China may face influx of US PE cargoes from Q3

China may be inundated by US-origin spot polyethylene (PE) offers in the third quarter, given huge shale gas-based capacities which could not be fully absorbed by its domestic market.

US-based PE plants with a combined capacity of 3.3m tonnes/year came on stream in the second half of 2017, according to ICIS data, and these are expected to ramp up production from July, when their upstream crackers begin operations.

US cargoes from the new PE plants have started trickling into the Chinese market since last year, but these are mostly spot volumes from traders. The offers included metallocene linear low density PE (MLLDPE), high density PE (HDPE) film and HDPE BM (blow-moulding) grades – most of them were off-specifications, according to Chinese distributors.

For the whole of 2017, imports of US PE surged by 46.9% to 580,000 tonnes, accounting for 4.9% of China’s total PE imports, based on official data. The bulk of the cargoes flowed into China in the first quarter of 2017 as the arbitrage window for US sellers was opened in the last three months of the previous year.

CHINA CONSUMPTION

There are limited US PE volumes that go to contract customers in China but this could change. PE consumption in China is growing at an average annual rate of 8-10%. In 2017, it stood at 27.4m tonnes, an increase of 10.9% from the previous year, much faster than the country’s 6.9% GDP expansion.

Meanwhile, the ban on waste plastics imports that took effect this year is also expected to boost demand for virgin PE resins. In 2017, the country imported 1.9m tonnes of polyethylene (PE) wastes, and 1m tonnes of other types of plastic wastes, according to China Customs data.

China had relied on imports for more than 43% (11.8m tonnes) of its PE requirements last year, representing a growth of 18.6%. In January, it took in 1.29m tonnes of PE, according to official data.

China’s import dependence is projected to remain at 30% by 2020, according to estimates from industry sources. It expects to add around 2.25m tonnes/year of new capacity this year, from coal-based and naphtha-based plants. This would mean a 14.2% increase from the 15.8m-tonne domestic PE production as of 2017, but most of the new plants are expected to come on stream in the second half of 2018.

US EXPORTS

Last year, the US is estimated to have exported 700,000 tonnes of PE to northeast Asia – the bulk or around 600,000 tonnes of which went to China – and the volume is projected to increase to more than 2m tonnes by 2020, according to the analytics team at ICIS.

Concerns about a possible trade war between the US and China – following the US’ imposition of tariff on imports of 25% on steel and 10% on aluminium – are unlikely to affect the PE market, industry sources said.

Chinese traders are watching offers for North American cargoes amid limited circulation of Iranian cargoes, following tightened supervision of foreign exchange transactions since end-2016. US-origin cargoes will not see the same level of scrutiny. Iranian PE had a 16.7% share, or 1.97m tonnes, of China’s imports in 2017.