The Next Trade War with China

China has a plastics problem, and it’s not what you might think. The country’s petrochemicals sector has exploded in recent years in an effort to satisfy seemingly infinite domestic demand for plastics. COVID and lackluster post-pandemic demand have thrown a monkey wrench into those rosy forecasts, however.

The law of supply and demand is simple and relentless: If supply of a product exceeds demand, prices drop. And they are plummeting in China, such that plants producing the building blocks of plastics are navigating the supply surge by shutting down temporarily and scaling back production. Nevertheless, production capacity continues to grow: Between 2019 and the end of 2024, China’s capacity to turn crude oil and gas into ethylene and propylene will equal the output of Europe, Japan, and South Korea combined, according to the International Energy Agency. China will become a significant exporter, “often selling into a glut and potentially exacerbating existing trade tensions,” reported the Economic Times of India in a recent article.

One-quarter of global ethylene capacity at risk of closure.

“China’s substantial investments between 2020 and 2027 have reshaped global supply dynamics, leading to a structural surplus in Asia and persistent low or negative profit margins,” said Kelly Cui, principal petrochemicals analyst at Wood Mackenzie, cited by the Economic Times. The consultancy estimates that almost a quarter of global ethylene capacity is at risk of closure, even as China is still adding more, noted the media outlet. This comes at a fraught time, especially for Europe.

Related:We Need to Talk About China, Again

As PlasticsToday reported last March, Europe’s share of global plastics production dropped from 22% in 2006 to 14% in 2022, according to Plastics Europe, an association that represents Europe’s plastics industry. During that same time frame, China’s shares increased from 21% to 32%. “Chemical companies around the world are now permanently closing plants, which are smaller, unintegrated, or which cannot access cheap feedstocks,” Will Beacham, deputy editor at industry analysis firm ICIS, told PlasticsToday. “The closures are focused primarily in Europe, where the industry suffers from elevated feedstock and electricity prices, as well as stagnant demand. Increasing flows of cheap imports from China have also undermined margins and contributed to falling production margins.” There are fears that European supply chains may lose access to locally produced raw materials and come to rely on imports, added Beacham, but that comes up against major supply security concerns as geopolitical instability disrupts logistics.

Europe challenges unfair trade practices.

European Union authorities are responding by protecting domestic industries, including the chemicals sector, from what they consider to be unfair trade practices, added Beacham. “There are increasing numbers of anti-dumping investigations in imports of chemicals from China,” he noted. And there is an attempt to put in place protective measures through grants and tax breaks to encourage investment in the low-carbon economy, said Beacham.

The United States has a competitive edge in resin supply over Europe, which uses naphtha-based production that is more expensive than the ethane-based US method. The cost advantage has buoyed US exports, as we have noted in the weekly Resin Price Report column, but that won’t indefinitely shelter industry from the impact of overcapacity in China. “Everyone in China has this notion that if they are fast enough, if they are the first in the industry, able to burn cash long enough, then they will become the survivor that takes market share. And then they can raise the price,” said Vivien Zheng, Asia chemicals analyst with Bloomberg Intelligence, cited in the Economic Times article.

It’s not a stretch to see this leading to a new chapter in the trade war with China, adding to the tariffs imposed by the Biden administration on Chinese-made electric cars and sundry other products and Europe attempting to claw back from its currently precarious position.