PE exporters face problems as China slows, global capacity expands

China PE May15China no longer wants to be the ‘manufacturing capital of the world’.  Its ‘New Normal’ policies are instead taking it in a new direction, where growth will be based on income levels, not property wealth effects.  So this seems a good moment to step back, and focus on the changes this is likely to bring.

The chart, based on Global Trade Information Services data highlights China’s enormous impact on the global polyethylene market (PE) in recent years:

    • The left hand side shows volume for the main exporters between 2009-2014, and also the latest position in 2014 as a percentage change versus 2013 volume
    • Thailand, Singapore and Iran have been the great success stories -Thai volume has trebled since 2009, and the other 2 have doubled sales
    • The USA and EU have been the main losers – their volumes have halved since 2009
    • The right hand side shows the main importers, with China of course dominant
    • Its demand has risen by almost a quarter over the period
    • Mexico, Turkey and India have  seen their volumes increase by around half, but from a smaller base

Part of China’s most recent rise, of course, has been artificial – related to the collateral trade. As I discussed last year, this involved companies buying imported PE on credit. They then immediately sold the volume for cash on the futures market – thus giving themselves free money for 180 days to invest in the property bubble.

But even leaving this volume aside (probably around 1MT at its peak last year), China’s imports have been around double the combined total of the other 3 major importers. And as the chart also shows, volume increased only 3% last year, and growth has been at similar levels in 2015.

So what will happen now, as China’s need for imports continues to slow, or perhaps even turns negative?  It is, after all, expanding its own capacity very quickly, in order to create higher-paying jobs as part of its new economic policy.  What will happen to those exporters who have depended on its volume?

A similar question arises over Mexico’s imports, as its new 1MT Etileno XXI ethylene cracker is due onstream next year, along with a similar volume of PE capacity.  This will reduce its imports needs by around 75%, once it is operating.  India’s imports will take an even bigger hit, as it is about to become a net exporter once 2MT of planned new capacity comes online later this year.

And, of course, there is the additional issue of the planned 40% expansion of capacity in the US, of which around three-quarters is apparently scheduled for export. I say, “apparently”, as it remains hard for me to see where exactly all this volume might go.

Everyone, of course, believes that their strategy will still work perfectly – it will just be the others who have problems.  For some, such as Mexico, this is probably true, given that the strategy has always been based on import substitution.

But I fear others may have a nasty shock ahead of them in the next 12 – 18 months.

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