By John Richardson
WHEN I HEARD RUMOURS that China’s polyethylene (PE) and polypropylene (PP) markets had bottomed out last week with a big recovery just around the corner, my first reaction was “good luck with that idea”.
The ICIS Pricing editors reported that efforts by producers to no longer tolerate very weak margins by holding to firmer offers had met with strong buyer resistance.
And look no further than the chart below to understand that we are a long, long way off from a full recovery in one of the grades of PE — high-density PE (HDPE). It is the same story in low-density PE (LDPE) and linear low-density PE (LLDPE).
Spreads are not margins, of course, but spreads have stood the test of time. They remain the single best measure of supply and demand balances.
In January–June 2023, the CFR China HDPE injection-grade price spread over CFR Japan naphtha feedstock costs was $274/tonne. This is at least an improvement on last year’s $211/tonne. But here’s the thing:
- The average annual spread between 1993 and 2021 was $487/tonne.
- In January 2022–June 2023 (the full period of the downturn), the spread averaged just $243/tonne.
Until we get much closer to the long-term average spread of $487/tonne, there will have been no full recovery.
HDPE and other polyolefin spreads may pick up later this year, however, on more economic stimulus in China.
Some market participants would argue that this signalled a return to the old China of a booming economy. But as I wrote in my 29 June post:
There is no chance of a repeat of the huge economic stimulus that we saw in 2009 because of:
- High levels of debt. “The zero-COVID shock and the housing crash last year seem to have brought China’s implicit government debt stress close to a breaking point,” wrote Wei Yao and Michelle Lam at SocGen in a report quoted in the 5 June edition of the Financial Times. China’s total debts are some 250% of its GDP, more than the US.
- Even if Beijing found the wiggle room for another giant stimulus programme, it probably wouldn’t work as effectively as it did in 2009 because of the loss of consumer confidence.
The latest data on China’s HDPE demand continues to point towards negative growth in 2023.
The outlook has brightened slightly as the January–April data pointed towards a 4% decline in full-year 2023 HDPE demand over 2022, whereas January–May indicated a 3% decline.
China’s HDPE self-sufficiency push
However, don’t get too excited. The reason for the improved outlook was the 16% month-on-month increase in China’s HDPE production in May compared with April.
For the full-year 2023, ICIS is forecasting a 12% increase in China’s HDPE capacity following a 21% increase in 2022.
The chart below puts this into a long-term context. It shows the percentages of China’s HDPE capacity over local demand in 2000-2021 and my expectations for 2023–2025.
I assume that minus 3% demand growth will be the final number for 2023, with a recovery to 2% growth in 2024 and 1% growth in 2025. I have also assumed that the ICIS base case forecasts for capacity additions between 2023 and 2025 will happen.
The end-result would be that in 2025, HDPE capacity as a percentage of demand would go over 100% for the first time. In PP, this happened in 2020.
Now let us look at what the latest China Customs department data indicate about China’s HDPE net imports in 2023 versus the years going back to 2020.
We had forecast that this year’s net imports would be 5.6m tonnes. They look more likely to be around 4.3m tonnes.
In 2022, China accounted for more than 40% of total global net imports among the countries and regions that imported more than they exported.
China’s declining net imports, down from their all-time peak of 9m tonnes in 2020, will increase competition in the other big net import countries and regions. These are detailed below.
South & Central America, Asia and Pacific, Africa and Europe are, of course, made up many different countries with varying net import and net export positions. ICIS supplies country-by-country trade flows in the ICIS Supply & Demand Database.
Let’s next consider the long-term prospects for China’s HDPE imports. The chart below shows three scenarios for China’s net HDPE imports from now until 2040.
The ICIS base case involves average annual demand growth of 2% and an operating rate of 76%. This would compare with actual average annual demand growth of 10% between 2000 and 2022 and an operating rate of 90%.
As I’ve discussed before, China’s petrochemicals demand in general has grown far too quickly given the size of the country’s population and its per capita income. This was the result of three events — economic liberalisation, a youthful population and the world’s biggest-ever economic stimulus package — that have been consigned to history.
This leads me to believe that demand growth in 2023–2040 could be lower than our assumption of 1%.
In Downside 1, I therefore take growth down to 1% and leave the operating rate at 76%. Downside 2 again involves 1% growth, but an operating rate of 90% as China pushes hard towards self-sufficiency.
In 2040, this could mean that under our base case, China’s net imports are around 7m tonnes versus some 200,000 tonnes of net exports under Downside 1 and 1m tonnes of net exports under Downside 2.
The ICIS base case would see net imports during the entire forecast period of 2023–2040 totalling 126m tonnes. Downside 1 would see the total at 38m tonnes and Downside 2 just 7m tonnes.
Conclusion: Levels of exposure to China
Then we need to go the next level, as I did in the case of PP in my 29 June post. Here is a table for three of the world’s major HDPE exporters. It shows what percentage of their total HDPE exports in 2022 went to their top five destinations.
Unlike in the case of PP where just 6% of its total exports went to China in 2022, Saudi Arabia is heavily exposed to China, with 23% of its HDPE imports going to China last year.
We can also assume that some of the 11% of its total exports that it went to Singapore will have probably ended up in China, as Singapore is a major distribution hub.
However, South Korea is in a far worse position than Saudi Arabia, with no less than 49% of its 2022 exports going to China. Southeast Asia (SEA), not including Singapore, was in distant second place at 16%.
Then we have the US which is far more diversified as only 8% of its 2022 exports went to China, with Mexico in pole position.
There is a possibility, of course, that all will be fine with China’s HDPE imports. Perhaps demand growth will be stronger than I assume, and/or capacity growth is below what ICIS forecasts because of efforts to reduce CO2 emissions. The latter theme will be the subject of a future blog post.
Nevertheless, even US producers, who sent just 8% of their HDPE exports to China in 2022, must plan for the worst-case outcome, ie. an entirely elf-sufficient China. This would reduce the size of the global pie for everyone.
Scenario planning has always been important. But in this increasingly uncertain world, it has become a vital component of business success.