Morgan Stanley: Pace of China's PE Import Recovery Determines US Price Trajectory

Overview

This research report focuses on the decisive impact of changes in China's net polyethylene (PE) imports on US PE contract pricing. Morgan Stanley argues that while China temporarily substituted for imports by drawing down inventories and increasing exports following the closure of the Strait of Hormuz which constrained global supply, this behavior is unsustainable. As China's excess inventory gradually draws down from June to July, its import demand is expected to return to normal levels, becoming a key variable driving a surge in US PE exports and contract price increases; conversely, if import recovery lags, US market prices face downward pressure.

Core views

The sharp decline in China's net imports stems from inventory buffers rather than disappearing demand. China's PE net imports plummeted from an average of 1.1 million tons per month before the conflict to just 180,000 tons in April, with import dependence dropping from 31% in 2025 to 5%. This adjustment was achieved primarily by reducing imports (with shipments from the US declining by approximately 40%) and increasing exports to Southeast Asia. The report asserts that this abnormally low level of net imports is supported by excess inventory built up by China prior to the conflict, estimated at 2.3-3.5 million tons held by Chinese producers and traders, equivalent to about 30 days of domestic demand. Inventory drawdown progress determines the US market turning point. Scenario analysis indicates that using the lower inventory estimate (2.3 million tons), China's excess inventory could be exhausted before June, tightening the North American market possibly as early as late June due to trade flow adjustments. Using the higher estimate (3.5 million tons), the time when markets tighten would be delayed until late July or early August. Regardless of the scenario, China's annual net import dependence is expected to rebound to the mid-20% range by year-end and return to over 30% in 2027. Once China resumes net imports to pre-conflict levels of approximately 1.1 million tons per month, it will generate an incremental export demand of about 250,000 tons per month for the US, representing 12% of annual US supply, effectively absorbing current accumulated inventories and supporting upward movement in contract prices. The current US market situation shows weak exports and a divergence in prices. Despite significant rises in contract prices during March and April, US spot prices trended downward, and May exports missed expectations, causing producer inventory days to rise from 42.5 days in April to 46 days in May. Currently, the PE price spread between China and the US is as high as 39 cents/lb (far above the historical average of 13.9 cents), severely undermining the price competitiveness of US货源. For June contract negotiations, although Dow and LyondellBasell proposed price hikes of 20 cents and 10 cents respectively, the report's model still predicts flat settlement prices for June; should exports remain sluggish, declines of up to 5 cents in June or July cannot be ruled out.

Analysis framework

The report adopts an analytical framework of 'Key KPI Anchoring + Scenario Deduction'. First, it establishes China's PE net imports as the core leading indicator for forecasting US contract prices, as China, acting as the largest marginal buyer under geopolitical shocks to global supply chains, directly determines the direction of global trade rebalancing. Second, by decomposing the gap between 'apparent consumption' and 'actual import volumes' and incorporating channel survey data, analysts inferred implicit inventory levels. Rather than simply linearly extrapolating the low April import data, the analysts introduced a 'excess inventory buffer' variable, constructing two inventory drawdown paths (high and low scenarios) to quantify the timing window for import recovery and the specific magnitude of pull on US exports. Finally, cross-regional spread analysis and infrastructure constraints were used to validate the conclusions. Trade flow recovery incentives were assessed by comparing US-China spreads, while the maximum throughput capacity (approx. 17% upper limit) and operating rate ceiling (98.8%) of US export facilities were considered to ensure that predicted incremental demand is physically feasible rather than purely theoretical calculations.

Methodology notes

• Industry/Industrial Analysis FrameworkSupply-demand framework

  Net Import Dependence as Marginal Pricing Anchor

  In the global commodity market, the 'net import volume' of a core consuming country reflects marginal supply-demand changes more accurately than 'total demand'. When a country shifts from being a net importer to drawing down inventory, globally tradable supplies instantly become oversupplied; conversely, when inventory is exhausted forcing restocking, it creates pulsed procurement demand, becoming a key regional pricing variable.

