“Houston, we have a problem” – China’s move to self-sufficiency a game-changer for the plastics industry

“Houston, we have a problem!” This famous phrase, alerting the world to the problems on the 1970 Apollo 13 moon mission, aptly describes the impact of China’s move to self-sufficiency for the plastics industry. Not only Houston, but everyone who currently relies on exports to China, are wondering what happens next?

Since 2009, China has been the growth engine of the chemicals industry and the global economy. Its slowdown, and rapid moves to self-sufficiency, are raising critical questions over the outlook:

  • Major over-capacity is now developing in the major value chains
  • Already profits have begun to tumble along with margins, as discussed here last month
  • And signs of the ‘demand recession’ are multiplying under the impact of today’s higher inflation and interest rates
  •  Current demand levels are very weak, even though this is one of the seasonally strongest times of the year

The charts highlight the problem for the world’s 2 major plastics – polyethylene (PE) and polypropylene (PP).

President Trump’s decision to launch his China trade war means that policy has moved from cooperation to competition. China is now rapidly expanding its own capacity, in order to remove the need for imports from the USA – and other major regions.

Based on Q1 data, China’s self-sufficiency level in PE is likely to reach 70% this year versus just 51% in 2020. And in PP, it will likely reach 96%.

At the same time, of course, companies are beginning to realise they were fooled by China’s stimulus programme into believing:

  • That demand would continue to grow for decades, and at double-digit rates
  • Essentially, as Prof Pettis of Peking University has warned, they have over-invested in new capacity, based on over-optimistic assumptions about future demand

For the moment, the full impact is being hidden by the inflationary impact of the Ukraine war. But it is increasingly clear that we are now moving, for the first time in living memory, into a ’demand recession’.

And as with the Apollo 13 rescue, there is no ‘business as usual’ option. China’s move to achieve self-sufficiency is not the only problem on the horizon.

Closer to home, the industry is under increasing pressure from investors, governments and brand owners on the issue of single-use plastic and plastic waste.

This is another game-changing development, as single-use plastic accounts for more than half of PE demand and around one-third of PP.

And it confirms the urgent need for companies to follow the auto industry and adopt new, forward-looking, business models based on Net Zero needs.

Autos are now reinventing themselves to focus on Electric and Autonomous Vehicles. And the plastics industry now needs to similarly refocus on the 4 key challenges involved in moving to use recycled plastic as a major feedstock:

  • One key issue is the need to dramatically increase the collection and sorting of waste plastic. This will transform today’s problem of waste plastic and marine pollution into a valuable feedstock for the future.
  • Secondly, managements need to task their technical and manufacturing colleagues with resolving today’s problems with pyrolysis and other potential recycling technologies. Only the majors have the resources and expertise to do this.
  • Thirdly, their commercial teams need to work with waste companies, local and national governments, as well as brand owners and retailers, to implement a more circular business model for the industry.
  • Fourthly, finance teams need to begin raising the investment needed to fund roll-out of the new business model on the scale required. Local waste centres need to become recycling centres, linked with existing infrastructure wherever possible.

Essentially, China’s move to self-sufficiency, and the need to deal with the issue of plastic waste, means there is no ‘business as usual’ option. There is only limited time available to achieve the necessary transformation. Winners and Losers are already starting to emerge, as companies react to the challenges of today’s New Normal world.