Home Blogs Asian Chemical Connections Global oversupply of petrochemicals to hit 218m tonnes in 2023 – the highest in any other year since 1990

Global oversupply of petrochemicals to hit 218m tonnes in 2023 – the highest in any other year since 1990

China, Company Strategy, Europe, European economy, European petrochemicals, Fibre Intermediates, India, Indonesia, Japan, Malaysia, Middle East, Olefins, Philippines, Polyolefins, Singapore, South Korea, Taiwan, Thailand, US
By John Richardson on 08-Mar-2023

By John Richardson

AS THE HEADLINE on the above chart asks: How on earth did we end up in this situation?

My first theory is that our industry had assumed that China’s petrochemicals demand growth would continue at close to or above double-digit levels in 2021 and 2022, following the pattern of 2000-2020.

But in 2021 and last year, growth in some of the big petrochemical building block derivatives was negative for the first time on record. Where growth was positive, it was in the low single digits.

Why should lower growth in just one country help explain the huge capacity overhang that we now confront? The chart below is a reminder of why.

In 1990, China’s global percentage share of demand for the six building blocks averaged 4%. In 2022, the average had reached 35%.

Now let’s move downstream into the seven biggest synthetic resins. The chart below shows China’s average percentage shares of global demand for the resins versus the averages for the other regions.

In 1990, China accounted for just 6% (see the brown line) of the global total, with 2005 a pivotal year as China became the world’s biggest consumer. In 2021, China’s share had reached an astonishing 42%.

“This is not astonishing at all because of the huge explosion of spending by China’s middle class,” I can imagine some people saying.

I worry that it is slogans like the “rise of China’s middle class” that might have got us into this situation. If a slogan is repeated enough, people tend to believe it, even if the data doesn’t back it up.

The above chart is a repeat of the chart I included in my 3 March blog post. I suggest reading the post, if you haven’t done already, for the background to the three major events on the chart.

Although I haven’t crunched the data yet (I intend to), what applies to polypropylene (PP) – featured in the above chart – I am sure applies to many other petrochemicals and polymers.

Warning bells should thus have been sounding that China’s petrochemicals growth might not remain around double-digit levels in 2021 and 2022 because of its ageing population – and because the property bubble would have to at some point come to an end, as I’ve been highlighting on the blog since 2014.

The property bubble was the main result of the post-2009 stimulus package.

In August 2021, the launch of the long-expected Common Prosperity economic reforms deflated the property bubble as the “drip, drip, drip” growth erosion caused by the ageing population continued.

Growth in 2022 was further dented by the zero-COVID policies and by the impact on China’s exports of high inflation and the cycle out of spending on goods and into services (again, don’t say I didn’t warn you) as the pandemic ended.

The following chart, again repeated from the 3 March blog post, underlines just how dangerous slogans such as “China’s rising middle class” can be.

The chart tells us that:

  • In 1990, China’s per capita income was just $350 versus an average of $18,000 across my definition of the developed world . China’s per capita PP consumption was around 1 kilogram (kg) versus 10kg in the developed world.
  • By 2022, China’s per capita income had grown to $13,000 with per capita PP consumption at 35kg.
  • But while the developed world’s per capita income had risen to $48,000, its per capita PP demand was just 19kg.

This demonstrates that China’s extraordinary growth in petrochemicals demand wasn’t mainly the result of a broad-based rise in middle-class spending but was instead due to export-focused growth supported by a youthful population.

This was followed by the giant economic stimulus package from 2009 onwards, as mentioned earlier, which led to a real-estate boom that concentrated tremendous wealth in the hands of a relatively very few citizens.

It was this property wealth-effect that was a major factor behind the steep rise in China’s global share in petrochemicals demand from 2009 onwards.

This explains why China’s PP per capita consumption was, I said, 35kg in 2022, which translates to a total consumption of 34.6m tonnes or 43% of global demand. This was beyond what consumption should have been based on China’s average per capita income – and relative to the income of the developed world.

But even though China plays such a dominant role in demand, the scale of today’s oversupply points towards other factors being involved.

Another obvious candidate is increased capacity in China, where the objectives of building plants are not always about immediate returns on investment – as I’ve again been highlighting on the blog since 2014.

Other motives for building plants include short-term economic stimulus through the “multiplier” effect and increasing self-sufficiency in an industry that is seen as high value. Moving into higher-value manufacturing is key to China’s attempt to escape its middle-income trap.

The chart below shows China’s rising percentage shares of global capacity in the building blocks from 1990 until 2022.

China’s share of global capacity for the building blocks averaged 5% in 1990 and 38% in 2022.

These two reasons still, though, aren’t enough of an explanation because of the extent of the oversupply.

A third theory, and I don’t have any data back to this up, has been suggested by some of my contacts: Overestimates of growth in the developing world ex-China because of failure to factor in affordability.

Because hundreds of millions of people live close to the absolute poverty line in Africa, Asia and Pacific and the Middle East, etc., it might only take a small rise in oil prices to make even the most basic of consumer goods unaffordable.

As I said, this is theory backed up by no data that I’ve seen. Watch this space to see if it can in any way be verified.

More prosaically, the single biggest explanation that’s been suggested to me is that not enough people accurately counted all the real projects.

Perhaps there was the belief that China wouldn’t go ahead with many projects because conventional measures of return on investment indicated they were uneconomic.

I am told that failure to count enough real projects has happened before, ahead of other downturns.

It is important to note, by the way, that in the case of the aromatics –  benzene, toluene and mixed xylenes (MX) – capacity additions don’t just relate to petrochemicals. They are also linked to major expansions in refinery capacities.

But mistaken assumptions over China’s petrochemicals demand growth could equally apply to fuel products.

Conclusion: Hindsight is a wonderful thing

It is of course very easy after the event to point out what has gone wrong. Nobody could have seen the surge in inflation and zero-COVID coming.

But I do worry that a persistent problem is lack of a broad enough view of the underlying factors that have shaped petrochemicals demand over the last 30 years – especially in China.

In the final analysis, whatever the reasons, the first chart in this post is shocking as it shows that:

  • Between 2000 and 2022, global capacity exceeding demand for the six building blocks averaged 76m tonnes – a figure skewed higher by the steep rise in surplus capacity that began in 2019.
  • But still, capacity exceeding demand is forecast to surge to 218m tonnes in 2023 from 191m/tonnes last year. The 2023-2025 average is expected to also be 218m tonnes.

What happens next? This will be the subject of future blog posts and podcasts with my colleagues.