Following In The Footsteps Of China Is Impossible

ChinaWorldPP25Feb

By John Richardson

THE chart above shows how China’s consumption of polypropylene (PP) rose from 4.6 million tonnes in 2000 to 19 million tonnes in 2014.

It also illustrates how, in the process, China’s percentage share of global PP consumption jumped from 15% in 2000 to 32% in 2014.

Meanwhile, imports also rose during the same period – from 1.7 million tonnes to 5 million tonnes.

This fantastic success story will carry on in China, albeit at a slower pace of growth, claim corporate planners at some chemicals and polymers companies.

And they also believe that as China’s import requirements and growth moderate ever so slightly, other emerging markets can step into the breach by following in China’s footsteps.

But they are wrong on both counts and here is why, starting with some crucial historical context:

  • China joined the World Trade Organisation (WTO) in 2001 as the West was still enjoying a “demographic dividend” from many of its Babyboomers being at the height of their earnings potential.
  • Admission to the WTO also coincided with the determination by Western central bankers, most notably the Fed, to do whatever it took to prevent deflation. Credit was thus no problem whatsoever.
  • This meant that China could not build local chemicals capacity quickly enough to meet all the demand growth in the West for its finished products. This led to strong import growth.
  • And China carried on working for the global chemicals industry after the 2008, thanks to the country’s stimulus programme – the biggest in global economic history. This again supported chemicals imports.

But all of this was a historical “one off” and here is why:

  • The West has lost the “wealth effect” of the Babyboomers because a critical mass of those born between 1946 and 1964 have retired, with many more due to retire in the coming decades.
  • Official data shows that there are now more households in the West headed by over-50s than those headed by younger people.
  • As a result, average household spending is now in steady decline in inflation-adjusted terms. This really matters because 60% of GDP in most economies is accounted for by consumer spending.
  • So China and other emerging markets cannot depend on the West to easily soak-up their manufactured goods.
  • China’s post-2008 effort to boost the local economy was a failure. It has left China with debts that quadrupled from $7 trillion in 2007 to $28 trillion by mid-2014, huge manufacturing and real estate overcapacity and terrible, terrible pollution. This means that it is simply impossible for any other emerging market to walk in China’s stimulus footsteps.

What does the future hold for China? It is this:

  1. Its import needs will decline quite dramatically, more than many people think, as it moves much closer to self-sufficiency in PP and other chemicals and polymers. This is a key part of its new growth model, both in the short and long term.
  2. Consumption growth may have already peaked in PP and other chemicals and polymers. It might even decline as, for environmental reasons, China learns how to do “more with less”.

If other emerging markets cannot follow in China’s footsteps, what should they instead do? And what does this mean for the global chemicals business?

On Friday, I will make some suggestions for India – ahead of India’s budget on 28 February.

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