Reliance On Any China Polymer Deficit Will Not Work

Business, China, Company Strategy, Economics, Oil & Gas, Olefins, Polyolefins



By John Richardson

THE “last big man standing’, as polyethylene (PE) was described to me during my visit to Shanghai last week, is widely expected to remain in major deficit in China for the next decade at least.

As PE is the foundation of the cracker business – i.e. it is the main reason why you build and run a steam cracker – this would be excellent news, as China now has high levels of self-sufficiency in just about every other chemicals and polymer.

But I really wouldn’t bet my house on it. Here is why.

There is an intense debate taking place in senior government circles about foreign versus domestic ownership of all industries.

In the case of the Internet, for example, Alibaba, the local giant majority foreign-owned. Questions are being asked about whether locally-controlled Internet companies should become the state-backed champions for the sake of maximising ownership of intellectual property. This would help China escape its middle income trap.

Local ownership would also guarantee that the majority of revenues from the huge potential for Internet sales would stay in China, thus helping the government tackle its absolutely critical challenge of raising enough corporate tax and VAT etc. to pay for a rapidly ageing population.

Think, therefore, of how this might apply to PE. We know that at least two overseas licenses have been granted to local companies for metallocene-grade linear-low density PE production. Why shouldn’t the next step be local metallocene technologies? This would again fit with the drive for local control of intellectual property.

And why not more local ownership of PE assets for the sake of boosting tax revenues? This could involve both overseas acquisitions, as well as building more PE capacity at home than most people expect.

In China’s western provinces you can also make the case that there will be a push to greater commodity PE grade production. Western inland China is at an earlier stage of economic development than coastal eastern China.

In a world of abundant and cheap energy, there will also be plenty of cheap feedstocks around for China to choose from.

At least one Chinese cracker project is evaluating importing ethane from the US. I believe that ethane, propane and butane will stay cheap over the long term, both in the US and globally. Importing natural-gas liquids to run steam crackers and propane dehydrogenation plants might therefore remain a very attractive option

Oil, and so of course, naphtha, will also remain very cheap. Your “anchor point” for forecasting long term crude prices should be $26/bbl, and not anything close to $100/bbl.

Coal is a more complex issue. Yes, it will stay cheap as demand from steel and power generation declines. But here social and political dimensions come into play. There is an argument to be made that coal-to-polyolefins capacity growth will be prioritised in a bid to preserve jobs in coal mines.

Sure, you can remain complacent and assume that PE will, without doubt, remain the “last big man standing”. But what’s happened in the other half of the polyolefins business – polypropylene – serves as a salutary warning about producers who lack a Plan B.

What should that Plan B comprise? In summary, as we point in our new Study, and this applies to chemicals and polymers in general:

What opportunities exist for you to focus on particular product areas where domestic producers are missing key elements of the package – in cleaning up pollution on the land, in the air and in water?

Is there also an opportunity to develop a service-led package, where you can utilise your expertise to help China solve these major problems in as cost-effective and affordable manner as possible?

To entirely base your strategy on China remaining in deficit in any chemicals and polymer no longer makes any kind of sense.


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