Home Blogs Asian Chemical Connections Scenarios for China PP trade flows underline the end of the Supercycle and many more new complexities

Scenarios for China PP trade flows underline the end of the Supercycle and many more new complexities

By John Richardson on 03-Feb-2024

By John Richardson

THE day after I published my 14 December 2023 blog post – How increased trade tensions could shape China’s PP exports and operating rates – ICIS news published this Insight article by my colleague, Lucy Shuai, which detailed new trade measures against China.

Indonesia’s Ministry of Finance had proposed a new scheme that would introduce stricter controls on polyethylene (PE) and PP imports which could be enforced this year, wrote Lucy.

“Under the scheme, importers would be required to request import quotas and justify why their requirements cannot be fulfilled domestically,” she added.

Brazil is to hike import tariffs on polyolefins in 2024.

“India previously implemented price protection policies to protect domestic producers. Indian buyers were more willing to purchase local PP under this policy,” added the article.

“India plans to implement BIS [Bureau of Indian Standards) certification for PE product and may also implement this certification for PP in future,” said Lucy.

In Vietnam, local PP and PE players had proposed raising imports tariffs. This was because the new Long Son Petrochemical complex in Vietnam had started trail runs with its cracker onstream. The Long Song complex includes a 400,000 tonnes/year PP plant.

As you build scenarios for global PP trade flows over the next decade, include scenarios where China does or does not become a much bigger export player. The scale of its exports will determine whether it remains a net importer or becomes a net exporter.

The scenarios will only be shaped by estimates of levels of trade tensions or disputes. There is another layer of complexity you need to add as you assess China’s PP trade flows, and it is the cost of carbon.

The EU is considering applying its carbon border adjustment mechanism (CBAM) to organic chemicals and polymers by 2030.

The EU says that its CBAM, which already applies to iron steel, cement, hydrogen and fertilisers, aims to “put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries.

“By confirming that a price has been paid for the embedded carbon emissions generated in the production of certain goods imported into the EU, the CBAM will ensure the carbon price of imports is equivalent to the carbon price of domestic production, and that the EU’s climate objectives are not undermined. The CBAM is designed to be compatible with WTO-rules,” adds the EU.

China and its overseas joint venture partners are building many state-of-the-art petrochemical complexes that might include carbon capture and storage (CCS).

Google, as always, is our friend. There’s a plethora of news articles and research papers available under the search term, “carbon capture and storage, China”.

But what’s free on Google hardly amounts to foundations for solid scenario planning. You will need experts in CCS on the ground in China to understand what real progress China is making, and in other aspects of decarbonising petrochemical production such as electric furnaces used to power steam crackers.

“A rapid surge in the rollout of renewable energy last year has put the world within reaching distance of a goal to triple global capacity by 2030, the International Energy Agency said, after China drove a 50% increase,” wrote the Financial Times in this 11 January 2024 article.

Renewable capacity increases were at record highs in Europe, the US and Brazil, but the main driver remained growth in China, which installed as much solar photovoltaics as the whole world did in 2022, said the FT.

“China more than doubled solar capacity in 2023, and wind power capacity rose by 66% from a year earlier, the IEA estimated,” said the newspaper.

The single biggest way of decarbonising PP and other petrochemicals plants can be to switch to renewable electricity.

An oversupply of renewable energy in some regions of China is said to have led to very competitive energy costs, and to an uptick in green hydrogen projects.

We could thus see China becoming a leading exporter of lower-carbon PP. This may not just be to the EU but also to other countries and regions that could introduce carbon trading or tax systems, supported by import mechanisms to protect domestic industries.

Or could some of China’s PP plants be carbon laggards, especially its smaller refinery-based plants and most of its coal-based plants? What percentage of China’s total PP capacity will be in the carbon laggard category?

The end of the Supercycle and the effect on global trade

“Global supply chains were a great idea during the Boomer-led Supercycle beginning in the mid-1980s. But today we have lost the demographic and ‘peace dividends’ that turbocharged the Supercycle,” wrote fellow ICIS blogger, Paul Hodges, in the 28 January 2024 Chemicals & The Economy blog.

