So What About China?

Recently we saw the latest GDP results release from the Chinese National Bureau of Statistics. GDP grew by 7.3% in Q3 2014 compared to 7.5% in Q2 and 7.4% in Q1. Indeed, overall the first three quarters of 2014 posted a 7.4% year on year increase in GDP. Following the release, the usual media tannoys trumpeted that all is not well in the world second largest economy and oil consumer, and that unless things pick up soon there may be more tough times ahead for as all.

Well, you would be forgiven to believing such doom and gloom such is the current economic landscape in Europe (Germany’s economy contracted by 0.2% in Q2 of this year) and sluggish growth in the US. But we need to slam the brakes on a little and take a look at things more closely, particularly when one assesses the China factor. To begin, it could be argued that the current Eurozone crisis is essentially self-inflicted due to the EU sanctions on Russia. Europe relies heavily on Russian energy; the US much less so. More hawkish commentators would argue that it is clear which of these regions would suffer more from their own sanctions regime and so the current or upcoming crisis is nothing short of expected. Ok, so where does China’s supposed economic stagnation fit in to this? In short, it doesn’t. China has not imposed sanctions on Russia and all its agreements, treaties and business arrangements remain intact and operational. The figures published on a quarterly basis by the National Bureau of Statistics are viewed in negative terms only because they have failed to reach the heady heights of 14.2% GDP growth recorded in 2007. The 7.3% recorded for Q3 2014 and indeed the 7.7% recorded for 2013 overall is still impressive. In fact, a western country can only wish for such figures. One need only look to the size of the investment in feedstock production in the country to see that this giant looks as though it has merely gone for a quick nap.

If we were to look at the coal-to-olefins (CTO) and methanol-to-olefins (MTO) growth one can see China’s quest to remove its dependency on imports and become self sufficient thus leading to a reduced energy reliance which comes with increased political benefits. Both technologies are relatively new to the ethylene supply market and indeed only accounted for 0.4% of the global ethylene capacity as of 2013, according to HSBC. However, in the medium term this figure balloons to 28% when assessing the globes incremental capacity in 2014-2016. Quite a staggering figure but we must exercise some caution that most of this capacity is due online between 2015 and 2017 and the next 12-18 months will be crucial to see how significant and influential this new wave of unconventional supply will be. Only a few projects have been properly launched so far – 6 out of 46 of those that are completed/planned/proposed.

There is no doubt that as one of the largest holders of the world’s coal reserves this route to domestic reliance is plausible and despite the huge costs and uncertainties involved in the new technology the acid test will be in the next few quarters when it will become clearer whether CTO/MTO has really reshaped the global chemical industry or just created a temporary capacity vacancy. In terms of the overall performance of China’s economy compared to the rest of the world, the fact this type of investment is happening shows that there is not only hope but a belief (particularly among Chinese elites and investors) that growth will return to the levels seen before 2008-2009 global recession. Quite how long it will take is down to the performance of the global economy as a whole and so whilst it may take some time things may not be as bleak as they appear!

specialised blog 06 Nov 2014

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