China: A Tale Of Two Polymers and the Trade War

Transcription

1 China: A Tale Of Two Polymers and the Trade War John Richardson Vienna April

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 2

3 000 tonnes Why China is so important 80,000 70,000 60,000 Global PP consumption 2008: China moves from 2 nd to 1 st place, overtaking Europe 50,000 40,000 30,000 20,000 10, NORTH AMERICA SOUTH & CENTRAL AMERICA EUROPE FORMER USSR AFRICA MIDDLE EAST NORTH EAST ASIA EX-CHINA CHINA ASIA AND PACIFIC ICIS Supply & Demand Database 3

4 '000 tonnes Why China is so important 120, ,000 Global PE consumption 2009: China moves from 3 rd to 1 st place, overtaking Europe and North America on individual basis 80,000 60,000 40,000 20, NORTH AMERICA SOUTH & CENTRAL AMERICA EUROPE FORMER USSR AFRICA MIDDLE EAST NORTH EAST ASIA EX-CHINA CHINA ASIA AND PACIFIC ICIS Supply & Demand Database 4

5 Polypropylene 5

6 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 6

7 China demand % of global demnd in % 60% 58% China polymers: Exposure to stimulus cycles and global importance of demand 50% 40% 30% 43% 39% 37% 31% 30% 29% 27% 20% 10% 0% ABS (high*) EPS (low) PVC (high) PP (high) LLDPE (low) PS, including HIPS and GPPS (medium) HDPE (medium) *Indicates high, medium or low exposure of polymer growth to China credit and infrastructure spending cycles ICIS Supply & Demand Database LDPE (low) 7

8 000 tonnes Lowest PP growth in China since % % 20% 15% 10% 5% 0% Demand in '000 tonnes Percentage growth -5% ICIS Supply & Demand Database and my estimates 8

9 Tonnes Global PP: Slower China leads to 7.2m tonnes lost demand 84,000 82,000 80,000 78,000 76,000 74,000 72,000 70, Base case Downside ICIS Supply & Demand Database and my estimates 9

10 Here we go again? 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 10

11 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 11

12 Limited upside for autos even with stimulus in overdrive 12

13 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 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 age group and those over 64. In , the 65+ population will jump by almost 150% from 135m to close to 340m China s official 2019 Lunar New Year postage stamp 13

14 Kilograms Has China s per capita growth maxed out? in other words, is our base case too bullish? China per capita PP consumption US per capita PP consumption Europe per capita PP consumption 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.. ICIS Supply & Demand Database 14

15 Beijing Shanghai Tianjin Jiangsu Zhejiang Fujian Inner Mongolia Guangdong Shandong Chongqing Hubei Shaanxi Jilin Liaoning Ningxia Hunan Hainan Hebei Henan Jiangxi Xinjiang Sichuan Qinghai Anhui Heilongjiang Guangxi Shanxi Tibet Guizhou Yunnan Gansu Kilograms 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 Per capita PP consumption by administrative region in 2017 ICIS Supply & Demand Database and IMF 15

16 China s booming urban clusters are driving wealth growth 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 Bloomberg picture, September 2018: Hong Kong surpasses New York in number of super rich (number of people worth at least $30m) South China Morning Post: Baidu autonomous cars funded by Its Nasdaq-listed Apollo Fund 16

17 Quantifying downside for PP Base case: China s average per capita PP consumption rising from 19.9 kilograms in 2018 to 32.3 kilograms in This would result in PP demand growing from 27.6m tonnes in 2018 to 45.4m tonnes in Downside scenario: Only reaches 28.3 kilograms in 2030 with 19m tonnes of lost demand 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, Base case in '000 tonnes Downside in '000 tonnes Base case per capita consumption in kilograms Downside per capita consumption in kilograms ICIS Supply & Demand Database 17

18 '000 tonnes Social and political versus economic motives 4,000 3,000 2,000 1,000 Three scenarios for China PP imports* 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 - (1,000) 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% And on the efficiency front, bigger and better plants Plenty of cheap feedstock *All of these forecasts assume our base case demand numbers ICIS Supply & Demand Database and my estimates 18

19 To what extent is polyethylene different? 19

20 Kilograms PE more local for local, driven by daily necessities in other words, has our base case underestimated growth? China per capita PE consumption US per capita PE consumption European per capita PE consumption ICIS Supply & Demand Database 20

21 '000 tonnes PE growth isn t linked to GDP Upside is 4.9m tonnes 36,000 34,000 32,000 30,000 28,000 26, PE upside (2018 actual numbers, forecasts) Our earlier assumptions 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 Chart: ICIS Supply & Demand Database and my estimates. Picture: WSJ, showing Alibaba food deliveries 21

22 Beijing Shanghai Tianjin Jiangsu Zhejiang Fujian Inner Mongolia Guangdong Shandong Chongqing Hubei Shaanxi Jilin Liaoning Ningxia Hunan Hainan Hebei Henan Jiangxi Xinjiang Sichuan Qinghai Anhui Heilongjiang Guangxi Shanxi Tibet Guizhou Yunnan Gansu Kioograms One demand number for China doesn t work China PE capita consumption by administrative region in 2017 IMF and ICIS Supply & Demand Database 22

23 '000 tonnes China s growing role in global PE consumption % % Chinese demand in tonnes Percentage shares of global demand ICIS Supply & Demand Database 23

24 '000 tonnes Standard assumption is that growth rates decline 60,000 50,000 40,000 30,000 20,000 10,000 A 41m tonnes upside! We assume average 4.6% growth in 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? Our old forecasts Upside ICIS Supply & Demand Database and my estimates 24

25 000 tonnes Again, assuming that flat recycling growth Three scenarios for China PE imports* 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, 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% *All of these forecasts assume our base case demand numbers ICIS Supply & Demand Database and my estimates 25

26 The trade war 26

27 US is demanding China scrap its economic growth model. 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 27

28 The threat of a new Cold War 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 prioritised capabilities to erode America s military advantages. But they will fail. Democrat support for Trump s China policies 28

29 000 tonnes 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 - ICIS Supply & Demand Database LLDPE in US would need 35% share Global net import regions including China US would need 69% share Net import regions excluding China 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 29

30 000 tonnes A flood of US LLDPE exports: Underestimate? 2,000 1,800 1,600 1,400 1,200 1, % 42% 53% 60% 50% 40% 30% 20% 10% 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? 200 And what about Turkey? Estimates % Total European imports US imports Percentage of total imports ICIS Supply & Demand Database and my estimates 30

31 China is accelerating BRI because of the US 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 31

32 Two new trading blocs US petchems face major risk 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? percentage shares of PE, PP, styrene and ethylene glycols consumption S&C America 4% Europe 14% Middle East 5% Former USSR 2% North America 13% Africa 3% ICIS Supply & Demand Database NE Asia Ex china 8% Asia P 15% China 36% 32

33 Just two of many scenarios Scenario 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 33