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US producers face uphill battle to increase PE sales in China

Chemical companies
By Paul Hodges on 28-May-2015

China PE May15a China is the world’s largest polyethylene market.  One-third of the way through the year, it  is therefore interesting to analyse the ratio of its own production versus imports, and look at relative import market shares.  The chart shows annual data since 2005, with 2015 data to April, based on trade data from Global Trade Information Services:

  • China’s domestic production has maintained an average market share of 57% over the period.  This dropped to 52% when stimulus began in 2009, but was back at 56% in 2015, as its new capacity has come online (red area)
  • Unsurprisingly, the Middle East has seen major gains in share.  It averages 16% since 2005, but it has been rising steadily since its new capacity began to come online in 2010.  It is thus at 22% so far in 2015 (blue)
  • SE Asia has seen a reasonable performance.  Its share averages 9%, but this disguises a dip from 11% in 2005 to 7% in 2010, followed by a recovery to 10% today, as its new capacity came online (light blue)
  • NE Asia has been the main loser.  Its share has fallen from a 15% peak in 2005 to just 7% today (green)
  • NAFTA has been the other loser.  Its share hit a peak of 8% in 2009, but has since collapsed to just 2% (orange)
  • The EU share has been stable but tiny at 1% (yellow), as has that of Others (black)

The chart thus highlights the major challenge facing US producers as they seek to find markets for their new production.  They will not have a cost advantage versus the largely ethane-based supplies from ME/SEA.  And they have a considerable logistical disadvantage, as they are operating on the other side of the world from China.

There is also, of course, a major question mark over whether China’s demand will continue to expand as it did under the stimulus programme.  Its New Normal policies in fact look designed to slow the economy, in order to burst the lending/property bubble that was created by stimulus.  As a result, the US faces a difficult choice:

  • Does it continue with its current plans in the hope that China’s demand does continue to expand as previously?
  • Or does it settle down for a long and attritional battle to force its product into the market versus current suppliers?

It is hard to see that any other options remain. The Latin American market is simply not big enough to take the planned new capacity.  In fact, the arrival later this year of the new Mexican capacity will probably reduce the Region’s import needs from the rest of NAFTA. Equally, the option of trying to force the closure of European capacity seems far-fetched, given the importance to EU refineries of naphtha demand for petrochemicals.

Of course, US producers are still euphoric today about the arrival of shale-based feedstock.  But cold reality shows that their export volume and share has been falling over the past few years, despite this advantage.   And the example of the Incredible India campaign shows that euphoria alone is not sufficient to create sustainable business advantage. It is thus hard to disagree with the recent analysis presented by former LyondellBasell CEO Jim Gallogly:

Some don’t look far into the future but just react. Some will be too late. It is time to recognise (the reality).  I would suggest that you think very, very hard about these investments. Some of you simply are going to be too late. And you need to recognise where you are at.