Industry News | January 20, 2009

The Upside of the Recession: Plastic is Cheap

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China has undergone rapid development in the past few years and has become one of the major plastic producing and consuming countries in the world. In 2007, the total production of plastics and plastic products was about 30.7 million tonnes and 33.0 million tonnes with the growth rate of 18.54 percent and 14.48 percent, respectively.

However, due to the world recession triggered by the U.S. economy, the Chinese plastics industry is suffering from shrinking demand, sharp decline in plastic prices, and shutting down of plastic plants. Almost all industry participants have a lower market expectation as pessimism pervades the entire plastics industry.

According to Frost & Sullivan's China Consultant of Chemicals, Materials & Food Practice, Sammi Sun, the Chinese plastics industry still experienced rapid development in the first part of 2008 but has deteriorated rapidly since the global financial and economic crisis hit. The production of Chinese plastic products is estimated to be around 36.9 million tonnes in 2008, with a lower growth rate of 11.7 percent, compared to 14.48 percent in 2007.

Also, she adds, because of the sharp decline in crude oil price, the price of almost all kinds of the plastic declined subsequently from the historical peak. "LDPE (Low-density polyethylene) price in China declined to around RMB 8,000 ($1,169.44 USD) per tonne in November from the historical peak of RMB 16,400 ($2,397.35 USD) per tonne in June 2008," she says.

"Furthermore, because of shrinking demand from overseas due to the world recession, some traditional downstream products of plastics such as electronic, automotives, and packaging are suffering from the toughest period in China," she says, "Demand for plastics declined forcing plastic product manufacturers to lower the operating rate of plants to survive."

In terms of industry specifics, Sun says that industry consolidations are likely to be facilitated by the recession. "In China, a great number of small scale plastic product manufacturers are surviving through selling low-tech products with low profit margins. A lot of them are likely to be eliminated during the recession period. Large-scale companies are expected to survive through enhancing product quality and winning more market share," she says.

Undoubtedly, the Chinese plastics industry is forecasted to face an even tougher period in 2009 resulting in depressed demand, declining prices, and even closure of many companies. The growth rate of Chinese plastic products production is expected to be around 10 percent in 2009.

According to Sun, policies carried out by the government are likely to ensure the growth of Chinese economics, including the plastics industry. "The Chinese government is putting in place some policies to offset the negative impact of the global economic slowdown on China's growth, by lowering interest rates, strengthening infrastructures, expanding domestic demands, lowering export taxes, raising export tax rebate rates, etc. All these are likely to increase the plastic demand, reduce the cost of manufacturers and ensure the growth of the plastics industry," she adds.

The fluctuating oil price is considered to be an uncertain factor for the Chinese plastics industry. The sharp decline in oil price reduces the production cost of plastic manufacturers. However, it also leads to a price decrease of plastics. It is a double-edged sword for the Chinese plastics industry.

"Furthermore, the decline in interest rates and a loose credit policy is good news for most plastic manufacturers. But the credit check for small-scale companies is still forecasted to be strict especially during the economic depression period. Therefore, the living environment for small-scale companies is expected to still be tough," Sun says.

She adds that high-end plastics, such as engineering plastics and plastic alloy, are likely to fare better during the recession period. This is mainly because the growth potential of these industries is much higher than other traditional plastics as the profit margin is also higher.

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