BLOG: Little prospect of China recovery in 2023 as zero-COVID, property downturn set to continue

John Richardson

23-Nov-2022

SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson. So much for that then! Chinese stock markets have fallen, after last week’s rally, on the cold reality that the real-estate sector isn’t going to be easily turned around and zero-COVID isn’t going to disappear anytime soon.

(We don’t believe China’s real-estate sector can be turned around, and, anyway, Beijing doesn’t want to reflate property because this would run counter to their “Common Prosperity” reforms.)

A worrying report in the Financial Times last week highlighted the work that needs to be done in boosting healthcare provision and in raising the percentage of over 80s that have received three doses of vaccines, before zero-COVID can be fully relaxed.

If zero-COVID were to be relaxed before the above challenges are addressed, experts warned in the FT that China would suffer a big “exit wave” of new cases.

And, anyway, as bigger outbreaks in Beijing and Guangzhou have demonstrated this week, Omicron still represents a significant problem for China even with the zero-COVID programme in place.

At some point. China will get past zero-COVID, and, because of higher savings rates, a recovery in consumer spending and therefore global chemicals and polymer prices seems inevitable. But how big will the recovery be if, as I suspect, the real-estate sector, worth 29% of GDP, hasn’t recovered?

We must more immediately focus on the chemicals demand prospects for 2023, as we do in today’s post which looks at China’s polypropylene (PP) market

We see a significant risk that 2023 will be too early for a recovery to take place in China’s PP market. Demand growth could well decline next year following negative growth in 2022. This would be the first two years of consecutive negative growth since 2000.

China’s PP market may also be weighed down with further local capacity additions. ICIS expects China’s PP capacity to increase by 16% in 2023.

But as is always the case in chemicals markets, you don’t have to take anyone’s word for what happens next. What you instead must do is look at the spreads between chemicals prices and feedstock costs.

In PP, the latest spreads data tell us just how far we are from a full recovery:

In 2003-2021, spreads between CFR China PP injection grade prices averaged $546/tonne compared with $251/tonne so far this year – a 118% difference.

During 1-18 November this year, CFR China PP injection grade spreads were just $176/tonne, the lowest monthly spread since our price assessments began in January 2003. The previous record low was $201/tonne in March this year.

Be cautious, be prudent and be realistic and out there.

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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