China To Drive 55% Of Global Polyethylene Growth In 2007-2017….

.…Major risks ahead from this over-dependence on China



By John Richardson

FOLLOWING on from my post on Friday, which showed almost exactly the same story for polypropylene (PP), see the above chart detailing the importance to the global polyethylene (PE) business of China’s consumption growth.

Over-exposure to China is a greater risk in the case of PE than PP because of the big build-up in PE capacity over the next few years. Unless China can continue to consume the lion’s share of global PE growth, and in so doing absorb many of the tonnes destined for export from new plants in the US in particular, then the global PE business is likely to be in trouble.

China’s growing importance as a driver of the world’s PE consumption can be broken into three phases:

  1. 1993-2000: This was the period immediately following Den Xiaoping’s 1992 Southern Tour. The economy became more open to private investment, leading to the beginning of China’s rise to its status as workshop of the world. During this period it accounted for 23% of global PE demand growth as against 24% for North America, 23% for Europe and 11% for Asia and Pacific. Our Asia and Pacific region includes Southeast Asia, India and the rest of the Indian sub-continent.
  2. 2000-2007: This as the period before and after China’s 2001 accession to the World Trade Organisation. Membership meant the removal of the tariffs and quotas that had restricted China’s exports of finished goods to the west. Meanwhile, North America and Europe were in the midst of their Babyboomer-driven economic boom as the Boomers had yet to start retiring. This meant that westerners could afford lots of Chinese-made plastic toys, fridges, TVs etc. etc. Combine this with China’s vast surplus of migrant workers willing to work for low wages in its coastal export-processing plants and China’s export competitiveness was unbeatable. These exports were often made from PE. Hence, between 2000 and 2007, China accounted for 31% of global PE demand growth. North America’s share of world growth fell to just 7%, Europe was at 19% and Asia and Pacific was at 15%.
  3. 2007-2017: This third phase is very different. China could longer depend on the west to power its growth via exports because the Babyboomers had started to retire. As a result, GDP growth in the west will remain well below its long-term trend as the Boomers retire in ever-greater numbers. China’s own demographic challenge of an ageing population means that it is also losing competitiveness in low-value manufacturing. Given these two dynamics, one might have expected China’s share of global PE growth to fall rather than rise. But what we have instead seen is a focus on domestic-led growth through the world’s biggest-ever economic stimulus package. Launched in late 2008, it was designed to boost the local economy as an antidote to the negative impact of the Global Financial Crisis. The end-result is the chart above, where ICIS Consulting forecasts that China will have accounted for 55% of the growth in PE demand between 2007 and 20017. North America’s share will have fallen to only 1%, Europe will also be at 1% and Asia and Pacific at 25%.

Why Phase Three Might Not Be Sustainable

You have to worry about China’s debt problems and its renewed efforts to deal with rising debt that could be as high as 650% of GDP.

Last week, the IMF said that had the Chinese government not turned on the credit taps, China’s average real GDP growth in the five years to 2016 would have averaged 5.3% rather than 7.3%. What might therefore happen to GDP growth, and so growth in PE consumption, if over the next 2-3 years GDP growth is slightly lower on efforts to deflate the lending bubble?

Perhaps the effect will be minimal because of the rise of mobile internet sales. The boom in e-commerce looks as if it might continue to drive strong growth in demand for PE into packaging end-use applications. Tencent and Alibaba etc. may not want to skimp on packaging because a.) They want to ensure that goods arrive undamaged to maximise their market share, and b.) The cost of PE packaging will only be a small percentage of total costs as oil price will, I think, remain low.

But we don’t know exactly how long it will be before China’ e-commerce players move along the product development curve. Packaging costs could soon become a big issue as competition in the e-commerce space intensifies. And the ban on imported recycled or scrap plastic is a sign that the Chinese government is concerned about pollution from plastic rubbish. Public opposition to plastic rubbish may also grow.

And what if GDP is more than just slightly lower? You cannot entirely rule out a financial sector-induced economic crisis in China, as it has reached a “Minsky Moment” where corporate cash flows can neither cover principal nor interest. Debt can thus only be serviced by taking out new borrowing.

Continued easy access to the China market is crucial

Let’s assume that China continues to drive global PE consumption growth on similar levels to 2007-2017.

We still don’t know the final outcome of trade policies under President Trump’s White House. Steve Bannon has left, sure, but on the same day the US announced the launch of an investigation into China’s intellectual property rights practices.  China may decide to maximise PE imports from just about every country except the US – particularly those countries that are members of its One Belt, One Road initiative.

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