PPregionalstructureChinaJune2014

By John Richardson

THERE has been a lot of talk about how fully integrated coal-to-polyolefins plants in China will compete exceptionally well with naphtha crackers on a variable cost basis.

OK, in terms of capital costs, the whole coal-to-polyolefins chain is some 2-3 times more expensive than building a naphtha cracker complex. You have to, of course, start with coal, which first needs to be turned into synthesis gas and then methanol, olefins and finally polyolefins.

Plus, of course, most of the coal-to-polyolefins projects are located in western China and thus a long way from the big-volume demand markets. The table above, from our colleagues at Chemease, illustrates the concentration of demand for polypropylene (PP) in China.

Still, one argument is that capital costs may continue to no longer be a factor if economic development remains the priority in western regions. Both the central and local governments might prioritise cheap funding for these projects in the interests of job creation.

Yet another theory, put forward in the foyer of a hotel at last month’s APIC conference in Pattaya, Thailand, is that China is these days much more focused on the quality rather than just the quantity of its growth in manufacturing capacity. This will mean less petrochemicals capacity additions across the board, whether they are linked to coal or oil refining, a firm indication of which was Sinopec’s decision in late April to shelve some of its naphtha-cracker projects.

Here is one more theory, put forward last week by a source with a major Western producer:

  • China at the moment imports around 50% of its polyolefins, but strategically, regardless of the competing economics of different processes, it might decide to drastically reduce this import dependency.
  • The focus on US and European definitions of the economic efficiency of coal-to-polyolefins might therefore be irrelevant.
  • Instead, overseas producers need to assess the tone of government statements about job creation, particularly in the less-developed parts of China where, as we said, most of these projects are located. The tone of these statements indicates that China will not hesitate to build lots of coal-to-polyolefins capacity. For example, China announced last week that it would spend $128bn in developing the coal-to-chemicals industry over the next 13 years. This would involve creating seven new integrated coal-to-chemicals sites.
  • The government will also not hesitate to use antidumping and other trade protection measures to protect its producers. The end-result will be that the least efficient of China’s coal-to-polyolefins plants will continue to operate in all market conditions and so will always be able to keep imports out.

In the old days, these kind of ambiguities didn’t matter as China’s demand for polyolefins was growing at such a rapid pace that an easy home was found for all volumes – whether produced locally or imported.

This is no longer the case – hence, this constant debate around the growth in coal-to-polyolefins and its implications for the global industry.

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