By John Richardson
GILLIAN TETT in Fool’s Gold, her fabulous book on the Global Financial Crisis, wrote that “silo thinking” was behind the collective failure to see the scale of the looming disaster.
The regulators worked in silos and were thus unable to see the big picture, as they were also hoodwinked the Masters of the Universe. The same silo behaviour applied to the buyers and sellers of credit derivatives, who spectacularly failed to see the wood for the trees. The river flowing through the wood was, of course, polluted by highly toxic debt. When the river burst its banks, the trees were almost completely submerged.
Several major petrochemical companies were close to bankruptcy in late 2008 and early 2009 because of the sudden collapse of petrochemical pricing happened, which left them with very high-cost feedstock inventories.
Ben Bernanke, the former Fed chair, argues that September and October of 2008 “was the worst financial crisis in global history, including the Great Depression”. But the global economy rapidly bounced back as we avoided a repeat of the long-run economic, social and geopolitical agony of the 1929-1939 Great Depression.
Sadly, we don’t seem to have learnt anything from Tett’s excellent analysis. “History never repeats itself, but it does often rhyme,” wrote the wonderful American writer, Mark Twain.
China’s demographic crisis
The petrochemicals industry operates in a silo largely containing experts in sector-specific economic drivers such as feedstock costs. Analysis of the wider macroeconomic, social, political and geopolitical context in which our industry operates is often outsourced to “experts” working in other silos.
Outsourcing worked perfectly well for most of the time from the early 1990s until late 2021 apart from, as mentioned, the brief problems created by the Global Financial Crisis. Late 2021 was when China’s “economic miracle” finally began to unwind.
A long time before consensus opinion swung towards an acceptance of the scale of China’s demographic crisis, the evidence was hiding in plain sight. We had to, for instance, look no further than World Bank data on China’s births per mother, which it has been publishing since the 1970s.
The above chart shows selected years, for ease of reading, of World Bank data for China’s births per woman between 1960 and 2021 and the Chinese government estimate of births per woman in 2022. Births per woman first fell below the population replacement rate of 2.1 in 1991 and have stayed there ever since.
We as yet don’t know what births per woman were in 2023. But The Guardian wrote in this article that last year’s “birthrate was the lowest ever recorded at 6.39 births per 1,000 people.”
A raft of policies had failed to encourage people to have more children or had not been properly implemented by local governments, which were suffering budget shortfalls after years of running the resource-intensive zero-Covid system, added the newspaper.
“People frequently cite the high costs of living in China – particularly in larger cities – as well as poor support for women in jobs, as reasons for not having children. Traditional gender roles and familial expectations have also contributed,” continued The Guardian.
Subscribers to the excellent ICIS Supply & Demand Database should have been able to track the remarkable growth in China’s share of global petrochemicals demand.
Using polypropylene (PP) as an example below (it is the same story in all the other products), China’s percentage share of global demand rose from 9% to 41% between 1992 and 2023 (I will discuss the significance of the 1992 starting point later on). Meanwhile, the percentage shares of other regions declined. For example, Europe’s share fell from 31% to 15%.
ICIS Supply & Demand Database subscribers have also long been able to combine our petrochemicals and econometrics sections to see how China’s petrochemicals demand has risen as a proportion of its shares of the global population. The chart below again uses PP as an example.
It is useful to divide the world into three mega regions – China, the Developing World ex-China and the Developed World – as these three regions have very different economic, social and geopolitical dynamics.
China’s share of global PP demand in 1992 was 9% versus 22% of the global population. But in 2023, its share of global PP demand was 41% versus a smaller share of the global population of 18%.
As soon as this trend became clear, this was the key question that should have been asked and answered in strategic planning sessions: Why has China started to punch above its weight in terms of demand versus its population?
Please see the answers below.
The above chart will be familiar to regular readers of the blog. It shows China’s rise in per capita or per person polymers consumption in general, in kilograms, from 1992 until 2022. ICIS Supply & Demand subscribers could again have produced charts like this many years ago.
The macro-economic context included in the above chart could have also been discussed in planning sessions.
This is where we get to the relevance of 1992 and the launch of major economic liberalisation following Deng Xiaoping’s Southern Tour.
Then came China’s admission to the World Trade Organisation (WTO) in late 2021. China still had a youthful population, meaning low manufacturing labour costs.
Admission removed the tariffs and quotas that had restricted China’s exports to the West. This triggered an export-driven economic boom in China as Walmart and Target stores were filled with cheap Chinese washing clothes, washing machines, fridges and TVs etc.
In 2009, China launched the world’s biggest-ever economic stimulus package to compensate for the Global Financial Crisis. This led to an explosion of domestic investment in manufacturing and real estate. Central and local government debt started to spiral to today’s unsustainable levels.
But in 2009, China had already started to age, according to a United Nations Population Fund report in that year, which quoted Chinese government statistics.
The World Bank data in today’s first chart, starting from way back in 1991, told us that the ageing of Chinese society was inevitable. As the investment bubble dragged on, this should have set alarm bells ringing in petrochemical boardrooms. Bells should have been ringing because of the basic laws of supply and demand.
