By John Richardson
LET’S AGAIN start with some good news. The January-September 2023 data suggest that China’s full-year polypropylene (PP) demand could grow by around 2% this year versus the January-August numbers which pointed to 1% growth.
This is the type of good news that polymer company CEOs might find worth highlighting in their quarterly result calls.
But China’s annual average PP demand growth was 10.6% in 2000-2019. Based on actual and forecast numbers, ICIS sees this falling to 5% in 2023-2030.
I worry that China’s annual average growth during this period could be lower than 5% for demographic and debt reasons. But even assuming 5%, this is obviously less than half the growth rate of 2000-2019.
And as recently as three years ago, a view out there was that China’s petrochemicals demand in general would continue to grow at 6-8% per annum. In my opinion, 1-3% now seems more likely – in other words, still in line with what the latest data suggest for PP in 2023.
The main reason for the data below is, I believe, excess PP capacity built on the basis of higher long-term Chinese demand growth rates than now seem likely.
PP self-sufficiency in China is, of course, another challenge. The chart below shows that while net imports are holding up better than we had forecast in 2023, the overall trend remains down from the all-time peak in 2020.
Very bleak spreads and margins in northeast and southeast Asia
Rebounds in pricing are sometimes seen as an indication of stronger real demand, when instead they could be the result of apparent demand: Increases in prices driven by improved sentiment and/or by higher oil prices.
When oil prices go up in any one month, along with polymer prices, converters sometimes stock more than they immediately need because they anticipate even higher prices the next month.
In order to shelter yourselves from the occasionally distracting noise of short-term prices movements – especially in China where the futures markets play an important role in the overall mood – it is worth analysing spreads.
The spreads between China CFR (cost & freight) PP prices and naphtha feedstock costs continue to tell a worrying story.
Average CFR China PP injection and block copolymer grade spreads over CFR Japan naphtha costs have fallen since August. Since August, more economic stimulus has been introduced. This decline suggests that the stimulus has yet to improve the PP supply and demand balance:
- From 6 January until 23 June – their peak so far this year – spreads averaged $279/tonne. From 7 July until the end of the October price assessment month, they averaged $224/tonne
The chart below shows that on an annual basis, the average of China CFR PP injection and block copolymer spreads is the lowest so far in 2023 since our price assessments began in 2003.
The table below the chart details long-term historic spreads between 2003 and 2021 and from January 2022 until October this year. January 2022 was when the downturn began.
Block copolymer spreads would need to rise by 120% to get back to their long-term average with injection grade spreads requiring a 124% increase. Average spreads would thus have to rise by 122%.
The ICIS Cost Curves allow us to go further through analysis of the variable and fixed cost position of each producer in all the regions. The chart below shows that during the week ending 20 October, we estimate that every northeast Asian PP producer was losing money.
South Asia, meaning just India, has some super-competitive plants. Some of the newer southeast Asian PP plants are estimated by ICIS to also be in a strong cost position, such as Malaysia’s Pengerang Petrochemical, the joint venture between PETRONAS and Saudi Aramco.
But as the chart below shows us, in the week ending 20 October, 17% of south Asia and southeast Asia PP capacity was loss-making, with all the loss makers in southeast Asia. This represented 1.3m tonnes/year of the two regions’ total capacity.
China sales losses increase among the major PP exporters
We can take another step forward using the ICIS data to estimate sales losses and gains in China among the key exporters to the world’s now second-biggest PP import market. China used to be the biggest, but because of rising self-sufficiency it has been overtaken by Turkey.
These losses and gains are calculated by taking the China Customs’ reports of imports by location and then multiplying these numbers by average ICIS PP prices over different periods. This generates estimates of sales by location.
To produce the data in the chart below, I took the January-September 2023 numbers away from January-September 2022 to work out which exporters have lost ground so far in 2023.
In January-August 2023 year on year, total sales losses among the big PP exporters came to $796m. This rose to $889m in January-September.
The only winners were the Russian Federation and Kazakhstan, which has a new PP plant that’s supplying China. Here, I took the January-September 2022 numbers away from this year’s data to generate the results.
The data below shows who has lost and gained in China in terms of the tonnes of imports reported by China Customs.
We must also consider the substantial rise in China’s PP exports since 2020 on greater self-sufficiency.
This excellent ICIS insight article from my colleague Lucy Shuai details the surge in China’s month-on-month exports in September 2023 on improved arbitrage. The chart below shows the destinations which saw the biggest increases.
But Lucy’s article indicates that arbitrage may have now closed, which you could result in a decline in China’s Q4 exports.
The chart below, however, shows the long-term shift in China’s destinations for its PP exports. China has spread its net wider to include India, Pakistan, Turkey and Latin America, creating a more competitive market for the other exporters.
Conclusion: Coming to terms with the long-term changes
As PP and other petrochemical company CEOs highlight short-term improvements in China’s demand during quarterly result briefings, investors should place these improvements in the long-term context.
They are entitled to ask the CEOs: “Did you see the long-term challenges coming?”
And whether the answers are yes or no, they should then ask, “What are your strategies to deal with the new China and all the other changes taking place in global petrochemicals?”
These changes are being driven by ageing populations across a broad swathe of countries, climate change, excessive debts and growing sustainability pressures.
The opportunities for the companies with the right strategies are huge.