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China’s Drive To PX Self-Sufficiency Again Shows Failure Of Conventional Thinking

Business, China, Company Strategy, Economics, Fibre Intermediates, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins
By John Richardson on 15-May-2017

China’s PTA imports minus exports

By John Richardson

BACK in November 2014, when I first suggested that China might move to self-sufficiency in paraxylene (PX), my blog post was met with widespread scepticism.

At that time, China was moving from a major import position in purified terephthalic acid (PTA) towards becoming a net exporter. This led to a lot of excitement about the prospect of building overseas PX plants to serve China’s growing PX needs.

And enthusiasm has been building since 2014 about the economic viability of either overseas refinery-based PX plants or PX plants based on standalone reformers. It is said that these standalone reformers could be fed by heavy naphtha split from condensate.

The historic data up until the end of last year provides a very convincing investment case. As China’s PTA capacity has surged, so has its dependence in imported PX. China customs data show that China’s PX imports rose to 12m tonnes in 2016 from 10m tonnes in 2014.

But it is important to take note of my November 2014 warning:

The global PX industry must prepare a contingency plan for China becoming an ex-import market.

 An ICIS news story earlier this month detailed Chinese plans to more than double its PX capacity over the next three years. Capacity could rise from 13.2m tonnes/year to 29.3m tonnes/year.

What is very interesting about this proposed capacity surge is that it appears to be refinery-based PX, involving PTA producers moving upstream to integration to their own PX feedstock supply. As my ICIS colleague Fanny Zhang writes in the ICIS news story:

The huge PX supply deficit and high exposure to price risks due to reliance on imports have prompted a number of major downstream PTA producers, including Rongsheng Petrochemical, Shenghong Petrochemical and Hengli Petrochemical, to move upstream and build their own PX plants.

This defies conventional wisdom because the PX business has close economic links with refining. Major global PX producers are very often also refinery or oil-to-refinery majors. This might lead to doubts over whether many of these new PX projects will be realised. Another reasons for scepticism could be that previous PX investments in China have been cancelled because of environmental protests.

But China has a habit of confounding the sceptics. For example, five years ago few people imagined that the coal-to-olefins (CTO) process would be as successful as it has been. The consensus view was that it a.) It wouldn’t be cost effective, and b.) The large amount of water required would make major investments environmentally untenable.

Now, though, partly thanks to major investment in CTO plants, China could easily move to being self-sufficient in commodity grades of polypropylene (PP) by 2020. It will have the capacity on the ground to achieve this. The only issue is how hard it chooses to run this capacity. What people missed with the rise of CTO capacity in general was the wider economic, social and political context.

The key for me here remains this: China will do what suits China – and it might well suit China to move to self-sufficiency in PX in terms of the wider context. Here is why:

  • As the ICIS news article points out, the Chinese PTA industry is struggling because of lack of access to local PX feedstock. Many of China’s PTA plants are new, and so world-scale, which means it makes no sense to shut them down. Further, the PTA plants are an important source of revenue for local governments and help generate local employment.
  • The solution could therefore be to build lots of new PX supply, which would involve support from local governments and the central government. These projects might thus be funded by cheap financing provided by the state-owned banks.
  • China has overcapacity upstream in refining with gasoline demand growth likely to slow down for environmental reasons. Take the latest projections from the International Energy Agency as an example. It has sharply revised-up its estimate of the growth of electric vehicles in China.
  • It might thus make solid economic sense for refiners to find an alternative value for mixed xylenes (MX), which is the feedstock to make PX, by partnering with PTA producers to build PTA plants. The alternative use for MX is of course as an octane booster in gasoline. MX is produced by reformers that are usually part of refinery complexes.
  • And unwanted toluene, which is also used as a gasoline octane booster, can be converted to MX – and then onto PX – via the toluene disproportionation process. Toluene, like MX, is made by reformers that are part of refineries.

This is a further example of why your analysis on China needs to look at the wider economic context. It cannot just be based on standard Western models of petrochemicals integration and cost-per-tonne economics.