A brand new ‘how to” guide for forecasting Chinese polyethylene demand

Business, China, Company Strategy, Economics, Environment, Olefins, Polyolefins, Styrenics, Sustainability

By John Richardson

TIME and again over the last ten years the strength or weakness of Chinese chemicals and polymers demand has taken everyone by surprise.

One method of analysis that does hold considerable value as a methodology for forecasting growth might be predictions of future credit flows for some chemicals. The big uptick in all Chinese chemicals demand after the 2008 Global Financial Crisis was down to economic stimulus. This applied both to chemicals that mainly go into durable, expensive end-use applications, such as autos and housing, and those that are more dependent on non-durable, cheap end-use applications.

Polyethylene (PE) largely falls into this second category. The above chart shows that the volume of new demand gained on a year-on-year basis has fluctuated because of the change in credit flows. So of course 2008 was woeful with just a 136,000 tonne build in demand. The following year, when stimulus kicked in, saw a 3.7m tonnes gain. 2010 then saw an addition of 2.3m tonnes of new demand.

This obviously partly reflected restocking following the heavy destocking that took place when oil prices collapsed in late 2008. The same pattern was common around the world. But the extent of the China rebound was the result of the unprecedented scale of Chinese stimulus.

Then we inevitably saw lower volume gains in 2011 and 2012 at 554,000 tonnes and 86,000 tonnes respectively because of a.) Overstocking and b.) A slowdown in lending growth. Total social financing (TSF) jumped by an extraordinary 61% in 2009 and then by 25% in 2010 before declining in 2011 and 2012

Broken links between credit and GDP

2013 was another banner year when 2.5m tonnes of demand was added as economic stimulus strengthened again. But in 2014, when China sharply reduced the availability of new credit, demand still grew by 1.5m tonnes. And then last year, when new credit available via the shadow banking fell to just $20bn per month, PE consumption still surged by 2.6m tonnes. $20bn per month same level as before the big economic stimulus programme began.-

My working theory is that Chinese growth in PE demand has become divorced from credit cycles. GDP growth obviously moves up and down in China depending on levels of economic stimulus. This could as a result mean the link between GDP and Chinese PE consumption has also been broken.

What is really driving PE demand growth in China then? The drivers are, in my view, as follows:

  •        The growth in China’s mobile internet economy is resulting in very strong growth in demand for PE protective packaging. Even though, for example, the economy slowed down last year, there was a big growth in demand for takeaway food bought over the internet delivered by courier (Chinese versions of Uber Eats). This was because people had less money to spend in restaurants due to a slowing economy. Changing social trends were also important as well, though. Now buying restaurant food online has become so popular it is difficult to see why demand won’t continue to grow.
  • The convenience of shopping on line in general for cheap, daily necessities promises further growth in what is a key industrial sector for the government. Beijing sees the internet-based economy as a way of escaping China’s middle-income trap.
  • Government money is being spent in western, poorer China to boost online selling. The objective is to provide easier access to low cost goods to people in remote rural areas who may lack access to shops.
  • Income thresholds. Even if China’s overall economy decelerates as its population ages, many millions more people in poorer China will still see their incomes rise over the threshold point where they can afford cheap, modern-day goods packaged in polymers. Once this demand is created it is rarely lost – i.e. once you’ve started buying a whole bottle of shampoo, you don’t go back to buying sachets.

Last year’s strong growth for PE wasn’t just driven by the booming in internet sales, however. Another major factor were the heavy restrictions on imports of scrap or recycled PE that were introduced for environmental reasons. Recycled PE imports fell to around 30,000 tonnes in 2018 from 2m tonnes the year. This as one-off benefit, but, of course, the market is now much bigger, thanks to the restrictions. Even if percentage growth slips in the coming years, this bigger base raises the potential for further annual additions well in excess of a million tonnes.

Note that all the above doesn’t just apply to PE. The same applies to general-purpose polystyrene (PS) and expandable PS that are also heavily used for protective packaging of sales over the internet.

The new tools for forecasting growth

So how should we now stare in the crystal ball measuring growth as multiples over GDP no longer work? Monitoring the growth of internet sales is obviously a starting point. We then need to assess how much PE is required, by weight, to package the average sale of an item over the internet. Multiply the two together, divide into tonnes, and predict future growth in internet sales.

The world of petrochemicals needs to now be balanced around China rather than China being balanced around the rest of the world. This is a change that has taken place over the last ten years, as Chinese PE and other petrochemicals demand has become the biggest of any other country or region. The tipping point for PE was in 2009.

The end-result of this shift is that we can longer treat China as one country. You wouldn’t treat the EU as one country, even though it is far less important a demand driver than China. We thus need to understand growth prospects in different regions of China.

Another of my working theories is that we can divide China into the rich southern and eastern provinces, the northeast that faces downward growth pressures from the closure of oversupplied industrial capacity, the middle up-and-coming provinces immediately next to the coast, and very poor China in the far west.

Dividing China up in this way and coming up with different growth forecasts for different regions isn’t only justified by the importance of China for global markets; it also because growth prospects between different regions vary greatly – and so knowing these varying growth numbers will help companies invest in the right logistics networks and sales and marketing operations. For example, whilst growth in rich eastern and southern China is slowing down, there is huge potential in middle China.

How do we get to these regional growth numbers? We need historic data on income levels, internet sales and other PE end-use applications at the level of the provinces and other administrative regions. Some PE is being consumed for exports as finished goods, so this needs to be subtracted from our historic calculations of income levels over PE (per capita PE consumption) at the level of the regions. Then we need to predict how we see income levels and internet sales etc. growing at the level of the different regions – along with the export of finished goods made from, or packaged in, PE.

And finally, think about income thresholds. Is the big kick-off point for Chinese PE consumption when people move from earning $15 a day to $20 a day? If so, look at regional historic patterns of income growth at $20 or above and forecast the future number of people reaching the $20 level.

Impossible? We don’t know until we try. A halfway solution would be better than no solution at all and all us remaining in the dark about PE growth prospects in the world’s most important PE market.

PREVIOUS POST

China chemicals storage at bursting point indicates no big new economic stimulus

27/03/2019

By John Richardson CHEMICALS markets are a great barometer for weather condition...

Learn more
NEXT POST

New ICIS podcast: Searching for a better way to forecast China

01/04/2019

  By John Richardson Click here for my latest interview with Will Beacham,...

Learn more
More posts
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
Europe to become much more self-sufficient in polyethylene because of sustainability
20/11/2019

Yes, I know I promised to focus on Asia and its cracker-to-PE industry today and how the region will...

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