China Urbanisation Policies Threaten 7m Tonnes Of PE Consumption

Business, China, Company Strategy, Economics, Olefins, Polyolefins, Sustainability, Technology, US

By John Richardson

CONTINUED urbanisation in China, it is often said by petrochemicals and polymer company CEOs, guarantees further strong demand growth for their products.

But just because a statement is repeated on many occasions by very senior people during investor conference calls and at big public conferences doesn’t automatically make it true. This is the case with the idea that China’s continued urbanisation drive will lift tens of millions more people permanently out of poverty. There is a good argument to be made that China’s current approach to urbanisation will be counterproductive.

You can argue, very compellingly, that urbanisation has to date been fantastically successful for China. Think of the hundreds of millions of people who have already moved from the countryside to the coastal cities to feed China’s rise to become the manufacturing workshop of the world. These migrant workers have grown rich beyond the imaginations of previous generations. As Jim Yong Kim, president of the World Bank said last year, China’s achievement of lifting 800m people out of poverty since the 1990s was “one of the great stories in human history”.

Consider how urbanisation has boosted consumption of polyethylene (PE). The rich coastal provinces of China have seen a huge rise in per capita consumption measured in kilograms. Take Beijing as an obvious example. In 2000, per capita consumption was 16.3 kilograms. Last year, it reached 46 kilograms.

The poorer western regions of China have benefited as money earned by migrant workers has flowed back home. Vast government spending on infrastructure in these poorer regions has also boosted income levels and so PE consumption. Gansu, which was the second poorest region in 2000 and the poorest in 2017, saw its per capita PE consumption rise from 1.5 kilograms to 10 kilograms – a 569% increase.

Click here for my methodology on how I estimate regional PE per capita consumption in China. This is based on IMF data for regional versus national income levels and nationwide average levels of per capita PE consumption from our ICIS Supply & Demand Database. In 2000, nationwide per capita PE consumption was just 4.8 kilograms, but by 2017 it had risen to 20.4 kilograms.

Has China’s approach to urbanisation now, though, reached its speed limit?

Lack of healthcare, education and pensions

In a January 2018 article in the Foreign Policy magazine, Eugene Chow wrote:

To help keep [migrant] numbers low in major cities, officials are encouraging, sometimes forcefully, rural residents to move to complexes on the outskirts of second- and third-tier cities such as Liaocheng, Zhengzhou, and Ankang, which often lack critical infrastructure.

He added that residents in these smaller cities had limited access to basic services such as health care and education because of a severe shortage of medical staff and teachers. This was the result of China’s bigger cities receiving better funding and better staff.

The law stipulates that everyone is entitled to the full range of social services. But as the same article also highlights, the reality on the ground is very different. Because of China’s rapidly ageing population, and so soaring healthcare and pensions costs, the system is very unequal with residents in richer cities getting a far better deal.

The prominent government research body, the Chinese Academy of Social Sciences, estimates it would cost $15 billion to provide a million new urban residents with services such as education and health care. The extra 70m people that the government wants to move to cities would cost an additional trillion dollars, more than one-third of all current government expenditures.

A February 2018 Bloomberg article warned that China’s next debt bomb could be its pension liabilities, a legacy of the One Child Policy that has caused an ageing of China’s population at too early a stage in the country’s economic development. The wire service wrote that China’s pension shortfall could reach 1.2 trillion yuan by 2019. As the gap between pension contributions and payments rises, this will make it ever-more difficult for the government to provide adequate retirement incomes.

There are other problems. Once older relocated rural residents arrive in cities, they often fail to find jobs. Even for younger people with more up-to-date employment skills, promises of jobs never materialise. The only work that many people can find is temporary government contracts.

There are also claims that local government officials are eager to accelerate urbanisation because of its popularity with the central government. Pushing urbanisation rates higher is seen as a way of winning promotion. Moving ever-more people to the cities is viewed as a way of absorbing China’s vast housing surplus. As Foreign Policy again writes:

A study by a state-run think tank found China’s building boom created ghost cities with enough housing for 3.4 billion people — more than twice the country’s population.

