China focuses on domestic PE production, ME/SEA imports

Chemical companies

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China PE Mar14China’s growth has been the main support for the global economy since the Crisis began in Q4 2008.  The slide above captures the extent of this in polyethylene (PE), one of the world’s largest chemical markets, based on data from China’s chemical association and Global Trade Information Services:

  • The total market grew 11% in the 3 years between 2005 – 2008, from 10.4MT to 11.5MT
  • It then grew 70% in the 5 years between 2008 – 2013, to reach 19.6MT

This is clearly a completely unsustainable level of growth for a mature product such as PE, invented back in 1933.

There is no need here to go through the reasons for this sudden development, as we know it has been due to the lending bubble.  The more interesting issue is to understand where we are today:

  • China is focused on increasing its own production, up 37% between 2005 – 2008, and a further 52% by 2013
  • Imports as a result fell 14% until 2008, but then rose 99% by 2013
  • Exports have expanded continuously, up 79% by 2008 and then a further 129% by 2013

Some investors with whom the blog talks find this business model very hard to understand.  They imagine that China’s communist government operates on the basis of cost curves and production economics.  But reality is much simpler – the government knows it will stay in power as long as long as living standards continue to increase.  Hence it expands domestic employment to create jobs, and reduces imports to a minimum.

It also takes a strategic view of the imports it does buy.  The sudden doubling of lending in 2009 meant it took product from everywhere, but since then it has become much more selective:

  • ME net imports have risen 131% since 2009 (red) due to the ‘energy for markets’ strategic corridor
  • Iran has been the big winner, with imports up 186%, whilst Saudi imports are up 92%
  • SEA has been the other region to benefit (orange) due to the Free Trade Agreement
  • Its net imports are up 49% since 2009, with Thailand up 199%

Critically important, however, is that all other regions have seen a decline in volumes since 2009:

  • NAFTA net imports (light blue) are down 62%, with US imports down 64%
  • NEA volumes are down 22% (green), with Taiwan down 17% and S Korea down 16%
  • The EU is down 16% (yellow), despite Germany’s HDPE exports rising in 2013 as it cut prices

These statistics seem to provide a fairly clear message about China’s market:

  • Its volumes jumped as it began the lending bubble
  • Since then, only the ME and SEA have managed to maintain their volumes
  • China’s own production has continued to expand, with more new plants being built

This raises two questions for the future.  The first is whether the lending bubble will continue?  The second is whether China will continue to focus on maximising its own production and on only importing selectively from favoured regions?

Neither of these questions give comfortable answers for current exporters, or for those planning to expand capacity.

The new leadership seems set on reducing lending and rebalancing the economy away from infrastructure spend and real estate.  It therefore seems likely that net imports will fall over the next few years, and that the focus for these will remain on strategic partners in ME/SEA.  At the same time, exports will probably continue to rise, despite the negative cost position, as the government seeks to maintain employment.

These answers may not fit with some current company strategies.  But the trends in the data seem clear.  The blog would certainly not therefore invest its own money in any PE expansions based on the potential for increased sales to China, no matter how large the cost advantage appeared to be.

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