Home Blogs Asian Chemical Connections Why China could become self-sufficient in HDPE

Why China could become self-sufficient in HDPE

China, Company Strategy, Middle East, Olefins, Polyolefins, Singapore, South Korea, Styrenics, Taiwan, Thailand, US
By John Richardson on 06-Jun-2023

By John Richardson

“WHEN THE FACTS change, I change my mind,” said the great economist John Maynard Keynes. Over the last few months, we’ve seen consensus opinion lining up behind what fellow ICIS blogger, Paul Hodges, and I have been warning about since 2011.

Sure, neither Paul nor I were able to answer the question of when China’s demographic and debt problems would reach the point where its economy would see a major slowdown.

However, the writing has been on the wall for the past 12 years. At some point, given that births per woman first fell below the population replacement rate in 2001 and the scale of the debt bubble, the slowdown was going to happen.

I flagged up in early 2021 when I saw that the tipping point had been reached. The anaemic post zero-COVID recovery has underlined the secular shift in China that is now broadly accepted as reality.

The chart below is a further demonstration of why the chemicals and polymers industries act as tremendously good barometers for what is occurring in the broader economies because our products go into just about every manufacturing and service chain.

High-density polyethylene (HDPE) seems more aligned with the economic realities than in linear-low density PE (LLDPE) and low-density PE (LDPE), where the January-April 2023 data provide evidence of overstocking.

But in HDPE:

• China’s January-April 2023 imports fell by 19% on a year-on-year basis to around 1.7m tonnes, according to the China Customs department. During the same months – and again on a year-on-year basis – exports rose by 97% to 166,493 tonnes.

• The ICIS estimate of local production in January-April 2023 suggests a full-year operating rate of 78%. This would be the lowest operating rate since 2000.

The chart below shows how the spreads data is in line with HDPE imports, exports and local production in 2023.

In 2022 and so far in 2023, China’s HDPE injection grade price spreads have fallen way below any other of the other years since 1993, when we started our price assessments. What applies to HDPE injection grade applies to all the other grades of HDPE – and to all the grades of LDPE, LLDPE and polypropylene (PP).

Sure, HDPE prices might well rise this week on Saudi Arabia’s decision to cut crude output in July and the OPEC+’s decision to limit output until 2024. This could lead to a rise in apparent demand as converters stock-up on anticipation of further price hikes.

But short-term prices go up, they go down, and in the process tell us very little. What matters instead is the producer power in the market, which indicates supply and demand balances in any chemical and the broader economy.

Here’s the thing in HDPE which you must remember: The average 1993-2021 annual spread was $490/tonne as compared with $264/tonne between 1 January-2 June 2023. Until today’s spread moves much closer to $490/tonne, there will have been no recovery.

The risk of China becoming self-sufficient in HDPE

So, what’s going to happen next? The conventional view, as I said, is that China’s chemicals growth, along with its economic growth, will be much lower than had been commonly assumed three years.

But while everyone accepts that PP and styrene monomer (SM) recently joined a long list of products where China has become just about or completely self-sufficient, most commentators believe that there is no chance of China becoming anywhere close to self-sufficient in PE.

I thought the same until recently, and now, I am not so sure, at least in the case of HDPE, as the chart below illustrates.

The ICIS Base Case assumes China HDPE capacity growth of 59% between 2023 and 2040 to some 22m tonnes/year.

This seems quite a moderate and reasonable increase in capacity when we consider that between 2000 and 2022, China’s capacity increased by 265%. For this reason, I’ve used the ICIS Base Case for capacity increases in all the three scenarios in the above chart.

The ICIS Base Case also factors in an annual average demand growth of just 2% in 2023-2040, down from 11% in 2000-2020.

Nevertheless, as the chart below indicates, which is repeated from my 15 May post, China’s HDPE demand relative to the rest of the world has probably grown too quickly.

The three historic events highlighted in the chart are over, for good.

The next chart, from the same 15 May post, shows how China remains a poor country relative to the developed world. Its per capita HDPE consumption and demand in millions of tonnes compared to the rich world has been greatly inflated by the same three historic events.

I therefore see a valid scenario where China’s growth is even lower than the 2% ICIS assumes for 2023-2040. Let us imagine it is just 1%, with some years of negative growth, as China becomes a more typical developing economy.

This is part of the basis for Downside 1 in the earlier chart, where instead of net imports at 7m tonnes in 2040, China is in a net export position of 240,000 tonnes. Cumulative 2023-2040 net imports under Downside 1 are 38m tonnes versus the Base Case’s 126m tonnes.

Both the Base Case and Downside 1 assume an average 2023-2040 operating rate of just 76%. But the actual 2000-2022 operating rate averaged 90%.

It can be argued that China has entered a period of lower chemicals capacity utilisation in general because of its weaker economy – and also because of the big build-ups on local capacity since 2000, and particularly since 2014.

The chart below might, however, point towards what happens next.

In every year since 1993 in China, unlike in other countries and regions, there appears to have been very weak links between operating rates and spreads. The above chart uses a few selected years to make the chart easier to read.

Take 2002 as the standout example where the overall HDPE operating rate was 103% despite an injection grade spread of only $288/tonne as compared with the 1993-2019 average of $493/tonne.

Injection grade is only one grade, of course. But the patterns of spreads for the other grades have been very similar from 1993 onwards.

The 2002 story underlines how individual plant profitability is not the only criteria determining production rates in China. Production can also be a political and social decision – about, for example, maintaining employment in downstream manufacturing plants through guaranteed supplies of raw materials.

This brings me to Downside 2 in the earlier chart showing scenarios for China’s HDPE net imports in 2023-2040. Why not a repeat of the 90% operating rate between 2000-2020?

This would result in 2023-2040 cumulative net imports of just 7m tonnes, with China moving into a net export position of around 1m tonnes per year from 2037 onwards.

In the years to come, China might decide to run its HDPE plants hard in order to boost export earnings and increase supply security for geopolitical reasons, even when standalone plant economics appear to point in the opposite direction.

What happens outside any HDPE plant gate anywhere in the world is also important. HDPE plants can be run harder than their standalone economics appear to justify in order balance production, profitability  and contract commitments across big integrated complexes.

“China previously committed to a target of 50% of electric vehicles (EVs) by 2035, but this ambition already seems obsolete, as we project that the share of EVs in the passenger car market will exceed 50% and surpass traditional energy cars before 2030,” wrote ING Think in this 28 February article.

As China pushes towards a 2060 target for carbon neutrality, might some of its refinery capacity eventually have to shut down, thereby creating shortages of petrochemicals feedstocks?

Or perhaps up until 2040, refinery capacity will be maintained with locally produced gasoline and diesel exported in bigger quantities. This would lead to ample naphtha to make ethylene and then HDPE.

Conclusion: The perils of conventional thinking

“Nonsense,” I can imagine some people saying, “there is no way China can become virtually HDPE self-sufficient”.

Maybe. But history has taught us the perils of conventional thinking and the value of scenario planning where we are prepared for a worst-case outcome.

And remember: Some people used to say that the idea of a big economic slowdown in China was nonsense.