Polycarbonate trade flows: The need for new approaches to reflect trade tensions

By John Richardson

THE SOUNDTRACK of my youth was provided by the Canadian progressive heavy rock band, Rush. In the fabulous Tom Sawyer, the lyrics include the following: “His mind is not for rent, always hopeful yet discontent, he knows changes aren’t permanent, but change is”.

Don’t let your mind be rented by anybody who tells you that the global chemicals industry isn’t going through the most profound set of changes in its modern-day history.

Sure, some of the changes might not be permanent – for example, I am beginning to wonder whether the sound and fury generated by recycling might quieten down, leaving the industry where it is today: A niche industry that cannot be scaled-up anywhere near-enough to meet polymers demand.

But sustainability in general seems sure to remain a defining force, much more than it was ten years ago. I have fewer doubts that the pressure to reduce carbon will reshape how we make things at the scale needed to meet demand.

The plastics waste crisis may end up being mainly addressed through building the infrastructure in the developing world to prevent waste from getting into the environment at today’s ruinous levels.

Even if recycling isn’t a mass-scale solution, then at least we can store a great deal more plastic in managed landfills with some recycling and controlled incineration. This would be a great deal better than allowing today’s quantities of plastic waste to continue to leak into the oceans and rivers.

Nobody knows all the details of the changes that will be permanent. Anybody who claims they know will lead you down a dangerous path away from the rigorous scenario planning essential for future proofing your business.

But we do know that in this world of flux and chaos at a micro level, the following macro trends are here to stay: Ageing populations across most of the G20, much more volatile geopolitics, ever-greater economic, social and political disruptions caused by climate change and the end of debt bubbles.    

China’s exports, geopolitics and third-party countries

The rest of this post is a follow-up to my 22 August post. A reminder of the post is contained in the slide below.

There are further complexities that I need to discuss today, to add to the ones I raised on 22 August.

Will the US, for example, play a successful “wack-a-mole” game against China as it blocks China’s finished-goods exports from third party countries such as Mexico, Turkey, Vietnam and Thailand?

Or, as I suggested in August, will this be practically impossible, at least in the short -to medium-term, because of China’s dominance of manufacturing chains such as electric vehicles and solar panels?

In the longer-term, major reshoring could take place in the US thanks to the Inflation Reduction Act. But is such reshoring affordable and sensible in a world already facing severe manufacturing oversupply? Will it therefore happen? How might politics in the US reshape the reshoring process?

What’s clear from this 5 September Financial Times article is that China has very successfully hedged against the risks to its exports by relocating services and manufacturing to third-party countries. Let’s just focus on Mexico as an example.

“Mexico is a member of the US-Mexico-Canada Agreement (USMCA), the successor to NAFTA, which embraces 510mn people and accounts for another 30 per cent of the global economy,” wrote the FT.

“Chinese companies have quietly gained a considerable foothold as investors in Mexico over recent decades,” the newspaper added.

The FT added the following points:

• One in five cars purchased in Mexico in 2023 was made in China, with half of these by Chinese manufacturers. Electric-vehicle makers such as BYD and Chery were looking for factory sites in Mexico so they could export to the US and avoid tariffs on vehicles imported to the US from China, which rose to 100% in August.
• US patience with Mexico’s role as a tariff-free staging area for China was running thin. The US had scolded Mexico over a lack of transparency in its steel and aluminium imports from third countries like China.
• But some experts said China was already too deeply embedded in Mexico for a change of direction to be possible.

Global polycarbonate per capita consumption

Let’s now look at polycarbonate (PC), starting with the chart below.

This is not real per capita consumption as our data do not factor in exports of PC as components of finished goods (this applies to all the chemicals and polymers in the ICIS Supply & Demand Database).

What the chart instead shows is populations in millions divided by PC demand in kilograms to get to gross rather than net per capita or person consumption in each of the countries and regions.

Watch this space as next year I plan to work with our data science team and fellow analysts to estimate the export components of per capita consumption.

Nevertheless, the above chart does show the extent to which China (it is the same in all the chemicals and polymers) has driven global demand from 1992 onwards.

Also note that when you separate Mexico from the region to which it belongs – the Developing World ex-China – its per capita consumption has increased in line with that of China’s. This reflects its role, along with China, as a major export centre.

The white boxes next to the trend lines are a reminder of the economic forces that drove the 1992-2021 Chemicals Supercycle.

 As economic liberalisation took off in China followed by its admission to the World Trade Organisation and then its giant 2009 economic stimulus package, the country’s PC consumption soared.

It seems likely that since the landmark Mike Pence speech in November 2018 – which marked a bipartisan shift in US policy towards China – some of China’s PC consumption has effectively been exported to Mexico. This is through the relocation of manufacturing capacity to hedge against trade risks.

Note how much lower per capita consumption is across the whole of the Developing World ex-China compared with Mexico. This reflects Mexico’s much-bigger role in PC end-use markets such as automobiles manufactured for export.

Also note how China’s consumption has surpassed that of the much-richer Developed World, with Mexico’s consumption forecast to about equal that of the Developed World by the end of this year. This again reflects the two countries’ outsized roles in global exports of products made from PC.

So, what could happen next?

China’s PC operating rates, capacity additions and geopolitics

As I discussed in my 6 September post, China has greatly increased its PC capacity during a period when its demand growth has declined.

It is possible that China could move from being the world’s biggest PC net importer to being a net exporter over the next few years. Its ability to export PC resins to countries such as Mexico, to manufacture autos etc, will surely be set as much by the level of trade tensions as by plant economics.

The chart below is a reminder of the extent to which China dominated PC global net imports during the 1992-2021 Chemicals Supercycle and how this has changed.

The ICIS base case forecasts that China’s PC demand growth will fall to an annual average of 3% in 2024-2030 from 17% in 1992-2023.

Assuming this 3% demand growth, capacity growth at 4% and operating rate of just 47% in 2024-2030 (the 1992-2023 operating rate averaged 68%), ICIS forecasts that China’s PC net imports will average around 460,000 tonnes a year.

Let’s imagine in a world of increased trade tensions, China decides it cannot afford to rely on large volumes of imports. Because of the trade tensions, it also cannot export significant quantities of PC to countries such as Mexico to make auto components etc.

Under this outcome, let’s keep demand and capacity growth the same in the base case but raise operating rates to 55%. Average annual net imports fall to just 80,000 tonnes.

What if, though, trade tensions are not that bad? If we again keep demand and capacity growth the same as the base case but raise the operating rate to 63%, China becomes a net exporter at an annual average of 460,000 tonnes between 2024 and 2030.

Building new demand and production forecast models

As mentioned, I plan to look at more granular assumptions of per capita consumption over the next 12 months by attempting to build new models. This of course may not work.

Likewise, I will explore whether new models are possible to predict operating rates, capacity additions and trade flows that reflect the new demographic, geopolitical, debt, sustainability and climate change realities.

It is going to be immensely difficult to build new models and failure will be a big part of any success. But we need to try as the old models don’t seem to work.

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