By John Richardson
WHAT A DIFFERENCE one month has made, as the chart above informs us. In January-March 2022, ICIS China production estimates plus China Customs Department net import data, when annualized (divided by four and multiplied by 12), suggested that growth in demand for polypropylene (PP) in China over the full year would be 4%.
But the January-April data for this year suggests almost zero growth on last year, to be precise a 0.3% increase in demand.
We must of course be very careful before drawing any firm conclusions from an additional month of data.
April’s decline is the result of a sharp drop in net imports, mainly due to lower imports, and this trend could easily be reversed.
But the gloomier full-year outlook suggested by the April data also points to the growing negative impact of China’s zero-COVID lockdowns.
Politics, economy and confinements
Some 328 million people were estimated by Nomura in early May to be under varying degrees of lockdown, representing 31% of the country’s GDP.
Great news is that Shanghai appears to be reopening. By Wednesday this week, the number of new coronavirus cases had fallen to zero.
Shanghai generates around 3.8% of China’s GDP. The city’s ties to the rest of the Chinese economy and the global economy through its large manufacturing capacity and its container port, the largest in the world, likely means that this percentage underestimates Shanghai’s importance. .
But a widely expressed scenario is that nationwide lockdowns will remain prominent until a November political meeting, when Xi Jinping, China’s president, is expected to be given a third five-year term. He gave his strong support for zero-COVID.
There are other reasons to develop scenarios for the demand for PP and other petrochemicals around an extended period of major lockdowns.
On Wednesday, May 11, a peer-reviewed study from Shanghai Fudan University was published in the Nature log. The study indicates that a decision by Chinese authorities to lift zero-COVID measures could lead to more than 112 million symptomatic cases of coronavirus, 5 million hospitalizations and 1.55 million deaths.
“We find that the level of immunity induced by the March 2022 vaccination campaign would be insufficient to prevent a wave of Omicron that would cause ICU capacity to be exceeded with a projected peak ICU demand of 15 .6 times the existing capacity,” the authors wrote. .
The study, however, said that with access to vaccines and antivirals and “continued implementation of non-pharmaceutical interventions”, authorities could prevent the health system from being overwhelmed. He suggested that these factors could be further targeted in future policies.
But implementing policy changes would likely take a long time, as it could involve importing foreign vaccines that would be more effective than Chinese versions and boosting low vaccination rates among the elderly. China’s vaccination program has slowed due to shutdowns.
An article from mid-April of FinancialTimes reported that only 57% of people over 60 had been fully vaccinated with three shots.
A study from the University of Hong Kong, published in March, found that over-60s who received two doses of Sinovac’s CoronaVac vaccine [a local vaccine] were three times more likely to die from Covid than those who received two doses of the BioNTech/Pfizer vaccine, the FT article.
Coming back to politics, The Economistin this article from last week’s issue, argued that local officials’ adherence to zero COVID policies had become a test of political loyalty.
That meant the risks to local officials of an outbreak of cases in their areas were greater than reporting weak GDP growth, the magazine said.
Once the major lockdowns end, there will be a surge in demand as the millions of people previously unable to leave their homes start spending again. Restaurants and shops will surely be full to bursting again.
But, as noted in my May 20 post when I provided scenarios for China’s ethylene equivalent demand in 2022, the extent of the post-lockdown rebound will depend on the nature of government stimulus.
The “supply-side” stimulus, involving corporate tax breaks, cheaper bank loans and the growth of the real estate sector, faces the law of diminishing returns.
High debt levels and overcapacity in manufacturing and real estate have reduced the effectiveness of this type of stimulus. Most of the new stimulus measures announced so far this year have been on the supply side.
Where the “greatest value for money” could be in demand-side stimulus measures such as cash transfers to households and spending vouchers.
Hence my three scenarios for Chinese PP demand in 2022 in the chart above:
- Scenario 1: Major lockdowns end no later than Q3 and recovery is primarily demand-driven. Consumption increases by 2% compared to 2021.
- Scenario 2: As the January-April data suggests, growth is flat. This again implies major lockdowns ending no later than the third quarter. But the upside is limited as the stimulus remains largely supply driven.
- Scenario 3: Containment measures remain largely in place for the remainder of this year, rendering the nature of academic recovery and much of the economy frozen. Growth fell by 4%.
I must again stress that these are my opinions only and do not represent the kind of in-depth script work you need to do to test your business. This type of scenario work is available from our consultants and analysts.
China’s net PP imports in 2022 could be as low as 200,000 tons
What is remarkable about our production estimate for January to April 2022 is that, when again annualized, it suggests an exploitation rate of 79% for the year 2022. This compares to the ICIS Supply and Demand Database estimate of an 82% exploitation rate.
The lower operating rate from January to April reflects the significant operating rate reductions that have taken place in a so far unsuccessful attempt to bring naphtha-based PP margins back into positive territory.
Embedded variable cost margins in Northeast Asia have been mostly negative since mid-December 2021. In the week ending May 20, 2022, they were minus $117/tonne.
Using the first two of my three demand growth scenarios from today’s first graph, let’s assume that 79% is the operating rate for the year 2022.
A 2% growth in demand would result in net imports almost the same as last year, at around 3.4 million tonnes, but still well below 2020, when they were 6.1 million tonnes . Flat growth would drop net imports to 2.8 million tonnes.
In Scenario 3, demand growth drops to minus 4% and operating rates average 82%, with China increasing capacity in 2022 by the projected 13%. Net imports fall to just 200,000 tonnes.
It may seem counterintuitive for China to operate its factories harder when local demand is weaker.
But with the yuan weaker against the US dollar, mining rates could be pushed higher to boost export earnings. The new capacity in China is also very effective as it includes world-class and very well-integrated factories.
Conclusion: This could be a very different China
As always, I hope that’s far too pessimistic. China may well be confusing the gloom, as it has done so many times in the past, with a rapid recovery later this year.
But you can’t hide from the risks. You should be prepared for the risks that the Chinese economy is already in recession during a period when its self-sufficiency in PP increases sharply.
We are potentially facing a very different China than most of us have known throughout our working lives, where Chinese demand growth for PP has almost always exceeded that of the world and its imports have been greater than in any other region.
Like I said, please don’t hide from the risk. Plan for these inconveniences.