A SHIVER of excitement swept through global polyolefin markets last week when a rumor spread that China was finally back, that its prices and demand had finally started to rebound.
Maybe. But we have to wait and see what this Friday’s ICIS Pricing assessments say about the direction of the world’s most important market.
In the week ending August 12, there were no signs of recovery, as my colleagues at ICIS wrote in the Asia-Pacific Polyethylene (PE) report: “Discussions on the PE imports into China have been subdued this week, with many traders showing little interest in US dollar-denominated shipments on weak local yuan prices.
Even if prices are rising in the current trading week, we have to ask ourselves if this is due to higher demand or reduced supply.
“China’s overall refining cycles have fallen sharply this year with the largest margins in history. Apparent demand for rough so far in 2022 is well below 2021 levels,” Logan Wright wrote in an Aug. 5 China report for the U.S.-based Rhodium Group.
He added that even the weaker apparent demand was somewhat flattering, as China had cut fuel exports in 2022 to ensure low and stable domestic energy costs.
It could be that fewer raw materials from refineries are available for the local production of ethylene, propylene, then PE and polypropylene (PP).
This may help explain the sharp reductions in Chinese PE and PP exploitation rates. Another factor behind the rate cuts is the very low profitability of polyolefins.
Weak local demand for fuels indicates a weak local economy. If the demand for fuels is weak, the same is true for polyolefins.
China is no longer interested in growth for growth’s sake
“China’s zero-COVID policy is an extreme reversal of policies that aimed to spur growth in the 1990s and 2000s, even at the expense of the environment and workforce wellbeing,” wrote Sara Hsu in an August 8 article for The Diplomat.
Hear hear. As I have been warning since March, China has no choice but to stick to its zero COVID policy due to what appears to be ineffective local vaccines, the political impossibility of importing vaccines foreigners and low vaccination rates among the elderly.
If China were to abandon its zero-COVID approach, its healthcare system would risk being overwhelmed with hospital admissions.
Until China develops its own effective mRNA vaccines and vaccinates enough people, its economic recovery will continue to be stop-start based on the number of coronavirus cases. Another possibility is that Omicron becomes less contagious, but there is no indication that this is happening.
China is no longer interested in growth for growth’s sake either. Greater priority is given to the impact of growth on debt levels, income inequality and the environment.
If there is an increase in imports of PE and PP induced by local supply and prices on the reduction of Chinese production, it will not change the direction of travel.
But you don’t have to take my word for it. Instead, consider ICIS data.
PE demand could be 5% lower in 2022 with net imports down 3.2 million tonnes
My July 27 post looked at what the latest data, for January-June 2022, said about China’s demand and net imports of high-density polyethylene (HDPE) for the year 2022. I performed the same exercise in PP on July 31.
The table below brings together the latest demand data for the three grades of PE.
It can rightly be said that the slowdown in growth in 2021 was inevitable after the boom year of 2020, when average growth in 2019 was 8%. This was due to China’s export-led recovery from the pandemic.
However, a decline in growth this year would signal the big changes China has made to its economic growth model and the zero-COVID policy trap that policymakers seem unable to escape.
As usual, the graph above includes three consumption scenarios in 2022.
Scenario 1 assumes average growth of minus 2% over the three years, the same decline seen in 2021 relative to 2022.
Scenario 2 is based on the ICIS estimate of local production in January-June and the annualized net number of Chinese customs imports (divided by six and multiplied by 12). This indicates a 4% decline in growth.
The worst case outcome, Scenario 3, assumes a 5% contraction in growth.
Then look at the table below on net imports.
China’s self-sufficiency has continued to increase despite exploitation rates in January-June 2022 well below our forecast for the full year.
ICIS estimated the HDPE rate at just 79% in January-June, compared to 84% for the full year.
Low-density PE capacity utilization from January to June was placed at 78%, compared to 86% for the full year.
The exploitation rate for Linear Low Density PE (LLDPE) was assessed at 83% in January-June compared to our full-year estimate of 85%.
As mentioned above, these lower rates were likely the result of reduced refinery feedstock availability and low PE profitability.
And yet net imports from January to July, when annualized (this is scenario 2 in the chart above), suggest that this year’s net imports for all three qualities will still be 1 lower, 4 million tonnes to those of 2021.
Scenario 1, like scenario 2, assumes that exploitation rates for the rest of this year remain unchanged from January to June, leading to an average annual exploitation rate of 80% for the three classes.
In Scenario 1, as in the previous graph showing only demand, I assume that consumption works best at minus 2%. Net imports would be around 630,000 tonnes lower than in 2021.
Scenario 3 forecasts an increase in the average operating rate of 85% on average over the whole of 2022, in line with our forecasts, with demand contracting by 5%. Net imports would be 3.2 million tonnes lower than in 2021.
“But wait,” I hear you say, “it’s only January-June. What about July and August?
July net import data will only be released towards the end of this month, allowing us to further update the demand outlook.
In the meantime, the table below is instructive.
I only consider HDPE and LLDPE price differentials against naphtha feedstock costs in the chart above, as low density PE (LDPE) price differentials have been very strong this year. This despite the likelihood of Chinese demand falling 4% in 2022 after a 5% drop in 2021.
Weak demand reflects significant production cuts driven by higher ethylene vinyl acetate (EVA) margins.
The lack of availability of LDPE has combined with a flood of LLDPE, which competes in many of the same end-use applications. This continued the destruction of demand for LDPE that we saw in 2021. LDPE remains too expensive compared to LLDPE.
So China’s LDPE spreads don’t tell us how weak demand is.
This is not the case with HDPE and LDPE. The average HDPE spread from January to August 5, 2022 was only $201/ton versus $405/ton last year. The average LLDPE spread is $252/tonne compared to $474/tonne in 2021.
This year’s spreads are the lowest on an annual basis since ICIS price assessments began in January 2000.
Now let’s take a look at today’s final table.
The narrow, continuous gap between the grey, red and blue lines tells you everything you need to know. Until the week ended August 5, 2022, the markets for these two polymers were still facing strong difficulties.
Why this type of data processing can become redundant
I have lived and breathed this type of data analysis for many years, as have, of course, most of us. This is how we learn to understand the markets.
I don’t see this continuing for very long. We are entering a very different chemical world, driven by austerity, geopolitical chaos, record inflation levels, challenging demographics and a very different China.
Just as China is moving away from growth for growth’s sake, so will the rest of the global economy. The chemical industry will have to adapt.
Success will no longer be measured by each additional ton sold at the right price in the right place, which was the raison d’être of traditional types of market analysis.
Watch this space to learn more about what this means for your business.