China used to be the manufacturing capital of the world. It would buy raw materials, and sell finished products to the West. But these volumes are now in decline. The West’s ageing populations already own most of what they need, and their incomes are reducing as they enter retirement.
So China’s business model is changing. It can’t afford to lose jobs, because that would lead to social unrest. So its exports are still booming. But today, these are exports of basic products such as diesel, gasoline and polymers. And they are gaining market share by cutting prices, at the expense of other Asia producers. Thus gasoline margins in Singapore, the Asian pricing benchmark, have halved to just $7/bbl since the start of the year:
- China’s diesel exports trebled in March to 1.25 million tonnes as the economy slowed
- Gasoline exports were also up 8% to 670kt
- Gasoline stocks in Singapore are now close to all-time highs at 15MT
Polymers are seeing the same effect, as the chart shows for polypropylene (PP) in Q1:
- China’s production has risen by a third since 2014, causing imports to also fall by a third
- Middle Eastern exporters have been badly hit, losing nearly half of their volume
- Exports are also starting to rise, from a small base, following the diesel and gasoline model
- And China’s polyethylene (PE) capacity is also rising – it is up 13% versus 2014
PP is therefore following the path set last year by PVC, where China now seems set to become a net exporter. PP will take longer to reach this position, but net imports are already seeing a major decline, down to just 640kt in Q1, versus 1 million tonnes in Q1 2014. So the direction of travel is clear.
One other fact is critical, of course, as we discuss in our new Study, ‘Demand – the New Direction for Profit’. This is that PP can often substitute for polymers such as PE, PVC, PET, ABS and others in certain applications. So today’s downturn hitting the C3 chain – and European propylene prices are now trading at just 69% of ethylene prices – has wider implications. It will make it even harder for the new US PE and PP capacity to find a home.