This Is Not Just Another Economic Downcycle

Business, China, Company Strategy, Economics, Naphtha & other feedstocks, Olefins, US

ChinaInvestment

By John Richardson

ECONOMIC upcycles come and go, but in the end, the fundamentals don’t change. This is the message I have picked up from conversations with senior industry executives over the last two weeks.

“All we have to do is cut costs, wait this one out, and everything will be fine in 12-18 months. When all the panic has died down, we then need to focus on when and where to build new world-scale capacity. Nothing changes. It’s all about building big, using the right technologies and securing feedstock advantage,” was one comment I heard.

But this is sadly misleading advice and will get you into a lot of trouble.

Firstly, this is because of the scale of today’s problems. Take just one of many, measures – the multiple of earnings to house price ratios. At the height of the US sub-prime boom, they were 5:1; in China, during its real estate frenzy, they reached no less than 14:1.

Overinvestment as a whole in China has also been at all-time historic high, as the two IMF charts at the beginning of this post indicate.

Comparisons are often draw between China and countries such as South Korea and Japan, which also went through periods of investment-led growth that went badly wrong because of badly-spent money.

But the charts show that China’s reliance on building ghost cities and steel, aluminium, chemicals and other manufacturing plants as a driver of GDP growth is on a scale that the world has never seen before.

Coming down from these heights, to a new more sustainable growth model, will take years of painful adjustment.

Will the adjustment even be successfully made at all? It remains very much in the balance whether China can make the transition from an investment to a consumer-led economy. If it fails, it will fail to escape its “middle income” trap.

Old chemicals industry hands have also largely grown up in a period when Western demographics were very favourable. Put these two factors together – rich Babyboomers, and booming emerging markets in general led by China – and you had an economic Supercycle.

We are in an altogether different era of global economic and so social and political history when all the accepted wisdom upon which you have successfully built your career has been turned on its head.

Here is one headline change for you to contemplate amongst many, many others: Chemicals markets are set to become much more regional as a result of the need to preserve local jobs.

This spells the end of the linear thinking that the route to success in commodity chemicals is purely to build big with feedstock advantage. If you do this again, you will not be able to find a home for your surpluses because of, I said, more regional markets.

And here a further reason why the old model of saying building a big steam cracker complex based on cheap ethane feedstock in the US no longer works: Most of the evidence points towards China becoming self-sufficient in commodity chemicals and polymers.

The problem is that the majority of people in this industry have either spent their entire careers working in the Supercycle, or cannot remember life before the Supercycle. You have to go way back to 1989 to remember that.

But this is just a problem of Denial. We have to move very quickly beyond Denial to Acceptance.

PREVIOUS POST

Japan Repeats Its Mistake. You Cannot Print Babies

01/02/2016

By John Richardson WHEN you have built your reputation on a policy that has so f...

Learn more
NEXT POST

Anchors Aweigh: $26 Oil As Your New Starting Point

05/02/2016

By John Richardson IF not these six months then it will be the second half of th...

Learn more
More posts
Why China’s polyethylene imports could be either 22m tonnes or 3m tonnes in 2030
27/10/2020

By John Richardson THERE are so many angles to this that, as with the potential outcomes of the US p...

Read
Debate about refinery closures, re-configurations a harmful distraction for the petrochemicals business
25/10/2020

In the second of a four-part series of blog posts that examines the paradigm shift confronting the p...

Read
Developed world polymers demand: layer after layer of new complexity
22/10/2020

By John Richardson THE PROPOSITION that petrochemicals and polymers demand in the developed will see...

Read
China rapid rebound promises another great year for petchems, but beware of the fault lines
20/10/2020

By John Richardson IT helped immensely that as the rest of the world was shutting down, China’s fa...

Read
Plastic rubbish: the pandemic is increasing rather than reducing the pressure for change
18/10/2020

This is the first of a series of blog posts where I will examine the environmental paradigm shift an...

Read
Retreat of globalisation and implications for petrochemicals
15/10/2020

By John Richardson EVER SINCE the Berlin Wall fell in 1989, and the last great geopolitical struggle...

Read
European petrochemicals at risk of delayed demand collapse as new business model emerges
06/10/2020

By John Richardson AS DELEGATES take part in this year’s virtual annual European Petrochemical Ass...

Read
US polyethylene: resilient demand could be at risk from delay to new stimulus
04/10/2020

By John Richardson THIS REMAINS a mystery that needs to be solved: why US polyethylene (PE) markets ...

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