By John Richardson
IF YOU DO a Google search, you will find a lot of articles on China’s economic recovery. Click on the links, spend some time reading them in detail, and you will discover a common narrative: China’s recovery remains on track this year. But you will not find the data that conclusively supports this notion.
But we do have ICIS petrochemicals data for 2020 which shows an historically good year in Chins that defied all the pessimistic predictions.
Let me start with the above chart which shows the extraordinary strong growth in demand across a range of products. In terms of percentages, 2020 growth was in some cases more than what occurred in 2019 versus 2018.
And in all the examples above, the additional volumes of demand in 2020 were big. Take polypropylene (PP) as the standout example. Our preliminary estimate is that last year’s demand was around 4m tonnes more than in 2019.
Please also study the chart below which compares the same preliminary estimates for 2020, which are for apparent demand (net imports plus local production), with our original forecasts for real demand growth. Real demand is apparent demand adjusted for inventory distortions.
Across the three grades of polyethylene (PE), 2020 apparent demand was 2.7m tonnes more than our original forecasts. PP was 1.6m tonnes more and paraxylene 2m tonnes higher.
When we have completed our final estimates for China’s 2020 demand later this year, it might be that our final numbers are not quite as bullish as these estimates for apparent demand.
But without doubt, our final numbers will be much higher than our original forecasts. China will have generated many millions of tonnes of consumption that had not been expected.
Why I continue to focus on these themes is that I am concerned our ICIS customers will end up being exposed to a sudden correction in pricing if we eventually discover that demand growth so far this year has been weaker than in Q4 2020. This is the crucial comparison because growth in the fourth quarter of last year was so extraordinarily strong.
I am not saying, and have never said, that China’s economy could fall off the proverbial shelf. The risk is instead that the same growth momentum will not be maintained.
I believe that China’s economy has lost some steam, mainly because China’s export growth must have slowed down in Q1 2021 – again compared with the fourth quarter of 2020, the only valid comparison.
Why do I believe export growth will have slowed down? Firstly, because some loss of momentum was always going to happen given Q4 last year was so strong. The second reason is there are so many negative influences on exports, their sheer number points in a clear direction.
February’s official and Caixin/Markit purchasing managers’ (PMIs) indices both indicated a fall in new export orders. Perhaps the March PMIs will tell us something different. But they will cover new export orders for April which is obviously in Q2.
It stands to reason that there must have been some negative effect on Chinese exports because of the global container-freight and semiconductor shortages.
The lack of data and analysis on both these critical supply-chain issues is, I believe, a major concern. We need to get better at monitoring supply chains in general – a theme I will cover in detail in later posts.
It could be that the double-dip recession in the EU has slowed Chinese export growth; and/or peak demand has already arrived for laptops, washing machines and all other goods that we have bought in greater volumes because we have been stuck in lockdowns. Another “and/or” could be that the easing of lockdowns has reduced demand for lockdown-related goods.
Our lack of ability to adequately assess the variables in this last paragraph was the theme of my 18 March post.
It is critical to understand that last year’s soaring petrochemicals demand in China was mainly an “in-out” story – rising petrochemicals imports that were re-exported as finished goods that served pandemic-related demand. The data clearly tell us this.
What is also important to recognise is that last year, Chinese local consumption was smaller than before the pandemic. The only question is how much smaller: were 2020 retail sales 3.9% down on 2019 – the official number – or 4.8% lower, the China Beige Book estimate?
Domestic demand growth will, I believe, be underwhelming during Q1 2021 because of disappointing Lunar New Year holiday spending. Government economic stimulus has also been reduced in 2021. This is in response to the rise in debts caused by the pandemic-relief programme.
The steep decline in Chinese stock markets during March might have also negatively affected domestic spending.
The health of local stock markets is critical to measure when trying to assess Chinese consumer spending because the vast majority of investors are retail investors. One study suggests that no less than 99.6% of 2019 investments in Chinese markets were by retail or individual players. This compared with 48% in the US.
Let me stress that when I say domestic demand growth will be underwhelming in Q1 2021, I am not suggesting anything like a collapse. I am instead suggesting that somewhat disappointing local growth will combine with weaker exports to reduce the all-important economic momentum versus the fourth quarter of 2020.
The consensus view is that Chinese growth must be stronger than this year than in 2020 because the worst of the global pandemic appears to be behind us. But for the reasons I have detailed above, I don’t believe this view has a logical foundation.
Muddling apparent with real demand
I also worry that mainstream thinking has muddled strong apparent demand, caused by the recent surge in prices, with real demand.
The run-up in global petrochemicals pricing since the major US outages in February will, in time-honoured tradition, have prompted buyers to purchase ahead of their immediate raw material needs to hedge against the potential for further price increases.
If you are a PE converter, for instance, you might buy an extra few hundred tonnes in March even if the extra tonnes are beyond the immediate requirements of your customers.
You put the tonnes into storage without any visibility on whether the demand from your customers will be sufficient in April to fully consume your extra stocks.
But worrying about customer orders is not your top priority when raw-material costs are rising rapidly, as has been the case over the last few weeks. Your priority is to hedge against further price rises.
This is obviously a big risk for buyers as petrochemicals prices very suddenly so often head in the opposite direction because of unforeseen events.
Take last week’s 7% fall in oil prices as a good example which surprised crude markets that had been very bullish since the start of the year. The decline was said to be the result of a rising US dollar, increased crude inventories and fresh setbacks in European vaccination programmes.
The fall in oil prices led to lower Asian benzene, ethylene and propylene prices for the week ending 19 March, according to ICIS price assessments. But polymer markets had not been affected.
“Only when the tide goes out…”
… do you discover who’s been swimming naked,” Warren Buffett famously said.
It might be oil prices which expose who is swimming naked swimmers if the retreat in crude continues. And/or it could be the easing of historically tight petrochemicals markets as US plants come online and some of the more recent US outages are resolved.
But I believe the tide must go out over the next few months. I am not going to comment on oil prices as nobody has a clue about their direction. What without doubt will happen, though, is that petrochemicals tight supply will ease, sometime probably in April.
We will then start to understand the real and underlying nature of petrochemicals demand in the world’s most important market.
Who will be swimming naked? It will be the petrochemicals producers, buyers and traders who don’t already have purchasing and sales plans in place to deal with modestly lower Chinese growth at a time when local capacity is also sharply increasing.
For advice on how to build these plans, contact me at john.richardson@icis.com.