Home Blogs Asian Chemical Connections China PP demand looks set to grow by just 1% in 2023 as sales losses increase

China PP demand looks set to grow by just 1% in 2023 as sales losses increase

China, Company Strategy, Japan, Middle East, Naphtha & other feedstocks, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand
By John Richardson on 20-Oct-2023

MOST OF the commentary on China’s third quarter economic data, which was released earlier this week, was in my view spot on. It is at last being broadly recognised that while short-term growth has picked up slightly, the longer-term challenges make a return to the heady growth years of 2000-2021 pretty much impossible.

Just about everyone is now talking about the impact on long-term growth of demographics, debt, geopolitics and the relocation of export-focused manufacturing away from China.

And even the moderately good news represented by the Q3 data should be taken with a pinch of salt. As the Financial Times highlighted in this 18 October article, stronger-than-expected year-on-year growth in GDP partly reflected the fact that in the third quarter of 2022, China was marooned in the doldrums of the zero-COVID lockdowns.

September retail sales grew by a healthy 5.5% on a year-on-year basis. But several commentators pointed out that double-digit growth in retail sales had been expected after the zero-COVID lockdowns ended.

We also mustn’t forget the drag on growth from the end of the real-estate bubble, which I discussed in detail in my 17 October post.

As I, for example, wrote, referencing The Economist: “The magazine quoted the economic research firm, CRIC, which estimated that 2023 Golden Week year-on-year property sales fell by 79% and 57% year on year in Shanghai and Shenzhen respectively.”

The same FT article on the Q3 economic statistics said: “Property investment in the first nine months of the year was down by 9.1%, reflecting sector-wide debt defaults by developers and weak apartment sales. New housing starts have fallen by more than 20% so far this year compared with 2022.”

Lost petrochemicals growth versus earlier expectations

China dominates global petrochemicals and polymers demand both in terms of volume and growth.

This means that because our industry has got China so badly by overestimating the country’s growth, we have ended up with charts such as the one below.

When new polypropylene (PP) projects were being planned, the proponents of the projects assumed that China’s demand would expand by 6-8% per year for the next 20 years are more. Instead, growth at 1-3% seems to me more likely.

The chart below underlines the new direction of travel. The ICIS base case assumes 5% growth for this year whereas the annualised January-August data suggest that 1% is more likely.

This would leave China’s market 1.4m tonnes smaller than our base case assumes.

Let’s imagine that the improved economic momentum continues until the end of the year and that final 2023 demand ends up growing by 3% – the top end of my range.

This would still leave the market 1.9m tonnes smaller than if growth were 8%, which was the top end of the range of earlier assumptions.

There’s the rub for PP and other petrochemical products. Every year that growth disappoints in this fashion, the cumulative gap between earlier forecasts and today’s patterns will build.

How will we know if improved economic growth momentum has worked its way through to delivering better profitability for PP producers in China and those who export to China? It will be through spreads – the gap between resin prices and feedstock costs. 

Despite the pick-up in Q3 GDP growth, CFR China PP price spreads over CFR Japan naphtha costs have fallen.

The average spread between 7 July and 13 October 2023 was $231/tonne. This compares with $279/tonne between 6 January and 23 June.

On an annual basis, CFR China PP spreads so far this year are $1/tonne higher than their lowest level since our price assessments began in 2003 – which was in 2022.

We can measure the week-by-week progress of the PP industry towards full recovery by comparing spreads from January 2022 (when the downturn began) to the present with the long-term averages between 2003 and 2021.

PP block copolymer grade spreads would need to rebound by 118% to return to their long-term average and injection grade spreads would need to be 123% higher.

On an annual basis, as the next chart details, CFR China PP spreads so far this year are $1/tonne higher than their lowest level since our price assessments began in 2003 – which was in 2022.

\We can also use ICIS data to assess the financial impact of the downturn on PP exporters to China.

How the above chart works is that I calculated average CFR China PP injection, block and random copolymer prices for January-August 2022 and January-August 2023.

Then I multiplied these two numbers by the tonnes of imports reported by China’s from its major trading partners for these two eight-month periods, I next took the 2022 totals away from the 2023 totals.

This tells us that South Korea’s sales to China were down by no less than $326m in January-August this year versus the same period in 2022. Singapore’s sales were down by $157m and even the feedstock-advantaged United Arab Emirates saw its sales slip by $119m on lower pricing and lower imports.

Total losses among these exporters to China came to $769m tonnes in January-August 2023, again on a year-on-year basis, versus $755m in January-July.

But there were some sales winners as the next chart shows. They included Kazakhstan with its new PP plant that is supplying China via a new road link, the Russian Federation and Vietnam. As the links to the news articles on the slide below details, geopolitics is playing a role in this shift in trade flows.

Conclusion: The big adjustment process

This is the worst downturn our industry has probably ever seen because we got China so badly wrong.

I will give you my thoughts next week on the regional winners and losers who could emerge once the downturn is over.

Before then, PP and other petrochemical capacities will need to be shut down and new projects cancelled or postponed in order to bring markets back into balance. The shutdowns and cancellations will have to be big.

How long will this process take? In my view, at least another two years, so we are at least two years away from recovery.