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How China’s Response To Chemicals Is Affecting the World With John Richardson of ICIS
In this episode, I’m speaking with John Richardson, of ICIS. John is an expert in China, the Middle East in chemical markets and probably a few other things. If you follow John on LinkedIn, you know that he has strong insights and a point of view on the supply-demand of petrochemicals, he writes a lot about polyethylene and polypropylene in particular and he’s not afraid to share those points of view. We’re going to be talking about China’s policies, including clean air and common prosperity and the impact that has on petrochemicals globally. John, welcome to the show.
Thank you, Victoria.
I’m glad to have you here again. Let’s take a look back at 2021. What stood out for you in the world of petrochemicals and plastics supply and demand?
Focusing on China and if you go back to 2020, first of all, which was quite a remarkable year because it started very badly for China, then from May onwards. There were supplying all the stuff we needed during lockdowns in the rich world, the TVs, refrigerators, the office furniture, the game consoles. There’s a huge boom in Chinese petrochemicals demands. It’s China in, China out. We have big rise of polyethylene and polypropylene imports.
Polypropylene being the bigger re-exported product that made its way into finished goods, re-exports. That supported an unusually strong growth at a time when there’s a lot of Chinese plastic coming online. It always felt that 2021 would be a little bit more subdued and things will come off that high. You need to compare with pre-pandemic 2019 as well, to be realistic.
What I didn’t see that anyone saw was this common prosperity shift. We knew it was around. We didn’t know that they were going to take it that seriously. That was from August onwards. This is the big change, both environmentally and for supply and demand fundamentals, which has contributed to the negative growth of polyethylene in 2021.
Probably, polypropylene remained positive but it was lower than people had expected because polypropylene is modular by that tremendous export trade that carried on booming in 2021. It’s got major short and long-term implications to the global industry because China totally dominated global demand way ahead of the US and Europe now from 2009 onwards. As everyone knows, it’s the biggest import market with so many chemicals and polymers.
Let’s start unpeeling some of that. If I think about what I heard and saw going on, let’s say in the third and fourth quarter. We were hearing a lot about electricity and maybe energy rationing in China, resulting in plants having to shut down, cycle production. Was that a common prosperity thing? Was that something else? What was the impact?
Plastic recycling is carbon intensive but you can also see a significant recycling industry building in China.
Yes, that and other things. What happened is that the central government said, “The provinces are hitting their carbon emissions reduction targets under the five-year plan that is coming towards an end.” There are strict requirements in the provinces. This occurred when the Australian coal impulse was being practically banned because of the political dispute with Australia and at a time when Indonesian coal supplies were falling major export to China because of weather. It was a perfect storm but what the Chinese government did very quickly fixed that.
If you talk to the market in early November, they said at the end of November it would be fixed. It was fixed. Now, coal economics or chemicals are very good. In fact, better than that, through economics and coal supply is back to normal. It is an important sign that we’ll get lots of disruptions between central government and local government as they roll out this common prosperity policy shift.
How much of that was linked to air quality? I know we’ve got the Olympics starting up. In fact, when this show gets published, the Olympics will have started. I know we’ve seen in the past some shifting of where manufacturing sites are, some shutdown of certain facilities to help make the air cleaner, frankly, for big events. How big of an impact did that have?
In terms of the coal shortage, that was more of a carbon emissions issue. Although, coal air worsened because of the coal issues and the steel and coal there at the Winter Olympics. We’re going to see factories closing if they haven’t already. They’ve got to create clean air for the Winter Olympics. That will cause some supply chain issues for the chemical industry around the Winter Olympics. They have to go off smoothly.
Everybody’s watching them and it’s already under pressure because of COVID and either athletes not participating. I saw that in some of the news, the sports reporters aren’t going to be onsite. That’s a big impact. Let’s talk about cleaner policy in general. What is it, and how’s it affecting petrochemicals?
You talk to people in China. You read everything you can get your hands on, and then see opinions. There are other kinds on how the government applies its policies but the feeling is they’re deadly serious about this. They want to hit those international commitments for geopolitical reasons, geopolitical gain over the US, then we go onto air, soil, and water quality.
There’s a big improvement in air quality for the last several years. Soil and water still lag behind. That’s a firm political commitment to the people of China. Before I explain the meaning of petrochemicals and also say why another reason it’s important for China and that’s the gaging population. That got us some to SAPs to Kimberly-Clark.
You think about rising wage costs to China needs to move up that manufacturing value chain to justify the higher way use in those coastal ridge provinces. It’s not the same in other parts of China that’s a manufacturing heartland. The way to do that is green industries, environmentally, advent industries and combined with which also is cleaning up carbon and plastic waste. There is an argument to be made that Chinese funding is enormous for innovation. A massive number of new patents coming in and innovation, you can argue that they will go for this in a huge way.
