google badge ios badge
Newsletter successfully sent
Failed to send newletter

AnalysisSSESSMENTS: Detailed Analysis of COVID-19 Impact On Business, Polymers Demand in China

Author: SSESSMENTS

  • China hit by the global outbreak in January, and curb the nationwide pandemic in March
  • China’s GDP has shrunk by 6.5% year-on-year in the January-March period
  • Outbreak marked the first quarterly decline since 1992 
  • For 2020, the growth projected to slow sharply to 2.5% from 6.1% in the previous year
  • Beijing steps up policy measures to support the economy further and conducted stimulus measures

China first reported the case of Coronavirus on December 31, 2019. There were 41 cases of patient with mysterious pneumonia. Most of all patients connected with Huanan Seafood Wholesale Market, and on January 1st, the wholesale market was closed. Not long afterwards, on January 11, China recorded the first death over the disease. January 23, the city of Wuhan with 11 million residents placed under quarantine, Hubei province with more than 60 million residents followed a few days later. The government also extended the nationwide Lunar New Year public holiday to February 2 to avoid mass commuting. Most of the impacts of the Coronavirus were seen after the Lunar New Year on January 25, when family gatherings are common and the infection risk heightened during the close contact with the infected carrier, especially those who had been infected but show no symptoms.

China’s GDP already grew at its weakest rate in almost three decades in 2019. The outbreak came as the market expected improvements in the country’s economy. China's three main commodity exchanges remain closed for a prolonged period as the country extends its week-long Lunar New Year holiday. Dalian commodity exchange, Zhengzhou commodity exchange, and Shanghai futures exchange also remain closed until February 2. Import and export activities in Shanghai were reported to still run as usual, yet materials delivery in the domestic market was disrupted as many roads were blocked and some areas were tightly controlled. Fourteen of Chinese cities and provinces told companies to extend their closure until at least February 10. Additionally, most of the workers in Shanghai, Jiangsu Province, Zhejiang Province, Guangdong Province, and Chongqing were asked to work from home or remain on holiday between February 3-7, 2020, depending on the company’s policy. These regions are making a considerable share in China’s GDP and exports, thus the closure was a big hit on the market.

On February 2, the first trading day after an extended Lunar New Year break, Chinese commodities markets plummeted, and several futures contracts hit downside limits. China’s losses happened after declines in global markets since January 24. As the Coronavirus cases spreaded globally and more cases found in other countries, fears of the virus drove down prices in all sectors. Chinese businesses cut their rate or shut down their operations during the extended break. Chinese exporters also said at the time that they struggled to meet overseas orders for February as it remained unclear when the companies can resume their regular activity.

China’s PE and PP market is facing difficulties as the country is struggling to get the Coronavirus epidemic under control in February. The offers for PP Homo Raffia are reported to have been decreasing by CNY500/ton ($72/ton) in total. The domestic PP and PE market supply continues to pile up as most converters said that they had sufficient inventory on hand and were running at 20-30% from the normal operating rate. Monomers were also reported in softer costs at the early to mid-February, thus the price of PET bottles from Chinese producers was lower by $30-50/ton compared to before Lunar New Year level. In the month’s production, generally Chinese PET producers were running below 70% from the normal capacity, considering the weak buying sentiment from the outbreak. Upstream, some PTA producers also slashed their operating rates to 60-70% from the normal output to prevent the build-up of inventories. As for PS converters, their factories only ran around 20-30% from normal production rate.

China’s Ministry of Transport (MoT) reported that the country's transportation had improved amid signs of slowing coronavirus outbreak. As of February 22, 28% of road transportation firms and 41% of waterway companies in the country had resumed operations. The number of cars had increased by 10% each day since February 18. Ship turnover reached 95% of the pre-holiday level. The China Ports and Harbors Association (CPHA) said that around 65% of port operators had returned to work, and more than 95% of coastal ports are operational. The amount of crude oil discharged at China's seven largest ports declined by 9% year-on-year to 7.05 million tons on the week ended February 15. Shandong authorities have eased requirements for vehicles travelling from or to the province. Other provinces such as Liaoning, Shanxi, Yunnan, and Guangdong have also relaxed the restrictions. Travel limitations remain tight only in Hubei province.

