The Chinese polyolefin market has been flying at a double-digit rate for the past decade, but the golden age may come to an end. The market already has shown signs of an abrupt landing, and the slowing trend is going to continue.
At least that is the view of senior analyst Frank Zhao with Chemical Market Resources Inc. of Houston. In a Sept. 21 interview, Zhao said Chinese imports of polyolefins are decreasing for the first time in a decade.
The first five months of 2005 already have seen a 20 percent plummet in China's imported polypropylene and a 6 percent drop in polyethylene. Imports of low density PE in particular have tumbled 36 percent compared with a year ago.
These figures are surprising, given that China's PE and PP demand has grown at averages of 12.7 percent and 14.9 percent, respectively, for the past 10 years. But the less-known truth is that Chinese domestic production capacity has grown slightly faster than demand during the same period.
By 2004 China's PE output had quadrupled to 8.82 billion pounds, compared with 2.2 billion pounds in 1995. At a similar rate, PP output has risen rapidly to 9.92 billion pounds.
China now produces more polyolefins than it imports. In 2004, Zhao said, 50 percent of the PE consumed in China and 40 percent of the PP came from abroad.
Meantime, demand is cooling. During the past decade, China's polyolefin demand has surpassed its gross domestic product by an average of 1.6 times. But in 2004, polyolefin demand grew only 5.7 percent, while GDP grew 9.5 percent.
The slowdown was mainly triggered by high oil prices, Zhao said.
``The Chinese converters are under huge pressure,'' he said. In reaction to higher resin prices, processors focused on cutting costs. Some Chinese companies try to use less material in the same products, for instance, to minimize the bottle walls, others choose to downgrade the quality and still others bring in more recycled plastics.
Imports of recycled plastics have been growing faster than 20 percent annually the past two years, he said, and the volume of imported recycled plastics equaled 10 percent of China's consumption of virgin plastics in 2004.
Recycled plastics, however, are mainly used in products that are sold domestically. ``The export market requires higher quality,'' Zhao said.
Another highlight in China's 2005 polyolefin market is the surging volume of linear LDPE imports. From January through May 2005, the figure leapt 35 percent compared with same period last year.
``The phenomenon is driven by the demand in agricultural film,'' Zhao said. China cut the tariff on imported LLDPE resin from 11.6 percent to 6.5 percent in January, in part to satisfy roaring demand from agricultural film extruders.
Yet, is the heyday for China's polyolefin market phasing out? Zhao's answer is ``depending on your own expectations.'' Nevertheless, the market will grow at a more modest and sustainable rate than in the previous decade.
Zhao projects a 5-7 percent growth rate from 2005 through 2015 - staying lower than GDP growth.
China's slowing economy is Zhao's first and foremost reason, and he also mentioned the influence of the 2008 Olympics in Beijing - after the event, demand for plastics products, especially pipes, wire and cable, will fall 20 percent or more.
Still, that 5-7 percent growth rate translates to a potential 34.6 billion- to 41.5 billion-pound market for PE and a 32 billion- to 38.1 billion-pound market for PP in 2015.
The supply/demand gap for PE is likely to remain at 8.8 billion to 11 billion pounds and PP at more than 8.8 billion pounds through 2015. Meanwhile, the growth rate of polyolefin imports will continue to decrease in the coming decade.
``It's like a same-size cake targeted by more and hungrier eaters,'' said Zhao, making a metaphor for the competition landscape of countries trying to export to China. Most likely, Middle East companies will grow at the expense of other Asian competitors, he said.
Currently China's majority of polyolefin imports are from Asian countries including South Korea, Japan, Malaysia, Thailand, India, Taiwan and Singapore. But the Middle East has been gaining larger shares, and Zhao expected the trend to continue.
``The feedstock advantage of Middle East [polyolefins] will force the current exporters to China to find other outlets for their capacities,'' Zhao said. That will affect the global market, he added.
Zhao also predicted 70 percent of China's polyolefin demand will be met locally by 2015, as domestic capacity continues to grow, including joint ventures with Western petrochemical giants.
In fact, while the Chinese petrochemical industry has remained state-owned in general, major players like China Petroleum and Chemical Corp. (Sinopec) and China National Offshore Oil Corp. (CNOOC) are bringing in more international partners.
In 2005 alone, three 50-50 joint ventures have started or will start, including Shanghai Petrochemical Co. (Secco) between British Petroleum plc and Sinopec Shanghai; BASF-YPC Co. Ltd. between BASF AG and Sinopec Yangzi; and CSPC, a Shell Oil Co. and CNOOC company. Secco in Shanghai and BASF-YPC in Nanjing have operated since June, and CSPC in Huizhou plans to start in December.
``These `big three' will add a combined 2.3 million tons of ethylene capacity,'' Zhao said.
A fourth joint venture, ExxonMobil Fijian, plans to start production in 2008. The 50-25-25 investment project among Sinopec, ExxonMobil and Saudi Aramco began construction in July.
Who will be the next foreign participants in China's polyolefin production? Zhao said he saw potential in Dow Chemical Co., Saudi Basic Industries Corp. and Total SA.
After all, ``the Chinese market still presents significant opportunities for global polyolefins players,'' he said.