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China PP import and export complexities require much deeper and wider analysis

China, Middle East, Olefins, Polyolefins, Singapore, South Korea, Taiwan
By John Richardson on 13-Apr-2023

By John Richardson

HERE IS SOME GOOD news for a change. The above chart suggests that China’s polypropylene (PP) net imports may be higher this year than in 2022 and 2021.

The annualised January-February net import numbers are a long way from my gloomy forecast in February that China might this year be in a PP net export position of as much as 0.9m tonnes.

Instead, net imports could be as high as 3.8m tonnes in 2023 versus 3.2m tonnes in 2022 and 3.4m tonnes in 2021. But they would still be a long way shy of 2020’s 6.1m tonnes.

Unfortunately, this is where the good news ends.

January-February 2023 net imports were 10% higher than during the same months last year, despite what has remained a very sluggish market following the end of this year’s Lunar New Year Holidays in January.

This indicates to me that the January-February rise in net imports might have been driven by stock building in anticipation of a post-holiday demand recovery that hasn’t happened.

What underlines the continued weakness in the market is the latest China PP spreads data, as I discussed on Tuesday:

The China CFR PP injection and block copolymer grade price spread over CFR Japan naphtha costs was just $264/tonne from 1 January until 7 April 2023. This was close to last year’s record low of $258/tonne, which was the lowest since our price assessments began in 2023.

Let us put these recent spreads into important longer-term context: The average 2003-2020 annual spread was $571/tonne compared with the 2022-2023 average of $261/tonne.

As market participants continue to be misled by the significance of short-term price movements, I must again stress the importance of spread analysis. Spreads over time reflect the real state of any petrochemicals market.

So, when people talk about “recovery” as short-term prices rebound, China’s average 2022-2023 spread would need to recover by 119% from where we are today to reach the 2003-2020 average.

Only when we see a 119% recovery in spreads will there have been recovery. It is as simple as this.

Given the macroeconomic challenges and the extent of global oversupply, I see a 119% rise over the next 12-18 months as almost impossible.

It also important to note that China’s actual PP exports jumped from 48,241 tonnes in January to 101,213 tonnes in February, perhaps suggesting a problem with overstocking. Year-on-year exports in January-February 2023 were 19% higher.

Further underlining the weakness of the local market is that my estimate of the local operating rate was just 75% in January-February compared with last year’s 83% and the 2000-2021 annual average of 90%.

This low operating rate occurred as China plans to raise local PP capacity by a further 13% in 2023 following a 9% increase in 2022.

China’s choice of PP operating rates will shape global markets  

And I’m afraid, from an exporter to China’s perspective, the above chart is further bad news.

But at least regular readers of the blog would have been prepared for the 2021 moment when China’s PP capacity exceeded demand. From 2014 onwards, this was the direction of travel following a change in government policy.

Because China’s PP capacity is now exceeding local demand, just minor changes in operating rates could make a big difference to whether China is a net importer or net exporter, in my opinion.

The above chart illustrates my argument that because of the increases in capacity, China could so easily swing into a big net export position:

  • Scenario 1 takes our base case average operating rate of 78% for 2023-2025. As with all the scenarios, it assumes demand growth of 3% during each of the years between 2023 and 2025, substantially down from the 10% annual average growth between 2000 and 2021. I see this decline in growth as being the result of debt and demographic headwinds. Under this scenario, net imports in 2023 would total 1.8m tonnes, falling to 0.7m tonnes in 2024 and 0.2m tonnes in 2025.
  • Scenario 1 assumes an average operating rate of 80%. In 2023, China would be a 1.1m tonnes net importer. But next year, the country would swing to net exports of 0.8m tonnes with 0.9m tonnes of net exports in 2025.
  • Under Scenario 3, I assume the same operating rate as last year – 83% – for 2023-2025. Net exports in 2023 would be 0.2m tonnes, rising to 2.2m tonnes in 2024 and 2.3m tonnes in 2025. To put 2.2m-2.3m tonnes in net exports in context, this would likely mean China would export more than Singapore in 2024-2025. Last year, Singapore was the fourth biggest PP exporter in Asia and the Middle East.

A major PP net export position would follow the historical pattern

Consensus opinion holds that China will remain a big net importer of PP as far out as until 2040. This is perfectly possible as the consensus isn’t always wrong, of course.

But in this increasingly uncertain world, where even positive Chinese petrochemical demand growth cannot be taken for granted over the next 20 years, another outcome must be considered.

And here’s the thing: The other outcome of China become a big net exporter in homopolymer grades (it will likely still need to import copolymer grades) would be in keeping with history.

The list of products where China has swung from being the world’s biggest importer to a major exporter includes polyester fibres, polyethylene terephthalate (PET) resins and films and purified terephthalic acid (PTA).

During a period of weaker domestic growth, China’s PP producers might choose to increase their export presence as compensation. They have both the scale and solid economics (many of China’s PP plants are world-scale and well-integrated) to achieve this.

It is worth stressing again, though, that even if China’s import market for homopolymer grades almost disappeared, there would still plenty of other big net import markets.

Note that these estimates of the other major net import markets in 2023, aside from possibly China, were made late last year before the terrible earthquake in Turkey – and before the further decline in Pakistan’s foreign currency reserve. This has led to a decline in petrochemicals trade in general with Pakistan.

But the essential point stays the same: The more established PP export players in Saudi Arabia, Abu Dhabi, South Korea, Singapore and Thailand need to increase their focus on these other markets because of the risks surrounding China.

And China continues to spread its PP export net much wider

The above table shows China’s top 10 PP export destinations by percentage shares of total exports from 2020 until January-February of this year.

Vietnam is in pole position, with other southeast Asian (SEA) destination also in the top 10, because of proximity and the ASEAN-China free-trade deal.

But note that as China’s exports have surged from 2021 onwards, destinations further afield have entered the top ten, including Brazil, Peru, Mexico, Turkey, Bangladesh, India and Pakistan.

So, of course, netback analysis for more established PP exporters becomes more important. They must constantly compare China prices with those in other countries and regions to determine the scale of risk from China’s exports.

Let me give you a couple of examples of netback analysis, starting with Latin America.

The above chart is a reminder of just how de-globalised the PP world became during the pandemic-driven run-up container freight costs. Average Brazil, Peru and Mexico injection grade PP price premiums over China reached their historic peak in September 2021 and have since then declined.

But in the context of the now collapsed container-freight costs, the lower premiums are said to still give China PP producers, and their off-taking traders, very comfortable netback advantages to ship to Latin America.

It is the same story in the longstanding biggest export market for China PP – SEA.

Conclusion: A complex world requires complex solutions

Whether you are PP exporter outside China, one of China’s emerging PP exporters, or a buyer of PP anywhere, the sensitivity of decision-making has increased. Make wrong decisions in this much more complex and uncertain environment and the financial damage will be much greater than in the past.

In the good old days, it was almost as simple as putting your resins on a ship and sending them to China, in the comfortable knowledge that China would easily absorb the shipments. And there was very little competition from China’s exports.

From a buyer’s perspective, you knew that no matter how much capacity was being built, global PP markets would remain pretty snug because of soaring Chinese demand growth and a lack of sufficient Chinese capacity.

Now analysis needs to be much more nuanced, involving many more scenarios on China’s demand growth and its import and export flows.

Analysis also needs to be wider. Every other PP market has taken on greater importance because of the record levels of global oversupply, which is mainly down to events in China.

How do you achieve this more nuanced and wider analysis? Through ICIS data and expertise.