Chinese styrene apparent demand numbers from the first half of 2017 show a very dramatic difference from the first to the second quarter, but this was entirely due to changing inventory positions with underlying styrene demand accelerating through the year.
This was driven by increased downstream self-sufficiency as well as better end market growth than feared. But with Chinese credit growth being reined in, fears are rising over a consumer slowdown. China is the world’s largest consumer of styrene, representing more than 30% of global demand. It is also one of the fastest growing. In 2016, consumption grew 2.7% compared to a global average of 1.8%. Therefore, the world looks at growth in China with interest. The data from H1 show a rollercoaster ride. Apparent demand in Q1 was up 10% driven by massively higher domestic styrene production.
Then Q2 apparent demand was down 10% as net imports fell drastically year on year. However, ICIS calculates that all of the difference is due to inventory adjustments. Inventory data from eastern China shows an increase in Q1 of more than 170,000 tonnes, followed by a sharp decline in Q2.
The factors behind the inventory build are diverse. There were styrene outages in North America in Q1. The maintenance shutdowns were widely flagged and Asian inventory built up into the year. When the shutdowns were extended – prices rose and Asian operating rates increased as units with more marginal profitability became more attractive to run. Chinese styrene operating rates rose eight percentage points between Q1 2016 and Q1 2017, as manufacturers rushed to take advantage of higher pricing.
In addition, there was a belief that demand would pick-up sharply after the Lunar New Year holiday in January. Inventories of other products such as polyethylene, also rose sharply in Q1 as more product flowed into China. The result was massive styrene oversupply. Spot prices started to fall from mid-February. Lower prices simultaneously stimulated lower production and higher demand, as many convertors and consumers had delayed purchases given the high prices through January and February.
The normal direction of trade flows was reversed as China exported significant quantities of styrene from March to May, and as the US imported product.
As a result of the pick-up in demand, lower production, lower imports and higher exports, inventories fell rapidly through Q2. This then drove the nominal fall in apparent demand of 10%.
ICIS proprietary production data for downstream derivatives shows that styrene use actually accelerated in Q2 compared to Q1, as production of key derivatives, like expandable polystyrene (EPS) and polystyrene (PS), picked up.
EPS in particular is the largest use of styrene in China and switched from negative production growth year-on-year in Q1 to over 8% in Q2. Both exports and domestic demand for EPS picked up sharply in Q2.
The question is how much of the pick-up in apparent demand for derivatives is due to restocking in Q2 and how much is a real pick-up in underlying demand. Undoubtedly purchases of plastics were delayed from Q1 to Q2 as prices were expected to come down.
Effectively we believe inventories of styrenic plastics behaved very differently to inventories of styrene and slimmed in Q1 before being restocked in Q2. As a result, the increase in demand for styrene may not be indicative of an increase in end market demand.
RISKS TO Q3 OUTLOOK
The outlook for Chinese styrenics demand in Q3 is inevitably tied to the manufacturing season, with exports of finished goods picking up ahead of the western Christmas season. We estimate that 10-15% of Chinese styrene demand ends up being exported – more in Q3.
Styrenics go into a host of seasonal products from electronics, toys, and household goods. Western economies are currently experiencing better than expected economic growth with good progression in North America and Europe, so we see no reason for pessimism there.
More certain is the outlook for growth in China. First half GDP numbers were up 6.9%, surprisingly strong. However, some commentators point to a slowdown in the rate of credit lending, the so called credit impulse. This correlates very highly with private sector demand.
If the government continues its lending clampdown and increase environmental controls this could depress future growth. We do not see China styrene demand falling off a cliff in the second half, but the risks of a slowdown from the high underlying growth in H1 are clearly there. Preliminary July and August data shows weak demand for products like PS and EPS.
Coupled with this – a number of new styrene start-ups this year mean that demand for imports will continue to decline. What we believe will happen is that some of the older units in China will operate as swing units – only operating when prices are high and reducing some of the volatility in pricing seen this year.