By John Richardson
MONDAY’S blog post on China’s One Belt, One Road initiative has produced a very strong response. I thus thought it was important to discuss in detail what what One Belt, One Road could mean for two major polymers – polypropylene (PP) and polyvinyl chloride (PVC).
One Belt, One Road is happening because of huge social, political and economic changes taking place in China. We need to also think through how these broader changes will reshape global PP and PVC markets.
I’ll start with the history of PVC in China. Next will come PVC markets today and their future. And finally, I’ll ask and try to answer this crucial question: Might PP in China end up following in the footsteps of PVC?
China PVC: The Historical Context
Coal has long been the most-dominant route for making PVC in China. Coal-based PVC, via the “carbide” technology route, accounted for 78% of China’s total PVC capacity in 2016, according to ICIS Consulting. This will rise to 81% by 2026.
Why coal? Because:
- China has abundant coal reserves, and so the feedstock is both locally available and cheap.
- The alternative route to PVC requires ethylene. Building a cracker costs several billion dollars, involving big integrated complexes with obviously more derivatives than just PVC.
- China has instead been able to build small-scale stand-alone PVC plants, close to coal reserves in western and northern China – provided that local chlorine has also been available (you need chlorine in the carbide PVC process, just as you need chlorine in the ethylene route).
- So investment costs have been low. Crucially, also, small PVC plants have been built to serve small inland, and so logistically isolated, markets.
- This has thus helped grow local economies through providing vitally needed supplies of plastic pipes and window frames, whilst generating lots of downstream jobs in plastics processing etc.
But despite all these advantages, China remained a net importer of PVC until as late as 2014, when net exports swung to 188,000 tonnes. Last year, China crept back into a net import position of 56,000 tonnes. But in a sign of what I think is going to happen on a much bigger scale in the future, net exports in January-July of this year stood at 258,000 tonnes.
Why the big change? It was huge overinvestment in PVC capacity because of the 2009-2013 economic stimulus package – as happened in many other industries,. China’s capacity will have increased by 94% between 2009 and the end of this year.
China PVC: The Future
China’s vast coal reserves are still there. Plastic pipes and window frames etc. are also still needed in huge quantities as China develops its under-developed western provinces, where these PVC plants are located. Jobs are also still required in big quantities.
If you add to this the declining demand for coal and the case for rationalising PVC capacity and replacing it with imports doesn’t add up. Demand for coal is falling because of a weaker overall economy, which makes this feedstock route for PVC cheaper. And again jobs are critical here. Why close PVC plants down when by so doing you would put miners’ jobs in jeopardy – and all the employment downstream of PVC plants in these western provinces that are already economically far-behind the eastern provinces? Why not instead build more PVC plants?
Exporting more PVC would also help compensate for weaker economic growth at home as economic reforms accelerate.
Here is how this connects to One Belt, One Road:
- China will export its manufacturing surpluses to countries and regions along the One Belt, One Road route. This will help keep PVC plants etc. operating.
- PVC resin will flow to say Myanmar and Cambodia, where labour costs are now lower than in some regions of China, which makes manufacturing plastic pipes too expensive. The finished plastic water and sanitation pipes will then be re-exported back to China – and will also be exported to other countries and regions.
- China will thus, in effect, win “captive” export markets for its PVC resin. One Belt, One Road partners will only want to buy from China because of the investments China will make in infrastructure in these countries and regions.. This will leave other producers attempting to export to China’s One Belt, One Road partners at a major disadvantage.
Let’s now look at our latest forecasts for PVC trade flows in 2026, which are part of our recently updated Supply & Demand database (see the first chart at the beginning of this post).
We expect China to be exporting 3.5m tonnes of PVC by that year followed by North America at 3.3m tonnes.
The biggest importing region will be Asia and Pacific at 5m tonnes (Asia and Pacific includes India and Southeast Asia). Africa will have a deficit of 1m tonnes and the Middle East 600,000 tonnes. Many of the countries within these regions are part of One Belt, One Road.
But this assumes an average Chinese operating rate of 72%. Production could be higher than this, with capacity also higher than we have assumed.
We can help you build alternative scenarios for your PVC business.
The Risks Ahead for PP
The second of our two chart at the beginning of this post shows are base case for PP in 2026, which is again from our recently updated Supply & Demand database. As you can see, we still expect China to be importing 4m tonnes of PP in 2026, with big deficit regions including Europe and Asia and Pacific. This a very solid, and carefully thought-out base case or your business.
Here are some thoughts on why you need to again consider alternative outcomes.
In 2009, no PP was made via the coal-to-olefins (CTO) process in China. By the end of this, however, we expect 21% of PP capacity to be via coal. But by 2026, we see this falling to 14%. One of the doubts surrounding the further expansion of CTO capacity is the reliability and cost position of the technology.
But the same used to be said of US shale-oil technology. Where there is an economic will there is a way, with claims that this strength of will has already overcome one CTO obstacle: High levels of water consumption.
The economic drivers are of course the same in coal-based PP as well as coal-based PVC. It is all about jobs in the western, less-developed provinces of China.
Technology options for PVC are limited to just the coal and ethylene routes. But there many other routes to making propylene and then PP apart from just coal. You can source propylene via steam crackers, refineries, the metathesis process, and propane dehydrogenation (PDH). So China has plenty of technology options beyond just coal if it chooses to more aggressively expand its PP capacity.
As with PVC again, though, greater PP export revenues would help compensate for a weaker local economy. And China can channel its PP exports to its One Belt, One Road partners.
PP today remains in a strong net import position. During the first seven months of this year, net imports were still at 2.3m tonnes – although this was 16% down over January-July 2015.
But PP has also seen an aggressive growth in new Chinese capacities as a result of the economic stimulus programme. We expect China’s PP capacity to have risen by no less than 145% in 2009-2016. What if this continues?