By John Richardson
WE HAVE BEEN here before, of course. In April 2020, pessimism abounded about China’s growth prospects which proved unfounded due to the extraordinary strength of its post-peak-pandemic recovery.
But the circumstances that led to the economic rebound in the second half of 2020 were very different.
Deflation or at least disinflation were the concerns during this period as huge amounts of government stimulus were pumped into western economies to offset the economic hit from the coronavirus.
As I reported on this blog, before most people knew what was going on, global demand for petrochemicals skyrocketed – the “China in, China out” story.
Exports of petrochemicals to China, as well as local Chinese demand, have literally exploded in relation to the collapses in GDP.
Petrochemicals were needed to fulfill all of China’s durable finished goods exports, demand for which has been spurred both by the stimulus and by the boredom of middle-class Westerners stuck in lockdowns.
But today it is very different with inflation at its highest level since the 1970s, leaving little room for Western governments to launch stimulus measures of the same magnitude due to higher interest rates.
And, anyway, people don’t usually buy a new computer, washing machine, refrigerator, game console, or a new set of home office furniture every year.
These purchases are usually more casual than that, so 2022 – even without the impact of the Ukraine-Russia conflict on inflation – was still likely to see a temporary drop in demand for durable goods.
It’s also possible that Westerners will buy far more services than durable goods for the rest of this year if the shutdowns aren’t reimposed. That is if they can afford onboard flights and hotel stays, as inflation also drives up the cost of services.
Here is yet another reason to doubt that China can export itself to recovery in the second half of this year: further supply chain disruptions, caused by the Ukraine-Russia conflict and China’s Zero COVID policy, that limit the availability of durable goods that Westerners still feel able to afford.
China could lose control of events
That still leaves the “Chinese put option” to fall back on – the tried and true maxim that the worse things get, the better they will soon become.
On every occasion over the past 20 years, major Chinese economic stimulus measures have been launched after temporary periods of weaker economic growth.
Such a stimulus could lead to a recovery in domestic demand so strong that it would offset any weakness in China’s export trade in the second half of 2022. But this time, consider:
- China may not be willing to go very far on stimulus, as it would delay its economic reform agenda vital to common prosperity.
- The risk that, even if it decides to go for big stimulus, a protracted struggle to bring its latest pandemic outbreak under control could limit the benefits.
As I therefore warned three weeks ago, China risks losing control of economic events.
And as sensitive as this additional challenge is, it must be addressed: if Western divisions with Russia drag on, and if China maintains its close relationship with Russia, the risk of secondary sanctions against the Chinese economy cannot be excluded.
What early polyolefin data could tell us about 2022
Absolutely, of course, two months of data can hardly be extrapolated into a firm trend for a full year.
Still, consider the likelihood that China will need at least the rest of this month to bring the latest coronavirus outbreak under control.
Next, consider that for most forecasts for polyolefins demand growth in 2022 to be accurate – to average high single digits across all grades – consumption growth would need to be around 12% in H2 to compensate for the disappointing numbers in the chart at the start of this section of the post.
Also consider the chart below, which again, based on just two months of data, suggests what imports could be for the year 2022.
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Unexpected events can surprise us as they did in 2020. But beware of the significant risk that China will miss in real terms its official GDP growth target of 5.5% for this year.
Then create scenarios to test your business to determine what this could mean for the country’s polyolefin demand and imports.
Being prepared, using ICIS data and analysis, is always better than being exposed to events you could and should have planned for.