By John Richardson
LET’S START with some good news first. The chart below shows a dramatic swing in expectations for China’s full-year 2023 polyethylene (PE) demand growth.
The annualised data for January-August of this year had suggested full-year demand growth would be flat over 2022. But the January-September numbers indicate an average 3% increase across the three grades, much closer to our latest base case assumption of 5% growth.
One reason for the stronger demand outlook is that local production edged higher in January-September versus January-August on a year-on-year basis.
Total PE output reached 17.6m tonnes in January-August 2023, up by 12.7% year on year. But in January-September 2023, it reached 20m tonnes, a 12.8% increase.
Another factor seems to be the growth in net imports in September versus August. Whereas linear low density PE (LLDPE) net imports were flat, high density PE (HDPE) imports net rose by 4% with low density PE imports 10% higher.
And to again compare January-September 2023 with January-August 2023, the table below shows the percentage shifts in net imports year-on-year.
The continued falls in HDPE net imports reflect our estimate that China’s capacity as a percentage of demand will increase to 84% this year from 77% in 2022.
But LDPE and LLDPE self-sufficiency is expected to be just about flat at 54% and 76% respectively in 2023 versus last year.
Estimated local production for all three polymers has so far in 2023 been in line with what we had forecast at the start of the year. There thus doesn’t appear to be a production shortfall in LLDPE which would help explain the sharp rise in net imports.
If you then annualise the January-September China Customs Department net import data to again provide forecasts for the full-year 2023, you end up with the chart below.
The “smoking gun” could be overstocking
China’s economy continues to flounder on the collapse of the property bubble, very bad demographics and the fall in exports due to high levels of global inflation.
It therefore looks as if there might have been excessive inventories of LLDPE that have built up over the year and minor excessive stocks of HDPE and LDPE in September compared with August 2023.
This doesn’t feel like a market where demand is going to grow at 3% in 2023. Neither does it appear logical that LDPE net imports should grow by 800,000 tonnes in 2023 over last year given no shortages of local production.
The rise in oil prices over the last three months may of course have played a role in any excessive inventories, as could have overconfidence regarding the impact of recent Chinese stimulus efforts.
Remember that the latest economic data remains, on balance, disappointing as I discussed in my 17 October blog post.
As for the remainder of this year, I wouldn’t get too excited about the announcement that Chinese yuan (CNY) 1tr ($137bn) of central government bonds will be issued to help repair holes in local government financing and to pay for infrastructure rebuilding following natural disasters.
“We believe the economic impact of this [the central government bonds] should not be overstated, especially in the near term,” Nomura’s chief China economist Ting Lu said in a research note quoted by CNBC in this 25 October article.
The biggest challenge remains the end of the real estate bubble, given that the property sector accounts for some 30% of China’s GDP – the largest percentage in economic history.
Here is an alarming statistic from the same CNBC article: 80% of residential sales in 2023 were of homes still under construction. This suggests that further deflation of the bubble may happen.
The statistics also raise the question of where the money is going to come from to complete construction of these homes given the financial problems of real estate developers. For example, Country Garden, China’s biggest real-estate developer, earlier this week failed for the first time to pay $15.4m interest on its dollar bonds.
Returning to theme of LLDPE, if the market is so good in northeast (NE) Asia why the data in the chart below? The chart, from the ICIS Cost Curves, indicates that every producer in the region was losing money during the week ending 20 October.
This is indicated by the portions of the light blue bar above the dark blue line (the current LLDPE price of $910/tonne CFR NE Asia). The light blue bar represents our plant-by-plant estimates of LLDPE variable and fixed costs in NE Asia.
But the US continues to win in China because of its feedstock costs
As has been the case throughout this year, the January-September data point to the US continuing to win in China because of its exceptionally cheap ethane costs.
This is said to have even put the US ahead of the Middle East where some crackers are mixed feed (ethane, LPG and naphtha). And, of course, the US is significantly ahead of the liquid-based players in places such as South Korea, Singapore, Taiwan and Japan.
The table below underlines the old rule that in any market affected by oversupply, the lowest-cost producer wins.
As China’s HDPE imports fell to 3.7m tonnes in January-September 2023 from 4.5m tonnes in January-September 2022, the US share of the China market rose to 13% from 3%.
The United Arab Emirates, Saudi Arabia, South Korea and Iran were among the countries that lost market share.
See below the latest estimate of what this means in US dollar sales terms in China.
Total estimated HDPE sales losses in January-September 2023 versus the same period last year, among China’s major trading partners, came to $1.4bn. Meanwhile, the US gained $296m.
However, as mentioned earlier, the LLDPE story is different. As with net imports (imports minus exports), China’s imports have also risen in 2023.
The US capturing so much more LLDPE market share suggests that downstream affordability must be an issue in China, despite higher imports that could amount to speculative stock building.
China’s LLDPE imports from the US more than doubled year on year in January-September 2023 as Singapore and Iran saw substantial declines.
We can again turn to ICIS Supply & Demand and ICIS Pricing data to estimate LLDPE sales losses and gains in China.
In January-September 2023 over the same months last year, total estimated losses among China’s top 10 trading partners came to $898m.
As the next chart illustrates, Canada, which also has low-cost feedstocks, remained among the winners in January-September. Estimated total gains among the winners came to $846m.
In volume terms, the US also continued to win in the China LDPE market. China’s imports from the US were up by 56%.
But because LDPE is a smaller market than the other two polymers, the gain in US market share was more than offset by the lower pricing in January-September 2023 versus the same period in 2022.
Total estimated losses came to $765m, including the US which lost $44m. The only winner appears to have been the Russian Federation with a gain of $21m.
Conclusion: Be realistic
It is what it is, I am afraid, and it isn’t going to get significantly better for the next two years as we’ve built far too much capacity relative to demand.
Even if China were to see 3% PE demand growth in 2023, this wouldn’t change the long-term trajectory of much lower Chinese demand growth than had been widely expected only three years ago.
The missing China demand versus earlier expectations explains today’s record levels of oversupply.
Be realistic in your planning for 2024, be cautious, be conservative, and hope for rather than plan for major upsides.