By John Richardson
AGAIN, PLEASE don’t say I didn’t warn you. The shift from inflation to disinflation or deflation is already well underway, much earlier than my prediction for the first quarter of next year.
American retailers, after spending months scaring customers with stories of shortages, were trying to lure them into stores with discount offers, extended sales, and faster deliveries, wrote John Dizard in this Financial Time article.
But Dizard said the data suggested customers weren’t interested. This could indicate that the cycle of goods and services, the result of the end of lockdowns, is well advanced. The destruction of demand due to the sharp rise in inflation also appears to be a further drag on consumer spending.
Chicago’s October ISM inventory index rose 8.5 points to 59.6, the highest since fall 2018 in the United States. The region’s manufacturer order books fell 18.8 points to 60.8, 6 points below the 12-month average, Dizard wrote. The Chicago ISM is considered a reliable business barometer nationwide.
Susan Sterne, president of U.S.-based Economic Analysis Associates, has spent years tracking U.S. buying trends, inventory levels, labor levels, and sentiment metrics .
High inventory appeared to be “more of a shortage of demand than supply, which is consistent with what the consumer is saying about current buying conditions,” Sterne said.
But don’t necessarily expect the same level of support for US government stimulus demand that we’ve seen over the past 18 months. Joe Manchin, U.S. Democratic Senator, could successfully block passage of President Joe Biden’s $ 2 billion Build Back Better spending package, which includes new social and climate change spending proposals.
But Manchin, like many people, could be in danger of fighting yesterday’s battle. His objections to Build back better is based on inflation. But his perspective changes when it is commonly accepted that the fear of inflation is over.
Further evidence of the supply stretch came from Dell, which reported an extraordinary 60% year-over-year increase in inventory for the nine months through September to $ 5.4 billion. In the same nine months, HP’s inventory rose 33% to $ 7.9 billion.
It is not just the result of weakening demand. This is also because of the “boost” effect: sharp increases in inventory during the sudden arrival of raw materials and finished products, long stuck in today’s dysfunctional supply chains.
And, since one of the few things you can get fired as a purchasing manager for is running out of stock, it seems likely that purchasing managers in many countries have placed excessive orders to make up for late deliveries. caused by shortages of containers and truckers and blocked ports.
This raises the question of the quantity of stocks at sea or in port warehouses. When they arrive, it will be in addition to deflation or disinflation. It seems logical that stocks in transit are huge due to a) hedging against supply chain disruptions and b) hedging against further price hikes by buying more than is immediately needed.
And there is China’s long-term structural slowdown.
Last week’s reaction to Evergrande’s default on his debts was incredibly quiet. I suspect it was because other events “crowded out” the news.
But it’s still a massive deal, as Beijing’s decision to allow Evergrande to default underscores its unwavering commitment to common prosperity. One indication of this commitment is the graph below, by blogger Paul Hodges, which shows China’s decline in “shadow” or speculative loans.
“There is no sign of panic from Beijing based on the November loan numbers,” Hodges said.
“Since China’s real estate bubble started to burst, funding for local governments has been on the rise as they have bought more unsold land themselves,” he added.
“But shadow banking, which financed the bubble, has remained in the doldrums. 2022 will see the implications of the explosion on global commodity markets as speculative real estate demand from China subsides. “
I couldn’t agree more with this last statement. The speculative foam has been removed from the Chinese economy. As indicated by the increase in loans to local communities, this will be a stable and well-managed economic transition. There will be no collapse.
But as I have been saying since September – and as summarized in the graph below – China’s economic growth will become less commodity intensive due to the policy shift from Common Prosperity. The graph also includes what this could mean for Chinese demand for polypropylene (PP).
Looking at the PP forecast in detail, our baseline scenario indicates an average annual demand growth of 5%.
But what if it were to reach 3% on average? Cumulative demand in 2021-2025 would be 14 million tonnes lower than the baseline scenario. The second drawback, with growth of only 2%, would leave cumulative demand 20 million tonnes lower.
This is a huge deal because in 2020, China accounted for 41% of global demand, well ahead of any other region.
China’s slowing growth in demand for raw materials, including petrochemicals, is therefore another major global deflationary or disinflationary trend that is already underway. Partly due to common prosperity, China’s polyethylene (PE) demand growth in 2021 is expected to be negative compared to 2020. PP growth will still be positive, but lower than expected.
As we dig deeper into what this all means for polyolefins, let’s take a look at the supply of PP and PE.
China will drive global PP oversupply as US drives global PE oversupply
The graph below, taken from this article from last week, shows how China could become a net PP exporter in 2022 from a net import position of 6.1 million tonnes in 2020.
There is nothing new here, as we saw a similar drastic change five years ago in Purified Terephthalic Acid (PTA) in a very short time, China went from being the largest net importer to world to that of a net exporter.
And like in the PTA five years ago, few see this potential for the PP. The conventional view is that China will still be in a net import position of around 3-4 tonnes per year of PP from 2022 until the end of the decade.
May be. But just imagine the psychological impact on the markets if I’m right and China unexpectedly becomes a net exporter of PPs next year. This would obviously weaken market sentiment.
But no matter the psychology, just look at the physical impact of this change, illustrated by the graphic below.
Our baseline scenario predicts that China will still import 3.6 million tonnes of PP in 2022, 33% of the global total of around 11 million tonnes, just behind Europe including Turkey with 3.7 million tonnes. tonnes to 34% of the total.
My alternative outlook assumes weaker Chinese demand growth in 2021 and 2022 on common prosperity – three percentage points lower in 2021 and two percentage points lower in 2022 than the base cases. I increased exploitation rates from 2022 to 86% from our base case of 82% to achieve net exports of around 600,000 tonnes in 2022.
My figures could, of course, be wrong. But the minor scale of my adjustments shows how easily China could swing into net exports. And without China, the remaining net import market would drop to 7.4 million tonnes, creating a much more congested space.
While the Chinese supply of PP could dominate the global PP market in 2022, it could well be the American supply of PE as the graph below reminds us.
High density polyethylene (HDPE) and low density polyethylene (LDPE) [KJ(S1] US stocks are reportedly high as local production returns to normal after exceptional production losses this year.
Chemical Data, the ICIS service, estimates that in January-November 2021, US exports as a percentage of overall production were 23% due to production. Under normal operating conditions, exports as a percentage of production should be 33%. Go figure it out.
Conclusion: Lower container freight rates, the final piece of the puzzle
On the subject of oil prices, before moving on to containers, I think the prices will go down either because of the increase in supply resulting from the political pressure on OPEC + to increase production, or because of ‘a global recession because crude now costs more than 3% of global GDP. On several occasions in the past, crude above 3% has caused recessions. Hopefully the first will happen.
Some analysts predict a 40% drop containerized freight rates in 2022. Last month I predicted container rates would drop next year on the cycle of demand for goods and towards services due to the easing of lockdowns.
It would be the last piece of the puzzle. When lower container rates kick in, I see a picture emerge of the polyolefin trade becoming much more global again. Take a look at the table below and think about what that means whether you are a producer or a buyer. Consider the box at the bottom of the graph.
Now take a look at this last graph below, again showing the Linear Margins of Low Density PE (LLDPE), but this time with a focus on the United States. The same pattern of margin divergence – huge premiums in Europe and the US versus Asia in 2021 – applies to other grades of PE and PP.
I see the margins in 2022 normalize towards Asian levels as broader deflationary or disinflationary trends kick in.