VINACHEM

There is only one slight problem with the theory of a strong 2023 recovery in China’s petrochemicals demand growth and it is this: The data.

The latest set of numbers, from an annualising January-February net polyethylene (PE) and local production estimates for the same two months, suggest average 2023 demand growth across the three grades of just 1%.

This would mark the third year in a row of very low China PE demand growth and would compare a 10% increase in consumption as recently as 2020.

The consensus “business as usual” view of China assumes 5% PE demand growth in China this year. Growth of only 1% would leave consumption at some 1.5m tonnes less than the consensus, adding to what is already record global oversupply in PE.

And don’t forget the spreads data. China PE price spreads of naphtha costs were just $291/tonne in January-March this year. This compares with an annual average spread of $525/tonne in 1993-2021.

What we need to come to terms with are the following macro-economic trends:

China’s housing bubble has burst for good, ending the old “put option” that the government would never let property and land prices fall. So, confidence to invest in real estate seems unlikely to return to the heady levels of 2009-2021. Concerns over further sudden changes on government policy might damage consumer and investor sentiment following the sudden end to zero-COVID.

Year-by-year, the impact of China’s shockingly bad demographics is getting worse. Savings rates to meet rising pension and healthcare costs seem likely to increase because of the ageing population. This also circles back to real estate, as real estate is no longer a strong as a source of wealth creation to meet pension and healthcare costs.

The 10% PE demand growth in 2020 was to some extent the result of China’s booming exports of manufactured goods that met demand for exercise machines, computers and office furniture etc from cash-rich, bored lockdowners in the West. These exports came wrapped in PE or were partly made from PE. As the pandemic ended, there was always going to be a cycle out of spending on physical goods and into services that would weaken China’s exports. This decline has been made worse by inflation. China’s export earnings have fallen during the last five consecutive months.

And China’s PE self-sufficiency looks set to further increase in 2023. The latest data suggest that this year’s net imports could fall to 13m tonnes from 19m tonnes in 2020.

We all need to challenge conventional thinking as we build new petrochemicals business model.  – ICIS –