By John Richardson
CHINA is the new “swing producer” in some global petrochemicals markets, as is the case with US shale oil producers in the global oil market.
Let’s start with US shale oil. Here, the Catch 22 situation is that every time global oil prices edge up, the US shale industry will boost production.
Breakeven production costs for the shale process will also continue to fall, meaning that it will only take very modest crude prices rises to trigger frequent rebounds in production over the next five years. The US could also see more investment in shale oil for energy security and job creation reasons.
In the case of China, a great deal of world-scale capacity in products such as purified terephthalic acid, synthetic rubber phenol and acrylonitrile butadiene styrene have been added over the last few years. Many of its recently added plants have therefore great economies of scale, even if they don’t always have good feedstock-cost positions. So why not push operating rates higher by, say, 5% if there is a modest uptick in prices?
Just as in the US, social and political factors also come into play. Let’s take propylene as an example where I was last week told that:
- Companies were invited by local governments across China to build propane dehydrogenation (PDH)-based propylene plants.
- Local governments knew that propane globally was likely to be long for several years because of overproduction by both US shale oil and shale gas producers. So they quite rightly figured that these companies would be receptive.
- The local authorities wanted PDH projects so they could make money from land sales and tax revenues. These remain important ways of covering healthcare, education and other local costs.
- And the companies knew that if the worst came to the worst and propylene markets were very long, the local branch of a state-owned bank would be very unlikely to foreclose on their debt. They were thus confident that shutting down a brand new, world-scale plant would never make sense to either their bankers or local governments, who often have very close relationships with bankers.
On two occasions over the last week I have heard the view expressed that because more private companies are now involved in petrochemicals production in China, they will behave like private companies in the West – i.e. they will rationalise oversupplied capacity.
But we know that this doesn’t apply to US shale oil companies. They are in the West, aren’t they? And for the reasons I have just given above why should it apply Chinese PDH-based propylene producers? It seems likely to be a similar story for other new propylene producers in China.
The above chart shows our base case estimates for total propylene capacity in China in 2015-2020 versus consumption into downstream derivatives. I have also detailed the rise in PDH-based propylene capacity. You need multiple scenarios for production levels – and of course for downstream consumption.