“It’s time to go back to the more resilient and reliable ‘local for local’ supply chains that existed before the Supercycle,” he added.

During the Boomer-led Supercycle, demand was expanding because of youthful populations, and the “peace dividend” following the fall of the Berlin Wall in 1989 meant transport risks were lower, he said.

“But today, the low-spending, lower-earning Perennials 55+ cohort are the main source of global population growth, and the ‘peace dividend’ is over,” wrote Paul.

Disruption to global trade caused by events such as Russia’s invasion of Ukraine and the Houthi attacks on shipping in the Red Sea could lead to reshoring of PP and other manufacturing chains for supply security reasons.

On demographics and demand, consumption is 60%-70% of GDP in most developed economies.

The above chart highlights how spending declines as people pass the age of 55. In 2000, there were 65m Wealth Creator 25-54 households, each spending an average of $69,000. This compared with 2022 when there were 66m Wealth Creator households, each spending an average of $82,000 ($2022).

In other words, there was no growth in the number of Wealth Creators, but their spending (supported by furlough payments) did increase in real terms. But look at what has happened to the Perennial (55+) households: Their numbers increased by 25m to 61m between 2000 and 2022 – with their spending is 20% less at only $66,000.

The data for Germany and France are very similar. We can therefore conclude that overall developed-world consumer spending will decline as the Perennial demographic cohort expands in size.

When you retire you have already bought most of the things you need, and you are living on a pension that will often not fully replace your income.

We are as a result seeing the growth of a Replacement Society, where new goods are only purchased when old goods have worn out.

The chart below shows that the Perennial age group is the source of most of the world’s population growth.

In a world of slower demand growth for PP and other petrochemicals, sub world-scale plants that operate in regions such as Europe might be sufficient to meet consumption.

Net PP imports of 5m tonnes a year or net exports of 2m tonnes

This will especially be the case if local producers reinvent themselves through recycling, which by its nature is more “local for local” – and through switching to bio feedstocks.

Another long-term negative for virgin PP demand – and thus the need for virgin PP imports – is recycling.

A challenge for recycling PP is how to turn plastic waste into food-grade PP. Chemicals recycling at significant scale may be the solution.

Returning to my original point: Local supply chains are more likely to thrive if they are behind higher trade barriers.

Now, using the same numbers from 14 December post, let’s consider what all these factors might mean for China’s PP trade flows, measured by net imports or net exports.

Under the ICIS base case (the green line), China’s PP operating rates are forecast to fall from a 2010-2023 average of 86% to just 73% on overcapacity. But good demand growth of 4% per annum results in net imports averaging 5m tonnes a year.

Under my Alternative Scenario 1 (the dark blue line), Chin runs its plants at an average 86% operating rate in order to boost exports, as the factors detailed above don’t significantly reshape global trade. This places China in an average annual net export position of 2m tonnes. Demand growth is again a healthy 4%.

Alternative Scenario 2 (the light blue line, which is my preferred scenario) again involves China running its plants at 73%. Geopolitics and increased trade tensions etc. mean it cannot increase its exports. This leaves it in an almost balanced position. It is in a balanced position because an operating rate of 73% is enough to meet local demand, as domestic demand growth falls to 1.5% on long-term structural economic challenges centred on an ageing population.

Conclusion: What applies to China PP applies to all petrochemicals

I’ve use PP just an example. What applies to PP would apply to all globally traded petrochemicals under the outcomes described above. As you can see from my choice of Alternative 2 Scenario as a preferred scenario, I believe this is what is going to happen.

This underlines how we are no longer in the comfortable petrochemical environment of 1993-2021 during the Supercycle.

During this period, success was all but guaranteed through building more and more capacity to meet booming demand while ideally ensuring that new plants had strong feedstock cost positions.

But now markets are becoming more nuanced, more complex, and as I said, potentially much more local. Localisation is again my preferred scenario.

Does your company accept that these changes are a scenario worth planning for? And if so, do you have the resources to plan accordingly? How do you start by persuading enough people to listen?