China PE Supply Pattern Changes amid Capacity Expansion
From 2018 to 2023, China’s PE capacity is gradually rising, especially from 2020. Although the import volume showed a downtrend on the capacity expansion, the imported PE resources still exerted certain impacts on China’s PE market with the advantages of low cost and high performance. What changes are seen in China’s supply pattern?
Capacity Keeps Rising Year by Year
From 2018 to 2023, China’s PE capacity is gradually rising, especially from 2020. It’s estimated that the total newly added PE capacity in the recent 6 years will reach 14,877kt/a, with a CAGR of 11.94%. In 2023, China’s PE capacity is estimated to rise by 3,150kt/a to 31,858kt/a, up 10/97% from 2022.
As for the capacity structure, the capacity of LLDPE and HDPE increased notably. Therein, the newly added LLDPE capacity in the recent 6 years is 2,315kt/a. In 2023, it’s estimated that the total LLDPE capacity will reach 9,313kt/a, with a CAGR of 5.88%. As for HDPE, the newly added capacity in the recent 6 years is 10,465kt/a, and the total will reach 18,660kt/a in 2023 with a CAGR of 17.89%. Meanwhile, the newly added units in 2023 will mainly be FDPE and HDPE ones, with capacity of 1,100kt/a each.
With the acceleration of energy structure optimization and industrial transformation and upgrading, the main feedstock of PE production in China includes naphtha, coal, methanol and light ends. In 2023, naphtha will still be the major feedstock of PE production, and the naphtha-based PE capacity will rise by 2,200kt/a to 21,228kt/a, taking up 67% of the total capacity. Light ends, as a new feedstock source for PE, have a more obvious expansion rate. The light ends-based PE capacity will reach 4,150kt/a in 2023, taking up 13% of the total. Meanwhile, the proportion of coal-based PE capacity will drop to 17% due to the lack of cost advantages.
China’s PE capacity is in hands of Sinopec, PetroChina, local enterprises and joint ventures. With the continuous advancement of refining and chemical integration projects, local enterprises have developed rapidly in recent years. In 2023, the PE capacity at local enterprises is estimated to increase by 1,350kt/a to 12,100kt/a, accounting for 38% of the total. Sinopec and PetroChina still occupy a high market share with a strong discourse power in the market, while their capacity proportion will drop from 54% in 2018 to 48% in 2023. With no newly added capacity at joint ventures, their capacity proportion is expected to contract further.
According to SCI, China’s PE output was estimated at 2,190.3kt in May, up 8.53% Y-O-Y. The operating rate was 78.74%, up 2.08% Y-O-Y. However, the overall capacity utilization rate kept falling as of May.
High Cost and Low Profit & Operating Rate
In May, the production cost PE produced via different technologies trended down. As of May 25, the average production cost of naphtha-based LLDPE was RMB 7,924/mt, and that of coal-based LLDPE was RMB 7,811/mt. Meanwhile, China’s LLDPE price declined notably. Therefore, the gross profits of producers were limited. As for naphtha-based PE producers, the gross profit turned from negative to positive, while that of coal-based PE producers furthered trended down. According to SCI, as of May 25, the gross profit at naphtha-based LLDPE producers averaged RMB 129/mt, showing an M-O-M uptrend; that at coal-based LLDPE producers was around RMB 50/mt, down 75% M-O-M.
Due to the limited profits, operating rates stayed at a low level in May. Therein, operating rates at naphtha-based PE producers were around 80%, up 1% from April. Those at coal-based PE producers were around 75%, down 7% from April. Those at light ends-based PE producers were below 72%, down 8% from April.
In May, unit maintenance increased notably from April with an estimated output loss of 350kt, up 30% M-O-M but down 3% Y-O-Y.
Imports Keep Falling
According to SCI, China’s PE import volume trended up year by year from 14,024.9kt 2018 to 18,537.3kt in 2020, while it kept falling from 2021 to 2022. In 2023, China’s PE import volume totaled 13,465.8kt, down 7.68% Y-O-Y. The import dependence degree dropped from 47.33% in 2018 to 36.27% in 2022.
From 2020 to 2022, the imports declined due to multiple reasons. First, some producers saw profit losses due to high energy prices, so most PE units ran at low loads or were shut down for maintenance. Second, the overseas prices stayed at a high level, while China’s domestic market prices were at a low ebb, dampening imports. Some Middle East-origin resources flowed to Europe, the U.S. and Southeast China with better profits, so fewer flowed to China. Third, China’s newly added capacity was put into production intensively, while the overall demand was mediocre, so buying appetites for high-priced imported resources were tepid in H1.
As for 2023, the import volume remained at a low level from January to April. As seen from the price spread (= China’s domestic price – overseas price) between China’s domestic market and overseas market, it was negative for most of the time in H1 of 2022, with the lowest hitting RMB -800/mt. This was mainly because production costs stayed at highs due to upstream crude oil prices. Overseas prices trended up supported by costs, while China’s domestic prices were low caused by mediocre demand in China. However, the price spread narrowed in H2 and was positive most of the time. In 2023, it further narrowed and fluctuated between RMB -289/mt and RMB 236/mt as of mid-May. The arrival of imported PE resources is expected to decline, while the import dependence degree will stay high in the short term.
On the whole, China’s PE industry witnessed continuous capacity expansion but a low capacity utilization rate. Meanwhile, fewer import arbitrage opportunities were seen. The import volume trended down but was still at a relatively high level. In addition, the end demand was under expectation.
All information provided by SCI is for reference only, which shall not be reproduced without permission.
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