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China’s latest LLDPE spread and demand data offer worrying clarity about the broader economy – Asian Chemical Connections

Linear Low-Density Polythene (LLDPE) China’s CFR (Cost and Freight) Price CFR Recent data on Japan naphtha cost underline evidence from other grades of polyolefin that China is far from a complete economic recovery.

The chart below shows the monthly price of CFR China LLDPE C4 film grade per ton CFR Japan on naphtha cost from January 2000, when our assessment began, until the week ending July 1, 2022.

Spread reached a low of $ 202 / ton in March 2022. They have rebounded moderately since then, but in the week ending July 1, they dropped to $ 235 / ton from the previous week’s $ 268 / ton and the June average of $ 277 / ton.

This fall reflects a recent ICIS Asia Pacific PE price report commentary that said confidence has waned due to endless market sentiment at the beginning of the week ending July 1.

Now let’s look at the CFR China LLDPE spread on an annual basis. Spread averaged $ 513 / ton in 2000-2021, $ 452 / ton in 2021, but averaged only $ 276 / ton so far this year.

Let us next look at the actual CFR China LLDPE price vs. the actual CFR Japan naphtha cost instead of the difference.

There is nothing new, of course, about the rapid rise in oil prices this year and thus the cost of naphtha. But, falling into the chart above, here are some important differences:

  • Oil prices, including naphtha costs, rose sharply from January 2003 to October 2008, when they collapsed due to the global financial crisis. During this long period of high cost, the CFR China LLDPE spread averaged $ 568 / ton.
  • Another long period of mainly oil price rise and naphtha consumption occurred from January 2009 to November 2014. During this period, the LLDPE spread averaged $ 492 / ton.
  • In short, in April 2020, oil prices turned negative. But from that month until December 2021 they have grown again. During this period, the LLDPE spread averaged $ 465 / ton.
  • But, as mentioned above, this year’s spread averages only $ 276 / ton.

China LLDPE 2022 demand outlook has worsened

To complete my latest round of posts on the Chinese polyolefin market – which January-May 2022 net imports and local production data examined what we have to say about the whole year – consider the LLDPE chart below.

On an annualized basis in January-April (divided by four and multiplied by 12), ICIS estimates of local production and the number of net imports from the China Customs Department suggested a 2% reduction in LLDPE demand in 2022 compared to last year. This is Scenario 1, which is my best case.

But January-May data indicate a 4% decline. This is the basis of Scenario 2, my medium-case result. Scenario 3, in the worst case, indicates a 6% contraction.

And finally, as always, see my latest estimate for China’s LLDPE net imports in 2022.

Scenario 2 is again based on January-May data – the number of net imports from the China Customs Department and the annual operating rate indicated by our assessment of local production. This year’s net imports will drop from 5.5 million tonnes in 2021 and about 4.9 million tonnes in 2020 from 6.6 million tonnes.

Scenario 1 follows my best-case demand result factor and again the 83% operating rate suggested by our January-May estimate of local output. Net imports fell by 5.1 million tonnes.

Under Scenario 3, I assume higher yields later this year as the year’s average operating reaches 85% – the base case forecast in ICIS Supply and Demand Database. Demand minus 6%. Net imports fell to just 4.3 million tonnes.

History tells us that China often relies heavily on its chemical and polymer capabilities in times of weak demand to reduce dependence on imports and increase export earnings.

China’s LLDPE exports could be supported by further yuan weakness against the US dollar for the rest of this year. So far this year, the yuan has depreciated against the greenback.

We have already seen a small pick-up of Chinese LLDPE exports. In January-May 2022, exports were 57,944 tonnes vs. 38,504 tonnes in the same month last year.

The story of China’s LLDPE imports and exports will also be shaped by how much new capacity will come on-stream later in the year. In 2021, local capacity increased by 20% and in 2022 by a further 11%.

The economic downturn continues

Contrary to the clarity of ICIS data, the noise surrounding China’s macroeconomic statistics continues. Take the May Official Purchasing Managers Index (PMI) as an example.

The manufacturing index, which mainly covers large businesses and state-owned companies, rose to 50.2 in June, the first time since February this year that it crossed 50, CNN wrote in a June 30 article.

“The non-manufacturing PMI, which includes the construction and services industries, rose to 54.7 in June from 47.8 in May. This is also the first time the index has returned to the expansion zone in four months and its strongest reading since May 2021, ”CNN wrote in the same article.

Economists saw improved PMI results as a sign of increased economic activity due to easing lockdowns in big cities like Shanghai.

But ING, analyzing PMI readings, wrote: “The rebound in non-manufacturing PMI was mainly due to more construction activity. It signaled a resumption of infrastructure construction and some state-backed real estate developers also resumed home and office building.

“Employment sub-indices have shown further decline in workers in both PMI series. This will continue to put pressure on retail sales and selling prices.

“The selling price sub-index, from which we can estimate demand for both goods and services, was weak in both non-manufacturing and manufacturing PMIs, although lockdowns were further localized in June.

“Profit margins could come under further pressure because now costs are rising while selling prices are falling.”

And this is July 4 The Wall Street Journal The article reminds us that China’s strict adherence to its zero-quad policy means that there is always the risk of a new lockdown.

“China is imposing new sanctions on some former cities because the COVID-19 cases have reached their peak in more than a month,” he wrote. WSJ As it reported new lockdowns in Anhui and Jiangsu provinces.

And I’m concerned that while coronavirus is largely under control for the rest of this year, retail sales will be negatively affected by economic restructuring (mainly the deflation of real estate bubbles) and rigorous testing and quarantine regulations.

Conclusion: Keep looking at our numbers

As I said, ICIS Chemical Data provides clarity in economic confusion, if you subscribe to our data with the help of market intelligence from our analysts and editors.

And what seems clear from recent data from China is that something very unusual is happening. In 25 years of following chemical data and China’s economy I think the country may be nearing recession for the first time or already.

Let’s hope the number of chemicals goes in the right direction, but I’m afraid it won’t happen for the rest of this year.

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