Is their innovation focused on green and low carbon technologies or do you see that across the landscape?
Across the landscape and it talks specifically about chemicals. People talk about this. In the big chemical companies, they say, “Don’t be surprised if China leads the way on electric crackers, for example, built on renewable energy. Don’t be surprised if they lead the way on green and blue hydrogen if that ever works.” Carbon can be another issue around that and carbon capturing storage. BASF for building this low carbon cracker. Under the cracker, which is supposed to be the lowest carbon crackers in the world beating a gas cracker in the US but a long way.
How is it low carbon?
I’m not quite sure. There’s been some stuff on the BASF website by the technologist. I forget, but it will explain it to you. It’s 40% and lower than a standard cracker.
It’s around the cracker process that they’re saving carbon. Therefore, they’ll invite in those technologies and develop them locally. Not necessarily mean that they’ll slow petrochemicals investment drastically because it’s important to know that another feature, their policy direction is something called dual circulation, which is greater self-sufficiency from commodity inputs. They’ll be more selective. You can argue the coal-to-chemicals may struggle to get approvals. That’s the general view. We see a declining share of coal-to-chemicals in the capacity mix.
Is it because of the carbon impact?
Yes, and the dirtier. It’s both articulate stuff in local communities and the carbon issue as well. It’s very carbon-intense.
How does clean air affect petrochemicals?
You would think and again, this is speculation. We don’t know what the bureau thinks and be very arrogant. This is what’s being discussed widely in the industry, Europe’s in carbon, both talk about introducing carbon border to adjust the mechanisms. If you’re importing, eventually, if it does cover petrochemicals, that’s the plan. If you’re importing probably from the United States, then what’s the carbon impact of that polyethylene versus local plants that have to be very carbon-conscious and carbon-efficient? Why on Earth would China do that as well at some point if it’s deep normalizing this industry. That’s the theory long-term.
It’s decarbonizing it to low carbon technologies inside the country and getting higher carbon ones elsewhere or being neutral on it.
Common prosperity has created greater wealth inequality within China.
There are issues around how carbon-intensive plastic recycling is. That’s another story altogether. One can argue and I would argue that but you can also see a significant recycling industry building in China. Again, the idea I’ve been told is they developed technologies that can export. They lead the way in these things. They’re licensing overseas.
How about common prosperity? Let’s switch over to that because that seems to be having a significant influence now. What is it? What’s the impact? What do we see happening as a result of that in plastics or petrochemicals?
Common prosperity includes this environmental push.
Is it all part of it?
Common prosperity, cleaning up the environment, hitting those carbon emissions and connects to which is the aging population moving up that, dealing with it. The other aspects of common prosperity, let’s start with the property bubble. Post-2009, you look at these extraordinary demand patterns where China’s shadow global demand took off for all the petrochemicals and polyenes. You can do a correlation that takeoff and the rise of total social financing or credit in China is pretty close.
You have this property boom mainly centered in the ten richest provinces where you see the highest rates of consumption growth. It’s obviously directly linked to the property sector but indirectly through conspicuous consumption. Xi Jinping said in 2017, “Houses are for living in and not for speculation.” People thought, “He’s just saying that.”
Evergrande and real estate has been percolating for a while.
It was early August 2021 when he said, “We’re going to let Evergrande fail.” No, that’s not right. We will let the big Evergrande masters fail. There’s no suggestion Evergrande will completely go belly up. It would be possible subject to a state rescue, almost nationalized with the smaller investors being okay and to social stability. The big investors will take the hit. That was a big turnaround from August. People thought that would never be allowed to happen because of the size of the debts. It’s a sign that they call the three red lines have introduced since August, which has credit restrictions on the developers.
It means there’s less credit available and the government wants to deflate that property bubble for common prosperity reasons because there’s crazy too much debt, and there are too many empty apartments in those richer provinces. This is where we get on to another aspect of come-on prosperity. It has created greater wealth inequality within China.
Before, the Gini coefficient in China was worse than in the US. You have extremely rich people in those ten rich provinces. A lot poorer people as you move further West and look to the Northeast Rust Belt. They want to, under common prosperity, create more even economic growth across the country.
Let’s deflate the property bubble. Let’s raise the tax base. The reasons for that, the tax base being raised will create more pensions healthcare payments. They go with an aging population and normally to be invested in the other provinces of China. The key part of raising the tax base could be, I’m not saying it’s happened yet, a nationwide property tax.
Does that exist now or not?
It’s been trialed in cities such as Shanghai. You may see that. There’s resistance to this, obviously. A big problem is this merry-go-round where, this is a dilemma for China, 89% of government funding for pensions and health care comes from the local governments, the provincial authorities. Their main source of spending is selling land to property developers. Go figure. They’ve been able to raise the levels of spending because the value of lands has been going up.
