China PVC Oct14Be very careful what you wish for.  That is the key message coming out of close analysis of China’s latest trade data.

Recent media reports were upbeat at news that China’s exports had increased, as it appeared to suggest Western demand was returning.  But it seems nothing could be further from the truth.

One major concern is that part of the increase was due to the final convulsions of the collateral trade, as I will discuss tomorrow.  Property developers are clearly making last desperate efforts to raise cash by any possible means

A second critical issue is that the data confirms that China is now becoming a major exporter of high value products, such as PVC and PTA, for the first time in history.

CHINA IS BECOMING A MAJOR EXPORTER OF PVC
PVC highlights the change underway, as data from Global Trade Information Services shows.  PVC is one of the world’s major plastics, used in drainage pipes and windows by the construction industry.  As recently as 2009, when its stimulus programme began, China was the world’s largest importer.

Its net imports in 2009 totalled nearly 1.5 million tonnes, coming mainly from Asia and the US.  But since then it has been busy expanding its own production.  By 2012, its domestic output had jumped 70% from 9MT to 15.25MT.  As a result of this, and the start of the housing market slowdown, its 2012 net imports halved to 665kt.

Since then, further major change has taken place as the chart shows, based on January – September data:

  • Critically, China is no longer a net importer of PVC
  • Its total imports have fallen to just 608KT in 2014 (red column) versus 816kt in 2012 (blue column)
  • Its total exports have risen from 285KT to 949kt over the same period
  • As a result, it has become a net exporter of 341kt

This change in policy by China was confirmed a year ago at the 3rd Plenum.  And its impact has been building since May.

  • The big loser so far has been the USA, despite its cost advantage due to shale gas developments
  • China’s imports from the US are already down 34% versus 2012 levels
  • And at the same time, China has been gaining export market share, partly at US expense
  • It has sold 364kt into India so far this year and 175kt into SE Asia
  • Exports to the Former Soviet Union have doubled from 124kt in 2012 to 277kt this year.

It also seems highly unlikely that China will change course.  Most of its PVC production is coal-based, and it is strategically important for the country to maximise use of this resource, given its wider energy deficit.  PVC production also maintains employment in the coal regions – which is critical for social stability.

PTA DEVELOPMENTS CONFIRM THE TREND TO EXPORTS
Developments in PTA, the raw material for polyester, confirm the major change now underway:

  • China was importing 6.5MT of PTA as recently as 2011, but volumes more than halved to just 2.76MT in 2013
  • In January – September  2014, import volumes have more than halved versus 2013 to under 1MT
  • China has also begun exporting PTA for the first time in history, with volume of 340kt by September
  • On current trends, China could also be a net exporter of PTA by this time next year

Companies and investors seem so far to have preferred to ignore these developments.  But China’s drive towards self-sufficiency is unlikely to reverse.  And social stability means it has to replace its lost export-oriented jobs in low-margin textile and other industries via a move up the value chain.

Thus very soon, one suspects, the Western media will be reporting howls of pain instead of cheers as China’s export surge continues.