By John Richardson
ONCE people in the developing world start buying food wrapped in plastic packaging, they rarely switch back to food wrapped in paper, executives in the polyolefins industry keep telling us. They thus talk about a “base load” of permanent new demand as urbanisation increases across Asia, which is often accompanied by higher incomes.
But the chart above, detailing the growth of polyethylene (PE) demand in China is worth studying in the context of trying to separate this base load of permanent new demand from whatever unsustainable demand growth has been added by China’s $10 trillion worth of new lending in 2008-2013.
In the space of those five years, China added so much new lending that it was equivalent to all the financing within the entire US banking system. The difference is that this was just five years. It took the US 100 years to accumulate this same level of credit.
It stands to reason, therefore, that some of the additional PE demand must have been unsustainable- for example, in the form of fuel tanks made from high-density PE (HDPE) for all the autos sold between 2008-2012. During those years, car sales increased by 138% in China. Auto sales growth will have to go down because of bad debt and environmental reasons.
Or some of the unsustainable PE growth might have been in the form of the speculative trading, connected, for instance, to the “one way bet” on further appreciation of the Yuan. Slower lending via the highly speculative shadow banking system during the first two months of this year further underlines how Beijing plans to rid the economy of the speculation that it views as harmful.
Plus, what do higher blue-collar labour costs mean for PE demand growth in the future? It takes some 20 people to operate each production line that makes retail store plastic bags out of blends of linear low-density PE and low-density PE (LLDPE/LDPE).This kind of plastic bag production is often no longer viable in coastal China because of rising wages.
Low-value garment manufacturing is also struggling in China’s export-processing zones because it, too, is labour intensive. Garments are shipped out wrapped in plastic bags made from LLDPE/LDPE.
Will this lost coastal demand be fully replaced in China as plastic bag and garment factories move inland, to where labour costs are cheaper? Perhaps not because of logistics of air-freighting garments from, say, Sichuan province to overseas markets isn’t economically viable (Sichuan isn’t close enough to the coast to make shipments by sea a possibility).
Garment factories might instead increasingly move overseas to countries such as Vietnam and Cambodia where labour costs are lower.
Sure, domestic garment sales might eventually replace this lost export trade. But how long will this take?