The above chart is a major wake-up call for anyone who still believes that China will continue to import ever-increasing volumes of major commodities such as polyethylene (PE). It suggests demand and import growth are now at much lower levels than in the past, and may even have begun to peak.
The chart shows cumulative volumes in January-February 2015 (red column), versus 2014 (green), based on trade data from Global Trade Information Services:
- China’s overall demand has fallen 4% versus last year, whilst domestic production has risen 9%
- As a result, imports have fallen 20%, hitting all major Regions
- The Middle East is down 21%, NE Asia down 10%, NAFTA down 61%, Europe down 31%, and SE Asia was flat
There are a number of key messages that jump out from the data.
One key issue is the continuing increase in China’s own production. This is in line with my discussion yesterday of Sinopec’s 2014 results, which confirmed once again that China’s refining and petrochemical industry operates without the need to make Western-style returns on its investment.
A second is that it confirms my concern last year that China’s PE imports were then being artificially inflated by the “collateral trade“. This was a development in China’s shadow banking system, whereby imports of commodities such as PE, copper and iron ore were used as collateral for lending into the property sector*.
A third is confirmation, if confirmation were still needed, that China is unlikely to be very interested in taking additional imports from the planned US expansions. Slowing demand growth, and rising domestic demand production, means that China simply doesn’t need to buy from the US any more.
Instead, it is clearly aiming to increase employment in relatively high-paying industries such as petrochemicals and polymers. This neatly compensates for the loss of jobs in low-margin activities such as plastic film processing, and means that China retains most of the value-added..
This is clearly a difficult message for US producers. But it is better to face reality today, that to commit large sums of money to build new capacity for which there is no market.
* As described last June in my joint note with Polarwide of Hong Kong, Here today and gone tomorrow, a simple guide to China’s world of trade finance