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Global Chemicals Trade And Swimming Naked

Business, China, Company Strategy, Economics, Europe, Fibre Intermediates, Polyolefins, US
By John Richardson on 25-Sep-2015

By John Richardson

WHAT if your understanding of how the chemicals industry works is no longer valid?PTA25Sept

This was a theme I covered on Monday when I talked about how the future winners will be those who first of all will be prepared to say, “Look, I was wrong about China”.

The next step for these executives would be to build the right framework for the debate about what comes next. This framework cannot afford to include any of the old thinking about China. None of us can possibly even pretend to know all the answers about what comes next and how we should respond. But unless we at the very least set the right terms for the discussion, we are not going to get anywhere.

The same applies to the future of global chemicals trade – the subject of today’s blog post.

The danger is that in trying to defend their old forecasts for global trade flows, chemicals companies will take what they used to think and adapt the logic in order to make these old forecasts still valid. In other words, what they will attempt to do will be this: “We are still going to be right on our estimates, even if for different reasons”.

In my view, though, you also have to start from scratch in how you view global trade. You cannot even hope to have a sensible debate if you abandon old ways of thinking.

This is some the “new logic” supporting old forecasts, relating again largely to China and how it will shape the future of global chemicals trade.

  • Low value export-based manufacturing will increasingly migrate away from China as it successfully escapes the “middle income trap” in its eastern coastal provinces. Granted we missed this important turning point when it was clear several years ago that it was going to happen.
  • But this drift will result in the creation of a lot more jobs in making cheap shirts and blouses, low-end electronics and cheap plastic toys etc. in the other developing countries in Asia, in Latin America and Africa.
  • This drift in manufacturing will create lots more personal wealth in Latin America and Africa etc. Hundreds of millions more people will thus escape from extreme poverty and so will be able to buy modern-day consumer goods and services for the first time.
  • And all the above will happen perhaps a lot quicker than the pessimists think. This will enable producers of basic commodity chemicals in the West to find replacement markets in the rest of the emerging world for slower demand growth for these chemicals in China, which will be the result of China no longer being the world’s dominant low-cost manufacturer.
  • And further, this growth in demand in other emerging markets will help compensate for the fact that China’s own production of these basic chemicals has risen more rapidly than we had anticipated. Yes, granted we also underestimated China’s determination to raise its production in products such as polyvinyl chloride and polypropylene.

In the past, chemicals company CEOS could get away with “turning on a sixpence”. By this I mean that if a set of facts didn’t fit a particular set of financial results, they could quickly change their story to match the facts. The reason for them being able to do this was because nearly every set of financial results moved in a positive direction.

This is no longer the case because as Warren Buffett famously first said way back in 2001: “You only find out who is swimming naked when the tide goes out.”

Now that the China tide has gone out we have to, as I said, start from scratch on the issue of global chemicals trade as well. Here are just three points on this issue that will help you start this process:

  1. It has also always been an oversimplification to say that China will stop being the world’s low-cost manufacturing sector. Firstly, this is because China’s vast supply-chain advantages will still give it an edge in the manufacture of some cheap finished products in its richer eastern provinces for many years to come. And secondly, we are not just talking about low cost manufacturing moving overseas from China. A lot of that manufacturing will instead continue to move to inland China, thanks to big government re-investment incentives.
  2. As I again talked about on Monday, there is a strong argument to be made that the rise in China’s manufacturing process, and thus its extraordinary growth rates in chemicals, was a historic one-off.
  3. Plus, other developing countries are way behind China in satisfying the basic needs that simply must first of all be satisfied before you can even hope to enjoy a manufacturing-led economic take-off. If you cannot even go to school in India because you are too sick to attend due to illnesses caused by inadequate sanitation, you have no chance of gaining the education you need necessary to hold down a good job. In Africa, more than 600 million poor people do not have access to grid electricity. They may spend as much as 16% of their income on energy and pay up to $10 per kilowatt per hour for fuels such as kerosene or disposable batteries for cooking and lighting. This is about 100 times more per unit than people in the richer world.

This blog post has obviously only scratched the surface of this subject. There are many more angles to consider – including how events in the US and Europe will shape future trade flows. These other angles will be covered in later blog posts.