By John Richardson
CONSENSUS OPINION is gradually falling into line with the warnings that fellow blogger Paul Hodges and I have been making for the last 12 years.
Sure, timing is rather important and nobody – including Paul and I, of course – had any idea how long China’s “economic miracle” would last.
Now let me give you the context behind our thinking, starting with the chart below and using polypropylene (PP) throughout this post as an example.
The chart shows the divergence between PP per capita demand growth in China versus the rest of the developing world.
In 1990, both China and the rest of the developing world had per capita consumption in the region of 1kg. In 2022, China’s per capita consumption was 22kg versus just 5kg in the rest of the developing world.
Let’s now put this into the context of millions of tonnes of demand versus populations.
China’s demand generated by 1.45bn people was 34.6m tonnes in 2022. The rest of the developing world with a population of 51.6bn people created demand of only 27.6m tonnes.
Three “one-off” historic events
I believe there were three “one-off” historic events that led to China breaking away from the rest of the developing world.
First was Deng Xiaoping’s Southern Tour in 1992. This led to economic reforms, the economy opening up and a boom in export-focused economic growth.
Th reforms have obviously long been completed and the jury is out over whether future economic reforms will enable China to escape its middle-income trap.
The post-1992 export-driven boom was also the result of extremely favourable demographics. Births per mother peaked at 7.5 in 1963 and by the 1990s, this huge cohort of young people were part of the workforce.
Hundreds of millions of young people were willing to move from the countryside to the cities to work in export-focused manufacturing plants for low wages.
Then whoosh, China’s export-driven economic growth was turbocharged by admission to the World Trade Organisation, which removed the tariffs and quotas that had restricted China’s exports to the West.
Meanwhile, the consequences of the trend line in the chart below were becoming apparent. After the 1963 peak, births per mother began to decline because of the One Child Policy.
But the gradual negative impact of an ageing population was more than compensated for by China’s giant economic stimulus package that ran from 2009 until 2021.
The main consequence of “sub-prime on steroids” was growth in the importance of real estate to GDP. The sector is now worth some 29% of GDP.
China’s birth rate per woman fell to just 1.2 in 2022, well below the population replacement rate of 2.1. The overall population also shrank in size in 2022 for the first time in 70 years.
Household formation is declining due to the ageing population and an alarmingly unbalanced male-to-female birth ratio.
This means that an attempt to reinflate the deflated property bubble would likely have a limited effect because demand for housing is declining.
Diminishing returns and “bridges to nowhere”
Another reason why the property bubble cannot be re-inflated is China’s worryingly high levels of bad debt.
“Beijing’s fiscal stimulus after the financial crisis played a key role in maintaining global demand, particularly for commodities but also for German manufacturing and European luxury goods. Much of it went into real estate and infrastructure, the country’s massive go-to growth sector,” wrote Kenneth Rogoff in this 18 March Financial Times article.
“Today, however, after years of building at breakneck speed, China is running into the same kinds of diminishing returns as Japan began to experience in the late 1980s (the famous ‘bridges to nowhere’) and the former Soviet Union saw in the late 1960s,” added Rogoff, a professor of economics and public policy at Harvard University and former chief economist at the IMF.
He said that over-centralisation of decision-making, bad demographics and creeping de-globalisation meant that China would play a diminishing role in driving global economic growth. Hear, hear.
For some more context about the events in China between 1990 and 2022 consider the chart below. What applies to PP applies to all the other petrochemicals and polymers.
Developed world demand in millions of tonnes in 2022 (1.14bn people) was 22.6m tonnes. The region’s average per capita income was $48,000.
China’s PP demand from 1.4bn people was, as mentioned earlier at 34.6m tonnes in 2022. But the country’s per capita income was just $13,000.
China’s low per capita income versus the developed world compared with Chin’s much higher PP demand in millions of tonnes (the populations are similar) underline the importance of China’s one-off historic events.
Consensus opinion has long been that China’s percentage demand growth would slow down, But it is though that this won’t matter because of the huge growth in the size of its markets.
Let me provide a statistical illustration of this point.
In 1990, China’s PP demand was in the region 0.7m tonnes, according to the ICIS Supply & Demand Database.
The following year it rose to some 1.2m tones, an 89% increase when you look at the exact numbers – a gain of around 0.6m tonnes.
In 2023 over 2022, the ICIS base case forecast is for 6% growth to a market of around 36.7m. This would involve an increase in demand of approximately 2.1m tonnes.
But I argue that, as the last chart tells us, China’s petrochemicals demand has grown by too much relative to its wealth. A fall in consumption rather than just a decline in growth could therefore take place.
The chart below shows the ICIS base case for China’s PP per capita demand growth in 2023-2040, which is an average of 3% per year, versus my downside of flat growth – and declining growth from 2030 onwards.
The base case would see China’s per capita demand reach 43kg in 2040 with the downside at 25kg.
The next chart converts these two per capita scenarios into millions of tonnes of demand by multiplying per capita consumption by the population.
“You see, you are just far too pessimistic”
Before I finish with what I see as the real difference between pessimism and optimism, a contact said to me last week, “you see, you are just far too pessimistic,” after I’d presented these views.
While he accepted that China’s PP demand growth might indeed turn negative, he was optimistic about growth in other regions. This inspired me to build upside scenarios for the other regions.
The upside in the above chart assumes 5% annual average PP per capita demand growth in the rest of the developing world between 2023 and 2024. This compares with our base case of 3%.
The upside is based on export-focused manufacturing continuing to drift from China to lower labour cost locations such as Vietnam, Mexico, India, Bangladesh and Indonesia.
The stronger growth outcome also assumes that sustainability pressures, ageing populations and re-shoring don’t lead to a decline in exports from the developing to the rich world.
Under the upside, per capita consumption would be at 13kg in 2040 versus the ICIS base case of 9kgs.
Let us again translate these outcomes into millions of tonnes.
I then doubled per capita demand growth in the developed world to an average of 2% per annum compared with our base case of 1%.
The upside assumes that PP demand is supported by the growth of electric vehicles as PP is used to manufacture batteries. The green transformation in general many to an economic and thereby stronger-than- expected PP demand growth.
This could more than cancel out the negative impact on consumption of sustainability pressures. T
The upside would see per capita consumption at 30kg in 2040 versus the base case of 24kg.
The chart below once again translates these outcomes into millions of tonnes.
As today’s final slide tells you, even under these extremely unlikely upsides for growth elsewhere, the net effect would be a 2023-2040 global market 33m tonnes smaller than the ICIS base case.
I see it as much more likely that weaker economic and therefore petrochemicals demand growth in China would have a negative effect on the rest of the world, because of the world’s economic dependence on China.
And as comments on the upside scenarios hint at, I see ageing populations and sustainability as negatives for petrochemicals growth, particularly in the developed world.
Both these factors are also a threat to the export-focused growth models of countries such as Vietnam, Bangladesh and Indonesia. So is reshoring.
A cause for genuine optimism
If China’s petrochemicals demand growth does go negative over the next 20 years with no compensating pick-up in the other regions, I see this as grounds for genuine optimism.
This would be a great result as it would force petrochemicals companies to focus on value rather than volume growth. “Value growth” would be centred on tackling the carbon and plastic waste challenges.
Surely, this is a better outcome than the world choking on yet more uncollected plastic waste as climate change accelerates.