China’s manufacturing Purchasing Managers’ Index (PMI) also shows an enormous impact of the outbreak on China’s economic activity. According to data from the National Bureau of Statistics, China’s manufacturing PMI fell to 35.7 in February from 50.0 in January. The manufacturing production sub-index also fell to 51.3 in January to 27.8 in February, while new orders slumped from 51.4 to 29.3. Labour conditions remained tight due to the travel restrictions, with reading for employment dropping from 47.5 to 31.8. In the service sector, PMI also contracted to 29.6 last month from 54.1 in January. This sector contributes to 60% of the country’s GDP. The virus outbreak has hurt the transportation, tourism, and catering industries in China, with their sub-index plunging to below 20. A sub-index of construction activity tumbled to 59.7 in January to 26.6 in February. Analysts at Nomura expected China’s growth to slow to 2% year-on-year in the Q1, while Capital Economics expects the economy to contract for the first time since the 1990s this quarter. Economists at Investment bank ANZ forecast that China’s GDP would contract by 0.4%-2.1% year-on-year in Q2, depending on how the pandemic would evolve. The People’s Bank of China also cut its 7-day reverse repo rate by 20 bps from 2.40% to 2.20% and pumped CNY50 billion ($7 billion) into financial markets through 7-day reverse repo as a boost for the economy.

In March, business activities began to resume from nationwide factory closures and travel restrictions imposed by the government to curb the coronavirus outbreak. Although, the pace of recovery has been slow as Beijing remained worried about the second wave of infections from overseas. Virus containment measures across the world also pose an economic threat to China. Manufacturing activity improved slightly in March after plunging to a record low a month earlier as more factories have reopened amid fewer new cases of COVID-19. However, new orders extended decline to the second month, while export orders were still lower than the pre-pandemic level.

PE resins demand in China was sluggish during March. The lack of workforce was still an issue, and the plunge in crude oil prices plus the Coronavirus outbreak outside China have dampened buying sentiment in the PE market as the digestion rates were slow. For PET Bottle, the demand in China local market was also on a soft note. The peak season for PET Bottle demand usually takes place in March on the back of preparation for summer season’s production, but seems to be delayed for this year. However, Chinese demand in the local market was better than the export market. While in the export market, buyers were reluctant as most are worried that the global pandemic will push prices to decrease further. Likewise, the PP market was still slow in March as buying sentiment was affected by the Coronavirus outbreak in other countries which led to end-product being unabsorbed. Some downstream manufacturers kept operating rates at a low level, and these conditions made the supply abundant throughout the month.

Early April, China market had an upward trend in prices, buying sentiment is also improving showing uptrends in all-polymer offers. Before the finalisation of OPEC+ meetings and US crude oil crashes, the improvement in the domestic market was considered stable, although some of the producers are still bought as needed since they are cautious that the crude oil price may slump in the near future. Producers reported their productions already on a full swing, while most downstream factories produced around 70-75% of their maximum capacities.

For PET, the demand was good as some of the converters started to produce as the workers in downstream factories were allowed to work, thus the price rose. Demand for PET resins in the local market remains stable, although the supply is quite tight entering peak season along with the summer season. Some traders reported as they have started offering for June, even July shipments to the export market.

As for PE, bullish sentiment happened in the early April since local and imported cargoes from some origins were hedged aggressively, but no supply issue was caused by this move. Through this month, demand for PE resins remains weak due to unsupportive finished product demand. However, a trader informed that demand for HDPE Blow Moulding is the strongest from the other PE grades as supported by its wide range of applications in the industry and healthy demand from the food and beverages sector. Another trader also heard that in order to avoid the potential spread of the Coronavirus, a number of states in the United States have reversed their plastic bag bans and replaced reusable packaging with disposable plastic bags. As such the HDPE Film price goes up. But the majority of Chinese market players stated that PE prices in the local market have a possibility to continue to go lower, even back to March levels considering the slump in crude oil and ethylene prices.

Likewise, for PS, even though the prices have been on the downtrend, buyers are still expecting lower prices to surface. The demand for the end products is also weak from both domestic and export markets since big home appliances manufacturers are still operating at 50% of the production rate or even lower due to global pandemic. Market players opined that PS demand will remain weak as long as the Coronavirus outbreak in exported countries for end products is uncurbed.

Imported PVC offers to China reached the lowest level since 2009 and this condition will put more pressure on local producers. As the ongoing global lockdown already led to sluggish demand, traders and producers are aggressively selling the cargoes to the China market which has curbed the pandemic. This manoeuvre caused a significant decrease in prices. If the import prices move lower and local PVC inventory continues to pile up over a few more weeks, PVC producers in China have no options but to shut their plants to ease the supply glut. A trader also informed that some PVC converters who focused on export markets in Dongguan city of Guangdong have announced that starting from April, they just can afford the basic salary of CNY 66/ton per day for workers, and coming to May and June, they would likely to shut temporarily. They have no orders from export markets, so in order to reduce the cost, they have no choices.

A PVC-frame converter who focuses on the export market said that the PVC situation in April is terrible now, as the converter said “Under normal circumstances, the monthly consumption is 60-100 tons. In late March this year, the factory just restarted, but due to the outbreak happening in other countries, especially their aimed market US and Europe, the factory had to shut down. After Lunar New Year there is no smooth running for the factory, as workers' wages and other benefits had to stop. America's big supermarkets such as Wal-Mart, are freezing payments to all their suppliers as three options shall be selected by the supplier; 1) payment will be collected to the supplier after the goods are sold; 2) 50% discount for payment of goods; 3) cancel the orders”.

