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Why the rest of the developing world cannot follow in China’s growth footsteps

China, Europe, India, Indonesia, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Singapore, South Korea, Taiwan, Thailand, US
By John Richardson on 09-Nov-2023

In the fourth in my series of blogs on the New Petrochemicals Landscape (see the Executive Summary here), I discuss why we need to challenge the idea that petrochemicals growth in the developing world outside China is set to boom over the next 20 years. The challenges to this idea are the results of climate change, ageing populations and sustainability.

 By John Richardson

GEOGRAPHY AND the quality of a country’s institutions – its norms and rules – are said by economists to be the two major factors determining economic development.

In this excellent January 2023 paper by Laurence Chandy, Principal Advisor for Economics at UNICEF, written for the Carnegie Endowment for International Peace, he argues that the weight of influence has swung more towards geography because of climate change.

“Temperature has been found to affect income via agricultural yields, the physical and cognitive performance of workers, demand for energy, as well as the incidence of crime, unrest, and conflict,” wrote Chandy.

He added that in the second half of the 20th century, an average temperature rise of 1°C in a given country and year caused per capita income to fall by an average of 1.4%.

“Critically, the effect persisted once the temperature shock was over, thus affecting a country’s economic performance over time,” he said.

Global warming promises greater productivity for countries with lower temperatures that are predominantly in the rich north. But in the poorer south, where temperatures are higher, there’s the risk of the reverse happening.

The chart below, published in the paper, shows the impact on economic growth in percentage point terms of a 1% rise in average global temperatures.

Food insecurity accelerates because of climate change

Increased droughts and floods are also, of course, two of the other results of climate change. Developed economies are less vulnerable to what Chandy says are these “episodic” interruptions to steady growth patterns because they have better access to technology than developing economies.

“If climate change augurs a world of more frequent and intense shocks, sustained episodes of fast economic growth – so-called growth miracles – will become harder to pull off,” said Chandy.

“The result will be fewer poor countries succeeding in converging on rich country income levels compared to a world without climate change.”

He argued that the prospects for economic convergence had further been dimmed by weak institutions in the poorest countries. Institutional weakness was linked with deeper growth decelerations, implying that poor countries faced a harder path to recovery following episodic climate change shocks, he added.

The next chart, from the same study, should give us all cause for concern.

As you can see, the percentages of the world’s population living in extreme poverty, defined as living on under $2.15 a day, has fallen very steeply since 2014. But the percentages of those facing food insecurity – and these people mainly live in the poorer countries – has increased.

“The number of people suffering acute food insecurity increased from 135m in 2019 to 345m in 82 countries by June 2022, as the war in Ukraine, supply chain disruptions, and the continued economic fallout of the COVID-19 pandemic pushed food prices to all-time highs,” wrote the World Bank in an October 2022 report.

But the World Bank added that global food insecurity had already been rising due in large part to climate phenomena. Global warming was influencing weather patterns, causing heat waves, heavy rainfall, and droughts, said the bank.

Chandy, however, added that the longer-term possibility of abundant renewable energy was a source of hope. But this depended on sufficient investment and technology moving to the developing world.

The green revolution might create losers among the 21 economies, many of them developing, that are heavily dependent on fossil fuels for their exports.

As I discussed in the second part of my series on the New Petrochemicals Landscape, Saudi Arabia should be fine. Saudi Aramco looks set to turn a lot more of its crude oil into chemicals to compensate for the decline in demand for gasoline due to the electrification of transport.

But for the developing economies with weaker economic heft, the energy transition will surely be a lot more painful.

Only a few years ago, major economic disruption from climate change felt as if it was a long time away. But evidence has since accumulated that the changes to our climate are accelerating.

Keeping global temperature increases below 1.5°C since the pre-industrial era seems to be beyond us because the carbon budget is rapidly running out.

“The world’s available carbon budget is running out faster than scientists expected, meaning that average global warming could routinely exceed 1.5°C by 2029 rather than the mid-2030s, warns a new study published yesterday in the journal Nature Climate Change,” wrote The Energy Mix in a 30 October article.

In the old world, petrochemicals and polymers demand growth in the developing world was always pretty much constant and strong because of the “income threshold effect”.

Imagine, say, in 2010 that another 10m people in east Africa had moved from earning $5-10 a day to $10-15 a day. This would have allowed many more people to buy their first motor scooter and refrigerator, made of course from petrochemicals.

