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India, climate change, demographics and polymers demand growth

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By John Richardson on 20-Apr-2023

By John Richardson

DEMOGRAPHICS ARE ECONOMIC destiny. This is something that Paul Hodges and I have been arguing since we published the ICIS-New Normal Consulting book, Boom, Gloom and the New Normal, in 2011.

But as evidence increases of the potential catastrophic economic, social and political implications of climate change (in the book we also highlighted the importance for the petrochemicals industry of sustainability), this is also clear: Climate change is also economic destiny.

While demographics and climate change are economic destiny as they are unavoidable megatrends, outcomes for economies, societies and companies are entirely up for grabs.

Economies, societies and the petrochemical industries in which they operate are not helpless actors confronting forces they can do nothing about. Far from it.

Take China as an example. It was good to see China’s strong export growth in March this year because this was partly the result of increased shipments of electric vehicles (EVs).

This is the type of industry China needs to focus on if it is going to compensate for rising labour costs resulting from its ageing population. Of course, China’s government knows this and has been heavily investing in higher-value industries since 2012.

And obviously EVs tick the environmental box.

India and its major climate challenges

Now let me focus on India, a country I plan to cover much more in the blog.

I will start here with its climate challenges before contrasting its demographics with those of China. India has the potential “demographic dividend” of a youthful population.

Some three-fourths of India’s workers work in heat-exposed jobs like construction and mining, wrote the BBC in this 19 April 2023 article.

“Workers are losing the ability to safely and efficiently work outside as the planet warms. It’s becoming too hot and humid for them to cool themselves enough when they generate a large amount of body heat when conducting heavy labour,” the BBC quoted climate researcher Luke Parsons of Duke University, North Carolina, as saying.

“Climate change is impacting India’s natural environment, economy and society with increased frequency and intensity. Heatwaves, floods, monsoons and declining groundwater reserves are some of the extreme challenges that India is facing today. Heatwave risks to wellbeing and GDP have been particularly costly,” wrote the Grantham Research Institute on Climate Change and the Environment in this 2 November 2022 article.

In 2022, up until April, 15 states in India struggled with the effects on health, agriculture and the availability of water from heatwaves, added the institute, which is part of the London School of Economics.

“Floods have cost India US$26.3 billion, with damages exceeding approximately 0.5% of its GDP. Several studies point to the devastating economic and social costs of climate-related damages in India due to climate inaction – which could total US$35 trillion over the next 50 years – with particular impacts in the health and agriculture sectors,” the article continued.

The increasing frequency of such disasters was being felt most by the local communities inhabiting India’s ‘climate frontiers’ – areas that are more susceptible to climate-related disasters. A climate-induced refugee crisis from bordering nations like Bangladesh and Pakistan was likely, while internal migration and losses to livelihoods were already occurring, the article added.

The institute said air pollution as another challenge, quoting a 2019 study that estimated annual losses to the Indian economy of $36bn from air pollution.

The same article highlighted what India is doing to tackle climate change, including protecting glaciers ad producing green cooking fuel as it aims to hit net zero by 2070. India plans to decouple GDP growth from rising emissions.

This, of course, just scratches the surface of the extent of India’s climate challenges and what its government and other agencies are doing to mitigate the challenges.

But the essential point here is this: As with demographics, petrochemical demand growth forecasters cannot ignore outcomes from climate change in India and every other country and region.

We must make sure we don’t sit in silos. Those who model demand need to involve views from a range of climate scientists and economists who assess the effects of climate change. Gone are the days when forecasting consumption largely involved assuming different multiples of petrochemicals demand growth over GDP.

And, anyway, on the theme of GDP growth, it can be argued that we must see lower GDP growth over the next 30 years (“less is more”) if we are to have any hope of limiting the rise in global temperatures to less than 1.5°C.

Others argue that it is just the composition of growth that needs to change rather than the levels of growth – more towards services and less manufacturing, and where manufacturing output happens it must be increasingly decarbonised.

Or there is the “catastrophe” school of thought. This holds that we have left too late. The negative impact of climate change will be so great that by about 2040, we will be at very low or even negative global GDP growth, it is argued.

Of course, the implications for petrochemicals go far, far beyond just how we forecast growth. For instance:

  • We need to be part of the solution and not the problem. We must go beyond just minimising carbon output in existing and new petrochemical plants.
  • We must also focus on the Materials Transition: How we make better use of petrochemicals and polymers to reduce carbon emissions in other industries such as construction and transportation.

