By John Richardson
SORTING out those who get it from those who either don’t want to admit they are wrong or don’t even know that they are wrong is vital for chemicals businesses as the New Normal progresses.
So how do we spot the difference between the people we should ignore and those we need to listen to? Fortunately, there are lots of excellent litmus tests out there, which can help company executives seek the right kind of advice.
Last week, for example, some people were upbeat about China’s official GDP (gross domestic product) growth of 7% for Q1 2015. They pointed out that whilst this growth was the weakest since the same period in 2009, growth of 7% was still the envy of the rest of the world.
But this kind of thinking misses the point, and here is why:
- The fact that official growth is now the weakest since Q1 2009 is in itself worrying as this was the lowest point of the Global Financial Crisis. This was also before the beneficial impact of China’s giant economic stimulus package began to fully kick-in.
- You cannot believe official growth numbers. Some analysts believe that real Q1 growth was more like 4% or perhaps even lower. This was based on anaemic increases in electricity consumption, industrial production and credit, along with a decline in freight-rate movements. In the case of electricity consumption, the above chart shows that it increased by just 2.5% during the first two months of this year. This represents the latest in a series of steady declines from peak growth of 15% for the whole of 2010.
So where do we from here? To real GDP growth possibly as low as 1.7% in Q4 2015, according to the Bank of England.
This will be the result of an“industrial shakeout”. Companies in oversupplied sectors such as steel and cement will be forced to consolidate by being starved of financing, whilst other companies that add enough value to the economy will receive plenty of credit.
How it effects chemicals consumption will obviously vary end-use by end-use application.
Another industry being targeted for consolidation is real estate, where land purchased by property developers fell by 32.4% during the first quarter. Not surprisingly, therefore, sales of air-conditioning units were down by 30-40% in Q1, according to UK-based metals analyst Simon Hunt. So might also be the case for all the chemicals and polymers that go into both building and fitting-out new homes.
The reaction to Sunday’s rate reserve requirement ratio (RRR) cut by the People’s Bank of China, the second such cut since February, is also another great way to sort out those who get it from those who continue to cling on to outmoded ways of thinking.
The RRR, which is the percentage of reserves that the state-owned banks have to set aside against lending, was cut by a percentage point to 18.5% for the bigger lenders. And it was lowered by a further 1-2 percentage points for rural financial institutions. These were the biggest cuts in the RRR for more than six years and, in theory, could release between a trillion to two trillion Yuan of extra stimulus into the economy, according to analysts.
But we know that with real Q1 GDP growth at 4% or less, and with momentum set to slow even further later this year, this can only be a defensive measure designed to mitigate the impact of painful economic reforms that will not, simply cannot, be reversed.
And to further counter anybody out there who thinks that the RRR cut points to a return to the good old days of a stimulus-led growth bonanza, consider these sobering facts:
- China’s total debts from $7 trillion in 2007 to $28 trillion by mid-2014, says McKinsey.
- Debt service charges cost China 17% of its 2014 GDP, according to Fitch.
- Chinese debtors paid interest costs close the size of India’s GDP last year ($1.87tn) and costs larger than South Korea’s ($1.3tn), Mexico’s ($1.26tn) and Indonesia’s GDP ($870bn), says the Financial Times.
We also know that the mood in China has changed. People are much less willing to both lend and borrow money because they know that Xi Jinping and Li Keqiang have wills of iron and so will not change course.