China PP Exports Jump 38% On Jobs Drive

Polyolefins markets in Asia are not behaving in the way that they used to behave. For value-added analysis of these changes, and for price and margin forecasts for the region, contact john.richardson@icis.com for details of how to subscribe to our Asian Polypropylene and Asian Polyethylene forecast reports.

By John Richardson

NOT everything in petrochemicals is about the costs per tonne of production. Instead, you have to also take into account the political and social factors that shape decisions on new investments and on once plants have been built how hard they operate.

A great case in point is what is happening in China’s polypropylene (PP) industry at the moment. The above chart shows that in January-July of this year compared with the same period in 2014:

• China’s PP exports rose to around 114,000 tonnes from approximately 83,000 tonnes.
• This represented a percentage increase in the region of 38%.

Sure, imports remain far bigger volume wise at around 2.5 million tonnes for the same first seven months of this year. This was only slightly lower than imports during the same seven months in 2014.

But the thing is that these relatively small-volume exports are of greater significance than the raw numbers themselves. Here is why:

1. This rise in exports is not mainly the result of  re-exports, which occasionally happens in China – i.e. material that is shipped to China from overseas cannot be sold at a decent profit and so is sent overseas again by traders.
2. What these increases instead also represent are sales of coal-based PP that is made in China itself, say several industry sources.
3. On a cost per tonne of production basis, this has left people scratching their heads. This is because most coal-based plants are very far inland, and so a long way from the coast, which obviously means high freight costs in getting this material to overseas markets.
4. Because these plants are coal-based, their competitiveness versus naphtha-based plants has been eroded by the recent declines in crude-oil prices.
5. So, obviously, the decision to export material from these plants is not based on short-term economics.

“This is the typical Chinese way of growing really big in market share first before thinking about making money,” said a senior polyolefins industry source.

“And, anyway, these are government-owned companies and so they don’t have to make money,” he added.

This once again underlines the value of having great people on the ground in China, and elsewhere, who understand markets beyond raw spreadsheet data.

This, of course, has always been the case, but today I think it is even more important as the political and social factors shaping the petrochemicals business in China are undergoing rapid change.

In addition to the points made by the industry source I have just quoted, there is another reason why these new coal-based PP plants have a.) Been built in greater numbers than some people expected and b.) Are also being harder than they anticipated, and it is this: JOBS.

In the more developed eastern provinces, from the many conversations I have had with people on the ground in China, and from my own reading of the situation, I think that focus there is on better environmental protection.

The “social contract” between the government and the people who live in these eastern provinces has changed.  No longer is it just about jobs for the sake of jobs, but is also about quality of life. This is making gaining approval for new petrochemicals plants in the east harder, and is making the running of existing plants more expensive because of stricter environmental compliance. There is also some evidence that plants are being forced to close down for environmental reasons.

But out west, in the less-developed inland provinces, the government approach is different.

I am not saying that environmental considerations don’t come into a play at all in the west, but the top priority in these provinces is creating lots more basic manufacturing jobs. These jobs are essential if Beijing is going to successfully narrow the yawning per capita income gap between its eastern and western provinces.

And a great way of creating lots of employment in basic manufacturing is to first build petrochemicals plants and then run them very hard, no matter what the cost per tonne economics. Great people on the ground will tell you that this has been Sinopec’s approach for many years. In eastern China, though, at least, the approach both Sinopec and PetroChina’s is undergoing radical change.

Petrochemicals plants do not, of course, employ that many people once they have been built. But the resins etc. that they produce create an awful lots of jobs in downstream plastic processing and finished goods manufacturing.

And as the history of the petrochemical industries in Japan and South Korea shows us, petrochemicals are one of the key building blocks for developing an economy, almost regardless of short-term economics.

So the 22% rise in China’s PP production in January-July, along with this 38% increase in exports, will not have come as a surprise to both “old Asia hands” who have seen this before – and to, as I said, the great people on the ground in China.  Decisions have been made to run plants hard, even if it means selling PP at a loss in overseas markets.

I also think that there is every chance that this export trade will increase, based, again on this reading of the political and social factors – and on market intelligence from more of those great people on the ground in China. I hear, for example, that Chinese distributors are looking at building or acquiring overseas warehouses in order to export more locally-based PP.

Eventually, I can even see this happening: China, just like Japan and South Korea before it, becoming almost entirely self-sufficient in PP.

This will first happen in the basic commodity grades, but why not eventually in random and block copolymer grades? Moving up the value chain in PP grades would help China escape its middle-income trap, which is more an issue in its eastern provinces.

Far fetched? So would have been the theory a couple of years ago that China would be exporting pretty significant volumes of PP from coal-based plants.

There is no room for complacency as you build your new strategic plans for the New China.