By John Richardson
THE GLOBAL petrochemicals and polymers businesses are hugely dependent on China for demand and trade, as I’ve been discussing since 2011.
But to paraphrase a sentence from George Orwell’s fantastic book, Animal Farm, some petrochemicals are more equal than others. In the polyester fibres value chain, the reliance on China is greater than in any of the other industry value chains.
Let’s use paraxylene (PX), the subject of today’s post, as an example. I will examine China and the rest of the polyester value chain in detail in later posts, as all the issues are too complex to deal with in one post.
Starting with China’s share of total global PX net exports (the regions where imports exceed exports), the above chart doesn’t make any sense without the macroeconomic and demographic context.
China accounted for an eye-popping 97% of global PX net imports in 2023. In 2001, China made up just 27% of global net imports with Europe the biggest net importer. By 2006, China’s share of global net imports had jumped to more than 90% and has stayed there ever since.
Why conventional wisdom on China PX and MEG could be wrong
What follows is the context behind these astonishing numbers.
China used to have a very youthful population. Low labour costs combined with economic liberalisation from 1992 onwards (following Deng Xiaoping’s Southern Tour) to result in major investments in export-focused manufacturing plants, including in apparel and non-apparel production.
Then whoosh, China joined the World Trade Organisation in 2001. Admission removed the tariffs and quotas that had restricted China’s exports of finished goods to the West.
The flood of competitively priced polyester sheets, pillowcases and shirts etc. to the West was such that the EU imposed temporary restrictions on China’s imports. This created serious trade tensions between China and the EU in the early 2000s.
But the die was cast because of what was China’s unbeatable labour cost advantages, the excellent economies of scale of its textile and garments plants, great logistics, cheap energy costs and advantaged or “soft” government loans. China came to completely dominate the global apparel and non-apparel businesses.
And from the early 2000s onwards, Beijing drove a programme of upstream polyester chain integration.
China a long time ago imported fabrics to make pillowcases and shirts etc., mainly from Japan, South Korea and Taiwan. This was replaced by local fabrics production.
The focus then switched to making local yarns and fibres to manufacture fabrics. Over the last ten years, China has swung from being the world’s biggest net importer of polyester fibres to being the biggest net exporter.
The last decade has seen China also swing from being the world’s biggest net importer of polyethylene terephthalate (PET) bottle and film grade resins to the biggest net exporter.
From 2014 onwards, China shifted its polyester self-sufficiency drive further upstream to purified terephthalate acid (PTA). In 2014, China was the world’s biggest PTA net importer; it is now a major net exporter.
But further up the value chain, China is still the world’s biggest PX net importer as the above chart indicates. The same applies to mono-ethylene glycol (MEG). I will examine China’s MEG industry in a later post.
Conventional wisdom is that China will never likely become self-sufficient in PX. This is said to be because PX production is heavily linked with refining, a separate and much more complex business than adding capacities further down the polyester value chain.
When it comes to MEG, the rationale is that China won’t be able to build enough steam crackers to make enough ethylene to achieve MEG self-sufficiency. I disagree with this assumption. I will explain why in my later post.
It is equally wrong, in my view, to assume that just because refining is a more complex business, China won’t add a great deal more refinery and PX capacity. This process is, in fact, already well underway.
A key shift in refinery capacity growth was Beijing’s decision to open-up the refinery sector to private investment, leading to the construction of giant privately-owned refineries heavily focused on PX production. These refineries are operated by companies that also run assets further down the polyester value chain.
What will also be important to observe is the extent to which Saudi Aramco’s investments in China in refining and petrochemicals in general contribute to China’s PX self-sufficiency.
Saudi Aramco needs to hedge against a potential big decline in its crude oil production resulting from electrification of transport, biofuels and fuel efficiency. A way to achieve this is to turn more oil into chemicals, both in Saud Arabia and overseas, mainly in China.
China is the world’s biggest oil importer and is also committed to achieving petrochemicals self-sufficiency for supply security and economic value-addition reasons (escaping its middle—income trap).
