By John Richardson
Measured in US dollars, the price of US imports from China has risen just by 4% over the last ten years, but measured in Yuan, it has actually fallen by no less than 20% (see our above chart).
What does this tell us? It tells us that:
- China, following its accession to the World Trade Organisation in 2001, did what it had to do to create hundreds of millions of jobs for all its migrant workers.
- This meant that profitability was of far less importance than volume. The key was to seize market share in export markets in order to create these jobs.
- And then the priority was to maintain, and wherever possible add to, these jobs.
- It really didn’t matter, in this context, if Sinopec was losing money or if a plastics factory wasn’t even covering its variable costs.
The headline priority – maintaining employment for the sake of social stability – hasn’t changed. How could any set of leaders stay in power in China if employment wasn’t guaranteed? The very legitimacy of the Communist Party would also be challenged if mass unemployment happened.
China must, therefore, maintain unemployment, whilst pressing ahead with the boldest, most risky programme of domestic economic reforms for at least the last 20 years.
How will it achieve this incredibly difficult balancing act? By exporting the huge manufacturing surpluses that have been left over from its old, failed economic growth model. This is one of the biggest single reasons why we need to prepare for a prolonged period of global deflation.
The data already tells us that China is pursuing this course. For example:
• China imported 6.5m tonnes of purified terepthhalic acid (PTA) as recently as 2011, but this had fallen to just 2.76m tonnes in 2013.
• In January–September 2014, import volumes more than halved to less than 1m tonnes compared with the same period last year.
• China has also begun exporting PTA for the first time in its history, with 340,000 tonnes sent overseas in the year to September.
• If these trends were to continue, China would end up as a net PTA exporter by around this time next year.
A lot of people might say, “not to worry, this is just a temporary imbalance in PTA markets and reflects the mistake that China has made in building too much capacity too soon. In other petrochemicals they remain in deficit.”
But this entirely misses the point. Here is how events could play out in polyolefins – one of the industry segments where China is in big deficit:
- It decides not to become self-sufficient, or almost self-sufficient, by adding lots of capacity via the coal-to-olefins (CTO) route. The government instead thinks that there will be plenty of global supply to keep it happy over the next ten years or so.
- China will then welcome all the low-cost imports from North America, and also the Middle East with open arms.
- North America and the Middle East will at first be delighted because they will have no trouble in placing all their surplus volumes, as they hugely ramp-up capacity over the next decade.
- But what will be the price of these exports? In dollars per tonne, very cheap, I think, as China will remain the world’s most important export market and will, thus, retain the upper hand in all negotiations.
- And there is another price that North American polyolefins producers would, in particular, have to pay in return for gaining more market share in Asia: The increased volumes of resin that they export will end up returning to their home markets in the form of finished plastic products. This will, of course, damage sales in the big local North American polyolefins market.
- China will be happy, though, because it will have obtained lots of cheap raw materials that will help keep millions of people in work in plastics processing plants.
Alternatively, of course, China might decide that global polyolefins balances will not be in its favour unless it presses ahead with lots of CTO investments. In the end, though, how China gets there is academic, as the outcome will be the same for the global industry.
No criticism whatsoever of China is intended here, by the way. I think its leaders are absolutely right to follow this set of priorities. And I also think that, as the New Normal develops, more and more countries will start doing the same thing. Trade policies, industrial policies and economic policies in general are set to become much more regional.
But to return to our main point: Anyone who thinks that China will rationalise petrochemicals and other industrial capacity, based on a Western definition of economics, is whistling in the dark.