Seven million tonnes less polyethylene demand by 2030

The battle against air, water and soil pollution, which China simply has to win, raises further doubts about the boost to economic growth that can be achieved through additional urbanisation. As a July article in Borgen Magazine so aptly puts it, China can no longer rely on building coal factories and chemical plants to supply new employment in its poorer provinces because of the implications for pollution.

And what of this year’s moderate economic slowdown that could become something much worse if a full-blown US-China trade war develops? Where would the government then find the revenues necessary to lift more people out of poverty?

Let me now extrapolate and think through what this could mean for China’s future PE demand growth (see the above chart). My estimates are bound to be wrong, but at least they will give you an idea of the scale of the risk

  • Our ICIS Supply & Demand Database assumes that PE per capita consumption will rise from a nationwide average of 21.5 kilograms in 2018 to 34.9 in 2030. Multiply this by the actual and projected populations in each of these years and this will result in total PE consumption rising from around 30m tonnes to 50m tonnes.
  • For the sake of argument, I assumed that 2030 per capita consumption would be five kilograms lower at 29.4. This would be the result of failed government urbanisation policies. 2030 consumption would instead be only 43m tonnes – 7m tonnes less, or around seven word-scale cracker-PE complexes.

This is all very negative, of course, and only gives one side of a very complex story. There could be as many positives as well as negatives if China successfully adapts its economic policies to suit its next phase of development. Perhaps, for example, a big new source of jobs for poorer Chinese might be in renewable energy. What about the opportunity China has to build a big, state-of-the-art local plastics recycling industry?

But the negativity at least serves this purpose: It gives you a way of challenging a CEO the next time she or he trots out the familiar phrase, “petrochemicals demand is going to continue to soar in China because of urbanisation”. In an ever more complex world, we need more complex and nuanced answers from the leaders of our industry.

PREVIOUS POST

China's Latest Threat Of US Methanol Tariff Perfectly Targeted

06/08/2018

By John Richardson CHINA crunches exactly the same data as the rest of us, as I...

Learn more
NEXT POST

China 25% Tariffs On US PE Imports Extended To All HDPE, Nearly All LLDPE

10/08/2018

By John Richardson CHINA has extended its 25% import tariffs on US polyethylene ...

Learn more
More posts
US/China trade deal achieves little as China pushes hard towards petrochemicals self-sufficiency
16/12/2019

By John Richardson PRESIDENT Trump has promised a “tremendous amount of business” for US farmers...

Read
Global polyethylene in 2020: Margins will reach historic lows as new growth model emerges
08/12/2019

Here is a first of a series of outlook articles for 2020 where I focus on the risks ahead for the gl...

Read
Long term downcycle will transform global petrochemicals, creating new Winners and Losers
06/12/2019

By John Richardson THIS IS not a normal downcycle. Please get over that idea however many people, bo...

Read
Asian PE and PP margins at lowest levels in at least five years and will go lower……
04/12/2019

By John Richardson NOT since at least the beginning of 2014 have Northeast and Southeast Asian polye...

Read
Asian polypropylene market heads for major 2020 downturn
02/12/2019

By John Richardson THE ASIAN polypropylene (PP) market hasn’t been as bad as the region’s polyet...

Read
China new vehicle sales: A long term decline and what this means for petrochemicals
29/11/2019

By John Richardson THE MAINSTREAM view is that there is nothing fundamental about the decline in new...

Read
Asian copolymer polyproplyene used as a sink for growing oversupply of ethylene
27/11/2019

By John Richardson A SURE sign that the Asian ethylene-to-polyethylene (PE) markets are distressed c...

Read
Asian polyethylene shutdowns? Once again, good luck with that idea
25/11/2019

By John Richardson I was new to the game as I had only been analysing the petrochemicals business fo...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more