As you plan for 2025, a reminder of the big shift in market fundamentals

MANY ICIS data points tell the same story. So does data that’s been shared with me from the research and analytics teams at several of the major global chemicals and polymers. producers.

What’s consistent across the numbers I’ve parsed can be summarised as follows.

China came to dominate global chemicals consumption, way out of proportion with the size of its population, from 1992 onwards as the 1992-2021 Chemicals Supercycle began. We can see this from the ICIS Supply & Demand Database chart below.

In 1992 – the year of Deng Xiaoping’s Southern Tour after which economic liberalisation delivered a huge export-focused boost to China’s economy – China’s share’s percentage share of the global demand for the nine synthetic resins listed above was just 7%. This was from a 22% share of the global population.

Move the clock forward to the end of this year when ICIS predicts that’s China’s global share of the same resins will have soared to 40% from only an 18% share of the global population.

Compare this with the much more populous Developing World outside China, comprising developing countries in Asia Pacific, Africa, the Middle East including Turkey, the Former Soviet Union and South and Central America. By the end of this year, this region of 5.3bn people is forecast to account for 68% of the global population but just 32% of the demand for the same synthetic resins.

So, why the disparity? As mentioned, first came the liberalisation that followed Deng’s Southern Tour. Then came China admission to the World Trade Organization in late 2021 which removed the tariffs and quotas that had restricted China’s exports of finished goods to the West.

This enabled China to take maximum advantage of what was then still a youthful population. The boom was further supported by the outsourcing trend in the West and China’s excellent infrastructure and strong manufacturing economies of scale.

But World Bank data show that way back in 1992, China’s births per woman first fell below the population replacement rate of 2.1 babies. This has been the case ever since. The chemicals industry could and should have realised that China’s demographic dividend of a youthful population would eventually disappear.

Further warning bells should have sounded when the third phase of China’s remarkable chemicals demand-growth story began. This was the launch in 2009 of the world’s biggest-ever economic stimulus package for an economy the size of China’s.

China’s middle-class myth

This led to a property bubble that enriched only a small proportion of the country’s population while leaving real estate in the big cities out of the reach of hundreds of millions of people. Again, this is what the macro-economic data tell us. Period.

Switching our academic discipline from data analysis to history, history has long told us that asset bubbles always end, usually with a period of rapid deflation in valuations.

We were just waiting for more normal levels of Chinese chemicals growth to happen, more in proportion with the country’s share of the global population.

This knowledge should have led to greater caution over global capacity additions. Instead, “We have the feedstock advantage and so we will build” was the approach. This was accompanied by the assumption that because China’s middle class was rapidly growing, demand would always be fine.

Further, conventional views of what drove chemicals plant construction in China assumed that China would not come close to fulfilling its ambitions to become much more chemicals self-sufficient, which were first announced in 2014. The data on China’s capacity additions again expose the flaws in conventional thinking.

The chart below shows how costly these mistakes have been. The chart features ethylene and propylene, but the story is the same in just about all the building-block chemicals and their derivatives.

Before the Evergrande Turning Point in late 2021 (more on this later), a “wisdom of crowds” approach of talking to lots of people shows a consensus that China’s long-term chemicals demand would grow at 6-8% per year.

But the government’s decision not to support the property developer Evergrande in late 2021 triggered the end of the country’s epic real estate asset bubble. We all, belatedly, know the scary statistics. For example, there are 20-30m houses that Chinese citizens have paid for that have yet to be built.

The Evergrande Turning Point has combined with the “drip, drip, drip” of China’s ever-worsening demographics. The country’s population decline may be much worse than the official data suggest, according to ICIS economist Kevin Swift.

Plus, of course, we have China’s growing geopolitical and trade split with the West, especially with the US following Donald Trump’s successful re-election. How might US tariffs of up to 60% on Chinese imports effect China’s economy?

Major capacity closures needed to return markets to normal

As mentioned again, the consensus view before the Evergrande Turning point was that China’s chemicals demand would grow at 6-8% per year.

Now, 1-4% per annum chemicals demand growth – perhaps even negative growth for some chemicals tied to construction – seems more likely. It is the gap between 6-8% and 1-4% that largely explains the vast global oversupply that we can see in the above chart.

What would it take to return global chemicals markets to normal? What would it take to address the vast global capacity overhangs up and down nearly all the value chains? Let’s use ethylene as an example.

ICIS forecasts that global ethylene operating rates will average just 78% in 2024-2030. This would compare with the very healthy 1992-2023 average of 88%.

What would have to happen to return global operating rates to the 1992-2023 average of 88% from now until 2030?

Assuming global production, which is about the same as demand, stays unchanged from our base case, global capacity would have to grow by an average of around 2m tonnes a year versus the ICIS base case of 6.2m tonnes a year.

Advantaged projects in the Middle East and North America seem likely to still go ahead under this alternative scenario, and China might continue its push towards greater self-sufficiency. This implies capacity closures elsewhere to get to the 2m tonnes a year of 2024-2030 capacity growth.

Global capacity would need to grow at an average 1% per year to achieve a 2024-2030 operating rate of 88%. This would compare with the 1992-2023 average of 4%.

Conclusion: What we can learn from this story

We should not have taken intellectual shortcuts. The problem during the Chemicals Supercycle was not enough people asked hard questions about the nature of demand growth in China. Instead, too much analysis focused on feedstock advantage only while assuming demand would take care of itself.

We thus need to set up demand teams that build much more nuanced and in-depth scenarios about what could happen next in China and elsewhere. How will demographics, climate change, geopolitics and the energy and chemicals transitions shape future global consumption growth?

Artificial intelligence is potentially a fantastic tool to help us model this complexity, provided we ask it the right questions and use a commodity in much shorter supply than chemicals: Commonsense.

Another lesson we can take from recent history is not listen to those who shun this complexity, who stick to the tried and failed approach that got us into this mess in the first place.

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