China plastics demand won’t revive enough to melt glut

China’s consumption of plastic could grow by up to 7 percent this year after stalling in 2011, but the rebound will not be enough to melt a regional supply glut that will curb the output of plastic manufacturers and pressure the petrochemical market. Asian plastic exporters, who rely heavily on demand from the world’s second-biggest economy, face having to scale back production further this year, in turn cutting demand for naphtha - the key oil product used to make plastic. Plastic demand is a key gauge of the health of Chinese manufacturing given its use in almost everything from iPads to cars and packaging, but weak traditional export markets and Bejing’s steps to cool economic growth are still hitting sales. A Reuters survey of five consultants and a leading industry body sees China’s consumption of plastic by Asia’s top importer growing around 5-7 percent, up on last year’s flat growth but well down on the double-digit growth in 2009-2010. “2012 could still be a problematic year. You are unlikely to see growth going back to levels seen in 2009,” said Malaysia-based Mazlan Razak of consultancy Nexant Asia Inc, who projects that demand in China could grow at least 5 percent. Higher oil prices with Brent crude averaging $118.21 a barrel this year, up 6.6 percent from 2011’s $110.91, are also squeezing margins, which could push plastic makers to cut runs, hitting demand for the raw material ethylene made from naphtha. “A lot of people are going from hand-to-mouth and are keeping inventories low. If (raw material) costs get too high, people would stop buying,” Razak said. Naphtha margins, the premiums from refining Brent crude, hit a 5-1/2 month low at $76.13 a tonne on May 16 . Although less than half of the Feb. 29 high of $182.63, margins remain well above the near minus $190 in late 2008 when the crisis hit. Home demand to improve; lower imports needed In Asia, South Korea has overtaken Japan as the leading manufacturer of ethylene. Key exporters of petrochemicals to China include Taiwan’s Formosa Petrochemical Corp, Asia’s top naphtha importer, Japan’s Mitsubishi Chemical and South Korean firms including YNCC, LG Chem and Honam Petrochemical. Japanese exports have been losing out to competitors in South Korea and Taiwan due mainly to higher production costs because of the smaller scale of production and older technology. A petrochemicals trader in Japan said a strong yen was also hurting the sector along with shaky Chinese demand. China has forecast its economy will grow 7.5 percent in 2012, the slowest in eight years, with exports crimped to traditional customers such as Europe and the United States. China’s industrial production also weakened sharply in April, while the central bank recently cut the amount of cash banks must hold as reserves, in a move to support the economy. “I am not expecting much growth (in Chinese plastics demand) in the first half of 2012 as China is still facing export demand loss due to weak global economies,” said J P Nah, Asia director of polyolefins at consultancy IHS Chemical. Polyolefins is a term used for polyethylene and polypropylene, two of the most widely used plastics, which are made mostly from naphtha-based ethylene in Asia. More than 70 percent of the polyethylene consumed in China goes into packaging, while more than 60 percent of polypropylene is used for consumer and electronic goods, data from the China Petroleum and Chemical Industry Federation showed. With weaker exports to the United States and Europe, Nah said China could look to spur exports to emerging economies such as the Middle East and Africa, which could help plastic demand grow 6.5 to 7.0 percent this year. “Things might bump up in the second half of 2012 through 2013,” he added. China consumed 17.27 million tonnes of polyethylene in 2011, with imports contributing 43 percent, federation data showed. “But we expect China’s polyolefins’ consumption to rise slightly this year by around 5 percent, driven mainly by increasing domestic demand for consumer products,” said an official at the federation who declined to be identified as he was not authorized to speak to the media. On the other hand, polypropylene imports this year are seen falling again due to higher local production, the official said. Melting the excess plastic The single-digit growth in China’s plastic consumption will not be enough to break the supply glut in Asia, where production is outpacing demand. While Asia’s demand for polyethylene could grow 6 percent this year to 39.7 million tonnes, according to data from IHS Chemical, polyethylene production is expected to grow 8 percent to nearly 42.6 million tonnes. High-density polyethylene prices were quoted at about $1,500 a tonne on a cost-and-freight (C&F) basis in China last month versus around $1,300 in mid-January, up by about 15 percent. In contrast, naphtha-based ethylene prices were up nearly 22 percent to around $1,400 in mid-April compared to mid-January. “There is a huge disconnection between plastic prices and raw material costs,” said a Singapore-based trader. IHS’s Nah sees operating rates at Asian plastic producers cut to 85 to 88 percent in 2012 and 2013, against about 90 percent on average last year. Run cuts are not the only difficulty Asian plastic exporters face. They need to constantly hunt for new outlets beyond the region. For now, some of these exporters are finding an alternative outlet in Brazil, which will need another 1 to 2 years before it starts up its own plastic units. “Brazil was predominantly a market for the United States. But the South Koreans have gone there. Spain has also gone there. So have Qatar, Saudi Arabia and Thailand,” said Paul Hodges, chairman of London-based consulting firm International eChem. This is because China is becoming a less attractive option for Asian plastic exporters as it increases production at home and gets more imports from the Middle East, which uses cheaper gas feedstock. North Asian polyethylene exports to China were down 18 percent in 2011, said Hodges. “It’s a gathering storm. The export market is getting more competitive,” he said. “People have inflated ideas of Chinese demand.”