The Materials Transition will require many billions of dollars of investment in R&D and in marketing – and will require much closer cooperation with other industries and with the regulators.

But, realistically, what other choices do we have? None whatsoever, in my opinion.

India and its demographic opportunities or challenges

“People under the age of 25 account for more than 40% of India’s population. In fact, there are so many Indians in this age group that roughly one-in-five people globally who are under the age of 25 live in India,” wrote the Pew Research Center in this 9 February 2023 article.

“Looking at India’s age distribution another way, the country’s median age is 28. By comparison, the median age is 38 in the United States and 39 in China,” said the same article.

Adults aged 65 and older comprised only 7% of India’s population compared with 14% in China and 18% in the US, said the Pew Center, quoting UN research.

The share of Indians who were 65 and older was likely to remain under 20% until 2063 and would not approach 30% until 2100, under the UN’s medium variant projections, said the Pew Research Center.

The chart below, from the World Bank, compares India’s births per woman with China’s.

While India’s births per woman have also been declining, its birth-rate was still much higher than in China between 1972 and 2020.

As labour costs continue to rise in China, and if geopolitical tensions with the West persist, India could be well-placed to take advantage of the China Plus One strategy over the next few decades: Manufacturers and retailers moving their outsourcing to other developing countries.

But this assumes that the export-focused growth that has powered China’s economy can be repeated in India, Bangladesh and Vietnam, etc, given lower demand in the West for manufactured goods because of the retirement of the Baby Boomers – a key theme of Boom, Gloom and the New Normal.

As Paul Hodges wrote in the 13 January 2023 issue of ICIS Chemical Business:

Back in 1950, the world was seeing a major increase in population as the Baby Boom began. This had a major impact on the economy. By the 1970s, the Boomers were settling down and having children. They created a massive increase in demand for housing, autos, electronics and other key elements of today’s consumer-based economy. The numbers confirm their impact. In the developed world, the number of these Wealth Creators aged 25-54 rose from 321m to peak at 520m by 2010.

But today, this core segment is in long-term decline. Instead, the ageing Boomers are joining the ranks of the Perennials 55+ generation. This is now the only growth segment of the population. They are lovely people, but they already own most of what they need. And their incomes usually reduce as they enter retirement.

And we must consider sustainability pressures on industries such as fast fashion. “Less is more” is becoming the new fashion, as is reshoring of manufacturing back to the West for sustainability and geopolitical reasons, as well as increased concerns over extended supply chains.

Combine the potential lack of export-focused jobs in India with the local damage from climate change and India risks failing to create enough jobs for all its young people.

The supposed demographic dividend of a youthful population might instead become demographic deficit of increasing economic, social and political unrest.

Or India may be able to create hundreds of millions of new jobs in sustainable local industries, and in so doing support the global transition to net zero.

Three scenarios for India’s polymers demand growth in 2023-2050

The above chart shows actual Indian growth in per capita consumption and in millions of tonnes for seven of the major synthetic resins between 1990 and 2022.

In 1990, per capita consumption was in the region of 1kg and with demand in millions of tonnes at around 1m tonnes. In 2022, per capita consumption had reached some 15kgs with demand in millions of tonnes at around 21m tonnes.

Here are three scenarios, based on the impact of climate change and demographics, on Indian growth for the same seven polymers between 2023-2050.

And here are the same three per capita outcomes translated into millions of tonnes with summaries of the headline economic outcomes under each scenario.

Note that the Base Case in the above charts is the Base case in the excellent ICIS Supply & Demand Database.

The differences in cumulative demand would be huge: Under the Upside, India’s 2023-2024 consumption would total 1.8bn tonnes, under the Base Case it would reach 1.4bn tonnes and under the Downside it would be at 975m tonnes.

Conclusion: As always, these are not proper scenarios

What you have just read should not be taken as proper scenarios but should instead be viewed as guesstimates to get the discussion going. For proper scenarios, contact me at john.richardson@icis.com and I will put you in touch with our consulting team.

ICIS is integrating all the above themes into how we assess long-term demand – and supply as well, of course. We realise that the old ways of doing things no longer work.

I must stress again that while demographics and climate change are reshaping our industry, and so in this respect are destiny, we can and must influence the outcomes from these two megatrends.

This means a new approach for the petrochemicals industry that needs to be centred on reducing carbon in the atmosphere rather than just making less carbon in old and new plants.

In other words, this is the Materials Transition combined with effective strategies to deal with the separate challenge of plastic waste.

This is again where ICIS can support you in building these new strategies.