China could easily become styrene net exporter as trade war drives self-sufficiency

Aromatics, China, Company Strategy, Economics, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, South Korea, Styrenics, US

By John Richardson

CHINA MIGHT remain a major net importer of styrene by 2025, making it still the biggest importer of any country or region in the world. Alternatively, as you can see from the chart on the right, it could swing into a small net export position – or may even be exporting as much as 1.1m tonnes by 2021.

You need to prepare for all three scenarios. I personally rate my two downside scenarios – Scenarios 1 and 2 – as more likely than our base case, Scenario 1. This would be a major blow to the global styrene business as China is by the far the biggest importer. Between 2010 and 2018 its net imports averaged 3.5m tonnes per year.

Now let’s look at the arguments for each of these three scenarios. I will then look at the global implications of these three very different outcomes.

Scenario 1: Net imports average 1.7m tonnes

Our base case assumes that China’s styrene operating rates will average only 71% between 2019 and 2025 and will be at an average of just 65% in 2021-2025.

During the great credit boom of 2009-2017, China added a considerable number of styrene plants that were not back-integrated to their own ethylene feedstock supply. Capital investment was no barrier in those days because China was flooding its economy with post-Global Financial Crisis economic stimulus.

Because these styrene plants were not back-integrated to ethylene production, they had to import ethylene – a very costly, uneconomic business. But the assumption was that they would eventually be integrated upstream to coal-to-olefins (CTO) and coal-to-methanol plants (CTO).

Inland CTO plants, which involves gassifying coal to make methanol and then olefins, have been cancelled for environmental reasons. Coastal MTO plants are based on imported rather than domestically-made methanol. It is often not economic to import methanol to make olefins – and so, again, MTO plants have been cancelled.

This will leave quite a few of the post-2009 China styrene plants still dependent on imported ethylene, and will therefore force them to run at low operating rates. We think this will be sufficient to keep overall capacity utilisation very low – hence, styrene net imports remaining at well above 1m tonnes. Net imports average 1.7m tonnes in 2019-2025.

Scenario 2: China becomes a small net exporter

China will have lots of surplus benzene to get rid as a result of running its paraxyelene (PX) plants much harder than our base case assumes. As I discussed last week, there is a strong case to be made for China’s PX operating rates averaging 82% in 2019-2025 rather than our base case of 62%.

These higher rates will be because of China operating very sophisticated and highly integrated new refining-petrochemicals plants better than we anticipate. Never underestimate China’s technical capabilities as it pushes hard to move up the manufacturing values chains – essential if it is going to escape its middle-income trap.

From a strategic perspective, reducing dependence on petrochemicals imports in a world of fragmenting trade – in which China is unsure over its future friends and adversaries – makes a lot of sense. Scenario 2 assumes a long term rift between the US and China but does not factor in an all-out, full-scale trade war and Cold War.

Benzene, as I said, becomes long under this scenario as reformers are maxed out to make the mixed xylenes (MX) to make the PX (benzene is a co-product from reformate).

Toluene disproporationation (TD) units turn two molecules of toluene into one molecule of benzene and one of MX – and TDP units tend to be run hard when there is big demand for MX to make PX. China runs its TDP units at high operating rates.

Because benzene has become a disposal problem, this improves the economics of China’s styrene plants. Ethylene, though, is the more expensive of the two styrene feedstocks because of the high cost of ethylene transportation.

But we are conservative over future Chinese ethylene operating rates. We assume an average rate of just 76% in the seven years from 2019 until 2025 compared with an actual average of 90% in the seven years from 2012 until 2018.

Scenario 2 assumes cracker operating rates closer to 90%, leading to plenty of local ethylene to supply local styrene plants (local ethylene is much cheaper than imported ethylene because of lower shipping costs).

Styrene operating rates are at 79% in 2019-2025, the same as in 2012-2025. By 2022, China is in a small styrene net export position and this continues until 2025.

Scenario 3: China becomes a major net exporter

There will be lots of surplus benzene available for the reasons described above. Cracker operating rates are also closer to their longer term 2000-2018 average of 94% as China maximises production for import independence reasons.

This is because China’s split with a US-controlled global trading bloc grows very wide, forcing it into much greater self-reliance across all of its manufacturing industries. We are in the midst of a major US/China trade war and a Cold War that creates the constant risk of US/China military conflict.

Styrene operating rates in 2019-2025 do not replicate the long term 2000-2018 average of 88%. This is impossible as there is insufficient styrene export markets for China as China continues to dominate the styrene derivatives market. There is, for example, little change from 2018 when China accounted for 58% of global acrylonitrile butadiene styrene demand.

The global economy slows on a major intensification of the US/China divisions, reducing demand for styrene. Styrene demand also struggles because of low global growth in polystyrene – a very mature polymer.

But China temporarily drives styrene capacity utilisation to high levels as it is in the midst of the biggest economic fight in its entire history. Desperate for overseas earnings, China floods overseas markets with styrene in 2021 as net exports reach 1.1m tonnes. This compares with our base of 1.8m net imports.  

But then trade barriers force operating rates lower. Under this worst-case outcome, China remains in a net export position in 2021-2015, but exports shrink after 2021. For the whole of the seven years from 2019 until 2025, capacity utilisation averages 81%.

The global implications of China self-sufficiency

Let’s make it simple and assume somewhere in between Scenarios 1 and 2 – China becomes completely self-sufficient in styrene, but isn’t exporting any volumes – i.e. it is balanced. This is bad enough

Under our base case, where China remains a big styrene importer, total global net imports across all the world’s net import countries and regions total 24.4m tonnes. Take China out of the picture, as it moves into balanced position, and global net imports fall to just 12.5m tonnes.

This would leave some 24m tonnes of net exports from the two biggest net exporters – the US and the Middle East – to fit into just 12.5m tonnes, based of course on our current estimate of operating rates.

High cost capacity would rationalised, with naphtha-based ethylene-to-styrene producers especially vulnerable in Northeast Asia ex-China. But even ethane-based ethylene-to-styrene producers in the US and the Middle East would be under pressure.

It is important to also note that even under Scenario 1, the US styrene producers will be in trouble because, for the time being at least, they face duties on exports to China of 50%. This comprises 25% antidumping duties and 25% import duties imposed as part of the trade war. The longer the duties stay in place, the greater the economic pain for US styrene players

The story in styrene once again reminds us just how over-dependent the global petrochemicals business is on China.

This was fine whilst there was consensus about more, rather than less, globalisation being good for the world economy. Not now. The China split with the US and reverse globalisation have led to a heightened risk of China pushing much harder towards petrochemicals self-sufficiency.

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