INSIGHT: Global crisis hits China’s ethylene plans

13 January 2009 12:13  [Source: ICIS news]

By Elsa Yan

SHANGHAI (ICIS news)--China has delayed many of its cracker projects with further postponements possible as a result of the global economic crisis, CBI analysts said on Tuesday.

Eventually, the two state-owned petrochemical majors – PetroChina and Sinopec – aim to add 8.45m tonne/year of C2 capacity to an existing capability to produce 9.62m tonne/year. But negative demand growth for polyethylene (PE) and polypropylene (PP) in the first 11 months of 2008 - resulting mainly from the collapse of exports of finished goods to the West - has forced a major rethink on timings.

Long-term optimism over growth remains high as a result of government efforts to reduce export dependence and boost domestic consumption.

But there is less confidence on how this demand will be met because the rise in coal prices and the falls in crude have raised doubts over coal-based olefins investments.

China has abundant coal reserves, which, on paper could enable it to become much more self-sufficient in petrochemicals.

More immediately, the task China confronts is bringing markets more into balance following the economic disasters of 2008.

In December last year, PetroChina delayed the start-up of two cracker projects – at Panjin, in northeast China’s Liaoning province, and at Dushanzi, in the north-western Xinjiang autonomous region – representing 1.45m tonne/year in capacity, from 2008 to H1 2009. Later the same month, Sinopec said that it would slow construction of several on-going projects and suspend those where ground had not been broken.

The 1m tonne/year cracker at Zhenhai in the eastern province of Zhejiang and the 1m tonne/year cracker at Tianjin in northern China have been postponed from the fourth quarter of 2009 to the first half of 2010.

The 1m tonne/year cracker at Nansha Island in southern China has been delayed from 2010 to 2011 or beyond due to a change of location from Guangzhou province and undecided downstream facilities.

Other crackers slated to come on stream in 2010-2011 include Chengdu at 800,000 tonne/year, the planned 600,000 tonne/year facility at Daqing – both operated by PetroChina – and Sinopec’s 1m tonne/year project in Wuhan.

“It is likely that these projects may be postponed to 2013,” according to Li Xihong, president of Sinopec’s Economic & Development Research Institute.

The confirmed delays mean that China’s ethylene capacity is scheduled to increase by one-fifth to 11.87m tonne/year by the end of this year. This includes Fujian Refining and Petrochemical, the 800,000 tonne/year cracker and derivatives complex due on stream in Q2 2009. The project is a joint venture between Sinopec, ExxonMobil and Saudi Aramco.

China faces “unprecedented risks” in 2009, the greatest since it became an emerging economy, according to Shen Gaoming, chief economist of Caijing, a local leading finance and economics magazine.

But he has talked of the inevitability of the government achieving its objective of transforming the economy over the coming years from being export to consumption-driven.

China’s export volumes showed a 19.2% year-on-year increase in October 2008 but contracted by 2.2% in November. Export-focused factories continue to shut down in large numbers in the country’s southern and eastern provinces.

Flagging downstream demand resulted in local olefin derivatives prices falling by as much as two-thirds during 2008.

Various grades of PE and PP tumbled by 50% or more from record highs in June. The worst-affected grade of PE was low-density (LDPE), the price of which had fallen by nearly 60% as of end-November, said CBI. PP yarn grade had fallen by 61%.

Apparent PE demand fell by 1.28% in January-November to 10.28m tonnes compared with the same period in 2007, CBI added. PP consumption contracted by 1.3% to 9.57m tonnes over the same period.

Still, confidence remains over China’s fundamentals with recent government measures expected to deliver long-term benefits.

The government increased export tax rebates for partial textile and garment and plastic woven and non-woven products from 11% to 13% last August. These were further increased to 14% in October.

And then in November, a Yuan (CNY) 4,000bn ($584.7bn) economic stimulus package was announced. CNY 100bn had already been spent by the year end.

Local plastic pipe manufacturers are expected to be major beneficiaries of spending on construction and on projects across many sectors where the emphasis is on low-energy consumption.

The stimulus package and delays to projects are likely to tighten PE supply over the medium-term, said Li Jie, an analyst with CBI. She added that the local market is already 30% dependent on imports.

Low-cost ethane-based Middle East production is ideally placed to take advantage of resurgent demand growth, Li added.

The big unanswered question - once the dust from the global economic crisis has settled - is how many further projects China will announce.

The cost advantages of coal-to-chemicals have been undermined by the sharp rise in coal prices since 2006 and the falls in crude. 

Only one coal-to-olefins plant is on stream – the 600,000 tonne/year Shenhua (Baotou) Coal Chemical Industry Co facility.

($1 = CNY6.84)

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By: Elsa Yan
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