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China 19% PP Production Increase Should Be No Surprise

Business, China, Company Strategy, Economics, Oil & Gas, Olefins, Polyolefins
By John Richardson on 28-Apr-2015


By John Richardson

THE chart above should come as no surprise whatsoever to anybody in the global polypropylene (PP) business.

Here is why:

  • Many of China’s new PP plants are coal-based and so are located in inland provinces where job creation is more important than how much money these plants will actually make per tonne of production versus their international competitors.
  • Employment creation in these less-developed regions of China has become an even bigger priority over the last 18 months as economic reforms have accelerated. The reason is that Beijing has to find replacements for jobs lost in other industries that are undergoing restructuring.
  • You cannot also, you simply must not, view some of these new PP plants as standalone because they are not standalone at all.  They are instead part of huge integrated coal gasification complexes that are making everything from PP and polyethylene to ammonia and other chemicals, diesel, gasoline and kerosene and synthetic natural gas.  These big complexes are thus adding very wide economic value to China. So what if a PP plant viewed in isolation is losing money? This doesn’t really matter in this wider context.
  • Synthetic natural gas, made at these gasification complexes, is being piped from inland regions to China’s bigger cities in order to improve air quality by using this gas to replace coal in power-generation plants. These complexes are therefore  an important part of China’s efforts to tackle its environment crisis.
  • Here is another point: Shut down a PP plant that is part of one these big sites because it is losing money on a dollars-per-tonne of production costs basis and you put the whole complex out of balance.

You should have known all all of this from as early as late 2013, enabling you to build a scenario that China would run its new capacity at very high operating rates. And we have known for even longer that China is due to raise its PP capacity by no less than 96% between 2010 and the end of 2015.

This thinking has since been supported by the 8% rise in PP production for the full year 2014 over 2013 to 12.8m tonnes as import volumes remained flat.

And this view of the world is now, of course, further backed up by the above chart, which shows no less than a 19% rise in local output so far this year as imports declined by 8%.

As I said, nobody should be surprised by any of the above, but I know that some global PP producers have just received a rather alarming wake-up call.

Why has this story been missed? Because some people spend too much time looking at only the costs of making a tonne of PP in China versus the costs of making the same polymer overseas. China and other regions in the world, such as Europe, have always been a great deal more complex than this. Recent history also tells us that the world of petrochemicals is becoming even more complicated.

Some people out there might still argue that there is nothing worth worrying about.

“Sure, I now accept that China will become self-sufficient in PP, but there are plenty of other export markets out there seeing fantastic growth that will provide plenty of compensation,” these people might say.

But data, data and more data matter more than wishful thinking, and so please consider the chart below – and then come back to me if you still think there is nothing to worry about.