By John Richardson
IF you think that progress towards tackling issues such as gender inequality in sub-Saharan Africa has nothing to do with forecasting chemicals and polymers demand growth, then you are going to face some severe difficulties over the next ten years.
Sub-Saharan Africa loses around $95bn a year due to gender inequality, jeopardising the continent’s efforts for economic growth, according to a new UN Development Programme report.
You will also face problems in your career if you think that other variables don’t matter, such as the speed with which the developing world is able to tackle the challenges of climate change, and access to sufficient potable water and infrastructure shortfalls. In the whole of Africa, for example, more than 600m people do not have access to electricity from a grid.
This kind of analysis matters today far more than it did in the past. The reason was that during the Economic Supercycle global demand growth was nearly always very strong. It thus didn’t really matter if in previous decades little or no progress was made towards tackling the problems of the developing world, as the West was in the midst of a one-off historical economic sweet spot. But now the Supercycle is over.
“Gender inequality? What on earth are you talking about?” You may still shrug your shoulders. But here is the thing. It has been proven to matter for economic growth in the US: Between 15% and 20% of growth of the country’s aggregate output over the last 50 years was the result of two factors – increasing numbers of women joining the workforce and ethnic minorities.
Just as the size of the US Babyboomer demographic cohort was a one-off, so was women joining the workforce. Both these sources of strong economic growth could be pretty much tapped out.
This makes what happens in the developing world tomorrow more important than in the past – i.e. its ability to tackle basic needs such as gender inequality, and lack of adequate education, drinkable water, sanitation, food and infrastructure etc.
You therefore need downside scenarios for Africa, and other developing regions of the world, which assume that all of these big challenges will not be adequately addressed over the next ten years.
Equally, though, you can help create an own upside scenario by active involvement in programmes to, say, tackle gender inequality in sub-Saharan Africa and improve the region’s fresh-water supply. The chemicals industry has to in future more actively manage its own demand. In the post-Supercycle world you cannot just sit back and expect demand to grow of its own accord.
There is another huge plus for the chemicals industry here: Being seen as part of the solution and not the problem. Like it or not, the global debate about climate change being human-made is over.
Unless chemicals companies convince the public and legislators that they are delivering major societal value, they risk legislation that could ultimately threaten their freedom to produce. And if you are seen as part of the problem, and not the solution, you run a greater risk of ethical investors dumping your shares.
Managing your own demand will also help you compensate for wider political social and economic uncertainty resulting from the end of the Economic Supercycle. As I have discussed before:
- The global consensus that free trade is good for the global economy is a thing of the past. You might thus find yourself with chemicals capacity in the wrong locations, behind major trade barriers.
- And more alarmingly, of course, currency wars (especially if China gets involved) and tit-for-tat new trade barriers could ultimately lead to a new Global Depression.
- Public anger over weak real economic growth – as opposed to what the financial markets are telling us – has created a political vacuum. Into that vacuum has stepped politicians who pose a challenge to geopolitical stability.
- China’s economic reform process is at risk of failure. This failure will happen if it cannot escape its middle-income trap.
- China could decide to continue to import large volumes of chemicals and polymers. Or it instead might move much closer to self-sufficiency.
- Even if it does decide to remain a major importer, imports may predominantly come from those countries and regions that are part of its One Belt, One Road initiative.
Every chemicals and polymers value chain is affected by these issues. To date I have looked at the implications for fibre intermediates, polypropylene, polyvinyl chloride and linear low-density polyethylene .
Now I am going to think through what this means for high-density polyethylene (HDPE), and will examine other value chains in future post.
Scenarios for HDPE
An excellent starting point for this discussion is our recently updated Supply & Demand database. The above charts show our base cases for the HDPE world in 2016 and 2026.
Our base case is that Africa’s HDPE consumption will grow from around 1.8m tonnes in 2016 to 3.3m tonnes in 2026.
For the reasons detailed above, you clearly need a downside scenario. It is incredibly hard to model the impact of factors such as climate change on Africa’s growth over the next decade.
It is equally possible that economic growth could be better than this – and the HDPE industry can play a major role in making this happen. For example, HDPE can be used to make irrigation, fresh water and natural-gas pipes. Partner governments and local communities, make these pipes low-enough in cost, and your company could be a major winner here.
Get involved in projects to get more women in the workforce, including support for better education for young girls. If gender gaps are closed in sub-Saharan labour markets, education and health, it will accelerate the eradication of poverty and hunger, adds the UN report I referred to at the beginning of this post.
What happens in China is absolutely critical to global HDPE supply and demand balances.
There is a strong and reasonable case to be made that Chinese economic reforms will work, and that its HDPE capacity additions will substantially slow down over the next decade.
China has big potential for more consumer-led growth. And at the just-concluded G20 summit, Xi Jinping announced plans to shut down 500m tonnes coal production. This might severely limit China’s ability to further expand HDPE capacity through the coal-to-olefins process, with very few new naphtha crackers being planned in China over the next decade.
We thus see China’s HDPE consumption growing from 11m tonnes in 2016 to 18m tonnes in 2026, as its deficit grows from 5m tonnes to 8m tonnes.
But what if economic reforms do indeed fail? No country the size of China has previously escaped the middle-income trap. And never has one country’s ability to do this mattered so much to the global economy.
What if, also, coal-to-olefins expansions are instead accelerated in order to keep some coal mines open?
Let’s assume, though, that are base case comes true. This still leaves the question of where China’s HDPE imports come from? Quite possibly from the countries and regions that are part of its One Belt, One Road initiative – and those countries and regions that refrain from imposing new trade restrictions on China.
The complications don’t end here, of course. What about the impact on HDPE demand of growing efforts to either ban or restrict the use of HDPE shopping bags as environmental concerns increase? In Europe, for instance, there are reports that low-density PE/LLDPE shopping bags are replacing HDPE bags, because bags made from these former two polymers can be re-used.
Confused? It’s a confusing world, which is why you need our help in modelling scenarios.