GPCA: Gulf shares interest in China’s growth

22 November 2012 16:25  [Source: ICB]

The current dynamics between the petrochemical industries of China and the Middle East can be aptly described by the Chinese idiom "The lips being lost, the teeth feel cold." This refers to two entities that are so closely related that they have common interests and share the same fate.

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In other words, the Chinese and Middle East plastics industries are in the same boat in many respects. The intrinsic interdependence between the Chinese and Middle East petrochemical sectors (not including inorganic fertilizers) is mainly defined by two products - polyethylene (PE) and polypropylene (PP) resins.

The Middle East petrochemical sector is highly dependent on the China market, the largest destination for its polyolefin exports. China covers more than half of its polyolefin requirements with imports from the Middle East.

Continued growth in China's resin production and consumption is one of the key common interests between the Chinese and Middle East petrochemical industries, explains a source with a Middle East polyolefin producer. The continued presence of local output is not only important to the domestic Chinese producers, but also crucial to the Middle East producers, the source adds.

"Traditional polyolefin suppliers from Japan and South Korea have been squeezed out of the commodity market segments in China in recent years, but most Middle East producers don't intend to displace the local polyolefin producers , because when that happens, prices would have fallen to very low levels and margins will be very thin," the source argues.

China's polyolefins capacity has increased significantly over the recent years and it is expected to continue rising rapidly over the coming years. The country's PE and PP capacities are estimated at 12.2m tonnes/year and 12.3m tonnes/year at the end of 2012, according to data from Chemease, an ICIS service in China.

NEW CHINESE CAPACITY

With 2.4m tonnes/year of PE and 3.7m tonnes/year of PP scheduled to come on stream by the end of 2015, China's PE and PP capacities are estimated to grow by around 6.6%/year and 9%/year on average during the 2013-2015 period, the Chemease data show.

There are concerns among Middle East producers that they will lose market shares to competitively priced material produced at the new coal-to-olefin (CTO) and methanol-to-olefin (MTO) plants in China, because of their lower cost structures. Naphtha cracking is the usual route to olefins and hence polyolefins in China.

CH-polyethylene

Industry pundits have different views on the potential long-term impact of China's CTO and MTO technologies on Middle East producers, but there seems to be a consensus about its short-term impact. Polyolefins produced on CTO technology in China will not be a serious threat to Middle East polyolefin export in the medium term, because of their small quantity, says Larry Tan, ICIS Consulting's vice president for business development and consulting (Asia).

Based on the CTO projects currently under construction and those in the pipeline, and the assumption that these new plants will run at an average annual rate of 60% capacity, China's CTO-based polyolefin output will cover only around 30% of China's polyolefin demand by 2015, says Tan.

China's polyolefins import demand is estimated at around 13m tonnes/year during the 2012-2015 period, and its polyolefins output from the CTO process will hit 3.8m tonnes/year by 2015, according to ICIS Consulting data.

"While CTO will contribute towards China's polymer demand, and directionally reduce, but not negate, imports, it is less easy to forecast quantitatively what impact China's CTO technology would have on Middle East polymer exports over the long term, because that depends on a number of factors," says Tan.

PDH PROJECTS

China's rapidly developing propane dehydrogenation (PDH) sector will change the competitive landscape for foreign PP suppliers because it can provide more competitively priced PP, compared with the existing naphtha-based PP plants in China. China is scheduled to start up several PDH projects from 2012-2015 with a combined capacity of more than 5m tonnes/year, according to the China National Chemical Information Center (CNCIC).

It is too early to say if China's PDH projects will displace a significant portion of Middle East PP exports to China because of the many factors at play, says Fang Fang Wang, ICIS Consulting's senior manager (Asia). It will be affected by many factors, such as the import prices of propane and the operating rates of the PP facilities that are integrated with the PDH units," says Wang.

The large PDH capacity scheduled to come onstream in China between 2012 and 2015 is expected to push the prices of propane and liquefied natural gas (LNG) higher, says Arley Li, CNCIC's deputy manager for refining & petrochemical business.

