) market has performed in a very mixed fashion so far in 2023, as the above chart tells us.
The annualised January-March 2023 data suggest a 3% fall in high-density PE (HDPE) full-year demand over 2022, a 3% in increase in low-density PE (LDPE) demand and a 4% increase in linear-low density PE (LLDPE) consumption.
Because HDPE has the largest single share of demand among the three grades (45% of the total in 2022 and an estimated 43% in 2023), the forecast decline in this year’s HDPE consumption would mean total demand growth of only around 400,000 tonnes.
This would compare with the annual average growth in 2000-2022 of 1.4m tonnes.
The January-March data suggest that this year’s average demand growth across the three grades could be 1% versus 2% in 2022.
So, why the mixed performance? Market players suggest this could be partly the result of some degree of overstocking in LDPE and LLDPE, ahead of the mirage of a strong demand recovery following the end of this year’s Lunar New Year holidays.
As I flagged up shortly after China scrapped its zero-COVID policies in November last year, the post-Lunar New Year rally in 2023 was never likely to happen for the following few reasons.
The housing bubble has burst, very probably for good. I believe that this is limiting the rebound in consumer spending.
A further speed limit on the post-zero-COVID recovery in consumer spending seems likely to have been imposed by a rapidly ageing population, as household formations decline and as pension and healthcare costs rise.
Buyers of PE in China know that the global PE market faces all-time high levels of global oversupply. ICIS estimates that global PE capacity exceeding demand will reach 26m tonnes in 2023. This would compare with the 2000-2022 average of 10m tonnes/year.
And in China, ICIS forecasts that HDPE capacity will increase by 12% in 2023 after a 21% increase in 2022; LDPE capacity will increase by 3% in 2023 after a 7% rise in 2022; and LLDPE capacity will rise by 5% in 2023 after an 11% increase in 2022.
PE buyers are thus in a very strong position to wait and see. They also confront very uncertain demand growth prospects for the things that they make.
The chart below puts China’s rising PE self-sufficiency in important historical context.
As recently as 2020, China’s HDPE capacity as a percentage of demand was just 53%. This year, it could reach 92%. In 2020, LDPE and LLDPE capacities over demand were at 49% and 59% respectively. In 2023, the LDPE and LLDPE percentages are forecast to reach 58% and 77%.
This big surge in HDPE capacity in particular is reflected in the chart below.
HDPE net imports for 2023 could decline by around 900,000 tonnes versus 2022 – again based on annualised January-March 2023 data. While LDPE net imports are heading for a 200,000 tonne decline, LLDPE imports could actually increase by 500,000 tonnes.
The January-March 2023 data indicate that this year’s total PE imports could fall from 13.5m tonnes in 2022 to 12.9m tonnes 2023.
So why, given the state of the market, have LLDPE net imports been so strong in Q1 2023?
The overstocking theory could be supported by a sharp increase in China’s PE exports across all the grades in March versus February this year, as the chart below details.
It needs to be stressed that China’s PE exports are a drop in the overall ocean – they are very modest. But note that the March 2023 exports of PE in each of the grades were the highest monthly totals on record.
And please, please don’t forget spread analysis. This remains the most important area of analysis for working out supply and demand balances.
The average China PE spread over naphtha costs so far in 2023 at $301/tonne is at its lowest since our price assessments began in 1993. This beats last year’s previous record low of $321/tonne.
Until spreads recover much closer to their 1993-2021 average of $532/tonne there will have been no recovery. Period.
Conclusion: Don’t be misled by a possible recovery later this year
Imagine China’s economy as a car that used to travel at 110 miles/hour but then suddenly slowed to 30 miles/hour because of zero-COVID . The car might pick up speed again to, say, 70 miles/hour, but because of the long-term structural changes discussed above, China can never return to 110 miles/hour.
In other words, 1% PE demand growth this year – which is suggested by the January-March numbers – may improve to, say, 3-4%. But if this happens, do not be misled into believing that this changes anything about the long term, as I discussed earlier this week.
And don’t fall into the trap of thinking, “There is nothing new here, so move” concerning the long term likely fall in China’s PE demand growth in terms of percentages.
Yes, it is true that it has long been expected to that percentage growth rates would eventually moderate. But the consensus was that growth would moderate to around 5% per year, as recently as three years ago. Now 2% growth or even lower seems likely. Negative growth is possible.
Get used to the new China and adjust your business plans accordingly. Denial is not a sensible strategy.