BLOG: China PE and PP downcycle a long, long way from being over
SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson.
China’s polyethylene (PE) and polypropylene (PP) markets were, in our view, never going to see a big recovery in 2023.
Conventional opinion was that by now we would be seeing a strong recovery. But sadly, because of record high levels of oversupply, a recovery may not happen until as late as 2025.
In PE, for example, ICIS forecasts that global capacity exceeding demand will be 26m tonnes this year compared with the 10m tonnes/year average in 2000-2021. Much of the new capacity is in China and southeast Asia.
We can see how far we are from recovery from the China PE and PP prices spreads over Japan naphtha costs. Spreads have always been the single best measure of supply and demand balances. For example:
- The average China PE spread between 1 January and 17 March this year was just $290, the lowest since our assessments began in 1993 – and lower than last year’s average spread of $321/tonne, which was the previous record low.
- Between 2000 and 2021, the annual spread averaged $532/tonne. This means that until spreads increase by 83% from their current levels, there will have been no recovery.
We believe one of the reasons why some market participants thought there would be a strong rebound was that they weren’t considering the impact of demographics and debt.
Let us stress again, though, that as the year progresses, China’s demand for PE and PP will surely improve on resumed economic activity.
But to repeat our analogy, the automobile (the Chinese economy) was travelling at 30km/hour during zero-COVID because large swaves of the economy were shut down.
The speed of the car must therefore pick up to, say, 60km/hour as people travel and shop more etc. But because of debts and demographics, the economy cannot return to 110km/hour.
Crucially, an economy travelling at 60km/hour is nowhere near fast enough to absorb the PE and PP oversupply in 2023 – and very probably in 2024 and 2025 as well.
Editor’s note: This blog post is an opinion piece. The views expressed are those of the author, and do not necessarily represent those of ICIS.
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