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China’s PP industry: Short-term tactics and long-term strategy

By John Richardson on 30-May-2023

By John Richardson

FIRST IT WAS polyester fibres, next polyethylene terephthalate (PET) resins and bottle-grade chips, and then purified terephthalic acid (PTA). In all these products, China went from being the world’s biggest net importer to being the world’s biggest net exporter.

Before trade flows in each product underwent about turns, the consensus view was that China wouldn’t build the capacities it said it was going to build because it didn’t have the cost-per-tonne economics to justify the investments.

But those on the ground in China in senior positions in the chemicals industry have long argued that China doesn’t just build plants just to make money from the plants. I first heard this argument in 2000, from a China-based executive who later became the CEO of a major global chemicals company.

The back-integration of China’s vast polyester manufacturing chain was, for example, about guaranteeing supplies of raw materials to its many millions of mainly export-focused workers in its textiles and garments plants. It was also about maturing the economy by making it less dependent on imports of basic raw materials.

“History doesn’t repeat itself, but it often rhymes,” wrote the American novelist, Mark Twain.

In the highly commoditised polyester fibres sector self-sufficiency it was, as I said, about firstly guaranteeing supplies of basic raw materials. It is now about both maintaining import independence and earning money from competitively priced imports.

But in PP, China might increasingly shift to the production and exports of high melt strength and copolymer grades. This would help China climb up the manufacturing value chain to escape its middle-income trap.

“They cannot do it, they haven’t got the technologies, the catalysts, the technical skills,” I can hear people saying. It seems likely that similar views were once expressed about China’s electric vehicles industry. China now has a “crowded new market” of luxury electric SUVs, wrote the China Project in this August 2022 article.

China’s short-term tactics to deal with weak local demand and rising supply

But before we deal with what could be the long-term strategic direction of China’s PP industry, we need to consider short-term tactics to deal with local demand growth that could be minus 1% in 2023. Weak growth appears to be occurring as China is scheduled to add a further 4.6m tonnes of capacity this year.

The revised chart below, factoring in my new estimate of a 1% decline in China’s PP demand growth based on the January-April data, shows that China’s capacity as a percentage of demand could reach 124% this year – and went over 100% for the first time on record in 2021.

The tables below show that as China’s PP exports have increased, the country has spread its export net much wider.

China’s total PP exports in January-April 2023 fell to 436,195 tonnes compared with the 486,727 tonnes during the same months last year.

But as my ICIS colleague Jackie Wong wrote in this 25 May ICIS news article, the overall decline masked growing pressure from competitively-priced Chinese products in the southeast Asian (SEA) market, particularly in Indonesia.

Jackie quoted a PP supplier as saying: “Chinese producers are hiring salespersons in Indonesia. This is something that was unheard of before.”

China’s exports to SEA increased to 163,101 tonnes in January-April this year from 127,042 tonnes in January-April 2022. The main reason was a sharp rise in shipments to Indonesia and the Philippines.

Since February 2014, ICIS has published an Indonesia-specific CFR price quote for PP raffia grade. The monthly price premiums for this quote over CFR China PP raffia grade are detailed in the chart below.

Indonesia’s price premiums over China increased from $59/tonne in December 2022 to a peak so far this year of $151/tonne in February, before a decline to $106/tonne in May. The rise in price premiums attracted more shipments from China, probably resulting in the dip in premiums from March until May.

We will see this pattern across a wide range of China’s export destinations in south Asia, Turkey and Latin America etc. I believe that the increased pressure from Chinese exports will result in greater volatility in pricing differentials between regions and countries.

And as the updated chart below highlights (I am providing updates of this chart every month), China’s PP net imports look set to further decline in 2023 from their record-high peak in 2020.

The above chart emphasises the importance for the major global PP exporters of the next chart. The major exporters are China (only since 2021), Saudi Arabia, Abu Dhabi, South Korea, Singapore, Thailand, Taiwan and Japan.

The chart details the world’s big net import markets, where imports exceed exports, in 2023 apart from China.

These countries and regions will be a fierce battleground up until H2 2025 when I expect the downcycle to end.

China’s long-term strategy of moving up the value chain

My ICIS colleagues and I have heard unconfirmed reports of Chinese PP producers opening overseas sales offices around the world. As many as seven new offices have reportedly been established.

Market players say that right now, the vast majority of Chinese exports are PP raffia grade. But, as discussed earlier, exports of higher-value grades eventually seem possible.

The question then becomes whether geopolitics could get in the way through reduced Chinese access to overseas catalysts and process technologies.  But as the example of electric vehicles illustrates, China is great at homegrown innovation.

Clearly, therefore, the big PP exporters aside from China need to factor in the risk of China becoming an exporter of higher-value grades. What the other exporters should do to hedge against this risk will be the subject of a future post.

Meanwhile, a scenario-based approach is essential on the size of China’s future net imports given that as recently as 2021, China was responsible for 41% of total global net imports amongst the countries and regions that imported more than they exported.

The above scenarios involve all the years from 2023 until 2040, but I have just featured three years for ease of viewing.

The ICIS Base Case assumes an average 2023-2040 local operating rate of just 78% compared with the actual average 2000-2022 operating rate of 90%.

Capacity utilisation of 78% could happen, though, because of plants that although they have been shut down for a long while have not been officially scrapped. This might be what happens to China’s smaller powder-based PP plants that have seen poor economics since the downturn began.

Or a range of other outcomes are possible leading to China remaining a big PP net importer. These include cancelled new projects and/or demand growth higher than the average 3% per annum that I use for all three of the scenarios.

You can see from the chart that the sensitivity in raising operating rates above our base 78% is high.

An average 2023-2040 operating rate of 85% would see net imports at 3m tonnes in 2040 rather than our base case of 7m tonnes; and average operating rate of 90% would see net imports fall to 1m tonnes in 2040.

Conclusion: It is not about being “doom and gloom”

One of the challenges to my analysis that I often hear is, “You are all doom and gloom”.

I instead see my work as support for building scenarios to future proof chemicals businesses. Scenario planning requires alternatives to conventional thinking.

Of course, I am not always right otherwise I would be sitting on a yacht in Monte Carlo harbour rather than tapping away at this blog post.

But I was right about the long-term structural slowdown of the Chinese economy, which began in 2021. And I was right about China’s rising PP self-sufficiency.

I am here to challenge and be challenged. So, contact me at john.richardson@icis.com if you need support with your scenario planning, either from myself or from our excellent team of consultants.