By John Richardson
IN the good old days everybody could very easily export just about all their surplus chemicals and polymers volumes to China for two very obvious reasons. Firstly, even real GDP growth, never mind the fabricated government numbers, was nearly always close to or actually in double digits. And secondly, China was short of a wide array of chemicals and polymers because expansion in its local capacity could not keep up with this tremendous, historical one-off demand growth.
But now everything has changed. Real growth is in the low single digits and will consistently stay there for the next two years, perhaps much longer. China has also been left with vast surpluses in some chemicals and polymers because of the frantic pace of local capacity additions during the 2008-2013 economic stimulus programme. Here are two of the most prominent examples:
- Polyvinyl chloride capacity will have risen from 17.9 million tonnes/year to 31.7 million tonnes/year in 2015, according to ICIS Consulting. That’s a 77% increase. But local consumption is only expected to have reached 16.3 million tonnes by the end of this year.
- Purified terephthalic acid (PTA) capacity will increase from 15.1 million tonnes/year in 2010 to 46.3 million tonnes in 2015. That is staggering 207% increase. We estimate this year’s consumption at 30.2m million tonnes.
It should therefore be of little surprise that there is increasing interest in FOB, or free on board, chemicals and polymers price assessments in China. These are prices when product leaves the factory gate before freight costs are added. FOB prices are quoted when a product in any country swings into surplus and so becomes an export rather than an import opportunity. CFR prices, where freight has been added, apply when a chemicals or polymer is in deficit.
The above chart shows the huge turnaround in PTA imports versus exports from 2013 until 2015. Imports have fallen by no less than 75% with exports up by 423%. And that’s despite local operating rates that are forecast to average only around 60% this year. What happens if production goes higher in 2016?
This represents a great opportunity for the savvy traders and distributors who can source low cost product from China. Money will have to be invested in new distribution systems, such as renting or building warehouses. But this will be money well spent because overseas chemicals end-users will be ever-more eager to source Chinese product in a deflationary world.
For the overseas chemicals producers who didn’t see this coming, a lot of painful adjustment lies ahead. They will need to think hard about what they do next as China increasingly shifts from being a very simple “put anything on a ship and send it there” opportunity to something far more complex and fluid.
A great example of this in the autos industry, which is one of the users of PVC (artificial leather for seats, for example) and polyester, which is made from PTA (polyester seat covers). All the chemicals and polymers companies that serve global autos markets must therefore step back and think about what happens next in China.
As the country sees a rapid growth in its second-hand car market, why not an explosion in demand for 3D printing? The same could well happen in the West, by the way). Affordability and environmental pressures mean that Chinese new car sales are very unlikely to return to their 2008-2014 levels. This will mean more and more people will want to buy both second cars and keep those cars on the road for longer by printing replacement spare parts.
The intelligent auto makers might end up supplying 3D printing facilities to hundreds of thousands of garages across China. Far-sighted chemicals companies that serve autos markets could in turn supply the chemicals and polymers needed for these printing machines.
This kind of thinking may seem a million miles away from the immediate challenge of running your business today. But you simply must engage in this kind of “out of the box” thinking if you are going to make it in the new China, whatever end-use industries you serve.