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China And A Breakdown In Free Trade: Scenarios For Petrochemicals

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By John Richardson on 14-Aug-2016


By John Richardson

MY blog post last Friday, on the threat to the petrochemicals industry of a retreat in global free trade, has gained a great deal of interest. This is good as this is an essential debate.

Today I am therefore going to take this important debate further by considering in more detail how China might respond to an increase in trade barriers.

Let’s begin with the chart above, which shows our newly-updated estimates of China’s polyolefins imports in 2020 versus 2016.

.Our base case is for polyethylene (PE) imports to rise to around 11.5m tonnes by 2020 from 9.8m tonnes in 2016.

Polypropylene (PP) is a considerably different story because of China’s large number of new plants, most of which were sanctioned during the 2009-2014 economic stimulus programme. We expect PP imports to slip to 3.6m tonnes in 2020 from 3.9m tonnes in 2016.

By 2020, China is expected to remain the world’s biggest importer of both PE and PP. This would put it ahead of not only every other country, but also all the regions as well such as Europe, Latin America and Africa.

It might seem as if China will be in such a desperate need for polyolefins imports it will not be able to refuse imports even from countries and regions with which it is engaged in trade disputes. This is an overly complacent, and so dangerous, viewpoint.

First of all, China has abundant coal reserves in its western provinces. Building more coal-to-polyolefins plants would further monetise these reserves and help create downstream jobs in its less-developed western province.

It might be the case that environmental concerns will make further aggressive growth in coal-based polyolefins capacity impossible. But where there is a will there is a way: There is evidence that China has made progress in overcoming high levels of water consumption that are one of the environmental concerns.

But I could be barking up the wrong tree here. Perhaps China will still have to import a big percentage of its polyolefins. But this does not mean that the playing field will necessarily be level for everyone. China is likely to want to import wherever possible from those countries and regions where trading relationships remain good. Let’s consider some scenarios here:

  • China more firmly establishes its “strategic corridors” with regions and countries that can supply it with both the oil and gas that it needs and the petrochemicals (the Middle  East, quite obviously). It will in turn use its financial, engineering and manufacturing resources to boost the economic development of these countries and regions. The Middle East is a candidate here. These same partners also seem likely to be involved in China’s One Belt One Road, or New Silk Road, initiative.
  • Do not rule out the possibility that China creates higher levels of virtual self-sufficiency through directly investing in overseas petrochemicals capacities. It has, as I said, the financial and engineering resources to do this quite easily – along with very good geopolitical relationships with some major overseas producers that lack sufficient resources.

Sure, all the above could be easier to achieve in commodity grades of polyolefins. China might have to be less discriminatory over from where it imports higher-value grades. And these higher-value grades are only going to grow in importance as it tries to escape its middle-income trap.

But capacities in these higher-value grades will continue to increase. Some of today’s speciality polyolefins could be amongst tomorrow’s easily and cheaply available commodities.

Planning and executing unannounced projects before 2020 could be a big stretch. This may lead you to conclude that China will struggle to make much of a dent on the 2020 polyolefins deficits we detail above. Just as hard might be getting overseas projects off the ground by that date. Fair comment.

But the recent history of PP has taught us that China has the capability of building, and then bringing on-stream at high operating rates, projects that have been dismissed as unfeasible.

Equally, think of the overseas producers that lack the resources to run existing plants at higher operating rates and carry out small-scale brownfield expansions. China may provide these resources in a short-time frame for its strategic partners.

Companies quite obviously also need to plan for the world beyond 2020, when China will have more time to announce, build and execute new capacities.

All of the above explains why our Supply and Demand database is a vital part of your planning process, along with back-up support from our single-client scenario planning team.

If your production is located in a country or region where populist anti free-trade politics are on the rise, everything may turn out OK in the end. This would be through a return to the popular consensus in favour of free trade that has been pretty much in place for most of the time since the end of the Second World War.

But, personally, I cannot see this happening, unless mainstream politicians and central bankers very quickly come to accept the underlying reason behind today’s backlash against the establishment: Demographics.

In 20 years or so time, when historians get round to writing the history books for this era, they will surely end up posing this question “Why on earth didn’t the political and economic elites of the early 21st Century understand that demographic changes were really what drove all the resentment over lost economic opportunities?