By John Richardson
THE CHART BELOW SHOWS that despite tighter Asian polyethylene (PE) supply resulting from disruptions to trade flows caused by the Red Sea crisis, Middle East turnarounds and disruptions to US production caused by cold weather, the effects have yet to work through to better profitability.
Spreads remain, in my view, the best single guide to longer-term supply and demand fundamentals beyond temporary events such as turnarounds and what we all hope will be a short-lived crisis in the Red Sea.
This doesn’t mean that these temporary events are not very, very important in measuring short-term market direction. Of course not. Such events must always be considered in assessing price direction and are thus a key part of our excellent ICIS Pricing service.
What we can and must also do is add extra layers of analysis using ICIS data to present, as mentioned, a longer-term perspective involving charts such as the one above.
The chart tells us is that so far in 2024, the average per tonne CFR China PE price spread over CFR Japan naphtha costs has fallen to its lowest annual level since we began our price assessments way back in 1993. 2022 and 2023 were the previous record lows.
The significance of this data should not be underestimated as we confront the deepest and longest lasting structural upheavals that the Asian and global polyolefins industries have faced.
The table below the chart shows average CFR China high-density (HDPE), low-density PE (LDPE) and linear-low density (LLDPE) price spreads over CFR Japan costs, again per tonne, over two date ranges – 1993 until 2021 and 2022 up until January this year.
We know that until the following happens, there will have been no full recovery:
- HDPE spreads need to rebound by 138%, LDPE spreads by 55% and LLDPE spreads by 91%. Average PE spreads would have to rise by 86%.
Now let me explain the significance of the date ranges in the table (this section is in italics so you can more easily cut-and-paste into a separate document, print out, and pin on your boardroom wall.)
1993-2021 was a golden period for the global petrochemicals industry in general. This was when PE and other petrochemicals demand growth was greatly boosted by China’s youthful population, the relentless march of globalisation, including very importantly China’s admission to the World Trade Organisation in 2001, and China’s huge economic stimulus. This is confirmed by ICIS data.
January 2022 up until now. In late 2021, China’s property bubble began to deflate. The bubble had largely masked the negative economic effects of China’s ageing population.
Globalisation has gone into reverse as reshoring accelerates and trade tensions build, making it harder for China to export its way out of its economic difficulties.
China’s ability to use domestic stimulus to rejuvenate growth is being stymied by lack of consumer confidence, the results of the ageing population, trade tensions, weak healthcare and pension systems and high youth unemployment.
“Loan growth in China increased at the slowest pace on record in December [2023], as weak business confidence continues to dampen borrowing demand,” wrote Bloomberg.
“Credit demand from households and businesses was persistently weak in 2023. An ongoing slump in the property sector, which once accounted for almost a third of all loans, is reducing demand for mortgages. Soft domestic demand has made many companies reluctant to expand, and banks are wary of lending to developers as many have defaulted,” the wire service added.
The petrochemicals industry didn’t see the events in China coming. This means that far too much global capacity has been added to serve Chinese demand growth that I believe won’t happen. Demand growth now seems more likely to be 1-3% per year compared with the previously anticipated 6-8%.
Focusing on PE, the ICIS Supply & Demand Database tells us the following.
- Global HDPE capacity between 2024 and 2030 would have to be 97% lower than our base case for global operating rates to reach their historically healthy level of 88%. ICIS forecasts annual average 2024-2030 global HDPE operating rates at just 75%.
- Global LDPE capacity growth in 2024-2030 would need to be 140% lower than the ICS base case to hit historic operating rates of 85%. In other words, capacity would have to shrink. ICIS forecasts annual average global LDPE operating rates at 78% in 2024-2030.
- Global LLDPE capacity growth would need to be 25% lower than the ICIS base case to achieve historic operating rates of 84%. We forecast 2024-2030 global LLDPE average operating rates at 80%.
Please note that these already alarming enough numbers do not include capacity growth more than what is ICIS is forecasting.
Further announcements of new capacity to come on-stream by 2030 seem possible because of China’s push towards complete petrochemicals self-sufficiency for supply security and economic value addition reasons, and Saudi Aramco’s need to protect oil consumption via its crude-oil-to-chemicals technologies.
Conclusion: Major capacity closures appear to be essential
A major wave of capacity closures at less efficient plants in Asia and Europe seems the only way to return Asian PE spreads and operating rates to their historically healthy levels, given that new capacity in Saudi Arabia and China appears likely to go ahead for the reasons described above.
“But what about a surge in demand growth that brings the market quickly back into balance?” you might ask. My answer is that this is highly unlikely, again for the reasons highlighted above.
The scale of required shutdowns suggested by the ICIS data is so big that I cannot see markets fully recovering in 2024 or 2025.
There are ways to get through this crisis and prosper. For some thoughts on what needs to be done, contact me at john.richardson@icis.com.