GDPtimestwo

By John Richardson

THE above chart is part of China’s New Normal, and so helps us to understand the future of the country’s chemicals and polymers supply and demand balances.

As you can see, the gap between its richest and poorest provinces remains substantial despite some progress in narrowing this gap since 2002.

The success so far is partly the result of big investment in infrastructure. For example, China as a whole has no less than 10,000 kilometres of expressway and many of these expressways have been built in the poorer western and southern provinces.

“Furthermore, foreign direct investment has been lured into inland regions, and third-tier cities such as Leshan located in Sichuan province or Yulin in Shaanxi ,” wrote Deutsche Bank, in the report from which this chart was taken.

Foreign investment, and also investment by domestic companies, has helped to boost manufacturing in these provinces. Some of this domestic spending is the result of the relocation of manufacturing from eastern coastal provinces, where labour costs are now too high because the developed regions of China are now negotiating their way through a “middle income trap”.

But still, if you again look at the chart, the gap between per capita incomes in the rich eastern provinces versus the west and the south remains way too high – and the government is determined to fix this problem.

So this means billions of more dollars of spending roads, railways and bridges in the south and the west.

A lot of this money will poured be into the provinces on China’s borders, through which the land and maritime New Silk Roads will run (see the map below).

china-railway-yuxinou

More low-value manufacturing will also be shifted to these provinces, which will be partly targeted at  export markets that will be cost much more cost-effectively penetrated as a result of the New Silk Roads.

And what’s the best way of raising per capita income? It is, of course, by creating jobs and many of those jobs in poorer provinces will be in basic manufacturing, such as making cheap plastic bags, films, buckets and pipes etc. from commodity grade polyolefins.

China could, of course, choose to import ever-greater quantities of these commodity grades of polyolefins from overseas suppliers, but this is not going to happen and here is why:

  1. It is better to have your own local supplies of resin. In that way, you reduce the risk of supply disruptions that would close-down processing plants and thus cause job losses. Such supply disruptions have to be a big risk for China’s inland provinces, which are of course a long way from major shipping lanes.
  2. China has vast coal reserve, and the demand for coal for power generation is going down for environmental reasons. So building lots of new coal-to-polyolefins plants is a great way of maintaining employment, as this gives coal miners another outlet for their coal.
  3. Yes, the availability of water might constrain these investments. But what if, assuming that water is a problem, the government is determined to fix this problem?
  4. The economic value add can also be huge here. If, say, coal only fetches $60/tonne in today’s domestic market, the alternative for a coal miner is to sell that coal into power generation where firstly, as I said, demand is declining. Also, power prices are regulated.
  5. But the pricing of polyolefins is a free market. You are therefore upgrading $60 a tonne coal to say high-density polyethylene (HDPE) injection grade. Last month, Northeast Asia HDPE injection-grade prices averaged $1,284/tonne.

This helps to explain why China’s polypropylene (PP) production increased by 19% in Q1 of this year over the same period in 2014. New PP capacity in China is mainly coal-based.

It is crucial that polyolefins producers globally factor this kind of thinking into their long-term scenario planning.

PREVIOUS POST

Ten Reasons To Plan For A Difficult H2

30/06/2015

By John Richardson LACK of clear thinking about the challenges ahead worries me ...

Learn more
NEXT POST

Margin Upswings Will Be Shorter And Shorter

02/07/2015

By John Richardson A GOOD chart can quite often by worth many thousands of words...

Learn more
More posts
China moves closer to Iran as tensions with the US build: Implications for petrochemicals
02/08/2020

By John Richardson Opinions and emotions and can shape how we interpret data, but, as we all know, o...

Read
China polyolefins market H1 review: so far so good, but beware of the risks ahead
30/07/2020

By John Richardson ALL looks fine in the polyolefins world. The Old Normal appears to have reasserte...

Read
Polyethylene market recovery could be threatened by slower China crude buying, weaker economic growth
28/07/2020

By John Richardson EVEN by China’s standards, where just about every number is eye-wateringly larg...

Read
Why the polypropylene industry must switch from volumes to value
26/07/2020

By John Richardson EVERYONE knows about the oversupply in the polyethylene (PE) market as it has bee...

Read
China consulate closure underlines long-term split with US, potential big shift in petchems trade flows
23/07/2020

The views in this blog post are, as always, my personal views and do not reflect the views of ICIS. ...

Read
China’s real GDP could have been negative in Q2: What this may mean for PP
22/07/2020

By John Richardson CHINA’S official GDP growth of 3.2% for Q2, which was announced last week, may ...

Read
Iran and China new deal could hasten Belt & Road Initiative petrochemicals self-sufficiency
19/07/2020

By John Richardson ONCE AGAIN, please don’t say I didn’t tell you. A proposed new investment and...

Read
China paraxylene imports head for bigger declines as excess industrial production appears to boost GDP
17/07/2020

By John Richardson SOME PEOPLE see the 9.9% year-on-year rise in China’s crude oil imports in Janu...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more