INSIGHT: Shrinking China trade signals trouble for chemicals everywhere

BARCELONA (ICIS)–Double-digit declines in China’s latest import and export figures, together with shrinking domestic manufacturing data, confirm a persistent collapse in demand for chemicals around the world.

Official trade data for July show a 14.5% year on year slump in overall exports to around $281.8bn and a 12.4% year on year dive in imports to around $201.2bn, reflecting a steep contraction in manufacturing activity in China and poor demand for finished goods in key regions such as Europe and the US.

The latest purchasing managers’ index (PMI) data for the manufacturing sector, published last week, also show industry in a prevailing downturn, with the  official National Bureau of Statistics PMI signalling contraction for the fourth month in a row.

China’s economy has been struggling to gain momentum since a hoped-for post zero-COVID policy rebound failed to materialise. The country’s bloated construction sector – which accounts for around 30% of its economy – is one drag on GDP growth. It is suffering from a burst property bubble thanks to excess inventory and high prices.

Demographics are also a drag on the economy as the country’s population ages amid low birth rates.

Inflation has now switched to deflation as stagnant demand weighs on excess capacity.

The ongoing cost of living crisis has created recessionary conditions in key markets in the US and Europe, with PMIs globally indicating contracting activity. With wage increases not keeping up with inflation, consumers are focussed on survival and avoiding discretionary spending on manufactured goods.

CHEMICAL MARKETS IN DISARRAY
The China trade data confirm that this troubled global macroeconomic situation – which has had a devastating effect on chemical company production and margins around the world – is continuing.

ICIS data show that petrochemical operating rates in all regions are well below long-term averages, with Europe languishing at an unsustainable 57% in June, the latest available month.

CHINA EXPORTS CHEMICAL PRICE DEFLATION
China is adding a massive 232.5m tonnes of chemicals capacity in 2023 and 2024 and as it comes online, amid weak domestic manufacturing activity, it is exporting more cheap material, especially to Europe.

The weekly ICIS Petrochemical Index show how European chemical prices have been dragged down towards northeast Asian values and have now fallen below them as European producers fight for market share.

A huge price gap emerged from late 2020 when the global container shipping system became congested thanks to a big ramp up in demand for finished goods to serve the pandemic stay at home lifestyle. It became too expensive and slow to shift many chemicals from China to Europe.

Falling container rates and improved journey times have reversed this situation, leading to a big increase in China chemical exports, particularly to Europe.

Latest ICIS data show how China has ramped up chemicals exports to major markets around the world as its new capacities come onstream. The data also reflect a decline in recent months which tallies with the fall in overall export trade from China.

The overcapacity and poor demand are also affecting margins, with northeast Asia and European naphtha cracking margins plunging and becoming very volatile since the new capacities started coming onstream.

Naphtha-based ethylene cracker margins slump to near zero in China and Europe. Source: ICIS Margin Analytics

BASF CEO Martin Brudermuller warned last week that BASF and the wider chemicals sector faces worse conditions than during the pandemic and 2008 financial crash.  “I have been on the Board for 17 years and have never seen such a situation,” he said.

China’s troubled economy may lead to years of flat or even negative polymer demand growth, because consumption per capita has grown too quickly for the size and wealth of the country’s population, according to ICIS senior consultant for Asia, John Richardson.

Speaking on the ICIS Think Tank podcast he said: “We may see 1%, 2%, polymers demand growth for the next few years, possibly even some years of negative growth. A few years ago the consensus view was China would grow at 6%, 7% or 8%/year.”

Paul Hodges, chairman of New Normal Consulting added: “China’s trade surplus is equal to nearly 4.9% of China’s GDP over the January – July period, and to nearly 1.1% of global GDP. It highlights the tremendous economic distortions created by China’s focus on supply-side measures to boost its economy, at the expense of its domestic consumption.”

He said that July’s 23% fall in exports to the US, and the 21% fall with the EU, confirms the extent of the downturn in the major Western economies.

In previous years China would have been ramping up exports at this time of year to meet demand for the Thanksgiving/Christmas period.

Insight article by Will Beacham

Interactive graphics by Yashas Mudumbai

Additional reporting by Yvonne Shi and Tom Brown

Thumbnail picture: A cargo terminal at China’s Yantai port (Source: Costfoto/NurPhoto/Shutterstock)