Home Blogs Asian Chemical Connections China could still become entirely petrochemicals self-sufficient despite the impact of EVs on its refineries

China could still become entirely petrochemicals self-sufficient despite the impact of EVs on its refineries

China, Company Strategy, India, Indonesia, Middle East, Naphtha & other feedstocks, Olefins, Projects, Singapore, South Korea, Sustainability, Taiwan, Thailand, US
By John Richardson on 14-Jun-2024

CHINA HAS set itself of a target that 40% of all the vehicles on its roads will be electric by 2030. And by that year, the aim is that all new-vehicle sales will be electric vehicles (EVs). The country wants to reach peak carbon emissions before 2030 and carbon neutrality before 2060.

“After 2030, it is going to be pretty much impossible to get approval for a heavy industry project because of the emissions targets,” said a petrochemicals industry source.

This has led to suggestions that the resulting lower availability of feedstocks from local refineries will slow China’s push towards complete petrochemicals self-sufficiency. I disagree for the following reasons.

The refinery cap versus more focus on petrochemical feedstocks

From 2027 until 2040, China has capped its refinery capacity at around 1bn tonnes a year, according to ICIS analysis. This compares with between 2000 and 2027 when China’s capacity is forecast by ICIS to increase by 230%.

The decline in fuels demand because of electrification may also exert downward pressure on refinery operating rates, especially if China struggles to export its gasoline and diesel surpluses because of trade tensions.

But I’ve been told that local supply of naphtha etc. shouldn’t be a problem until up to a least 2030 because refineries will be increasingly turned into petrochemicals feedstock centres.

More naphtha and gasoil crackers are expected to be added to refineries ahead of the 2030 cut-off point. Heavier fractions from refineries are also forecast to be increasingly used as petrochemicals feedstocks.

Competitive overseas feedstock supply and weaker demand growth

And even if local feedstock supply does become constrained after 2030, we shouldn’t assume that this will restrict domestic production because of the weaker economics of importing raw materials.

China’s closer geopolitical relationships with the Middle East, along with increased availability of natural-gas liquids in the Middle East, suggest that imports of feedstocks will be available at the right costs.

My view is that China’s economic challenges will result in annual average petrochemicals consumption growth of 1-3% per year up until 2030. Beyond 2030 I see growth falling to around 1%.

Weaker demand growth will of course make it easier to increase petrochemicals self-sufficiency.

Demographics are the main reason why I see growth declining to these levels from the double-digit increases we saw during the Petrochemicals Supercycle in 1992-2021.

As regular readers of the blob will be aware, I’ve been warning about the challenges of China’s ageing population since 2011.

These challenges are neatly summarised by Yi Fujian, a demographer at the University of Wisconsin-Madison, in this 22 May article for Project Syndicate.

“The WHO [World Health Organisation] defines the start of an economy’s ageing phase as the point where the share of those aged 65 and older exceeds 7% – a demographic milestone China reached in 1998,” he wrote.

“By 2023, the share of Chinese people over 65 increased to 15.4%. Historically, no country has managed to achieve 4% growth in the subsequent 12 years after the elderly made up 15% of the population. The average growth rate for high-income countries during this period is just 1.8%,” he added.

Yi said that an ageing population affected production, consumption, entrepreneurship and innovation.

Shrinking labour forces had caused GDP per capita in Spain, Greece, and Portugal, respectively, to fall from 73%, 66%, and 51% of the US level in 2008 to 39%, 27%, and 32%, he said.

The chart below, from a September 2022 issue of the Wall Street Journal, features Yi’s estimates of the rate at which China’s population will decline from now until the end of the century. This is compared with other predictions from the United Nations etc.

Even if the UN’s estimates of population decline prove to be the most accurate, which are most conservative, it is hard to see how China can avoid a sharp decline in its GDP growth.

Even under the UN’s best-case outcome, China’s population will fall from 1.4bn today to below 800m in 2100.  Yi’s worst-case outcome would see a population of less than 500m by 2100.

Sustainability and supply security

Because recycling is mainly a “local for local” business due to the restrictions on moving plastic waste across borders, the growth of recycling in China will increase the country’s self-sufficiency in polymers.

Recycling is exactly the type of higher-value industry China needs to nurture as it attempts to escape a middle-income trap made very deep by its demographic challenges.

A further reason to expect strong growth of recycling in China is the need to guarantee local supplies of raw materials in a more uncertain geopolitical environment.

Local petrochemical plants will be run at high operating rates for the same reason. These high rates will be achieved by maximising supplies of feedstocks from local refineries, and by competitive imports of feedstocks from China’s geopolitical partners.

Conclusion: Focus on other markets

Don’t be therefore distracted by suggestions that the growth of EVs in China and the country’s emissions targets will be good news for petrochemical exporters to China

China will become a vast continent-sized market that will be just about entirely self-sufficient. As I shall explore in a later post, this will apply to speciality as well as commodity grades of petrochemicals.

This means that overseas producers most focus on markets elsewhere. As the above chart shows and using high-density polyethylene (HDPE) as an example, the opportunities in other countries and regions are big.

China lifted all petrochemicals boats during the 1992-2021 Supercycle, making even the least-competitive companies successful. This is no longer the case.