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China Polyethylene: Please Tread Very Carefully

Business, China, Company Strategy, Economics, Oil & Gas, Olefins, Polyolefins
By John Richardson on 18-Nov-2015


By John Richardson

HAND on heart, how many of you saw the above slide coming? As you can see, China’s polypropylene (PP) self—sufficiency will have risen from 69% in 2010 to 82% in 2015. And by 2020, we forecast it will be at 88%, leaving very little room for imports.

The widespread assumption is that polyethylene (PE) will behave entirely differently, leaving huge room for imports from now until 2020-2025.

I think this is very risky because it is exactly the kind one of one-dimensional thinking that got so many people into a mess in the first place on not only PP, but upstream to propylene. Propylene now faces many years of oversupply because of over-bullish supply and demand forecasts.

“Five years ago we were told to build lots of propane dehydrogenation-to-propylene plants as propylene was supposed to be tight for a long time, and just look what has happened there,” a delegate told me yesterday, on the side lines of the first day of this year’s Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai.

I of course buy the argument that some extent PE might be immune from long term slower growth in China’s economy because a large percentage of end-use applications are non-durable – i.e. they go into food packaging and you don’t stop using plastic film when economic growth slows.   But of course you do stop buying as many new autos, refrigerators and TVS etc.

I can also see that rising food-safety concerns is a plus for PE. The demand growth for packaged food has anecdotally been very strong this year in China because of all the environmental issues connected with food safety.

But with Asian propylene being so persistently cheap over the next five years, and with Asian PP following suit because propylene set Asian PP prices, why not much more the substitution of PP for PE?

I first discussed this theme two weeks ago, and then on 13 November my colleagues at ICIS pricing wrote in their Asia Pacific PE price report:

China’s PE spot import prices dropped in the week, especially for HDPE injection grade. Local traders lamented that some garbage and tray factories replaced HDPE injection resins with PP copolymer resins due to lower feedstock costs. Hence, the HDPE injection grade prices dropped by about $50/tonne from the previous week.

The above quote obviously refers to non-food applications, which is also an underestimated threat to PE. But why not technical adaptions that push PP into the food space? I strongly believe we are in a deflationary world and so plastic processors will do whatever it takes to save on raw-material costs.

There was also a lot of confidence expressed at GPCA yesterday that China would not build that much more PE capacity over the next 5-10 years.

I think this is premature, as we need to study in detail the 13th Five-Year-Plan (2016-2020) when it has been fully released, which might not happen until 2016. At the moment, we just have a rough sketch of what’s being planned.

But this rough sketch in itself sounds another warning bell. One of the priorities of the plan is to work on technological improvements to the coal-to-olefins (CTO) process. Sure water may remain an issue, or it may not. Clearly, though, this is not black and white.

And this is a scenario I see for investment priorities:

  • In eastern China, sure, I can see that fewer naphtha crackers may well be over the next decade because of environmental pressures. This is “developed China” where these pressures are the greatest.
  • But in the west the story is very different. Firstly, it’ all about catch-up per capita GDP growth. This can only happen if you create more jobs for people and the bedrock for these jobs can be more PE plants. This creates lots of work downstream in plastic processing.  Crucially, also, as demand for coal for power generation falls in the big cities for environmental reasons, jobs in coal mines in the west will be under threat. So building CTO plants will help keep these mines running.
  • I have also heard little discussion about whether or not new CTO plants will be part of much-wider coal gasification complexes. If they are then you don’t just build these complexes for CTO as it’s also about transportation fuels and synthetic natural gas. Synthetic natural gas is a way of improving air quality in the big cities. Instead of burning coal in power gen you instead gasify it and pipe it to the cities. So a decision to build a CTO complex is part of a much wider commercial/strategic view.

There is also the issue of the cheap price of coal. At as little as $20/tonne, because of the oversupply of coal that’s a threat to jobs, low oil and so naphtha prices have not pushed existing CTO plants into variable cost losses.

You may want to dispute many if not in fact all of my points above. Good. This is a vital process because we must, as we said, avoid the one-dimensional thinking that saw the propylene-to-PP value chain as a guaranteed win as little as five years ago.

The worst thing that the petrochemicals business can do is to rush into more overseas investments in PE  to serve Chinna – and thus repeat the mistakes made in not only propylene and PP but also in many other products. You only have to look at purified terephthalic acid and polyvinyl chloride to see other good examples of what I am talking about.