Gazette – Plastic prime resins’ overcapacity

Recently, the production of raw materials from China’s petrochemical companies has far exceeded the country’s domestic demands. Due to reduced transportation costs following the COVID-19 pandemic, a significant amount of excess capacity has been exported to the United States and Europe, consequently impacting global plastic prices.

This surplus has particularly affected the prices of plastic recycled pellets, creating a situation where the cost of recycling is higher than the price of prime materials. As a result, some brand owners who were previously committed to using recycled content have shifted towards using a higher percentage of prime materials in their products. Additionally, some market players have adopted a wait-and-see approach, leading to a sluggish and pessimistic market sentiment.

The primary reason for this excess capacity is the Chinese government’s allowance of private companies to produce petrochemical products. This policy has prompted many companies to invest in the production of plastic raw materials. These new entrants have significantly increased their production capacities through technological advancements, aiming to achieve economies of scale and drive out existing companies with higher production costs and lower capacities. This has resulted in a vicious cycle of competition within the industry. Currently, some plastic overcapacities, such as polypropylene, have reached levels as high as 30-40%, with production capacities approaching 39 million tons, a 30% increase this year. ABS has added 1.5 million tons of production capacity, and PET has seen new production capacities of around 3 million tons annually. This challenging market environment has made it difficult for smaller petrochemical companies to operate.

Unfortunately, the oversupply of plastic raw materials is expected to persist in the near future, as suspending production would lead to substantial economic losses for the prime material production plants. Consequently, most factories continue production despite operating at a loss. Some new factories have chosen to delay the start of their production lines, while existing ones have postponed the resumption of normal production following annual maintenance and repairs.

Ironically, even though the market lacks room for additional capacity, there are plans for new projects to commence operations between 2024 to 2026. This suggests either a certain level of optimism or a long-term strategy within the industry.

Market participants are concerned that excess capacity shows no signs of easing due to the traditional Chinese attitude of “not giving up or stopping unless resources are exhausted.” Presently, the prices of almost all prime materials are at their all-time low, considering inflation and currency depreciation.

Polypropylene and polyethylene prices are around $900 per ton, ABS is approximately $1,000 per ton, and PET chips are at the $900 per ton level. Technically, these prices are at historical lows.

The sudden excess capacity in mainland China, coupled with a 5% annual increase in global plastic production, efforts to reduce plastic usage, and the use of recycled materials, indicates that both prime virgin and recycled materials will continue to be priced at low levels.

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