China polyethylene demand forecasting: Forget GDP, look downstream and focus on regions

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

By John Richardson

THE TOP DOWN method of estimating polyethylene (PE) demand growth in China that uses multiples over GDP seems to have major weaknesses (and some of what follows may apply to other chemicals and polymers).

The problem is with GDP itself. China’s actual and forecast official GDP growth numbers have long been understood to be unreliable as a new Brookings Institution study further underlines.

The study estimates that between 2008 and 2016, official GDP growth was 1.7 percentage points per year too high.

Local government officials were motivated to exaggerate data because the better the growth the better their promotion prospects.

When this data was fed through to the central government’s National Bureau of Statistics (NBS), the NBS lacked the authority to make the correct adjustments as local government officials were more powerful.

Official GDP growth numbers before 2008 were also very unreliable, the study adds. There is no reason to believe that government data after 2016 has become any more accurate.

A further problem is that most supposedly independent numbers for China GDP never challenge the official numbers as they are usually only just a little lower.

Another difficulty is with the very nature of top down analysis, as it doesn’t take into account the end-uses for PE and how they are growing in China. Even if we could get Chinese GDP growth right, which is probably impossible, downstream demand drivers seem to bear little relationship to GDP.

Take 2018 as an example. There are no obvious reasons to believe that future years will be any different.

The sale of low cost goods over the internet, which were either made from PE and/or were packaged in PE, continued to boom despite weaker official and unofficial GDP growth.

This boom was partly driven by a rise in takeaway food sales as people cut back on more expensive restaurant dining because of the slowing economy. Takeaway food is packaged in LLDPE and LDPE films and rigid HDPE containers.

A lot of the rise in demand for takeaways consisted of food delivered to people’s homes by the Chinese equivalents of Uber Eats. This trend actually has an inverse correlation to GDP rather than being correlated to it.

Last year also saw strong demand for HDPE natural gas and water pipes as a result of an increase in government infrastructure spending.

This type of demand again seems to have an inverse correlation with GDP growth. Beijing always spends more money on subways, roads and railways etc. when growth slows.

There is another aspect of demand for HDPE natural gas pipes that has a weak link to GDP and that is switching homes and business from using coal to natural gas for environmental reasons.

The use of coal in China is a major cause of lung cancers and other respiratory diseases. China’s leaders have made a firm long-term commitment to tackle the environmental crisis regardless of GDP growth patterns.

This illustrates the point that in a very heavily centrally controlled country, government policy decisions shape PE and other polymers and chemicals markets. Central control has increased since President Xi Jinping came to power in 2013.

Another example of the role of government policy was last year’s introduction of heavy restrictions on imports of scrap or waste plastics. This boosted the demand for virgin PE even though the economy was slowing. Demand for virgin general purpose polystyrene and polyester fibres also benefited from the restrictions.

One number for China doesn’t work

Yet another problem is that conventional top down analysis tends to treat China as one country, when, in fact, it is a combination of several quite different regions from an economic standpoint. Broadly speaking, there is rich coastal China, the north eastern rust belt, the central provinces that are enjoying strong catch-up economic growth and the very poor provinces in the far west.

It may be necessary to create many more sub-groups for sensible analysis. Perhaps we need to go all the way to generating separate bottom-up demand growth numbers for each of China’s 31 provinces and other administrative regions.

“Having one PE demand number for China makes as much sense as producing one demand number for the whole of the EU,” an economist told me the other week.

Quite. Nobody would think that one PE consumption number would be good enough to take into account varying patterns of growth between Germany and poorer southern Europe.

But conventional top down analysis often assumes just one PE demand number for China. This is despite the vast differences between say Gansu, China’s poorest province and Beijing, China’s richest region. In 2017, I estimate that Gansu had per capita PE consumption of just 10 kilograms compared with 46 Kilograms in Beijing.

The potential for further growth in Gansu seems big whereas per capita consumption in Beijing may have pretty much maxed-out for basic commodity grades.

I think it is therefore essential to produce regional PE demand estimates from the bottom up that take into account central government spending on infrastructure, local consumer spending patterns, demographics, government spending on new manufacturing capacity and local increases in income levels etc.

Demographics region by region are crucial to understand. For example, young people have tended in the past to migrate to the cities, meaning that people in rural areas are not only poorer but older – which has a major influence on consumption patterns.

China’s growing dominance

As recently as 2009, one number for China might have been just about good enough as before then China’s PE consumption had yet to become the biggest in the world.

But from 2009 onwards China became the world’s biggest consumer, surpassing the US and the EU on an individual basis.

And consider this: In 2009, China PE demand was 15.6m but by last year this had almost doubled to 31m tonnes.

Meanwhile, China’s percentage share of global demand had risen from 23% to 30%. The increase in China’s percentage share of global growth is even more remarkable. In 2009, China accounted for 32% of world growth in PE demand, but last year this was at 62%.

As for official and unofficial China GDP numbers as the basis of analysis, this has probably never been a reliable enough approach because of the weakness of the data.

PREVIOUS POST

US foreign policy reshaping global oil markets at major cost to the US

08/03/2019

By John Richardson THE TOP DOWN method of estimating polyethylene (PE) demand gr...

Learn more
NEXT POST

Risks for US petrochemicals once again rise as trade war takes another twist

15/03/2019

By John Richardson THE TOP DOWN method of estimating polyethylene (PE) demand gr...

Learn more
More posts
China benzene spreads at ten-year low on misplaced trade deal hopes
19/05/2019

By John Richardson THE ABOVE chart shows that in April the average spread between CFR Japan naphtha ...

Read
Longer trade war: Impact in numbers on China polymers demand
15/05/2019

By John Richardson WE MUST now start to quantify the impact on the petrochemicals industry of no end...

Read
Plastics pollution crisis: Impact on polyethylene margins in 2022-2027
13/05/2019

By John Richardson ALMOST all countries late last week signed a UN deal to monitor the flow of hard-...

Read
China PE demand boom will not stop further margin declines
10/05/2019

By John Richardson CHINA’S polyethylene (PE) market is being temporarily weighed down by overstock...

Read
China holds all the petchems demand aces as it digs in for longer trade war
08/05/2019

By John Richardson THE STRENGTH of China’s position in the intensifying trade war is further under...

Read
President Trump’s Tweets increase risk of no trade deal until 2021
06/05/2019

By John Richardson THE PROSPECTS of a trade deal seem to have have faded into the distance as a resu...

Read
Pressure on US builds as PE exports to China tumble and EU considers tariffs
03/05/2019

By John Richardson DONALD TRUMP insisted in early March that he was willing to walk away from a bad ...

Read
China 2019 PE demand grows in double digits as PP struggles
01/05/2019

By John Richardson CHINA’S polyethylene (PE) and polypropylene (PP) markets continue to tell us so...

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