Will China’s troubles hit chemical tanker demand?

Economic turmoil…? Last year saw chemical tanker demand in and out of China grow strongly as it exited its zero-tolerance approach to Covid which had previously proved to be a significant drag on the Chinese economy. However, the economic rebound was relatively short-lived and now the country finds itself facing increasing economic headwinds including turmoil in its construction and property sectors, persistently high youth unemployment and deflation. Indeed, last year’s official Chinese GDP number was 5.2%, although this was a rebound from the Covid-hit 3.0% posted in 2022, it was a slowdown from the 7.7% averaged over 2010-19. Considering that Beijing has set its GDP goal at an ambitious 5% in 2024, initial expectations were for a large scale stimulus package which could kick start the economy. However, Beijing, appears to be resorting to a rather hands off approach to controlling the economy. As we recently stated in BRS Weekly Dry Bulk Newsletter, as Chinese policy makers balance national security considerations and attracting and retaining foreign investment, they are largely ‘tweaking around the edges’ rather than introducing policies aimed at tackling these issues head on. Accordingly, expectations for such a stimulus injection are receding, as are GDP growth expectations with projections now lying in a 3-4% range.

…Or just a deceleration? Taken at face value, the above suggests that China is in line for a hard landing. However, we do not subscribe to this view. The Chinese economy has experienced phenomenal growth over the last couple of decades and this could not continue forever. Indeed, the Chinese economic model is shifting towards being based more on encouraging domestic demand, high value manufacturing and new technologies for the energy transition, and away from being reliant on low value manufacturing for export, investment, property and infrastructure construction. It is there inevitable that growth would slow down. Indeed, such slowdowns have always been part and parcel of economic development with such slowdowns being sporadically experienced by the mature economies of the OECD. Indeed, it should be noted that even growth in the 3-4% range makes China the envy of many developed, western economies.

Bright outlook. Despite the above, we maintain our expectations that the prospects for Chinese chemical demand should remain strong across both the short and medium terms. Although China is shifting its manufacturing base, it should continue to have an almost insatiable appetite for chemicals. Moreover, although the turmoil in the construction sector will put a dampener of Chinese chemical demand, it is still projected to grow strongly due to offset coming from other sectors. For example, China is now the world’s largest producer of electric vehicles with its output soaring at an astounding rate, and projections suggesting that growth should accelerate going forward. Furthermore, China is also seeing some structural shifts which will support its chemical exports. Principally, it is constructing vast amounts of petrochemical capacity. Last year, China added nine new PDH units, with capacity for 5.4million mt/yr of propylene and 6.48 million mt/yr of propane. Moving forward, demand for petrochemical feedstocks should remain strong as we understand that around 7.3 mt/yr and 6.0 mt/yr of petrochemical capacity should be commissioned in 2024 and 2025, respectively. As this capacity ramps up, we anticipate that a sizable chunk of its output will be exported, both to Asia and farther afield.