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China self-sufficiency drive expected to accelerate in PE, PP, EG and PX

China, Company Strategy, Fibre Intermediates, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Singapore, South Korea, Sustainability, Taiwan, Thailand
By John Richardson on 15-Nov-2023

In the fifth part of my series on the New Petrochemicals Landscape (see the Executive Summary here), I start with a history lesson about the blunder I made in 1998 in assuming that cost-per-tonne economics were the only thing that drove petrochemicals investments. Then I examine whether China could go as far as to become completely self-sufficient in PX, EG, LLDPE, LDPE, HDPE and PP by 2030. Far-fetched? History suggests otherwise.

By John Richardson

ONE OF THE worst professional mistakes I have made was during the Asian Financial Crisis that spread to South Korea in 1998.

“You have to understand that the South Korean petrochemicals industry isn’t viable on a cost-per-tonne basis,” I was told by an industry commentator when I was working as the deputy editor of a petrochemicals magazine.

“They cannot expand any further and might even have to shut some capacity down,” he added, in comments sent by a fax machine (Here’s a link for those of you who are too young to remember what a fax machine was).

I duly wrote up his comments in the magazine, as I was sure I was onto something. 

The South Korean petrochemicals industry did go through a period of consolidation as several companies undertook government-supported mergers.

But here’s the thing: Between 1998 and 2023, South Korea’s ethylene capacity increased by more than 100%, partly because the industry was seen as strategic by successive South Korean governments – and party because of the wider strategies of the chaebol that the petrochemical companies belonged to.

On a cost-per-tonne basis, absolutely, South Korea competed very well because of the ingenuity of the industry’s engineers and economic planners.

And, most importantly of all, demand for South Korea’s exports was boosted by China’s “economic miracle” – the boom that lasted from 1992 until 2021.

This miracle was the result of economic liberalisation in China, the country’s youthful population, China’s admission to the World Trade Organisation in 2001 and a youthful population in the West (the Baby Boomers) who had mountains of cash to spend on Chinese imports because of very easy credit conditions.

And from 2009 onwards as China’s population rapidly aged, China conducted huge economic stimulus that further supported the country’s growth.

As this narrative played out over the years, the article I’d published back in 1998 became more and more embarrassing. I was, of course, determined not to make the same mistake again.

Then in 2000, the head of Asia for a global petrochemicals producer (he later became the CEO of the company), gave me a tutorial on petrochemicals in China.

“China’s petrochemicals industry will never be run purely for profit. Investments will also happen for job security and supply security reasons,” he said.

He used the example of polypropylene (PP) and acrylonitrile butadiene styrene (ABS) plants being built to keep people in jobs in the “downstream washing machine factory, by making sure the factory never runs out of components made from local resins”. This is an example I still use today.

And in remarkably prescient comments, he said that while he felt that China would remain a major petrochemicals importer for a long time, “at some point, it may decide to become much more self-sufficient, even completely self-sufficient.”

He also taught me that close study of Chinese government policy, especially its five-year economic plans, was the starting point to understanding the country’s petrochemicals industry.

This meant that when China announced a pivot to a push to much greater petrochemicals self-sufficiency back in 2014, I didn’t take much notice of the argument that this wouldn’t happen because of weak cost-per-tonne economics.

And as the years progressed, I was told that that cost-per-tonne economics were improving because of government support.

This involved moving smaller petrochemicals plants to big, highly integrated, sophisticated industry parks, where raw materials were closer at hand and utilities shared, said my contacts.

Another motive for greater clustering of petrochemicals was later-on reported to be sharing carbon abatement technologies. In parallel, programmes to close smaller less economic and less carbon efficient plants were carried out, I was also told.

“In September 2020, President Xi Jinping announced that the People’s Republic of China will ‘aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060,’ “, wrote the International Energy Agency in its 2021 September report, An energy sector roadmap to carbon neutrality in China.

I also didn’t take notice of the contention that because more privately-owned petrochemical producers were establishing operations in China, this meant a shift to a more conventional cost-per-tonne approach to the industry.

Private companies are still said to be heavily linked to provincial and central governments.

“History never repeats itself, but it does often rhyme”

The great US writer, Mark Twain once famously said: “History never repeats itself, but it does often rhyme.”

The political, social and wider economic reasons (beyond the plant gates) why petrochemicals capacity is built have changed. But they are still, obviously, political, social and wider economic reasons.

As I discussed in part three of this series on the New Petrochemicals Landscapes, Saudi Aramco may convert up to 4m bbl/day of liquids into chemicals by 2030.

