By John Richardson
WE NOW HAVE 32 months of trade and pricing data since the end of the 1992-2021 Chemicals Supercycle and so it is worth taking stock of what the numbers are telling us.
And as we have 32 months of information to draw on since the end of the Supercycle, which is from January 2022 until August 2024, it is worth making like-for-like comparisons with the 32-month period immediately before the end of the Supercycle – May 2019 until December 2021.
A standout problem child is polypropylene (PP) where China’s rising self-sufficiency has combined with a sharp decline in the country’s demand growth.
During the Supercycle, ICIS estimates that China’s annual average PP demand growth was at 11% whereas from 2021 to 2030 we are forecasting just 4%. I believe that 4% might be overoptimistic given China’s economic challenges.
This decline in demand growth is occurring as China’s PP capacity continues to increase. Capacity is forecast by ICIS to be at 118% of consumption in 2024 and 126% in 2025. This would be up from 89% ten years ago and 63% in 2004.
A $4.6bn decline in China PP sales turnover
The table below, from the ICIS Supply & Demand Database, shows the declines and increases in PP imports reported by the China Customs department from its top ten trading partners. This is when the two 32-month periods are compared.
As you can see, the losers were South Korea, Singapore, Saudi Arabia, Malaysia, Vietnam and most notably Thailand. Imports from Thailand fell by more than half to 498,565 tonnes.
The big winner was the Russian Federation because of the shift in trade flows resulting from the invasion of Ukraine. Japan and the United Arab Emirates eked out small gains.
In May 2019-December 2021, the average CFR China PP price for injection, block and random copolymer grades was $1,077/tonne. This fell to just $980/tonne between January 2022 and August 2024.
Multiply imports in tonnes by these prices and the results are the estimates below of differences in sales turnover in the two 32- month periods.
South Korea and Taiwan saw the two biggest declines in turnover at $1.1bn and $694m respectively. Despite its feedstock advantages, Saudi Arabia saw its turnover fall by $681m followed by Singapore at $633m and Thailand at $613m.
Losses across China’s top ten trading partners totalled $4.6bn. The only winner was, not surprisingly, the Russian Federation with a turnover gain of $102m.
Another symptom of a chronically oversupplied market has been a collapse in margins, as the chat below illustrates.
For the sake of a like-for-like comparison, this chart again begins in May 2019. But in order to provide you with a more up-to-date view, the chart is extended to the third week in September this year, up until our latest margin assessments. China’s PP import data is only available up until August 2024.
The story is remarkably consistent. In spread and margin chart after margin chart, we saw dips in in late 2019/early 2020 on oversupply.
We then saw big improvements during the pandemic because of reduced feedstock supply from refineries as gasoline, diesel and kerosene demand collapsed due the lockdowns. Margins for the plants still operating were further supported by a surge in demand – the “China in, China out” story as China met much of the increase in global consumption of finished goods.
Then came the Evergrande Moment. I defy anyone to argue that this wasn’t a pivotal turning point in global as well as China chemicals markets. Any margin slide covering this period that lacks a label pointing out the Evergrande Moment is missing the essential context.
The margin numbers are as bleak as the sales turnover numbers: In May 2019-December, the average of both naphtha and PDH-based PP margins was $281/tonne, but this fell to just $12/tonne in January 2022-September 2024. And, as you can see, this latter period has involved many weeks of negative margins.
Conclusion: All of us could and should have seen this coming
China’s debts and its demographics told us from as early as 2011 that a steep fall in economic growth had to happen. We also knew from 2014 onwards, thanks to a shift in government policy, that much-greater chemicals self-sufficiency was on the way. This gave producers plenty of time to build new that reduced their dependence on China.
But how many companies took note of what the demographic and debt trends were telling us? How many took note of the threat to China’s exports from 2018 onwards as the geopolitical environment deteriorated?
My suspicion is that far too few companies were ready for the changes now well underway, which are reflected in the above demand, supply, sales turnover and margins data.
This was because people chose to believe misleading nonsense about the “rise of China’s middle class” when the numbers on China’s per capita incomes, the country’s birthrate and the rise in its debts exposed the myth.
The chemicals industry is science and data driven except, seemingly, in one critical area: Macroeconomics.