By John Richardson

CHINA has long set targets for petrochemicals self-sufficiency in each of its  five-year economic plans – and those targets have been pretty aggressive as the chart above, showing the recent rise in ethylene production, indicates. These have involved often-realised plans to raise independence from exports in a particular product to a specified percentage.

The objective has been very straightforward: To use local petrochemicals capacity as a building block to create lots of manufacturing jobs in downstream industries.

But now that China is focusing on the quality rather than just the quantity of growth, there is a body of opinion developing that future five-year plans may  set far less aggressive targets for raising local petrochemicals capacity. This is based on our discussions with industry executives over the last few weeks – and, also, over the last few hours in Pattaya, Thailand, where delegates are gathering for this year’s Asia Petrochemical Industry Conference (APIC).

Self-sufficiency targets might even be abandoned altogether in favour of other targets, such as minimum returns on capital employed, say some sources.

This fits in with Sinopec’s announcement last month that, because of very competitive capacity that is being added overseas, it has shelved several of its cracker projects.

“Sinopec is no longer just an arm of the government. From now on, as it starts being charged a genuine, market-based price for its capital, it will have to look much harder at the viability of its projects,” said a source with a global polyolefins producers, in a hotel foyer in Pattaya.

“Plus, as the Sinopec announcement also made clear, all of China’s petrochemicals producers are going to have to clear much-higher environmental hurdles if they want to build new plants,” he added.

US producers are therefore beginning to become more confident that there will be plenty of room for all their shale gas-based olefins and derivatives additions.

“Even though China’s economy is admittedly slowing down quite dramatically, consumption is already at very high levels,” said a source with a US producer a couple of weeks ago.

“So, even if, say linear low-density PE ((LLDP) demand in China only grows by 3-4% over the next  five years, which we think will be the case, the volume increases will still be big.

“Add to this China’s decision to slow down its only capacity additions and everything looks pretty good for the easy absorption of US exports.”

As one rather cynical observer put it: “China would rather let the US and the Middle East create the extra pollution by building new plants, as it can no longer afford to add to its own environmental problems.”

There might be another reason for cheer for overseas petrochemicals producers: An increasing demand for higher-quality grades of polymers.

China has added so much infrastructure in such a hurry over the 5-10 years that shortcuts have been made, goes this argument.

One of the results of this mad rush has, for example, been the use of lots of fillers and off-grade high-density PE (HDPE) to make water pipes. Not surprisingly, these pipes are now falling apart, resulting in the need for expensive repair work.

“Never again” is apparently the attitude of China’s government. It is now insisting that the repairs be done right, using high-quality overseas resin to make the pipes – and that new infrastructure projects are also done right.

This all sounds a little bit too straightforward for our liking, given all the uncertainty and ambiguity surrounding China’s future.

For instance, we still think that:

  • In certain less-developed regions of China, job creation will still be more important than the environment. As you move west, where the big  coal reserves are, coal-to-olefins (CTO) projects, despite their extremely poor environmental footprint, might still get government backing.  (if you once again read last month’s Sinopec statement, they stressed that they are now in favour of CTO and less-enamoured by naphtha cracking)
  • China is itself determined to move up the manufacturing value chain – and this  is already happening at the plastics processing end of the business – in fact, it has been happening for years. These processors predominantly buy their resin from overseas suppliers. But how long will it be before China captures the whole value chain – i.e. it ends up making its own high-quality grades of resin at, perhaps, a fraction of the cost of the overseas suppliers?

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