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China Excess Phenol Capacity A New Strategic Tool

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By John Richardson on 17-Sep-2014


By John Richardson

STANDARD Western cost-per-tonne analysis has never really been applied in China’s petrochemicals industry – and it never will be applied.

In the past, we have seen how petrochemicals plants have often been run at operating rates of 100% or more, even in the lousiest of market conditions, in order to guarantee supplies of raw materials to downstream industries. This was about keeping blue collar workers employed in these downstream industries..

Now we have a new logic, which is based on the following:

  • OK, we have hugely overbuilt capacities in many petrochemicals, including purified terephthalic acid (PTA) and polyvinyl chloride. But what is done is done. Even though we are rebalancing our economy, there are still very sound “social reasons” to keep these plants open. And in the case of PTA etc. many of our plants are very new and so have great economies of scale. So let the South Koreans, the Taiwanese, the Japanese and the Westerners shut down if they want to, as they have older plants.
  • And as domestic economic growth slows down, we can increasingly export PTA and PVC etc. to earn more export dollars. This will, of course, help us compensate for lower growth at home.
  • We also have all this installed capacity that can supply cheap, basic local raw materials to value-added downstream industries. This will help us keep costs down because, in reality,  China is still a poor country. And so affordability is the key. We need to make local, branded refrigerators at $100 and smartphones at $299 rather than the Samsung price tag of $899.

Phenol is another petrochemical that provides us with an excellent example of this new logic.

China’s phenol capacity is set to rise from 1.5m tonnes/year in 2013 to 3.73m tonnes/year in 2017, according to ICIS Consulting (see the above chart).

But real consumption, which is adjusted for inventory distortions, will only rise from 1.7m tonnes in 2013 to 2.5m tonnes in 2017, adds ICIS Consulting.

In this excellent article on the short-term dynamics in China’s phenol market, by my ICIS pricing colleague Trisha Huang, you can read that three brand new phenol/acetone plants are due to come on-stream in China in the fourth quarter (phenol is co-produced with acetone).

These start-of-the art facilities include Shanghai Sinopec Mitsui’s new phenol/acetone plant at Caojing in Shanghai. It can produce 250,000 tonnes a year of phenol.

Trisha also highlights that surplus phenol is being increasingly exported.

And, of course, as local capacity builds, import opportunities have diminished.

The China Customs trade data show that:

  • China’s phenol exports surged to 26,202 tonnes  in January-July 2014 versus just 2,178 tonnes during the same period last year.
  • Imports totalled only 127,973 tonnes in January-July this year. This compares with 248,874tonnes for the first seven months of 2013.

China’s strong growth in all overall exports  in July and August was largely the result of a surge in “value added exports, such as smartphones,” according to ANZ China chief economist Liu Li-Gang.

Phenol is used to make bisphenol-A, which is then used to make the plastic, polycarbonate. Polycarbonate is a low cost way of making smartphones.

Ample and therefore cheap local phenol might already be an important part of China’s competitive advantage in the global smartphones business. If this isn’t already the case, this will surely happen.

The global market share data for smartphones in  Q2 of this year from Strategy Analytics – as fellow ICIS blogger, Paul Hodges, discusses in this post – was as follows:

  • Total market share for China’s Huawei, Lenovo and Xiaomi jumped to 17% from 11% in Q2 2013.
  • Xiaomi more than doubled its share to 5% from 2%, and become the world’s fifth largest supplier.
  • The big loser is Samsung, down to 25% from 33%.
  • Even Apple is slipped, down to 11% from 12%.

Anyone who thinks that excess petrochemicals supply in China will automatically shut down is deluding themselves.