By John Richardson
THE above chart shows much polyethylene (PE) we think the US will have to export by 2020, based on our latest Supply & Demand updates. This might well have changed due to delays in start-ups. Watch this space for further updates.
But what about the ability of US PE producers to actually export in the first instance? It is important that as you quite rightly focus heavily on building constantly updated estimates of US production in the crucial 2017-202o period, you do not miss the bigger picture. Global PE markets could become much-more closed than they are today if the anti-free trade rhetoric that has been a feature of the US presidential campaign turns into hard policy.
And this morning, of course, the chances of Donald Trump winning the election might have improved following the latest controversy over Hillary Clinton’s emails. What would a Trump presidency mean for the ability of US PE producers to access the key China market if his threats to declare China a “currency manipulator” become concrete policy? How would China react?
What is said during an election campaign is obviously quite often very different from what happens when a successful candidate is in office. But a growing US public distrust of free trade may give whoever is the successful presidential candidate little room for political manoeuvre.
We then have to ask ourselves why US public opinion has turned against free trade. I believe it is because the middle class is looking for reasons why their economic prospects have diminished. Coming to terms with the prospect of your children being worse-off than you is difficult for any parent.
Demographics Are The Real Problem
You might well be able to make a strong argument that my fears of a US retreat from free trade are overblown. There are also plenty of alternatives to my base case view that a US retreat from free trade would lead to a global trade war in 2017. And, in fact, I very much hope that I am wrong as I believe that nobody would benefit from a global trade war.
But what I cannot accept is the notion that demographics are not the root cause of the stagnation of US middle class incomes – and in turn middle class discontent.
Earlier this month, a landmark was reached in this important debate with the publication of two US Federal Reserve studies. Both backed up our research, which we first published five years ago, that the ageing of the baby boomer population is behind the decline in long-term US economic growth prospects.
Recognising a problem isn’t, however, the same as fixing it. As Paul Hodges writes in the lead Letter to the Editor in the FT’s 28 October issue:
The Fed’s approach [of low interest rates] might have made sense in the past, when demand was on a growth trajectory as the baby boomers joined the 25-54 cohort, which drives wealth creation. But today’s problem is growing overcapacity, not lack of supply, given that the ageing baby boomers already own most of what they need, while their incomes are declining as they enter retirement.
The problem is that the Fed’s economic models were developed at a time when the population effectively contained only two main segments — the under-25s and the 25-54 cohort. From a policy perspective, the number of over-55s was too small to be of interest. But this is no longer true, as increasing life expectancy means the baby boomers can now hope to live for another 20 years after reaching retirement age.
Equally important is that since 1970, fertility rates have been below the replacement level of 2.1 babies per woman in the developed world. Thus the relative size of the wealth creator cohort has been reducing for the past 45 years, while the numbers in the 55-plus cohort have been increasing.
The result is that the ageing baby boomers are now nearly a third of the developed world’s population. Policymakers therefore need to urgently refocus on the demand-side implications of ageing, if they want to craft suitable policies for this New Normal world.
It is not the just the Fed that needs to change direction, but Western central banks in general. And any politician that also comes up with the right set of policies will go down in history as truly visionary.
Unless or until this happen, if it is not the issue of free trade it will be something else. Political, social and so economic volatility will remain high as long as demographic changes remain largely unaddressed.
How Demographics Are Reshaping PE Demand
“But hold on,” I hear you say, “this doesn’t have much to do with PE demand because PE goes largely into packaging of food, and not production of the durable goods that I can see might be in decline because of ageing populations. I can see how people living on pensions will buy less homes, autos and TVs etc. made from other chemicals and polymers, but people still have to eat.”
You might well add that in the developing world, rising income levels will continue to underpin PE demand growth. As more and more people rise out of poverty they will buy increasing quantities of modern-day packaged food.
China is also important here. Rising food-safety concerns have led to the country’s PE demand growing at stronger multiples its GDP growth in the last few years than has been the long-term historic trend. The more people worry about food contamination, the more likely they are to buy good quality food packaged in PE.
There is truth in all of this. But you have to also consider:
- Growing sustainability concerns in the West. Environmental consciousness is on the rise as the “can do anything” optimism of the baby boomer generation is replaced by a more cautious, concerned view about the future. This will lead to demands for less and less plastic food packaging, and more and more recycling.
- China’s attempt to escape its “middle-income trap” because it, too, confronts an ageing population. This attempted escape involves the One Belt, One Road (OBOR) initiative. This could lead to China and the other 64 countries that make up the OBOR becoming entirely self-sufficient in PE. The US and the rest of the West is not part of the OBOR.
Both of these two examples of course again relate to demographics. They underline how building scenarios around the impact of demographics on demand is crucial – no matter what petrochemicals value chain you are involved in.