China PP prices started a notable hike by thousands Yuan. During 11-14 April, PP Homo Raffia, PP Homo Injection, PP Random Copolymer Injection were increased by CNY1,800-2,000/ton ($255-284/ton), CNY2,300/ton ($326/ton), and CNY800-1,050/ton ($113-149/ton) respectively. The hike was due to stronger crude oil prices, firmer futures prices, combined with the switch of some producers to PP Homo Fiber causing limited supply. As for PP Homo Fiber, the price has skyrocketed by multiple folds. PP Homo Fiber prices were at a range of CNY7,400-7,600/ton ($1,049-1,078/ton) on cash, EXW China basis and including 13% VAT in early April, but market players heard offer at as high as CNY60,000/ton ($8,509/ton) on April 13 and CNY88,000/ton ($12,480/ton) over the weekend of April 11-12.

PP Homo Fiber is the main materials of medical masks, and in the times of global pandemic, the massive demand was not only surged the price, but appealed many producers to change their line of production from other PP products to PP Homo Fiber. Even though there are numerous local producers switching production to PP fiber, China’s local PP supplies are still insufficient. Imports mainly come from India, Thailand, and Indonesia.

Many converters are also adding, or even more, switching their entire plant into medical equipment production. More than 3000 plants have added “masks, disinfectant, protective clothing, thermometers and medical equipment” into their business scope from January until February. The mask production nationwide increased from around 10 million/day in early February, to 200 million/day in March. Companies from unrelated sectors such as electronic, automobiles, even baby care products are also joining in to push the production capacity. This condition boosts demand for melt-blown fabric by multifold. Melt-blown fabric is the main material to produce both medical and consumer masks, a fine mesh of PP fiber that acts as the filtering layer inside a mask.

The Chinese government recently announced intervention to control price gouging on the commodity market, thus the market became more rational and PP Homo Fiber prices started to cool down. The government also announced they will be seriously investigating and prosecuting unqualified converters who do not have certifications to do standard productions. As one of the traders explained about the masks “Standard 3-ply surgical masks should be like SMS, S is general PP fiber for preventing the dust or something else, the most important one is M which is melt blown, should be particularly PP materials. Now the popular one is S2040 used as the M, but it only can be the S actually, which means the mask is not workable. That’s why the government will investigate.” The China PP market is expected to return to normal coming towards May.

Analysts in a Reuters poll said that coronavirus is expected to push China’s first-quarter economy into the first contraction in more than three decades. According to the survey, China’s GDP has shrunk by 6.5% year-on-year in the January-March period, marking the first quarterly decline since 1992 compared to a 6% expansion in the previous quarter.

For 2020, the growth is projected to slow sharply to 2.5% from 6.1% in the previous year. If the projections are accurate, this would show the weakest figures since 1976, when the decade-long Cultural Revolution ended. China’s industrial production is forecasted to decline 7.3% year-on-year in March, easing from a 13.5% drop in January-February, while retail sales are likely to drop by 10%, compared to a 20.5% fall in the first two months of 2020. Fixed-asset investment is expected to decrease by 15.1% year-on-year in the first quarter, moderating from a 24.5% drop in January-February.

Meanwhile, the International Monetary Fund forecasts in its updated 2020 World Economic Outlook, that China’s economic growth will slow to 1.2% this year. The economy will then rebound strongly by 9.2% this year. To achieve such growth, Beijing is expected to step up policy measures to support the economy further and has conducted stimulus measures to fight the fallout of the pandemic, as mounting layoffs threaten China’s social stability. The government so far has managed to resume a large part of its economy after being put to a near halt by the coronavirus outbreak in February. The country’s central bank slashed its medium-term interest rate to a record-low. Meanwhile, the government also expected to unleash trillions of yuan of fiscal stimulus as a way to avert mass job losses and boost the economy.

As for the traders’ outlook for Q2 and Q3, a trader opined that “Looking ahead, the outlook is not positive this year. Doctor Zhang Wenhong which is the most authoritative epidemiologist claimed that in October this year, this COVID-19 will break in globally again even though it would be controlled before July. So it’s obvious that the world economy is under depression, and needs a long time to recover”.

Tags: All Chemicals,All Feedstocks,All Plastics,All Products,Analysis,Asia Pacific,China,English,NEA,PE,PET,PP,PVC,Styrenics

Published on May 12, 2020 5:00 PM (GMT+8)
Last Updated on August 11, 2020 3:32 PM (GMT+8)