By John Richardson
I STRUGGLED with mathematics at school. My excuse leads me to another Rock music analogy: My maths teachers resembled the schoolteacher villain of Pink Floyd’s The Wall, brought to life by Gerald Scarfe’s fabulous cartoons.
I am therefore assuming – having largely taught myself how to do better sums since I left school in the late 1970s – that there are many millions of people out there who can do their sums an awful lot better.
But some recent analysis I’ve read, regardless of how good the calculations are, seems to miss the essential bigger picture.
I don’t want to point a public finger at individuals, so I am not going to identify the analysis concerned. This would amount to the kind of public humiliation that my maths teachers specialised in, including in their case physical slaps around the head.
In this analysis, market conditions are forecast to improve later this year. This is of course possible because of short-term factors such as a new round of Chinese economic stimulus or a cut in interest rates by the US Fed.
But the analysis goes further by suggesting that an uptick in market conditions before the end of 2024 could be followed by a full and sustainable upswing in 2026-2027.
While an upswing in two-to-three years’ time cannot obviously be ruled out, the ICIS data continue to suggest we still have an oversupply mountain to climb.
And, anyway, as I argued in my 19 August post, we need to stop thinking of the traditional patterns of down- and upcycles because of long-term shifts in global chemicals resulting from demographics, debt bubbles, sustainability and geopolitics.
Today, though, let’s just look at the mountain by focusing on the ethylene value chain (it is the same story in other chemicals building blocks such as propylene, butadiene and paraxylene).
I did this same exercise almost exactly a year ago and nothing seems to have changed.
I start with the same question I asked in September 2023: What would it take to return global operating rates to their very healthy 1992-2023 average of 88%?
Assuming global production, which is about the same as demand, stays unchanged from our base case, global capacity would have to grow by an average of around 2m tonnes a year versus our base case of 6.2m tonnes a year.
Advantaged projects in the Middle East and North America seem likely to still go ahead under this alternative scenario, and China might continue its push towards greater self-sufficiency. This implies capacity closures elsewhere to get to the 2m tonnes a year of 2024-2030 capacity growth.
Global capacity would need to grow at an average 1% per year to achieve an 2024-2030 operating rate of 88%. This would compare with the 1992-2023 average of 4%.
One might argue that we have underestimated global demand given the likelihood of a loosening cycle by the Fed, perhaps a big dose of Chinese economic stimulus, and booming economies in the developing world such as India’s.
But as I keep going on and on about, trying to ensure the message lands with ICIS clients, what happens in the rest of the world is, mathematically speaking, of not great consequence compared to events in China.
Today’s second chart – showing China’s percentage shares of global demand for the major ethylene derivatives in 1992 (at the start of the Chemicals Supercycle) and by the end of this year – underlines the disproportionate role that China has come to play in driving global consumption:
The Economist wrote in its 7 September issue that the real Chinese economic picture may be bleaker than is commonly painted.
“The official [Chinese government] numbers show that the GDP growth rate has reverted to pre-pandemic level, despite the moribund housing industry and low investment in infrastructure,” wrote the magazine
“This is a risible claim, says Logan Wright of Rhodium Group, a consulting firm. ‘The broader problem is simply that the GDP data have stopped bearing any resemblance to economic reality,’ he explains”.
Ergo, if anyone is using the official GDP statistics to calculate China’s chemicals demand growth, they could be wrong. At the very least, they should look at alternative scenarios.
The Economist contends that getting reliable data out of China is becoming harder. It uses the example of the youth underemployment rate which in mid-2023 a professor at Peking University calculated was a high as 46%.
Within a month, China’s National Bureau of Statistics stopped issuing data on youth unemployment. “Improved and optimised” figures were published from January this year, said the magazine.
Between 20m and 30m Chinese citizens are reported to have paid for houses that haven’t been built. The Economist said that little analysis had been done on the economic effects of these numbers.
My ICIS colleague, Kevin Swift, has looked at disagreements over China’s population level. In the blog’s 30 August post, he wrote:
“Demographer Yi Fuxian at the University of Wisconsin has questioned assumptions about current Chinese population and the likely path forward. He examined China’s demographic data and found clear and frequent discrepancies, such as the inconsistencies between reported births and the number of childhood vaccines administered and with primary school enrolment.
“These should parallel each other, and they do not. Analysts see that there are strong incentives for local governments to inflate data. Reflecting Occam’s Razor, the simplest explanation is that the births never happened.
“Yi posits that China population in 2020 was 1.29bn, not 1.42bn, an undercount of over 130m.
“The situation is most acute in northeast China where the economic engine has stalled. Yi speculated that with low fertility rates – 0.8 versus replacement level of 2.1 – China’s population will fall to 1.10 billion in 2050 and 390 million in 2100. Note that he has another even more pessimistic projection.
“We have seen other estimates that China’s population could be 250m less than what is currently reported. China accounts for roughly 40% of global plastic resins demand and as such, alternative futures concerning population and other factors significantly influence global plastic resins demand dynamics.”
If China’s population was a lot smaller than was commonly assumed in 2020, so perhaps was its chemicals demand, making today’s global oversupply worse.
And if the decline in China’s population is steeper than is officially projected, the future of its chemicals demand could be worse than is assumed by some commentators.
As always, today’s post has been published to invite challenges, data point by data point, contextual argument by contextual argument. I look forward to the discussion.
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