Concept4

By John Richardson

YOU will have no doubt seen many charts similar to the one above, which shows lots of arrows indicating the direction of global petrochemicals trade flows – in this example, polyethylene (PE). The actual numbers, are, of course, missing from beneath each of these arrows, but if you are interested, you can contact us.

Most people have up until now used a tried and very trusted way of crunching the numbers that go into charts like this. This has involved looking at feedstock advantages to indicate where capacities are going to be built. It has also included a study of likely plant closures in raw material-disadvantaged regions such as Europe.

The demand side of the story has then involved taking IMF and World Bank estimates etc. of GDP growth to work out how consumption is likely to increase across different regions.

Historic data tell us what have been the multiples of petrochemicals consumption over GDP growth. So, if you have a solid-enough range of GDP growth forecasts, you can then estimate what petchems demand growth will be in the future for different regions and countries. Add this view of demand to your view of capacity and you can then, of course, forecast trade flows.

This way of looking at the world is still important, of course. You should not throw the baby out with the bathwater. But the world is changing, and so we need to also employ other ways of analysing likely trade flows.

Right now, the first and foremost difference in the way the world is behaving centres around China’s radical programme of economic reforms.

Yes, China might still want to import petrochemicals in the future, but perhaps these will only be the higher-value petrochemicals that help it escape its middle-income trap. In basic petrochemicals, it might even choose to be self-sufficient.

And here’s another important thought: What if China chooses to only import any type of petrochemical, low or high value, from countries that support its new economic growth model? These are likely to include those countries which have signed-up for its Asian Infrastructure Investment Bank (AIIB), which does not include the US.

The world is also changing because the reforms of China’s economy are occurring at the same time a  long term slowdown of growth in the West, driven by demographics. The Great Unwinding has begun.

There is something else to consider, and it is the growing consensus that climate change is man-made.

Let’s move the clock forward ten years when it is possible to imagine a US government that denies this consensus. Again, I am not going to come down on either side of this argument, but a consensus is a consensus and you have to live with that, no matter what you might think.

US petrochemicals companies face a big problem in the world I have imagined ten years from now, as they have added a great deal of new capacity, largely in the form of PE

A significant proportion of this new PE capacity will have to be sold to emerging markets because of flat-lining growth at home.

We know that China might not want to buy this PE because, as I said, by that point it might be much closer to self-sufficiency in basic grades of the polymer. As for the higher grades, it may only want to purchase these products from countries which support its new growth model. So the US, because of its opposition to the AIIB, might be shut out of China.

It can, of course, turn to Latin America, Africa and South Asia etc. but any realistic forecasts for growth in these other developing regions indicate that they cannot entirely replace a “lost China” for at least a decade – very probably, in fact, a lot longer.

But, anyway, as US companies turn to these other developing regions they face trade barriers from Latin American, African and South Asian countries that lie in tropical regions.

These are the result of the US government’s position on climate change, which runs against a  global consensus that:

  • Changes in the climate are affecting the world’s poorest people much more than its richest people.
  • One reason for this is because many of the world’s poorest people live in tropical regions where reduced rainfall is damaging crop fields. The argument in favour if this view is already gaining volume. For example, a recent study concluded that already hot tropical regions could lose as many as 200 growing days per year. This would affect a total of 3.4 billion people, 2 billion of whom live in low-income countries.
  • Food shortages are not the only problem. Diseases such as Dengue Fever and Malaria are already on the increase because of rising temperatures. Cholera outbreaks also occur when hurricanes mix waste and drinking water – and as everyone knows, some research supports the conclusion that hurricanes are becoming more frequent because of man-made climate change.

Sure, the majority of scientists who believe that climate change is man-made could still be proved wrong by the earth actually cooling-down over the next 10, 20, 30 and more years.

But do you really, honestly want to build your entire business plan around this one and only outcome? I think not. It is instead best to prepare for the possibility that today’s consensus view on climate change is proved to be right.

What might trade barriers and other changes to the costs and ways of doing business look like? And what should petrochemicals companies do right now that will help them make money in a world of much-lower carbon consumption? These will be the subjects of my post tomorrow.

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