No replacement for China demand shortfall – consultant

LONDON (ICIS)–No other country can make up for the petrochemicals demand shortfall resulting from China’s economic slowdown, according to the authors of a joint report by ICIS Consulting & Analytics and International eChem (IeC).

The global petrochemicals industry has seen not only lower growth in China, but also has to contend with China’s move towards much greater self-sufficiency in many petrochemicals and polymers.

“China’s growth is slowing as it tries to move from an investment to a consumer and services-led growth model,” said ICIS consultant John Richardson.

“We warned in 2013 that this critical point had arrived, as the deflation of the biggest credit bubble in economic history began,” he added.

During the bubble, from 2008 until 2013, there were huge expansions of Chinese capacity in products such as purified terephthalic acid (PTA), polyvinyl chloride (PVC), polypropylene (PP) and many other propylene derivatives

The report argues that instead of shutting down excess petrochemicals capacity left over from its investment-led credit boom, China will instead add even more.

“In products such as PTA, the opportunity to export to China is vanishing, or has already vanished for – for good. China has also moved much closer to self-sufficiency in PP with polyethylene the next target,” said Richardson.

Expectations that producers in China will increasingly follow Western concepts of plant economics – where returns are measured entirely on revenues from individual plants over costs per tonne of production – may not hold true, according to the study.

This has never been the case in the past, says IeC chairman Paul Hodges.

“China will continue to grow capacity for strategic, wider economic growth purposes. For instance, as labour costs rise in China, labour-intensive plastic processing will be outsourced to neighbouring countries such as Myanmar or Laos,” said Hodges.

“Logistics links with these neighbouring countries are being greatly improved through the New Silk Road, or One Belt, One Road, investment initiative,” he added.

“These processing plants will be supplied with, say, PVC resin from China. The resin will then be moved back to China in the form of finished plastic pipes, or will be shipped to export markets. The One Belt, One Road investments in better road, rail and sea links will make all of this possible,” said Hodges.

The study argues that to do business successfully in China in the future, overseas petrochemicals companies must shift to a service-led approach in dealing with large-scale challenges such as the necessity for China to clean up its heavily polluted water, air and soil.

 “Future winners will succeed by developing a more service-led approach, aligned to the new megatrends of the future – water, food, health, shelter, mobility and sustainability,” says the study.

Focus Article by Tom Brown

The new scenario study by ICIS and the independent UK chemicals consultancy, International eChem, is the culmination of five years of ground-breaking forecasting work. It has been developed by a team of experts who have many decades of industry experience in all the main product areas and geographies, and is under-pinned by data from the ICIS global Supply & Demand data analytics platform. It enables you to examine the data and analysis underlying key trends and to see how our experts predict three very different potential scenarios will play out for petrochemicals markets.

Guidance is also provided on how to correctly prepare, plan and pivot for different crude oil price scenarios, and to identify major new revenue and profit growth opportunities in the petrochemical value chain. To view “Demand – The New Direction for Profit,” click here.