BLOG: Developing world outside China to the rescue, but not for long

SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson: Understanding chemicals and polymers demand during the 1992-2021 Chemicals Supercycle was easy, firstly, because demand always boomed and secondly,  because these were the dominant factors shaping markets:

Lots of young people moving to the cities in China to make goods for export followed by China’s enormous debt and speculation bubble from 2009 onwards, which was mainly centered on real estate.

Now, as the future of demand growth is in the Developing World ex-China, we need to understand hundreds of different countries.

Before you get carried away with excitement, ICIS analysis suggests this: Developing World ex-China demand cannot do anything over as long as perhaps the next seven years to substantially absorb all-time high levels of oversupply.

Why the oversupply? Because too many people missed the build-up of demographic and debt challenges in China and didn’t react quickly enough when the 2021 Evergrande Moment arrived. This is a lesson for how we analyze the Developing World ex-China.

Focusing on polypropylene (PP) as an example:

Despite the Developing World ex-China’s much bigger population of around six billion versus China’s population of some 1.4 billion, ICIS still expects that by 2030, Developing World ex-China’s demand will be some 8 million tonnes lower than China’s.

The ICIS base case assumes that global PP capacity exceeding demand will average 25 million tonnes a year in 2021-2024. This compares with just 5 million tonnes a year during the 1992-2021 Chemicals Supercycle.

Global operating rates averaged 87% in 1992-2023. But given this oversupply, our forecast for 2024-2030 is 77%. To achieve 87%, assuming our base case assumption for production is right (the same as demand), capacity would have to grow by an average 2.2m tonnes a year versus our base case of 4.8 million tonnes.

As feedstock-advantaged producers such as those in the Middle East are likely to press ahead with projects, and as China may continue to add more capacity, capacity growth of 2.2 million tonnes a year implies closures of plants elsewhere.

The ICIS base assumes 4% average annual PP demand growth in China in 2024-2030 when 2%, in my view, is more likely. If 2% growth were to happen, and demand growth in the other regions was the same as our base case, capacity growth would need to be just 1.4 million tonnes year to achieve an 87% operating rate in 2024-2030.

Let’s next take 2% off Chinese growth and add this to our base case forecast for the Developing World ex-China. Capacity would still have to grow by just 1.9 million tonnes a year to achieve an 87% operating rate in 2024-2030 compared with, as mentioned earlier, our base case assumption of capacity growth of 4.8 million tonnes.

While, as I said, the Developing World ex-China offers long-term big opportunities, we should keep in mind the words of Mark Twain: “History doesn’t repeat itself, but it often rhymes”.

Editor’s note: This blog post is an opinion piece. The views expressed are those of the author, and do not necessarily represent those of ICIS.