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Geopolitics have always shaped the petrochemicals industry

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By John Richardson on 21-Mar-2022

By John Richardson

THE HEADLINE IN the above slide has always been the case. Why it was forgotten could be because many of us spent most, if not all, of our professional careers in the benign period between the end of the Cold War in 1991 and the pivot in the US approach to China, which happened some four years ago.

And/or it might the result of the “silo thinking” that Gillian Tett talked about in her superb book on the Global Financial Crisis, Fool’s Gold: people with deep expertise in one discipline not being able to recognise that other areas of knowledge matter for outcomes.

In the benign period, geopolitics were still playing a defining role in shaping petrochemical investment and trade flows, even if tensions were only bubbling away on the back stove.

For instance, one of the drivers behind allowing China into the World Trade Organization in late 2001 was the belief that this would further entrench what was called “the triumph of liberal Western democracy”. As China traded more with the West, it was thought it would politically move closer with the West.

But this didn’t happen. China’s subsequent economic boom was presented by Beijing as evidence that their political system worked extremely well.

So, we had two very different political systems becoming increasingly economically connected to one another to the point where we have ended up with the kind of charts you can see above. What applies to high-density polyethylene (HDPE) applies to many the other petrochemicals and polymers, oil and gas, iron ore, smartphone sales and burger sales by global fast-food companies.

Geopolitical disruptions were therefore a risk. But the conventional view was that in an ever-more globalised world, all that mattered for petrochemicals trade flows and investments was cost-per-tonne economics. It was said that the cheapest exporters would always win in the China market.

I have warned, ever since this blog started in 2008, that we need to always consider geopolitics and how they might affect trade flows and investments – because of the lessons of history.

Mike Pence’s speech in October 2018 – when he signalled a change in US policy to China towards treating it as a geopolitical competitor rather than a partner – was something I flagged up at the time as an important turning point. The sentiments in the then US vice-president’s speech had and still have strong cross-party support.

Next came the trade wars with China, during which I accurately predicted that PE would be the subject of trade-war tariffs. This led to a dramatic shift in PE exports away from China and towards countries such a Malaysia and Vietnam, as the big global producers scrambled to rebalance their sales strategies.

At the time, I also warned that the new divisions with the US were colliding with China’s demographic challenges. The US started restricting China’s access to high technology during a period when it needed more access – because of rapid population ageing and its middle-income trap. I don’t think that anyone would now dispute these conclusions.

This in turn led to China accelerating its Belt & Road Initiative in an effort to pull more countries into its economic and geopolitical sphere of influence, especially from the developing world. There was a parallel push to improve independence from imports – or self-sufficiency – including in petrochemicals, because of increased geopolitical concerns.

We are therefore where we are today, with the highly sensitive debate coursing through the petrochemicals business about what China’s relationship with Russia – and its potential deeper divisions from the US – will mean for our industry.

How will events in Ukraine effect China’s relationship with Russia and China’s relationship with the US? There are many different outcomes that require deep study, with multiple scenarios for petrochemicals trade flows and investments.

The numbers on HDPE – from our excellent ICIS Supply & Demand Database – speak for themselves. The level of interdependence between China and the rest of the world would be extraordinary if it wasn’t, as is said, so commonplace: The same applies to many other petrochemicals and polymers.

Our database is a key tool for your strategic planning as you, hopefully, place geopolitics at the very heart of your planning process. Or perhaps you will continue to assume that the world is flat and that all the matters is cost-per-tonne economics. As they say, “good luck with that”.