By John Richardson
The distance from end-use markets didn’t matter for chemicals and polymers producers during the 2008-2013 credit surge in China because, as we said yesterday, demand was so good that few people were willing to ask too many awkward questions.
But now the questions need to be asked.
One of the questions we would love to be able to answer is this: What will be the future demand growth for autos in China?
There are two important factors to consider here when making this assessment:
- How will any long-term reduction in credit growth effect demand for new autos? As the above chart illustrates, in 2008 up until October 2013, auto sales had increased by an incredible 138%. As you can see, the increase seems to correlate very neatly with the rise in lending. Some very questionable financial practices, including, in effect, “giving away” cars for free, have been behind this extraordinary number, we think.
- How will the increased focus on cleaning-up the environment affect both the volume and nature of auto sales?
- Volumes could be down if more restrictions are introduced on how many people can buy autos, and on when and where cars can be driven in the big cities and towns.
- And here’s another aspect of the story to consider: Congestion in cities in China, Brazil and Russia will spur a 30 million-vehicle annual decline in auto sales by 2035, according to a new study.
In the US, each new US auto is worth $3,539 of chemicals and polymers sales, according to the American Chemistry Council – and so it is fair to assume a similar figure for China. This involves a wide range of products including antifreeze, plastic dashboards, bumpers and windows, as well as upholstery fibres, tyres and coatings.
The further questions that chemicals companies then need to ask themselves include:
- Are our demand-growth scenarios for autos rigorous enough? Do they take into account a wide-enough range of outcomes because of the uncertainties around future credit growth, further environmental measures – and, perhaps, even, as the above study suggests, the impact of congestion on consumer behaviour?
- Do we sell“solutions” to the problem – i.e. do we produce chemicals and polymers that can be used by manufacturers of energy and emissions-efficient autos in China? Or are we instead we adding to the problem by selling to to manufacturers of gas-guzzling autos with low emissions standards?
- If we are part of the problem, rather than the solution, could we be legislated out of existence?
In-depth downstream studies, such as the one we have suggested above, could well separate the winners from the losers in the New China.
And these studies will need to be frequently updated to take into account changes in the variables we have discussed above – and numerous other variables that we haven’t even discussed here.