By John Richardson
NOBODY should be surprised by the above chart and what follows in the rest of this blog, which is the second in a series of posts (HDPE was the first one followed by PX) on how China could move to pretty much complete self-sufficiency by 2030 in the petrochemicals and polymers in which it today is in big deficits.
The full list of these products is high-density polyethylene (HDPE), low-density PE (LDPE), linear-low density PE (LLDPE), polypropylene (PP), paraxylene (PX) and mono-ethylene glycols (MEG).
Why the above chart shouldn’t be a surprise is that way back in 2014, China said it was going to push much harder towards petrochemicals self-sufficiency.
Senior executives in the know perhaps took the approach of “if you can’t beat them, join them”. This might be why we have seen a growth in overseas petrochemicals investments in China since 2014.
Overseas investments, many of them joint ventures with local companies, could play a big role in China achieving its self-sufficiency ambitions.
We should also remember that while China appears to have entered a period of much-lower demand growth (the failure to forecast this is, I believe, behind today’s record levels of global oversupply), growth of say 1.5% a year will deliver far greater volumes than 10% growth 20 years ago. This is because China’s markets are so much bigger than they were at the turn of the century.
The joint ventures – and existing plants and under sole local ownership – will thus benefit from big new volumes of demand when measured in tonnes. And as mentioned earlier, local players will gain from helping China’s push towards much greater self-sufficiency.
This leaves the exporters highly reliant on China in a bind. Producers in South Korea, Singapore and Taiwan could be the most exposed view. Next in order of risk might be producers in Thailand and Malaysia.
Thailand and Malaysia are the net exporters in ASEAN (Association of Southeast Asian Nations). The other ASEAN members are net importers with the biggest net importers by far being Indonesia and Vietnam.
Perhaps Thailand and Malaysia could therefore focus more on duty-free ASEAN trade in the event of much greater China self-sufficiency.
But as we shall see from the data on LLDPE (the same applies to the other products), absent China as a major net importer and the remaining global net import markets would become much more crowded. Barring major capacity rationalisation, Southeast Asian producers could see competition in their local markets intensify.
We next need to consider where North America (mainly the US, but there’s also some heavily export-based capacity in Canada) and the Middle East will stand in a world where there are no longer major Chinese imports.
North America is a major exporter of ethylene derivatives only because most of its crackers run on ethane. If China were to become close to self-sufficient in PE and MEG, North America could pivot to exporting more to South & Central America and Europe.
Europe may be forced to rationalise its petrochemicals capacity because of high energy costs, assets that are often old and thus have weak economies of scale, and increased competition from low-cost imports. Plant closures in Europe could in theory create more opportunities for US exporters.
But Saudi Arabia’s crude-oil-to-chemicals (COTC) investments may substantially add to today’s oversupply, making the remaining big global net import markets (assuming an absence of China again) even more crowded.
The Middle East in general is conducting a major wave of refinery as well as gas-based petrochemical investments that is targeted for start-up by 2030.
Turning more oil into chemicals or petrochemicals seems to be about underpinning oil production, which is threatened by the growth in electric vehicles, biofuels and fuel efficiency.
If there is major growth in COTC, petrochemicals markets might behave very differently. The value of making a tonne of petrochemicals may come to be partly shaped by the alternative value of leaving oil in the ground for good, which is clearly zero.
How might such a shift in market behaviour effect South Korea, Singapore, Taiwan, Thailand, Malaysia and the US?
China may itself, of course, also choose to become a substantial exporter in PE (it already is a big exporter in PP), further adding to the competitive pressures in the remaining net import markets.
In the cases of PX and MEG, there are no other major import markets other than China because of its dominance of the global polyester value chain. It thus seems much more likely that China will simply choose to be close-to-balanced in PX and MEG.
Now let’s look at the LLDPE chart at the beginning of this post in detail.
China’s average annual LLDPE net imports could be just 300,000 tonnes in 2024-2030
The ICIS Base Case sees China’s LLDPE demand growth averaging 4% a year in 2024-2030 with the average annual operating rate at 73%. This would leave net imports at a healthy annual average of 6.5m tonnes. Last year, net imports were 5.9m tonnes.
Demand growth at just 4% would compare with actual average annual demand growth of 13% in 1992-2023 and an operating rate of 91%.
I believe that because of China’s demographic and debt challenges, its petrochemicals demand growth is likely to fall to 1-3% per year.
For argument’s sake, let’s assume 1.5% growth for LLDPE in 2023-2040, the middle of this range. Let’s also assume that China runs its plants at an annual average of 83% while adding 4.4m tonnes/year of unconfirmed capacity as part of its self-sufficiency drive. Under this Downside 1 Scenario, average annual net imports would fall to 1.8m tonnes.
Downside Scenario 2 again sees demand growth averaging 1.5% per year and 4.4m tonnes/year of unconfirmed capacity coming onstream, but the operating rate averages 91% a year – the same as the historic average. Net imports would fall to an annual average of just 300,000 tonnes.
Note that unconfirmed capacity is listed in the ICIS Supply & Demand Database with a question mark next to it. The capacity is therefore not included in our total base-case capacity estimates.
Also note that under the two Downsides, China would remain in big net import positions in 2024-2026 before reaching close to balanced positions in 2027-2028 and then small net exports in the remaining two years of the decade.
The above chart shows the effects that the three China scenarios would have on the size of total annual average global LLDPE net imports in 2024-2030.
Our base case would see the global annual average net import market (as a reminder, this is among the countries and regions that import more than they export) at 12.9m tonnes; under Downside 1, this would fall to 8.1m tonnes and Under Downside 1, 6.6m tonnes.
The downsides would likely lengthen supply in the other net import countries and regions, which, in order of size, ICIS estimates will comprise Europe, South & Central America, Africa, Turkey and Asia & Pacific.
As the next chart shows, we estimate that total global net exports in 2024-2030 will be at annual average greater than the net import market under all three China scenarios.
There will, of course, be other export opportunities available to the countries and regions that export more than they import. But the Downsides would intensify overall competition.
Under the base case, total net exports of 14.3m tonnes per year would exceed the size of the net import market by 1.4m tonne; under Downside 1 by 6.2m tonnes and under Downside 2 by 7.7m tonnes.
Conclusion: This is not a normal downturn
There are some people out there who argue that this is just another cyclical downturn, albeit an extended one. The ICIS data consistently suggests otherwise.
I believe we are instead seeing a radical shift in how our industry behaves. This means an equally radical shift in business models to a greater focus on the end-users of petrochemicals, on sustainability and on growth opportunities in the developing world outside China.
For details on the practical and detailed implications for your company, contact me at john.richardson@icis.com.