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2014: The Rear View Mirror

Business, China, Company Strategy, Olefins, Polyolefins, US
By John Richardson on 02-Jan-2015

By John Richardson

Rear-view-mirror-captionMOST of my forecasts for 2014, which I made in this post on 30 December last year, look good in the rear view mirror.

I was right about credit availability being the single biggest issue for the polyethylene (PE) industry in China – and, of course, all other manufacturing sectors.

As the year progressed, it became ever-more apparent that China’s government saw the control of credit as a vital part of its rapidly accelerating economic reform programme.

Credit has, for example, been used as strategic tool to move China up the manufacturing value chain. Smaller less efficient plastic converters have found it increasingly hard to source finance – and have, thus, closed down – as I had warned would happen.

Most economists would have disagreed with my argument that China’s GDP growth would decline because they misread China’s intentions on reform.

But it is now widely expected that China will post its lowest official GDP growth rate since 1990 – and will miss its official GDP growth target for the first time since the 1997 Asian Financial Crisis.

As the year progressed, though, it became obvious that Beijing wasn’t really interested in official GDP growth targets anyway – and that, instead, its focus was on the quality rather than the quantity of growth.

It also became obvious that the real economy was, in any event, a lot weaker than the official GDP growth numbers indicated.

Another of my predictions was as follows:

Might 2014 also mark the year when China erects more trade barriers in order to protect its domestic producers? We suspect not, as we think a more likely scenario is post-2017, when most of the new US capacity is due on-stream and China has substantially raised its local production. The rest of Asia may follow suit as petrochemicals markets become more regional.

The process of China moving towards much greater self-sufficiency in PE has already started: China’s production rose by no less than 10% year-on-year in January-November 2014.

I now have a slightly different take on events, as I think that US competition will essentially be irrelevant to China. As it moves towards PE self-sufficiency, particularly via the coal-to-olefins route, it will have no strategic or economic need to import from the States. Long term strategy and economics are one and the same in China, and so don’t get confused by overly simplistic cost-per-tonne analysis of the PE industry.

Thus, the alternative future that I had suggested last December – where Chinese investors would seek to off-take lots of cheap US PE post-2017 – isn’t going to happen.

But I hold with my prediction of 30 December 2014 that petrochemicals markets in general will become more fragmented as the new global financial crisis develops.

What of this year? Watch out for my forecasts next week.