23:12 PM | January 25, 2021 | Clay Boswell
Polyolefin prices and producer margins recovered smartly from the onslaught of COVID-19 last year, say analysts at IHS Markit. "Earlier in 2020, we had expected demand for polyethylene (PE) and polypropylene (PP) to be severely impacted by COVID-19, resulting in lower margins for the producers," says Utpal Sheth, executive director/polyolefins at IHS Markit." While that held true in Q2, the situation took a turn for the better in the second half. Particularly during Q4, polyolefins prices and producers’ margins surged."
Certain macroeconomic factors contributed to the resilience of the polyolefins market. Low interest rates played a role by reducing the cost of borrowing and encouraging speculative buying in commodities. The depreciation of the US dollar versus China's renminbi also supported polyolefin prices. "This meant that even as domestic prices increased in China, import prices were cushioned by the depreciation of US dollar against the renminbi," says Sheth. "The dollar has depreciated around 9% against the renminbi since May, even as domestic linear low-density polyethylene (LLDPE) prices increased by 19% during the same period."
Another factor was the overall strength of China's economy, which grew by 2.3% despite a 4% decline in the global economy. This was a boon to the polyolefins market because China, while contributing just 17% to global GDP, accounted for 33% of polyethylene demand and 40% of polypropylene demand, according to figures from IHS Markit.
Ultimately, supply and demand drive pricing, and here polyolefins were advantaged by their usefulness in the specific circumstances created by COVID-19, Sheth points out. "Plastics demand in food packaging, health and hygiene, e-commerce, and single-use applications accelerated due to the changing lifestyle during the pandemic," he says.
Demand into packaging had already been rising on the back of the growing online economy, and though the parallel trend toward sustainability attenuates these gains by driving increased recycling, the situation is not always straightforward. China consumes huge amounts of recycled resin, but during the second half of 2020, there was not enough available--the small, family-owned recycling companies at the base of the supply chain were hit hard by the pandemic. "Shortage of manpower and lockdown restrictions made it challenging for these smaller recycling companies to operate," says Sheth. As a result, China's consumption of recyclate declined by 26% in 2020, or about 1.4 million metric tons, boosting demand for virgin material and supporting prices.
The supply of virgin material was also affected by the pandemic. "If all the PE plants scheduled to start operations during 2020 had started without delays, the market would not have tightened as it did during the fourth quarter [after hurricanes Laura and Delta struck] the US," says Sheth. "However, the pandemic slowed down several projects resulting in a significant delay in new plant startups during the year. Thus, while the demand surged, supplies were constrained by new plant startup delays and unplanned outages." PP projects were also delayed by the pandemic, pushing back anticipated oversupply, while demand increased into food takeaway packaging and medical products such as face masks, personal protective equipment, syringes, and IV bottles. "China used to manufacture about half of the global consumption of face masks prior to COVID-19," he adds. "The production volume increased by about 28 times in 2020."
Disruptions in trade flow and logistics have compounded these effects. "The supply-demand imbalance for empty containers and shipping routes resulted in doubling of freight rates from the Middle East and Asia to the Americas, Europe and Africa," Sheth notes. "Moreover, it resulted in inordinate delays in exports, thus tightening availability at the destination markets and stoking higher polymer prices."
With China's GDP forecast to grow 7.4% this year, global GDP to grow by 4.4%, and the dollar to further weaken, Sheth expects polyolefins demand and prices to continue rising. "We continue to expect a similar trend of consumer behavior as that of 2020 in 2021," he says. "Hence, demand for PE/PP, especially in packaging is expected to grow at a rapid pace. China’s demand is expected to grow at about 8%, and global demand is expected to be at about 5%."
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