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China Inland Boom: Who Will Benefit?

Business, China, Company Strategy, Economics, Polyolefins
By John Richardson on 29-Feb-2012

By John Richardson

This fascinating article in The Economist raises further important questions about the impact on petrochemicals of changing migration patterns.

Last week, we discussed how what industry executives had been discussing for three years has finally happened: Severe labour shortages in the southern and eastern provinces post-Lunar New Year, preventing chemicals and polymer consumers to run at full operating rates.

Millions of rural residents have chosen to stay at home after the New Year rather than travel to the south and east to either find work or return to existing jobs, because of government policies that have raised income levels in the countryside.

The Economist notes that in 2004, coastal wages for migrant labourers were 15 percent higher than inland, according to the National Bureau of Statistics. The difference has all but disappeared, thanks to both higher wages in rural areas and the surge in living costs in the east and south.

The article largely focuses on the city of Chengdu, which is some 1,000 kilometres from the coast. 

As inland areas such as Chengdu further develop, the big plus for the petrochemicals industry is, of course, rapid demand growth for basic commodity plastics etc in inland provinces, as people emerge from poverty. For the first time they will be earning enough money to afford a washing machine or a refrigerator.

But income levels will still be relatively low compared with more-developed parts of China. As a result, cost pressures will be big.

Naphtha cracker operators in Asia ex-China are going to really struggle to supply these inland markets. Moving, for example, polymers 1,000 kilometres by rail or road, to a city such as Chengdu, might make business unviable.

All overseas producers wanting to penetrate these markets – including those in the Middle East, which are obviously in the strongest position because of their feedstock costs – will have to consider investment in local warehouses. The Borouge model, employed to date only in coastal regions of China, might be the answer. This involves polymers being shipped to warehouses before orders from end-users are taken.

The other option is to hand material over to local traders and distributors. But the resulting multiple levels of distribution and trading, as product is shifted long distances, will make short-term demand fluctuations harder to read.

Domestic producers will be obviously in a very-strong position to supply these inland markets. 

One of the big fallbacks of the coal-to-chemicals sector is the logistics costs of moving product to the coast, where the big consumption volumes are at the moment. But if the inland provinces continue to boom, coal-to-chemicals will become more viable.

The Economist also notes that the number of 15-to-29-year-olds peaked last year, according to UN data – and the working-age population as a whole will begin to decline in a few years.

More than 90 percent of people from rural areas are already engaged in non-agricultural work, according to a report by the government’s Development Research Centre. This shows that China’s one-child policy is already adding to labour supply and cost pressures, further undermining China’s role as a supplier of low-cost manufacturing to the rest of the world.

Export volumes to the West are also going to struggle as a result of the New Normal.

Petrochemical exporters, who have based their business models largely on shipping product to eastern and southern China for re-export as finished goods, will need to adjust their strategies.