China’s rising exports: less about growth, more about exporting deflation

Economic growth

SHARE THIS STORY
China’s move towards self-sufficiency is radically changing global oil and petrochemical markets,as I describe in my latest post for the Financial Times, published on the BeyondBrics blog
Sinopec Mar16Markets used to cheer when China’s exports rose, believing this showed the global economy was in good shape. They are still hopeful today, despite the 25 per cent fall in February’s exports. But closer analysis of China’s important refining and petrochemical sector shows that a paradigm shift is under way.

No more is China’s economy based on importing raw materials and exporting low-cost manufactured goods. Instead, the focus is on using the new capacity built during the 2009–13 stimulus period to maintain employment and boost China’s self-sufficiency.This has two important consequences for companies and investors.

• It means that China’s status as a leading oil importer has decoupled from its domestic use, making judgements about oil market demand and its own economic outlook more complex.

• It also means that traditional exporters have lost their markets in China and are instead seeing Chinese exports enter already over-supplied Asian markets, causing margins to slide.

Diesel markets highlight some of the changes under way. China’s diesel consumption dropped 4% in 2015 as its economy slowed, but refiners were able to raise runs to 10.5m bbls/day by boosting exports. Diesel exports rose 75% versus 2014, whilst gasoline and jet fuel exports rose 16%.

Runs are expected to increase 5% in 2016 as China has doubled fuel-export quotas, leading to expectations of at least a 70% rise in diesel exports. In turn, this will pressure Asian refining margins, which are expected to average about a third less in 2016 at around $10/bbl.

Petrochemical markets are similarly changing direction, as China focuses on building self-sufficiency in critical areas. China used to be the world’s largest importer of PTA (terephthalic acid), the main raw material in polyester manufacture. But annual imports have collapsed from 6.5m tonnes to near zero over the past four years, as China’s own capacity has ramped up.

China was also the leading importer of PVC, but these volumes have similarly disappeared as domestic production has risen 39% since 2010, while China’s construction boom has ended. Other major petrochemical products seem set to follow the same path: polypropylene imports are already suffering as major new domestic capacity comes online.

These developments also highlight the key role of state owned enterprises (SOEs) such as Sinopec in supporting the change of direction. Sinopec is China’s largest refiner and petrochemical producer and, as the chart shows, it has invested $41bn (Rmb 288bn) since 1998 in capital expenditure for refining, and $33bn for chemicals. Over this period, it has lost $11bn at EBIT level in refining, and made just $15bn in chemicals. Overall, it has therefore invested $74bn in capex, for a combined EBIT of just $4bn.

Clearly no western company would ever dream of spending such large amounts of capital for so little reward. But as an SOE, Sinopec’s original mandate was to be a reliable supplier of raw materials to downstream factories, to maintain employment. More recently, the emphasis has changed to providing direct support to employment, through increased exports of refined products into Asian markets and increased self-sufficiency in petrochemicals.

We can expect this trend to continue during the new Five Year Plan for 2016–20. China’s main focus is now on its New Normal policies, which aim to create a more service-led economy based on the mobile internet. But it cannot allow its Old Normal economy, originally based on export-led growth and infrastructure spending, to disappear overnight. Sinopec therefore has a vital role to play in maintaining employment and wage growth in the urban areas.

These developments highlight the more complex investment world that we are entering as the Great Unwinding of policy stimulus continues.

Paul Hodges is chairman of International eChem and publisher of The pH Report.

PREVIOUS POST

US ethylene output rise warns of market share battles ahead

16/03/2016

China’s move towards self-sufficiency is radically changing global oil and...

Learn more
NEXT POST

Oil market speculators profit as central banks hand out free cash

21/03/2016

China’s move towards self-sufficiency is radically changing global oil and...

Learn more
More posts
US-China trade war confirms political risk is now a key factor for companies and the economy
12/05/2019

There are few real surprises in life, and President Trump’s decision to launch a full-scale tr...

Read
Uber’s $91bn IPO marks the top for today’s debt-fuelled stock markets
28/04/2019

Uber’s IPO next month is set to effectively “ring the bell” at the top of the post...

Read
The End of “Business as Usual”
21/04/2019

In my interview for Real Vision earlier this month, (where the world’s most successful invest...

Read
Most businesses were nowhere near Ready for Brexit last Friday – we mustn’t make the same mistake again
14/04/2019

Thank goodness for backbench MPs and the European Union. Without their efforts, the UK would by now ...

Read
Don’t get carried away by Beijing’s stimulus
07/04/2019

Residential construction work in Qingdao, China. Government stimulus is unlikely to deliver the econ...

Read
Businesses thrilled by Brexit uncertainty: “It’s exhilarating” says small business owner
01/04/2019

With the European Commission saying that a No Deal is now “likely“, small businesses acr...

Read
Ageing Perennials set to negate central bank stimulus as recession approaches
10/03/2019

The world’s best leading indicator for the global economy is still firmly signalling recession...

Read
BASF prepares its UK supply chain for Brexit
24/02/2019

BASF has been working with Ready for Brexit (the online platform I co-founded last year) as part of ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more