China: A Tale Of Two Polymers and the Trade War€¦ · Tighter lending in H2 or kicking the can down the road •Scenario 1-Trade deal gets done, which will be paper thin-Economy

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China: A Tale Of Two Polymers and the Trade War

John Richardson

Vienna – April 2019

www.icis.com 2

Today’s agenda

• Broad split between durable and non-durable end-use applications so useful guide to the future. PP more dependent on credit cycles, GDP growth

• PE decoupled from GDP growth

• The trade war in the essential demographic context

www.icis.com 3www.icis.com 3

Why China is so important

ICIS Supply & Demand Database

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Global PP consumption

NORTH AMERICA SOUTH & CENTRAL AMERICA EUROPE

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NORTH EAST ASIA EX-CHINA CHINA ASIA AND PACIFIC

2008: China moves from 2nd to 1st place, overtaking Europe


Why China is so important


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Global PE consumption

NORTH AMERICA SOUTH & CENTRAL AMERICA EUROPE

FORMER USSR AFRICA MIDDLE EAST

NORTH EAST ASIA EX-CHINA CHINA ASIA AND PACIFIC

2009: China moves from 3rd to 1st place, overtaking Europeand North America on individual basis

www.icis.com 5

Polypropylene


Clear from February that credit was slowing down, so Apple earnings warning should have been no surprise:• China’s shadow lending averaged around $20bn/month in 2008, a minor addition to official

lending• But then it took off as China’s leaders panicked after the 2008 Global Economic Crisis• By 2010, it had shot up to average $80bn/month, and nearly doubled to $140bn in 2013• President Xi Jinping then took office and the bubble stopped expanding• But with Premier Li Keqiang still running a Populist economic policy, it was at $80bn again

in 2017• At that point, Xi took charge of economic policy and slammed on the brakes. In 2018,

monthly shadow lending was $20bn

www.icis.com 7

58%

43%39% 37%

31% 30% 29% 27%

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ABS (high*) EPS (low) PVC (high) PP (high) LLDPE (low) PS, includingHIPS and GPPS

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HDPE (medium) LDPE (low)

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China polymers: Exposure to stimulus cycles and global importance of demand


*Indicates high, medium or low exposure of polymer growth to China credit and infrastructure spending cycles

www.icis.com 8ICIS Supply & Demand Database and my estimates

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Demand in '000 tonnes Percentage growth

Lowest PP growth in China since 2012

www.icis.com 9www.icis.com 9ICIS Supply & Demand Database and my estimates

Global PP: Slower China leads to 7.2m tonnes lost demand

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Base case Downside


January-February TSF up 26%

So assumption is that this could be a repeat of 2009 and 2016

But private sector starved of credit last year even though main driver of growth, so extra lending attempted reversal

Local government financing vehicles at risk

Here we go again?

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Tighter lending in H2 or kicking the can down the road

• Scenario 1

- Trade deal gets done, which will be paper thin

- Economy boosted, assuming tariffs are removed!

- Credit tightens again

• Scenario 2

- No deal or terms of deal bring no significant economic relief

- In a year of political sensitivity, stimulus continues to rise

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Limited upside for autos even with stimulus in overdrive

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A demographic disaster…..

• Between 2015 and 2040, China’s population aged 50 and over will increase 250m as the population under 50 falls by the same amount

• The 15-29 age group – which across all modern societies has the highest education and is the most IT and tech savvy – will shrink by 75m

• The only cohort that will grow in size will be the 50-64 age group and those over 64. In 2015-2020, the 65+ population will jump by almost 150% –from 135m to close to 340m

China’s official 2019 Lunar New Year postage stamp

www.icis.com 14ICIS Supply & Demand Database

Has China’s per capita growth maxed out?....

• Low value manufacturing gradually drifting away

• Can it be replaced by high value manufacturing?

• Spreading growth westwards when the west is ageing faster than the east a major challenge…..

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…..in other words, is our base case too bullish?

China per capita PP consumption US per capita PP consumption

Europe per capita PP consumption

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Challenge of raising rural incomes

• Third of rural population over 65 by 2040

• Residents in poorer inland cities lack access to health care and education

• Unless China escapes middle income trap, major pension, healthcare shortfalls

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Per capita PP consumption by administrative region in 2017

ICIS Supply & Demand Database and IMF


But this might lead to lower than expected per capita PP consumption:

1. The rich, apart from sustainability concerns, don’t want to waste time in traffic jams

2. China government funding for autonomous driving and ride-hailing

3. Focus on improving air quality

4. The time poor, cash rich and the washing machine

China’s booming urban clusters are driving wealth growth

Bloomberg picture, September 2018: Hong Kong surpasses New Yorkin number of super rich (number of people worth at least $30m)

South China Morning Post: Baidu autonomous cars funded byIts Nasdaq-listed Apollo Fund

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Base case in '000 tonnes

Downside in '000 tonnes

Base case per capita consumption in kilograms

Downside per capita consumption in kilograms


Base case: China’s average per capita PP consumption rising from 19.9 kilograms in 2018 to 32.3 kilograms in 2030.

This would result in PP demand growing from 27.6m tonnes in 2018 to 45.4m tonnes in 2030.

