Home Blogs Asian Chemical Connections China PP price spreads over naphtha hit new low as the long-term shift in markets continues

China PP price spreads over naphtha hit new low as the long-term shift in markets continues

Business, China, Middle East, Naphtha & other feedstocks, Olefins, Polyolefins, Singapore, South Korea, Thailand
By John Richardson on 30-Jan-2024

By John Richardson

THE DATA IS THING, always the thing. We connect the dots between different data sets to paint an accurate picture of what’s happening in any petrochemicals market. As I did with polyethylene (PE) on Monday, let’s start today’s discussions with the chart below, showing average China CFR PP price spreads over CFR Japan naphtha costs.

Spreads over time have proven to be the single-best measure of supply and demand fundamentals. We can draw close parallels between spreads, operating rates and margins.

So, consider this: The average China PP price spread over naphtha feedstocks has so far this year been just $191/tonne, the lowest since ICIS price assessments for all three grades began in 2003.

Note that spreads first fell off the shelf in 2022. In that year, they declined to $263/tonne from $511/tonne in 2021. Then in 2023 they fell to $246/tonne before this year’s new record low.

Next look at the table at the bottom of the chart. I will provide a reminder about the significance of the range of dates in the chart shortly.  Meanwhile, think through the implications of this:

  • China block copolymer and raffia-grade price spreads between 2022 and 26 January this year were 144% lower than their long-term average with injection grade spreads 145% lower.

When you therefore hear people say, “The market is recovering,” point them in the direction of this data. There will have been no full recovery in the Asian PP market until spreads have rebounded by these amounts.

A print-out-and-keep guide for C-Suites

Now let me repeat my print-out-and-keep guide for petrochemical company Boards from Monday’s post below in italics (Monday’s data on PE is replaced by data for PP):

1993-2021 was a golden period for the global petrochemicals industry in general. This was when PP 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 PP, the ICIS Supply & Demand Database tells us the following.

  • Growth in global PP capacity between 2024 and 2030 would have to be 45% lower than the ICIS base case in order for global operating rates to hit their long-term healthy average of 87%. Based on what we see as a further big surge in capacity in a weak global growth environment, we are forecasting global PP operating rates of just 76% in 2024-2030.

Please note that these already alarming enough numbers do not include capacity growth more than what 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.

More layers of helpful ICIS data

A spate of confirmed and reported PP shutdowns in the Middle East and Asia – some of which are said to be in the Middle East because of the Red Sea crisis – are apparent in the ICIS Live Disruption Tracker.

The tracker calculates available capacity versus nameplate capacity. Some 64,000 tonnes less PP capacity is available in the Middle East and Asia in January 2024 compared with January 2023, according to the tracker.

But the ICIS Supply & Demand Database again tells us that global PP capacity is this year scheduled to increase by 7% over 2023, with no less than 74% of the increase due to take place in China. This would amount to an additional 5.5m tonnes/year of new capacity in China.

These capacity additions in China are occurring at a time of weaker demand growth. I believe that China’s PP demand grew by just 1% last year and I see China’s growth as between 1-3% per year between 2024 and 2030. In 2000-2022, China’s growth averaged 10%.

Conclusion: Building success in the new landscape

We should stop thinking that a little bit of supply tightening or an unexpected surge in demand will quickly return petrochemical markets to their Old Normal. As the ICIS data on PP confirms, this is not a realistic prospect in 2024 and very probably in 2025 as well.

The above chart provides a summary of the secular shifts taking place in global petrochemical markets. New ways of navigating short-term markets are needed. New long-term plans are also required.

For a discussion, contact me at john.richardson@icis.com.