"In my opinion, Middle East producers will increase the prices of propane and LNG gradually in the run up to 2015," says Li. But propane prices in China are likely to come under pressure after 2015 when several shale gas exploration projects will be implemented in China, he adds.

China's emerging PDH industry is likely to be perceived as a threat by Middle East PP producers because it potentially means China could be importing less PP. Many Middle East producers would prefer to convert their feedstock into derivative products for export to China so as to obtain better profits, adds Li.

PP EXPORTS FAVORED

Propylene feedstock in the Middle East is currently mainly for captive use in making downstream derivative products, and most Middle East producers export propylene only when their downstream plants are shut for maintenance, or because of unforeseen circumstances.

Middle East producers prefer to export PP rather than propylene feedstock because it costs much more to ship propylene than PP.

Currently, Saudi Arabia is the only Middle East country that exports propylene to China, having exported 62,168 tonnes last year and 34,108 tonnes in the January-August period this year, according to China Customs' data.

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But the Middle East remains an important ally in China's aspirations in the PDH sector because it is currently the largest exporter of propane to China. China imported about 2m tonnes of propane from the Middle East last year, which accounted for more than 50% of its total propane import, with Qatar ranking as the top exporter, according to C1 Energy, an ICIS service in China.

Chinese and Middle East poly-olefin producers will obviously stand to gain from continued resin demand growth in China, even as the annual increment in demand is expected to shrink because of the weakened demand for Chinese exports of finished products in the US and the European markets.

China's polyolefin demand is estimated to either grow at the same pace as the country's GDP growth or at a slower pace than GDP growth, industry sources suggest. "China's polyolefins demand growth used to be on par with GDP or 1.5 times of GDP, but going forward, it is estimated to be 4-7% per year," notes a source with a Middle East polyolefin producer.

The increments in China's PP demand over the coming years are estimated to be only around 40% of the additions in the domestic capacity, a source with a Taiwanese PP producer says. Chinese producers currently account for 61% and 74% of Chinese PE and PP demand, according to Chemease.

The Middle East accounted for 47.69% of China's PE and 28% of its PP imports in the first eight months of this year, according to China Customs' data.

China and the Middle East face the same prospect of having to compete with lower-priced resins produced from shale-gas based plants in the US after 2016. "While the potential of unconventional oil and gas is under consideration on a global basis, North America is already developing new petrochemical opportunities," says ICIS's Tan.

"US shale gas developments are further along than others as they can tap onto existing pipelines, gas uplifting and storage infrastructure which other geographical areas are lacking comparatively. These allow the US to have a competitive cost advantage in bringing their gas and petrochemical products to end markets," explains Tan.

Natural gas liquid (NGL) production in the US is expected to increase by 62% by 2016 from current levels because of the sharp shift to drilling in wet shale areas, and that in turn will support 11m tonnes/year of new ethylene capacities, Macquarie Bank said in a recent research note.

A massively rising surplus of propane, another shale NGL derivative, could support even greater petrochemical capacities, Macquarie said.

If planned new US capacity additions prove fruitful and ethane supply is sufficient, a renewed next downcycle is likely later this decade, the bank said. "Very large, low-cost, gas-based petrochemical capacities in the US could have global repercussions," it said.

DELICATE BALANCING ACT

Despite their inter-dependence, Chinese and Middle East polyolefin producers are still competitors in a profit-driven setting where disagreements are inevitable and diplomatic engagements necessary.

Chinese state-owned petrochemical major Sinopec had in the past two years raised issues with the influx of low-priced PE imports from some Middle East countries, particularly those from Iran, according to Sinopec sources.

"We have looked into calling for an anti-dumping investigation on LDPE [low density polyethylene] import from Iran," one of the Sinopec sources said. Any disagreements over trade matters are expected to be resolved amicably, a delicate balancing act much needed to keep business going.

Additional reporting by Amy Yu, Angie Li and Judith Wang of ICIS Singapore


By: Chow Bee Lin
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