China plans wave of new crackers

The proposed Wanhua Petrochemical cracker, which would be located in Shandong province, might be based partly on imported ethane – perhaps from the US

Details are emerging on what could be as many as 13 new crackers in China for start-up over the next few years.

This raises the possibility that China might end up moving much closer to self-sufficiency in ethylene derivatives such as polyethylene (PE) than many people think.

This self-sufficiency could be the result of new capacities both in China itself and via new China owned-and-operated plants in the One Belt, One Road region (OBOR).

The China-led OBOR involves some 65 countries and a proposed trillions of dollars in investment in better road, rail and maritime links between these countries. Member countries, which represent around 40% of global GDP, will also be brought closer together by new free-trade deals.

Let us first of all take a close look at the new proposed crackers in China before focusing on what might also be built within the OBOR.

You will notice from the table that eight of the new crackers will be downstream of new refineries. Some of these new refineries will be privately owned as Beijing opens up the local refinery sector to more competition. The Chinese government wants to improve the efficiency of state-owned refining giants Sinopec and PetroChina by increasing private investment in refining.

The proposed crackers involve some very interesting feedstock approaches. For example, the Shenhua Ningxia project involves converting coal into naphtha. There are several routes to get to naphtha from coal including naphtha via coal pyrolysis, via hydrogenation and via gasification of coal.

China is slowing down its coal-to-chemicals investment in general because of environmental reasons, including a major slowdown in coal-to-olefins (CTO) capacity additions. But this project indicates that coal still remains a feedstock option.

LPG FEEDSTOCK

The global liquefied petroleum gas (LPG) market could remain oversupplied for a long time because of the US shale gas revolution. Revolution is not too strong a word because the US shale industry has transformed global gas and oil markets.

One of the bright spots for the US economy is its shale technologies, and so it is a good bet that global LPG markets – that is, propane and butane – will remain oversupplied as the US exports its way to better economic growth. Ever-lower shale production costs and better logistics may allow the US to still make money, even at historically low LPG prices.

This could also benefit the new crackers in China that are scheduled to be fed entirely, or partly, by imported LPG. There is a precedent here and this is the rapid growth in China’s propane dehydrogenation (PDH)-based propylene capacity. These plants are based on imported propane.

Interestingly, the proposed Wanhua Petrochemical cracker, which would be located in Shandong province, might be based partly on imported ethane – perhaps from the US.

This project could, to some extent, follow the model set by companies such as INEOS and Reliance Industries. Both of these companies have built their own ethane carriers to import US ethane to replace dwindling local supplies of ethane. But the Wanhua project would be different as it would be a new grassroots cracker, partly based on imported ethane.

In total, the table details just over 13m tonnes/year of new ethylene capacity. At this stage we do not know what derivatives capacity will be downstream of these crackers.

NOT ALL ABOUT FEEDSTOCKS

Feedstock economics is only part of the story here. There is a complex, and often opaque, mix of social and political factors that are likely to also determine how many of these new refinery-cracker projects end up being built.

The social and political aspects involve creating new employment at the construction phase of any industrial project and when a plant is operating. And in the case of a cracker complex, lots of new jobs can be created downstream in plastic processing and finished goods manufacturing. All but one of the new refining-cracker projects are in provinces that are in China’s top 10 provinces and regions in terms of per capita GDP.

The main objectives for these projects might thus be the quality rather than the quantity of new jobs, as China tries to escape its “middle-income trap”. Expect these new refining-petrochemicals complexes to focus on developing higher-value local engineering and marketing and sales skills, which will help justify rising wage costs in China’s more developed provinces. Also expect that wherever possible, new petrochemicals plants in developed provinces will push beyond just the production of basic commodity grades.

The first project on the list – Shenhua Ningxia – is the exception here as it would be located in the Ningxia autonomous region in northwest/north central China.

In 2015, Ningxia had per capita GDP of $7,033, making it the 15th richest out of China’s 31 provinces. Here the focus could be more on commodity grades as government officials try to narrow the income gap between Ningxia and the richer coastal provinces.

The relationship between industrial development and local government financing also needs to be taken into account.

Local governments depend on land sales for their revenues, and on the tax receipts from plants once they are up and running. This can lead to preferential financing for constructing and operating plants that can sometimes override feedstock cost disadvantages.

“But hold on,” you might be saying. “Aren’t some of these new refining-cracker projects being operated by private companies, and so won’t there be a heavier focus on standard Western measures of profitability, such as cost-per-tonne economics?”

Increased private involvement in China’s chemicals industry will not necessarily make a substantive difference. Local and central governments could support private companies in the same ways they have supported state-owned enterprises if it means revenue and job creation.

NEW CHINA-OWNED PE IN OBOR

China may, as we said, raise its ethylene derivatives self-sufficiency through a combination of new local capacities and new capacities in fellow OBOR countries. Here is how this might work in terms of the OBOR:

■ China builds, operates and owns new PE plants in say the Middle East. All of the Middle East is part of the OBOR. Iran could, for example, benefit from investment in its underdeveloped oil, gas, refining and petrochemical industries that are being held back by sanctions. China, in return, gets access to low-cost hydrocarbons that make its overseas refining-petrochemicals plants highly competitive.

■ And/or China imports petrochemicals and polymers duty free from OBOR countries, thanks to the new free-trade deals that are part of the OBOR.

■ Think also of all the infrastructure investments China is making as part of its OBOR initiative – and its outsourcing of lower-value manufacturing to fellow member countries that have youthful populations and therefore lower labour costs. This could lead to further discounts off the cost of PE imported by China from fellow OBOR countries.

The export opportunities to China could remain substantial over the next five years, and perhaps more, in the ethylene derivatives in which China remains in major deficit. These include not only PE, but also styrene monomer (SM) and monoethylene glycol (MEG).

But will petrochemicals companies outside the OBOR region be able to take advantage of these opportunities? Perhaps not.

Equally, which companies will get to supply the feedstocks and technologies that China needs to build its 13 new refining-cracker complexes? It might be that suppliers within the OBOR will again be in a stronger position.

Read John Richardson’s views on the Asian Chemical Connections Blog at www.icis.com/blogs/asian-chemical-connections