Asia polyolefins overcapacity to worsen amid eurozone recession

SINGAPORE (ICIS)–Asia’s polyolefins market is bracing for a supply overhang as heavy capacity additions coincide with a significant weakening of demand from the recession-laden eurozone, and amid the slowing Chinese economy.

• Eurozone in technical recession
• Asia to welcome more than 4m tonnes/year PP new capacity in Jun-Dec – ICIS
• Economists cut China 2023 GDP growth after downbeat May data

“The European recession is a big deal for the global polyolefins business as it comes at a time when China is undergoing a long-term economic slowdown,” said ICIS senior Asia consultant for Asia John Richardson.

The eurozone is in a technical recession as its GDP shrank for two consecutive quarters. On a quarter-on-quarter basis, the region’s economy contracted by 0.1% in January-March 2023 and in October-December 2022.

Europe is the world’s second-biggest high-density polyethylene (HDPE) and linear-low density PE (LLDPE) net import market in the world behind China. It is the third biggest behind Turkey and China in polypropylene (PP).

In 2022, the European energy crisis that immediately followed Russia’s invasion of Ukraine in February had raised initial expectations that the consequent cracker-to-polyolefins rate cuts would boost the region’s demand for PE and PP imports.

“This would have helped the big Middle East and Asian exporters – in Saudi Arabia, Abu Dhabi, Qatar, South Korea, Singapore, Thailand and Taiwan – compensate for the demand crisis in China,” Richardson said.

But Europe managed to diversify away from its dependence on Russian pipeline natural gas through energy saving schemes and increased imports of liquefied natural gas (LNG). Energy costs have also declined sharply from their post-invasion high, he said.

“The challenge has instead become European demand destruction because of high inflation… Across all the polymers, there is market talk of the rest of 2023 being written off because of flat or declining demand,” Richardson said.

Indicating weakening demand from Europe, container shipping rates for the Asia-to-Europe route has fallen sharply over the past year, based on data from online freight shipping marketplace and platform provider Freightos.

WEAK EUROPE DEMAND AGGRAVATES ASIA OVERCAPACITY
Poorer European demand on top of new capacity additions and fewer turnarounds for olefins and polyolefins producers in Asia after May will add on to the oversupply conditions in northeast Asia, according to ICIS analyst Joey Zhou.

“The bearish end-user demand in Europe is affecting the Asian market,” she said.

There has been an unusual influx of European propylene cargoes being sold into Asia due to poor end-user consumption in Europe which has resulted in European propylene derivative producers cutting operating rates, Zhou added.

More than 4m tonnes/year of PP new capacity is due to come online in Asia in June to December this year, she noted.

“The imbalance of propylene and derivatives’ fundamentals will be intensified in the second half of the year,” Zhou said.

“Although propylene and PP prices could see a price recovery in the third quarter 2023, the average price in H2 2023 is still projected to be lower than H1,” she added.

Olefin and derivatives prices in June are expected to be weaker from May amid bearish demand and increasing supply, according to Zhou.

For June, the average monthly prices of 31 petrochemical commodities covered by the ICIS Asia Price Forecast is expected to fall compared with May, with butadiene (BD), propylene and methanol leading the decline.

CHINA DEMAND RECOVERY STALLS
Within Asia, demand for polyolefins is also weakening with the Chinese economy losing its recovery momentum.

In May, most economic data from China were downbeat, with exports and property sector investments posting contractions.

Growth in the world’s second-biggest economy is expected to slow down in the second quarter after expanding by 4.5% year on year in the first three months of this year.

Several major banks have cut their forecasts for China’s growth this year, with Japanese brokerage Nomura cutting its annual GDP growth forecast for the country to 5.5% from a previous estimate of 5.9%.

“We cut our growth forecasts amid rising evidence that the post-Covid recovery has been rapidly losing steam,” Nomura Global Markets Research said.

“We believe sequential growth has already peaked in Q1 and could drop significantly. The property sector recovery seems to have stalled, while exports still face strong headwinds,” it said in a note on 13 June.

Focus article by Nurluqman Suratman

Additional reporting by Pearl Bantillo and Helen Yan

Thumbnail image: At Longtan Port Container Terminal in Nanjing, China – 12 June 2023. (By Costfoto/NurPhoto/Shutterstock)