By John Richardson
CHINA’S high-density polyethylene (HDPE) and linear low-density polyethylene (LLDPE) markets are very simple. As each head for his or her lowest ranges of development in 2022 for not less than 20 years, it’s all in regards to the nation’s economic system.
Each the polymers, as with each different chemical and polymer in China, face:
- China’s shift away from “development for development’s sake”. Because it makes an attempt to construct a brand new financial development mannequin (we don’t know if this may work), plenty of collateral harm must be anticipated, most notably in the intervening time within the real-estate market, which, because the ICIS information present, has been a significant driver of China’s terribly robust PE demand development because the property bubble started to inflate in 2009. In August this yr, home costs in practically 70 Chinese language cities declined, based on Reuters.
- Within the short- to medium-term, China’s zero-COVID polices will add additional downward momentum to the economic system. China can not afford to scrap the insurance policies due to the restricted effectiveness of its vaccines.
One other issue is rising chemical compounds self-sufficiency, the roots of which we are able to hint again to 2014 when the Chinese language authorities determined to far more closely in home capability. When Beijing says it will do one thing, it normally does it.
As a reminder of an earlier publish, the China Customs and ICIS manufacturing information present that HDPE demand is in line to fall by 4% this yr. The China Customs January-July numbers counsel that HDPE web imports in 2022 will fall to five.6m tonnes from 6.4m tonnes in 2021 AND 8.9M TONNES IN 2020!
LLDPE demand is that this yr on observe to additionally fall by 4%. The January-July China Customs information counsel web imports at 4.7m tonnes versus 5.5m tonnes in 2021 and 6.6m tonnes in 2020.
The story of China’s low-density polyethylene (LDPE) market is extra sophisticated. However, in fact, as I shall describe now, its demand can also be being affected by the brand new macroeconomic fundamentals.
Booming photo voltaic panels demand and ethylene vinyl acetate pricing
The chart under helps clarify why we’re heading for a 3rd yr in a row of contracting LDPE demand in China.
As you possibly can see, the worth premiums for the 2 Asian benchmark grades of EVA (ethylene vinyl acetate) over CFR (value & freight) China LDPE began to take off from March 2020 onwards and have since remained at very elevated ranges.
EVA and LDPE are made in crops that may swing between manufacturing of both polymer. Producers have swung to EVA due to the a lot stronger pricing that has translated into stronger margins relative to LDPE.
The principle driver of those traditionally excessive premiums is booming demand for photo voltaic panels. EVA is used as encapsulants in manufacturing photo voltaic panels, with many of the world’s panels made in China.
I’m afraid we’re heading for the deepest financial downturn that the majority of us could have seen in our working lifetimes. Occasions akin to at the moment are those who led to the stagflation of the Seventies.
We have to add to the stagflation our excessive overreliance on China as an engine of financial development as this engine splutters and doubtlessly stalls. However whereas demand for chemical compounds on the whole goes to see deep contractions, any chemical or polymer linked with sustainability will do positive (extra on this theme in a later publish).
So, I wouldn’t be stunned if these record-high EVA value premiums continued, however large will increase in Chinese language EVA capability.
Now take an in depth have a look at the chart under, which exhibits CFR China LDPE value premiums over CFR China LLDPE C4 movie grade. They’ve reached report highs since January 2019. However whereas premiums nonetheless stay elevated, they’ve fallen very sharply since October 2021 (bear with me – extra on this decline in premiums later within the publish).
LDPE and LLDPE movie grades compete for most of the similar end-use market. Converters have switched to consuming extra LLDPE and fewer LDPE as a result of LLDPE has been comparatively less expensive since January 2019.
LLDPE has been at report reductions to LDPE since that month due to the massive build-up in world LLDPE capability in contrast with smaller will increase in LDPE capability. The LDPE market has additionally been made tighter by the manufacturing cutbacks ensuing from higher EVA pricing and margins.
A lot for what’s completely different about LDPE versus the opposite two grades of PE. Now, let’s deal with the similarities, beginning with the chart under.
The annualised January-June information solely indicated a 4% decline in full-year demand. What a distinction a month has made. The January-July numbers level to an 8% fall in demand this yr. This is able to be the worst annual fall in development since 1990.
As normal, the above chart additionally consists of two different situations for 2022 LDPE demand – a best-case consequence (State of affairs 1) and a worst-case end result (State of affairs 3). State of affairs 2, the 8% fall in demand, is what is usually recommended by the January-July information.
In January-July 2022 on a year-on-year foundation, ICIS estimates that native LDPE manufacturing was down by 9%. That is regardless of latest falls within the EVA value premiums over LDPE and the LDPE value premiums over LLDPE. This yr’s fall in LDPE manufacturing due to this fact appears to level to macroeconomic weak point.
Underlying how LDPE can also be being affected by the broader financial context was the ten% year-on-year fall in web imports in January-July. The decline occurred regardless of what the chart under tells us.
Regardless of the destructive China LDPE demand development that we noticed in 2020 and 2021, native working charges had been wholesome. However this yr they give the impression of being prone to fall off a cliff. Mix this with the autumn in web imports – regardless of what may very well be record-low working charges – and I relaxation my case!
Right here is extra proof for the prosecution. CFR China LDPE movie grade spreads over CFR Japan naphtha prices have held up very nicely to date this yr in contrast with the spreads for HDPE and LLDPE. However, because the chart under confirms, LDPE spreads have not too long ago fallen very sharply. Spreads by no means lie. They continue to be among the finest measures of demand.
Now allow us to have a look at precise China LDPE and LLDPE costs. Each have not too long ago seen sharp declines partly on the again of weaker naphtha prices (additionally included on this chart), but additionally due to the declining prospects for the Chinese language economic system. Word that naphtha is down on weaker oil costs, with oil costs pushed decrease by what is going on within the Chinese language economic system.
The autumn in LDPE spreads over naphtha is the results of LDPE costs falling extra quickly than the declines in naphtha prices – proof of an absence of producer energy in value negotiations.
And eventually, for the sake of completion, see the slide under.
I once more offer you three situations for this yr’s web imports, with State of affairs 2 primarily based on the January-July information annualised (divide by seven and multiply by 12). Internet imports at 2.7m tonnes in 2022 would evaluate with 2.9m tonnes in 2021 and three.3m tonnes in 2020.
Don’t be misled by claims over an financial restoration
Some commentators nonetheless consider that China’s economic system will bounce again by the tip of this yr. I can not see this taking place, and the prospects for 2023 usually are not wanting good.
We’re coming into a wholly new period on the whole for the chemical compounds trade due to quick, medium -and long-term occasions in China and elsewhere. Buckle up for a really troublesome journey and get on with constructing new enterprise fashions.