By John Richardson
WITH HEALTHCARE RESOURCES reportedly thinner on the ground in China’s poorer rural areas, the rates of COVID-19 infections and deaths could end up being higher in the countryside than in the big towns and cities.
If the rate is lower as you move westwards, further away from the richer coast, this may expose the rural population to greater risks.
Demographic differences could be a further problem. Rural China has an older population because of the mass migration of younger people to the coastal cities in search of jobs. Older people are obviously more vulnerable to Omicron.
But then there is population density to consider, obviously higher in the big cities, with infections increasing during the winter months as people huddle indoors out of the cold. The colder the temperatures during this winter, the greater the danger of the disease spreading as people spend more time indoors.
All the above merely, however, represents conjecture laid upon more conjecture from some of the discussions I had last week with polyolefin market participants.
Because of longstanding concerns over the quality of data coming out of China, making a call based on numbers is very difficult. This leaves us with conjecture.
We must therefore treat with caution predictions that China’s economy will return to normal in Q2 next year. Analysts at Macquarie Capital, quoted in this 15 December South China Morning Post (SCMP) article, are among those putting this view forward.
Even in the event of China adequately vaccinating enough over-60 and over-80-year-olds by the time Q2 comes around (vaccination rates among the elderly are said to be too low), preventing the healthcare system from being overwhelmed, we also need to consider the strength of China’s exports.
China’s industrial output last month rose by just 2.2% on annualised basis, the slowest increase since May this year. A Reuters poll of economists had predicted a 3.6% increase.
“While the virus outbreak has disrupted production in some parts of the country, we think most of the weakness is due to a drop in demand, especially from overseas,” said Julian Evans-Pritchard and Zichun Huang, China economists at Capital Economics, in the same SCMP article.
“China reported remarkably weak trade numbers for November, underscoring its lingering difficulties with the COVID-19 pandemic, as well as a slump in consumption of consumer goods hitting the US, the EU, and some rich markets in Asia,” wrote Trade Data Monitor in a 6 December article.
November exports fell 8.7% year-on-year to $296.1bn, the worst performance since February 2020, added the trade data analysis service.
Exports are worth some 20% of China’s GDP. While inflation may have peaked in the US, the impact of high interest rates on consumer spending seems likely to be at its most severe in 2023. EU inflation is higher than in the US because of the impact of the Russian invasion on food and energy costs.
Consumer spending will be the key thing to watch
“The Chinese government is shifting back to growth mode, as a rapid deterioration in economic conditions prompts alarmed officials to turn more of their focus to development after years of criticising cadres who gave priority to growth at the expense of social stability and fiscal prudence,” wrote the Wall Street Journal (WSJ) in a 15 December article.
Last month’s 16-point support package for the real-estate sector is one example of this policy pivot, as is re-examination of the regulatory clampdown on the technology and education sectors.
“One such move would allow ride-hailing company Didi Global Inc.’s mobile apps to be restored to domestic app stores, according to people familiar with the issue,” added the WSJ.
But if consumer confidence doesn’t recover, no amounts of new government stimulus or adjustments to regulations to favour privately-owned businesses are going to make any big difference.
If consumers distrust the official numbers for fatalities and infections, they are not going to start dipping into savings rates that have shot up this year.
If they are frightened of catching the virus, they are going to stay at home. “It’s like zero-COVID Version 2, a lot of people are self-isolating,” said a friend in Shanghai last week.
And what of the end of the “government put option”? The put option was that Beijing would never allow land and house prices to fall. The decline in house prices has slowed, but it seems very unlikely that investments in speculative real estate, so important for polyolefins demand, will be allowed to return to 2009-2021 levels.
So, watch like a hawk the consumer spending numbers along with the chemicals and polymers pricing spreads data. Sorry to be maniacal about this, but I cannot stress enough the value of comparing the differences between chemicals prices and feedstock costs.
What you can see above for high-density polyethylene (HDPE) injection grade applies to many other grades and types of polymers, and to liquid and gaseous chemicals.
Spreads, or differentials, between prices and feedstock costs have never been as low as they have been in 2022 since we started our price assessments. There are no exceptions across the dozens of chemicals and polymers I’ve looked at.
Chemicals and polymers are the building blocks or raw materials for all the manufacturing and service chains. If spreads are weak, it means demand downstream must be weak.
This tells us that there will have been no full recovery until spreads return to their long-term historic averages. In the case of HDPE injection grade, the 1990-2021 average annual spread was $495/tonne compared with just $211/tonne so far this year.
A wide range of scenarios is essential for 2023
When China does recover, pricing and demand will go “whoosh”.
But predicting with any certainty something as nebulous as a recovery in Chinese consumer confidence is quite simply impossible. If you also include all the variables relating to the global economy, the only sensible approach for estimating 2023 chemicals demand is a wide range of scenarios.
The starting point is this year where the annualised January-October data suggest a 1% decline in in full-year 2022 demand over 2021.
Scenario 1 for next year assumes that China successfully transitions from its zero-COVID policies. Consumer confidence comes roaring back. Demand grows by 4% year-on-year to a market of 17.6m tonnes.
Scenario 2 assumes that high infection rates and a lack of healthcare resources keep consumer confidence depressed but that the global economy recovers, supporting China’s exports. Growth is minus 2%, leaving demand at 6.6m tonnes.
The worst-case outcome is Scenario 3 where the impact of zero-COVID continues, and the global economy gets weaker. Consumption falls by 4% to 16.1m tonnes.
As usual, also see the slide below. The slide on net imports factors in these same three scenarios for demand in 2023 and two different operating rates for local HDPE plants.
China’s HDPE capacity is scheduled to increase by 13% next year over 2022 to around 15.5m tonnes/year.
The bigger the decline in China’s HDPE net imports, the greater the importance for the big exporters of selling in the other big net import markets. See the final chart below which estimates the size of these non-China net import markets in 2023.
Conclusion: Forecast, re-forecast and re-forecast again
Over the last few weeks, I’ve been supporting ICIS clients by compiling the data from my blog – along with other ICIS data points – to provide presentations on my outlook for global polyolefins in 2023. I’ve presented to four of the big global polyolefin producers.
But as soon as the ink was dry on these presentations, they were out of date, as will be the case with this post.
In the 25 years I’ve been analysing chemicals markets, I’ve never known a period of greater uncertainty. This requires constant data re-crunching, mountains of background reading and thinking (in my case, lots of long walks with my dogs) and numerous conversations with markets.
ICIS is here to support you in this essential work. For the details, contact me at firstname.lastname@example.org.