By John Richardson
THERE IS ONLY one slight problem with the argument that developing world demand is behind the boom in petrochemicals demand over the last 20 years: the data.
Sorry to begin the year on a rather sarcastic note, but this is unfortunately a drum I feel I need to keep banging to support your strategic planning.
Understanding this business has for the last 20 years hinged on China. This will continue to be the case as China’s Common Prosperity policy pivot reshapes just about everything.
Let me today, though, provide some historical context to ensure your planning starts from the right place.
Regular readers of the blog will not be surprised by the chart below. But I do hope that as we start this year, this type of hugely valuable data, from our ICIS Supply & Demand Database, will reach a wider audience.
The above chart uses high-density polyethylene (HDPE) as an example, but the pattern is the same in nearly all the other petrochemicals and polymers:
• Up until 2009, and right back to 1978 when our database begins, North America was the biggest consumption region, driven mainly, of course, by its two highly developed economies – Canada and the US.
• But in 2009, China overtook the US, and, since that year, its dominance of global consumption has grown and grown.
China isn’t really a developing economy anymore because of its rich eastern and southern provinces. As you move further inland, however, China becomes progressively less developed as per capita incomes fall.
China therefore falls into a category of its own and should be more properly thought of as four separate economies: as I said, the rich southern and eastern provinces, the up-and-coming provinces adjacent to the eastern and southern provinces, the northeast, China’s rustbelt, and the poor far west.
Now let us look at this in terms of demand (in millions of tonnes) before I break the data down to give you further context.
Africa, Asia & Pacific (this region includes the Indian subcontinent and southeast Asia), the Middle East and South & Central America fall into the developing world category.
Between 2000 and 2020, their combined percentage share of global demand rose from 21% to 27%. In millions of tonnes, this represented an increase in consumption from 5m tonnes to 13m tonnes.
Meanwhile, China’s percentage share increased from 11% to 36% as its demand in tonnes rose from 3m tonnes to 18m tonnes.
The population of the developing world was some 5.3bn in 2020. Based on the demand of 13m tonnes in 2020., this left per capita consumption at 2.5kg.
China’s population in 2020 was just over 1.4bn. Demand of 18m tonnes equated to per capita consumption of 12.8kg – more than 300% higher.
Let’s deal with the comparison that it is still being erroneously made between India and China, built on the idea that “India is the next China”.
India was in 2020 the second most populous country in the world with a population of slightly below 1.4bn, just behind China. India’s HDPE demand in 2020 was 2.5m tonnes, leading to per capita consumption of just 1.8kg – nearly 600% lower than China’s.
In comparison in 2000, developing world per capita HDPE consumption was 1.4kg versus 1.9kg in China – a percentage difference of just 37% when you look at the exact numbers.
This amply demonstrates that China in terms of its population size is punching way above its HDPE This has been especially the case since 2009 as the first chart in today’s post illustrates.
The China middle class myth
So why has China’s share of global demand gone through the roof – and why it is punching so much above its weight?
A dominant theory is “China’s booming middle class”, creating the impression that China is becoming middle class by Western standards.
But the data again doesn’t support this argument. In 2020, the World Bank estimates that China’s average GDP per capita income was $10,434 compared with $63,413 in the US, $43,258 in Canada and $46,208 in Germany.
China is nowhere close to being middle class by Western standards. Such a status is decades away, assuming it can be achieved.
True, as I said, the eastern and southern provinces of China have enjoyed an economic boom.
Take the province of Beijing – China’s richest – as an example. I estimate, based on the latest provincial-level data for 2019, that in 2020 Beijing’s per capita income was $25,109.
But, as I have shown, even $25,109 is much lower than per capita income levels in the developed world.
The chart below should give you pause for thought. It shows estimated per capita 2020 income levels in China’s 31 mainland provinces and autonomous regions.
There are some very poor inland regions of China. Take Gansu as the opposite extreme of Beijing, where 2020 per capita income was just $5,361.
We can measure this economic divergence in terms of petrochemical demand, again using HDPE as an example.
As I said, ICIS estimates nationwide per capita HDPE consumption at 12.3kg. Multiply this by the percentage differences between provincial-level income levels over the nationwide average for 2020 and we end up with the chart below.
We can turn this into millions of tonnes and place the demand into the context of China’s population. The chart shows that the majority of demand was driven by the 10 richest provinces, accounting for a minority of the population.
We also know that China has become a much more unequal society since 2009, based on IMF and World Bank data.
Elizabeth Economy, a leading export on China’s politics, society and its economy, believes that China has become one of the most unequal countries in the world.
“China’s overall income inequality, with an official Gini of .47, is significantly greater than that for the US (around .41) or the average across the Organisation for Economic Co-operation and Development (around .35),” wrote Professor Branko Milanović, a visiting professor at City University of New York, in this International Politics and Society article.
China’s petrochemicals demand boom is clearly therefore not the result of the country becoming broadly middle class by Western standards.
And, as we have demonstrated, due to the link between incomes and petrochemicals consumption, most of the demand boom has been concentrated in just a few rich provinces.
What’s really behind the surge in China petrochemicals demand since 2009? The answer is in the charts below.
As you can see, there is a close link between China’s rise in Total Social Financing since 2009 and the big take-off in China’s HDPE demand. Total Social Financing is lending via China’s state-owned banks and its private or shadow lenders.
The 2009 take-off point, as I have been highlighting since that year, was China’s introduction of the world’s biggest ever economic stimulus package, in response to the Global Financial Crisis.
China has dominated global economic stimulus since the Global Financial Crisis. Cumulative stimulus from its central bank, the People’s Bank of China, has exceeded that of all the other major central banks put together.
China’s dominance of global finished goods export markets has also played in this HDPE growth, especially in 2020 as China enjoyed a rapid recovery from the pandemic. During that year, China provided most of the goods the West needed or wanted during lockdowns.
But in 2013, China’s exports accounted for 25% of its total GDP and this percentage steadily has steadily fallen since then. Despite the pandemic boost to exports, the percentage was at 195 in 2020, according to TheGlobalEconomy.com.
The “smoking gun” at the end of this investigation is obvious: the 2009 stimulus programme that greatly boosted local HDPE demand in China’s richest provinces as the rest of China fell economically further and further behind.
Conclusion: 2022 will be largely about Common Prosperity.
Most of China’s stimulus went into real estate, leading to a surge in petrochemicals demand directly and indirectly linked to the property sector.
Directly, think here of HDPE pipes and kitchenware to kit out new homes made from HDPE. Then consider all the indirect conspicuous consumption, resulting from soaring property-related wealth, that boosted demand for all manner of goods and services packed in or made from HDPE.
The real-estate boom is over because of the Common Prosperity policy pivot. We should, as a result, expect moderating HDPE and other petrochemicals growth over the next decade.
As my post on Friday shall detail, we have already seen evidence of this moderation in the close-to-final demand numbers for 2021. Last year’s HDPE demand growth was negative versus 2020.
Common Prosperity – as I’ve been discussing since September last year and will continue to discuss – has so, so many implications for global demand and supply that it must be at the very core of your strategic planning.
As you get to grips with Common Prosperity, I hope today’s historic context has helped by getting rid of what I see as distracting myths. If you don’t start your planning with the right historic assumptions, you will have little chance of ending up with the right forecasts.
Good luck in 2022 and please stay safe out there.