BLOG: Your new China stimulus noise-cancelling headphones: PE spreads and margins

SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson: Last week’s launch of a new “stimulus bazooka” by the Chinese government might lead to a rally in chemicals and polymer pricing.

But so what if prices go up over the next few weeks? The price rises will be of little long-term consequence unless we see big shifts in spreads and margins in the key polyethylene (PE) market.

Between January 2014 and December 2021, northeast Asia integrated variable cost naphtha-based PE margins averaged $451/tonne; from January 2022 until the third week of September, they averaged just $2/tonne.

In late 2019/early 2020, northeast Asia PE margins briefly turned negative as oversupply increased. But the full downturn was delayed by reduced feedstock availability and a surge in PE demand resulting from the pandemic. Then came the Evergrande Moment

Average CFR China PE price spreads over CFR Japan naphtha costs are at just $280/tonne so far this year, the lowest since our price assessments began in 1993. We have seen three consecutive years of new record-low spreads. It is of course no coincidence that the three years have followed the Evergrande Moment.

HDPE spreads would have to rebound by 129%, LDPE spreads by 48% and LLDPE spreads by 88% to see a return to the old market conditions. Average PE spreads would thus have to rise by 80%.

Follow the ICIS PE spread and margin data every week to discover whether a recovery is really happening in China.

My view, as you know, is that China’s economy faces deep long-term challenges resulting from the end of the real-estate bubble and an ageing population. The extent to which it can maintain its dominant role in global exports is also in question because of a much more difficult geopolitical environment.

I don’t believe that any amount of likely economic stimulus in China (there are political and economic limitations on stimulus) can fully address these challenges. It is what it is. We need to get used to a Chinese chemicals market where demand growth for some products might even go negative.

You may disagree. But what we can and should agree on is the story that’s been consistently told by PE spreads and margins since January 2022.

Editor’s note: This blog post is an opinion piece. The views expressed are those of the author, and do not necessarily represent those of ICIS.