As the Middle East struggles to find labour and raw material supply with contractors’ order books bursting at the seams, the Chinese seem to have no difficulty in executing their projects.
See below for detailed analysis of what’s happening with the current wave of Chinese crackers. Suffice to say here that nearly all of China’s cracker projects will be on time, unlike the Middle East where the delays are mounting.
Contractor markets are forecast to be tight until 2008–09. Could the Chinese be able to leverage their way into joint ventures in the Middle East before the market slackens by offering a one-stop shop of labour, equipment, contractors and financing?
Technology supply, marketing reach and cash have been the traditional means the foreigners have used to get their hands on highly competitive Middle East gas supply. Perhaps the Chinese might also offer lump-sum turnkey contracts plus a dollop of cash from one of China’s state-owned banks with highly attractive lending terms, given that they are weaker on technologies and marketing.
The Middle East project builders would be, of course, happy and so would the Chinese government. Its priority is energy security, whether at the oil and gas or basic petrochemical level.
China’s monstrous appetite for raw materials has long been the salvation of the global olefins and polyolefins industry, but the country has embarked on a surge of petrochemical construction. What will this new capacity mean for future import demand, particularly with growth slowing on the maturation of some markets in eastern China?
The short answer is a decline in some import volumes, based on capacity additions already announced. Further announcements could occur in products where big deficits are being forecast.
The long answer is more interesting. Consider this extraordinary development: the new construction almost entirely excludes foreign involvement. Only three years ago, China needed the West in petrochemicals. But today, as in so many other industries, that is no longer the case.
INCREASING SELF RELIANCE
China has the money, expertise and manpower to go it alone in building petrochemicals.
The mother ship of global demand growth is largely exempt from the resource crunch affecting construction elsewhere. This is despite China adding 11.53m tonnes/year of ethylene capacity alone in its 2006-2010 five-year plan (see table 1).
“More than 80% of the machinery for the current wave of crackers is being provided locally, up from less than 50% for the plants that came on stream in 2004-2006,” says a Beijing-based consultant.
Such is China’s strength in building petrochemical plants that Sinopec formed a joint venture (JV) with Aker Kvaerner last year to chase construction work in the booming Middle East market.
Some of the timings listed in ICIS insight’s capacity tables might slip a few months – the result of start-up hiccups that always afflict big complexes.
But delays will be nothing like those in the Middle East, where manpower, contractor and raw material constraints have pushed some projects back by several years. In Iran, throw in the additional problem of politics and you are looking at every cracker project beyond Olefins No. 10 being frozen indefinitely.
China is also able to execute its petrochemical ambitions at what seems like warp speed because of the cost and supply of its labor.
Labor costs have increased and supply has tightened, owing to the frenetic building work taking place in other industrial sectors, but China is still a much cheaper location than the Middle East.
“We seem to have no problem in finding the sometimes tens of thousands of workers needed to complete an integrated refinery-to-petrochemicals complex,” observes the consultant.
China’s lack of significant project delays is even more remarkable when the scale and complexity of what is being built is taken into consideration.
The government has stipulated that all of the crackers in this wave must source at least 70% of their feedstock from a local refinery. A total of 12 grassroots refineries are therefore part of this five-year plan, along with numerous capacity additions at existing refineries.
It is hardly surprising – given the muscle of the local industry – that the foreigners are largely shut out of the current construction wave.
Crackers brought on stream in 2004-2006 included Shell, BASF and BP as JV partners.
In this round, however, only one project definitely involves foreign involvement -Fujian Petrochemical in Fujian in southern China, in which ExxonMobil and Saudi Aramco both have a stake. And even this one is actually a legacy project. Discussions surrounding Fujian Petrochemical began in the mid-1990s, with start-up originally due in 2004. It should therefore have been part of the first wave of worldscale grassroots crackers including the other foreigners.
SABIC might end up taking a stake in the Tianjin cracker because, like ExxonMobil and Aramco, it has something to bring to the table that the Chinese desperately want -crude oil. A deal, however, has yet to be done, with negotiations stretching back more than three years.
“I would go as far as to say that, maybe with one or two exceptions, we will be completely excluded from any further cracker projects in China, whether in this five-year plan or the next one [2010-2014],” says a source with a major Western polyolefins producer.
But even though it seems almost certain that China will continue to go it alone, nobody can predict the fate of any of the projects planned after 2010 that don’t have final central government approval. For those that have been given the green light, start-up dates are only provisional and could change subject to assessments of supply and demand and whether associated refineries are on track.
