China Jan-Feb Polyolefins Production Underlines New Direction

By John Richardson

Here is another chart to consider as you, hopefully, dismantle and completely rebuild your strategy for China:

ChinaJanFebPEPPproduction

It shows that in in January-February of this year compared with the same period in 2014, China’s polyethylene (PE) production was 15% higher at 2.3m tonnes. Its polypropylene (PP) production was 21% higher at 2.5m tonnes.

These sharp increases have occurred as demand growth slows down on a rapidly deteriorating economy.

Not surprisingly, therefore, imports have registered sharp declines: January 2015 PE imports fell by 21% to 797,509 tonnes with PP imports 22% lower at 466,220 tonnes.

This is in line with last year, when, compared with 2013:

  • PE production rose by 10% over 2013 to 12.9m tonnes as PE import growth slowed to 3% from 12% in 2012-2013.
  • PP production increased by 18% to 12.8m tonnes with import growth flat.

Those who prefer their planning in a “plain-vanilla only flavour” will give you plenty of reasons to carry on doing business in the same way that you have done business for the last ten years.

They will argue that as a large slice of China’s recently added capacity is coal-based, production will soon slow down on weaker oil prices. This has increased the advantage of naphtha over coal-based plants.

Much-stronger consumption growth in China’s inland provinces versus its coastal regions means – as Beijing tries to narrow its yawning wealth gap – will also guarantee big PE and PE import requirements over the next decade and longer.

I have also heard that coal gasification plants, upstream of many of the PE and PP plants in China, need frequent maintenance work. So heavy shutdown schedules could result in frequent and big reductions in local production.

Then you have the government’s determination to tackle the environmental crisis. This might result in a slowdown in further coal-based capacity additions. And as environmental regulations are toughened-up along with enforcement, you could also see coal-based producers more frequently forced to shut down.

But I worry that, whilst all the above are valid points, there is another flavour of planning you must sample:

  •  China has so far shown no inclination to cut on back coal-based production on lower oil prices.
  • Why? Because maintaining jobs, in the face of the economic slowdown, has been a bigger priority than standard cost-per-tonne economics. This is set to continue.
  • Much-stronger consumption growth in China’s inland provinces might, thus, end up being met mainly by local poylolefins production because this is a great way of narrowing the regional wealth gap.
  • There might still be big opportunities for foreign producers, but my gut feeling is that is more likely to be in the area of higher-value grades that China does not produce – and in helping China do “more with less”. One higher-value grade that fits with this objective is metallocene PE. Metallocene PE allows converters to produce thinner films that have the same strength, and better performance, than thicker films made from standard-grade PE. So less raw material resin is needed.
  • Pollution is as much of an opportunity as a challenge. In the case of the coal-to-fuels and coal-to-chemicals industries in general, for example, the emissions problem might be solved through the growth of a local carbon capture and storage (CCS) industry. This is again an opportunity for those overseas companies that have CCS technologies.
  • And/or China might  decide to build a lot more naphtha crackers.

Here is a separate point: China only does business with other countries on its own terms. It cannot afford to dictate these terms because it will long remain the world’s most-important growth market.

This  means no more dumb decisions from the governments of the countries in which you operate – such as opposing the China-led Asia Infrastructure Investment Bank.

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