By John Richardson
DETAILS are emerging of what could be as many as 13 new crackers in China that would all be on-stream very probably by 2025. I originally thought only around ten new crackers would be built by that date.
This offers further support to my argument that it is perfectly possible that China will reach “effective” self-sufficiency in commodity grades of polyethylene (PE) by that year.
By effective I mean that is could be a combination both of the additional local PE supply that will be downstream of these 13 new crackers – and any other local PE projects that I might still have missed – and preferentially-priced imports from fellow One Belt, One Road (OBOR) members.
Let’s first take a close look at the new local crackers before focusing on what might also be built within the OBOR region.
You will notice that eight of the new crackers will be downstream of new refineries. Some of these new refineries will be privately owned as Beijing opens up the local refinery sector to more competition. An objective here is that in so doing, the Chinese government will improve the efficiency of state-owned refining giants Sinopec and PetroChina.
It is also important to note that several of these refineries will be integrated downstream with crackers and PE plants etc. – and also with new paraxylene (PX) facilities.
China, one by one, is picking off the chemicals and polymers in which it remains in major deficit and is moving towards much greater, or even complete, self-sufficiency. As I discussed last month, PX is a target because of the need to improve the profitability of China’s surified terephthalic acid (PTA) and PTA-to-polyester producers who right now have to import large volumes of PX.
Back to the crackers. As you can see, the crackers involve some very interesting feedstock approaches. For example, the Shenhua Ningxia project involves converting coal into naphtha. There are several routes to get to naphtha from coal including naphtha by coal pyrolysis, naphtha via hydrogenation and naphtha via gasification of coal.
China might be slowing down its coal-to-chemicals investment in general because of environmental reasons, including a major slowdown in coal-to-olefins capacity additions. But this project indicates that coal still remains a feedstock option.
The global liquefied petroleum gas (LPG) market is likely to remain very long for a long time because of the US shale gas revolution. Revolution is not too strong a word because as US shale has transformed both global gas and oil markets.
One of the few genuine bright spots for the US economy are its shale technologies, and so it is a good bet that global LPG – i.e. propane and butane – markets will remain oversupplied as the US exports its way to better economic growth. Ever-lower production costs and better logistics could well allow the US to make money, even at historically very low LPG prices.
This could also be a win for the planned crackers on the above list that are scheduled to be fed entirely, or partly, by imported LPG. There is a precedent here and this is the rapid growth in China’s propane dehydrogenation (PDH)-based propylene capacity. These plants, that are already operating, are based on imported propane.
Interestingly, also, the proposed Wanhua Petrochemical cracker, which would be located in Shandong province, might be based partly on imported ethane – perhaps from the US.
This might to some extent follow the model set by companies such as INEOS and Reliance Industries. Both of these companies have built their own ethane carriers to import US ethane to replace dwindling local supplies of ethane. But the Wanhua project would be different as it would be a new, grassroots cracker, partly based on imported ethane.
In total, the table above involves just over 13m tonnes/year of new ethylene capacity. At this stage we don’t know what PE and other derivatives capacity will be downstream of these crackers, but PE will of course be an important derivative.
It is not all about feedstocks
Feedstock economics is only part of the story here. There is a complex, and often opaque, mix of social and political factors that are likely to determined how many of these new refinery-cracker projects actually end up being built.
The social aspect and political aspects involve creating new employment, both at the construction phase of any industrial project and then when it’s operating. And in the case of a cracker complex, lots of new jobs can be created downstream in plastic processing and finished-goods manufacturing etc.
All but one of the above refining-cracker projects are in provinces that are in China’s top ten provinces and regions in terms of their per capita GDP– in other words, they are relatively very rich provinces.
The main objectives for these projects might thus be the quality rather than just the quantity of new jobs as China tries to escape its “middle-income trap”. Expect these new refining-petrochemicals complex to focus on developing local engineering and marketing and sales skills etc.
Also expect that wherever possible, new PE plants in developed provinces will push beyond just the production of basic commodity grades. Whilst the biggest risk to importers might be for imported grades of commodity PE, do not rule out the possibility that China will push into other higher-value markets such as metallocene-grade PE.
The first project on the above list – Shenhua Ningxia – is the exception here as it would be located in the Ningxia autonomous region in northwest/north central China.
In 2015, Ningxia had per capita GDP of $7,033, making it the 15th richest out of China’s 31 provinces. Here the focus could be more on commodity grades as government officials try to narrow the income gap between Ningxia and the richer coastal provinces.
There is something else that makes cost-per-tonne economics even more of a blunt tool to measure the viability of any industrial project in China, which is the relationship between industrial development and local government financing.
Local governments depend on land sales for their revenues, and on the tax receipts from plants once they are up and running. This can lead to preferential financing for constructing and operating plants which can override feedstock-cost disadvantages.
Further support for this holistic, bigger picture analysis is provided by the chart below, from fellow blogger Paul Hodges.
It shows that since 1998, Sinopec has spent $45bn on capex in the refining sector, and $38bn in the chemicals sect. Yet it made just $1bn at EBIT level (Earnings before Interest and Taxes) in refining, and only $21bn in chemicals. No Western chemicals company could possibly operate on these rates of returns because of pressure from shareholders, bondholders and bankers.
What this tells us is that Sinopec continues to operate largely as a utility to guarantee employment downstream of refining and petrochemicals.
“But hold on,” I can hear you saying, “aren’t some of these new refining-cracker projects being operated by private companies and so won’t there be a heavier focus on standard Western measures of profitability, such as cost-per-tonne economics?”
No, I don’t think this makes any substantive difference. Local and central governments will support private companies in the same way as they have supported state-owned enterprises if it means job creation.
It is also important to note that many of the chemicals and polymers plants that have been built in China post-2009 are privately owned, but still received preferential land sales and financing despite questionable cost-per-tonne economics. This was all about creating local jobs to compensate for the impact on the Chinese economy of the Global Financial Crisis.
New China-owned PE capacities in the OBOR region
As I said at the start of this post, China may reach commodity grade PE self-sufficiency by 2025 through a combination of both new local capacities and new capacities in fellow OBOR countries. Here is how this might work in terms of the OBOR:
- China builds, operates and owns new PE plants in say the Middle East. All of the Middle East is part of the OBOR. Iran, say, benefits from investment in its underdeveloped oil, gas, refining and petrochemicals industries that are being held back by sanctions. China, in return, gets access to low-cost hydrocarbons that make its overseas refining—petchems plants, including PE plants, highly competitive based on the standard cost-per-tonne measure.
- And/or China imports PE resin duty free from partner OBOR countries, thanks to the new free-trade deals that are part of the OBOR.
- Think also of all the infrastructure investments China is making as part of its OBOR initiative – and its outsourcing of lower-value manufacturing to fellow member countries that have youthful populations, and therefore lower labour costs. This could lead to further discounts off the cost of PE imported by China from fellow OBOR countries.
How do you emerge as a winner then? Firstly, encourage your government to work with, rather than against, China’s long-term economic objectives. If you operate a PE business that is already inside the OBOR region, that is an excellent starting position.
Secondly, China will need help in building its 13 refining and cracker complexes, whether it is through feedstock supply or perhaps downstream differentiated PE technologies. But this help, more likely than not, will only be sought from companies that operate in countries that it views as being on its side.
