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China’s Polyolefins Supply Surge: The Bigger Picture

Business, China, Company Strategy, Economics, Naphtha & other feedstocks, Oil & Gas, Polyolefins
By John Richardson on 01-Oct-2014


By John Richardson

ON paper, the polyolefins supply surge in China during 2014 is huge as it involves:

  • Some 2.2m tonnes/year of new  polyethylene (PE) capacity, according to this ICIS news article.
  • No less than 4.1m tonnes/year of new polypropylene (PP) capacity. To put this into context, China’s total effective capacity was estimated by ICIS Consulting at 14.5m tonnes in 2013. This represents a theoretical increase of nameplate capacity totalling 28.3%.

But we all know that extra capacity isn’t going to hit the market in anything like these on-paper numbers during 2014.

Plants are, obviously, being commissioned at different points of time during the year.

And the volume of start-ups is so great that a substantial number of technical problems in getting these facilities fully operational seem inevitable.

Many of these plants are also remote from the big consumption markets, as they are coal-based and therefore located in western China in order to  be close to their feedstock supply. Logistics costs and delays might, thus, further reduce the amount of volumes from the start-ups that will hit markets this year.

There are anecdotal, but unconfirmed, reports of a shortage of process engineers to run chemicals and plastic processing plants. This is said to be the result of very tight overall blue collar labour markets.

Lack of experience in running plants might be another factor. Some of these facilities, as they are coal-based, are being operated by new entrants to the polyolefins business.

This is all important for short term analysis, of course, but there is a bigger picture here.

The bigger picture is this:

  • Strategically, China wants to run its new polyolefins capacity hard in order to boost economic growth in western China. Running petrochemicals plants hard in general will also be about generating export dollars as domestic growth continues to slow down. Cost curves will thus be of secondary importance.
  • And so expect any initial delivery and production problems to be fairly quickly ironed out.
  • Plants will then run hard even if the oil price falls below the $85 barrel or  thereabouts, which is seen as the break-even point for coal-based producers.

What is equally worrying is that people are still building vast amounts of new polyolefins capacity elsewhere, most notably in the US, as they think that advantaged supply will inevitably make profits, and that demand will always grow.

They assume that demand will always grow because they think that global economic problems are cyclical rather than secular. This assumption is wrong.