But climate change challenges the Old Normal with major implications for global petrochemicals growth.

Why a repeat of China’s export-led petrochemicals demand growth is impossible

China’s “economic miracle” wasn’t really a miracle at all. Instead, it was the result of the happy coincidence of the Baby Boomers in the west, ample credit that allowed the Baby Boomers to buy lots of Chinese imports, and a youthful population in China.

China’s youthful population meant that it could very competitively make manufactured goods for export to the west.

Exports were turbocharged in 2001 when China gained admission to the World Trade Organisation (WTO). At that time, the Baby Boomers – the youngest and richest demographic cohort in history – was at the height of it spending powers.

The chart below, using polypropylene (PP) as an example, reminds us of the impact on global consumption of three historic events.

Deng Xiaoping’s 1992 Southern Tour introduced economic liberalisation that kicked-off China’s first phase of export-led economic growth. Then, as mentioned, China joined the WTO and export-driven growth accelerated.

By 2009, China’s population was already ageing. In that year, the world’s biggest-ever economic stimulus package was launched which led to an ultimately unsustainable debt bubble.

The debt bubble has now burst as China’s population rapidly ages. This means China’s rapid petrochemicals demand growth in the last 30 years is a thing of the past.

The chart below shows China consuming a volume of PP in 1992 that reflected the size of its population and its per capita wealth.

Not so in 2022. China’s per capita income was just $13,000 and yet it consumed more than the Developed World which had a per capita income of $48,000. And as the chart below shows, China consumed more than the Developing World ex-China, even though the latter had a much bigger population.

It now seems to be commonly accepted that China’s long-term petrochemicals demand growth will be closer to 1-3% compared with the previously forecast 6-8%.

The hope is that the Developing World ex-China will make up for this missing growth because the region’s youthful population will allow it to replace China as the low-cost exporter to the world.

But this theory fails to consider the chart below, from New Normal Consulting and based on UN Population Division data.

The Wealth Creator 25-54 generation dominated consumer markets as they entered the workforce and settled down. They were the largest and wealthiest generation ever seen.

But now the youngest Boomer is joining the Perennials 55+ generation while the number of Wealth Creators plateaus. The Perennials already own most of what they need, and their incomes reduce as they enter retirement.

The Perennials have now replaced the Wealth Creators as the main source of population growth in the world. They are also the main source of population growth in the world’s top 10 economies (70% of global GDP).

They are also the main source of population growth in nine of the top 10 – only India is the exception.

They no longer need more “stuff”, but instead are focused on “doing more with less” because of both reduced incomes as more people live on pensions – and because of increasing sustainability concerns.

The data also tell us that in the US, the world’s biggest consumer economy, spending declines as people get older. The same surely applies to other ageing countries.

There seems to be no path by which the Developing World e-China can follow China’s export-led economic growth of 1992-2022.

Two scenarios for global PP demand in 2023-2040

The ICIS Supply & Demand Database estimates that the Developed World’s PP demand grew by an annual average of 1.1% in 2000-2022. Consumption in the Developing World ex-China grew at 6.6%, with China growing at 10.1%.

Between 2023 and 2040, we forecast that the Developed World’s demand will accelerate slightly to 1.2% per year as the Developing World ex-China slows down to 4.2%. We see China’s growth at 3.1%, the result of a deceleration of annual growth to 2% towards the end of the forecast period from 5% to 4% the next four years.

These outcomes are measured in terms of cumulative 2023-2040 PP demand in the bar on the left-hand side of the chart below.

The right-side bar assumes that sustainability pressures and ageing populations reduce 2023-2040 developed world growth to 0.5%. Developing World ex-China growth is just 3.2% on the climate change and green transition effects. China, because of its debt and demographic issues, grows at 1.5%.

The net result under the downside scenario would be a global market some 300m tonnes smaller in 2023-2040 than under the base case.

Conclusion: Should we even be thinking about growth?

Is economic growth even compatible with a sustainable environment? Should we instead accept that economies can only thrive if the focus is on the quality rather than the quantity of economic output?

I worry that very weak to declining GDP growth and petrochemicals growth could happen in any event.

This may either be the result of climate change that runs out of control or because we enable economies to thrive and in so doing tackle the climate change challenges by doing more with less.

Whatever the outcome, we need to get away from the idea that all’s right with the world.

Fundamental and permanent changes are taking place because of the New Petrochemicals Landscape. These changes require very different business models.