By Li Xue, Sublime China Information (SCI)

The polypropylene (PP) market could not shrug off its weakness in 2023, as more and more PP producers reduced operating rates or halted production for maintenance to accommodate the market features of big supply, high cost and limited demand. In May, the operating rates of domestic PP plants decreased to a nearly five-year low, which, to some extent, eased the pressure brought by increased supply, but the market remained weak.  

Continuous PP capacity expansion intensified regional competition

Given the easy access to raw material propylene and the relatively mature production processes, PP producers continue to expand their capacity. We’ve seen the rapid development of coal-to-olefin process and the rise of PDH route. Especially since 2019, the pace of capacity expansion has been faster. The government specified in 2014 that integrated oil refining and chemical projects at petrochemical bases should be opened to social capital, which encouraged a big number of integrated oil refining and chemical projects to be put into production with most of them equipped with downstream PP units. In 2019, domestic PP market saw a spree of start-up of integrated oil refining and chemical plants, including big ones - Zhejiang Petrochemical, Gulei Petrochemical, and Bora Petrochemical. According to statistics, the average growth rate of domestic PP capacity reached 10.94% from 2019 to 2022 (see Figure 1).

Figure 1 China's PP capacity expansion, 2010-2022

The expansion of PP capacity is speeding up in 2023. The capacity grew by 1 million tons in the first quarter and the total capacity increase was up to 2.6 million tons at the end of June. The rapid expansion of PP capacity led to an increase in supply. 

Against the backdrop of capacity expansion, the growth rate was divergent between regions. North China, South China, and South China, the main consumption areas of PP, saw faster growth rate than other areas, so the competition in these regions was fiercer. 

Year-to-date,1.6 million tons of PP capacity were put into production in South China, the biggest among regions. South China also became the region with the highest proportion of PP capacity in China (see Figure 2). North China reported capacity increment at 1 million t/a. However, there was no new capacity released in other regions. Such significant difference led to changes in the regional supply structure, as well as the circulation and transfer of PP resources. For example, 25%-30% of coal chemical resources were previously flowed into South China, but now, most of them are transferred to North and East China instead; the allocation of PetroChina PP products, especially that of general grade, has also seen significant changes.

Figure 2 Regional capacity distribution in China, 2021-2023

Supply remained elevated despite maintenance shutdowns

Usually, there is a peak season of maintenance shutdowns in April-May (see Figure 3). In May 2023, many PP producers shut units for maintenance. According to statistics, the average operating rate fellto 80.94% from January to June 2023, down by 4.05 percentage points from the same period of last year. The lowest operating rate was even seen at around 77.68%. The average operating rate of domestic PP plants was at 77.68% in May, a decrease of 0.94 percentage points month on month and a decrease of 5.16 percentage points year on year, hitting a new low in the past five years. This eased the supply pressure to some extent and offset the impact of some new capacity, thereby providing support to the market on the supply side.

Figure 3 China’s monthly PP operating rates, 2018-2023

The reduced operating rates in May lent some support to the market, but supply remained elevated on the back of capacity expansions.  

In terms of production, the domestic PP output was at 15.4552 million tons from January to May 2023, an increase of 4.34% year on year. The output in May was much higher than the same period of last year (see Figure 4). According to calculations, the domestic PP production in May 2023 was at 2.5965 million tons, up by 2.53% month on month and up by 3.41% year on year.

Figure 4 China’s monthly PP production, 2022-2023

PP prices under downward pressure as a result of the slower-than-expected demand growth

The growth rate of domestic PP demand was slower than that of supply. The average growth rate of domestic PP demand was at 8.13% from 2019 to 2022, far below that of supply. The tight balance between supply and demand in the market was gradually transitioning towards loosening situation between supply and demand. Therefore, there was even excess supply in the forefront markets. The consumption of PP was at about 12.85 million tons during January-May 2023, and the consumption was around 2.5 million tons in May, down by 1.98% month on month.

The weakening demand was the main reason for the price drop in May. Demand at home and abroad was sluggish during the month, especially when export orders were much more limited than before, leading to seasonally weaker demand for domestic PP. According to statistics, the average operating rate of major derivatives, such as plastic weaving, film, and injection, marked a month-on-month decrease in May. To be specific, the operating rate of plastic weaving decreased by 8 percentage points, that of film decreased by 2 percentage points, and that of injection decreased by 5 percentage points.

The sharp decline in demand was also the main reason for the market downturn. Figure 5 shows the operating rates of major downstream sectors in China during 2022-2023. 

Figure 5 Operating rates of major downstream sectors in China, 2022-2023

From the perspective of PP movements, the domestic PP market was fluctuating at low prices, despite some short-lived upsides. According to the characteristics of PP price movements in the past six years, the PP prices have been at a low level (see Figure 6). Taking East China PP yarn as an example, the monthly average price was at RMB7 616.94/ton during January-May, down by 11.94% year on year. The average price was at RMB7 219.29/ton in May, down by 4.96% month on month and by 16.91% year on year. The main reason for the price decrease was the supply and demand, especially the weakening demand.

Figure 6 China PP price movements in recent six years

There will be risks of market downturn amid the unmatched growth rate of supply and demand

It is undoubtful that the domestic PP supply will continue to grow in the future, and it is expected that the new capacity of domestic PP will exceed 1.9 million t/a during July-August 2023.

There is a wave of massive maintenance shutdowns, but the release of new capacity is likely to impose heavier supply pressure. 

By July, according to statistics, the unit that has been shut for relatively long-term maintenance has a capacity of 1.5 million t/a, and the output loss is about 350 000 tons, which will offset a portion of the newly added capacity. However, given limited upward momentum in industrial demand and a lack of market confidence, the release of new capacity will impose more pressure on prices. 

At present, downstream demand is in the traditional off-season, and some downstream factories are closed for vacation. Against the backdrop of low index of new orders, high inventory of finished products, and reduced export orders in the main downstream sectors such as biaxially oriented polypropylene (BOPP) film, plastic weaving, and medical non-woven fabrics, it is expected that operating rates of downstream units will decrease, and hence demand will be weakening. 

In general, the PP market will be under pressure in the short term. On one hand, output will continue to increase due to start-up of new units, despite a spree of maintenance shutdowns. On the other hand, downstream demand will be weighed down by limited new orders and high inventories of finished products as major downstream sectors see sharply squeezed profits. This will have a drag on the PP market. In addition, the overseas economy is facing a slowdown in growth or even a recession, while domestic end-user demand is also in the recovering stage and PP demand is yet to increase. Therefore, it is expected that the PP market will be still weakening and no extensive recovery will be possible, and even if there are upsides. Of course, an improvement in demand will mainly depend on the expected and actual increase in end-user orders. In the fourth quarter, the PP demand will be weaker than the third quarter, but the downward room will be limited owing to the support gained from the expected demand.