By John Richardson
CHINA’S purified terepthalic acid (PTA) imports fell to just 751,000 tonnes in the first half of this year compared with 1.56m tonnes in H1 2013. Meanwhile, exports increased to 232,000 tonnes from only 27,000 tonnes.
The sad thing is that whilst, of course, the data was impossible to predict with such a degree of accuracy five years ago, many of the dynamics that have caused this situation were already apparent.
As early as 2009, it was clear that China’s economy was flooded with such a huge amount of emergency lending that there was no way that proper due diligence on every loan could possibly be carried out.
This meant that overcapacity has occurred across many industries, with sometimes the motive for building a plant bearing little connection with the fundamentals of supply and demand in the plant’s manufacturing sector.
In the case of PTA, it was often a case of local government officials backing a project because it helped boost provincial-level GDP growth – a career necessity.
It was also a case of local governments being anxious to raise revenue from selling the land to a PTA project and collect tax revenues once the facility was on-stream. Many of the less politically-connected local governments are too-heavily dependent on land sales to fund their liabilities because they lack financial support from Beijing.
But if you talked to just about any overseas investment bank about China’s economic prospects, they overlooked or missed these distortions and instead talked about how the country’s dominant position in export markets and its “economic growth miracle”.
And so too few people asked: “In the light of all this excess liquidity, and the non-economic motives behind building industrial capacity, what are the risks behind my investment?”
The risks for PTA in China have also longed involved an ageing population. Global apparel and non-apparel retailers will always source from the cheapest possible location and so it was obvious that China, because of its one-child policy, would see an erosion in its market share.
Equally, the economic growth miracle wasn’t really a miracle at all. Instead, it was the result of a one-off demographic dividend and a flawed investment-driven growth model. Both have come to an end, guaranteeing lower domestic demand growth for all the things made from PTA than many people had forecast.
There is also the cotton story. What goes up must, eventually, come down in any commodity market.
In what appears to a response to these problems, Middle East and Asian PTA producers have introduced “cost-plus’ formulas for setting their pricing. These formulas are based on the cost of paraxylene and a “conversion factor” – i.e. how much it typically costs to convert PX into PTA.
This feels like a defensive measure to us. In a strong market you don’t talk to your customers about your costs of buying raw materials and your costs of production, but instead focus on the value you are delivering. Where has the value gone in PTA?
Companies need much deeper macroeconomic, social and political analysis in order to prevent these mistakes from being repeated.
