China Reforms: The Global Implications

By John Richardson

wall_street_crash_headlines2_2598IT can feel logical to assume that the fundamentals of the petrochemicals business in Asia haven’t really changed.

When you think about it, apart from a brief interruption in the region’s success story during the Asian Financial crisis in 1997-1998, everything has been pretty much plain sailing.

And in retrospect, the severity of that crisis seems as if it was overplayed by financial markets and even by some governments. Demand quickly bounced back. By late 1998, everything was pretty much back  to normal, apart from most notably in Indonesia. But even Indonesia was back on its feet within a few more years.

The petrochemicals industry has, on the whole, enjoyed a tremendously benign period of growth over the last few decades as a result of rising income levels across Asia. Although we don’t like the term “the rise of the Asian middle class” because it oversimplifies the story, it is certainly true that hundreds of millions of people have been lifted out of poverty.

Consumption growth in all sorts of petrochemicals had thus been fantastic, as delegate after delegate at last week’s Asia Petrochemical Industry Conference (APIC) in Pattaya, Thailand, pointed out.

There was therefore little discussion about the risks to future demand  growth during the event. Instead, a lot of the debate was once again about feedstock advantage (see our separate article below, which details these discussions).

All very interesting stuff, but what about demand?

Yesterday, we discussed perhaps the single-biggest threat to global growth – what is happening in China’s property sector.

Delegates, of course, talked about this threat.

But it felt to us as if they viewed China’s real-estate reforms, and its economic reforms in general, as likely to fall into the same historic category as the Asian Financial Crisis: A temporary and only slight interruption in Asia’s success story.

Here is a quote, though, from a Daily Telegraph blog post on China’s  property sector which should make everybody think again.

It compares China’s determination to deflate the credit bubble in general, most notably the bubble in property to a policy decision that, arguably, helped cause the Great Depression.

This policy decision – should President Xi stay the course – is equivalent in global scale to the decision by Fed chief Benjamin Strong to pop the US speculative bubble in 1928, causing a commodity slump that was transmitted worldwide through the dollar based currency system (Inter-War Gold Standard), and which later snowballed into something far worse.

We think the author is right and shall explain why in a series of upcoming blog posts.

 

The APIC Feedstock Debate

FEEDSTOCK concerns centred around the big disadvantages of cracking naphtha versus other raw materials.

The rise in China’s coal-to-olefins industry was highlighted. Several delegates pointed out how, on a variable cost basis, CTO plants could compete exceptionally well with naphtha crackers. They conceded, however, that on a capital cost basis CTO remained comparatively very expensive.

There was also analysis of the US shale gas story and what it meant for competitiveness in Asia.

Asian producers are seeking to tap into this advantage by building olefins capacity  in the US. For instance, Thailand-based Indorama Ventures is in discussion with potential partners to build a cracker in the States. SABIC and PTT have also talked about the same thing.

Two other ways of taking advantage of the “shale gas bonanza” were discussed.

Serious discussions are taking place about shipping petrochemicals intermediates from the US to Asia for polymerisation in Asia. The logic is that the US has the feedstock advantage to make  intermediates, whereas it is cheaper to make some polymers in Asia.

A wider discussion was held about shipping ethane from the US to Asia and Europe.

INEOS in Europe is already well-advanced in its plans to ship ethane from the States to its crackers in the UK and Norway.

Several other European and Asian producers were also evaluating this option, said industry sources during APIC.

The blog has questioned the economics of this trade because of the need to depend entirely on specialist-built vessels to move ethane.

But maybe not. A shipping industry source said that there were smaller liquefied natural gas (LNG) carriers and larger ethylene vessels available that could also be used to move ethane from the States.

Plus, the consensus view was of almost indefinite ethane abundance in the State and high oil prices. This would underpin the economics of moving a gas that had previously been viewed as “stranded”.

The  implications of a substantial lightening of the European feedstock slate were also debated.

The US is already short of propylene and C4s because it has pretty much maxed-out its ability to switch from naphtha and liquefied petroleum (LPG) to cheaper ethane feedstock at its existing crackers.

Now it is apparently Europe’s turn to go much lighter. This could create a greater  opportunity for on-purpose butadiene production, via, for example, butane dehydrogenation because Europe would have much-less crude C4s to export, was one argument.

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