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China’s polyethylene market creates Winners and Losers

Consumer demand
By Paul Hodges on 03-Feb-2016

China PE Feb16Tens of billions of dollars have been spent over the past 6 years to produce the above chart.  And thousands of people have argued and debated around the world about what will happen to China’s polyethylene (PE) market.  It has been a key focus of attention for everyone in the petchem and polymer industry since 2009.

Now the time for argument and debate is over, as we know what has happened:

  • China’s market grew by 50% over the period, very creditable in the circumstances
  • But it totally failed to deliver the “SuperCycle” highlighted by most analysts
  • It also didn’t follow the logic they expected of reducing own production in favour of imports
  • In fact, China’s production rose by two-thirds, and imports by only a third, despite oil’s price disadvantage

Thus the data confirms the argument that China has very little interest in operating its business on the basis of the cost curves that drive decisions in the West.  It continues instead to follow the policy set out by Deng Xiaoping on his famous Southern Tour in 1992 – he argued that the Communist Party would only stay in power, if people’s living standards kept rising.  The Party knows it would probably lose power if it started shutting plants, and putting people out of work, in favour of buying imported product.

A second critical factor is also clear from the data.  When China imports, it chooses its partners for strategic reasons. Most PE grades are commodities, and so suppliers will all offer similar prices.  The newest PE grade, LLDPE, is the only exception.  China’s imports are focused on 2 key regions:

  • Middle East.  It operates a “strategic corridor” providing markets for the ME in exchange for energy supplies
  • SE Asia.  The China-ASEAN free trade area gives it valuable export markets in exchange for taking imports

Everyone else has failed to benefit from China’s growth over the period.  NE Asia saw its sales drop by a quarter, whilst NAFTA volumes halved and EU volumes fell 17% from a low starting point.

It is no exaggeration to say that these stark figures warn of an impending crisis for the industry.  Bullish analysts had forecast back in 2010 that China’s PE demand would have reached 29MT by 2014 – in fact, it was nearly 25% below this target, and had still only reached 23MT in 2015.  Equally, of course, the bullish case for increasing PE production in NAFTA, to take advantage of relatively cheap ethane feedstock prices, is also no longer valid, now oil prices have returned to historical levels around $30/bbl.

So what is going to happen to the the 40% increase in PE production planned for the NAFTA region as a result of the $155bn of new investment now underway?  Where will it all go, if China doesn’t need it – and doesn’t want it?  The rest of Asia is already worried about where its surplus can go, now that China’s Old Normal economy is slowing – and Latin America is heading into a severe downturn, now its exports to China have collapsed.

This is one of the critical questions that I tackle in our new joint Study with ICIS, to be published next month.  The good news is that we have identified a number of very exciting and highly viable opportunities for large volumes of PE (and other polymers).  But as we explain, companies will need to change their business models to access them.

Today’s chaotic conditions in feedstock and product markets suggest that 2016 is the year when the industry is likely to start dividing into Winners and Losers.  Our Study aims to ensure that clients end up as Winners.  Please click here if you would like further details, or contact me direct at phodges@iec.eu.com