Downside scenario: Only reaches 28.3 kilograms in 2030 with 19m tonnes of lost demand

Quantifying downside for PP

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*All of these forecasts assume our base case demand numbers

ICIS Supply & Demand Database and my estimates

Social and political versus economic motives

• Standard way is of course to look at forecast margins to get to operating rates

• But China has never run its plants purely on economics – it’s about jobs as well

• And on the efficiency front, bigger and better plants

• Plenty of cheap feedstock

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Three scenarios for China PP imports*

Net imports with average operating rates at 88% (our base case)

Net imports at average operating rates of 90%

Net imports/exports at average operating rate of 93%

www.icis.com 19

To what extent is polyethylene different?

www.icis.com 20ICIS Supply & Demand Database

PE more “local for local”, driven by daily necessities….

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…..in other words, has our base case underestimated growth?

China per capita PE consumption US per capita PE consumption European per capita PE consumption


Last year, demand rose by around 9% when had we expected 5.4%

Result of booming internet sales and recycling restrictions

Recycling rules now part of existing demand

But:

- Rising sales of food over internet

- Govt. spending on rural internet services

- HDPE pipe sales rising on more infrastructure spending

PE growth isn’t linked to GDP

Chart: ICIS Supply & Demand Database and my estimates. Picture: WSJ, showing Alibaba food deliveries

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Upside is 4.9m tonnes

PE upside (2018 actual numbers, 2019-2020 forecasts)

Our earlier assumptions

www.icis.com 22www.icis.com 22IMF and ICIS Supply & Demand Database

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China PE capita consumption by administrative region in 2017

One demand number for China doesn’t work


China’s growing role in global PE consumption

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Chinese demand in tonnes Percentage shares of global demand



We assume average 4.6% growth in 2019-2025

But previous seven years was at 7.7%. If history repeats itself, 41m tonnes of extra demand over our base case!!

How much demand, though, will be met by virgin production?

Standard assumption is that growth rates decline

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Our old forecasts Upside

A 41m tonnes upside!


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*All of these forecasts assume our base case demand numbers


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Three scenarios for China PE imports*

PE net imports with average operating rate at 87% (base case)

PE net imports with average operating rate at 89%

PE net imports with average operating rate at 93%

Again, assuming that flat recycling growth

www.icis.com 26

The trade war


…when it is in a race against time to move up the manufacturing value chain as its populations ages

Meanwhile, it still faces the challenge of 500m of its population who live on less than $5.50 a day

So it cannot possibly agree to stop state subsides for manufacturing

US also closing the door on technology transfers

US is demanding China scrap its economic growth model….


Largely overlooked key moment last November when, for the first time, the US National Security Strategy identified China as a geopolitical threat

Mike Pence: China now spends as much on its military as the rest of Asia combined. Beijing has prioritisedcapabilities to erode America’s military advantages. But they will fail.

Democrat support for Trump’s China policies

The threat of a new Cold War

www.icis.com 29www.icis.com 29ICIS Supply & Demand Database

Scenario 1: If the US cannot export to China, but it still runs plants as hard as we expect

Naphtha cracker operators forced to cut back operating rates – possibly consolidate

Scenario 2: Naphtha players win trade protection and US forced to cut back -

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LLDPE in 2019-2025

US would need 35% share

US would need 69%share

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A flood of US LLDPE exports: Underestimate?

• Total US exports to rise to 4.5m tonnes this year from 3.4m tonnes in 2018

• Assuming US again sends same percentage of exports to Europe as last year, and based on expected growth in European imports, see right for the results

• BUT, what happens if the US struggles to export to China?

• And what about Turkey?


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China thought it had more time to make this multi-generational project work

But risk of losing US export markets has made the project more urgent

It has also created major geopolitical and economic opportunity for China to replace the US

In its largest definition, the Belt and Road Initiative would include 78 countries, 4.4 billion people and about 40% of global GDP – the World Bank

China is accelerating BRI because of the US


One centred on China and its trading and geopolitical partners. This could comprise most of the developing world –and most consumption and growth

The other trading bloc centred on the US and its partners

Where does this leave the Middle East?

Two new trading blocs – US petchems face major risk


China 36%

Asia P15%

NE Asia Ex china8%

Africa3%

Former USSR2%

Middle East 5%

Europe14%

S&C America4%

North America13%

2018-2025 percentage shares of PE, PP, styrene and ethylene glycols consumption


Just two of many scenariosScenario 1 - China/US reach deal and sustainability small effect

• Trump/XI reach a compromise. OR Trump leaves office and

US/China trade war ends

• Petchem world remains fully globalised

• US production and export growth continue

• Producers in other regions continue today’s strong capacity

growth

• Demand big enough to easily absorb new capacities

• Pushback against plastic waste has small effect on demand

Scenario 2 - China/US fail to resolve differences and

sustainability has major effect

• Trade war escalates

• New world of China + friends versus US + friends

• US unable to export to China and so floods Europe and

developing world ex-China with excess supply

• US and other projects are cancelled

• Global investment also slows on demand loss from plastic

rubbish crisis

Documents

China: A Tale Of Two Polymers and the Trade War€¦ · Tighter lending in H2 or kicking the can down the road •Scenario 1-Trade deal gets done, which will be paper thin-Economy