This is where you get all this confusion between central government targets and provincial government objectives, which is the coal. It’s an example of how things can go wrong and have to be fact-fixed in the short-term. You have lots of backward and forwards on these policies. It seems they’re deadly serious about sticking with common prosperity because the old economic growth model doesn’t appear to be working anymore.
Is common prosperity a Robin Hood policy in some respects, like tax the rich to equalize to the poor? Is that effectively what’s happening?
I hate to use a word but it’s socialism. You talk to people like Michael Pettis in smacks and stuff on this, the Beijing-based economist. There’s been a lot of resistance to that approach.
Is it resistance in the rich provinces or is it widespread?
Anybody who’s got skin in the game is doing well, including the state-owned enterprises as well. That’s another issue that doesn’t work well from the system.
When China says he’s going to do something, he normally does it.
Let’s take this back a little bit. I’ve seen some of your writings on LinkedIn because you like to publish your points of view there, which I think is a good place. The real estate bubble drove a lot of plastics demand and petrochemical demand as a result of consumption and building. What happens with common prosperity? Does this imply a pretty dramatic decrease in demand or a leveling out? What do you see happening?
I don’t think demand will decrease. It could potentially grow a lot slower. I published a chart on the blog but I looked up polypropylene per capita demand forecasts China outs until 2032. It’s a straight line going up. It overtook the US a few years ago, which, when you think about it, China’s a lot poorer country than the U, a lot of that is re-exports and polypropylene. You can make the case that the rate of growth will slow down from, say, 4% or 5% per year, which is our base case. The US polypropylene per capita will be 1% in 2032. It’s a very mature economy, the US. That’s what you would expect but maybe China’s going to grow less.
I will contend for, A) Because of the property bubble deflating, B) Because of the challenges of raising wealth in those poorer provinces. Something else that’s important is that they want to do that. They want to create a more equal country, but the poor provinces are older than the richer provinces because a lot of the young people rather have moved to the coast over the years for the jobs.
As we know in spending patterns, older people buy less stuff and generate less demand. You need scenarios. There’s a scenario where, say, polypropylene demand grows more like the US and, let’s say, as low as the US out to 2032 and beyond, then you start calculating what that means for global demand. It’s a lot smaller than most assumptions but I don’t think demand will decline.
We’ve seen a lot of investment. Now, there are some plants starting up. It seems like all around the globe, we continue to see investment. Do you see investment keeping at pace with where it’s been? Is there any reason to suggest it wouldn’t?
The issue is what the plant wants to do while you’re building it. If you’re building a polypro to come to export to China, think again.
Is it because China’s becoming independent on polypropylene?
In particular. That’s another issue of job circulation. You’ve got lower demand growth and you play around with that data. This was impossible years ago. You look at the ICIS data. You make not unreasonable adjustments to our base case and operating rates in demand growth. Suddenly, you’re into a net export position over the next few years. You don’t automate ridiculous adjustments.
I’m not saying that will happen. They could happen but what’s certainly true, even under our base case that imports are declining. If you’re building a polypropylene plant to export to other big markets like Turkey, Asia Pacific, you might be all right. Some 40% of global net imports of polypropylene go to China. That’s a big chunk lost, isn’t it? Potentially. Hence the focus of that investment, I think, Victoria.
What about polyethylene? Is it lessened?
Less at risk. HD is the big one because of the size of China’s capacity additions. Potentially, you could see imports dropping to about 5 million tons this 2022 from 6.4, 6.9 in 2021 and 9 million tons the year before. Over time, that self-sufficiency might edge down a bit, especially if they start building more selectively.
Do you think there’s a drive towards self-sufficiency in the long-term, especially when we think about maybe the green technologies and the circularity of plastics in particular, which is getting a lot of focus? Is that realistic? Is that the plan?
When China says he’s going to do something, he normally does it. From the level of looking at the policy details, they say, “We want to be much more self-sufficient. We started the process in 2014,” and they got there with polypropylene, they close this diary. They’re getting there with high density but as I say, that’s a short-term challenge. The answer, in short, is yes. There’s a potential that, across the board, they could become much more self-sufficient in the future years. Certainly, in the median term products like glycols, polystyrene, there’s no risk. The new low, there’s no mentioned risk.
It’s all about polypropylene.
Also, the styrene.
What should we be looking out for in 2022? What would be our early indicators of any dramatic changes? What do you see on the horizon that we should be paying attention to?
Reflation of the property bubble. Some of the signs of being easy on the developers and where the merry-go-round probably starts a bit, again. They may panic.
Does reflation of the property bubble increase demand?
Yes. Boost to conspicuous spending. It would put the local authorities in a temporary better position to meet their obligations for all that financing. A big political meeting on October and November 2021 where Xi Jinping is due to be confirmed for the third term of office because they’re changing the rules. Normally, they have to step down after two terms. It might be that if growth is struggling ahead of that key meeting, then there were other facts. Zero COVID. That’s that. The feeling is and again, do we know that the feeling is that zero COVID will certainly stay in place to the Winter Olympics are over?
