China’s paraxylene imports in 2019-2025 face major downside risks

Business, China, Company Strategy, Economics, Fibre Intermediates, Naphtha & other feedstocks, Oil & Gas, South Korea

By John Richardson

NEVER underestimate China’s ability to execute vast and highly complex manufacturing projects very efficiently.

There is of course a very good chance that my  downside scenario will be wrong. It may be technically unfeasible for China to operate its new paraxylene (PX) capacity at 82% in 2019-2025, as opposed to what could turn out to be our sensible base case of 62%.

And what about the surplus benzene resulting from high PX operating rates? This would become a major disposal problem. Benzene margins would plummet due to reformers running hard to make the mixed xylenes feedstock of PX.

Assuming I am 100% right this would mean 48.4m tonnes less PX net imports in 2019-2025 than in our base case.

But even if I am just 50% right, and operating rates average 72%, this is still a loss of 24.2m tonnes of imports versus our base case estimate of total net imports in 2019-2025 – 97.8m tonnes.

Rates at 72% would still be a major blow to the exporters to China, especially South Korea which in 2018 shipped 6.6m tonnes of PX to China, 42% of total imports of 15.9m tonnes. In second place was Japan at 15% of the total and 591,021 tonnes of exports.

Complete self-sufficiency, even when you include the new Chinese-owned Brunei PX plant, is beyond China for the time being at least.

But even our base case fall in PX export dependency would still represent the latest chapter in a story that began decades ago when China became the workshop of the world for textiles and garments.

Then it moved into fabric production and next into polyester yarn and fibres output where it became completely self-sufficient.

Post-Global Financial Crisis, as the Chinese government made available vast sums of lending to boost manufacturing capacity in general for economic multiplier purposes, China’s imports of purified terephthalic acid (PTA) collapsed. In 2010, China’s net PTA imports were 6.3m tonnes. Last year, it was in a net export position of 57,603 tonnes.

China leveraged its vast pool of cheap labour to become the workshop of the world in textiles and garments and remains by far the biggest textiles and garments exporter. This is despite the rapid rise in labour costs resulting from ageing population.

Increasingly, though, textiles and garments factories will move from China to other countries with lower labour costs – and, as we all know, this process is already well underway.

As we move into a bipolar world, some of these new factories will be under Chinese ownership within the Belt and Road region. They will also very often receive their raw material polyester fibres from Chinese plants, with the economics of polyester fibre production in China strengthened by integration all the way upstream to PX.

As the Chinese economy matures, it makes perfect sense for China to improve its refinery-petrochemicals integration in this way. This is adding value to its economy as it tries to escape its middle-income trap.

This is always the context in why you must view refinery and petrochemicals investment in China. Think about headline government policy as well as cost-per-tonne economics.

And never, ever, as I said at the beginning, underestimate China’s ability to surprise on the upside through highly efficient execution of complex and big manufacturing projects.

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