Construction Drives China 2013 PE Growth

ChinaPEAug2013

By John Richardson

THE blog has been banging its head against a brick wall for several months now in an an effort to fully explain why polyethylene (PE) apparent demand growth has been so strong during most of 2013.

Interviews with well over 20 producers, traders, end-users and market analysts (to be honest, we have lost count) have failed to give us a definitive answer.

Explanations have included:

  • A renewed clampdown on imports of recycled, or scrap, plastic.
  • A continued surge in income levels amongst China’s poorest. Many more people have, as a result, crossed the income threshold where they can afford modern-day consumer goods, containing PE, for the first time.
  • Rising food-safety concerns that has led to a big jump in consumption of pre-packaged food,  which, of course, is wrapped in PE film.

For us, though, a big reason for the surge apparent demand growth felt as if it might be the increased availability of lending that had led to more speculative activity, in one form or another.

This seemed to make more sense given that until as recently as May this year, nobody we had spoken to had highlighted rising income levels and food contamination concerns as big boosters of growth in 2013. Instead, the big majority of our contacts felt back in May that this year would turn out to be very bad indeed – perhaps even worse than 2012.

In other words, people have been searching for a reason for the recovery after the fact – i.e. they didn’t see it coming – and are just hoping that it will turn out to be very sustainable.

Another reason for the unexpected rebound could be China’s mini-stimulus package, which was designed to boost GDP growth. A lot of the extra government spending has gone into infrastructure investments.

The data on imports and local production – from Global Trade Information Services and the Chinese government, which has been broken down with the help of fellow blogger Paul Hodges - seems to support both these theories.

This is because:

  •  High-density growth between January-August of this year has surged by 18% compared with the same period in 2011.
  •  In contrast low-density PE (LDPE) growth is up by only 8%, with apparent demand for linear-low density (LLDPE) creeping up by a mere 2%.

Some of the major end-uses for HDPE are in the construction sector – for example, pipes and geo-membranes, whereas LDPE and LLDPE mainly go into film applications for consumer goods.

This seems to tell us that all the extra credit sloshing around China, much of it via the shadow-banking system, has found its way into more speculative property construction. Some of this extra money may have been used to hurry-through the completion of projects already underway, in anticipation that Beijing might soon withdraw the punch bowl.

And, of course, increased government spending on infrastructure could have driven-up the demand for pipes, geo-membranes etc.

All of this is a warning that this year’s growth – which now totals 14% across all grades of PE (see the above chart) - might not be as sustainable as some people think.

Why? Because:

  • The government seems determined to tackle excess credit in the financial system.
  • Now that it has shored-up political support ahead of the important November plenum meetingthrough boosting GDP growth, it can perhaps afford to cut back on infrastructure and stimulus spending as it presses ahead with a widespread programme of painful reforms.

All grades of PE might, also, not be as “economic cycle proof” as some people claim.

“It is commonly accepted that PE is primarily used in packaging of basic food stuff and hence is fairly resilient to economic downturns,” said an industry source.

“While this is true of food packaging to a large extent, the reality is that industrial packaging is nearly as large as food packaging and is linked to economic activity – for example, stretch film, stretch hood, protective films, liners, rotomoulding etc.

“Also, conversion from rigid packaging such as glass bottles and cans, etc slows down in uncertain economic times, as companies hold back on the capital investment needed to make the change. So while the long-term trend of substitution remains in place there may be deviations in the shorter term.”

And so, if China’s overall GDP growth does decline over the next decade, (the new consensus view) this will have important implications for the PE industry.

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