Rise in China's plastics consumption in 2012 insufficient to melt regional supply glut

China has forecast its economy will grow 7.5% in 2012, the slowest in eight years, with exports crimped to traditional customers such as Europe and the United States. China's consumption of plastic could grow by upto 7% in 2012 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, as per Reuters. Weak traditional export markets and Beijing's steps to cool economic growth continue to impact sales. As a result, Asian plastic exporters face possibility of scaling back production further this year, in turn cutting demand for naphtha. A Reuter’s survey of five consultants and a leading industry body sees consumption of plastic by Asia's top importer growing around 5-7%, up on last year's flat growth but well down on the double-digit growth in 2009-2010. Higher oil prices with Brent crude averaging US$118.21 a barrel this year, up 6.6% from 2011's US$110.91, are also squeezing margins, which could push plastic makers to cut runs, hitting demand for ethylene made from naphtha. Several processors are buying need based and keeping inventories low. If raw material costs get too high, buying would come to a virtual standstill.
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. Over 70% of the polyethylene consumed in China goes into packaging, while more than 60% 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, 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% this year. China consumed 17.27 mln metric tons of polyethylene in 2011, with imports contributing 43%. Consumption figures for polyolefins is expected to see a slight rise in 2012 by around 5%, driven mainly by increasing domestic demand for consumer products. On the other hand, polypropylene imports this year are seen falling again due to higher local production. 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% this year to 39.7 mln metric tons, according to data from IHS Chemical, polyethylene production is expected to grow 8% to nearly 42.6 mln metric tons.

High-density polyethylene prices were quoted at about US$1500/ton on a cost-and-freight (C&F) basis in China last month versus around US$1300 in mid-January, up by about 15%. In contrast, naphtha-based ethylene prices were up nearly 22% to around US$1400 in mid-April compared to mid-January. IHS sees operating rates at Asian plastic producers cut to 85-88% in 2012 and 2013, against about 90% on average last year. Run cuts are not the only difficulty Asian plastic exporter’s 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 it is now being explored by South Korea, Spain, Qatar, Saudi Arabia and Thailand. 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% in 2011.