By John Richardson
THERE IS NOTHING wrong in wishful thinking if it moves stock markets, provided you can get in and out before it becomes apparent that the thinking was wishful.
A case in point were two trading days last week when Hong Kong and Chinese mainland stocks soared on social media reports that China was preparing to re-open its economy through relaxation of the zero-COVID rules.
But as Bloomberg wrote in a 3 November article in Yahoo Finance: “Chinese stocks snapped a two-day rally sparked by reopening speculation, as the nation’s top health body reiterated its commitment to Covid Zero and the Federal Reserve’s hawkish comments led to a global sell-off.”
Stocks then recovered again on Friday last week on rumours that mainland China’s entry restrictions effecting Hong Kong would be relaxed and that international travel to China would become easier.
But China cannot relax the zero-COVID policies because of the reported limited effectiveness of local vaccines against coronavirus. The risk is that if zero-COVID was suddenly rolled back, China’s healthcare system could be overwhelmed.
This explains why I don’t buy the argument that the zero-COVID policies will be relaxed after the National People’s Congress next March – the annual meeting of China’s parliament.
If China produces its own versions of mRNA vaccines and adequately administers the vaccines, zero-COVID can be relaxed. But this seems likely to be some considerable time away.
Another option is that China imports mRNA vaccines. Reports that foreigners might be allowed to receive overseas vaccines were were another reason for last Friday’s stock markets rally. But this is not the same as a mass vaccination programme using overseas vaccines.
CNBC, in this 2 November article, highlighted just one aspect of the economic damage zero-COVID is causing to China.
“What we are hearing from companies is they are moving ahead with their supply chain diversification plans because this start-stop economy is here to stay,” Nick Marro, global trade leader at The Economist Intelligence Unit, was quoted as saying in the CNBC article.
Exports are worth some 20% of China’s GDP with another 29% accounted for by real estate. The real estate bubble has, I believe, burst for good because of the Common Prosperity economic reforms.
Real-estate wealth, concentrated in China’s 10 or so richest provinces, greatly accelerated chemicals and polymers demand growth between 2009 and 2021.
But now rates of chemicals demand growth will more accurately reflect a per capita income level in China which was just $12,556 in 2021, according to the World Bank. In comparison, the World Bank placed US per capita GDP at $69,287 in 2021.
China also confronts probably the world’s biggest-ever demographic challenge in the context of the importance of China’s economy to the rest of the world. China is in danger of becoming old before it is rich, leaving it struggling to pay for higher healthcare and pension costs.
Returning to the subject of the 20% of Chinese GDP accounted for by exports, the global inflation crisis looks set to continue in 2023.
“Jay Powell [chairman of the US Federal Reserve] warned US interest rates would peak at a higher level than expected even as he held out the possibility of the Federal Reserve slowing the pace of its campaign to tighten monetary policy,” wrote the Financial Times in this 3 November article.
Inflation is of course a threat to Chinese exports of manufactured goods and the consumption of the chemicals and polymers used to make the manufactured goods.
Scenarios for China’s HDPE demand in 2023
In this macroeconomic context and following my 31 October outlook for China’s polypropylene (PP) market, I will now turn my attention to high-density polyethylene (HDPE). Later posts will cover low-density PE (LDPE) and linear low-density PE (LLDPE) in order to complete the polyolefins picture.
Actual HDPE demand in 2021 fell by 4% over the previous year. The latest annualised data for 2022 (net imports plus local production for January-September divided by nine and multiplied by 12) suggest annual consumption will be in the region of 17m tonnes, 2% lower than last year.
This outlook for 2022 is a slight improvement on what was suggested by the January-August data – a 3% fall in demand. This is the result of a pick-up in imports in September over August on the idea that Chinese pricing had bottomed out, as we also saw with PP imports. I worry that this is not the case. But let us stick to minus 2% growth for this year as the basis for considering 2023.
Scenario One for 2023, my best-case outcome, assumes I am wrong and that the zero-COVID rules are relaxed. This outcome also factors in an improvement in global economic conditions.
I think there is a chance that some of the supply-chain pressures, including high container freight costs caused by the pandemic, will ease continue to ease . And the best fix for high oil prices is high oil prices. Demand destruction could bring the cost of oil down. This scenario sees China’s 2023 HDPE demand growth as flat over the previous year.
The worst-case outcome – Scenario Three – would see no relaxation of zero-COVID and a deterioration in global economic conditions on, say, more geopolitical problems that drive the cost of energy higher despite the demand destruction. HDPE demand would be 4% lower in 2023 compared with the previous year.
Scenarios for China’s net HDPE imports in 2023
Because of the rise in HDPE imports in September over August – and because of a month-on-month fall in China’s very small volumes of exports – the January-September numbers indicate that this year’s net imports will total 5.7m tonnes. This compares with the 5.6m tonnes indicated by the January-August data.
But 5.7m tonnes would still be 700,000 tonnes lower than last year. And 2021’s net imports were no less than 2.6m tonnes lower than in 2020.
Next year, some 1.8m tonnes/year of new HDPE capacity is due on-stream in China, according to ICIS. This would represent a 13% increase in capacity over 2022. This big jump in capacity combined with weak growth has led us to forecast an operating rate of just 77% in 2023 which would be the lowest since 2000.
Scenario One for 2023 net imports assumes flat demand growth over 2022, as in the previous chart, and the 77% operating rate. Net imports would fall to 4.8m tonnes.
Scenario Two assumes the same 77% operating rate and minus 2% growth. Net imports would slip to 4.4m tonnes.
My worst-case outcome – Scenario Three – involves the 4% decline in demand, again as in the earlier chart. But I assume an operating rate of 79% as China runs its plants harder than we expect in order to boost self-sufficiency. Exports would also increase to take advantage of continued Chinese yuan weakness versus the US dollar. Scenario Three would see net imports fall to 3.8m tonnes.
Conclusion: We are a long way from the bottom
As usual, there will be plenty of people out there who will see this analysis as too pessimistic. I hope they are right, but I am struggling to see why next year will be better than 2022. It feels to me as if we are long way from the bottom of this downcycle.
Good luck out there and stay safe and well.