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As Global Free Trade Unwinds, Where You Have Built Becomes Critical

China, Company Strategy, Economics, Europe, European petrochemicals, Middle East, Olefins, Polyolefins, Singapore, South Korea, Taiwan, US
By John Richardson on 12-Aug-2016


By John Richardson

THE assumption that global free trade will continue to grow has successfully underpinned the strategy of petrochemicals producers for many years. Companies have been able to plan new capacities in just about any location secure in the knowledge that the future promised lower rather than higher trade barriers. But the world has changed.

We saw the shock of the Brexit vote. But was it really a shock? Anyway, what is done is done. If you didn’t see this coming, it is essential to think about the outcome of attempts to achieve what could well be the impossible: Securing Britain’s continued unfettered access to the European single market without the UK being forced to still comply with EU rules on free movement of labour. If the seemingly impossible cannot be achieved then Britain’s access to overseas markets will surely suffer.

Then we have to worry about the result of next year’s French presidential election and the political sentiment in other mainland European countries. To what extent might this sentiment unravel free-trade agreements within the rest of the EU and between the EU and its external partners?

More immediately, of course, there is the result of the US presidential election in November. No matter which candidate wins, the political climate in the US suggests that further trade liberalisation will be difficult. In the worst-case scenario for US petrochemicals companies, existing free-trade deals will also break down.

We then have to think about how China might react to a redrawing of the global free-trade map. It is already in a very difficult position as it tries to restructure its economy. China’s No1 priority is jobs, both the quality and quantity of jobs. Here is its position:

  • It has to create millions of new jobs in higher-value manufacturing and service industries if it is going to escape its “middle-income trap”.
  • These jobs can only be created if it has sufficient access to overseas intellectual property, but new trade barriers might make this impossible.
  • China is firmly committed to getting rid of employment in oversupplied industries. But it has to very carefully calibrate the pace of these job losses if it is going to maintain social stability. Free trade matters here as well because this is being achieved through raising exports of manufacturing surpluses in industries such as steel, petrochemicals and refinery products.

How might China react if other countries erect new trade barriers? It could close some or all of its domestic markets to these countries, whilst building closer relationships with the countries and regions that do not erect new trade barriers that hurt China.

Remember that China is crucial because of the size of its deficits in some chemicals and polymers. Polyethylene (PE) is the standout example. In the case of PE, China might quite simply decide not to import from countries that retreat from free trade. The above chart illustrates this point. It shows global consumption, production and surpluses/deficits that we forecast for one grade of PE – linear-low density PE – in 2020.

The world has changed to the point where geographical distribution of a petrochemical company’s output is of critical importance. Any company that has existing and new capacities in the wrong locations could face serious difficulties.

Equally, of course, the buyers of petrochemicals are also vulnerable, The risk is that if they are heavily reliant on imports and find themselves in the wrong region or regions their imports may become more expensive, or even impossible to source.