Asia PP oversupply creates major opportunity for US buyers

By John Richardson and James Ray

THE BIG PRICING divergences that you can see in the above chart could very easily continue over the next few months because of any combination of the following reasons:

• Asia supply remains long because of weaker demand in China and southeast Asia and big increases in Chinese, South Korean and Malaysian capacities (most of the new capacity is scheduled to start up in H2 2021).
• Container freight costs from Asia to the rest of the world may stay at historic highs because of long-lasting disruptions to the container business caused by the pandemic. This is trapping oversupply in Asia.
• As some 50% of US propylene supply comes from refineries, this supply may remain constrained because of the impact of the pandemic on transportation-fuels demand.
• US polypropylene (PP) inventories are only just getting back to normal following the collapse in output resulting from the February Winter Storms. There is a 60% chance that this year’s US hurricane season includes storms of above-average severity. The Texas power grid operator has forecast that demand will this week reach a record high as a heat dome bakes the state. Further interruptions in US PP supply cannot therefore be ruled out.

Now let us look at this in terms of actual prices rather than differentials (see the above chart). In January 2021, US delivered PP injection grade prices were at $1,907/tonne versus $1,068/tonne CFR China and $1,253/tonne CFR southeast Asia (SEA).

But from February onwards as US production was hit by the Winter Storms, and as oversupply kept a cap on Asian prices, the gap widened. In July, US prices were at $2,767/tonne versus $1,109/tonne in China and $1,266/tonne in SEA.

If you are a US PP buyer, you should also consider both the short -and long-term ramifications of China’s rising PP self-sufficiency.

In 2020, China accounted for 43% of global net imports among the countries and regions that imported more than they exported.

So, just imagine the dislocation in global supply and demand balances if China were to become completely self-sufficient in PP. The chart immediately above provides just two scenarios about how China’s net imports could play out up until 2031.

Complete self-sufficiency is a possibility by as early as 2026. China could even move into a net export position in that year, although there is a good case to be made that it will still need to import higher-value copolymer grades.

This year we already know that China’s imports, as opposed to its net imports (imports minus exports), may easily fall to 4.4m tonnes from last year’s 6.6m tonnes.

Here is another useful slide, from our ICIS Supply & Demand Database, which shows which Asian countries are most exposed to Chinese PP self-sufficiency.

How to avoid leaving money on the negotiating table

This leads me on to the provocative headline of the pricing differentials chart at the beginning of this post – How Much Money Are US PP Buyers Leaving on the Table?

We offer confidential, tailor-made advice on sourcing strategy. Here are four headline guides to help you build the right strategy:

1. A global sourcing strategy for PP will substantially reduce your procurement costs as we, of course live in a global economy. Buyers that only look at one region are as a result at a major disadvantage.
2. On big volume purchases, US buyers should be looking at current US pricing and five years of history versus at least one other region in order to take advantage of short-term opportunities. In most cases this means Asia, where the largest volumes are produced and consumed.
3. Having confidential import alternatives for a low but flexible share percentage share of your volumes mitigates supply disruption risks. This also puts the buyer in a much stronger negotiating position, helping to insure the best price with their domestic supplier or suppliers.
4. But this must be confidential. If you disclose you are getting your alternative supply from, say, South Korea, your domestic provider will know exactly what cards you are holding in negotiations, weakening your position substantially.

Any global sourcing strategy needs to be backed up with the right kind of data and analysis. At ICIS, we offer the complete short-term package – global price benchmarking, price forecasting, margins, our new Plant Cost Evaluator and crucially, also, supply and demand data for every country and region.

Two objections I can hear are high Asia-US container freight rates and the cost of removing pellets from bags that arrive by containers and placing them into the US railcar and hopper system.

Contract Asia-US freight rates are a lot lower than spot rates and therefore much more workable with the right sourcing strategy. Removing pellets from bags and into the railcars is economic.

Sure, product specification issues also come into play. But given the potential scale of China-driven oversupply in commodity grades of PP, these can, in my view, be resolved.

For the complete ICIS sourcing strategy package, contact either John Richardson at  john.richrdson@icis.com  or James Ray at james.ray@icis.com.