INSIGHT: Concern as China inflation spirals

14 November 2007 11:26  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--It’s case of whether you view your glass as half empty or half full, as always with China.

Tuesday’s government announcement that October inflation had hit 6.5% - equalling the 11-year-high record reached in August after a decline in September - led to economists either predicting that there was nothing to worry about or that the end was nigh.

The China Economic Quarterly (CEQ), a Beijing-based research publication, argues that growth in the world’s most important petrochemical market will be not be jeopardised by inflation because:

  • The spike in the cost of living is due to food prices and there’s no evidence of inflation spreading to other goods. It adds that the costs of electronic and other consumer goods are actually falling on oversupply.
  • Inflation is nowhere near as bad as it was the late 1980s and early 1990s when it was more than 10%.
  • The rise in food prices is a good thing as it is forcing more rural workers off the land and into the cities. This means that even as agricultural prices increase manufacturers can keep wage demands - and hence finished goods prices - under control.

Try telling the people of Chongqing in southwestern China that the surge in food prices is a good thing: Three people were killed in one of the city’s supermarkets during a stampede to get hold of discounted cooking oil last weekend.

And Albert Keidel of the Washington DC-based Carnegie Endowment, a private not-for-profit political think tank, contends that if inflation was only down to food prices, the cost of most other goods would have fallen over the last few months as people spent a higher proportion of their incomes on food.

This hasn’t happened, indicating that inflation has a broader base than the CEQ claims.

And he warned in a paper he published in September: “China’s economy today looks much as it did before the inflationary catastrophes of 1988-89 and 1993-96. If inflation gets out of control, draconian steps to suppress it could cause hardship and social unrest.”

Average GDP (gross domestic product) growth was 6.1% in 1987-91 and declined by 2% in 1990 during the economic crisis caused by the Tiananmen Square unrest, according to the CEQ.

Growth anywhere close to 6% would be disastrous for the global petrochemicals industry which continues to bet everything on China maintaining an expansion rate of around 10% per year.

The government could be damned if it doesn’t and damned if it does.

A big rise in interest rates might be necessary to bring inflation under control but this could dampen growth.

If there are no steep increases in the cost of borrowing, investors might continue to pour money into the stock market where the rates of return are much better than leaving savings in the bank: Deposit rates are now less than the increase in inflation, while stock markets in China have increased six-fold over the last two years.

Surging stock markets and real-estate prices are also raising concerns that the economy is overheating.

Ironically, a US downturn or even a recession might be good for the Chinese economy as it would help slow growth, thereby reducing inflation.

The good news is that the Chinese and other Asian economies appear to have become decoupled from the US. Intra-Asian trade and domestic consumption have risen over the last ten years.

Jun Ma, economist with Deutsche Bank, predicted that if US growth fell from its current level of around 2% to 0.7% next year, China’s GDP could still increase by 10%.

This would be a slight cooling off from the 11.5% expansion recorded in January-September this year but would not be a disastrous decline.

All of this matters, as I said, because the petrochemical industry continues to bet on China maintaining its economic boom. Capacities have been added mainly in the Middle East but also in Thailand and South Korea, to meet strong polymer import demand.

China Plastic Raw Material demand and supply estimates (2007-2011)

 

 

2007E

2008E

2009E

2010E

2011E

PE

Supply (domestic)

7,450

8,200

10,130

10,800

11,550

 

Demand

12,500

12,900

14,100

14,800

15,500

PP

Supply (domestic)

8,190

9,710

10,920

11,180

11,550

 

Demand

10,100

11,450

12,400

13,450

14,500

PVC

Supply (domestic)

11,940

12,400

12,880

13,350

13,770

 

Demand

10,320

10,800

11,500

11,600

11,800

PS

Supply (domestic)

1,295

1,381

1,381

1,381

1,381

 

Demand

2,900

2,900

2,900

2,900

2,900

ABS

Supply (domestic)

1,433

1,660

1,745

1,871

2,000

 

Demand

3,560

3,840

4,110

4,300

4,480

Others

Supply (domestic)

2,770

3,250

3,750

4,360

4,920

 

Demand

4,630

5,580

6,410

7,380

8,320

Total

Supply (domestic)

33,077

36,601

40,807

42,942

45,171

 

Demand

44,010

47,470

51,420

54,430

57,500

Source: CBI Research and Consulting

China’s total polymer deficit would increase to 12.32m tonnes in 2011 from 10.93m tonnes this year, according to the Shanghai-based CBI Research & Consulting. 

The polypropylene (PP) deficit was expected to increase to 3m tonnes from 1.9m tonnes, while the polyethylene (PE) shortfall was forecast to decline to 4m tonnes from 5m tonnes.

Polystyrene (PS) imports will remain flat on poor growth and the polyvinyl chloride (PVC) surplus will continue to rise as more low cost production comes on stream.

Acrylonitrile butadiene styrene (ABS) imports are expected to rise to 2.48m tonnes from 2.12m tonnes.

Imports of other polymers are forecast to reach 3.4m tonnes in 2011 from this year’s 1.86m tonnes.

But forecasts of deficits such as these can attract more project announcements in China as local companies chase profits and the government tries to raise, or at least maintain, petrochemical self-sufficiency.

Still, though, the consensus is that import volumes will increase across the board provided the economy stays on track.

And a healthy Chinese economy is crucial for the rest of Asia because of China’s rapidly increasing imports of basic raw materials and higher end goods and technologies.

A sharp slowdown could have severe consequences for domestic chemical consumption in the export-dependent economies of Japan, South Korea and Australia, for example.

Let’s hope that the optimists are right about inflation. But even if they are, there are plenty of other threats to worry about - not least the environment.

An estimated 700m people don’t have access to clean drinking water - just one of many scary statistics. This is the result of all the chemical and other industrial waste being pumped into China’s rivers.

So if you are sitting in a cheap high-rise flat in Harbin and can’t afford to buy expensive bottles of foreign-branded mineral water (the cheap local mineral water is widely believed to be contaminated), it doesn’t matter whether you see your glass of tap water as half empty or hall full - either way it’s still going to poison you.


By: John Richardson
+65 6780 4359



AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly