INSIGHT: A self-sufficient, acquisitive China is a real possibility

28 March 2009 17:00  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--The world might be about to turn upside down as China becomes almost self-sufficient in some chemicals and polymers while it also buys assets overseas to boost energy security, its technological know-how and geopolitical muscle.

This is scary stuff if the assumption for your business is that the world’s most-important market will remain in major deficits for many years to come.

China’s energy and technology drive might also make it much harder for foreigners to negotiate their way into new domestic joint ventures.

It is far too early to say whether these scenarios will come true.

China announced a major refinery and petrochemicals stimulus plan on 19 February.

Under the plan, the country’s ethylene capacity is due to be increased by 4.55m tonnes/year in 2009, 800,000 tonnes/year in 2010 and 3.2m tonnes/year in 2011, according to CBI Research & Consultancy.

This would leave 2011 total capacity at 15.93m tonnes/year, an 81% increase from 2008.

Refinery capacity will grow by a compound annual average of 6.3% in 2008-11 to reach around 600m tonnes/year by 2011, forecasts CBI. A further 700m tonnes/year is in the approvals process.

“In the short term it’s about job creation as refineries and petrochemical plants take a lot of people to build. This will reduce the impact of job losses resulting from the collapse in finished-goods exports,” says a Singapore-based polyolefin trader.

“But the long-term strategy is to make China less dependent on imports of basic raw materials.”

His views were echoed by a consultant who detects a growing appetite for refinery and petrochemicals independence.

“And what you’ve also got to note is that this is not just strategic – it might also be pretty economic on a global basis because of ‘virtual’ integration through to crude oil.”

China continues to scour the world for more oil off-take deals. In February, for example, it signed a 20-year deal with Russia for the delivery of 300m tonnes of crude valued at $25bn, according to CBI.

In the same month China and Brazil signed an MoU under which China will extend $500m-1bn worth of loans. In return, Brazil’s exports of crude to China are expected to reach 100-160,000 bbl/day.

Until the collapse in oil prices and rising environmental and logistics concerns, coal-based transportation fuels and chemicals were seen as a major route to import self-sufficiency.

The appetite for coal to fuels and chemicals has weakened, but, given the country’s huge coal reserves, it might easily sharpen again – especially if long-term tight supply of crude forces prices back towards $100/bbl.

Dependence on polyethylene (PE) imports will fall to only 5% in 2010 from 40% in 2008, with reliance on overseas shipments of styrene monomer (SM) set to decline to 13% in 2010 from 53% in 2008, CBI adds.

This is based on projects already announced and a pessimistic growth forecast.

But other products could remain in substantial deficit. Monoethylene glycol imports, for instance, are forecast to be at 58% of demand in 2010 from 74% in 2008, says CBI.

The overall course set so far - of building more domestic output across several industries - is occurring in parallel with indications of increasing interest in acquiring overseas assets.

Western assets are at bargain prices. Buying companies in the US and elsewhere would also reduce China’s dollar exposure, the extent of which has been flagged by Beijing as a concern due to the risk of a sharp fall in the value of the US currency.

“Controlling more companies overseas would also give China access to better know-how and better technologies as it tries to move up the value chain – and would give it a stronger geopolitical position,” the consultant adds.

In a recent article, The Economist magazine said China saw an historic opportunity to take advantage of weakness in the west through exporting capital to southeast Asia and by acquiring US businesses.

China would be in a strong position to win approvals for acquisitions because of its high levels of US-dollar savings, the article added.

“I see a definite mood-shift in China. The chemicals industry is becoming more outward-looking,” adds the polyolefin trader.

Overseas companies heavily dependent on exports to China could be in trouble, especially the higher-cost naphtha-based northeast Asians.

And what of the ability of the foreigners to force their way into new joint ventures in order to tap into the dream of one billion-plus western-style consumers of everything from basic necessities to high-end luxury goods?

This dream might, by the way, not come true (see a later Insight article for more details).

Breaking into big refinery and petrochemical joint ventures was always tough going, taking more than a decade of negotiations by international oil companies (IOCs).

“It has become even harder since 2004 as China now has more expertise in building and operating big plants, has greater marketing and sales savvy and has always had ample financing,” says the consultant.

The main leverage used by foreign players since 2004 has been oil supplies and the more sophisticated – and also often the more tightly licensed – downstream chemicals technologies.

“There’s still going to be opportunities for the IOCs, and also the national oil companies, to get into China, however,” the consultant adds.

The pursuit of higher-value technologies - already supported by government-funded domestic research - could be further bolstered by overseas buys.

Again, though, it is far too early to say if any of this will come true, even if the early indications point to a major change in the economic world order brought about by the crisis.

But at the very least it is worth planning for the worst and hoping for something a lot better – as opposed to the widespread practice last year of doing the exact opposite.

ICIS' parent company Reed Business Information is an investor in CBI.

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By: John Richardson
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