China, global chemical trade flows and the need for better analysis

By John Richardson

THE WALL STREET Journal, in a 29 August article on China, made these points:

Ironically, foreign officials have tended to see the US. as the biggest threat to the world trade system, ever since President Donald Trump in 2018 imposed steep tariffs on China and narrower tariffs on other trading partners. He has promised to expand those tariffs if elected this fall.

And yet Trump’s tariffs should be seen as a reaction to China’s beggar-thy-neighbour economic model, one that has proved impervious to existing trade rules.

This was towards the end of a piece where the author, Greg Ip, the Journal’s Chief Economics commentator, made points including the following.

Whereas consumers contribute 50% to 75% to GDP other major economies, in China they account for 40%. Investment, such as in property, infrastructure and factories, and exports provide most of the rest. [This didn’t used to be a problem during the 1992-2021 Chemicals Supercycle but seems to be now, as China doubles down on exports in response to the collapse of the real estate bubble and its demographic crisis).

While China’s 12-month trade balance with the US had risen by $49 billion since 2019, it’s up $72 billion with the European Union, $74 billion with Japan and Asia’s newly industrialized economies, and about $240 billion with the rest of the world, according to data compiled by Brad Setser of the Council on Foreign Relations.

Logan Wright, head of China research at the Rhodium Group said China accounted for just 13% of the world’s consumption but 28% of its investment. That investment only makes sense if China takes market share away from other countries, rendering their own manufacturing investment unviable, he said.

Rhodium said that if China’s share of consumption equalled that of the European Union or Japan, its annual household spending would be $9 trillion instead of $6.7 trillion. The $2.3 trillion difference—around the GDP of Italy—was equal to a 2% hole in global demand.

What we need to build into scenarios for chemicals demand and trade flows, is whether China can effectively pivot towards a greater focus on domestic consumption given its debt problems and its very worrying demographics.

Can it afford to build much stronger healthcare and pension systems and reform the Hukou residency system? Can the tax system be reformed to more effectively redistribute incomes and wealth? Would such reforms make a big difference over the long term, given a population that maybe declining more steeply than official government and UN data suggest?

But this is a debate for another day. And for the time being at least, it seems as if China’s focus is on boosting exports.

“Even as China targets advanced products such as electric vehicles and semiconductors, it refuses to surrender market share in lower-value products,” continued the WSJ.

The newspaper quoted Rhodium as saying: “China provides fewer opportunities as an export market for emerging countries while competing head-on with them in the low-tech and mid-tech space.”

Agree? Disagree? Whatever your position, I think we all need to all agree that global chemicals demand, supply and trade flows will be shaped by the above. The old, comfortable world of the Chemicals Supercycle is over for good.

What the China chemicals data tell us

Since the Evergrande Moment in late 2021, China seems to have pivoted even more towards investment in export-focused manufacturing. This trend has of course been going on for decades. But the data suggest there has been an acceleration of the push to dominate both low -and higher-value exports.

How will the rest of the world respond? A 29 November South China Morning Post article said the following:

The EU’s civil service [last week] flew officials and experts in, at von der Leyen’s personal invitation, from around Europe and the United States for a full day devoted to Chinese overcapacity – an issue former trade chief Valdis Dombrovskis described as a “significant threat”.

“From steel and solar panels to shipbuilding and the automotive industry – this is not an abstract challenge, it is reality. And for many businesses, both in Europe and within our partners, it is an existential challenge,” Dombrovskis said.

The newspaper quoted a report published last week by the Mercator Institute for China Studies, a German think tank. The study detailed the efforts of 50 governments around the world to react to a surge in Chinese exports in recent years.

According to the report, the products being protected varied significantly from, for example, elephant-print trousers (Thailand) and brass keys (Brazil) to semiconductors and ship-to-shore cranes in the case of the US.

EU policymakers believed that Chinese government subsidies had led to a rush of investment in manufacturing sectors such as steel, chemicals, cement to solar panels, wind turbines and electric vehicles, the newspaper added. How will the EU respond? How will the rest of the world respond?

The chart below, from the ICIS Supply & Demand Database, shows China’s actual capacities as percentage shares of local demand in some polymers in 2021 (the Evergrande Turning Point) and forecasts for 2030.

We need to debate the extent to which this “overinvestment” (in inverted commas because this is a value judgement) reflects weaker-than-expected domestic demand growth versus a concerted to push towards being more export-focused. Or are these two things the same?

What’s significant about some of these polymers as that they can be higher-value, perhaps underlining the point made by the WSJ about China’s push into higher-value manufacturing. Look at the patterns in EVA and polycarbonate, for example.

China has long dominated global production in polyester fibres, so the small decline should be put into this context. In PVC, we might see substantial consolidation of carbide or coal-based capacities for environmental and cost reasons.

Now let’s overlay this chart with the chart below, showing China’s percentage shares of global capacities in these same polymers.

We must be careful here as if we take the data back further, to the start of the Chemicals Supercycle, the pattern between 2021 and 2030 doesn’t seem to be as alarming. As you can see, there was big much earlier surge in China’s share of global capacities between its admission to the World Trade Organisation in 2001, its huge 2009 economic stimulus package and 2023 Evergrande Turning Point.

But historic context is everything. In 2001-2021, trade tensions between the rest of the world and China were not where they are today. The world felt more able to accommodate China’s dominance of chemicals and other manufacturing value chains.

Conclusion: The old ways of looking at markets no longer work

You can talk as much as you like about cost-per-tonne economics and about feedstock advantage, but it won’t get you very far in this post-Supercycle world. Today’s blog is another example of why we need to broaden our analysis out to include a wide range of big picture factors that will shape the global chemicals industry.

In this case, you need to build a matrix of countries, companies and chemicals products and then determine scenarios for the effect on all three of a much more uncertain global trading environment.

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