China’s Butadiene Gamble

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Source of graph: http://www.economist.com/

 

By John Richardson

AN assumption is that China’s auto ownership will continue to rapidly expand and that, therefore, there will be a big need for substantial domestic expansions of butadiene and synthetic rubber capacity to make the tyres for the autos.

But auto ownership growth was “brought forward” by the economic package introduced in late 2008. This led to demand growth being concentrated in 2009-2010 that should have been spread across many more years.

Credit conditions have since been tightened, with the central and local governments also introducing restrictions on auto ownership for environmental reasons.The city of X’ian may soon join Guangzhou, Guiyan, Beijing and Shanghai in restricting vehicle ownership.

And in a June 2012 report, Citi said: “Interestingly, although (auto) 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.

“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.”

In short, vehicle ownership in economically-developed eastern China could be reaching saturation point.

Western China is much poorer and so will take many years to catch up with the east, resulting in relatively lower rates of growth in ownership of cars and trucks.

Growth in auto sales is also slowing down as a result of weakness in the overall economy, as the above graph illustrates.

Sales growth dropped to 2.5 percent in 2011 from 32.4 percent in 2010, according to the China Daily.

In the first half of this year, growth was only 2.9 percent, with further weakness evident in data for July.

Meanwhile, China’s auto industry is in financial crisis, says the same China Daily report.

Government agencies are trying to force inefficient auto makers into bankruptcy in an effort to tackle the oversupply crisis, the newspaper says.

And yet the planned capacity of the country’s 12 leading manufacturers will soon reach more than 30 million units a year, way in excess of demand, warns the National Development and Reform Commission.

As for butadiene, some 1.18m tonne/year of new plants are due on-stream in China by 2013, according to ICIS data.

“Each of us only has one child, but for each child there are several new industrial projects,” a contact in China recently told one of the blog’s colleagues.

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