By John Richardson
THE "luxury end" of China's polyethylene (PE) market is being heavily targeted by overseas producers and the results so far have been pretty spectacular, according to one of the producers.
"The annual growth in demand for higher value grades has been tremendous - two times GDP," said a senior executive with this producer.
"What we are, in effect, doing is destroying commodity demand by going to a processor and explaining the value of what we do," he added.
"As people get wealthier in the southern and eastern provinces, they are demanding higher-value packaging material, just as some rich people are moving from buying Hondas to BMWs."
He believes that the potential for further growth is very good as only 7-8 percent of China's total PE film market comprises what he categorises as higher-value packaging material, compared with 75 percent in the US.
But there are risks for companies who focus too heavily on the luxury end of the PE market, as is also the case with other "differentiated" polymer and chemical producer.
(It is very important to stress that this does not apply to the PE producer we have referred to above. It has put in place a strategy to profit from all segments of China's market and much of the thinking that follows is thanks to this company.)
The risks include China's annual GDP growth falling to as low as 3 percent over the next decade or more because of the difficult transition from an investment to a domestic-consumption driven economy.
China's growth could also fall well below most companies' base-case scenarios due to the disastrous impact of China's one-child policy.
In a later post, we will also explore how a slowdown in urbanisation, due to the one-child policy and other demographic factors, threatens comforting assumptions about China's economy.
If growth slows then, of course, so will the increase in per capita income levels.
Another issue, which we discuss in chapter 6 of our e-book, Boom, Gloom & The New Normal, is that the vast majority of Chinese remain exceptionally poor by Western standards.
Middle income in China is people who earn just $2/day-$20/day. The rich are those earning over $20/day, and are just 4% of the population.
And as the chart above illustrates, per capita consumer spending in China, and in other developing countries, was way behind Western levels in 2010.
Even in the best of economic circumstances, therefore, it would take many years for luxury goods markets to approach the size of those in the West.
Evidence for this view emerged in a Citi report released last month on autos.
"Interestingly, although ownership penetration in China remains low, at 60 cars per 1,000 drivers, annual sales have doubled since FY09 to around 24 per 1,000 drivers," wrote Citi.
"This is similar to Brazil levels, and compares with around 40 in Europe or Japan. Given development variance between China's east and west, this suggests China eastern annualised sales per 1,000 drivers are getting very close to Western levels already - even if the fleet remains small relative to the population."
The bigger opportunity in China, and in other developing countries such as India, is the hundreds of millions of people, who, for the first time, are earning enough money to be able to afford basic, low cost consumer costs.
Only in their wildest dreams do these hundreds of millions of people picture themselves owning a Honda, let alone a BMW.
In reality, they are only ever likely to own a motor scooter.