The ICIS polypropylene analysis in the linked headline is interesting in that it shows the vulnerability of the traditional exporters of polypropylene to China if China goes ahead with the longer-term capacity announcements that local producers have made to date. The analysis suggests that this development will move China moves from deficit to surplus in PP.. Where the analysis may be wrong in our view is that the current high price of propane, low ethylene margins, and low local polypropylene margins could put portions of the planned capacity on hold, and while it may come eventually, the phasing of additions may be different. Current economics make any ethylene (and associated propylene) investments hard to justify and the same with PDH. In the past, we have seen China pull back investments when economics have not worked – most notably in the early part of the last decade when oil prices were very high. At that time China moved to projects based on coal, and while that may re-emerge, local oversupply, in general, will slow things down in our view, and pushing back towards coal may not fit with whatever carbon emission targets China will set ahead of the COP26 meeting.
The ICIS article correctly points out that container rates and shipping space are major constraints to sending polypropylene from Asia to the much more attractive markets in Europe and the US today, but any normalization of freight costs could open up opportunities to move significant volumes. From China’s perspective, and confirmed in some of our meetings, this surplus is just noise. The country is looking for greater self-sufficiency in as many base materials as it can. There is likely some frustration that consumer spending in China is not back to its pre-pandemic trend and that this is adding to local oversupply today, and a swing in local sentiment, perhaps boosted by stimulus, could erase some of the current surpluses quite quickly.
We would also note that despite the shortage implied in the ICIS analysis, we see China exporting polypropylene. This is because it is not “one market’ and regional supply/demand imbalances exists – with imports satisfying shortages in some regions and surpluses appearing in others, especially as large new investment come online. For more on polypropylene and economics see our weekly report.
Source: Bloomberg, C-MACC, August 2021