• Cycle and Prosperity FrameworkInventory cycle (Kitchin)

  Implicit Inventory Buffer and Drawdown Duration Estimation

  Beyond explicit producer inventories, the report estimates 'implicit excess inventory' held by traders via channel surveys. By dividing the total excess inventory by the reduction in monthly net imports, one can calculate how long the inventory buffer can sustain itself, thereby predicting the specific time window for trade flows to normalize.

• Industry/Industrial Analysis FrameworkUpstream-Midstream-Downstream Transmission

  Cross-Regional Price Spread Regulation Mechanism for Trade Flows

  Commodity trade flows are driven by netback value. When the price spread between two locations (e.g., US vs. China) is significantly higher than the historical mean, arbitrage trade should theoretically stimulate; however, if the spread is too large, transactions are instead inhibited, suggesting non-price barriers exist (such as logistics, tariffs, or downstream acceptance). In such cases, flow prediction models based solely on price spreads must be adjusted.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Dow Inc. (DOW.N)

  Major US PE producer, directly benefiting from the resumption of exports to China

  Strengths

  Holds a large export share to China; the June proposed price hike of 20 cents demonstrates willingness to support prices

  Weaknesses

  Export delays led to inventory rising to 46 days, facing short-term downward pressure on spot prices

  Comparison

  Dow's proposed price hike is larger than LyondellBasell's (20 cents vs. 10 cents)

  Risks

  If China's restocking is delayed, high inventories could lead to significant subsequent contract price corrections

• LyondellBasell Industries N.V. (LYB.N)

  Major US PE producer, export-oriented enterprise

  Strengths

  Global layout with high dependence on the China market, benefiting from the normalization of trade flows

  Weaknesses

  Similarly constrained by the reduced export competitiveness caused by the huge price spread between China and the US

  Comparison

  More conservative June price hike proposal compared to Dow (10 cents), reflecting cautiousness on market acceptance

  Risks

  US effective operating rates have already reached the 98.8% limit, making further production expansion difficult even if demand recovers

Key data

• China's April PE Net Import Volume~180,000 tonsSharp decline from the pre-conflict monthly average of 1.1 million tons; import dependence dropped to 5%
• China's Estimated Excess Inventory2.3 million - 3.5 million tonsEquivalent to approximately 30 days of domestic demand, expected to be drawn down completely in June-July
• Potential US PE Incremental Exports~250,000 tons/monthIf China resumes imports, this increment represents 12% of US annual supply
• US Producer Inventory Days46 days (May estimate)Higher than the 42.5 days in April, reflecting weaker-than-expected exports
• China-US PE Price Spread39 cents/lbFar above the three-year average of 13.9 cents, dampening export competitiveness of US goods

Impact & implications

For US polyethylene producers, short-term price trends depend on the timing of China's restocking initiation. If China's imports pick up in late June, US export facilities will operate near full capacity, helping to absorb currently elevated producer inventories and supporting contract prices in the third quarter; if restocking is delayed until August, contract prices from late Q2 to early Q3 may face further correction risks. Additionally, while some Asian and Middle East capacities have restarted, considering the depletion of upstream raw material inventories and the 3-4 quarters required for post-war logistics restoration, the actual increase in effective supply may lag behind nominal capacity restart speeds, which to some extent limits the downside space for prices.

Risks

• Upstream capacity recovery faster than expected: Gail in India and CNOOC-Shell in China have restarted units; rapid recovery in operational efficiency could increase global supply
• Demand destruction risk: If high prices persist too long, downstream sectors may switch to alternative materials or reduce usage volumes
• Oil price volatility and geopolitical developments: Changes in market expectations regarding oil trends and the timeline for reopening the Strait of Hormuz may disrupt pricing
• Insufficient willingness for China to restock: If China's economic recovery remains weak or exports of finished goods are hindered, the low-import state could be prolonged

What to watch

• China's May PE net import data (expected release at the end of June/early July)
• Weekly inventory change trends for polyolefins held by Sinopec and CNPC
• June US PE contract settlement prices and execution status of export orders
• Navigation status of the Strait of Hormuz and progress of Middle Eastern energy logistics restoration