China inland petrochemicals boom winners and losers

23 March 2012 13:43  [Source: ICB]

The opportunity is enormous, but the key question confronting the global petrochemical industry is: Who will be the winners and the losers from China's economic development?

It is a question we will revisit in future editions of our new monthly focus on China, as the answers are complex, wide-ranging, and in constant flux. Here we will focus on who might be set to benefit the most from the central government's efforts to raise income levels, and create jobs, in the relatively impoverished inland regions of China.

Chengdu Rex Features

 © Rex Features

The city of Chengdu and others in the region are open for business

The size of the task confronting Beijing, like many things in China, is huge, following decades of rising income inequality. While coastal and southern regions have boomed, largely thanks to export-focused manufacturing, inland rural China has lagged behind.

But the gap is closing, according to the government's National Bureau of Statistics (NBS), which reports that in 2011 average rural incomes were 3.13 times less than those of city dwellers. This compares with 3.23 in 2010 and 3.33 in 2009. The average income of rural residents jumped by 17.9% year-on-year in 2011 to yuan (CNY) 6,977 ($1,101/€838) compared with a 14.1% increase in urban incomes to CNY 21,810, the NBS added, in its 2011 nationwide survey.

This is the result of policies such as the 13%/year increase in minimum wages, which is mandated under the 12th Five-Year-Plan (2011-2015). For the first time in history, ­hundreds of millions of people in rural areas, and the poorer inland cities, are earning enough money to afford their first washing machine, refrigerator or motor scooter - all of which, of course, contain petrochemicals.

THE LOGISTICS CHALLENGE

Inland cities such as Chengdu, in Sichuan province, and the nearby municipality of Chongqing saw GDP growth of 15.2% and 16.4%, respectively in 2011. The problem is that Chengdu is over 1,000 kilometers from the coast, raising doubts over whether importers will be able to take advantage of the inland boom. "I don't see this as a big obstacle, even for Asia ex-China naphtha cracker operators which have a high cost base," says a UK-based petrochemical consultant. "The South Koreans have, for instance, vast experience in shipping polymers all around the world, including to as far afield as Latin America, so I don't see the cost of moving product 1,000km or so by rail as a major issue."

However, despite what might be booming demand growth for basic commodity plastics in inland China, cost pressures are likely to remain ferocious, thanks to income levels being so much lower than on the coast.

A senior polyolefins industry source questions whether the South Koreans and other higher-cost producers will be able to make big volume gains in inland markets. "It will be particularly difficult for the naphtha-based producers when margins are being squeezed by high oil prices," he says.

There will be longer delivery times. South Korea has been delivering polymers into northern China within three to four days because of is proximity, letting its producers charge "prompt delivery premiums." But this will no longer apply further inland.

Extended supply lines might lead all producers to consider investment in local distribution hubs - whether they are high cost or in the case of the Middle East low cost - adds the industry source.

Building and operating warehouses in western China would enable producers to build inventory locally, and then take orders, achieving effective prompt delivery, says the source. This would also bypass the perennial problem that plagues markets in China - local distributors behaving like traders, even though they are supposed to profit from commissions rather than by going long or short.

The more levels of distribution there are - and the levels obviously increase the further you move inland - the more confusing and erratic markets are likely to become.

But even if overseas producers invest in the right logistics infrastructure, they could still find themselves squeezed out of these new booming inland markets by improved domestic competitiveness and more local capacity.

Beijing has been building new world-scale crackers to help satisfy demand in western markets, including the 1.2m tonne/year PetroChina facility at Dushanzi in Xinjiang province, northwest China. It is China's largest cracker, integrated with a 10m bbl/day refinery and located within a gas-processing hub.

China also plans to increase the average size of existing and future crackers to 700,000 tonne/year from just over 540,000 tonne/year, as part of the 12th Five-Year-Plan, according to ICIS Chemease .

The plan also stipulates that the percentage of non-naphtha feedstock used in the country's C2 plants should rise to 20% by 2015 from 5% in 2010. If forecasts of a global oversupply of liquefied petroleum gas (LPG) come true, this might help China producers better compete with low-cost Middle East imports.

China Etylene projects

Another concern for importers is the scale of China's petrochemical ambitions. It wants to raise total C2 production to 24m tonne/year by 2015 from 15.2m tonne/year in 2010, adds ICIS Chemease. "Projects are sure to be delayed, and perhaps even reduced in scale, but nobody doubts the central government's determination to boost petrochemical self-sufficiency in the long term," says a second polyolefins industry source.

"At the commodity end of the business, even with strong inland growth, it is going to be very hard for overseas producers to compete, unless they are located in the Middle East. The higher-cost guys are going to be caught between the rock of the Middle East and the hard place of bigger domestic capacities. The answer, if you have the technology, is to focus on value-added polymer grades for the developed eastern and southern markets in China."

Most new capacities in China, up until the end of the 12th Five-Year-Plan in 2015, will be based on traditional refinery-based feedstock.

Post-2015, the subject of intense discussion is to what extent China will take advantage of its abundant coal reserves to go down the coal-to-methanol-to-olefins (MTO) route.

ENERGY INEFFICIENCY

Skeptics argue that the high capital costs and energy inefficiency of the process will mean that the bulk of further new capacities will remain tied to refineries. It takes an estimated seven tonnes of coal to eventually make just one tonne of olefins, via first coal gasification, then the MTO process.

Stewart Hardy of global consultancy ChemSystems, however, contends that in some cases projects will go ahead because they will add value to coal reserves.

"Coal producers, who are behind some of these projects, are often receiving less than $100/tonne for their coal," says Hardy. This compares with turning coal into polymers that usually sell at over a $1,000/tonne.

Another strike against the MTO process is that all of the projects are located in western China - away from the big-volume markets in the eastern and southern provinces. But if demand in western China takes off, the MTO players will be able to sell into big-volume markets near their production centers.


By: John Richardson
+65 6780 4359



AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly