China’s renewed efforts to tackle excessive lending and pollution are closely linked as progress on deflating the 2016 credit bubble will also see progress towards cleaning-up the environment. This will lead to quite a sharp slowdown in GDP growth during the rest of this year which China is in a good position to weather because of strong growth in Q1. But globally, the implications could be more severe – including a decline in oil prices to below $30/bbl.
By John Richardson
A MAJOR intensification of efforts to clean-up China’s environment in 2017 is closely linked with this year’s slowdown in lending growth.
The 2016 re-inflation of the credit bubble not only made China’s bad debt crisis even worse. It also held- back efforts to get rid of oversupply in sectors such as steel and aluminium. In fact, in the case of steel, steel capacity on a net basis actually increased in 2016 despite headline data that indicated a decline, according to a Greenpeace/China steel consultancy study.
And as steel and aluminium etc. capacity increased and existing plants across many industrial sectors ran at high operating rate, thanks to very easy lending conditions, air quality declined:
- “Levels of fine-particulate pollution in the Beijing region had fallen by more than 25% in 2014 and 2015, as initial cuts [in manufacturing capacity and in coal-fired power generation] bore fruit, but in late 2016 and early 2017 they spiked again,” reports the National Geographic magazine.
- “China’s Ministry of Environmental Protection released data this month that reported for Beijing the concentration of small particulates in the atmosphere, known as PM2.5, rose by nearly 27% between January and March, compared to the same period in 2016,” writes Metal Miner, the metals new service. “Levels in Guangzhou also rose and the results have been supported by independent data collected in the US Embassy in Beijing,” it adds.
Move closer to solving one problem – too much credit flowing to the wrong sectors of China’s economic – and you move closer to solving the environmental problem.
The government’s first step will be to focus on making demonstrable progress in 2017 in cleaning-up the air, which is easy to do relative to solving China’s equally bad water and soil pollution.
Some 1.1m people are thought to die prematurely every year from air pollution in China. But more than 80% of China’s underground water drawn from wells used by farms, factories and mostly rural households is also unsafe to drink because of pollution, according to government research. And at least 20% of China’s arable land is unfit for food production because of pollution by heavy metals, again according to official research.
The infrastructure has been put in place to help monitor better quality as National Geographic again points out. It says that with “stunning (but typically Chinese) speed, the government has built a nationwide network of monitors tracking levels of PM2.5.”
Information from these monitoring stations is also being made freely available – and easy to access via mobile phone apps, via which citizens can track air-quality readings in real time.
And in a firm indication that China’s latest environmental campaign is more than just an empty public relations exercise, the government-run Global Times newspaper reports how Beijing’s environmental authorities have promised “zero tolerance” for mist cannons, or magic smog cleaners. These cannons blow pollution away from air monitoring stations in order to generate false readings.
Then there are the measures being taken to make sure that accurate air quality readings indicate big improvements.
The state-owned press is full of reports of an unprecedented increase during April of nationwide environmental inspections. For example, As the Global Times again writes: “During the first round of China’s largest national-level air pollution inspection conducted in April, authorities found that among the 4,077 companies in 28 cities in the Beijing-Tianjin-Hebei region and nearby areas inspected, 2,808 had violated the rules.”
There is also a link here between China’s long-running anti-corruption campaign and the lending/environmental clampdown.
The authorities are removing from office government and corporate officials who oppose deflating China’s credit bubble. If the bubble isn’t deflated production in oversupplied and heavily indebted industrial sectors will remain far-too high. And with these uneconomic levels of production will come very bad air quality.
What This Means for Petrochemicals Supply And Demand In 2017-2018
Before I tackle this subject, here is some crucial context: The success of the Chinese economy in Q1 has created big leeway for the government to effectively implement the linked objectives of a big slowdown in lending and a major clean-up of the environment.
Q1 GDP growth was 6.9% compared with the government’s full-year growth target of 6.5%, thanks to last year’s credit bubble. So the government can afford to let growth drop by several percentage points during the rest of 2017 and still comfortably achieve its annual growth target.
Equally important is the popularity of the lending and environmental measures:
- Tackling the credit bubble will help rein-in the explosive growth in real estate prices that has benefited a relatively small number of Chinese citizens, with the vast majority finding themselves priced-out of owning homes in China’s biggest cities.
- Clamping down on corruption is hugely popular because of widespread resentment towards corrupt government and company officials.
- A major public concern is pollution, which President Xi Jinping promised to deal with when he came to power three years ago.
It is thus sensible to plan for a substantial decline in GDP growth during rest of the 2017 and into 2018.
But you can make the case that any fall in economic growth will be more than compensated for by a slowdown in petrochemicals capacity additions, especially in the coal-to-olefins (CTO) sector where excessive water consumption and high levels of air pollution are said to be major concerns.
Perhaps existing CTO plants will also be closed-down if they fail to meet today’s more stringent environmental standards.
This could create room for more polyolefins imports as most of the CTO plants are integrated downstream to polyethylene and polypropylene.
Against this argument are all the complications that I highlighted in my 1 May post. For instance, CTO plants that ultimately usually produce polyolefins can be part of big integrated gasification complexes. These complexes can produce a net economic, social and environmental gain for China.
Further, what happens upstream has to be balanced with what happens downstream. For every Chinese petrochemicals plant that is shuttered, and every project that is either postponed or cancelled, there might be many more downstream users of petrochemicals that are similarly affected. How many washing machines and autos factories etc. will also be negatively impacted by the environmental clampdown?
Here is something else to consider: In the Chinese provinces where heavy industry largely drives economic growth the closure of steel mills etc. is bound to have a negative effect on growth – and so, of course, levels of petrochemicals demand.
But this seems set to be a sideshow compared with the main event: The negative impact on global commodities prices, and so the global economy, of China’s credit/environmental crackdown.
For the petrochemicals industry, the first order effect might be developments in China combining with higher crude output in the US and elsewhere. This could push oil prices back below $30/bbl. We may then enter a major destocking cycle up and down all the value chains.