The demand for polypropylene will not decline.
We don’t want that to be disrupted in the same way clean air probably until that political meeting takes place. You can argue that’s a negative for growth because it’s affecting economic activity that huge Lunar New Year spending season may be negatively affected. It’s not the theme but also it’s affecting supply chains as well around poor disruptions.
Let’s talk about the supply chain a little bit. I almost feel tired talking about the supply chain and yet, I think it’s still disrupted. Am I right? What are you seeing from where you sit? I hear a lot about empty containers at ports and that may be a US-specific phenomenon, products not getting shipped in, the crazy inflation and increase in rates, the competition for cargo space between chemicals and consumer products and other stuff. What are you seeing? Do you see any changes in 2022?
All of the above. That’s right. I had thought that maybe things would ease up a bit as the Lunar New Year holidays would finish on Feb 6 2022. It looks unlikely now because zero COVID deports themselves in China. Those are critical ports like Ningbo, Dalian and Shanghai. Ningbo and Dalian are the hot spots for COVID, have not been disrupted directly yet, I don’t think but the trucking deliveries to the ports have been affected by the lockdowns.
As you know, Victoria, this is a huge ripple effect around the world and China being so important for the distribution of stuff, especially by container vessel. We’ve got this weird situation polymer markets where you’ve got fantastic margins have come off in the US and Europe, the all-time high and all-time low margins in Asia. HD again was the lowest.
The ICIS stated it was the lowest on record, negative 2 tons. The US and Europe have been protected from Asian surpluses by the issue of containers. Sometimes, it’s not just the cost. The cost still works because of these record high differentials on pricing. You can’t get them. Our customer is not prepared to wait. I had thought that might ease, probably not for a while. Maybe in the second half of 2022, at the earliest, we’ll see some relaxation. It’s off the subject, the issue that I keep going back to this inflation and demand destruction all point the people stop buying all this stuff. These do look good.
When is that going to happen? We’re seeing pretty high inflation, certainly US, Europe, I think around the globe. When are people going to stop spending?
The old argument of that I’ve seen from a few economists is one, oil prices. The modern 3% of GDP, you get recessions historically because this ties in 2014. That’s well under 3% of GDP. There are reports in the US that consumers are bucking off if you look at some of the data. It’s probably started already because things are so expensive.
Everything’s gone up. If you walk to your local grocery store, you see a dramatic change in pricing. Inflation is likely to impact demand in 2022, potentially?
I think so. It has been done historically. The other thing as well that we were discussing before this show, how will demand to look if the pandemic becomes endemic? People stopped spending as much on computers and laptops. You only buy a computer once in a while. It’s also a circuit, bought those three refrigerators. You’re not going to buy one again for a while but people then spending more on services, whether that will then also take pressure away from container space.
That could be. Moving from big, hard-good, white-good type purchases to services and consumables might shift that. Hard to say. Although, my sense of it is that availability of products that had been hard to get before has eased. Whether that’s a manufacturing thing, manufacturing as in it’s finally catching up, whether it’s a supply-demand curve meeting up. Appropriately, it seems to be easier to get the things that were long lead times for a period of time, dishwashers, refrigerators, all those various things that people started investing in during the pandemic.
One more thing I read somewhere that the Los Angeles and Long Beach Port contracts look for the workers that are due for renewal in July 2022. The last time that happened, there was industrial action.
It seems like workers may have more power at the moment to demand if that’s the case. If there’s such a tightness at those ports, it seems like it would be favorable to the workers that they would have more power in those negotiations.
I didn’t realize how important those ports are until not long ago. They’re hugely important.
The US has been trying to develop other ports and has but Long Beach and Los Angeles continue to be critical for the traffic coming from China. John, this has been good. I appreciate you joining us and covering a whole variety of topics. If people want to connect with you, what’s the best way to get ahold of you?
What’s your email?
I hope you folks that have been reading have enjoyed this episode. Please subscribe, follow and share it with your friends and colleagues. We will see you again soon.
Thank you. Thank you, everybody.
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About John Richardson
John Richardson is a Senior Consultant at ICIS. John focuses on the polyolefins markets (polypropylene, polyethylene) in China, Asia and Europe.John has been very privileged to work with many of the smartest people in the petrochemicals industry over the last 22 years, helping steer their strategies in the right direction. Without fear or favour of internal company politics and conventional thinking, John provides the objective analysis you need to manage your business in today’s incredibly uncertain world.
ICIS is the global source of Independent Commodity Intelligence Services. ICIS connects data, markets and customers to create a comprehensive, trusted view of the global commodities markets, enabling smarter business decisions that optimize the world’s resources.