BLOG: China’s economic challenges continue to be made clear by PP spreads

SINGAPORE (ICIS)–Click here to see the latest blog post on Asian Chemical Connections by John Richardson.

China remains in my view trapped between an economic rock of being unable to significantly boost domestic consumption and the hard place of a more difficult export climate.

Until or unless China fixes weak healthcare and pension systems – and maybe also does something to give rural migrants to urban areas better job opportunities and wages by changing the Hukou residency system – the growth in domestic spending is unlikely to be at the levels we saw during the 1992-2021 Petrochemicals Supercycle.

And we must factor in the loss of growth momentum resulting from the end of a real-estate bubble. Real estate is worth some 29% of China’s GDP.

“If China is to maintain growth rates of 4-5% per year, it can only do so if the rest of the world agrees to reduce its own investment and manufacturing levels to less than half the Chinese level,” wrote Michael Pettis in a December 2023 article for the Carnegie Endowment for International Peace.

The rest of the world is hardy likely to accommodate China given the big reshoring push resulting from the Inflation Reduction Act and the EU Green Deal. Investigations into allegedly unfair China trading practices have also increased along with antidumping measures.

At the risk of being boring (I’ve probably gone well beyond just a risk), consider the latest version of my PP spreads (it is the same pattern in polyethylene), which is the main chart in today’s post.

Despite recent stimulus announcements, average CFR PP price spreads over CFR Japan naphtha costs remain at a record low in 2024 since we began our price assessments in 2003.

The table at the bottom of the chart shows PP spreads during the 1992-2021 Petrochemicals Supercycle compared with spreads from January 2022 up until 7 June this year.

Until average spreads recover by 149% from where they were up until 7 June, there will have been no return to the great markets we saw during the Supercycle. Meanwhile, too capacity will continue to chase too little demand.

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.