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China’s LLDPE and LDPE markets see overstocking on unfounded recovery hopes

China, Company Strategy, Middle East, Naphtha & other feedstocks, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand
By John Richardson on 01-Jun-2023

By John Richardson

CHINA’S INDUSTRIAL production and profits, property sales and credit growth fell short of analysts’ projections in April and early May, the Financial Times reported in this 29 May article.

“Confidence is a big problem,” Hui Shan, chief China economist at Goldman Sachs told the newspaper.

“For consumers, there are concerns about the future — you don’t really want to spend. Private investment is also very weak. You talk to entrepreneurs, there is still a reluctance to engage,” he added.

The day before this article was published, I conducted a round of calls to my contacts in Beijing and Shanghai and they echoed the above comments on confidence.

Nobody who regularly reads this blog should, of course, be surprised by any of this because in January, I predicted that there would be no substantial post zero-COVID economic recovery.

As I must stress again, in case the message is being missed: China’s economy has reached a definitive turning point because of its ageing population, the 112 boys to 100 girls born in China in 2021 – and the end of the real-estate bubble.

We should get used to chemicals and polymers demand growth in the region of 1-2% per year, possibly even minus growth during some years, from hereon in.

This requires a big adjustment in global chemicals supply because as a recently as only three years ago, the consensus was that Chinese demand would grow at some 6-7% per year over the next few decades.

The effect of consensus thinking on China’s LLDPE and LDPE markets

I will look at what the latest data on China’s high-density polyethylene (HDPE) market in a later post. Suffice to say here that the latest numbers, as was the case with the previous numbers, are in line with the economic realities.

Not so with linear-low density PE (LLDPE) as the chart below tells us.

China’s LLDPE imports in February this year reached their highest level on record for the month of February – 499,168 tonnes.

This seems likely to have been overstocking in anticipation of the post zero-COVID bounce back that hasn’t happened, as imports in March and April fell month-on-month by 6% and 7% respectively.

January-April 2023 exports also reached 64,678 tonnes – 96% higher than last year.

And despite the weak market conditions and a 5% scheduled rise in China’s capacity this year following an 11% increase in 2022, this year’s LLDPE domestic operating rate is at 85% compared with just 78% in HDPE.

This again seems to point to overstocking – and is the other factor behind the strong demand outlook for the full-year 2023 (I calculate demand by adding the ICIS estimates of local production to the China’s Customs Department data on net imports).

What supports my overstocking argument is weak China LLDPE spreads.

The CFR China LLDPE film grade price spread over CFR Japan naphtha costs so far this year is just $1/tonne above its lowest level on record, which was in 2002. Until the spread returns much closer to its 2000-2021 annual average of $514/tonne, there will have been no recovery.

The LLDPE spread story in 2023 is the opposite of what conventional opinion suggested in January. The majority of analysts were expecting a rebound in profitability once the Lunar New Year holidays were over.

Spreads are a very crude, but useful, measure of the profitability of producers.

The story is similar in low-density PE (LDPE).

LDPE imports in March rose to 281,301 tonnes. 21% higher than February. But in April, they fell by 21%

Exports were at 83,213 tonnes in January-April, their highest-ever level for these months, and were 54% higher than the same months last year.

Something seriously strange has happened to local LDPE production. The data so far this year indicate a 95% operating rate for 2023, despite a 7% rise in capacity last year and a 3% increase this year, as well as the weak market conditions. This is clearly a sign of overstocking, in my view.

The overstocking argument is supported by the latest spread data for LDPE.

The CFR China film grade spread over CFR Japan naphtha costs is $349/tonne so far this year, the lowest since we began our price assessments way back in 1993.

For a recovery to happen, LDPE spreads need to move much closer to their 1993-2023 annual average of $595/tonne.

Id the macroeconomic conditions in China do not improve during the rest of 2023, the overstocking described above seems likely to result in full-year demand growth lower than 3% in LLDPE and LDPE.

As an aside, though, LDPE – which competes for many of the same end-use markets with LLDPE – has become more affordable, as the chart below tells us.

The collapse in LDPE price premiums over LLDPE to just $4/tonne in May this year, close to a record low, from the all-time high of $388/tonne in October 2021 is perhaps providing some support to LDPE demand.

However, the broader and bigger point is that the LLDPE and LDPE apparent demand numbers so far this year (net imports plus local production) point to, as I said, overstocking.

I fear this is a race to the bottom, a search for volumes, in a weak Chinese economy that I don’t think will improve during the remainder of 2023. This may help explain the fall in LDPE prices and the decline in LDPE premiums over LLDPE.

Conclusion: Big adjustments are required

For argument’s sake, let’s assume I am wrong and 3% demand growth LDPE and LLDPE end up being the final numbers for 2023. The chart below illustrates that this would still represent a significant decline in growth from the 2000-2021 averages.

Please don’t be distracted by those who argue for a recovery to growth of around 6-7% per year across all the chemicals and polymers. This is just concentration-sapping noise that risks diverting our attention from the big adjustments our industry needs to make.