China: How Conventional Wisdom Becomes Conventional Wisdom

China, Company Strategy, Economics, Environment, M&A

Usagain

By John Richardson

HOW does  conventional wisdom – i.e. the opinion of the majority – become conventional wisdom?

This is a subject that the blog pondered over the last few days as it wandered around Euro Disney. Unfortunately, Mickey, Donald and his pals weren’t able to give us an answer.

The reason why we dwelled so much on this subject was because of our post last week on coal-to-olefins (CTO) in China. We feel, like many others perhaps should feel, that we might have have been suckered-in to believing that water was the Achilles Heel of the process.

If water is not really a challenge, and much of the planned new US supply come on-stream towards the end of this decade, here is a scenario:

  • US petrochemicals companies suffer severe oversupply distress, which will either be short term or long term, depending on your view of the global economy.
  • This could enable China to buy-up distressed US petrochemicals assets. It has ample reserves to go on a buying spree, especially if it reduces its holdings of US Treasuries.

Back to our main point about conventional wisdom.

Perhaps some of those at the top are happy to continue to peddle the CTO water challenge fallacy because they have pinned their career success on huge ethane-based capacity additions. When things go wrong, they might have already retired or moved on to other positions and so there is nothing in it for them to rock the boat.

Less senior people worry that if they, too, rock the boat by expressing their doubts, on either CTO supply or more importantly the macro-economic fundamentals, they will be committing career suicide. It is easier to follow the herd and say, “we didn’t see this coming” when things go wrong, rather than be an outlier.

Here is a reminder, from this excellent article by my colleague Nigel Davis, on the scale of what’s being planned in the US:

  • As many as 11 new crackers could be built in the US before the end of the decade. Add the capacity from eight expansions for existing facilities announced to date and the potential capacity increase is 51% or 13.9m tonnes. US polyethylene capacity could rise by 47%, or 7.1m tonnes.
  • Even if we tinker with some of the announced US cracker on-stream dates (see the above estimate, from ICIS Consulting, of actual, as opposed to announced, start-up timings), the big slug of ethylene capacity – as much as 7m tonnes – would be available after 2017. Tellingly, the ‘build-out’ – between 2017 and 2020 – is far above that in past ethylene cycles.
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