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Propylene: How To Turn Oversupply To Your Advantage

Business, China, Company Strategy, Methanol & Derivatives, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins
By John Richardson on 03-Nov-2015

The world has changed for good. Old ways of running petrochemicals businesses no longer work. Click here for details on an important new ICIS/International eChem study that will help you prosper in this radically different environment. And see below for a brief outline of one of the key themes that we shall explore in the study.



By John Richardson

EVERY cloud has a silver lining, but you must first of all spot the cloud before you can identify the silver lining.

The above slide identifies a major cloud for the global olefins and derivatives industries: Since 2011, China’s propylene consumption has overtaken that of ethylene. In no other region of the world has this happened. In Europe, the US and Asia & the Pacific, for instance, ethylene consumption remains away ahead of propylene.

China’s propylene capacity has risen in response to this historic shift, and by the end of this year will be 4 million tonnes/year bigger than the country’s ethylene capacity.

The reason for this extra capacity is a rapid growth in the capacities of the chemicals and polymers made from propylene – hence, of course, also, the big jump in propylene consumption.

Here are just three examples of the aggressive growth in chemicals and polymers capacities, tipping two of these products into oversupply:

  1. In 2010, China’s polypropylene (PP) capacity was 10 million tonnes/year against consumption of 15 million tonnes, according to ICIS Consulting. By the end of this year we are forecasting capacity of around 20 million tonnes/year versus demand of 21 million tonnes.
  2. China consumed 1.3 million tonnes of phenol in 2010 versus capacity of 880,000 tonnes/year. In 2015, we expect capacity of 2.5 million tonnes versus 2 million tonnes of consumption.
  3. Acrylic acid capacity in China in 2010 was 1.1m tonnes/year over consumption of 1 million tonnes. Capacity in 2015 will have increased to 3 million tonnes/year against 1.5 million tonnes of demand.

Finished goods at the end of the propylene value chain are similarly oversupplied.

The automobiles industry, which uses lots of PP for its components, is a good example. By 2020, China will be able to produce 30 million cars, with the government targeting exports of 3 million vehicles in that this year. This would compare with this year’s export target of 860,000 autos.

Everyone knows that China has vast oversupply in electronics. Phenol makes polycarbonate, one of the final applications of which is electronics.

Polycarbonate goes into construction, as do the phenolic resins that are also made from phenol. China’s housing inventory totalled 428.6 million square metres at the end of August, up 15.7% from a year earlier and near to the all-time high 431.5 million square metres in April,  according to government  data. There also claims that these official numbers are underestimates.

The consumption of acrylic acid is also heavily tied into construction, as it is used to make coatings, adhesives and paint thickeners.

Why did all of this happen? China’s 2008-2013 economic stimulus package encouraged huge overinvestment in everything from coal-to-propylene plants to condominiums and washing-machine factories.

If this had occurred in the West then you could have safely predicted lots of bankruptcies and capacity closures all the way down the propylene value chains.

But we know that this won’t happen in China as maintaining and creating new jobs remain top priorities.

And here is another thing to consider: China will use its oversupply of raw materials to help it climb the finished-goods value chain as it seeks to escape the “middle income trap”. The smartphone manufacturer Xiaomi makes an Android-enabled “smart” 40-inch flat screen TV that costs just $320. All well and good if there is lots of availability of cheap local polycarbonate to help manufacture this TV. Cheap but good quality TVs and smartphones etc. will help China win market share from the more established Western, South Korean and Japanese brands.

The dark cloud is obviously going to be depressed margins for propylene and propylene derivatives producers, both in China and globally, for many years to come.

But here is the silver lining: Take this cheap propylene and its derivatives and use it to gain global market share from ethylene and its derivatives.

For example, PP can win sales at the expense of high-density PE.  PP can also gain ground from another competing polymer – acrylonitrile butadiene styrene – in electronics markets. You need ethylene and benzene to make styrene.

Why not spend more money, therefore, on application development work on PP and other propylene derivatives as this oversupply is going to last and last? There is a historical precedent here, as cheap propylene in the 1980s led to all the innovation work that has already made PP one of the world’s most-versatile polymers.

If you are in the ethylene chain, though, you clearly face some major headwinds.

As this propylene/ethylene New Normal develops, olefins and derivatives producers in every region of the world will have to rebuild their strategies. We will tell you how to do this in a new ICIS/International eChem study. Click here for details.