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China And Iran: Reshaping Global Polyester Trade

Business, China, Company Strategy, Economics, Fibre Intermediates, Middle East, Naphtha & other feedstocks, Oil & Gas
By John Richardson on 14-Sep-2016


By John Richardson

IN TODAY’S world you have to start with political, social and macroeconomic factors to help build your map of global chemicals trade flows over the next ten years.

You next need to consider the old standard measures of feedstock availability, access to technology and logistics costs etc.

Why are these traditional ways of assessing production in different countries and regions only of secondary importance?Because if political and social factors are powerful enough, ways will be found around feedstock disadvantages etc.

This will result in old plants continuing to operate and new plants being built in locations that will shock people who are unable to see the bigger picture.

But in some cases the political, social, macroeconomic, feedstock, technology and logistics all line-up very neatly to support very obvious cases for investment. An outstanding example of this is China and Iran:

  • China’s demand for oil is forecast to grow from 6m/bbl today to 13m bbl/day by 2035.
  • Iran has the world’s fourth-biggest oil reserves. But sanctions have of course severely limited its ability to tap these reserves. Sanctions are now being removed, and so it will be in a much better position to help meet China’s energy needs.
  • China and Iran are both short of one thing: Jobs. China needs to escape its middle-income trap through creating millions of new higher-value manufacturing and service jobs in its eastern provinces, whilst in its western provinces it needs to focus on basic manufacturing. Iran’s problem is that it needs labour-market reforms to draw more people into the workforce. The Iranian government announced in April that unemployment was at “crisis point”. It said that the problem was particularly acute amongst 15-29 year-olds where the unemployment rate was 23.3%.
  • China and Iran grew politically and economically much-closer during the long era of economic sanctions. And there are plans to expand bilateral trade to $600bn over the next ten years. Iran’s Supreme Leader Ayatollah Ali Khamenei said in January: “Iranians never trusted the West… That’s why Tehran seeks cooperation with more independent countries like China.”

How might greater China-Iran cooperation be realised? Through, for example, the One Belt, One Road initiative.

Iran is on the route of One Belt, One Road and so is set to benefit from Chinese infrastructure investments aimed at improving logistics links all the way from China through to European markets.

How will this be of mutual benefit? :

  1. China gets to very cost-effectively export some of its manufacturing raw material surpluses to less economically developed countries along the One Belt, One Road, including Iran.
  2. Iran uses supplies of these raw materials to create new manufacturing jobs.
  3. By exporting its raw-material these surpluses, China also guarantees jobs back home.
  4. Where will this new Iranian manufacturing capacity go? Into a local economy growing at a much-healthier rate, thanks to One Belt, One Road. Some of this capacity will also be exported back to China and to European markets – via the greatly improved logistics links resulting from One Belt, One Road.

Now let’s look at one petrochemicals value chain – the polyester fibre chain – and consider how it might be affected.

We know that even at even today’s levels of oil production and economic development, Iran is in the bad situation of exporting crude whilst having to import much of its gasoline. It is as a result developing its refinery sector now that sanctions are being lifted.

And we know that most of the world’s paraxylene (PX) production is immediately downstream of refineries – and is often owned and operated by refinery companies.

We also know that China is in huge deficit on PX. In 2016, ICIS Consulting estimates that China will need to import 12.6m tonnes of PX.

Earlier this year, China moved into a net export position on purified terepthalic acid (PTA). We also expect it to export around 2m tonnes of polyester fibre in 2016.

Let’s then look at the chart at the beginning of this blog post. This shows another of our very solid base cases for the world in 2026, from our recently updated Supply & Demand Database.

As you can see, we think China will need to import 17m tonnes of PX in that year, with Iran’s export capability at only around 450,000 tonnes.

Might China help fund the development of Iran’s refinery sector – along with downstream PX plants?

We could also see Chinese support for condensate-based PX capacity in Iran. Iran has abundant supplies of condensate. Condensate, a type of heavy natural gas/very light oil, can be put through a condensate splitter to make heavy naphtha.

The heavy naphtha can then be fed into catalytic reformers to make benzene, toluene and mixed xylenes, with the xylenes then further processed to make PX.

Iran might thus supply more PX to China than is assumed in our base case, reducing opportunities for investment in new PX capacity elsewhere.

Developing this scenario a little further, China could then import the Iranian PX and re-export polyester fibre to Iran.

“But hold on you,” you might well say, “why on earth would Iran need to import more polyester fibre given the small size of its market?” In 2016, we estimate Iranian polyester fibre consumption at 250,000 tonnes with production at 220,000 tonnes – meaning an import requirement of just 30,000 tonnes. This is despite a population of some 79m.

Because when you convert polyester fibre into shirts, blouses, pillow cases and sheets etc. this is a highly labour-intensive process. Hence, one solution to Iran’s unemployment problem.

Where would the money come from to build these new Iranian shirt and blouse factories? The Chinese textiles industry confronts higher labour costs as a result of China’s middle-income trap, and so it needs to outsource production to lower labour-cost locations.

Moving all the way back upstream, China would benefit through guaranteed access to PX supplies from a very close trading partner. These guaranteed supplies would help China maximise operating rates in its oversupplied and feedstock-disadvantaged PTA industry.

And finally, back to polyester fibre. In 2026, we estimate that China will need to export 3m tonnes of polyester fibre. Iran might thus become a very willing export market.

Sure, you can disagree with my assumptions on the top-level political and economic relationships between China and Iran. And/or you may think that events cannot play out in this way in the polyester value chain. I would be delighted to hear your arguments.

But don’t let the detail get in the way of accepting what is beyond dispute: That in today’s New Normal world the main shaper of global chemicals trade flows will be social, political and macroeconomic factors.