THE GLOBAL FOOD crisis is first and foremost a potential humanitarian disaster that must be avoided. But “must” doesn’t mean “will”, of course. Nobody should underestimate the scale of the challenges in front of us.
“Ukraine has only compounded a catastrophe on top of a catastrophe. There is no precedent even close to this since World War II,” David M. Beasley, the executive director of the UN World Food Programme told the New York Times in this article.
After remaining mostly flat for five years, hunger rose by about 18% during the pandemic to between 720m and 811m people, said the UN. The Ukraine-Russia conflict could cause a further 7.6m to 13.1m people to go hungry, the UN added.
Armenia, Mongolia, Kazakhstan and Eritrea were said by the NYT to be among the most directly exposed countries because they imported nearly of all their wheat from Russia and Ukraine. But across the developing world in general, the cost as well as availability of food will be critical issues.
How each developing country is affected will depend on distribution of incomes across populations. The higher the proportions of people in a country that are or at, below or close to extreme poverty, the greater the risk.
Extreme poverty is defined by the World Bank as living on a minimum of $1.90 a day, and the by the UN as “”a condition characterised by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services””.
What’s depressing is that the above UN definition was drawn up way back in 1995, but we are still a long way from providing sufficient basic human needs.
If anything, in some countries provision of basic needs has remained static or even gone backwards over the last 27 years, though in overall terms hundreds of millions of people have been lifted out of extreme poverty.
It would be nice to think that richer countries will club together to support the countries most exposed to soaring fertiliser, wheat, corn and barley prices – and to ensure that there is enough food to go around.
But these are exceptional times. The desire to do the right thing – which has in the past led to big progress in the battle against extreme poverty – is likely to clash with domestic priorities.
Two weeks ago, for instance, China’s agriculture minister warned that the country could face its worst-ever winter wheat crop because of heavy rains. China, and no criticism is intended here, may use its big financial resources to ensure it has sufficient wheat imports to meet demand.
In Africa and the Middle East, energy exporters will be in stronger positions because of the huge increases in oil and gas prices – provided enough extra revenues are transferred to those most at risk.
Another factor will be the buying power of countries based on their historic demand for imported wheat, corn and other food. Turkey, Egypt, Bangladesh and Iran, which obtain more than 60% of their wheat from Russia and Ukraine, are identified by the NYT as potentially being in stronger positions than smaller-scale buyers.
“Countries afflicted by protracted conflict, including Yemen, Syria, South Sudan and Ethiopia, are already facing severe hunger emergencies that experts fear could quickly worsen,” wrote the NYT in the same article.
We thus have another category of risk: countries already facing food crises because of conflicts.
Implications for high-density polyethylene demand
As I said, this is first and foremost a potential humanitarian disaster. The disaster is probably already underway.
In the great scheme of things, polyethylene (PE) hardly matters at all. But the purpose of this blog is to support ICIS customers who need to get in with their jobs. Businesses must continue to run in this ever-more muddled world.
The starting point for understanding the impact of increased poverty food poverty and reduced food security on PE demand is recognising this: in poorer countries, there is no such thing as inelasticity of demand to as economic circumstances change.
In rich countries, yes, PE demand tends to hold up extremely well during difficult times because, as we all know, the bulk of PE consumption is into non-durable and “essential” end-use applications such as food and modern medicines.
But the poor world is very different. What is seen as essential in the developed world sometimes cannot be afforded in the developed world.
When you are in extreme poverty, you may well not be able to afford or have access to food and modern-day medicines because supplies are not available at any price. When extreme poverty increases in poor countries, the demand for PE often declines.
We saw this at the height of the pandemic. In the rich world PE demand was better than before the pandemic, whereas in poorer countries it was worse.
The above chart – using just high-density PE (HDPE) as an example (it will be the same story in the other two grades) – is my first attempt at modelling what could be the effect of the food crisis on demand.
It is important to note that China should no longer be categorised as a developing country. Some provinces of western provinces of China fall into this category, but nationwide, the world’s most important PE market falls somewhere between the developing and developed categories.
I have long argued that is, in fact, important to think of China as four different economies based on different geographies – ranging from almost fully developed to developing.
The above chart will be wrong, of course, as it was compiled in the space of a couple of hours and doesn’t consider the factors shaping demand that I’ve detailed above. But I hope it will act as a useful starting point for your internal planning.
I have added Mexico to the ICIS Supply & Demand Database’s South & Central America region, as, under, our database, Mexico is included in North America (the US and Canada being the rest of North America).
Likewise, I’ve removed Turkey from our data on Europe and added Turkey to the Middle East. Developing Asia and Pacific is our Asia and Pacific region minus the fully developed economies of Australia, New Zealand and Singapore.
Asia and Pacific does not include the fully developed economies of Japan, South Korea and Taiwan. They, along with China, fall into our northeast Asia region.
My downside assumes that this year’s declines in growth in the four developing regions exactly repeat the percentage declines that we saw in 2020 over 2019 – at the height of the pandemic. The percentage declines ranged from minus 0.1% to minus 2%.
Instead of 2022 HDPE growth being at plus 5% in the four region regions, the downside results in minus 1%.
On a global basis – assuming our bases cases our accurate for all other regions – the downside leads to global growth in 2022 of plus 1% versus plus 5% in our base case. Global consumption is reduced by 1.8m tonnes.
Under our base case, my four developing regions would comprise 27% of global demand in 2022.
Conclusion: how to start building proper scenarios
To get a real idea of the impact of the food crisis on developing-world PE demand, I believe you need to start with forgetting the oversimplified idea, so popular in conference speeches, that PE demand in the developing world is driven primarily by the “rise of the middle classes”.
This is a factor for sure. But people emerging from our falling back into extreme poverty can hardly be described as middle class under any measure – and levels of extreme poverty, as I have identified, play an important role in shaping PE demand in developing-world countries. So do overall income distribution patterns.
In summary, from the comments above, my six headline drivers for assessing developing-world PE demand in the context of the food crisis are:
- As I have just reminded you, study income distribution patterns across different countries. The percentages of people that fall into different income bands will play a big role in shaping demand because of varying levels of affordability. For instance, in a country such as Niger, a higher percentage of people at, close to our below extreme poverty than in, say, Malaysia, means more demand destruction.
- Consider the exposure of different countries to wheat and other food imports from Russia and Ukraine.
- The bigger the buyer of Russian, Ukrainian and other imported foods, the greater a country’s potential ability to avoid shortages because of its buying power.
- Energy exporters versus energy importers. An energy exporter in, say, Africa might be in a stronger position to avoid a major food crisis if increased revenues sufficiently flow to those most at risk.
- The overall economic muscle of countries – most notably China, which is a major energy importer – to obtain enough food supplies on international markets.
- The impact on countries where conflicts have already led to food shortage such as Yemen, Syria, South Sudan and Ethiopia.
Corporate donations can be a play big role in minimising the food crisis – because, to, repeat, this is first and foremost a potential humanitarian disaster. The petrochemicals industry has a proud track record in this regard.
I hope these ideas help support your internal discussions. For information on how ICIS can further support your demand modelling, contact me at john.richardson@icis.com.