China Will Not Shut Down. It Will Instead Run Harder.

VAM2

By John Richardson

EVERY $10 decline in the iron ore price knocks more than $2bn off the annual revenues of Vale,  Rio Tinto and BHP Billion and around $250m from those of Anglo American.

We can see a similar dynamic playing out in chemicals and polymers markets, but on a scale that has yet to be assessed (chemicals analysts  might well want to start crunching the numbers).

The problem with iron ore and chemicals and polymers is, of course, that the bottom has fallen out of China’s markets, just as lots of new capacity is being commissioned globally.

In the case of iron ore, it is seeing the largest increase in production the world has ever seen. The  industry produced about 1.1bn tonnes in 2013 for seaborne export and this is forecast to hit 1.4bn tonnes by the end of 2015.

And in many chemicals and polymers, the same thing is happening, or has already happened.

The assumption in the iron ore industry is that less efficient miners  in China will shut down. “The big miners are hoping lower prices will squeeze out competitors such as China’s high-cost domestic producers – the country is about 35% self-sufficient in iron ore,” writes the Daily Telegraph, in the same article that we have already linked to in the first sentence of this blog post.

This an assumption shared by chemicals and polymers producers outside China. They, like the big iron ore miners, are applying market economics to a country where social and political factors can often be more important.

Iron ore mines will keep  running if preserving jobs remains important in certain regions of China.

And as we are seeing in chemicals and polymers such as PTA and polyvinyl chloride, exports are increasing as  an alternative to wider economic and social implications of shutting  plants down.

As this excellent ICIS news article from my colleague Helen Lee points exports of vinyl acetate monomer (VAM)  have  also sharply increased this year as imports have fallen (see our above chart). VAM is used to make emulsion polymers, resins, and intermediates used in paints, adhesives, coatings, textiles etc.

One can argue that this temporary, in response to tight global supply of VAM.

But now that China has a bigger market share in what it could well view as “value added” export segment why should it give up ground, especially as its capacities are on the increase?

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