Home Blogs Asian Chemical Connections Global chemicals face negative growth on inflation, more logistics problems and a deep China downturn

Global chemicals face negative growth on inflation, more logistics problems and a deep China downturn

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By John Richardson on 03-May-2022

By John Richardson

SUPPLY-CHAIN problems continue to disrupt the global chemicals and polymer industries more than two years since the pandemic began.

Right now, the centre of attention of supply-chain anxiety is China. The accepted wisdom is that the country’s Zero-COVID policies will not be substantially relaxed before an important political meeting in November when Xi Jinping, China’s president, is expected to be given a third term in office.

“Ships are clogging up the waters off Shanghai. Average waiting times for container ships there have tripled,” said Joerg Wuttke, President of the EU Chamber of Commerce in China, in an April interview with The Market on the impact of the Zero-COVID policies.

He added that some ships were being diverted to Ningbo or Shenzhen, but these ports were not big enough to replace Shanghai.

“The ships coming into Europe today left Shanghai before the lockdown. Only in May and June will we see where the electronic equipment, the machine parts, the pharmaceutical precursors and components are missing. That will then lead to further shortages in the global supply chains,” he added.

Operations at Shanghai’s container port, the world’s biggest, are being disrupted by a shortage of truck drivers, who, because of coronavirus restrictions, are unable to make deliveries.

Nationwide freight volumes were reported to be down 15% in April on a year-on-year basis. Restrictions in one province or city are having ripple effects across the country, making movements of components to manufacturers in regions unaffected by the lockdowns very difficult.

This has led to efforts to relocate manufacturing to countries such as Indonesia, Malaysia and the Philippines. But because China remains the workshop of the world, fully rebalancing manufacturing away from China would take many years.

Inflation is also at levels that we haven’t seen since the 1970s. Even if supply is available of durable, non-essential goods made from chemicals and polymers (most finished goods are of course made in China), demand may well collapse because of rising costs. Or the collapse may have already started.

A “global buyers’ strike” and China year-long recession

“A recent report by Currency Research Associates, a US-based financial strategy firm, identified strong anecdotal evidence that a ‘global ‘buying strike’ is emerging, as consumers around the world begin to cut back their spending on anything they don’t absolutely need, wrote Rana Forhoorar, the Financial Times columnist in this article.

Not surprisingly, the strongest evidence so far of a buying strike is in the developing world where food and fuel shortages and depreciating currencies have eaten into discretionary spending. And as many millions more people are exposed to extreme poverty across the region, even demand for single-use polymers used to wrap food will likely decline.

Rana warned that discretionary spending may also take a hit in the rich world owing to, for example, the 60% of Americans who live from pay cheque to pay cheque. US inflation is at 40-year with household incomes, adjusted for rising prices, falling at their the quickest since data collection began in 1959.

This raises doubts over how demand will be in the West during the summer. Despite relaxed coronavirus restrictions, we may not see the anticipated boom in holiday travel. This would have negative implications for consumption of chemicals and polymers in airports, planes, hotels and restaurants.

A buyers’ strike might therefore not only affect the chemicals and polymers used to make big ticket items such as autos, computers and white goods, but also the single-use polymers used for packaging food. This may occur during a period when single-use demand for hygiene applications declines as we move into the endemic phase of the pandemic.

And back to China. We need to worry about local demand for chemicals and polymers in what is the world’s biggest consuming region. The economy can only truly function when the Zero-COVID restrictions are largely lifted, no matter what the volume of government stimulus.

Local and overseas private investment in China appears to have largely come to a halt. Entrepreneurs across China are said to be worried that the scale of the lockdowns that are happening in Shanghai could be repeated in their province or city.

Officially, everything seemed fine in Q1 as China’s GDP growth was reported to be 4.8%. But all official data needs to be treated with caution, and, anyway, for most of Q1 there was no Ukraine-Russia conflict, and the lockdown measures were less severe than they are now.

Craig Botham of Pantheon Macroeconomics estimated that the Chinese economy shrank by 0.5 percentage points in Q1 and would contract by another 0.6 percentage points in the second quarter, meaning it was already in recession, said the UK’s Daily Telegraph in this article.

As I said earlier, the accepted wisdom is that the country’s Zero-COVID policies will not be substantially relaxed before an important political meeting in November when Xi Jinping, China’s president, is expected to be given a third term in office. In other words, China could be in recession for the rest of this year.

Q1 2022 could be as good as it gets

The 2022 first-quarter results for global chemicals and polymers companies were very good, wrote my colleague Nigel Davis in this ICIS Insight article. In the case of LyondellBasell, it saw its best Q1 results since 2015.

“The major chemical producers are fairly upbeat about the next few months while acknowledging how pressured margins have been in Asia and the clear threats from Russia’s war in Ukraine, congested logistics and rising inflation,” wrote Nigel.

“Companies say they have been successful at passing higher costs downstream, but this remains a fluid situation that can meet resistance from inflation or otherwise-led demand destruction,” he added.

I worry that Q1 2022 could be as good as it gets this year as we head for a global contraction in demand.

At a very basic level, without considering any of the logistics and inflation factors detailed above, the World Trade Organization revised-down its forecast for 2022 global GDP growth on 12 April to 2.8% from 4.1%. Before the Ukraine-Russia crisis, 2022 forecasts were in the region of 5%

Between 2007 and 2008, as the Global Financial Crisis occurred, global GDP growth fell from 6% to 3%, according to the IMF. In 2008, global ethylene, propylene and benzene demand contracted by 5%

So, if this 5% decline were to be repeated this year, we would see the Downside happen in the chart below. Global demand would be 29m tonnes lower than the ICIS base case.

Conclusion: regional pockets of strength versus a negative global outlook

As I said, the above chart is very basic. Estimating demand has become much more difficult than linking chemicals growth to GDP.

For example, I see grounds for reasonable optimism in some areas of demand for single-use packaging in developed markers, even if we see a disappointing summer travel season.

I believe single-use polymers demand in Europe is likely to be resilient enough – when combined with reduced production due to reduced supply of Russian oil, naphtha and natural gas – to result in higher-than-expected imports of polyethylene (PE), polypropylene (PP) and other resins.

This will go some way to addressing oversupply in other markers, most notably China, where, as I said, demand is weak and substantial amounts of new capacity are being added.

And we cannot rule out the possibly of niche local markets that benefit, as well as suffer from, logistics constraints. If say, a local assembly industry suffers from a lack of electronic equipment from China, the same Zero-COVID-related container freight disruptions could limit competition from polymer imports.

But still, there seems no escaping the reality of the problems our industry faces during of the rest of this year. There are more downsides than upsides with a very real risk that a global economic recession coincides with a global recession in chemicals demand.