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

Business, China, Company Strategy, Economics, Environment, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 27-Aug-2015


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.