China imports 220% more LLDPE from the US as naphtha-based players lose market share
By John Richardson
THE EXTENT OF the crisis facing China’s economy, and I am afraid the word “crisis” is no exaggeration, was underlined by this 10 July Financial Times article.
“China’s economy teetered on the brink of deflation in June, adding to calls for Beijing to launch a stronger stimulus package to sustain the country’s sputtering post-Covid recovery,” wrote the FT.
This was a result of what the Financial Times said was flat consumer price inflation year-on-year in June. Consumer prices also declined by 0.2% in June this year versus May 2023.
China’s factory gate prices in June fell at their fastest pace since 2016 as demand for consumer and manufactured products softened.
This has led financial analysts to expect that more economic stimulus is on the way as China tries to hit its official GDP target of 5% growth for 2023.
But I believe there is little chance of a repeat of stimulus anywhere close the giant bazooka of 2009 because of high levels of debt. China’s total debts are some 250% of GDP, more than the US.
Even if Beijing found the wiggle room for another giant stimulus programme, it probably wouldn’t work as effectively as 2009 because of the loss of consumer and business confidence.
The loss of confidence is the result of record-high youth unemployment, geopolitical tensions with the West and most importantly, the collapse of the housing market.
China’s housing market is worth some 30% of GDP, more than any other country in economic history.
The fall in home and land prices is having a major impact on demand for the chemicals and polymers used in construction.
Many homeowners are seeing the value of their investments fall. Many more people are still waiting for construction of their homes to start, which have been purchased from financially struggling real estate developers.
Individual losses in housing markets are hurting consumer spending, affecting the demand for the chemicals and polymers that go into consumer goods.
The end of the housing bubble has occurred as China’s ageing population undermines demand for real estate.
Household formation has been declining since 2013 because of fewer young people – and because 112 boys were born for every 100 girls in 2021.
The end of old government “put option” is dampening what demand remains for housing. The put option was that Beijing guaranteed house prices would never fall. But they have, of course, now fallen, reducing the appetite for property investments.
What the latest LLDPE demand data is telling us
All chemicals and polymers markets are excellent barometers for wider economic activity because the products made are used in just about every manufacturing and service value chain.
The problems confronting China’s economy are therefore highlighted by the latest data for the country’s linear-low density polyethylene (LLDPE) demand, detailed in the chart below.
If you add the China Customs LLDPE net import data to the ICIS estimate of local production in January-May 2023 and annualise (i.e. divide by five and multiply by 12), the full-year 2023 LLDPE demand growth could decline by 2% versus last year.
This would compare with 14% year-on-year growth in 2020 – during China’s manufactured goods export-driven boom at the height of the pandemic – 1% growth in 2021 and 2% growth in 2022.
In January-May this year compared the same period in 2022, however, net imports grew by 11% to 2.3m tonnes.
What has caused the negative growth outlook is a local operating rate that could be just 79% in 2023, based on the annualised January-May production estimate. This would be the lowest capacity utilisation since 2000.
In January-May 2023 on a year-on-year basis, ICIS estimates that local production was down by 11% to 4.4m tonnes.
Northeast Asia’s struggling LLDPE industry
The next two slides explain why China’s LLDPE production was down by 11% in January-May this year, beginning with this slide.
The 1993-2021 annual average spread between CFR China LLDPE C4 film grade prices was $514/tonne. But between 1 January 2022 – when the downturn started – and 7 July 2023, the spread averaged just $291/tonne.
Until spreads get much closer to their long-term average, there will have been no recovery.
The chart below shows that northeast Asian (NEA) naphtha-based integrated variable cost LLDPE margins moved back in positive territory in March this year. This followed a period when margins turned negative from September 2022 onwards.
But let’s put this margin recovery into long-term context. From 2014 until 2021, NEA LLDPE margins averaged $425/tonne. From 1 January 2022 until 30 June 2023, they averaged minus $53/tonne.
As with spreads, until margins rebound to around $425/tonne there will have been no real recovery.
The recovery in NEA margins in 2023 is also due to a fall in raw material costs. Oil and naphtha prices have fallen because of the weak China and global economies.
During the week ending 3 March 2023, the variable cost of LLDPE production was $1,100/tonne with the LLDPE price at $985/tonne CFR China (cost & freight). Margins were minus $115/tonne.
