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China’s ethylene glycols imports could decline by 45% in 2021

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By John Richardson on 16-Feb-2021

By John Richardson

LET ME start with the good news first. As with the global polyethylene (PE) and polypropylene (PP) markets, the ethylene glycols (EG)* business isn’t likely to find that demand will be a problem in 2021. We can start to build the evidence for this conclusion by considering last year’s Chinese textiles and garments exports.

In 2020, China’s overall textiles and garments exports jumped by 9.6% in value terms over the previous year to $291bn, according to the official data.  This comprised a 29% surge in textiles exports as garments shipments slipped by 6%.

The surge in textiles exports was the result of booming demand for personal protective equipment(PPE) such as face masks, which are partially made from polyester fibres and the boom in demand for pillowcases, bed sheets, curtain material and carpets. These products can again be made from polyester fibres, which of course require EG as a feedstock.

These trends are the result of our pandemic lifestyles. The surge in demand for PPE speaks for itself. The rise in consumption of pillowcases etc. is a result of the bored cash-rich middle classes in the West spending more money on re-kitting their homes during lockdowns.

Demand for polyethylene terephthalate (PET) film and bottle grades was also buoyed by the increase in eating at home as restaurant dining declined. These are two of EG’s other major end-use markets.

But demand for the textiles and garments required for working in offices and travelling for business and leisure declined. There were similar falls in PET film and bottle demand connected office-work and travel.

As with most of the other petrochemicals and polymers, this puts EG in an impossible-to-lose position in terms of demand in 2021.

From a hard-hearted dollars and cents perspective, it won’t matter if variants of the virus result in failure to move much closer to herd immunity. Failure would lead to continuation of our pandemic lifestyles.

Demand for PPE would, as a result, remain robust as would demand for pillowcases etc. – along with greater demand for food packaging as we would continue to eat more at home and much less in restaurants.

Or there is the other outcome will all hope for: big success in vaccination programmes which allow us to begin to return to our old pre-pandemic lifestyles.

This would lead to a cycle out of demand for the goods linked to spending more time at home and into demand for working in offices and travel – although it seems likely that PPE demand would remain strong due to the precautionary principle.

Any loss of EG demand as we spend less time at home would, I believe, be compensated for by the return of consumption related to office-work and travel.

This has led me to my upsides of global EG demand in 2020 and 2021 versus our base cases, which you can see in the above slide. In 2020 versus our base, global demand would be 1.2m tonnes higher; 2021 global consumption would be 1.3m tonnes than our base case.

This is built on Chinese growth in 2020 being plus 5% rather than our base case of minus 1%. This reflects a 6% rise in China’s net EG imports to 10.5m tonnes over 2019, a 4% rise in local production, and, as mentioned above, strong growth in China’s textiles and garments exports.

China accounted for no less than 59% of global EG demand in 2020, so what happens to Chinese demand is way, way more impactful than what occurs in any other region.

My upside for 2020 also assumes positive growth in North America (Canada, Mexico and the US), Europe and northeast ex-China (Japan, South Korea and Taiwan) on stronger-than-expected textiles markets.

I left growth in Africa and the rest of the developing world unchanged versus our base case. We forecast steep declines in demand in Africa, Asia & Pacific, the Former Soviet Union and South & Central America.

As for 2021, I assume a decline in Chinese growth to 4% because of a moderate Q1 slowdown in the Chinese economy versus the fourth quarter of last year. This would still be strong growth in the long-term historical context, however. Growth of 4% is in line with our base case.

But I have slightly increased the growth rates for the developed regions in 2021 while leaving growth rates for Africa and the rest of the developing world unchanged from our base case. Our base case sees big rebounds in demand in Africa etc.

Chinese supply is instead the thing to worry about

As is the case with paraxylene (PX), China’s EG imports could quite literally collapse in 2021 even assuming another strong year of demand growth.

PX imports may this year fall to as little as 6.6m tonnes – 59% lower than their 2018 all-time high of 15.9m tonnes. EG imports in 2021 might end up as low as 5.8m tonnes compared with last year’s all-time high of 10.5m tonnes. This would represent at a reduction of 45%.

This could be the result of China moving much closer to self-sufficiency in both the fibre intermediates, the result of a Chinese government decision taken in 2014 to push much more aggressively towards petrochemicals self-sufficiency in general.

Over the last 30 years, China has steadily moved further upstream in the polyester value chain. China previously mostly imported the fabrics needed to feed its huge export-focused textiles and garment industries.

It then made major investments in polyester fibres and PET film and bottle-grade production to the point where it became a net exporter. China is now the world’s biggest net exporter of polyester fibres and PET film and bottle-grade resins.

