Trade War: 88m tonnes of lost polymers demand despite the boom in Asia ex-China

Aromatics, China, Company Strategy, Economics, India, Indonesia, Malaysia, Middle East, Olefins, Philippines, Polyolefins, Styrenics, Thailand, US

By John Richardson

SURE, there are tremendous opportunities for petrochemicals and polymers companies in booming Southeast (SEA) Asia and South Asia as manufacturing chains relocate from China.

Demographics are economic destiny. This is a process that has been taking place for at least ten years as Chinese labour costs rise on an ageing population whereas across most of SEA, with the important exceptions of Thailand, Malaysia and Singapore, populations are very youthful.

There are big armies of young people in most of SEA and the whole of South Asia (India, Pakistan, Bangladesh and Sri Lanka) willing to make cheap finished goods for export to the West. Manufacturing relocation is being greatly accelerated by the trade war.

“Do I make more space in my storage tanks in Vietnam because of the increased pace of manufacturing growth in that country? That’s the type of question I want answered,” said a source with a petrochemicals logistics supplier.

Nothing short of an investment boom is being talked about in Vietnam, Indonesia, Laos and Cambodia as manufacturing plants are shifted from China.

“Buyers are snapping up land in Laos and Cambodia to build new factories, as the tariffs have added extra momentum to a trend already taking place because of lower labour costs,” said an investment banker.

This might lead you to the conclusion that for every tonne of demand lost in China as its population ages and its trade and other disputes with the US intensify, at least a tonne of demand will be gained in the developing world. You might conclude that there is nothing to worry about.

I am afraid not. Let me explain why using five of the polymers that I see have the strongest upside potential for growth in SEA and South Asia and a big downside potential in China: Acrylonitrile butadiene styrene (ABS), expandable polystyrene (EPS), polypropylene (PP), polystyrene (PS) and polyvinyl chloride (PVC).

These five polymers are heavily used in the manufacturing of finished goods and in packaging finished goods. PVC window frames and pipes, EPS for insulation material and PP pipes also benefit when housing and infrastructure spending increase. It is a good bet that as SEA and South Asia growth further benefits from the relocation of manufacturing, spending on housing and infrastructure will continue to boom.

Taking the ICIS base case Supply & Demand data as a starting point, let us look at the following countries:  Bangladesh, India, Indonesia, Myanmar, other Asia Pacific, including Cambodia and Laos, Pakistan, the Philippines, Sri Lanka and Vietnam. Across all of these countries, average annual 2019-2025 demand growth for the five polymers is forecast at 5.6%.

We next need to examine the elephant in the demand room, which is obviously China. We see its consumption of these five polymers increasing by annual average of 4.3% in 2019-2015.

Our base case growth rates for the SEA and South Asia countries listed above could well prove to be too conservative. So, for argument’s sake, let’s double the annual average growth rate to 11.2%. Consumption across the five polymers totals 169m tonnes in these SEA and South Asia countries. This is 11m tonnes more than our base case.

At the same time, though, let’s half the growth rate in China to just over 2%.  Chinese demand is a staggering 99m tonnes less than our base case suggests. On a net basis this would result in a loss 88m tonnes of demand versus our base case.

China wins: The best news for demand

It won’t of course be anywhere near as simple as this. Just one of the many complications is that several of the countries listed above are intricately weaved into the economic success of China because they are major exporters of raw materials and agricultural products to China.

A slower Chinese economy, reflected in my halving of our base case polymer growth rate, would have a negative knock-on effect to on several of these countries. This challenges the notion of a doubling of polymer growth in SEA and South Asia.

Equally, though, China polymers growth might reach our base case or go higher if it can win its trade, technological and geopolitical wars with the US. This is assuming we continue to head towards a bi-polar world where there can be only one winner and one loser out of the US and China.

From a global petrochemicals demand perspective only, the above data seem to tell us that us that the best solution would be a China win.

The ideal outcome would be that China makes a success of its Belt and Road Initiative and is thus able to escape its middle income trap. In so doing it would achieve continued strong domestic growth whilst also improving the economies of SEA, South Asia, the Middle East, Central Asia and Africa.

You may have strong political disagreements with this statement and apologies if this has caused any offence. As always, I am trying to present the facts as I see them, based on the data.

I see it as virtually impossible for the rest of the developing world to become as important as China in driving demand for at least the next decade. And as I discussed yesterday, China dominates global demand and global demand growth both in the developing and developed worlds.

I believe that this is the situation we face until the drift towards a bi-polar world reverses gear, creating the opportunity for win/win solutions for the US and China. Let’s hope this happens.

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