By John Richardson
HERE is one of the many charts out there which show the awesome growth in chemicals and polymer consumption in China since 2000.
In this case, as you can, see the product is polypropylene (PP), where consumption has risen from around 4.5m tonnes in 2000 to approximately 18m tonnes in 2013. No other PP market anywhere else in the world can come anywhere close to matching this extraordinary increase in growth.
Volumes rose by a fantastic 83% from, as I said, around 4.5m tonnes in 2000 to approximately 8.4m tonnes in 2005.
But the growth between 2005 and 2013 was even more spectacular – a quite jaw dropping 113%. If you do the same analysis for any other chemicals or polymer, you will end up with very similar results.
This tells us that China’s economy went through two phases of development between 2000 and 2013, which were as follows:
- The export-driven growth phase following China’s accession to the World Trade Organisation in 2001. The resulting lowering of trade barriers, oodles of ample of credit in the West and favourable demographics all combined to result in China gaining hugely from increased sales of exports of finished goods. These finished goods were made from imported and domestically produced chemicals and polymers.
- The 2009-2013 period when lost export growth was replaced by local economic stimulus. China pumped around $10 trillion into its economy to compensate for the slump in overseas trade caused both by the global financial crisis and ageing Babyboomers in the West. This dwarfed the $3.5 trillion that the Fed spent on stimulus during the same period.
China entered a third phase of 21st century growth in January 2014 – one that is much more difficult and uncertain.
You must therefore asking yourself these two questions:
- Do my demand growth forecasts take into account the realities of this new, third phase of growth?
- If not, how do I unpick my numbers and rebuild my estimates?
Unpicking forecasts involves, first of all, working out “wealth effect accelerators” for individual chemicals and polymer markets.
A vast number of people in China were able to buy consumer goods in volumes and at prices way beyond their income levels because of excessively easy lending. Despite the rise of China’s “middle class”, it is important to note that average incomes in the country’s cities are still only $5,000 a year compared with $40,000 a year in Europe.
Once you have worked out to what extent demand was accelerated by the credit binge, you then obviously need to come up with another set of numbers: Wealth effect decelerators for 2015 and beyond.
You cannot rely on one set of wealth effect decelerator numbers. You will need several sets of numbers so you can build scenarios.
On scenario you must build is quite scary as it needs to assume that this new phase of development in China will help trigger another global financial crisis.
Building these new estimates will require fresh analysis of major end-use markets for chemicals and polymers in China.
Tomorrow I will look one of these major end-use markets: Autos.