Why This Year’s NPC Meeting Seems Unlikely to Rescue Chemicals Spreads and Margins

ONCE CHINA’S National People’s Congress (NPC) meeting concludes on 11 March, the question we must ponder is whether policy announcements will make a difference to the quite astonishing two charts below.

I’ve been running versions of this first chart since January 2022, following the Evergrande Turning Point. This turning point, which marked the beginning of the deflation of China’s real estate bubble, signalled the start of a chemicals and polymers downturn that could last as long as another ten years.

Before we address the question, consider the significance of the data you are looking at.

The End of the Chemicals Supercycle

The 1993-2021 period (see the table below the above chart) was the era of the Chemicals Supercycle. During this time, favourable demographics, an acceleration in globalisation, and the real estate bubble greatly boosted Chinese demand for chemicals and polymers in general.

This was why CFR China PE spreads over CFR Japan naphtha costs—a proxy for operating rates and profitability—were so strong between 1993 and 2021. As the table below indicates, they averaged $532/tonne across these grades.

However, the 2022-2025 period marks the lowest and longest period of depressed spreads in the history of our price assessments. Spreads have averaged just $296/tonne, meaning the following:

• HDPE injection grade spreads would need to rise by 133% from their 2022-2025 level to return to the spreads enjoyed during the Chemicals Supercycle.
• LDPE spreads would have to rise by 43%.
• LLDPE spreads would need to increase by 91%.

There has been no major movement in these numbers since early 2022. We remain at the bottom of a very deep and prolonged downcycle.

Margins in Freefall

The second chart shows variable cost margins for the same three grades of PE, weighted to reflect the significantly higher production and demand for HDPE and LLDPE versus LDPE. The spreads chart above isn’t adjusted in this way—hence, it isn’t particularly significant for the PE industry that global LDPE spreads would only need to recover by 43% to return to Supercycle levels.

Our variable cost margin assessments, which are integrated and include co-product credits from selling propylene, butadiene, benzene, toluene, and xylenes, only began in January 2014.

However, this period was still within the Chemicals Supercycle. So, we can do the same exercise as with spreads to conclude the following:

• Average Northeast Asian PE margins were at $461/tonne between January 2014 and December 2022.
• But between 7 January 2022 and 28 February 2025, they averaged just $8/tonne, with many weeks of negative margins.

The legends on the above chart provide some important context.

First, it is incorrect to say that the pandemic was bad for the petrochemicals industry—quite the opposite happened. Demand surged due to government stimulus in the West, with margins further boosted by tight supply caused by refinery shutdowns, as fewer people were traveling.

Second, as with my spreads chart, you can clearly see that margins crashed from January 2022 onwards, following the August 2021 Evergrande Turning Point.

The vast oversupply in chemicals exists because projects were sanctioned in every region based on the assumption that China’s annual consumption growth would be around 6-8% over the long term. After the Evergrande Turning Point and with rising trade tensions and demographic challenges, 1-4% growth now seems more realistic.

This leaves us with these two astonishing charts and a vast gulf between historical and current profitability.

Will the NPC Meeting Make a Difference?

Premier Li Qiang announced a GDP growth target of approximately 5% for 2025 at the start of this year’s NPC, mirroring the previous year’s goal.

However, China’s official economic statistics have long been scrutinized for their accuracy and transparency. The repeated 5% growth target—despite mounting external pressures such as increased US tariffs, which have recently been raised to 20-45%—raises questions about whether this goal is achievable without more substantial stimulus measures.

There are also suggestions that real GDP growth in 2023 and 2024 could have been as low as 2%. If that is the case, why should 2025 growth suddenly be 5%?

To counteract economic headwinds, the government has proposed several measures:

• Fiscal Policy: The budget deficit target has been increased to 4% of GDP, up from 3% the previous year, signalling a more proactive fiscal stance.
• Domestic Demand: Plans to boost domestic consumption include issuing special treasury bonds and enhancing consumer subsidies.
• Technological Advancement: The government is prioritizing supply chain self-sufficiency and investment in sectors such as artificial intelligence to reduce reliance on external technologies.

Why These Measures Won’t Be Enough

While these initiatives may provide a moderate turnaround, I don’t believe they will make a significant difference due to the following factors:

• Trade Tensions: The ongoing tariff war with the U.S. poses a major risk to export-driven growth.
• Debt Levels: Elevated local government debt could limit the scope of fiscal interventions.
• Demographic Challenges: An ageing population and declining birth rates are long-term headwinds.

I don’t believe that this year’s NPC meeting will do much to reverse the trends in today’s tow charts. The patterns in PE are mirrored across many other chemicals and polymers.

Perhaps if China radically overhauled its pension and healthcare systems and reformed the Hukou residency system, chemicals demand growth might return to somewhere close to Supercycle levels. But such reforms would likely take years to implement.

The Only Way Forward: A Reduction in Supply

The answer is very simple: the only way to restore decent spreads and margins in the coming years is through major reductions in global capacity.

Shutdowns would likely happen in disadvantaged countries and regions such as South Korea, Europe, and Southeast Asia.

Unless these shutdowns occur on an unprecedented scale—both in absolute tonnes and as a percentage of output—this downturn will drag on and on.

Depressing, I know. But ignoring the reality won’t help anyone.

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