2,900 delegates basked in Berlin’s autumnal sunshine earlier this month at the annual European Petrochemical Association meeting. But in the meeting rooms and in the corridors, all the talk was of the “China chill.” Everyone, no matter their industry or country, was already feeling the effect of China’s new economic direction.
As Pulitzer Prize-winning author of The Prize, Daniel Yergin, observed in a plenary session: “In the past, we have assumed that the U.S. is the locomotive for the global economy. But are we now seeing a new model appearing, where China’s change of economic policy means this is no longer true? Could China’s slowdown have a greater impact on global growth prospects than a possible U.S. recovery?”
Chemical company delegates from around the world all confirmed that China’s slowdown was having a critical impact on their businesses. They also saw the main impact from the U.S. as being more focused on the supply side than on demand. The shale revolution means that the U.S. has taken over OPEC’s role as the swing supplier in oil markets, and there are growing signs that it is taking the same role in global Natural Gas Liquids (NGL) and Liquefied Petroleum Gas (LPG) markets.
These two developments are creating a sense of chaos in energy and feedstock markets. On the supply side, we have seen a 50 percent collapse in oil prices over the past year. On the demand side, the “China chill” means that over-capacity is looming in a number of major value chains. U.S. spot ethylene prices, for example, have already fallen by two-thirds over the same timeframe. One highly-experienced olefins business manager told me he expected to see ethylene selling soon at cost plus 5c/lb – “It’s happened before, and it’s going to happen again” was his summary.
Many delegates shared his fears that energy and petrochemical companies had all rushed to invest at the peak of the cycle. And now the downturn is looming, with the added complication that the “China chill” is not only reducing demand for all commodities – but also taking demand patterns in new directions. As another delegate put it to me, “We have been operating on the basis of supply-led models, where demand could be forecasted on the basis on a GDP forecast from the IMF. Today, it seems we are moving back to a demand-driven world, where over-capacity exists for almost every molecule. Finding a customer is becoming far more important than having low-cost supply, as everyone has the same economics when over-capacity exists.”
This paradigm shift is certainly starting to look more and more plausible. Former boom economies, such as Brazil and Russia, are now deep in recession caused in part by the collapse in China’s demand for their commodity exports. Even the U.S. Federal Reserve postponed September’s planned interest rate rise due to worries over the “China chill”. But every challenge also brings with it an opportunity.
Thus, many delegates were starting to argue that the real growth story for coming decades is no longer going to be based on wishful thinking about growing numbers of middle class people in Asia. Instead, it will be built on supplying the growing numbers of people entering the 55+ generation. 1 in 5 of the world’s population will be in this cohort by 2030.
Even a century ago, life expectancy in the developed world was only 50 years, and just half this in the rest of the world. Today, thanks mainly to the chemical and pharma industries, those aged 65 in the developed world can expect to live another 20 years, and 15 years if they live elsewhere. This dramatic change will create a paradigm shift in demand patterns over time, and a new set of megatrends for the future.
These will be based on needs rather than wants, as those in this New Old 55+ generation already own most of what they need, and incomes decline as they move into retirement. As companies left Berlin at the end of the event, many were starting to think seriously about redesigning current business models to focus on such new megatrends as affordable food, water, shelter, health and mobility.
Paul Hodges is chairman of International eChem (www.iec.eu.com), trusted advisers to the chemical industry and its investment community. He is a member of the World Economic Forum’s Industrial Council on chemicals, advanced materials and biotechnology, and presents the ACS ‘Chemistry & the Economy’ webinars.