By John Richardson
NOBODY IN the petrochemicals industry really knows what’s happening inside any government and how that translates to policies for our industry, no matter how well connected they believe they are.
This makes understanding policy direction essentially a guessing game, based on always imperfect access to policy details and – here is the key – interpretations of how policies might be applied. It is one thing to set a new direction for petrochemicals, but on-the-ground implementation of that direction is almost an entirely separate thing.
This is not me talking, but instead some “wise old hands” who work, or have worked, at very senior levels in petrochemical companies. I’ve known some of these guys (and its mainly guys, unfortunately) for more than 20 years.
But there are certain watershed moments when the newspaper headlines by themselves tell us something important is happening. especially in the case of the heavily government-influenced domestic media in China. This is again something that the wise old hands have long argued.
We believe one such moment occurred in August 2021 when Beijing made it clearer that it wanted to build a new economic growth model. There has been more discussion in local papers since then about moving away from the debt-driven growth model to one based on greater income equality, increased innovation in manufacturing and better environmental protection.
Since August 2021, I have discussed in detail the implications for China’s economic growth of this policy shift. As the excellent Arthur Kroeber, founding partner of Gavekal Dragenomics, told the Financial Times last week: “Xi Jinping does not define economic success in terms of GDP growth.”
He added that hi-tech self-sufficiency was Xi’s definition of success. China is contending with increased geopolitical challenges during a period when it must move higher up manufacturing and service value chains to compensate for its rapidly ageing population.
Where does this leave the petrochemicals business? The chart below appears to show greater self-reliance combining with the higher-value manufacturing push.
China’s percentage shares of global capacities in higher-value products are forecast by ICIS to substantially increase in 2024 compared with 2022.
For example, China’s share of global capacities of acrylic acid esters is expected to jump to 13% in 2024 from 1% in 2022. China’s share of ethylene vinyl acetate (EVA) copolymers, some of which can be high value, is forecast to rise to 17% in 2024 from 8% in 2022.
Also note in the same chart that China’s shares in some of the basic commodities are also expected to increase. In polyester polymers, for instance, we expect China to have a 21% share of global capacities in 2024 versus 13% in 2022.
But how will further growth in petrochemicals capacity fit with China’s target of achieving net zero before 2060 and its efforts to further improve local water, soil and air quality?
In October 2021, I first heard that winning approvals for longer-term new petrochemical projects had become harder. Over the last two months, I’ve heard from a couple of contacts that winning approvals for new projects that are due to start-up after 2025 (beyond the time frame of the above chart) has become more challenging.
And then last week my ICIS colleague Lina Xu wrote in this ICIS news article: “China has updated its list of key industrial sectors and products that have to meet certain baseline energy efficiency levels so the country can meet its 2030 carbon peak target.
“A total of 11 industrial fields and products, including polyvinyl chloride (PVC), purified terephthalic acid (PTA) and mono ethylene glycol (MEG), are added in the 2023 list.”
She added that about 1.4m tonnes/year of China’s carbide-based PVC capacity had already been shut from 2013 to 2016.
Another wave of closures is expected over the next three years, especially of standalone carbide-based PVC plants with capacities of less than 200,000 tonnes/year.
Around 2m tonnes/year of China’s coal-based MEG capacity is also to be closed during the next one-to-two years.
Perhaps China will eventually shut down capacity in a wider range of products.
What happens next? We must be honest enough to admit that none of us really know. But what we can and must do is to build scenarios using the ICIS Supply & Demand data and to discuss and refine these scenarios in company workshops. Then producers will be prepared for a wider range of outcomes.
China 2024-2034 HDPE net imports at either 105m tonnes or 19m tonnes
For illustration purposes only, let me show you what can be done with our data to produce scenarios for China’s net imports of high-density polyethylene (HDPE) in 2024-2034, factoring in the variables detailed above.
These scenarios need refining in the context of, as I said, workshops with the support of our excellent analytics team in China and our global consulting team.
You always need to start with a base case. The ICIS base for China’s net HDPE imports in 2024-2034 assumes that capacity will grow by 5.7m tonnes/year as demand increases by an average of 3% per year with the operating rate averaging 73%.
This would compare with 2000-2023 annual average demand growth of 9% and an operating rate of 93%.
Scenario 2 involves only 3.7m tonnes/year capacity growth between 2024 and 2025. I have also assumed that 1.1m tonnes/year of HDPE plants, each with capacities of less than 100,000 tonnes/year, will shut down from 2025 onwards as part of China’s drive to improve economic efficiency and lower carbon output.
Under Scenario 2, I have kept demand growth and the operating rate unchanged from our base case at 3% and 73% respectively.
Scenario 3 involves the same capacity growth and shutdowns as Scenario 2. But I raise the operating rate to 93% while keeping demand growth at 3%.
Scenario 4 involves the same capacity growth and shutdowns as Scenarios 2 and 3. The operating rate is again 93%, but I lower demand growth to just 1%.
The chart below shows these four different outcomes in terms of net imports for selected years between 2024 and 2034.
The differences, as you can see are huge. Under the best-case outcome for exporters (Scenario 2), China’s net imports would reach around 10.5m tonnes in 2031 and 11m tonnes in 2034. The worst-case result, which is Scenario 4, would see net imports at 1.5m tonnes in 2031 and 2m tonnes in 2034.
Now let us look at the cumulative effect of these four scenarios – i.e. total net imports in 2024-2034.
Scenario 2 would see net imports at 105m tonnes. Under Scenario 4, net imports would be just 19m tonnes.
“Hold on,” you might say, “surely, China’s demand growth cannot slip to as low as 1% in 2024-2034. You could well be well right with our base case accurate at 3% growth – already a steep decline from 2000-2023.
But China’s polymers consumption in general grew out of proportion to the size of its population in 1990-2022. This was down to the three events that are now in the past, as I’ve discussed before. The chart below shows that HDPE demand patterns were the same across the broader polymers industry.
One can also argue that an 2024-2034 operating rate of 93% is way too high given what could be a weak economy and a local HDPE industry struggling with oversupply.
But perhaps China will decide to run its plants hard, as it has done in the past, to maintain employment in downstream factories and reduce reliance on imports in an uncertain world of geopolitics.
The chart below shows how overall HDPE operating rates were high during some years of weak spreads between CFR China HDPE injection grade prices and CFR Japan naphtha costs.
But, as I said, these are just ideas to get the debate going. I could of course be wrong.
Being right is not the point. The point is instead the quality of the debate. A productive discussion, where everyone is open to challenge and be challenged, will lead to correct scenario planning.