By John Richardson
WHAT A DIFFERENCE a month has made, as the above chart informs us. In January-March 2022, the ICIS China production estimates plus the net import data from the China Customs department, when annualised (divided by four and multiplied by 12), suggested that China’s full-year polypropylene (PP) demand growth would be 4%.
But the January-April data for this year suggest almost zero growth over last year, to be precise a 0.3% increase in demand.
We must of course be very careful about making firm conclusions from any extra one month of data.
The April decline is the result of a big drop in net imports, mainly because of a decline in imports, and this trend could easily be reversed.
But the bleaker full-year outlook suggested by the April data also points towards the increasing negative impact of China’s zero-COVID lockdowns.
Politics, economics and lockdowns
Some 328m people were estimated by Nomura in early May to be the subject of different degrees of lockdowns, representing 31% of the country’s GDP.
Some excellent news is that Shanghai appears to be re-opening. On Wednesday this week, the number of new coronavirus cases had fallen to zero.
Shanghai generates around 3.8% of China’s GDP. The city’s linkages to the rest of China’s economy and the global economy through its big manufacturing capacity and its container port, the biggest in the world, probably means this percentage underestimates Shanghai’s importance.
But a widely voiced scenario is that nationwide lockdowns will remain substantial until a November political meeting when Xi Jinping, China’s president, is expected to be given a third five-year term in office. He has given his firm backing to zero-COVID.
There are other reasons to build scenarios for PP and other petrochemicals demand around a prolonged period of major lockdowns.
On Wednesday 11 May, a peer-reviewed study by Shanghai’s Fudan University was published in the Nature journal. The study said that a decision by Chinese authorities to lift zero-COVID measures could see more than 112m symptomatic cases of coronavirus, 5m hospitalisations and 1.55m deaths.
“We find that the level of immunity induced by the March 2022 vaccination campaign would be insufficient to prevent an Omicron wave that would result in exceeding critical care capacity with a projected intensive care unit peak demand of 15.6 times the existing capacity,” the authors wrote.
The study, however, did say that with access to vaccines and antivirals and “maintaining implementation of non-pharmaceutical interventions”, authorities could prevent the health system from being overwhelmed. It suggested these factors could be more of a focus in future policies.
But implementing changes in policies would likely take considerable time, as it might involve importing foreign vaccines that are said to be more effective than Chinese versions and raising low vaccination rates among the elderly. China’s vaccination programme has slowed down because of the lockdowns.
A mid-April article from the Financial Times reported that only 57% of people over 60 had been fully vaccinated with three jabs.
A University of Hong Kong study, published in March, found that the over-60s who had received two doses of Sinovac’s vaccine CoronaVac [a local vaccine] were three times more likely to die from Covid compared with those who received two doses of the BioNTech/Pfizer vaccine, said the FT article.
Returning to the subject of politics, The Economist, in this article from last week’s issue, claimed that local officials’ adherence to the zero-COVID policies had become a test of political loyalty.
This meant that the risks for local officials of an outbreak of cases in their regions was greater than reporting low GDP growth, said the magazine.
Once major lockdowns do come to an end, there will be a big uptick in demand as the millions of people previously unable to leave their homes start spending again. Restaurants and shops will surely be packed once more.
But, as discussed in my 20 May post when I provided scenarios for China’s ethylene equivalent demand in 2022, the extent of the post-lockdown rebound will depend on the nature of government stimulus.
“Supply-side” stimulus, involving tax breaks for companies, cheaper bank loans and growth in the property sector, faces the law of diminishing returns.
High debt levels and overcapacity in manufacturing and real estate have reduced the effectiveness of this type of stimulus. Most of the new stimulus measures announced so far this year have been supply side.
Where the “greater bang for the buck” might lie is on demand-side stimulus measures such as cash transfers to households and spending vouchers.
Hence, my three scenarios for China’s PP demand in 2022 in the above chart:
Scenario 1: Major lockdowns end by no later than Q3 and stimulus is mainly demand focused. Consumption increases by 2% over 2021.
Scenario 2: In line with what the January-April data suggest, growth is flat. This again involves major lockdowns ending by no later than Q3. But the upside is limited because stimulus remains largely supply focused.
Scenario 3: The lockdowns remain largely in place for the rest of this year, making the nature of stimulus academic and a big proportion of the economy remains frozen. Growth declines by 4%.
I again must stress that these are just my opinions only and don’t represent the kind of thorough scenario work that you must do to stress test your business. This type of scenario work is available from our consultants and analysts.
China’s PP net imports in 2022 may be as low as 200,000 tonnes
What is notable about our January-April 2022 production estimate is that, when annualised again, it suggests a full-year 2022 operating rate of 79%. This compares with the ICIS Supply & Demand Database estimate of a full year operating rate of 82%.
The lower January-April operating rate reflects the major operating rate cuts that have taken place in an attempt, so far unsuccessful, to return naphtha-based PP margins to positive territory.
Northeast Asian integrated variable cost margins have been mainly negative since mid-December 2021. During the week ending 20 May 2022, they were minus$117/tonne.
Using the first two of my three demand-growth scenarios from the first chart today, let us assume that 79% is the operating rate for the full-year 2022.
Demand growth of 2% would see net imports almost the same as last year at around 3.4m tonnes, but still so much lower than 2020 when they were 6.1m tonnes. Flat growth would see net imports fall to 2.8m tonnes.
Under Scenario 3, demand growth falls to minus-4% and operating rates average 82% as China raises its 2022 capacity by the scheduled 13%. Net imports fall to just 200,000 tonnes.
It might seem counterintuitive for China to run its plants harder when local demand is weaker.
But with the yuan weaker against the US dollar, operating rates may be pushed higher in order to boost export earnings. China’s new capacity is also very efficient as it comprises world-scale and very well integrated plants.
Conclusion: This could be a very different China
As always, I hope this is way too pessimistic. China may well confound the gloom, as it has done so many times in the past, with a rapid recovery later this year.
But you cannot hide from the risks. You must prepare for the risks that China’s economy is already in recession during a period when its PP self-sufficiency is sharply increasing.
We are potentially confronting a very different China to the one most of us have been familiar with throughout our working lives, where China’s PP demand growth has nearly always outstripped the world’s and where its imports have been bigger than any other region.
As I said, please do not hide from the risk. Plan for these downsides.