Building ever-more factories when labour supply was tightening and ever-more condos when household formation was falling should have been a major cause for concern. The number of couples getting married fell by 50% from 13.5m in 2013 to 6.8m tonnes in 2022, according to China’s Ministry of Civil Affairs.
Instead of alarm bells ringing, it appears to me that slogans were a substitute for sensible economic analysis. External experts were believed when they said that the “rise of China’s middle class” guaranteed a continued economic boom.
This was despite many data points over the last 20 years telling us that China was nowhere close to becoming middle class by Western standards. Take as a recent example the Pew Research Centre ‘s estimate that there were just 23m Chinese citizens earning more than $50 a day in 2020.
Also consider the much earlier 2011 e-book, Boom, Gloom and the New Normal, by fellow ICIS blogger Paul Hodges and I, where we used the data to highlight China’s demographic and debt challenges.
“It takes 50 consecutive years of 7% annual growth for a country to boost per capita income from $500 to $20,000, says Nobel Prizewinning economist Michael Spence. China’s per capita GDP was only $4,382 at the end of 2010,” I wrote in Chapter Six of our Boom, Gloom and New Normal book.
The chart below repeats the trend line for China’s births per woman from the earlier slide with the added context of what’s happening in today’s Chinese economy.
China’s government estimates that the country will be short of 30m manufacturing workers by 2025.
Consumer spending growth is said to be falling on increased pension and healthcare savings rates. China’s pension and healthcare systems are weak by Western standards. Michael Pettis, a Peking University professor, warns that wealth transfers necessary to improve social safety nets will be politically difficult.
Returning to the Guardian article, which linked to above, the newspaper added: “The state-run Chinese Academy of Sciences has predicted the pension system in its current form will run out of money by 2035. By then the number of people in China above 60 years old – the national retirement age – will have increased from about 280m to 400m.”
China is struggling with the end of its property bubble as the demand for housing falls on fewer babies. Reinflating the real estate sector – which is worth some one-third of China’s GDP (the highest share on global economic history) – seems a major challenge.
Lack of confidence in China’s economic prospects has led to “lying flat” among young people – Chinese slang for rejection of societal pressures to overwork and over-achieve. This is dampening consumer spending, as high youth unemployment also undermines the “rise of the middle class”.
Implications for global PP capacity growth in 2024-2030
The above chart shows ICIS estimates of China’s PP demand growth in 1992- 2022, what I believe happened to consumption last year, and my forecasts for 2024-2030 growth.
I believe that demographics. along with China’s other economic challenges, will result in the country’s PP demand growth averaging just 2% in 2023-2030. This would compare with the 1990-2022 average of 12%!
Silo thinking and faith in the “growth of the middle class” led to overestimates of China PP and other petrochemicals demand growth in 2022 and 2023. Forecasts out to 2030 were also too bullish. This has resulted in way too much investment in new global capacity. Because China dominates global demand, it was therefore China’s prospects that were primarily used to justify projects.
As with my post on global ethylene, see the chart below showing what it would take to return global PP operating rates to their historically healthy levels.
ICIS estimates that global PP operating rates were at an annual average 87% In 1990-2023.
If we are to see a repeat of 87% in 2024-2030 (the green line in the chart) and assuming my forecast of 2% demand growth is correct:
- The increase in global capacity would need to average just 154,000 tonnes/year during each year between 2024 and 2030. This is versus our base case of 4.5m tonnes/year of annual increases. In other words, growth in global PP capacity would need to be 96% lower to achieve healthy operating rates!
- Even under our base case for China’s demand growth (an average of 4%), capacity increases would need to average 1.7m tonnes/year during each year to repeat the 87% operating rate.
The blue line in the chart shows what would happen at 2% demand growth and our base case estimates for global capacity: An average operating rate of only 72%.
As with global ethylene, big new superefficient projects in the Middle East and China would probably still go ahead in the event of much-lower overall PP capacity growth.
The lower capacity growth would likely be achieved through permanent closures of disadvantaged capacity in regions and countries such as Europe, Singapore, South Korea and Japan.
Conclusion: Moving forward
We cannot, unfortunately, change history. What’s done is done. But we can improve the strategic planning process by getting rid of silo thinking and bringing analysis of the big picture influences back inhouse, rather than continuing to outsource the analysis to the experts who told us about the rise of China’s middle class.
Beyond just demographics, we face the biggest changes in the big picture context for industry since the early 1990s. These include the rise of the petrochemical Supermajors or the alternative outcome of Deglobalisation, increasing sustainability pressures and the likelihood that by 2030, China will be pretty much completely petrochemicals self-sufficient (see the chart below).
Future blog posts will also consider the threats represented by “the end of the peace dividend” which lasted from the collapse of the Berlin Wall until very recently.
How will the conflicts in Ukraine, the Middle East and perhaps elsewhere effect the global economy, energy costs and petrochemicals trade flows? How might the rising costs of defence effect global growth?
I will also examine the issue of the sharp rise in global debts since 2008 during a period when eight out of ten of the world’s biggest economies are seeing their populations age.
We can only achieve the right strategies to deal with all these risks if we avoid silo thinking and bring big picture analysis back inhouse; otherwise, we risk repeating the kind of mistakes we made over China, making Mark Twain’s comment about history even more apposite.