India’s Demonitisation: Measuring The Real Impact

By John Richardson

FOR those interested in what demonitisation might mean for Indian polyethylene (PE) demand in the calendar years 2016 and 2017, the above two charts will be useful.

The top chart shows our base case for Indian demand growth, and for operating rates, from our Supply & Demand database. This was drawn up before Narendra Modi’s November decision to withdraw 86% of cash from the economy.

But that decision has had huge effects on demand. Most PE converters in India operate on a cash-only basis and so are short of cash. There were thus reports in December of warehouses stocked high with unsold polymers.

Some of the bigger converters do operate on credit, but then of course final consumption of PE, into finished goods, is also being negatively affected by the cash shortage. Hence, the second chart where I have:

• Taken growth down to 3.8% in 2016 and 3.7% in 2017. This compares with our base case assumptions of 6.5% growth in 2016 and 8% in 2017.
• Increased the average industry operating rate from 76% to 86% on the assumption that a weaker Rupee versus the US dollar would boost export competitiveness. (This would be the result of both the effect of demonitisation and tax cuts and economic stimulus in the US that promise to further strengthen the greenback).
• This could reduce India’s 2017 PE deficit – the amount it has to import – from 810,000 tonnes in our base case to 203,000 tonnes in my “Contained Downside” scenario.  New Indian PE capacity is due on-stream in 2017, and this will temporarily lower India’s deficit even in normal economic circumstances.

What about the bigger picture though?

The Six Big risks Become Seven

I identified six major risks for the global economy in a 16 December blog post. You now need to make this seven because of events in India. In normal economic circumstances, Modi’s decision would have been very risky, but these are not normal economic circumstances.

So here is another of my “print out and keep” guides for senior chemicals industry. My original list of six big threats has become seven:

1. India’s decision demonisation dips the country into recession.  This focuses attention of investors on the global dilemma of too much debt and not enough demand, and the recession spreads to the rest of the world.
2.  Populists win elections in Italy, Holland and France, and make big gains in elections in Germany.
3. One or more of these poll results causes a collapse of the Euro, as the EU as a whole begins to unravel.
4. Geopolitical tensions build between Europe and Russia over Ukraine and the status of the Baltic States.
5. Much-higher global interest rates and a stronger dollar lead to an emerging markets debt crisis.
6. The stronger dollar widens the US trade deficit to the point where the Trump government is forced to respond in a bid to deliver on its election-campaign promise of new jobs. This involves declaring China a currency manipulator and levying heavy tariffs on Chinese imports. We end up in a global trade war.
7. China is dragged into a major financial-sector crisis as a result of both the scale of its debts and these global headwinds.

If one or more od these risks are realised then of course the effect on PE demand in India could be more severe than in my 2017 Contained Downside scenario. Equally, of course, global PE and other polymer and chemicals markets would be badly affected. Watch this space for further estimates of what this could mean.

Again, as always, I hope this is way too pessimistic. But given today’s exceptional political circumstances, the result of the failure of mainstream politicians to deal with the New Normal, it would be extremely commercially risky not to plan for major disruptions in 2017.