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China Drives 58% Of Global PP Growth, So What’s Your Plan B?

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By John Richardson on 18-Aug-2017


By John Richardson

THIS IS a great example of putting most of your eggs in one basket! Polypropylene (PP) shareholders are entitled to ask what Plan B is if China can no longer deliver as much as 58% of the total growth in global PP demand. This is what ICIS Consulting forecasts will be the percentage for 2007 until 2017.

This would compare with its 23% share of total global growth between 1993 and 2000 and 41% in 2000 and 2007.

1992 was the year of Deng Xiaoping’s famous Southern Tour. His success in persuading China to focus on economic openness led to tremendous growth in coastal areas, especially the “Golden Triangle” region surrounding Shanghai. As a result, China started to become the workshop of the world.

And of course China needed ever-rising volumes of PP to feed this rapid and historically unprecedented growth in manufacturing capacity.

But whilst the 23% of global PP growth that China was responsible for in 1993-2000 was the biggest in the world, this was only marginally the case. Europe was close behind at nearly 23% with North American growth rising by a very solid 21%.

WTO, Low Labour Costs And The Babyboomers

In 2000-2007, though, everything changed. Whilst China accounted for 41% of growth, Europe took a 19% share and the expansion of the North American market fell to just 5%.

Part of the explanation for this extraordinary turnaround was China’s accession to the World Trade Organisation (WTO) in 2001. China greatly strengthened its position as the workshop of the world thanks to the terms of its WTO deal, as membership removed the tariffs and quotas that had restricted its exports to the West.

Also crucial for China’s manufacturing success story was a rising working age population. Many millions more workers were willing to move from the countryside to the cities to work in export-processing plants for very low pay.

WTO membership and low wages gave China an unbeatable advantage in global manufacturing.

The West was also enjoying a period of very strong economic growth because the Babyboomers had yet to start retiring.  This demand dividend – along with the very accommodative lending practices that preceded the Global Financial Crisis (GFC) – enabled people in Europe, Canada and the US to buy lots of Chinese exports

And again, many of these exports of finished goods were made from PP – hence, the big jump in China’s share of global growth.

A New Focus On Domestic Consumption

Then came the GFC and China’s response to the GFC – history’s biggest-ever economic stimulus package. As China could no longer rely on exports to the West to power its growth because of the economic crisis, it focused on boosting its domestic consumption.

This leads me onto the chart at the beginning of this post, which, as I mentioned at the beginning, shows that China’s share of global growth is likely to be in the region of 58% in 2007-2017.

In future blog posts, starting with polyethylene next week, I shall detail how this same pattern has played out in other chemicals and polymers.

This data will hopefully, once and for all, debunk the myth that it is the middle classes in the emerging world in general that are the future for big-volume growth in chemicals demand. The only significant driver of big-volume growth is quite obviously China, and this cannot possibly change in the foreseeable future.

Let’s now look at a few data points from above chart to support this argument:

  • Asia and Pacific, which includes Southeast Asia, South Asia and Australasia, will see its PP demand rise by  around 5.5m tonnes, South and Central America by just 600,000 tonnes and Africa by 1m tonnes.
  • Meanwhile, China’s demand will jump by a quite staggering 15m tonnes.

What the Plan B should look like

The first element of this plan should be how to operate your business profitably over the next 12-18 months, if, as I strongly suspect, China’s economy slows down. The data is already pointing in that direction.

Take just a few percentage points of Chinese growth and global chemicals and polymers markets would weaken substantially, given this extreme over-reliance on China.

The global economy in general is also so heavily reliant on China that we cannot rule out the possibility of a new global recession as Chinese growth decelerates.

Management of raw material inventories will obviously be crucial as a sharp fall in oil prices could be one immediate effect of the slowdown in China.

And as companies prepare their budgets for 2018, realistic sales targets are also essential.

The chemicals industry then needs to figure out its long-term response to the risk that China will fail to escape its middle-income trap. Now that China’s population is ageing it can no longer rely on low-cost manufacturing to power its growth.

What will also happen if China moves to complete self-sufficiency in all the major chemicals value chains?

Export volumes could as a result collapse or even disappear altogether.

A focus on local markets will, I believe, be the key to future success. This local-for-local approach will require a heavy emphasis on the circular economy as environmental concerns over pollution increase. Polymers companies will, for example, have to work much more closely with recycling industries.