INDUSTRY INSIGHT

The Impact of COVID-19 on GCC Petrochemicals Exports

By John Richardson, Senior Consultant, Asia, ICIS

The coronavirus crisis means that global growth across most if not all petrochemicals will be negative in 2020 over 2019. No meaningful recovery in markets seems likely until the end of 2020 at the earliest.

This is of course very bad news for Gulf Co-operation Council (GCC) petrochemicals producers. Exactly how bad is impossible to gauge at present but we can at least attempt to assess the impact on demand from China for GCC polyethylene (PE) imports. This we do in the section below.

First, it is important that we paint the overall picture of the challenges represented by coronavirus in order to support your planning process.

Previous assumptions on GCC operating rates and exports to all regions, as well as demand growth within the GCC itself, must be re-forecasted – and then likely re-forecasted again and again as events move rapidly forward.

The great news is that China may have got on top of its crisis thanks to a huge and highly co-ordinated government effort. A recovery in economic activity outside the most-affected province, Hubei, appears to be gathering pace as factory and office workers return to their jobs.

There is one major caveat here, though, which is whether there will be a secondary wave of infections when China fully gets back to work. Nobody really knows because there are so still so many uncertainties about this disease.

And even with significant Chinese economic stimulus that’s likely to occur once everyone is fully back to work, lost demand is lost demand. The Lunar New Year was a major consumption season so think of all the bus, train and car journeys, and all the buying of gifts etc. which didn’t take place during that period that cannot be replaced later in the year.

It will also take a good while for supply chains to come back to normal even in the best of possible outcomes. Chinese ports are clogged-up with goods that were made before the outbreak that still need to be shipped and internal logistics have yet to fully recovery.

The impact on Chinese PE imports from the GCC

My original expectation was that Chinese PE demand would grow from 33.9m tons in 2019 to 36.1m tons in 2020, a 6.6% increase over last year when analyse the exact numbers.

But so far in Q2, demand growth versus the base case appears to have been down by 8% based on discussions with market players.

Add to this a guesstimate of the prolonged impact of the Chinese economy of the crisis, assuming that the number of new infections has now peaked, and I estimate that annual demand may end up being y 11.4% below my original base case, at just 31.9m tons. This would represent a decline of 5.6% versus last year.

There is an upside to this outlook. Demand could bounce back more strongly than I assume. And it hasn’t been all doom and gloom across all end-use applications.

For instance, because of quarantine restrictions there has been a significant rise in high-density PE (HDPE) injection-grade and linear-low density (LLDPE) and low-density PE film-grade demand for packaging food delivered to people’s homes. Stretch LLDPE film demand has also benefited from stricter hygiene requirements which require more film to be used to wrap finished goods.

But let’s stick with this perhaps extreme downside scenario in order to map what this might mean for Chinese PE imports from the GCC countries.

How this was estimated was to work out the percentage split between Chinese local production and imports in 2019 for each of the grades and use this to forecast imports for each of the three grades of PE in 2020 on the basis of A.) Demand at 36.1m tons and then B.) Demand at 31.9m tons.

I then assumed that the GCC countries would achieve the same percentage market shares in the China market as they did in 2019, in order to estimate how much China would import from the region’s countries under scenarios A and B.

The end-results you can see in the below table, where I compare these two outcomes with actual imports in 2019. For example:

  • Total PE imports from Saudi Arabia imports in 2020 reach 4.1m tons in 2020 under Scenario A from 3.9m tons in 2019. Under Scenario B, they fall to 3.7m tons.
  • Imports from the United Arab Emirates were at 1.5m tons in 2019. In Scenario A they climb to 1.6m tons, but in Scenario B they fall to 1.4m tons.

For instance, to what extent might the US win more market share in China in 2020 at the expense of the GCC?

The US could gain more market share following a Chinese government decision in February to allow importers to apply for 25% additional tariffs that were imposed on US HDPE and LLDPE as part of the trade war.

The outlook for Chinese demand will also become clearer as China returns to work and as the global implications of the coronavirus crisis become clearer.

Also, I may be wrong to assume that local production as a proportion of demand stays the same in 2020 as in 2019. This assumption is based on substantial delays in domestic capacity start-ups in 2020 resulting from coronavirus. Before the outbreak, we were expecting local HDPE production to rise by 15% over last year. LLDPE was forecast to be 7% higher with LDPE production edging up by just 1%.

“The outlook for Chinese demand will also become clearer as China returns to work and as the global implications of the coronavirus crisis become clearer.”
“No other country in the world can replicate what China has done because of its unique levels of control. So, now that the virus has gone global, we need to study the disruptions that have taken place in China and game plan how they might play out across the world.”

Major global logistics reductions

No other country in the world can replicate what China has done because of its unique levels of control. So, now that the virus has gone global, we need to study the disruptions that have taken place in China and game plan how they might play out across the world.

Whereas economic stimulus will work in China once most people are back to work, provided there are no secondary outbreaks, it won’t work in the West because travel restrictions, factory and school closures etc. have only just begun. You cannot stimulate economic activity that isn’t taking place.

In May 2003, the Q2 company results came out and the results were grim. Even though by then SARS was being brought under control, the negative       effect on stock market sentiment – and so economic activity – was big. We can expect the same in May this year when the Q2 results come out, but on a bigger scale because this is a bigger event than SARS.

There will be several waves of disappointing financial results if this crisis isn’t over until the end of the year, whereas in the case of SARS it was only one wave of bad results.

Statistics from the ICIS Supply & Demand Database indicate the much bigger role that China today plays in the global economy today compared with 2003. Back then, China accounted for 22% of global consumption of the 28 major polymers. Our expectation is that in 2020 this will have risen to no less than 43%.

Another major problem will relate to logistics. Think of what’s happened because of events just in China. Containers are stranded in the wrong locations and there is a lack of backhaul cargoes.  Now consider these disruptions on a global scale.

There could be a major impact on the trade flows of petrochemical feedstocks, petrochemical products and customers’ products all the way down to finished goods. Petrochemicals markets may become much more regional.

An inevitable global recession could also morph into a financial crisis because of the big build-up in debt since the 2008-2009 Global Financial Crisis. The Financial Times reports that, according to the Institute of International Finance, the ratio of global debt to gross domestic product reached an all-time high of more than 322% in Q3 2019, with total debt reaching close to $253tn.