When China catches a cold….

China’s apparent demand for styrene in 2018 looks set to have increased by just 2.5% over the previous year.

Apparent demand is net imports plus local production. Real demand is apparent demand adjusted for inventory distortions.

This would be the lowest percentage growth and the smallest addition of new demand in tonnes since 2012 and would compare with the ICIS Data and Analytics’ earlier estimate of real demand growth of 4.1%.

Moving downstream to styrene derivatives, styrene butadiene rubber (SBR) apparent demand looks as if it might have declined by as much as 11% in 2018 on a year-on-year basis.

We had expected positive real growth of 4.4%. An 11% decline would be the lowest growth since at least 2000 and would lead to a loss of 150,000 tonnes of consumption.

Acrylonitrile butadiene styrene (ABS) apparent consumption seems to have grown by 5% in 2018 – the lowest growth rate in both percentage terms and when measured in new tonnes of demand since 2013. This compares with our earlier estimate of a 7.9% rise in real demand.

Bucking the trend is polystyrene (PS) where apparent demand appears likely to have grown by 11%. This would be the highest growth since at least 2000, and would be well ahead of our estimated real growth of 3.6%.

Weak growth in styrene, SBR and ABS is explained by the slowdown in the growth of consumer spending.

Retail sales grew by 9.1% during the first 11 months of last year compared with the same period in 2017, according to the government’s National Bureau of Statistics (NBS). This would compare with full-year 2017 growth of 10.2%.

But nobody should believe the NBS because, as usual at times like this, the government is very probably underestimating the extent of the slowdown. Retail sales in January-November 2018 grew by only 4.1% when the decline in GDP (gross domestic product (growth is taken into account, the South China Morning Post calculates.

The main cause of weaker retail sales growth was the big fall in credit availability via the shadow-banking system. Last year’s monthly average shadow lending fell to pre-2009 levels, which was before China launched its huge post-Global Financial Crisis stimulus programme.

A secondary reason for weaker styrenics demand growth was the negative effect on the economy of the trade war. Some 180m of China’s jobs are dependent on exports.

Specifically, on one of the styrene derivatives mentioned above, SBR’s main downstream applications is auto tyres. The collapse in SBR demand largely reflects the contraction of auto sales in 2018, the first annual fall in sales since 1992.

ABS was also hit by the slowdown in auto sales as one of its end-use applications is auto components. A further factor was the slowdown in other durable goods sales including washing machines, which are again made from ABS.

General purpose PS (GPPS), which is used in applications such as packaging, benefited from the heavy restrictions that China introduced from January of last year on imports of scrap or recycled plastics for environmental reasons. This meant greater demand for virgin GPPS resins.

These same dynamics drove strong polyethylene demand growth in 2018.

ECONOMIC SLOWDOWN WILL INTENSIFY

China will be unable to stimulate the economy to the same extent as it did in 2009-2017 because of the extent of existing bad debts.

The economic slowdown will therefore intensify even if the US and China manage to reach an agreement and bring their trade war to an end.

Also consider that China’s total household debt was $6.58 trillion at the end of June 2018 – 50.3% of GDP (gross domestic product), according to the Bank for International Settlements.

This is still a long way behind 76.6% in the US. But Chinese household debt over GDP was just 18.6% in 2008. Such a rapid rate of increase suggests limited room for further increases.

Consumer sentiment will likely remain weak – especially if the trade war continues and if we see a global recession. And of course a global recession would act as a further drag on China’s economy. A global recession could occur this year or in 2020.

A sign of continued weak consumer sentiment was the official announcement that retail sales during this year’s Lunar New Year holidays grew at their slowest pace since 2005.

The number of births in China declined by two million last year, with total births at their lowest level for half a century.

This a clear sign that the end of the One Child Policy in 2016 has yet to boost birth rates. History demonstrates that once people get out of the habit of having large families, reversing this trend is incredibly difficult.

China’s working age population will continue to shrink as the number of retirees increases. Government healthcare and pension shortfalls will worsen. All of this will act as further dampeners on consumer spending as savings rates remain high.

In 2016, private companies received just 11% of new loans, down from 52% in 2012, according to economist Nicholas Lardy in his new book on China, The State Strikes Back. This is despite the private sector accounting for 60% of GDP growth. The majority of loans in 2016 went to state-owned enterprises (SOEs).

China is doing its best correct this imbalance. But limiting the rebalancing back will firstly be the need to keep control of shadow lending, with shadow lending the main source of funding for private companies.

Secondly, China’s president, Xi Jinping, favours strong central control of the economy. An effective way of achieving this is to maintain the increased role of SOEs in the economy.

One million tonnes of styrene demand is at risk.

DOWNSIDE

Now take a look at the chart. It shows our base case for styrene demand growth in China versus a guesstimate of a downside.

This downside takes into account 2018 apparent demand growth of 2.5% ending up as real growth. The expansion in real demand then falls to 1% in 2019 from our base case forecast of 3.5%. Growth in 2020 is at 2.5% over base case of 3.5%.

Cumulatively, from 2018 until 2020 this would mean 1m tonnes less new styrene demand in China compared with our base.

The Chinese economy isn’t going to collapse and growth will still happen. But styrene, like all other chemicals, is way too dependent on China

No less than 34% of total global styrene demand growth in 2019-2020 is forecast to be delivered by China. This would make China by far the biggest source of consumption growth. Northeast Asia ex-China is in second place at 18%.

China will account for 65% of global net imports in 2019-2020. Europe is in a very distant second place at 15%.

You can argue with the forecast numbers in this report. But what is not in dispute is that all the talk of the global economy being buoyed by the US Federal Reserve’s decision to pause on interest rates has little relevance to the chemicals industry.

All the data, no matter what product you examine, tells the same story of this extraordinary overreliance on China. Chemicals companies need to worry more about growth in China and less about what the Fed does or does not do.

And here is a rather painful truth to conclude with: every time Chinese chemicals demand catches even the mildest of colds, global chemicals demand develops a bad case of the flu. ■

Click here to listen to a podcast interview with John Richardson.