INSIGHT: Plastics will gain as inland China provinces play catch up

19 August 2013 17:15  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--One of the misconceptions about China could be that growth in chemicals and polymers demand will be mainly driven by lots of middle and high-income people buying ever-larger amounts of frivolous consumer goods. That might well be the impression if you have only visited the glitzy high-end shopping districts of Shanghai and Beijing.

But when you talk to polyolefin industry executives who travel to inland China, away from where most Westerners do their sightseeing, the impression is altogether different. The bigger story for them is instead about satisfying what are very basic needs by Western standards.

“I expect double-digit demand growth in plastic packaging every year in China over the next 10-20 years,” said a polyolefins industry executive.

Driving the optimism is that many less-developed provinces in China are playing catch-up with the developed southern and eastern coastal provinces. Income levels in these poorer provinces are expected to rise at faster rates percentage-wise over the next decade than increases in overall GDP growth, thanks to government policy.

The gap between under-developed and developed China is huge, according to a Peking University survey, which was released last month.

“Average annual income for a family in 2012 was Rmb13,000 [CNY 13,000], or about $2,100,” wrote the New York Times in a 19 July report on the survey.

“When broken down by geography, the survey results showed that the average amount in Shanghai, a huge coastal city, was just over Rmb29,000, or $4,700, while the average in Gansu Province, far from the coast in northwest China, was Rmb11,400, or just under $2,000. Average family income in urban areas was about $2,600, while it was $1,600 in rural areas.”

And people in all regions of China are becoming more environmentally aware, which includes a great deal of anger over food contamination.

Andrew Liveris, CEO of Dow Chemical, told the Wall Street Journal in a 25 July article that food safety concerns in China, including those surrounding the number of dead pigs floating down a river in Shanghai and rat meat being sold as lamb at some food stalls, were resulting in more people buying pre-packaged foods in supermarkets.

This is one of the factors behind a 13% increase in apparent polyethylene (PE) demand growth in January-June this year.

“When you travel to poorer provinces in China you realise that very few people can afford decent packaging for their food,” the executive added.

“If you look at how they pack pork or ham, you wouldn’t bring it back for your family. The food is one-third, or even 20%, of overseas prices, but you can tell why. The plastic packaging peels off and there are bubbles in the packaging, they don’t use proper polymers and don’t always put food into refrigeration,” he said.

Quality wise, and therefore food-safety wise, overseas producers were well-placed to take advantage growth, provided they could keep costs down, as affordability would remain a big issue in most of China, he added.

“Minor changes in density etc can change performance when you are dealing with an extrusion structure [for packaging film] with nine layers, each layer of which has a unique performance. This type of film is very commonly used in the West and more developed parts of Asia,” he added.

“The Chinese are still producing one to three layer material and they don’t even understand how to make three layers perform well, and so there is a lot we can do to help them catch-up.”

Once the Chinese government realised how much poor food packaging was costing the economy in wasted food, improvements would happen very quickly, he said.

“This has major health implications. You are talking about billions of dollars of economic losses from wasted food and health issues,” he added.

In the short term, some of the changes in government policy have been bad for the chemicals industry – for instance, the crackdown on corruption.

A decline in luxury goods sales and lots of empty tables at high-end restaurants equal lower overall economic activity and, thus, reduced demand growth for chemicals and polymers.

“It is going to remain very bad for consumer luxury-goods items. Luxury-goods manufacturers are scaling back their investments and even golf memberships are being returned to golf clubs. Nobody wants to show off their wealth anymore,” added the polyolefin industry executive.

“There are still some old-fashioned guys, including some of our customers, who want a return to corruption because they think it will be good for business.”

But he argued that Beijing would not change course and that this new direction would eventually be great news for growth.

“The more I look into the government’s new policies the more I think they will be good for China in the long term,” he said.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog


By: John Richardson
+65 6780 4359



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