Market outlook: China has MLLDPE growth potential

04 July 2014 10:13 Source:ICIS Chemical Business

Companies are expanding production capacity in Asia and converters are investing in new machinery that can process a higher value resin

The great advantage for western and eastern China polyolefins producers in making more metallocene linear low density polyethylene (MLLDPE) is that converters are increasingly switching to machinery that can process the higher value resin.

 

 China is where the opportunities are the greatest for further growth in MLLDPE and is the focus of most of the sales efforts

Copyright: Rex Features

“In Europe and the US, the problem is that far more converters have already invested in machinery that can run MLLDPE and so the market, in this respect, is pretty much mature,” said an industry source.

“But the difference in Asia, and especially in China, is that this process has only really just begun. Investment is new machinery is constant, even when overall economic growth slows down,” he added.

You are also seeing other types of growth in Asia, which the source said was also pretty much tapped-out in the West, such as:

The “environmental plus” of needing less MLLDPE resin than conventional butene-grade LLDPE to produce the same volume of films.

MLLDPE has better puncture resistance, tear resistance and stretch properties than conventional LLDPE.

The polymer is replacing cardboard and expandable polystyrene (EPS) in some wrapping applications. For instance, collation-shrink film, made from MLLDPE, is increasingly being used to wrap refrigerators, TVs, etc, which means you need less cardboard and EPS. This is both a cost saving and another environmental plus because less plastic is needed and weight is reduced.

China is where the opportunities are the greatest for further growth in MLLDPE and is the focus of most of the sales efforts. The reason is illustrated by the bar chart from ICIS Consulting, which shows how demand in China for all grades of LLDPE was way ahead of any other developing Asian country in 2013. Even though percentage growth rates in China are slowing down, this much larger volume of demand means that in future years, the MLLDPE story seems likely to remain essentially about China.

But what about the challenges? Firstly, a lot of companies have invested in MLLDPE capacity in Asia, most notably ExxonMobil Chemical, which brought on stream 1.3m tonnes/year of LLDPE in Singapore last year. Some of this capacity is MLLDPE.

SK Global Chemical conducted trial production at its 230,000 tonne/year MLLDPE/polyolefin elastomer (POE) swing plant in Ulsan, South Korea, in May.

SABIC and SK have signed a $595m joint venture agreement, which includes the new plant at Ulsan. The two companies are looking at constructing a new facility in Saudi Arabia.

And then there is PTT Global Chemical. The Thai producer is scheduled to convert a 400,000 tonnes/year butene-grade LLDPE plant to metallocene in 2017. Butene-grade LLDPE is standard, commodity-grade LLDPE.

Will the market be big enough to easily absorb all of this new capacity?

“Metallocene films only account for around 20% of the Asian market and so this is going to be a challenge,” the industry source added.

“The more people that move into any particular product the more the danger that it becomes commoditised. In the US, the market is pretty much entirely metallocene and so customers have come to expect metallocene-standard resins for butene-grade margins,” he said.

The ‘New China Price’
Here is another concern: What could be driving increased interest in metallocene production in Asia is that the commodities end of the business in China is offering less potential for growth.

This is down to China’s economic reforms that are focused on the quality of growth rather than growth itself.

China might make a big move into metallocene-grade production as it attempts to move up the manufacturing value chain – thereby improving its quality of growth.

This will increase the danger of commoditisation, especially given that China might employ government subsidies, in one form or another, to support metallocene production.

China has to move up the manufacturing value chain in order to escape the middle-income trap, and so strong government support for many types of higher value manufacturing seems inevitable.

The middle-income trap represents one of China’s biggest challenges, if not its greatest challenge.

West Indian economist Sir Arthur Lewis found that developing countries in general have a 15-20 year “free ride” when they can cash-in on cheap supplies of labour.

Once this starts to run out, as is now the case with China, they have to move up the manufacturing value chain in order to justify higher wages – otherwise they will end up being stuck as a middle-income country, with per capita incomes of around $10,000.

Will overseas companies be able to match the new China price for metallocene-grade LLDPE, while also generating sufficient returns on their heavy investments?

The history of the smartphone in China could point to the future for the resin.

Access To Cheap Ethylene
“It has taken the smartphone world completely by surprise: a ‘flagship killer’ packed with high-end specs, all for an asking price that dramatically undercuts the high-end Android competition,” said a 22 May article on the Australian news site, news.com.au.

“At $US299, the OnePlus One [China made and owned] smartphone costs less than half the price of Android handsets such as the Samsung Galaxy S5 ($929) and HTC One M8 ($899),” the article continued.

“From the processor to the display, it is a no-compromise smartphone that blows the price-to-performance ratio wide open, in keeping with the company’s message of ‘the best and latest technology for everyone’.”

While we are on this theme of government support for manufacturing in China, in all its various forms, it is worth returning to a theme that we have covered before in this column: coal-to-olefins (CTO).

Back in late April, Sinopec, the state-owned oil, gas, refining and petrochemicals major, said that it was shelving its 1m tonne/year Qingdao Petrochemical Co naphtha cracker project, in Shangdong province, which had been due to start up in 2016.

Two other cracker projects are thought to have also been sidelined by Sinopec, meaning that a total of 2.8m tonnes/year of naphtha-based ethylene has either been postponed or perhaps cancelled altogether.

In the same announcement, Sinopec said that it was seriously looking at coal as an alternative petrochemicals feedstock.

It already has a 3.6m tonne/year coal-to-olefins (CTO) project in Inner Mongolia that is expected to come on stream in early 2017. Perhaps more will now follow.

And then China’s Premier Li Keqiang, in a 4 June press conference, said that China would build seven new petrochemicals bases – and that the coal-to-chemicals industry would be strongly supported.

This was followed a week later by a comment on Xinhua, the state-run wire service, that CTO and also coal-to-aromatics are more cost effective ways of making petrochemicals than traditional “petrochemistry”.

These seem to be important signals that, in the face of tougher competition from shale gas-based ethylene in the US, China will increasingly opt for coal rather than naphtha as the feedstock to make its petrochemicals. Capital costs for CTO are a lot higher than those for naphtha but on a variable cost basis, CTO is widely viewed as cheaper.

In a later column, we will also look at how government funded progress has been made in overcoming the environmental challenges presented by CTO, most notably in the area of heavy water consumption.

The Chinese polylolefins industry might, thus, end up with access to very cost competitive ethylene and value-added downstream technologies, such as metallocene-grade LLDPE.

How would Western and other Asian producers then compete with a much more self-sufficient, self-reliant China?

By John Richardson