By John Richardson
CHINA’S apparent demand (*see note below) for styrene in 2018 looks set to have increased by just 2.5% over the previous year. This would be the lowest percentage growth and the smallest addition of new demand in tonnes since 2012. This would compare with our earlier estimate of real demand growth of 4.1%.
Moving downstream to styrene derivatives, styrene butadiene rubber (SBR) apparent demand looks as if it might have declined by as much as 11% in 2018 on a year-on-year basis. We had expected positive real growth of 4.4%. An 11% decline would be the lowest growth since at least 2000 and would lead to a loss of 150,000 tonnes of consumption.
I estimate that acrylonitrile butadiene styrene (ABS) apparent consumption will have grown by 5% – the lowest growth rate in both percentage terms and when measured in new tonnes of demand since 2013. This compares with our earlier estimate of a 7.9% rise in real demand.
Bucking the trend is polystyrene (PS) where apparent demand seems likely to have grown by 11%. This would be the highest growth since at least 2000, and would be well ahead of our estimated real growth of 3.6%.
(*Apparent demand is net imports plus local production. Real demand is apparent demand adjusted for inventory distortions).
What partly explains weak growth in styrene, SBR and ABS is the slowdown in the growth of consumer spending. Retail sales grew by 9.1% during the first 11 months of last year compared with the same period in 2017, according to the government’s National Bureau of Statistics (NBS). This would compare with full-year 2017 growth of 10.2%.
But nobody should believe the NBS because, as usual at times like this, the government is very probably underestimating the extent of the slowdown. Retail sales in January-November 2018 grew by only 4.1% when the decline in GDP growth is taken into account, the South China Morning Post calculates.
The main cause of weaker retail sales growth was the big fall in credit availability via the shadow banking system. Last year’s monthly average shadow lending fell to pre-2009 levels, which was before China launched its huge post-Global Financial Crisis stimulus programme.
A secondary reason for weaker styrenics demand growth was the negative effect on the economy of the trade war. Some 180 of China’s jobs are dependent on exports.
Specifically on the styrene derivatives detailed above:
- SBR’s main downstream applications is auto tyres. As a result, the collapse in SBR demand largely reflects the first annual contraction in auto sales since 1992.
- ABS was also hit by the slowdown in auto sales as one of its end-use applications is auto components. A further factor was the slowdown in other durable goods sales, including washing machines, which are again made from ABS.
- General purpose PS (GPPS), which is used in applications such as packaging, benefited from the heavy restrictions that China introduced from January of last year on imports of scrap or recycled plastics for environmental reasons. This meant greater demand for virgin GPPS resins. These same dynamics drove strong polyethylene demand growth in 2018.
The job of an analyst is to only talk about the past when it is relevant to forecasting the future. Carry on reading if you need to know what is going to happen during the rest of this year and in 2020.
The economic slowdown will intensify
The law of diminishing returns means that China will be unable to stimulate the economy to the same extent as it did in 2009-2017. The economic slowdown will therefore will intensify even if the US and China bring their trade war to an end (the likelihood of a 2 March end to the war has sadly diminished over the last few days).
Also consider these four factors:
- China’s total household debt was US$6.58 trillion at the end of June 2018 – 50.3% of GDP, according to figures from the Bank for International Settlements This is still a long way behind 76.6% in the US. But Chinese household debt over GDP was just 18.6% in 2008. Such a rapid rate of increase suggests limited room for further increases.
- Consumer sentiment will likely remain weak – especially if the trade war continues and if we see a global recession. And of course a global recession would act as a further drag on China’s economy. I believe a global recession could well occur this year – or if not in 2020 at the latest.
- The number of births in China declined by 2 million last year, which was the lowest number for half a century.This a clear sign that the end of the One Child Policy has yet to deliver beneficial results. The working age population will continue to shrink as the number of retirees increases. Government healthcare and pension shortfalls will worsen. All of this will act as further dampeners on consumer spending as savings rates remain high.
- In 2016, private companies received just 11% of new loans, down from 52% in 2012, according to Nicholas Lardy in his new book on China, The State Strikes Back. This is despite the private sector accounting for 60% of GDP growth. China will do its best to correct this imbalance. But limiting the rebalancing back will be a.) The continued need to keep control of shadow lending with shadow lending is the main source of funding for private companies, and b.) President Xi’s desire for strong central control of the economy with support for the state-owned enterprises a key route to fulfilling this objective.
One million tonnes of styrene demand at risk
Now take a look at the chart at the beginning of this blog post. It shows our base case for styrene demand growth in China versus my guesstimate of a downside. This downside takes into account 2018 apparent demand growth of 2.5% ending up as real growth. The expansion in real demand then falls to 1% in 2019 from our base case forecast of 3.5%. Growth in 2020 is at 2.5% over base case of 2.5%.
Cumulatively, from 2018 until 2020 this would mean 1m tonnes less new styrene demand in China compared with our base.
The Chinese economy isn’t going to collapse and growth will be still happen. But styrene, like all other chemicals, is way too dependent on China:
- 34% of total global styrene demand growth in 2019-2020 will be delivered by China. ICIS estimates. This would make China by far the biggest source of consumption. Northeast Asia ex-China is in second place at 18%.
- China will account for 65% of global net imports in 2019-2020, we also forecast. Europe is in a very distant second place at 15%.
Every time Chinese chemicals demand catches even the mildest of colds, global demand always develops a bad case of flu.