LAST WEEK, I asked if the long-standing put option for petrochemical companies and investors would still apply to China 2022.
The put option is based on the well-established notion that the worse things happen in the short term, the better the immediate prospects, as Beijing always comes up to the rescue with big economic stimulus.
The challenge I posed to the put option was that China could only tinker around the edges of its common prosperity economic reforms.
The continued loss of momentum in the real estate sector – which has driven more growth in China than any other country in economic history – was my main reason for suggesting another economic slowdown in 2022, although it would be nice managed.
The boom in demand for high-density polyethylene (HDPE) in China since 2009 has been driven by real estate, the data shows. The same is true for other petrochemicals. Take away the momentum from the real estate bubble and I said we should expect lower demand growth for HDPE in the long term.
When you combined that with the restrictions on single-use plastics and China’s efforts to make its GDP growth less commodity-intensive, I struggled to understand why we hadn’t entered a period of more moderate growth in demand for petrochemicals.
Such is the speed of events that the past week feels like many years ago. History moves at a breakneck pace as it always happens during major geopolitical events. We must consider the risk of China losing control of events, regardless of the amount of economic stimulus.
China imported 70% of oil and 40% of its natural gas in 2021, reported the FinancialTimes in this article. The cost of its crude oil and natural gas imports was 2 trillion yuan (CNY) ($316 billion) and another CNY 1.2 trillion was spent on iron ore imports, it said. the newspaper.
Chinese wheat and corn futures are at record highs because of Ukraine. Heavy rains have led China’s agriculture minister to warn that this year’s national wheat harvest could be the worst in history. China’s wheat imports are expected to increase by at least 50% from their three-year average, according to the US Department of Agriculture.
You could say that because of China’s great ability to stimulate the economy, it will spend so much money on challenges that economic growth will be good. But what if China were to face a sharp drop in exports – a situation over which, of course, Beijing would have limited control?
So far, so good. China’s exports rose 16.3% in January-February 2022 on an annual basis, beating analysts’ expectations of a 15% rise, Reuters said in this article.
Even before the Ukraine crisis, however, China faced the challenge of a slowdown in its exports of finished goods as the lockdowns ended – the cycle of spending on goods and services.
With global inflation and further supply chain disruptions caused by the Russian-Ukrainian conflict, discretionary spending on durable goods looks set to take a hit. Rising food and fuel prices look set to force many people to cut back on non-essential spending.
China was also facing its worst coronavirus outbreak in two years as 3,400 new cases were announced on Sunday March 13, the Guardian in this article.
“A rise in cases nationwide has seen authorities close schools in Shanghai and lock down several cities in the northeast, as nearly 19 provinces battle clusters of the Omicron and Delta variants,” the newspaper added.
China’s strict zero CPVOD policy has reportedly been relaxed slightly. We don’t know if this is behind the latest outbreaks – although a Jilin city local government official was reported by the Guardian as saying that emergency responses were not robust enough in some areas.
China could be caught in a trap 22: if it reverts to strict zero-COVID policies, economic growth could be damaged; if it relaxes its policies, growth could still suffer.
We must consider the impact of what could be a long-term change in the global geopolitical landscape. Can China successfully balance its economic and geopolitical relations with the West and Russia? No one, of course, knows the answer to this question.
“China’s trade with Russia reached $147 billion last year, according to Chinese figures, compared to $828 billion and $756 billion, respectively, with the EU and the United States,” writes the FT in the same article already linked above.
Negative growth for all grades of polyolefins possible in 2022
Chinese demand for high-density polyethylene (HDPE) in 2021 fell by 6%, with low-density PE (LDPE) consumption also 6% lower in 2021 compared to 2020, according to my estimates. But demand for Linear Low Density PE (LLDPE) increased by 1% with polypropylene (PP) consumption 5% higher.
But what if we end up with negative growth in all grades in 2022? My downsides for Chinese polyolefin demand in 2022 assume minus 6% repeats for HDPE and LDPE. The growth of LLDPE is minus 1% and that of PP minus 2%. This leads to an average drop of 3%.
If that were to happen, it would be the first year since 2020 that demand for all grades has fallen year-over-year.
Similar pessimism was common in the first half of 2020. Demand for polyolefins rather boomed for the year as a whole due to “China inside, China outside” – soaring imports and local consumption to meet the strong increase in exports of finished products.
This time, as I said, it might be different because of the threats to China’s export trade.
However, the West could launch another wave of major economic stimulus to counter the effects of rising food and fuel prices. And, whatever the geopolitics, China remains the factory of the world.
Obviously, though, you have to be prepared for a wide range of outcomes in a world that hasn’t felt so uncertain since the end of the Cold War.