Petrochemicals And The End Of The Commodities Supercyle

ChinaversusstherestoftheworldPP2014

By John Richardson

YESTERDAY I suggested that a “permanent study group” should be established by the US petrochemicals industry, and very probably industries in other regions, that would focus solely on all the evolving implications of the New Normal.

So what should be this study group’s first topic for consideration? How about the implications of the end of the “commodities supercycle”, and what it means for petrochemicals?

I have been warning since early last year that the supercycle would come to an end as China’s economy was rebalanced,,  The subsequent collapse in oil,  iron ore and other commodities prices supports this argument.

In a report published last month, Citi agreed.  The bank said that:

  • China’s demand growth for commodities would permanently slow down, as Beijing steered a course away from overinvestment and environmental degradation towards greater domestic consumption and greater sustainability [doing “more with less” will be the key here].
  • To bring investment’s share of GDP down to 40% from the current 50%, China’s investment growth would need to be around four percentage points lower than GDP growth. Based on the current 7% economic growth target, this would mean 3% investment growth. This would have profound implications for commodities demand, given the exposure of most industrial commodities to China.
  • The commodities world would, as a result, become multipolar, with demand growth l increasingly come from the “Emerging Five,” namely India, Southeast Asia, the Middle East, Latin America and Africa.

This last point might well be seized upon as evidence that lost demand growth in China can be replaced by demand growth elsewhere. The chart at the beginning of this post is, however, a reminder about why this cannot conceivably happen anytime soon.

You can see that I have used the example of polypropylene, but whatever petrochemical you choose – or whatever other commodity, such as iron ore or copper that you might also pick – the data will tell the same story.

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