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China’s exports of polypropylene (PP) totalled just 424,746 tonnes in 2020, which is certainly not a cause for angst among major exporters in Asia and the Middle East. But as the chart below shows, in 2021, China entered the ranks of the top exporters, with its exports surging to 1.4 million tons.

As of 2020, China’s exports were only on a par with those of Japan and India. But in 2021, China exported more than even the United Arab Emirates, which has an advantage in raw materials.

No one should be surprised, as the trajectory has been clear since 2014 thanks to a major shift in policy. That year it resolved to increase its overall self-sufficiency in chemicals and polymers.

Worried that a change in investment focus for overseas sales and shifts in geopolitics could lead to an uncertain supply of imports, Beijing is concerned that China needs to escape the middle-income trap by developing higher-value industries.

For some products, it is thought that China could move from being a major net importer to a net exporter, thereby boosting export earnings. This quickly happened with purified terephthalic acid (PTA) and polyethylene terephthalate (PET) resins.

PP seems to be the obvious candidate for eventual full self-sufficiency, more so than polyethylene (PE), because you can make propylene feedstock in several cost-competitive ways, whereas to make ethylene you need to spend billions of dollars to build steam cracking units.

China Customs’ annualized PP export data for January-May 2022 (divided by 5 and multiplied by 12) suggests that China’s full-year exports could rise to 1.7m in 2022. With no capacity expansion planned for Singapore this year, China could eventually challenge the country as the third biggest exporter in Asia and the Middle East.

Perhaps China’s full-year exports for 2022 could even be higher than 1.7 million tonnes, as exports rose from 143,390 tonnes to 218,410 tonnes in March and April of 2022. However, exports fell slightly to 211,809 tonnes in May compared with April — whereas in 2021, exports peaked in April and then fell for most of the rest of the year.

This year may be different, though, as local demand remained very weak in May, as the updated chart below tells us. We are likely to see continued month-on-month growth in exports for the rest of 2022. Let me explain why.

From January 2022 to March 2022, again on an annual basis (divided by 3 and multiplied by 12), China’s consumption looks set to grow by 4 per cent for the full year. Then in January-April, the data showed flat growth, and now it shows a 1% decline in January-May.

As always, the chart above gives you three scenarios for full-year demand in 2022.

Scenario 1 is the best outcome of 2% growth

Scenario 2 (based on January-May data) is negative 1%

Scenario 3 is minus 4%.

As I discussed in my post on June 22, what will help us understand what is really happening in the economy is what happens next in the price differential between polypropylene (PP) and polyethylene (PE) on naphtha in China.

Until the week ending 17 June this year, the PP and PE spreads remained close to their lowest levels since we began our price review in November 2002. The spread between the cost of chemicals and polymers and feedstocks has long been one of the best measures of strength in any industry.

China’s macroeconomic data are extremely mixed. Much depends on whether China can continue to relax its strict lockdown measures, its approach to eliminating new strains of the virus.

If the economy gets worse, do not assume that PP starts will remain at the low levels seen from January to May. Our assessment of local production suggests a full 2022 operating rate of just 78 per cent, compared with our estimate of 82 per cent for this year.

Chinese factories have slashed interest rates in an attempt to reverse weak margins at Northeast Asian PP producers based on naphtha and propane dehydrogenation, with little success so far. Perhaps some of the 4.7 mtPA of new PP capacity coming online this year will be delayed.

But a weaker yuan against the dollar could spur greater exports by boosting operating rates and opening new factories on schedule. It is also worth noting that much of China’s new capacity is at “state of the art” world scale, allowing access to competitively priced raw materials.

Watch the yuan against the dollar, which has fallen so far in 2022. Watch the divergence between Chinese and overseas PP prices as the divergence will be another big driver of China’s export trade for the rest of the year.