“I suspect that Sinopec and PetroChina are now evaluating their options post-2010. We should hear some announcements within the next 12 months,” says the consultant in Beijing.
THE IMPORT REPORT
The prospects for high density polyethylene (HDPE), low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) imports vary substantially.
“HDPE imports are going to remain at around 2.5m tonnes/year until 2012, assuming there are no further capacity additions,” says the source with the Western polyolefins producer. “But it seems inevitable that China will build more plants to bring this deficit down.”
LDPE imports are projected to be only around 750,000 tonnes/year this year and in 2008, thanks to big local capacity additions.
But the polymer is expected to move to a deficit of 1m tonnes/year by 2012. Again, further projects seem highly likely unless there is a radical change in government thinking.
LLDPE imports are around 2m tonnes/year, but they are expected to move close to a balanced position by 2012.
Estimates for polypropylene (PP) invite the conclusion that there could be a rash of building. Imports are forecast to range between 2m and 3m tonnes/year in 2007-2010, rising to 3.5m tonnes/year in 2011.
This walloping demand growth increase would also support investments in more refinery-based propylene, as well as partly justifying further cracker announcements. China will not want to become heavily dependent on imported C3s.
PE and PP demand growth rates are forecast at 6-7% through 2012, well below the rates observed in the period 2001-2005, which were frequently above 10%.
The markets are maturing as consumption reaches Western levels in eastern coastal areas. The markets have also been hit by the increased use of recycled polymer, the result of the high price of virgin polymers. Imports of scrap or recycled polymer totaled 5.8m tonnes last year – an increase of 800,000 tonnes over the previous year. Only three years ago, imports totaled less than 2m tonnes.
The development of China’s enormous hinterland would expand prospects tremendously, but will the investment needed to stimulate these western regions take place? Poor logistics and labor availability are deterring fixed-asset investment.
Recycling, according to one major polyolefins importer, only makes sense if pricing remains above $1,000/tonne CFR China, because of the collection, shipping and processing costs. A second importer estimates that recycling would still make sense even if prices fell as low as $500-600/tonne.
Either way, a decline in price below $1,000/tonne – never mind to the disastrously low $500-600 last seen in 1995 -would reflect a huge slump in the industry.
But high oil prices seem certain to provide a floor below which polymers will not be able to fall – probably around $1,000/tonne – even when the supply tsunami arrives in 2009-2010. Recycling is therefore likely to continue to crimp demand growth, in some cases by as much as four percentage points a year.
Availability of scrap material and not pricing could swing the pendulum back in favor of virgin resins. So far this year, though, there is no evidence of a slowdown in imports or the growth of local scrap polymer collection.
Two government measures announced over the past few weeks will also influence demand growth. In late June, a radical overhaul of the value-added tax (VAT) rebate system for exports affected a wide range of chemicals and finished goods bought in yuan.
And in late July, the government expanded the range of businesses required to put 50% of import duties and VAT on deposit when they buy US dollar-priced imported raw materials for re-export as finished goods. To recover the deposit, these businesses must provide certification proving they have re-exported finished goods. The businesses affected, which are located in the eastern and southern coastal provinces, had previously enjoyed automatic exemption.
The measures are aimed at forcing the closure of low-value, resource-draining manufacturing. A further motive is to make the country less vulnerable to protectionism and a slowdown in the global economy through cutting back on exports.
The overhaul of the VAT rebate system could, in the short term, dampen domestic demand. Imports might also suffer as cash-flow-starved enterprises hit by the deposit rule search for extra sources of credit.
THE CHINESE CENTURY
In the longer term, producers will have to pay more attention to innovation and individual customer needs as Chinese manufacturing becomes more sophisticated.
As much as the 20th century was dominated by the rise of the US, this seems certain to be China’s century.
Soon enough, the “Made in China” stamp that today seems to grace just about every item on sale at department stores may end up on petrochemicals as well.
ICIS insight Asia is running Emerging Markets Seminars in Prague on September 13, Houston on October 19, New York on November 13 and 14 and Buenos Aires on November 16. These seminars will provide you with up-to-data, analysis and commentary on the Chinese, Indian, Middle East and Southeast Asian petrochemical industries from our team of highly experienced speakers. For details of our programmes, visit www.icis.com/StaticPages/Training.html or contact firstname.lastname@example.org