By John Richardson
WE HAVE BEEN here before, of course. In April 2020, pessimism abounded about China’s growth prospects that turned out to be unfounded because of the extraordinary strength of its post peak-pandemic recovery.
But circumstances that led to the economic rebound in the second half of 2020 were very different.
Deflation or at least disinflation were the concerns during that period as huge amounts of government stimulus were pumped into Western economies to compensate for the economic hit from coronavirus.
As I flagged up on this blog, before most people figured out what was going on, global petrochemicals demand consequently soared – the “China in, China out” story.
Exports of petrochemicals to China, along with China’s local demand, quite literally went through the roof relative to the collapses we saw in GDP.
The petrochemicals were needed to make all the exports of durable finished goods from China, the demand for which was boosted both by stimulus and by the boredom of middle-class Westerners stuck in lockdowns.
But today is very different with inflation at its highest levels since the 1970s, leaving Western governments with little room to launch stimulus on the same scale because of higher interest rates.
And, anyway, people don’t usually buy a new computer, washing machine, refrigerator, game console or a new set of office furniture for the home every year.
Such purchases are usually more occasional than this, so 2022 – even without the Ukraine-Russia conflict’s impact on inflation – was always likely to see a temporary dip in demand for durable goods.
There is also the possibility that Westerners will be buying a lot more services rather than durable goods during the rest of this year if lockdowns are not re-imposed. That’s if they can afford flights aboard and hotel stays, as inflation is also driving-up the cost of services.
Here is yet another reason to doubt whether China can export itself to recovery in H2 of this year: Further supply chain disruptions, caused by the Ukraine-Russia conflict and China’s Zero COVID policy, which are limiting the availability of the durable goods that Westerners still feel able to afford.
China could be losing control of events
This still leaves the “China put option” to fall back on – the proven maxim that the worst things get, the better they will soon become.
On every occasion over the last 20 years, big Chinese economic stimulus has been launched following temporary spells of lower economic growth.
Such stimulus might lead to a domestic recovery in demand so powerful that it compensates for any H2 2022 weakness in China’s export trade. But this time around consider:
- China perhaps being unwilling to go really big on stimulus because it would set back its vital Common Prosperity economic reform agenda.
- The risk that, even if it decides to go for big stimulus, a prolonged struggle to bring its latest outbreak of the pandemic under control may limit the benefits.
As I therefore warned three weeks ago, China is at risk of losing control of economic events.
And however sensitive this further challenge is, it must be confronted: If Western divisions with Russia drag on, and if China maintains its close relationship with Russia, the risk of secondary sanctions against the Chinese economy cannot be ruled out.
What the early polyolefins data could be telling us about 2022
Absolutely, of course, two months of data can hardly be extrapolated into a firm trend for any full year.
Nevertheless, consider the likelihood that China might require at least the rest of this month to bring the latest outbreak of coronavirus under control.
Then take into account that in order for most forecasts for 2022 polyolefins demand growth to be right – that it will be at an average of a high single digit across all the grades – consumption growth would have to be some 12% in H2 to make up for the disappointing numbers in the chart at the beginning of this section of the post.
Also factor in the chart below, which again based on just two months of data, suggests what imports for the full year 2022 might be.
If you are an ICIS subscriber, or are interested in becoming one, and want the actual numbers behind these charts, please contact me at firstname.lastname@example.org.
Unexpected events can surprise us as they did in 2020. But beware of a significant risk that China will in real terms not hit its official GDP growth target of 5.5% for this year.
Then build scenarios to stress test your business for what this could mean for the country’s polyolefins demand and imports.
Being prepared, using ICIS data and analysis, is always better than being exposed to events that you could and should have planned for.