Why The China “Higher Base” Argument Doesn’t Stand Up

Business, China, Company Strategy, Economics, Environment, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US

ChinaPEdemand

By John Richardson

WHAT an amazing success story. The above chart shows that:

  • China’s high-density polyethylene demand rose by 151% between 2000 and 2014 to end up at around 10 million tonnes.
  • Low-density PE consumption surged by 72% to approximately 4 million tonnes.
  • And linear-low density PE was up by 133%, ending up at 8 million tonnes.
  • This left total PE consumption, when you average these increases out, at no less than 128% higher.

The past dictates the future? In a way yes, most people have long thought because whilst they have for several years accepted that these percentage growth rates will simply have to slow down, this doesn’t really matter because increases will be from a much-higher base.

Let me give you just one theoretical mathematical example that could be used to support this kind of thinking. HDPE consumption rose from around 4 million tonnes in 2005 to approximately 4.5 million tonnes in 2005. That’s a hefty percentage increase of around 9% when you look at the exact numbers.

So let’s assume that HDPE consumption this year (and this is completely made-up and will be wrong) only grows by a historically paltry percentage rate of 7% in 2015 over 2014. That’s still a hefty extra 718,000 tonnes or so of new demand that needs to be met.

This “higher base” argument is being used to justify new PE investments in the US, along with the idea that smaller, older naphtha crackers elsewhere will close down to make adequate space for this new US investment.

But here are my three reasons why I have long thought that this argument doesn’t stand up:

  1. People have overestimated the strength of China’s economic growth. And so to use my complete fantasy of 7% growth in 2015, just imagine if it were say 3%. Then you would only have roughly 410 million tonnes of new demand. Because higher growth rates than will actually happen have been hard-boiled into  investment cases for new plants, there will be a demand shortfall.
  2. As I discussed on Monday, the final argument in support of new US investments is beginning to fade away as a result of the long-term decline in oil prices. As the competitive advantage between ethane and naphtha cracking continues to narrow, this makes it less likely that old naphtha crackers will be shut down. And even before this process began, you have never been able to assess likely cracker closures only on cost per tonne economics as social and political factors also come into play. This leads me to my third point….
  3. …..No matter how you assess future PE demand growth in China, there are no guarantees that this demand will be met by imports. Social and political reasons could well result in China moving much more rapidly towards PE self-sufficiency than many people think.  In China’s case these reasons relate to making use of coal reserves in its Western provinces as demand for coal for power generation falls for environmental reasons. The unworkable alternative is to throw loads of people out work by closing these mines down. Building coal-to-PE plants will also create lots of new jobs in downstream plastic processing and manufacturing industries. Creating more work in Western, less developed China is a top policy priority.

The new opportunities are nothing short of fantastic, but we simply cannot afford to allow old and discredited ideas hold us back from pursuing these new opportunities.

PREVIOUS POST

China: There Are No Shortcuts To Recovery

26/08/2015

By John Richardson STOCK markets can do what they want over the next few days an...

Learn more
NEXT POST

Moving Beyond A World Of Myths: Steps One And Two

28/08/2015

By John Richardson We are living in a world of myths that are at long last being...

Learn more
More posts
China’s shift towards styrene self-sufficiency adds to pressure for new petrochemicals business model
09/08/2020

By John Richardson IT IS dead simple, apparently. All you have to do is find alternative geographica...

Read
Why a hard look at the data show China has not seen a V-shaped recovery
06/08/2020

          Note: All the data comparisons below are year-on-year By John Ric...

Read
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

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