China “Base Case” Indicates Another Good Year

By John Richardson

nowtLAST year was a tremendous year for polyethylene (PE) exporters to China, according to data provided by US-based International Trader Publications, the US-based trade data and analytics service.

They conclude that China’s imports of high-density polyethylene (HPDE) and low-density PE (LDPE) posted strong gains. Volumes for 2013 were up 18% and 10%, respectively, versus the prior year.

Imports of linear-low density (LLDPE) from Singapore, with a major capacity expansion [the new ExxonMobil plant), were up 40%, in contrast to the 4% drop in LLDPE from Saudi Arabia, they add.

The job now for producers is, of course, to assess what might happen this year.

We have spent most of the last week asking them that very question and here is a summary of what they think:

  • Despite the evidence of an economic slowdown in China in early January, this is nothing to worry about. In fact, the more that growth slows down over the next few weeks, the better as the more likely it is that the government will kick-in with another big stimulus package – putting the show firmly back on the road. They cite the example of last July’s “mini-stimulus package” as evidence for their argument.
  • Their base case is for 2014 GDP growth of around 7%. Even though 7% growth would, actually, of course, be well below the often double-digit GDP growth rates of the last ten years, China’s PE markets are hugely bigger than they were a decade ago. LLDPE consumption was, for instance, just 2.5m tonnes in 2003 compared with 6.5m tonnes in 2013, according to ICIS Consulting. This means that slower growth would come off a lot bigger base.
  • This all bodes well for the ability of the Chinese market to absorb new capacities due on-stream in 2014. Output at the ExxonMobil plant in Singapore is, for instance, expected by many market players to increase, although this hasn’t been confirmed by Exxon. And Borouge is due to commission 1.08m tonnes/year of Borstar PE capacity in Abu Dhabi. Its associated cracker is due to come on-stream in Q1 with downstream capacities set to start-up in a phased manner thereafter.

This “base case” scenario might turn out to be right, but we continue to worry that:

  • If 2014 is another good year, then China’s government will have merely kicked the can down the road, creating bigger problems for the country’s economy – and its society and environment - in years to come.
  • There is a very good chance that the “when” has become the “now” and that reforms will significantly accelerate this year. There are no guarantees as to the outcomes.
  • The global implications of a potentially huge reduction of credit from the Chinese economy have yet to be fully evaluated.

In a special report, which we will publish next week, we will outline our arguments in more detail.

We hope that this will become a valuable tool in strategic planning.

, , , , , ,