As someone who has witnessed the chemical industry's evolution over several decades, I am acutely aware that the business is inherently cyclical. Historically, every five years or so, the industry would experience an overbuild of capacity, compelling manufacturing units to operate with minimal profits until demand eventually caught up. Then came China.Spanning nearly three decades, from the mid 90’s to 2021, China's rapid industrial and urban expansion seemed insatiable. Empty cities and sprawling highways quickly morphed into bustling metropolises and traffic-choked thoroughfares. I personally observed this hyper-growth in China, witnessing the transformation of once-empty eight-lane highways into congested roads within just five years. This era defined not only the latter part of my career in chemicals but also the perceptions of many of today's industry leaders.
Despite a wealth of historical evidence suggesting the inefficacy of central planning, the Chinese model of building ahead appeared, against the odds, to be remarkably successful. International capital flooded into China, fueling its economic engine and leading many to reconsider the potential merits of centralized economies. And the living standard for hundreds of millions of Chinese substantially improved. As the global community watched in awe, we almost allowed ourselves to believe that China had beaten the odds and discovered a new formula for sustainable growth.
However, the situation today paints a starkly different picture. China's demographic landscape is undergoing an irreversible decline, with labor rates set to escalate for years to come. The infrastructure built for projected growth is now obviously excessive, as the real estate sector faces a crisis that overshadows the 2008 financial collapse, destroying trillions in capital and precipitating a wave of capital flight. The very assets that once underpinned China's meteoric rise now threaten to unravel its economic fabric.
And rather than reassess, China seems to be doubling down on this approach. After glutting real estate and basic materials, it’s turned it’s eye to tech. Consequently, the world is witnessing a flood of Chinese-manufactured goods entering global markets, including chemicals, electric vehicles (EVs), and solar panels. The once-insatiable demand for these products within China has dwindled, leaving a surplus capacity eager for foreign markets.
If one thinks of this as “super-cycle"," with a two-decades-long boom, then the “bust” that faces us is unprecedented. A decade-long slump in materials demand looms, fueled by massive overbuilds that leave the market reeling. For instance, operating rates for polyolefins and ethylene, a key raw material, have plunged to historic lows, with predictions of sub-80% operating rates persisting for a decade at least!
The double-barreled impact of China's weak domestic growth and excess Asian capacity seeking new markets has created a climate of hyper-competition and stunted growth globally. If we set aside the narratives of the past two decades and return to the core economic principles, we should see that central planning, even if it works for a while, always brings with it capital misallocation. This reckless expansion has set the stage for a global market shakeout—one that promises to redefine the global materials landscape.
In this post-China Boom era, identifying new growth avenues is a clear challenge. As the industry braces for the shakeout, there will be clear winners and losers. Success will hinge on the ability to discard old narratives and adapt to the new realities (or maybe we should say return to the old ones). There are 3 key actions that leaders must undertake to start down this path:
Ultimately, the Chinese economic model that once captivated global attention is now a cautionary tale of over-expansion. As the industry returns to its cyclical roots, embracing historical wisdom and adopting a nimbleness to change will be key to survival in the new reality.
Until next week,
Kendall -
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