By John Richardson
LAST WEEK’S launch of a new “stimulus bazooka” by the Chinese government might lead to a rally in chemicals pricing.
The end-users of chemicals and polymers, such as the plastic convertors, may create stronger apparent demand as they buy more in October than in September on anticipation of prices rises. This may lead to successive waves of price increases over the next few weeks and months, also depending of course on what happens in crude oil.
Traders could add further momentum to markets by “buying on the rumour” of a stronger economy before the facts either confirm or deny the rumour. This is how traders have always made money.
But we must don our noise-reducing headphones to get a real sense of what’s happening. Yes, the stimulus is big and could be followed by further stimulus before the end of the year. But as Time magazine wrote in this 26 September article, quoting economists:
- While the decision to cut mortgage rates will put an additional $21bn into the pockets of 50bn Chinese, new home prices in 70 cities in China fell by 5.3% in August. Property investment has dropped by 10.2% so far this year [These latest declines will further undermine Chinese consumer confidence that had benefited from soaring real-estate prices up until the “Evergrande Moment” in August 2021].
- Real estate accounts for 80% China’s household wealth and some 30% of GDP. Only 10% of Chinese invest in the stock market. This means that measures to support the stock market – another feature of the stimulus package – will have a limited effect.
- “This isn’t a stimulus package; it should be considered a relief package,” Dinny McMahon, head of China markets research at Trivium China policy research group, told Time. “None of this is going to get any institutions or economic actors in China to say, ‘let’s go invest now,’” he was also quoted as saying.
The magazine said that China’s youth unemployment rate had reached 18.8% in August this year, the highest since a new method of measurement was introduced in December 2023.
But before this new method was introduced, a Peking University-based Professor estimated China’s youth underemployment (different, of course, from outright unemployment) as 46%. Yes, 46%, which implies that the youth unemployment rate could be higher than the official government numbers.
This is just one example of an ever-more opaque Chinese economy, the result of what The Economist claims has been a clampdown on independent data analysis. For example, the magazine says that there has been little research published into the economic effects of the 20-30m people in China who have paid for houses that haven’t been built.
We should therefore take any recovery in official growth numbers following the new stimulus with a large grain of salt.
Spreads and margins tell the real story
So what if prices go up over the next few weeks? The price rises will be of little long-term consequence unless we see big shifts in charts such as the one below.
The latest update of the PE spreads chart which I first published in January 2021 underlines the depth of the oversupply crisis. This latest chart is up until the week ending 27 September 2024.
Average CFR China PE price spreads over CFR Japan naphtha costs are at just $280/tonne so far this year, the lowest since our price assessments began in 1993. We have seen three consecutive years of new record-low spreads. It is of course no coincidence that the three years have followed the Evergrande Moment.
The table at the bottom of the above chart is also significant as it shows the extent to which spreads would have to recover to return to their levels during the Chemicals Supercycle, which ran from 1992 until 2021:
- HDPE spreads would have to rebound by 129%, LDPE spreads by 48% and LLDPE spreads by 88% to see a return to the old market conditions. Average PE spreads would thus have to rise by 80%.
- Spreads are obviously not margins as spreads don’t factor in full production costs and co-product credits. But as the above chart tells us, the Northeast Asia (NEA) PE margins trajectory is the same as in China PE spreads.
Between January 2014 and December 2021, NEA integrated variable cost naphtha-based PE margins averaged $451/tonne; from January 2022 until the third week of September this year, they averaged just $2/tonne.
In late 2019/early 2020, NEA PE margins briefly turned negative as oversupply increased. But the full downturn was delayed by reduced feedstock availability and a surge in PE demand resulting from the pandemic. Then came the Evergrande Moment.
Conclusion: Stick with these numbers
Follow the ICIS PE spread and margin data every week to discover whether a recovery is really happening in China.
My view that China’s economy faces deep long-term challenges resulting from the end of the real-estate bubble and an ageing population. The extent to which it can maintain its dominant role in global exports is also in question because of a much more difficult geopolitical environment.
I don’t believe that any amount of likely economic stimulus in China (there are political and economic limitations on stimulus) can fully address these challenges. It is what it is. We need to get used to a Chinese chemicals market where demand growth for some products might even go negative.
You may disagree. But, as I said, what we can and should agree on is the story that’s been consistently told by PE spreads and margins since January 2022.