THE RECENT CLAMOUR about new economic stimulus in China didn’t change anything. After initial stock market rallies, investors parsed the details and realised that Beijing was either unable or unwilling (it is surely a combination of both) to redirect the economy towards much greater domestic consumption and away from investment.
This 15 October article from the Wall Street Journal is worth close consideration. It suggests that the new stimulus measures introduced since early September are aimed at repairing the damage caused by excess lending to real estate and manufacturing. This points to the large scale of China’s debt challenges.
It is what it is. The only question is how low Chinese chemicals demand growth will go over the next decade and more. Will we see minus growth in some years for some products, especially those tied to construction?
“But China’s market is so much bigger than it was 20 years ago, so growth of only 1-2% a year would be huge in volume terms,” is one of the arguments that’s often, quite rightly, made.
This is not the main point, though. The main point is that while volume growth might still be big in China because of the effects of a bigger base, the consensus had assumed that China’s chemicals demand growth would be 6-8% per year over the long-term whereas 1-4% now seems more likely. The gap between earlier expectations and today’s reality largely explains today’s record levels of global oversupply.
The other argument used to suggest that everything is still rosy in the garden is booming demand growth in the Developing World ex-China, one of the three mega regions we need to consider – along with the Developed World and China.
In mathematical terms, and we should be governed by maths, here is the thing, though: Any realistic upsides for chemicals growth in the Developing World ex-China cannot come close to fully replacing “lost” China growth versus earlier expectations over the next ten years or so.
Note again that it is these earlier unrealistic expectations that led to far too much new capacity being built, resulting in the chart below.
The chart below helps explain why the numbers work the way they do. Because China has punched so much above its population weight, this is why the data suggest it will take the Developing World e-Chin a decade or so, depending on the polymer, to fully compensate for the disappointment of lower-than-expected Chinese growth.
Northeast Asia PE margins confirm negligible impact of recent stimulus
The chart below shows average PE margins in Northeast Asia between January 2014 and 18 October this year, weighted according to the estimated percentage shares of the three grades out of toral production in each of the eleven years from 2014 until 2024. As LDPE accounted for an average of just 16% in 2014-2024 versus 46% for HDPE and 38% for LLDPE, then of course more weight was given to the margins of the latter two polymers.
Despite all the sound and fury of the recent stimulus:
- Margins during the Chemicals Supercycle, from January 2015 until December 2022, averaged a positive $435/tonne.
- From January 2022 until August 2024 (before the most recent stimulus), they averaged minus $32/tonne.
- From January 2022 until 18 October (including post-stimulus) they averaged minus $29/tonne 1 Sept-18 October margins at a positive $25/tonne.
In other words, the most recent stimulus has barely moved the needle towards returning the Northeast Asia PE business to a health condition. Chemicals and polymers are a very good barometer for broader economies.
A view from this year’s EPCA: 3-9 years before a full recovery
My ICIS colleague, Nigel Davis, said that this year’s EPCA in Berlin was probably attended by more senior executives than is usually the case. Several industry sources agreed.
“Normally, companies send junior-to -mid-level executives to the EPCA, but on this occasion more senior leaders were present because they wanted to try and gauge what happens next,” said one contact.
I got the sense from my conversations at EPCA that there is recognition at board levels that the global chemicals industry is it an inflection point, not just because of events in China. My chart below is a means of getting the debate going about the wider transformation taking place.
Back to the downturn and China. Everyone I spoke to at EPCA recognised that China was front and centre of the downturn, given the type of data I presented above.
Estimates of when a full recovery might arrive ranged from a further three years to as many as nine years. But there was also a recognition, as the above chart suggests, that we may never fully return to the old market conditions.