The next step from 2009 onwards was the push towards purified terephthalic acid (PTA) self-sufficiency. As recently as 2010, China’s net PTA imports reached a record high of 6.6m tonnes. Last year, it was in a net export position of 191,822 tonnes.

The sceptics thought that PTA was the limit for China because the PX business is far more capital intensive than PTA and is heavily integrated with refining. They doubted that China had the funds and marketing and technical capabilities to build a major refinery-to-PX industry.

They were equally sceptical about China’s ability to produce enough ethylene to achieve a significant rise in EG capacities.

They accepted that China had a long track record in building and upgrading steam crackers. but they contended that most of the ethylene feedstock would be required for more PE production, the highest  strategic priority.

The sceptics also believed that China’s coal-based EG production would drag down overall operating rates because of its technical deficiencies. There was no coal-based EG capacity in China as recently as 2009. Last year, coal-based capacity accounted for 40% of the total.

I disagreed on PX and have been consistently warning, since the big government policy shift in 2014, that we would be where we are today. In as little as three years from now, China could achieve complete PX self-sufficiency.

I had thought, though, that EG exporters to China would be fine. Based on the latest data, however, I have changed my view, for reasons I shall detail shortly.

As a reminder, why China matters so much to the global fibre intermediates industry isn’t just because it dominates global demand.

China also completely dominates net imports. In 2020, we estimate that China accounted for 90% of global net PX imports and 87% of global net EG imports. This is among the regions and countries where imports exceed exports.

In other words, the PX and EG global industries would be unable to adopt a Plan B if Chinese PX and EG imports were to collapse as no other markets could possibly absorb their surpluses.

Now let us look at my forecasts for China’s 2021 EG imports in detail and what they could mean for the country’s top ten EG trading partners.

Two scenarios for China’s EG imports in 2021

As usual, I’ve expressed the above chart in tonnes to make it easier to read whilst sticking to millions or thousands of tonnes in the text.

If China runs its EG capacity at 70% and demand growth were 4%, imports from Saudi Arabia would fall to 2.4m tonnes in 2021 from 4m tonnes last year, a 40% decline (see Scenario 1). This would see China’s total imports drop to 6.4m tonnes in 2021 from last year’s 10.5m tonnes.

This is based on Saudi Arabia taking the same share of the total Chinese import market as is it did in 2020.You can see the impact under Scenario 1 on the rest of China’s top ten EG trading partners.

A 70% operating would be the same as the actual operating rate between 2013 and 2019. I chose these years rather than a longer time frame because it was from 2013 onwards that China’s less efficient coal-based capacity began to really take off as a proportion of overall capacity.

But here is the thing: in 2020, China’s EG capacity integrated upstream into ethylene from steam crackers rose by 39% as its coal-based capacity increased by 21%; in 2021, steam cracker-linked capacity will jump by a further 30% with a 25% addition to coal-based capacity.

This will lead to a slight dip in coal-based capacity as a percentage of total EG capacity to 39% in 2021 from 40% in 2020, with further declines in subsequent years.

Why this is important is because China’s steam cracker-based EG plants are part of new, world-scale petrochemical complexes located in state-of-the-art industry parks. We can thus expect these EG plants to run at high operating rates.

Further, I have been told that the efficiency of China’s coal-based EG capacity – which is via synthesis gas made from coal – has been greatly improved. The technical difficulties that had prevented coal-based EG from being used in polyester end-use applications have been largely resolved, I have been told.

So why not assume an operating rate higher than the 2013-2019 average? Providing support to this argument is that last year’s operating rate was 73%, according to my calculations. This leads us on to Scenario 2.

Under Scenario 2, I assume the 73% operating rate would be repeated in 2021 with demand growth also at 4%. Imports from Saudi Arabia would fall to just 2.2m tonnes – 45% lower than last year. This year’s total imports would fall to only 5.8m tonnes.

Here is another thing, also: if you wind the clock further back, China’s average EG operating rate was 84% in 1999-2019. If such an operating rate were to be repeated at some point over the next few years, China could easily reach complete EG self-sufficiency.

This might not happen, of course. More immediately, 2021 may turn out to be another good year for EG exporters to China if growth surprises on the upside and/or local capacity is delayed.

But this is a very risky business for all the export-focused producers located in the above countries. Want my opinion? I can see no reason why China won’t eventually become entirely self-sufficient in EG.

*Please note that our data for EG include mono-, di- and tri-ethylene glycols. But more than 90% of global demand is for mono-ethylene glycols (MEG) used to mainly make polyester fibres and PET film and bottle grade, with a small amount of MEG also used to make antifreeze. Hence, my comments above only deal with the biggest drivers of consumption – polyester fibres and PET resins.