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China trade war self-reliance push threatens ethylene glycols and PP imports

Business, China, Company Strategy, Economics, Fibre Intermediates, Methanol & Derivatives, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Styrenics
By John Richardson on 29-May-2019

By John Richardson

CHINA WILL do what suits China and not what suits the rest of the petrochemicals and polymers word. And what suits China has radically changed because of the new US approach to international relations.

No longer can China depend on the US, or indeed any other country, for the petrochemicals imports it needs to maintain jobs downstream in its vast finished goods manufacturing industries.

China knew who its economic and geopolitical friends versus its opponents were before 2016. Not now. Nothing can be taken for granted.

Perhaps the whole of the Middle East and South and Southeast Asia will side with China as we move towards a bi-polar world. Or maybe some countries in these regions will side with the US, limiting China’s ability to gain petrochemicals imports at preferential rates.

This is a key phrase – preferential rates. We are moving towards a world of two trading blocs, one centred on the US and the other on China with these two blocs protected by tariffs. Trade between the two blocs might as a result become prohibitively expensive, or may not take place at all.

China will as a result, in my opinion, push much closer to petrochemicals self-sufficiency than many people think as self-reliance becomes its overarching strategy. The same will apply downstream into, for example, semiconductors and other hi-tech sectors as the technology-driven trade war between China and the US accelerates.

Becoming more much more self-sufficient in petrochemicals also fits perfectly with China’s efforts to escape its middle-income trap. The state-of-the-art refinery-to-petrochemicals complexes that China is building will add great value to its economy. Why assume, as it tries to add value through improved technical expertise, that it will run these complexes at low operating rates? The opposite seems more likely, in my view.

Over the last week I’ve therefore argued that our base cases for paraxylene (PX) and styrene imports in 2019-2025 need to be challenged. These base cases are essential and excellent starting points for the strategic planning that we can help with:

  • In PX, we assume average Chinese operating rates of 62% in 2019-2025 and net imports averaging 14m tonnes per year. My alternative outcome sees 82% rates and average imports of just 7m tonnes. In 2023, our base sees imports of 14.3m tonnes, but under my downside they fall to full 4m tonnes.
  • In styrene, our base case sees 2019-2025 capacity utilisation at 71% and net imports averaging 1.7m tonnes with China in deficit throughout this period. My worst-case downside sees rates at 81% and China in a net export position from 2021 onwards. In that year, net exports reach 1.1m tonnes.

It’s now important to consider potential downside outcomes, from an exporter’s perspective, for ethylene glycols (EG) and polypropylene (PP). These are two other petrochemicals in which China as at the moment a major importer, the world’s biggest.

Ethylene glycols: Higher self-sufficiency to boost polyester chain efficiencies

Our base assumes average EG operating rates of just 62% in 2019-2025. This would result in net imports at an annual average of 2.1m tonnes.

The sound logic behind our base case is continued technical problems with the oxalic acid-to-EG production route in China, which begins with coal as the feedstock. Coal-based EG capacity will account for 43% of China’s total EG capacity in 2019-2025.

But let’s assume that these technical problems are resolved – and also let’s assume that capacity utilisation at China’s conventional ethylene-based plants will be higher than our base case anticipates.

In 2000-2018, operating rates at both China’s coal-based and ethylene-based EG plants was at 79%. If there were to be repeated in 2019-2025, then, as the chart at the beginning of this blog post illustrates, EG imports would average 8.2m tonnes per year instead of our base case 11.2m tonnes.

Greater self-sufficiency because of an uncertain global trading environment would be one motive for higher-than-expected EG production.  Another would be improving the economics of the polyester value chain.

China is already entirely self-sufficient in polyester fibres, in purified terephthalic acid (PTA) and has launched a major programme of investment in PX. So maximising EG output would help complete much-improved polyester chain integration.

Polypropylene: Don’t assume copolymers will save the day 

Even in under base case – PP operating rates of 87% in the seven years from 2019 until 2025 – annual net imports would average 2.1m tonnes. This would compare with a 4.6m tonnes average in the seven years from 2019 and 2025.

As about 20% of China’s 2019-2025 PP capacity will be via the propane dehydrogenation (PDH) route to propylene and PP, 87% might turn out to be an accurate estimate of capacity utilisation as PDH plants are difficult to run at consistently high operating rates. But most of the new capacity being built in China is either based on refinery or cracker propylene feedstock.

Another reason to expect China remaining in PP deficit is that it lacks the technical capabilities to make big volumes of higher value copolymer PP. But producing more copolymers would again fit with China’s efforts to raise the value of its manufacturing. Never underestimate China’s technical abilities.

My alternative scenario sees PP rates at 90% in 2019-2025, which is again the same as in 2000-2018. The result you can again see from the above chart. Instead of net imports averaging 2.1m tonnes, they fall to just 1m tonnes. And between 2021 and 2024, China is in a small net import position.

Last man standing: Polyethylene  

China long ago moved into potential self-sufficiency in polyvinyl chloride and in methanol. But the good news for exporters is that it remains a substantial importer for tax and cost efficiency reasons.

PTA, though, has essentially disappeared as an import opportunity. Styrene and PP may follow, as described above, with EG and PX perhaps seeing much-lower-than anticipated deficits.

That would leave just one product – polyethylene (PE) – where, at least for the time being, China’s import requirements look likely to remain unchanged. China’s import requirement may even expand because of incredibly robust demand growth and the inability to add local capacity quick enough.

Might even PE deficits come under threat, though? It seems perfectly logical as China prioritises self-reliance in a world of highly uncertain trading and geopolitical relationships.