For the ending 30 June, the variable cost had fallen to $761/tonne with the LLDPE price at $905/tonne CFR China. There had also been declines in co-product credits from selling propylene, aromatics and C4 olefins etc. Margins for that week were plus $144/tonne.
US exports to China surge on strong margins, new capacity
We can now understand why China’s LLDPE production has fallen. The next question to answer is why more cargoes of LLDPE were shipped to China in January-May 2023 compared with the same period last year.
The main reason for the increase seems to be a rise in US shipments to China because of the US’s strong cost position, the easing of logistics constraints that had constrained US PE exports in general in 2022 and further additions to US LLDPE capacity.
The chart below shows actual total US LLDPE exports in 2020-2022 and projected exports for 2023 based on the January-May 2023 US Customs Department trade data.
Now consider the table below which shows LLDPE imports in tonnes from China’s top ten trading partners in January-May 2023 versus the same period last year.
Imports by China from the US were 162,135/tonnes in January-May 2022, but rose to 519,273/tonnes in January-May this year – a 220% increase. This was by far the biggest increase in imports among China’s top ten trading partners.
The rise in arrivals from the US therefore seems to largely explain the increase in overall imports in January-May 2023 to 2.3m tonnes from 2.1m tonnes in the same period last year – the 11% increase mentioned earlier.
If the January-May 2023 trend were to continue, China’s full-year 2023 imports from the US would reach 1.2m tonnes from 534,011 tonnes in 2022.
This 1.2m tonnes would account for 89% of the projected increase in US total LLDPE exports in 2023 over 2022 – 1.4m tonnes, when you consider the exact numbers.
The other winners in January-May 2023 in China’s LLDPE import market were the United Arab Emirates (UAE), Saudi Arabia, Indonesia, Canada and Spain. Canada and Spain were new entrants into the top ten.
The US, the UAE, Saudi Arabia and Canada are advantaged feedstock players because of their access to low-cost ethane feedstock (see, in a moment, a slide on US LLDPE margins compared with those in NEA).
Feedstock advantage matters today more than before the downturn began. The advantaged feedstock players are in a strong position to exert a squeeze on the higher-cost naphtha or liquids-based players.
The liquids-based players in Singapore, Thailand and South Korea were among the countries that saw their sales to China slip in January-May 2023.
The chart below details the US LLDPE cost advantage over the liquids-based producers in NEA.
US spot ethane-based integrated variable cost LLDPE margins averaged $725/tonne with contract margins at $785/tonne from 1 January until 30 June 2023. This compared with NEA margins at $44/tonne for the same period.
US LLDPE capacity is forecast to increase by 7% this year following a 13% increase in 2022. US demand fell by 4% in 2022 and is only forecast to increase by 2% in 2023.
“The US must export around 45% of its total PE production to maintain operating rates at 90% following the latest wave of capacity expansions,” wrote ICIS Chemical Business editor, Joe Chang, in this 26 March ICIS news article.
“PE exports were constrained for much of 2022 by logistics challenges that resulted in frequent shipment delays stemming from shortages of truck drivers, warehouse space and container ship availability,” added Joe.
The logistics challenges have since faded into the background.
Conclusion: The race to the bottom
If you annualise China’s imports in January-May this year (again, divide by five and multiply by 12), this points towards 2023’s full-year imports reaching 5.6 tonnes versus last year’s 5.2m tonnes.
But another outcome is possible. If China’s demand weakens in H2 2023, where will the US then place its new output?
It is also worth also noting that China’s LLDPE capacity is forecast by ICIS to increase by 5% in 2023 following an 11% increase in 2022. This could squeeze imports in H2 2023 if the economics allow the new capacity to operate.
And to finish on what I am afraid is a very gloomy note, consider today’s final chart.
The above chart shows global LLDPE capacity exceeding demand – i.e. demand subtracted from capacity to leave the surplus.
I have picked selected years form 1990 until 2025 to make the chart easier to read but have the data for the whole period.
Between 1990 and 2021, global LLDPE capacity exceeding demand averaged 3m tonnes per year. In 2022-2025, it is forecast to average 9m tonnes per annum.
This market will likely have to get an awful lot worse before it gets better as the overcapacity is dealt with. We are, I am sorry to say, in a race to the bottom.
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