By John Richardson
AN ENGLISH expression or saying is, “when it rains it pours”, meaning when we are experience troubled times, the times are often extremely troubled.
So is the case with the global chemicals industry as I discussed in my post last Tuesday where I suggested that there would be no recovery until 2026. I went further last Friday by raising the concern that global demand could be shrinking, which is what some of my senior industry contacts think.
All of us should have all been prepared for this. The demographics data told us that China’s “economic miracle” couldn’t go on forever. We have known this since the early 1990s. And we’ve known since 2009 that China’s experiment with debt-fuelled, real estate-driven growth couldn’t go on forever.
Further, since the Evergrande Moment in August 2021 everyone should have recognised that the China miracle was over. ICIS data on chemicals and polymers spreads and margins tell us this, as the latest spreads chart on polypropylene (PP) below confirms.
From 2003, when our pricing assessments began, until 2021, spreads over naphtha feedstock costs never fell below $400/tonne. As the table below the chart shows, the average of the three PP price spreads in 2003-2021 was $562/tonne.
But from January 2022 up until July of this year, the average of the three spreads was just $239/tonnes. The average spread would thus have to recover by 136% for normal market conditions to return.
What’s making the rain come down in torrents rather than a mild drizzle is that the popping of the real state bubble, represented by the Evergrande Moment, occurred as China’s demographic crisis further depressed chemicals markets. So did rising China chemicals self-sufficiency. In PP, we estimate that this year’s local capacity will be more than 100% of local demand, up from just 60% in 2010.
The 1992-2021 Petrochemicals Supercycle, which was the tide that lifted all boats, even the boats of the most uncompetitive chemicals companies, is over.
Higher freight rates add to the challenges
Data sets often sit in different silos which means that the full value of the data is only realised if the walls of the silos are demolished.
Take as an example the ICIS China pricing data and the China Customs department chemicals and polymers import data. Prices times imports give a proxy for sales turnover by country.
The above chart shows average CFR China PP injection, block and random copolymer prices in 2022 and 2023 multiplied by the number of tonnes of PP that China Customs said was imported from the country’s major trading partners.
I then subtracted the 2023 resulting numbers from 2022 to get estimates of sales losses by country in 2023 (there is a way of doing this by individual producers. If interested, contact me at john.richardson@icis.com). 2022 numbers were subtracted from the 2023 to assess sales gains.
South Korea lost an estimated $377m in sales in 2023 versus 2022 on lower prices and a decline in imports by China. In 2022, imports from China’s imports from South Korea were 1m tonnes in 2022, but last year they fell to 785,000 tonnes.
Saudi Arabia’s China PP sales fell by $168min 2023 over 2022. This was againabout a fall in pricing as China imported 349,000 tonnes from Saudi Arabia in 2023 compared with 458,000 tonnes in 2022.
As you can see, and using the same approach, Taiwan, Singapore, the UAE, Japan and Thailand also made losses in descending order. The countries and regions that saw sales gains were Kazakhstan, thanks to a recently started-up plant, the Russian Federation and Malaysia.
South Korea’s PP industry is in deep trouble. Its business model of growing exports through capacity additions worked extremely well during the 1992-2021 Petrochemicals Supercycle.
But now that China is moving towards complete self-sufficiency in PP – which is likely to happen soon in homopolymer grades with copolymer grade self-sufficiency probably a few more years away – South Korea is losing its biggest export market.
Saudi Arabia’s mainly PDH-based PP capacity, as most of its steam crackers run on ethane, doesn’t have any feedstock edge as propane has alternative value for Saudi Aramco because it can be exported as LPG. So, essentially, Saudi Arabia is in the same position as South Korea.
I worry about the future of Singapore’s commodity chemicals industry in general given the island nation’s very small local demand and its heavy reliance on China as an export market (it is not just in PP where China’s self-sufficiency is increasing).
The chart below shows that the trends highlighted earlier have continued in 2024.
Saudi Arabia saw its PP sales in China fall by $85m in January-June 2024 versus the same months in 2023. This was again on lower pricing and a fall in imports to 96,000 tonnes from 182,000 tonnes.
South Korea is also among the losers in 2024. Its sales were down by $35m in January-June as imports reported by China slipped to 353,000 tonnes from 380,000 tonnes.
Another storm cloud that has burst is the surge container freight rates resulting from the Red Sea crisis.
“We lose money if we export to China because of the fall in pricing and because of the rise in freight rates, so we try to find alternative markets,” said a source with a Middle East PP producer.
Unrest in the Middle East could escalate. Concerns are growing of a full-scale regional conflict. Combine the Red Sea issues with the surge in shipping costs during the pandemic and logistics disruptions have become more than just a one-off short-term challenge.
Although this doesn’t relate to the main themes of this blog, it is also worth noting that the Red Sea crisis is adversely affecting PP exports to Europe.
For the South Koreans, arbitrage to Europe, which was their third-biggest PP export market in 2023, is said to be closed. The chart below shows the surge in South Korean freight costs to Europe.
“We can sell to European converters, but they say ‘Here’s the price we want’ which factors in the extra shipping time around the Cape of Good Hope and uncertain arrival times. This is making sales to Europe loss-making for us,” added the source with the Middle East PP producer.
China’s surge in PP exports
China’s PP exports remained at record highs in January-June as the table below tells us.
I believe it is likely that China’s exports will be subject to more and more antidumping and other protectionist measures. Compared with 2021, before the surge in Chinese exports began, Chinese PP is going to a far wider range of destinations in response to oversupply.
I also believe that China’s PP demand growth could be flat this year. Or we might even see a decline in demand growth as China’s economic problems build.
Conclusion: Three scenarios for China’s chemicals demand growth
Here are my three scenarios for China’s long-term chemicals and polymers demand growth in general with percentage weightings – i.e. how likely I view each of the scenarios.
I am becoming more and more convinced that we are entering a period of declining global chemicals growth, as I again discussed last Friday.
This is what the demographics, debt, climate change and geopolitical factors seem to be telling us. Chemicals companies need to respond by deciding whether they can continue to compete in commodity chemicals,
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