China’s PX net imports could average just 700,00 tonnes a year in 2024-2030
The perfectly reasonable and well thought-through ICIS Base Case in the ICIS Supply & Demand Database assumes China’s PX demand growth will average just 1% per annum in 2024-2030, with the local operating rate at 82%.
Such an outcome would lead to China’s net PX imports at an annual average of 7.4m tonnes in 2024-2030. Don’t misread me here. I am here to challenge and be challenged and this outcome is perfectly possible.
But given the increasing uncertainties of the petrochemicals world in which we live, one scenario isn’t good enough. Downside planning for PX producers is essential. PX buyers must also prepare for alternative outcomes.
Downside Scenario 1 sees demand growth the same as in the base case. Why? Because our very sound base case has considered the end of the Petrochemicals Supercycle, mainly driven by China, from 1992 until 2023, when China’s annual PX demand growth averaged 16%. I cannot see China’s demand growth falling beneath our base case.
But under Downside Scenario 1, I raise the local operating rate to 88%, the same as the 1993-2023 average. I also add 6.2m tonnes/year to China’s capacity, which comprises unconfirmed plants in our database. These our plants that have question marks next to them and so don’t figure in our base-case assumptions for capacity.
Downside 1 would result in net imports dropping to a 2024-2030 annual average of just 1.5m tonnes/year.
Downside Scenario 2 again sees demand growth the same as in the base case, an operating rate of 90% and 6.2m tonnes/year of unconfirmed capacity comes onstream. Net imports would fall to an annual average of just 700,000 tonnes a year.
Note that under both these downside scenarios, the first two years of the 2024-2030 period would still see big China PX net imports. Skewing the averages lower is a shift to almost balanced positions in 2026-2028 net exports in 2029-2030.
A highly concentrated global net export market
Just three regions dominated the PX export trade last year.
Northeast Asia ex-China (Japan, South Korea and Taiwan) accounted for 65% of total global net exports in 2023. The Middle East (Iran, Israel, Kuwait, Oman and Saudi Arabia) took an 18% share. This was followed by Asia and Pacific at 17% (India was the biggest exporter followed by Brunei and Malaysia).
Brunei Hengyi Industries is a 1.5m tonnes/year plant that came on-stream in 2019. Partly owned by China’s Zhejiang Hengyi Group, close to 1m tonnes of the plant’s output was exported to China in 2023. The plant can thus be considered part of China’s PX self-sufficiency drive.
We can clearly see that if either Downside Scenarios 1 or 2 happened for China’s net imports in 2024-2030, there would be a great deal of consolidation pressure exerted on many of today’s major exporters.
Conclusion: A highly complex value chain
I’ve kept things very simple here by mainly focusing on PX. There is so much more to consider in future posts on this highy complex value chain, including how China continues to offshore its apparel and non-apparel manufacturing to cheaper labour cost locations, especially to developing countries that are part of its Belt & Road Initiative (BRI).
As this important 26 February 2024 Financial Times article also explores, China has built and continues to build free-trade agreements with both BRI (140 countries) and non-BRI member countries as a hedge against its growing geopolitical differences with the West.
We could thus see a significant shift in trading patterns as more Chinese apparel and non-apparel production moves offshore to these countries, with the overseas plants fed by China-made polyester fibres. The same could apply to overseas bottle and film-grade converter plants fed by imports from China of PET bottle and film grade resins.
China could thus maintain its dominance of the global polyester value chain through the offshoring process described above, thereby compensating for its rising labour costs.
Offshoring to the developing world may also enable China to make up for any lost exports of finished polyester -products to the West due to increased trade tensions. The developing world, which makes up most of the BRI, has tremendous polyester demand growth potential, but per capitq consumption-wise remains a long way behind the West.
This shift in downstream investments and trade flows could help provide economic justification for just about complete PX and MEG self-sufficiency – two missing pieces in China’s polyester jigsaw puzzle.