By John Richardson
HERE is a list of just a few recent what were are told were “Black Swan” events:
- The Lehman Bros-triggered global financial crisis.
- China’s 2008-2013 economic stimulus package.
- Last year’s collapse in oil prices.
- China’s economic and environmental about turn.
We are also told because these were Black Swans – freak events that are virtually impossible to predict – there is no point in obsessing about what the next Black Swan might be. Why spend sleepless nights, and all that unnecessary intellectual energy – and also, crucially, money – trying to stare into the crystal ball in an attempt to identify the next Black Swan when you have no realistic chance of being successful?
The same people that tell us that obsessing about Black Swans is pointless also argue that disruptions to chemicals and polymers demand growth, such as the ones caused by the Black Swans listed above, are only ever temporary.
We are also told these freak events do not, essentially, make that much of a difference to “long-term trend growth”. This growth is being driven by factors such as population growth and the rise of the middle classes in the developing world, is the logic used to support this thinking.
Another argument put forward by some analysts is that the size of markets today makes a huge difference. You cannot take growth away that’s already happened, and so even if growth moderates percentage-wise as a result of Black Swans that do last a little bit longer than is expected, this doesn’t really matter as volumes are so much bigger today than they were, say, ten years ago.
Take China as an excellent case in point. In 2005, the country’s polyethylene consumption totalled around 10m tonnes, but we estimate that by 2015 this will have risen to approximately 24m tonnes. Thus, because the base is much bigger, even if percentage growth in China tumbles to the low single digits during its economic transition, that is still a heck of a lot of extra demand in terms of more tonnes needed.
The good news that we at ICIS don’t look at the world in such a linear and dangerously limiting way.
History strongly suggests that Black Swans are not Black Swans at all. They are instead often events that could and should have been predicted and are interconnected: One supposed Black Swan causes the next Black Swan. Everybody, surely, for instance, now recognises that the Germany’s terms of surrender at the end of the First World War helped cause the Second World War.
And what are wrongly called Black Swans are events that are so so significant in nature that they will profoundly and permanently reshape both the scale and the nature of chemicals demand growth.
Let’s just look at the four events I detailed at the start of this blog post, and their interconnections, to support our argument.
When you had truck drivers earning $20,000 a year in the US who were suddenly able to afford homes worth many hundreds of thousands of dollars, this should have set warning bells ringing. Some analysts, such as Nouriel Roubini and Paul Hodges, told us about the risks ahead. Common sense should also have told us that this bubble could not last.
China’s economic stimulus package was a response to the Global Financial Crisis, And again, at the outset, it should have been obvious to everybody that it wasn’t sustainable.
It was also clear that the recovery in oil prices, post-Lehman Bros, was driven by economic stimulus in both China and the West. And yet too many people looked at the history of oil, at $100 a barrel for most of the time between 2008 and H2 2014, and took this as the real “New Normal”. They wrongly thought that $100 a barrel represented long term supply and demand fundamentals.
And it was equally clear, once Xi Jinping and Li Keqiang came to office, that the mistakes of the past would be rectified in China. Investment growth, and thus long term GDP growth, would have to slow down for economic reasons. China also simply has to find new routes to growth because of nothing less than an existential environmental crisis. This again should have been obvious for a good while now.
If you lay on top of this thinking the realisation that just looking at population growth and the rise of the middle classes in the emerging world from top-down levels is too simplistic, you then start to get a much clearer picture.
Population growth by itself is important, of course, but it is the demographic profile of populations that matters most of all. Ageing populations in the West and China will shape both the volume and nature of future economic growth.
Credit has hidden demographic problems in the West – both before and after the 2008 Global Financial Crisis. China’s giant stimulus package also helped to disguise the long-term implications of its one-child policy. Lending growth simply had to be reduced at some point, exposing these problems, and this is what is happening today.
So Black Swans are not Black Swans are at all, but are instead entirely predictable events, even if getting the timing right is difficult. But actually, even the timing is something that you can estimate pretty accurately with a bit of decent analysis.
That still leaves us with the need to address the argument that because markets in China are so much bigger in volume terms than they were, say, a decade ago, lower growth will be from a much higher base.
Here are just a couple of reasons to challenge this:
- This doesn’t take into account how the nature of demand is changing in China, as I discussed earlier this week. You can no longer place any standard grade of chemicals or polymer on a ship to China, send it there, and assume it will automatically sell.
- There a very realistic scenario that can be outlined where China becomes much more of a protected market. Much bigger volumes on paper are only much bigger volumes in reality if you have access to a particular market. And I still see this as a possibility for the world in general. Declining economic growth could well result in a sharp rise in trade protectionism.
It also crucial to note that the argument that much bigger volume growth negates the need to worry about the declines in percentage-growth rates applies to China and China only.
Taking polypropylene as another example, look at the chart below:
It shows that China’s consumption in 2014 dwarfed anywhere else in the world. So, if percentage growth rates do fall across the world, this will have a big impact on how much new volume of demand is created.
So if China ends up as pretty closed local-for-local market, what is the global chemicals industry’s Plan B?