THE argument I’ve been making for a couple of years now is that the history of petrochemicals in China suggests a constant drive towards much greater self-sufficiency. No value chain is immune, I have kept contending.
The recent history of a sharp rise in self-sufficiency in polyvinyl chloride (PVC), purified terephthalic acid (PTA) and polypropylene (PP) was a pointer to what could happen in value chains where China remained in deficit, has been my warning.
PVC and PTA have gone from being major net import markets to being in net export positions. It is also possible, based on the capacity likely to be on the ground in China by 2020, that China will be virtually self-sufficient in commodity grades of PP – assuming that its plants are run very hard.
In November 2014, I warned that China’s focus might switch to paraxylene (PX), where import demand was growing. This is now happening. China plans to raise its PX capacity from 13.2m tonnes/year to 29.3m tonnes/year. Not all of these projects might happen, of course. But even if only half of these projects were realised, China would be a lot closer to self-sufficiency in PX.
Now it seems that polyethylene (PE) is the next target for an aggressive push towards much-greater self-sufficiency.
As CTO perhaps fades, China switches to naphtha
There has been much talk of how delays to or cancellations of coal-to-olefins (CTO) projects in China has created a great opportunity for PE exporters to China. Some 2.1m tonnes/year of new CTO-based PE had been due to come on-stream in 2017, but we now believe that less than 1m tonnes/year will actually be commissioned. Projects have been pushed back to 2018 or even later – or, as I said, may even be cancelled.
The main reason seems to be environmental. The government is apparently concerned not only about the amount of air pollution that the CTO process causes, but also the big amounts of carbon dioxide generated. CTO plants produce several times more CO2s than naphtha cracking.
China is taking its commitment to the COP21 deal even more seriously than before because it believes it has an opportunity to gain geopolitical ground on the US. The US might retreat from its COP21 commitments because of the Trump White House.
Plus, China is due to launch a carbon trading scheme in H2 this year and a new environmental tax in January 2018, both of which will be nationwide. These could undermine the competitiveness of CTO versus naphtha cracking.
“Coal-to-liquids (CTL) projects are strategic for China and CTO projects are not,” said Peter Huang, CEO of China National Chemical Information Centre, the Chinese chemicals consultancy, during a presentation at last week’s Asia Petrochemical Industry Conference in Sapporo, Japan.
In other words, China seems to view making coal into liquids – i.e. liquids – as being more important to its national interest than making coal into olefins. In the case of CTL Beijing might be more prepared to accept the environmental downside than with CTO.
But in parallel, under its 13th Five-Year Plan (2016-2020), China is planning to develop seven new highly integrated refining and petrochemicals bases whilst upgrading four existing bases.
I’ll provide the details of these proposed investment later on, but in short here some of the new refining/petrochemicals complexes are being planned by private companies. There is a crossover with PX here as some of these complexes would include PX plants and crackers downstream of refineries. The four existing sites are already operated by Sinopec and will be upgraded by Sinopec.
This all means that more than ten new naphtha crackers are being planned in China, according to my colleagues at ICIS China. These would start-up from 2019-2020 onwards.
In addition, there is a wave of new naphtha crackers being planned elsewhere in Asia for start-up after 2020. I will again provide the details of these projects later on, when I have the details.
Three potential outcomes
This might lead to the following outcomes:
- China by itself moves close to self-sufficiency in PE commodity grades by 2025. By that year, it will be where it will be by 2020 in PP: In the position to be virtually self-sufficient in commodity grades, depending on how hard it operates its plants.
- China moves very close to PE self-sufficiency through a combination of more domestic crackers and crackers built in fellow One Belt, One Road countries (OBOR). Most of the new cracker investments being planned in Asia – and any unannounced projects in the Middle East – are likely to be in OBOR countries. China will thus prioritise imports from these fellow OBOR nations for geopolitical and energy security reasons.
- The US is “left out in the cold”. Whilst its first new wave of PE capacity might just about find a home for the next few years, after 2020 seems far less certain. And the second wave of new US PE capacity faces an even more difficult future.
As always, I could be wrong here. But, as always, this is not the point of this blog post. The purpose is to instead help with your strategic planning.
What I think is clear, though, is that we have moved into a world where petrochemicals investments are being driven more by national economic interests and geopolitics than by feedstock advantage.