It Is not clear exactly how much of this conversion is already operating – and how much new capacity will be brownfield versus greenfield. But it does seem as if big new greenfield investments, not all of which may be commonly known, will occur in Saudi Arabia and overseas, mainly in China.

These crude-oil-to-chemicals (COTC) investments are driven by relatively recent social, political and wider economic pressures resulting from the electrification of transport. This leaves Saudi Arabia at risk of being forced to leave its most valuable national asset – oil, of course – in the ground if it doesn’t heavily pursue the COTC rule.

It therefore seems clear to me that we cannot judge COTC investments just on their standard cost-per-tonne rates of return.

What happens next in China is, as always, truly fascinating.

As we move closer to the 15th five-year-plan (2026-2030), questions are being asked about whether China will aim for much greater petrochemicals self-sufficiency, even complete self-sufficiency in yet more products.

“Yes,” is the answer from the contacts I’ve spoken to. One contact has gone as far as to way that complete self-sufficiency in all the value chains where China is still a big importer is possible by 2030.

These value chains are high-density polyethylene (HDPE), low-density PE (LDPE), linear-low density PE (LLDPE), PP, ethylene glycols (EG) and paraxylene (PX).

One argument is that China will become a major exporter in some products, but not in EG and PX where there are no other export markets of significant size apart from China.

China may instead decide to move to just about balanced positions. Exports may only happen to deal with temporary oversupply in the products targeted for greater self-sufficiency; and imports could only occur to cover shutdowns or unexpected surges in demand occur.

It seems as if there is enough local refinery capacity to provide the necessary feedstocks to achieve at least balanced positions, despite the slowdown in refinery capacity growth.

Big growth in China’s availability of renewable energy, leading to oversupply in some regions, is said to have created the potential for a lot of green hydrogen. But then the carbon backbones would also need to be found.

“Impossible”, you might say, “there is simply no way that China can get to complete self-sufficiency from now until the end of the 15th five-year-plan [2023 until 2030, a period of eight years).”

But returning to theme of history, consider the slide below – today’s main slide.

History tells us the following, based on the trade data section of the ICIS Supply & Demand Database:

  • In 2010, China’s purified terephthalic acid (PTA) net imports were 6.6m tonnes/year. By 2016, it was close to a balanced position. in 2022, its net exports were 3.3m tonnes/year.
  • In 2000, China’s net exports of polyester fibres were 1m tonnes. By 2006 it was a net exporter and has remained there ever since. Its net exports reached more than 1 tonnes for the first time in 2008 and last year, its net exports were more than 4m tonnes.
  • In 2015, China’s polyethylene terephthalate (PET) bottle grade net imports were more than 300,000 tonnes. It became a net exporter for the first time in 2017 and in 2021, its net exports were more than 300,000 tonnes.
  • In 2015, China’s polyvinyl chloride (PVC) net imports were 53,000 tonnes. The following year it was a net exporter and in 2021, its net exports were 1.4m tonnes.

The chart on the above slide should give us pause for thought. It shows the forecast importance of China between 2023-2030 for the exporters of paraxylene (PX), ethylene glycols (EG), LLDPE, LDPE, HDPE and PP.

Major consolidation would surely be necessary if China were to move much closer to self-sufficiency in these products by 2030.

One of the social, political and wider economic reasons for further growth in China’s petrochemicals capacity appears to be unchanged: Supply security.

Adding value to the economy is another longstanding driver of greater petrochemicals self-sufficiency.

Ever-more integrated, bigger and sophisticated complexes – now perhaps including carbon capture and storage and green hydrogen – are viewed as a means of China escaping its middle-income trap.

Conclusion: Don’t just look at spreadsheets

The above chart is very much work in progress. It will be constantly updated as we become aware of any new project announcements and what are likely to be closures of less competitive capacity in Europe, South Korea, Singapore, Taiwan and Japan.

In terms of demand, I cannot see any major upsides before 2030 because of the events in China, the developing world outside China and the developed world. The events are being shaped by demographics, debt, sustainability and climate change.

And given the difficulty in taking shutdown decisions, we may still be in a world of historically high levels of oversupply and low operating rates by 2030.

In other words, while the numbers on the above chart will change as we move closer to 2030, the general message of the chart could remain unmoveable.

Don’t get me wrong here. The Middle East in general will still surely achieve very good cost-per-tonne economics – as will North America and probably China.

But the purpose of this blog is to flag up the need to not just look at spreadsheets. We must also consider the wider picture.