Eyes on China’s skies to gain an edge in petrochemicals

The UBS global chemical equity research team is taking a novel approach to gaining an edge on petrochemical markets by using satellite, unmanned aerial and other imagery and sensors to gauge China’s air quality and the likely ensuing actions.

“Just from the transitory impact of government inspections, there is widespread evidence of the scale of the positive influence on global pricing in a number of key chemicals chains,” said UBS chemicals analyst Andrew Stott, in a research report. “With various controls on industrial production and distribution about to be implemented in 28 key cities in the east [of China] from mid-November to mid-March (the ‘2+26 Plan’), we are now moving into a key period for China’s commitment to improving air quality,” he added.

In April 2017, China launched the first of 25 rounds of air pollution inspection campaigns to be conducted by a total of 5,600 inspectors within one year. These inspections target Beijing, Tianjin and 26 cities in the Beijing-Tianjin-Hebei and surrounding area, and are thus known as the ‘2+26 Plan’.

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Air monitoring in China can help forecast tightness

EYES IN THE SKY

UBS aims to gain insight into just how bad the air quality is in certain regions, to determine the consequences – particularly production curtailments – with not just equipment on the ground, but eyes in the sky.

The “UBS Evidence Lab” is using satellite imagery, aerial survey, unmanned aerial imagery and land-based monitoring sensors to track air quality in 2,186 locations in China. UBS says it can track on a daily basis the air quality across China and, importantly, in the six provinces that are impacted by the winter closures in the 2+26 cities and surrounding regions.

In September 2017, a five-month campaign was launched in the 2+26 northern cities to improve air quality during the winter, when air quality normally deteriorates because of the greater use of coal for heating purposes. “In our opinion, if the quality of the air does not improve enough over the coming weeks for the official targets to be achieved, then China is likely to take further action, eg: 1) increase the percentage of production curtailed; 2) extend coverage; 3) expand the number of industries impacted,” said Stott.

“A range of 6-39% of Chinese petrochemical capacity, depending on product, is within the area impacted by the winter clean air programme in China,” he added.

As a percentage of global capacity, China petrochemical capacities in the 2+26 cities range from 1% for ethylene and polycarbonate (PC), to 2% for acrylic acid, 4% for butadiene (BD) and 6% for toluene di-isocyanate (TDI), according to UBS.

POTENTIAL BENEFICIARIES

The analyst identifies Arkema, BASF, Covestro and Evonik among the potential beneficiaries in the European chemical sector, as they are “exposed to more constrained commodity chemicals production and their non-China operations could significantly benefit from higher global industry pricing”.

Potential US-based beneficiaries are Westlake, Olin, Celanese and Huntsman. Closures in polyvinyl chloride (PVC) and caustic soda would benefit Westlake and Olin, he said. “A significant amount of Chinese PVC is based on coal based processes, which if closed could create more demand for EDC (ethylene dichloride) and reduce caustic supply if associated chlor-alkali production is closed,” said Stott.

Acetic acid producers such as Celanese also stand to benefit, noted Wells Fargo chemicals analyst Frank Mitsch. He points out that Celanese management is optimistic the acetic acid market will have high effective operating rates and sustained profitability into 2018.

In the next two months, acetic acid producers in northern China may have to cut output due to insufficient supply of feedstocks methanol and carbon monoxide, according to the ICIS editorial team in China. Among the region’s acetic acid plants are Tianjin Soda’s 250,000 tonne/year unit, Kingboard Chemical’s 500,000 tonne/year plant, Shandong Hualu-Hengsheng Chemical’s 600,000 tonne/year unit and Yankuang Group’s 1m tonne/year plant.

The Chinese government has ordered these producers to scale down production at their integrated coking plants to address the usual spike in pollution levels in northern China during winter. Mitsch notes that these China plants totaling around 2.4m tonnes/year in acetic acid capacity, represents about 12% of global capacity.

Additional reporting by Anna Xiang and John Richardson