Longer trade war: Impact in numbers on China polymers demand

Business, China, Company Strategy, Economics, Olefins, Polyolefins, Styrenics, US

By John Richardson

WE MUST now start to quantify the impact on the petrochemicals industry of no end to the US/China trade war during 2019.

Economists at Barclays estimate that a 25% US tariff on $200bn of exports could cut Chinese growth by half a percentage point over 12 months, and as much again if Mr Trump acted on his threat to impose the same tariffs on Chinese exports worth a further $325bn.

Analysts at Moody’s project that if all Chinese exports to the US were taxed at 25% for a full year, real GDP growth (as opposed to the fictional official numbers) would slow by 1.2 percentage points to just over 5%.

From a macro-economic perspective, this is bad enough. But from a petrochemicals industry perspective the downside is far greater.

The problem for our industry is that it is way too reliant on China for consumption. In the case of acrylonitrile butadiene styrene (ABS), no less than 58% of global demand for the polymer was driven by China.

This of course isn’t just domestic-for-domestic demand because of China’s outsized role as a global exporter of finished goods containing ABS such as washing machines, computers and auto components. For instance, of the 2m tonnes of ABS imported in 2018, some 50% was re-exported as finished goods, say industry sources.

In the case of polypropylene (PP), a far bigger polymer demand-wise, China accounted for 37% of global demand in 2018. Between 30-40% of the 4.4m tonnes of PP that was imported in 2018 was re-exported as finished goods, add the industry sources.

If the trade war continues for the rest of this year global growth would suffer. So would of course China’s overall export trade.

Another problem is consumer sentiment in China. Last year saw the first decline in auto sales since the early 1990s. Housing sales also suffered as China’s famed middle class pulled back from purchases. This was the result of the negative sentiment created by tighter credit conditions and the trade war.

“But surely, if the trade war carries on China will just launch another huge wave of economic stimulus and everything will be fine,” you might say.

No. China’s bad debt position will considerably limit the benefits from further stimulus, if not entirely cancel them out.

Assuming that the trade war continues throughout 2019, my estimate, as you can see in the above slide, is that ABS demand will fall 470,000 tonne short of our earlier forecast. The hit on PP would be 1.6m tonnes of lost demand versus our earlier prediction.

The same story will apply to other polymers that are heavily used in big ticket or expensive consumer goods sold in China and in export markets. I will detail the impact on the other polymers in later posts.

And this is just in China itself. Because the global petrochemicals business relies so heavily on China as a source of demand, consumption in other regions will likely fall well short of expectations.

As I discussed last Friday, you must prepare for lower naphtha cracker profitability during the rest for 2019 and very probably into 2020. Margins could very easily go below the levels of the last major industry downturn, which was in 2013-2014.

The problem is not with polyethylene where Chinese demand growth remains spectacular. It is instead with PP and the co-product credits from selling ethylene, benzene and butadiene that go into other polymers.

The former British Prime Minister Harold Wilson famously said during the 1960s that a week was a long time in politics. These days it is just a few minutes, the time it probably takes for President Trump to type one of his tweets.

But do not bet on either the US or China reversing course. Both sides appear to have dug in for a longer-than-expected battle.

 

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