European PE and PP Producers Face Re-Globalization Risks – Asian Chemical Connections

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By John Richardson

LONG-TERM COMPARISON of chemical and polymer price patterns between different regions has made sense since our industry has gone global, with China’s influence on global prices increasing since 2000.

This reflects China’s much larger role in driving global demand, which is disproportionate to the size of its population, as shown in the chart below, using polypropylene (PP) as an example.

What applies to PP applies to all other chemicals and polymers.

In 2000, China’s share of world PP demand was 15% compared to 21% of world population, according to ICIS’ excellent supply and demand database.

In 2005, a turning point was reached when, for the first time, China’s share of world demand exceeded its share of world population. That year, China accounted for 21% of global demand against 20% of the world’s population.

Last year, however, consider how significant this is: China absorbed only 18% of the world’s population, but 41% of the demand! China’s population has only grown from 1.3 billion to 1.4 billion between 2000 and 2021, with its share of global demand rising from 15% to 41%.

Now let’s compare China to the developed world.

The developed world’s share of global demand has collapsed from 61% to just 27% in 2021, a decline of 56%. This came as its population remained nearly unchanged at around 1.1 billion.

And here is the developing world.

Of the world’s three mega-regions, the developing world has experienced by far the strongest population growth, growing from 3.7 billion in 2000 to 5.2 billion in 2021. increased only from 24% to 32%.

It’s also worth repeating that slide from my September 15 post.

China accounted for no less than 60% of total global net imports of PP between 2000 and 2021. The closest second place was Europe, including Turkey, with 18%. It was one of the countries and regions that imported more than they exported.

Why the world of polyolefins is re-globalizing

But for a brief moment, China’s role in driving world prices in the markets I follow – polyolefins – was significantly reduced. Beginning in March 2021, price premiums across much of the rest of the world relative to China reached historic highs as polyolefins essentially de-globalized.

This was the result of expensive and tight containerized freight markets which limited the ability of Asian and Middle Eastern exporters to move excess supply out of North East Asia (NEA) and South East Asia. (SEA).

The oversupply was due to a slowing Chinese economy – the result of Common Welfare economic reforms – and large capacity additions in China. This compares to tighter markets overseas.

The pandemic-related economic recovery has boosted demand, particularly in Europe, the United States and elsewhere in the developed world.

The supply of polyolefins has been constrained by a lack of raw materials from refineries due to reductions in refining rates caused by the pandemic. The Texas winter storm in February 2021 and the American hurricanes later in the same year added to the tightness of PP and PE.

But the world of polyolefins is re-globalizing because freight rates are falling, as shown in the graph below.

This is the result of a drop in demand for durable goods. The drop in demand is the result of the global inflation crisis and the post-pandemic cycle of spending on durable goods and returning to services.

Lower freight rates would make it easier for major exporters in Asia and the Middle East to get PP and polyethylene (PE) out of NEA and SEA.

Capacity additions in China continue at the rate that Chinese demand for PP and PE is heading towards negative growth in 2022.

In the PP, a combination of minus 1% growth and additional new capacity could reduce net imports in 2022 to 2.4 million tonnes, from 3.4 million tonnes in 2021 and 6.1 million tonnes in 2020. Meanwhile, Chinese PP exports are increasing.

China’s slowdown is also having broader negative economic effects, especially in heavily export-oriented economies like Germany and Vietnam.

Decline in European price premiums over China

As I explained in my September 19th post – when I launched new weekly PP and Polyethylene (PE) price indices comparing China to a bunch of other countries and regions – the premiums are shrinking. This is happening as prices outside of China approach very depressed levels in China.

Now let’s take a detailed look at North West Europe (NWE) prices versus China, again using the PP as an example (patterns are similar in the PE).

Average NWE PP price premiums for block copolymer and raffia and injection grade homopolymer over China reached an all-time high of $1,192/tonne in May 2021. This was since our assessments began price in November 2002.

Premiums then fluctuated in a narrow range, reaching a high so far this year in April of $809/tonne. But since April, premiums have fallen. In September of this year, until September 16, they were at $338/tonne, compared to $425/tonne in August.

If we look at actual prices, we can see that European prices have been moving closer to Chinese levels since April.

The wide disparity in spreads between PP prices and naphtha feedstock costs has also narrowed.

The premium for NWE spreads over Chinese spreads peaked at an all-time high of $1,203/tonne in May 2021. In September 2022, again through September 16, the NWE spread premium was only $303/ton.

Spreads are a basic measure of profitability.

The EPCA and the need for a debate on China

As delegates gather in Berlin from October 4-6 for this year’s European Petrochemical Association (EPCA) annual meeting, the first live annual meeting since the pandemic, much of the debate will no doubt focus on the European energy crisis.

The good news is that gas prices in Europe may have peaked in the medium term, according to Aura Sabadus, gas editor at ICIS, in this ICIS Think Tank podcast.

“The era of cheap Russian gas may be over, but assuming all these LNG supply projects come to fruition in the next 2-3 years, we are going to see a price rebalancing. They may not go back to $8-10/MMBTu, but certainly not much above $30/MMBTu,” Aura said.

But gas rationing cannot be ruled out if the Northern Hemisphere winter is cold, despite European gas storage levels ahead of EU targets.

“Improving supply and subdued demand between summer and winter helped European gas storage levels to exceed the EU’s 80% target by October a month earlier. Germany may even be able to reach its 90% target by October 1,” wrote Will Beacham, Deputy Editor of ICIS Chemical Business in this ICIS Insight article.

Of course, the energy issue is of crucial importance for Europe, but delegates should not lose sight of the re-globalization of polyolefins.

Will European PP and PE price premiums relative to China return to their long-term averages?

In the case of PP for the same three qualities mentioned above, the monthly price premiums of ENO compared to China averaged $161/tonne between November 2002 and December 2020. Between January 2021 and the 16 September 2022, price premiums averaged $749/tonne.

What would be the consequences for prices and profitability of the European PP if price premiums returned much closer to their long-term averages?

Delegates should also reflect on the first three slides of this article and consider what happens next with global demand for chemicals and polymers as it attempts the biggest shift in its growth pattern since Deng Xiaoping’s Southern Tour in 1992.

What will happen if China’s share of global demand starts to decline? There is a risk of negative chemical growth in China next year, and possibly even beyond 2023, as no one knows if the new common prosperity approach will work.

No other country or region would be able to pick up the slack in China’s lost growth momentum, given all the other economic challenges.

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