What Happened to PE Market after Receiving “Prohibition” Notice

On November 25, 2017, China published the result of auditing the first batch of waste plastic importing enterprises, afterwards the PE market surged. LLDPE futures, which had kept sluggish for several days, surged immediately. But after the hustle and bustle dissipated, the PE market returned to calm again. So the question is, what happened to China’s PE market after receiving the “Prohibition” notice in 2017.

The import volume of recycled PE slumped, giving opportunity to the PE market.

According to the import data of recycled PE in the past three years, it can be seen that the import volume of recycled PE was decreasing year by year, and that declined the most in H2, 2017. With the decline in recycled PE imports, the changes of consumption structure of PE had taken place. Hereinto, The average annual growth rate of apparent consumption volume of PE in the past five years remained at around 6.2%. Up to November 2017, China’s PE consumption volume was 24,400kt, rising by over 10% Y-O-Y. In addition to the high demand for PE, the sharp decline in recycled PE supply severely limited the operation of enterprises who used recycled materials as feedstock. Therefore, virgin PE market had more opportunities.

Strict conditions are needed to import recycled granules. The import pattern of PE has changed.

With regard to the import of recycled granules, most of the market rumors are ambiguous. With regard to the import tariff of recycled granules, in the category description of the HS code, the China Customs clearly pointed out that: The discharged thermoplastic plastics and scraps with single type made into “primary shape” cannot be classified into tax terms 39.15 under the category of waste plastics. Instead, they will be classified into tax terms 39.01-39.14. However, the single type discharged thermosetting plastics and scraps or mixture of two or more discharged thermosetting plastics and scraps, even after being processed into “primary form”, should still be classified into tax terms 39.15. In other words, most waste plastics can be imported under the HS code of feedstock after being processed into granules, but it is important to note that not all of the recycled granules can be imported!

In May 2014, the supervision department of General Administration of the Custom had made clear requirements on the import of recycled plastic granules: 1. The primary type recycled plastic granules made from waste plastics may not be regulated as solid waste if the same batch of imported goods has the same color and size; the shape of the granules are the same and the packaging is identical; and meet the relevant specifications and standards. 2. In the course of supervision, if the recycled plastic granules are found to be suspected of solid waste, it should be identified according to the properties of solid waste.

More China’s recycled materials enterprises began to build factories in Southeast Asia and other places, who process the waste plastics into recycled plastic granules first, then import to China and finally supply to the downstream factories. In this case, the import of recycled plastic granules will undoubtedly enter a rapid growth period. However, considering that it takes a certain period of time, and there is no clear conclusion in the link of customs clearance (At present, the recycled granules are clearly defined as the requirements of the Department of supervision and regulations of the General Administration of Customs in May 2014), the import volume of recycled plastic granules didn’t increased notably in 2017 (it had little influence on the import volume of virgin PE). But there is no doubt that in 2018, the changes in the import of recycled plastic granules will affect the import pattern of feedstock.

How will PE market change after the prohibition is implemented?

From the supply side of recycled PE, the total supply volume of recycled PE will decrease year by year from 2017 to 2018 because of the prohibition in imports and environmental protection actions. That in 2020 may recover, due to the establishment of the medium and large-scaled enterprises and the prosperity of the recycling market in Southeast Asia. That is, from 2017 to 2018, the supply gap of recycled PE will give more opportunities to virgin PE, but with the mature and large-scale development of China’s recycling market from 2019 to 2021, in addition, more recycled PE granules from Southeast Asia will flow into China, the virgin PE will be under pressure.

Considering that the rapid capacity expansion of PE in later period will aggravate the competition in the industry, PE prices will gradually drop. In the meantime, the price spread between virgin PE and recycled PE is expected to shrink from RMB 2,000-2,500/mt to RMB 1,000-1,500/mt. It is worth mentioning that although the virgin PE and recycled PE game with each other, it does not mean that the virgin PE will replace the recycled PE entirely. On one hand, under the environmental protection pressure and with the improvement of people’s quality, China’s waste material recycling runs orderly. Besides, the state subsidies will drive a large number of large-scale recycling enterprises to upgrade the technology and industrial planning. For example, Kingfa Science & Technology, Shandong Intco Recycling Resources, Sound Environmental Resources, Midea, Gree and some other home appliance and automobile enterprises are all involved in the field of recycled materials, and the products of these enterprises made with recycled materials are perfectly comparable to the virgin materials. On the other hand, as a part of the recycling economy, the recycled material itself has its political and economic significance. By this taken, it is an inevitable trend of virgin PE to coexist with recycled PE.

In a comprehensive view, the prohibition of importing waste plastics will support the virgin PE market somewhat in the short term, but it is not quite so in the long term.