China events suggest no global petchems recovery until 2026

Capacity growth of just 1.6m tonnes a year versus our base case of 5m tonnes a year would require substantial capacity closures in some regions. Closures are never easy and so take considerable time because of links with upstream refineries, environmental clean-up and redundancy costs – and the reluctance to be the “first plant out” in case markets suddenly recover.

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THE CONVENTIONAL wisdom out there is that the petrochemicals cycle may have bottomed out as the prospects of interest rate cuts increase.

There is talk of signs of recovery in the Europe. And even in a high inflationary environment, the US consumer kept on spending with unemployment at record lows, although there are recent indications that US consumer spending is moderating.

Elsewhere, there are economic bright spots such as India’s booming economy and a Turkish economy that, despite high inflation, is enjoying a manufacturing-for-export boom thanks in part to the weak Lira. Other export-based economies such as Vietnam and Mexico are said to be also doing well.

But these arguments miss, in my view, a proper reading of the ICIS data. The chart below will be familiar to regular readers of the blog. It shows the huge role that China has played in driving polymers demand in nine of the biggest synthetic resins.

Something truly remarkable was going on during the 1992-2021 Petrochemical Supercycle years. It was China’s emergence as the workshop of the world, thanks to economic liberalisation, favourable demographics and its admission to the World Trade Organisation, removing the tariffs and quotas that had restricted its exports to the West. This was followed by the “sugar high” of the 2009 economic stimulus package.

All of this I believe is over, in the past. As last week’s Fifth Plenum meeting of the Chinese Communist Party underlined, China is a long way from building a new economic growth model that would continue the astonishing growth story told by the above chart.

China’s household consumption “consistently lower than its peers”

Indeed, one can argue, as the Rhodium Group does in an 18 July 2024 research paper, that China’s economic growth may never return to previous levels. This would mean no return to the double-digit annual growth rates we saw in petrochemicals demand during the Supercycle.

“In the absence of significant fiscal reforms, long-term household consumption growth is likely to slow to around 3-4% per year in real terms over the next five to ten years,” wrote Rhodium.

Rhodium added that household consumption would contribute around 1.5 percentage points of GDP growth per year, which was likely to limit overall long-term GDP growth to around 3%, “given the known headwinds to faster investment growth”.

The known headwinds are overcapacity across many manufacturing sectors, including in some petrochemicals, and a trade surplus which “ballooned to around $823bn last year, invigorating a protectionist backlash in the US, Europe and elsewhere,” wrote the Financial Times in this 21 July article.

The Rhodium research paper is also an important reminder of how perceptions about China’s economy can be wrong.

There is for example the perception of booming household consumption. But Rhodium said that household consumption was just 39% of GDP. “In comparison to other rapidly developing and developed economies, not only is China’s household consumption share consistently lower than its peers, but it has been falling in recent years,” wrote the research group.

Another perhaps flawed idea is that because China’s household savings rates are very high, a policy pivot by Beijing towards focusing more on domestic consumption (there seems to be no signs of this right now) will unlock a new spending boom.

But Rhodium said that households in the top 10% of household incomes held 69% of total savings and 57% of total income in 2012 with little change since then.

“Data from the China Household Finance Survey in 2019 showed that a third of Chinese households had negative savings rates, meaning they spent more than their incomes, and relied upon borrowing or past savings,” wrote Rhodium.

The research group concluded that a recovery in domestic spending, which it said had fallen more than the official data suggested, could be achieve through major reforms.

But Rhodium argued, as I do, that the reforms would be politically difficult because of the transfers of wealth involved and the time it would take to build better healthcare and pension systems. Rhodium also questioned whether the reforms would be affordable.

Then there are the demographic challenges, a theme I shall return to in a later post when I look at the work of Kevin Swift, the ICIS Senior Economist for Global Chemicals. He has built some downside scenarios for China’s polymers demand based on lower estimates of China’s population today and its population by 2100 versus forecasts by organisations such as the United Nations.

China’s relevance to every country and region

Sorry to put this so bluntly, but too many of us in this industry got China wrong (as always, these are my views only), We didn’t recognise, as we should have done more than a decade ago, that the real estate investment bubble couldn’t go on forever. Neither did we give enough consideration to demographics.

It seems that too much global capacity was planned on the basis of China’s petrochemicals demand growth being at 6-8% per annum over the long term, whereas 1-4% now appears to be more likely.

China’s petrochemicals capacity growth was underestimated on the basis of standard cost-per-tonne economics used to assess projects. History teaches us is that national strategic objective also come into play.

“What on earth has this got to do with, say, a new petrochemicals plant in Latin America?” you might ask.

A great deal, in my opinion. While a new plant in Latin America might well not export to China, China’s exceptional demand growth was the tide that lifted all boats in every country and every region by making the global demand pie so much bigger than would otherwise have been the case.

And, of course, for the big exporters in the US, the Middle East, South Korea, Singapore, Malaysia and Thailand etc, the new China is front and centre of the challenges they are facing.

Here some statistical reminders of the importance of China to the global demand story.

The above tables show that China had a 22% share of the global population in 1992 and a 9% share of global polymers demand. By the end of this year, ICIS forecasts that China’s share of the global population will have slipped to 18%, but its share of global polymers demand will have risen to 40%.

No end to the Downcycle until 2026

Sure, the potential is huge in the Developing World ex-China mega region where, as you can see, we expect the region to account for 68% of the global population in 2024 but only 32% of polymers demand.

But time is the thing. It will take time for this much more populous region (a region which is also rapidly growing in population as China shrinks) to overtake China as the biggest polymers demand driver. This is again what a study of the excellent ICIS data suggest. In some of the products, Developing World ex-China isn’t forecast to become bigger than China terms of millions of tonnes of demand for another decade or so.

Until the Developing World ex-China hopefully overtakes China as the primary global demand driver, the petrochemicals industry needs to adjust its supply to bring operating rates back to normal levels.

The first thing I must say about the above chart is that the higher operating rate line will be wrong as it involves a simple mathematical exercise rather than tracking events.

I kept to our base case assumptions on global polypropylene (PP) virgin production growth between 2024 and 2030, which is obviously very close to demand growth. I then manually reduced capacity growth until I got back to the historically very healthy operating rate of 87% (operating rates being production divided by capacity).

(What applies to PP applies to other petrochemicals and polymers. The ICIS data for other products suggest similar steep reductions in capacity growth versus our base to get back to the long-term history of operating rates).

This led me to the conclusion that global PP capacity growth would need to be just 1.6m tonnes a year versus 5m tonnes a year under our base case. Under our base case, we see global operating rates averaging just 76% in 2024-2030.

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But the headline takeaways from this chart are, I believe, still valuable. They are as follows

• Capacity growth of just 1.6m tonnes a year versus our base case of 5m tonnes a year would require substantial capacity closures in some regions. Closures are never easy and so take considerable time because of links with upstream refineries, environmental clean-up and redundancy costs – and the reluctance to be the “first plant out” in case markets suddenly recover.
• The sale of rationalisation suggested by just 1.6m tonnes a year of capacity growth therefore suggests to me no full recovery in PP and in other petrochemicals until, I am guessing, 2026.

This doesn’t mean to say that there won’t be regions of strong growth and thus high operating rates and good margins until then. There will be opportunities to make money in a petrochemicals world that I see as being increasingly de-globalised by geopolitics and logistics.

But the disproportionate role that China had played in global demand – and the very different roles it is now playing in global demand and supply – have led me to guestimate that it will be two years or so before we are back to normal global operating rates.  

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