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China PP Production Up 23% As Self-Sufficiency Drive Continues

Business, China, Company Strategy
By John Richardson on 28-Jul-2015


By John Richardson

THE above chart provides further support for the argument I have been making for the last three years – that China’s future growth in petrochemicals capacity, and how this new capacity will operate, is not just about Western notions of economics. There is an awful lot more to this story than people who don’t take into account all the political and social considerations seem to think.

What we have here is further evidence that China’s new coal-based polypropylene (PP) plants are being run very hard in order to create jobs in the less-developed western, or inland, regions of China, where most of these plants are located.

Interestingly, also, about five weeks ago I heard rumours that PP made by these new facilities was being exported to Southeast Asia – and  even to Latin America. Our pricing team has confirmed that offers of Chinese material from these plants have emerged in Southeast Asia.

This will leave those who only apply Western notions of economics to how petrochemicals plants operate in China scratching their heads, as we all know that:

  • Even if the costs of actual production for coal-based PP producers integrated through to their own sources of coal might be very low, many of these plants are very far inland, and so the logistics costs of getting this product to Southeast Asia must be high.
  • Capital costs of building these complexes are also very high. This means that even if the costs of production are being covered, it seems doubtful that this export trade can generate a decent return on investment.
  • And more importantly, why is it that in such a weak domestic economy, local PP production is up by no less than 23% so far this year? Surely, real demand growth, when adjusted for inventory distortions, cannot justify this? As China’s painful economic reforms continue, you have to wonder what kind of local margins are being achieved by these new PP producers.

But  if you talk to senior chemicals industry planners, both in the West and in China – and if you do all the right background reading and thinking about China’s current set of social, political and economic challenges – you should know that a huge priority is economic development of China’s inland provinces. As already mentioned above, creating jobs is a great way of generating this development.

It is of course right to point out that not much work is involved in actually operating PP plants once they have been built. But a lot of permanent work is generated downstream in plastic processing – and you don’t want a fabricator in a remote, inland region of China dependent on the vagaries of foreign supplies of resin.

This means that whilst the exact numbers you have can see above were almost impossible to predict three years ago, it was clear  where China’s PP market was heading.

If you are an overseas PP producer, you should therefore already have the strategies in place to cope with this year’s 7% fall imports and the inevitable further declines in imports.