By John Richardson
IN A 1921 essay marking the centenary of the UK newspaper, the Manchester Guardian, its editor CP Scott wrote, “Comment is free, but facts are sacred”.
Reasonable people can and need to disagree on lots of things in open and constructive ways. That’s how we move forward. But in a world so badly distorted by “research” on the internet and social media tribes, all of us need to stick to the facts. I believe CP Scott’s message has probably more value today than it did in 1921.
And the facts, or rather the ICIS data, regardless of our personal leanings or feelings, continue to tell us that we are facing the biggest shake-up in the petrochemicals industry since the industry began in its modern-day form in the 1970s.
Let’s today use high-density polyethylene (HDPE) as an example. What follows is just a snapshot of the huge value delivered by integrating ICIS data sets together, from our econometrics data at the highest level right down to the “here and now” of our pricing data.
The above chart will be familiar to regular readers of the blog. The pattern in HDPE is similar across nine of the biggest synthetic resins:
- Before Deng Xiaoping’s Southern Tour in 1992, which led to economic liberalisation, China’s per capita HDPE consumption was very close to that of the much more populous Developing World ex-China.
- But the two regions began to diverge from that year onwards as China took advantage of its youthful population and huge government investment in export-focused manufacturing. China started to become the Workshop of the World. This accelerated China’s local demand for HDPE and demand for HDPE exports, either as packaging for finished goods or to make components of finished goods.
- Then China joined the WTO. Membership led to the removal of the tariffs and quotas that had restricted China’s exports to the West. You can see how this led to the further divergence of the green line (China) and the orange line (the Developing World ex-China) from 2001 onwards.
- Next came the 2009 economic stimulus package. China pumped the same amount of money into its economy in that year, in response to the Global Financial Crisis, as the US did the following year with one important difference: At that time, China’s economy was only one-third the size of the US.
See the table below which shows, again by these three mega-regions, the percentage shares of global HDPE demand compared with the percentage shares of global populations in 1992 and 2024.
China accounted for just 6% of global HDPE demand in 1992 although it had a 22% share of the global population. By the end of 2024, we expect China to generate 33% of global demand even though it will have just an 18% share of the population.
The warning signs that were for too long ignored
For far too long, our industry overlooked the warning signs that were flashing red: China’s rapidly ageing population, its real estate bubble, and, more recently, the geopolitical split with the West.
I have long thought that it was only a question of when rather than whether the Chinese economy would enter a new and much more challenging phase. We can see from the ICIS data on spreads and margins that the “when” arrived in late 2021 – the Evergrande Moment.
CFR China HDPE injection grade price spreads over CFR Japan naphtha costs have averaged just $212/tonne since the end of Petrochemicals Supercycle, which is from January 2022 onwards. This compares with the $487/tonne average during the Supercycle – 1992 until 2021.
So, spreads need to rebound by 130% to get back to where they were during the Supercycle. But they are showing no signs of moving in that direction:
- This year, as you can see from the above chart, they have fallen to a new record low. We have seen three consecutive years of spreads well below $300/tonne which is the longest period since our price assessments began in 1993.
Spreads are not margins, of course, as they don’t include variable and fixed costs per tonne of output minus co-product credits from selling aromatics, propylene, butadiene and fuels etc. But they are still useful as a long-term sense check and margins, as I said, tell a similar story.
Record levels of global capacity exceeding demand
The excellent ICIS Supply & Demand Database estimates that China’s 1992-2021 HDPE demand growth averaged 12% per annum. We see this as falling to 4% per year between 2022 and 2030.
But here’s the thing: China’s January-June net import plus local production data when annualised (divided by six and multiplied by 12) suggests that the country’s HDPE demand might contract by 3% in 2024.
Given China’s big role in driving global HDPE demand, this points towards China being a big factor behind the following ICIS estimate: In 1992, global HDPE capacity exceeding demand (demand taken away from capacity) was 2m tonnes. This is forecast to rise to 8m tonnes in 2024, an all-time high – and to reach 14m tonnes by 2030.
Global capacity was added largely on the assumption that China’s HDPE demand growth would be higher than is going to be the case, in my view.
My highly unscientific “wisdom of crowds” approach, which involved talking to lots of people, suggests that the consensus view was that China’s petrochemicals demand growth in general would be at 6-8% over the long term. Low single digit growth now seems more likely.
The “known knowns”, the “known unknowns” and the “unknown unknowns”
What happens next?
The former US Secretary of Defense, Donald Rumsfeld, famously said: Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.
The things “we know we know” include some of the features of the ICIS chart below.
We know that global operating rates were very healthy during the Petrochemicals Supercycle. Including two years after the end of the Supercycle (the 1992-2023 period), we estimate that they averaged an eye-poppingly good 88%.
One can argue about the exact number, of course. Was the operating rate 86% or perhaps even 89%? But we do know that capacity utilisation was high from the strong earnings reported by the global HDPE industry
Another “known known” is that if you take our global virgin HDPE production estimates for 2024-2030 (the same more or less as demand) and divide production by capacity, you end up with an operating rate of just 75% for this period.
There doesn’t seem to be much of an upside for demand given the events in China, and in the context of China’s importance for global demand.
How can the industry maintain 88% operating rates in 2024-2030?
A “known known” mathematical exercise is to keep forecasts of production as they are and cut capacity growth until operating rates get back to normal. On this basis, global capacity would have to grow by just 173,000 tonnes a year versus our base case assumption of 2.6m tonnes a year to achieve an 88% operating rate.
You can again argue about the numbers, but the facts all seem to point to this direction of travel: Rationalisation of capacity in disadvantaged regions such as Europe and Asia ex-China as China, the Middle East and the US carry on building.
One of the big “known unknowns” is who will blink first, who will shut down first and who will then follow. But somebody surely must blink. This is where our ICIS News service is of value in tracking the announcements.
The “unknown unknowns”? Here are just two:
- What will be the size of China’s population by the end of the century and therefore its HDPE and other resins demand? The United Nations expects China’s population to fall to 1.26bn in 2050 and 633m by 2100. Recent analyses by demographers (Shanghai Academy of Sciences, Victoria University of Australia, etc.) question the demographic assumptions behind these projections and expect that China’s population could fall to as low as 1.22bn in 2050 and 525m in 2100. Other estimates are even lower.
- Can China fully maintain its role as the Workshop of the World? Or will reshoring and trade tensions eventually lead to a major decline in Chinese exports? Is something between these two extremes the more likely outcome? Looking just at the resins – and the same could well apply to other manufacturing value chains – what’s practical may play a big role here. Because China dominates polyester fibre net exports (now increasingly going to overseas textile mills where labour costs are lower), it is hard to imagine a big increase in anti-dumping duties on the exports of the fibres themselves and reshoring of polyester fibres capacity. Not so in polypropylene (PP), perhaps, where there are plenty of alternative suppliers.
Facts are sacred. So should be rigorous scenario planning as “one size fits all” views of the future won’t get us anywhere. Neither will be a repeat of the conventional thinking that got us into this mess in the first place.