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China Becomes Dominant Superpower: Implications For Petchems

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By John Richardson on 17-Nov-2016


By John Richardson

CHINA can become the world’s No1 Superpower, replacing the US, if it can rise to challenges such as these:

  1. Asia needs US$8trn of investment in the decade to 2020 to deal with its infrastructure deficit. As countries with urban populations expand, demand for transport, logistics and utilities will place a major burden on public funds.
  2. The Iranian government announced in April that unemployment was at “crisis point”. It said that the problem was particularly acute amongst 15-29 year-olds where the unemployment rate was 23.3%.
  3. Lack of electricity generating capacity means that the whole of sub-Saharan Africa, with a population of 910m consumes only 145 terawatt hours of electricity a year—less than the 4.8m people who live in the state of Alabama. That is the equivalent of one incandescent light bulb per person for three hours a day.
  4. In the absence of electricity, the usual fall-back is paraffin (kerosene). Lighting and cooking with that costs poor people the world over $23bn a year, of which $10bn is spent in Africa. Poor households are buying lighting at the equivalent of $100 per kilowatt hour, more than a hundred times the amount people in rich countries pay.

As America becomes more isolationist, China is moving in the opposite direction.

Its Free Trade Area of the Asia Pacific initiative, involving the whole of the Asia-Pacific, could fill the gap created by the collapse of the US-led Trans-Pacific Partnership.

But a much, much bigger deal is the multi-generational ambition behind China’s One Belt, One Road (OBOR) initiative that comprises 65 countries, 4.4bn people and 40% of global GDP. In terms of petrochemicals, as the above chart indicates, the OBOR is an even bigger deal.

The OBOR involves investments by China in roads, bridges, railways, ports, water and electricity supply in its OBOR partner countries. Lots of jobs will also be created, in countries such as Iran, through relocation of manufacturing that is no longer competitive in China because of higher labour costs.

China is taking a leaf out of the US history book. America’s post-Second World War Marshall Plan involved spending $12bn in late 1940s-early 1950s money on rebuilding Europe. This created a big new market for US exports.

What the US recognised is that people cannot afford to spend money on goods and services unless they have their basic needs met – the kind of basic needs highlighted above. Europe, following the devastation of World War II, was also short of roads, bridges, electricity supply and jobs etc.

The OBOR is a Marshall Plan on steroids as it is vastly bigger in scale.

This is not intended as any kind of comment on the rights or wrongs of Donald Trump’s “America First” policy. I will leave you to make your own judgements. But every change in political and economic direction obviously has consequences, and the consequences for the US petrochemicals industry are as follows:

  • The immediate risk is that you will end up behind trade barriers imposed not just by China, but also by its OBOR partners. As I wrote on Wednesday: If America travels down the road of protectionism, it is easy to imagine many of these 65 countries lining-up on the side of China in what could become a full-blown global trade war. The US polyethylene industry will not be able to sell its rising surpluses.
  • Longer term, the old approach of building a heavily export-focused petrochemicals plant in the US to serve develop emerging markets will no longer make sense.

Our focus must now turn to the potential for Populist political upheavals in Europe. As in the US, these populists have found space to operate because of the failure of mainstream politicians to address the issue of ageing populations.

For instance, Marine Le Pen has a good chance of winning next May’s presidential election in France. The pundits are claiming that she will be easily beaten in the election’s second round run-off, but this sounds very much like the obviously wrong analysis that there was no way Mr Trump could win.

If Ms Le Pen were to become president she would follow-through on her promise to hold a referendum on France’s continued membership of the EU. If France withdrew from the EU, it is hard to see the EU surviving in its current form.

Mainland Europe could end up moving in the same direction as Britain following Brexit, as free trade breaks down across the continent. Europe is a major importer, rather than exporter, of petrochemicals, and so the implications for its industry would be different. More protected “local for local” markets seem likely.

China might not win the 21st century geopolitical and economic game, though. It could instead fail to deal with its debt crisis, and/or fail to escape its middle-income trap. The OBOR may also flounder.

If the US continues on its current isolationist course there would then be nobody with enough economic muscle to build all the bridges, roads and hospitals that the emerging world so badly needs.

Even more frightening is that this could well lead to major global military conflicts. With the US turning is back on its internationalism, and with China unable to take its place as the top global Superpower capable of keeping the peace, war on the scale that we haven’t seen since the end of the Second World War becomes very possible.

What would add to the geopolitical tension would be shortages of food and water resulting from climate change. With nobody providing the money to solve these problems, wars over food and water seem very, very likely.