Globalisation had a golden age between 1982-2007. Trade barriers fell almost everywhere. Companies focused on achieving a ‘lowest cost’ position, in order to maximise their competitive advantage.
Today, however, the world is starting to look quite different.
It presents a remarkable picture. Over this period, the USA gained major cost advantage, due to the increased extraction of ethane from cheap shale gas. Yet:
• Its net PE exports actually fell 39% from 2.6MT to 1.6MT
• Net exports to China were down 70% from 900KT to 266KT
The blog’s many US friends naturally find this very difficult to understand. They believe China should simply shut down its high cost, naphtha-based production and import cheaper US product.
But China operates on different values. Its petchem industry operates as a utility, providing reliable supplies of raw materials to the factories to keep people employed. If it shutdown plants, then social unrest would increase, threatening the existing Chinese political structure.
Sinopec’s own financial performance proves the point. Between 1998-2010, it invested RMB 166bn ($25bn) in chemicals capital expenditure. Yet its total EBIT (Earnings Before Interest and Taxes) was only half this at Rmb 84bn. No Western company would dream of investing on this basis.
But as the blog noted last week, China is continuing to expand production. And the government is currently expected to raise its stake in Sinopec from 76% to 78% over the next few months. It is paying the bills, not Western-minded investors.
The US thus faces a major dilemma. It has the 2nd cheapest ethylene feedstock in the world (after the Middle East). But its markets for this product are reducing:
• Braskem of Brazil is building new capacity in Mexico (with Grupo Idesa)
• It is also planning to build in Brazil
• Both expansions will reduce US exports still further
• Equally, Asian/ME producers are already expanding sales in Latin America, to compensate for lower import demand in China
The US position on ethane thus provides a good example of the changes underway as we transition to the New Normal. New value structures are emerging that focus on social and political factors, rather than economics.