2. Export-focused economic growth then really, really took off through China’s accession to the World Trade Organization in 2001. This removed the tariffs and quotas that had restricted China’s exports to the West. This enabled China to take maximum advantage of what was then a youthful population, and therefore its low labor costs. Local chemicals and polymers demand was turbocharged.

3. In early 2009, China launched the world’s biggest-ever economic stimulus package in an effort to make the economy more consumption and less manufacturing-driven. Chemicals demand was further turbocharged.

So, we ended up with the extraordinary situation in 2022 when China’s PP consumption, translated into millions of tons, was 34.6 billion tons from a population of 1.4 billion people; the developing world ex-China’s consumption was 27.6 billion tons from a population of 5.2 billion people.

Coming to terms with low single digit growth in China

I’ve been warning since 2011 that China would eventually face major demographic and debt challenges related to its housing bubble.

In early 2021, I called the end of the housing bubble, based on the ICIS PP and other petrochemicals demand data for China. This was an accurate call.

And in January 2023, I warned that there might not be a strong economic recovery following the end of the zero-COVID restrictions – because of the demographic and debt challenges.

So far this year, this seems to be the case. China’s PP demand, based on the January-April data, looks set to decline by 1% during the full year of 2023 compared with consensus expectations of 5-6% growth.

Why this matters so, so much for the global PP market is that in 2022, China’s share of global consumption was more than 40% up from just 6% in 1992 – because of the three historic events outlined in the first chart. This 2022 percentage share was far more than any other region.

Now let us unpick the above chart to explain why China’s long-term PP demand growth looks set to be in the region 1-2% per year, with possibly some years of negative growth. This compares with consensus expectations only three years ago of 6-7% annual growth.

Household formation has been declining in China since 2013 because China’s population is ageing. China’s births per woman first fell below the population replacement rate of 2.1 in 2001 and has stayed there ever since.

A further problem is that 112 boys were born to 100 girls in 2021. This is of course exerting further downward pressure on household formation.

The need to save money is increasing because of the rising number of retired and therefore dependent relatives.

The old government “put option” on real estate no longer applies. Beijing used to guarantee that property price would never fall which made investments in multiple properties a safe bet. Real estate prices have fallen.

The real estate sector is worth some 30% of China’s GDP, the highest percentage in global economic history.

Provincial governments used to be able to easily raise money for infrastructure spending that spurred economic growth, by issuing bonds that were backed by rising land prices. Local government funding in general was paid for by these bonds. Some 70% of total government spending is via the provincial authorities.

All-time high levels of global PP oversupply

The above chart was compiled by subtracting global PP demand away from capacity for all the years from 1990 until 2025. Only selected years are used in the chart for the sake of easier reading.

Global capacity exceeding demand is forecast to reach 21 million tons this year and remain at 21 million tons/year average between 2023 and 2025. This would compare with an annual average of just 6 million tons in 1990-2022.

The line representing operating rates, plotted on the right-hand axis, shows that ICIS expects capacity utilization to reach its lowest global since 1990 in 2023.

So, why are we in this situation?

As discussed earlier, China’s demand growth was overestimated in 2021-2022 – and 2023 is set to be another disappointing year.

Not enough people expected China to build so much PP capacity. When China announced in 2014 that it would push much harder towards greater petrochemicals self-sufficiency in general, the consensus view was that this wouldn’t happen because of cost-per-ton economics.

But China has always built petrochemicals capacity for reasons other than just the economic returns of individual plants. Supply security and broader economic development play important roles in the government approval process – as well as financing from the state-owned banks.

Events in China are the main reasons for record levels of global PP oversupply, but not the only reasons.

The developing world ex-China’s consumption hasn’t fully recovered from the damage caused by the pandemic. PP consumption growth, driven by the escape from extreme poverty, has been set back by the drain of wealth from low-paid “day rate” laborers, who were unable to work during the pandemic.

More recently, the increase in interest rates has led to a strengthening of the US dollar. This has placed strains on poorer developing economies, which have experienced currency weakness and sovereign debt repayment problems.

In the developed world, higher interest rates on the surge in inflation are eating into demand for durables goods made from PP.

Returning to the subject of the increase in China’s PP capacities, consider the chart below.

China’s capacities as percentages of demand exceeded 100% for the first time in 2021. This year, based on a 1% decline in PP demand growth and a scheduled 12% increase in capacity to 42.7 million tons/year, capacity over demand looks set to reach 124%.

Conclusion: The timing of the recovery

In a 1921 essay for the UK newspaper, the Manchester Guardian, the newspaper’s editor, CP Scott wrote, “Comment is free, but facts are sacred.”

So is the case with petrochemicals. The fact has always been that product price spreads over feedstock cost represent the single best measure of supply and demand balances.

The above chart, from ICIS Pricing, shows the annual average spreads between CFR China PP copolymer and injection grade prices and CFR Japan naphtha costs since our price assessments began in 2023.

Last year marked the lowest annual spread since 2003. So far this year, spreads have only edged slightly higher from their 2022 record low.

The data tell us that until copolymer and injection grade spreads return much closer to their 2003-2021 averages of USD 597/ton and USD 545/ton there will have been no recovery.

I don’t see any return to normal market conditions until H2 2025 at the earlies, given the distance that spreads need to travel to return to their long-term averages and the macro-economic environment.