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Premium of Turkey and SE Asia over China nears pre-pandemic norms in PP markets

by Esra Ersöz - eersoz@chemorbis.com
by Pınar Polat - ppolat@chemorbis.com
  • 11/08/2022 (10:18)
The historic premium Turkey and Southeast Asia carried over China in PP markets for more than two years has been shrinking since April. ChemOrbis data suggest that this unusually big gap, driven by skyrocketing freight rates, between China and other markets is now coming back to the pre-pandemic norms. Here is how and why:

According to ChemOrbis Price Index, the premium over Turkey’s import homo-PP prices over China hovered around $300-500/ton between 2020 and Q1 2022, and hit a record-high of $680/ton in mid-March 2021. Under balanced market conditions before the pandemic, this was a gap of $60-70/ton given freight differentials and Turkey’s comparatively smaller market size.

In the case of Southeast Asia,import homo PP prices used to carry a premium of around $20-30/ton over China. Since late 2020, this gap has grown to around $100-150/ton and hit as large as $250/ton in mid-March 2021.
When it comes to today’s market, ChemOrbis Price Index shows that these gaps are standing at $50/ton for Turkey and $65/ton for Southeast Asia, which are either at par or close to the traditional premiums under balanced market conditions in the pre-pandemic era.

What has changed in market dynamics?

1. Freight rates come off their peaks


Global freight rates have been on a bearish run since March 2022 after going through the roof in September 2021 with the release of pent-up demand during the pandemic and a lack of capacity. Increasing inventories, global financial tightening amid rising inflation, and a shift in consumer spending from goods to services remain factors weighing on spot rates.

Despite this ease-off - as large as 35% from the all-time high, spot freight rates are still significantly above the pre-pandemic levels. According to Drewry data, the composite World Container Index is almost 5 times higher than in August 2019. That is to say, the slump in freight rates does not solely explain the shrinking premium of Turkey and Southeast Asia over China.

2.China’s path to self-sufficiency and demand slump upend PP markets


China has been adding huge PP capacities in recent years. By the end of this year, the country is expected to welcome another 4.5 million tons of PP production capacity if everything goes as planned.

Not only the country’s increasing self-sufficiency , but also falling domestic demand has reduced import buying appetite. Demand from China has been hit by the country’s uphill battle with the Covid-19 pandemic, driven by the government’s commitment to the “zero-case” policy, as well as the property crisis.

This ‘perfect storm’ pushed overseas sellers to focus on other export outlets, including Turkey and Southeast Asia, in the past few years. They also benefited from higher netbacks in these markets than in China, as the China PP rally remained restricted compared to the other two.

3. PP price rout deepened on fierce competition among global suppliers


The combination of China’s growing capacities and slower local demand resulted not only in shrinking imports, but also boosted exports of PP. China ramped up its PP exports during the first half of 2022 to near a record of 860,000 tons, according to ChemOrbis Stats Wizard.

Accordingly, Saudi Arabia and South Korea, the largest PP suppliers of the world, have started to lose market share in China, and what is more, they have started to face rising competition in the other export outlets - mainly in Turkey, India and Southeast Asia - from China.

Russia’s increasing focus on Turkey and Vietnam - following the western sanctions - added fuel to the price rout across these PP markets.

The competition among overseas suppliers caused PP slump to gain momentum in these markets particularly after April. This showed signs of change as of late July with Middle Eastern and S. Korean suppliers turning their focus back to China.

What comes next for China PP markets?

Where China will head from here is critical for Turkey and Southeast Asia as import PP offers have come at a point where sellers are no more willing to make discounts.

Initial reports show that China’s PP markets have followed a stable to slightly firmer trend starting this week, despite competitive import offers. A Chinese trader reported concluding a deal for South Korea origin raffia on the weekly low end, confirming how overseas suppliers’ focus has turned to China.

This slight upturn is driven by the early-week gains in the Dalian futures and higher crude oil prices. Supplies at home are also lower as producers cut their run rates, which has contributed to the uptick in the sentiment.

However, players are still cautious about the sustainability and underline that there is a room for fluctuations, as this recovery is yet to have support from the demand side, despite the upcoming seasonality.
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