China’s petrochemicals capacity growth: A new normal of much greater uncertainty

UNDERSTANDING what was going to happen next with petrochemicals capacity additions in China used to be easy. Now we are in a world of muddle and ambiguity.

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UNDERSTANDING what was going to happen with petrochemicals capacity additions in China used to be easy as all you had to do was read the State-run press. Remarkably, though, too few people believed that China was going to do what it said it was going to do, despite plenty of historic evidence supporting this direction of travel.

What I’m referring to were comments in the local media way back in 2014 that China was going to push much harder towards petrochemicals self-sufficiency. This helps explain why in products such as polypropylene (PP), China’s percentages of capacity over demand could this year exceed 100%.

But conversations with industry sources indicate that interpreting what will happen to China’s capacity growth has become way more complex.

As always, what follows only represents what I have heard. In an ever-more uncertain world, there are no entirely right answers.

Let’s start with the decision to cap China’s refinery capacity at some 1bn tonnes a year from 2027 onwards up to at least 2040. This is a huge change from 2000-2026 when capacity is forecast to increase by more than 250%.

The reason for the cap on refinery capacity is that China wants 40% of its car fleet to comprise electric vehicles (EVs) by 2030. It also wants all new car sales to be EVs by that year. It is again sensible to assume that China will do what it says it is going to do.

At first glance, this indicates that China won’t have sufficient local petrochemicals feedstock to maintain its aggressive self-sufficiency push. One could thus reach the conclusion that deficits or imports will rise given the weaker economics of importing feedstocks.

But the above slide – which breaks the rule of as few words as possible on a PowerPoint slide in order to provide you with a one-stop summary of all the key variables – suggests a much more ambiguous future.

Local refineries may increasingly be turned into petrochemicals feedstock centres. This would support their operating rates, and therefore of course earnings, as gasoline and diesel demand declined due to electrification of transportation.

I’ve been told that conversion of existing refineries cannot involve the breakthrough crude-oil-to-chemicals technologies (COTC) belonging to Saudi Aramco, SABIC and their technology-provider partners. The reason is that COTC requires the construction of new refineries.

Instead, tweaks to existing Chinese refineries using older technologies will be the route to maximising feedstock. This could involve just adding naphtha or gas-oil crackers to refineries.

But here is another variable to consider: As local transportation fuels demand declines, maintaining good refinery operating rates may hinge on China’s ability to export increasing quantities of gasoline and diesel which in a world of increasing trade tensions may be difficult. This might place a limit on refinery capacity utilisation and could even force refineries to close.

I had thought that China’s push towards peak carbon emissions by 2030 and carbon neutrality before 2060 would make it difficult to get approval for heavy industrial projects for start-up after 2030. Now, though, I’ve been told that the push to reduce carbon emissions is already making it hard to win approvals.

Each province in China has reportedly been given a carbon budget. If a province wants to make room in its budget for a heavy industrial project, it might have to shut down an existing plant. Combine this with the small scale of some petrochemicals plants in China and we will or already are seeing closures of older plants to make way for new facilities, I’ve been told. This especially applies to the more developed provinces with high carbon output.

Geopolitics could shift trade flows as demographics reshape demand

If all of this is true, do not assume that this is automatically good news for all petrochemicals exporters to China. There are three reasons for change this assumption.

Firstly, Saudi Arabia is said to be developing a closer geopolitical relationship with China. This could mean that the Kingdom is the preferred source of imports of petrochemicals feedstock and the petrochemicals themselves over the coming years.

Secondly, consider the work of Yi Fuxian, the Wisconsin-Madison University scientist and demography.  He believes that China’s population is 1.28bn instead of the official 1.41bn.

The chart below, from The Wall Street Journal, shows Yi’s estimate of China’s population declines up until 2100 versus estimates from the United Nations etc. As you can see, he sees China’s population declining to less than 500m by the end of the century compared with the UN’s projection of just below 800m.

Yi believes the impact of China’s One Child Policy, which was ended in January 2016, and the subsequent failure to reverse declining births because of economic, social and lifestyle reasons, is greater than is officially acknowledged.

Whatever the truth about China’s demography, its society is clearly ageing. The extent of its ageing and the size of its population has major implications for its petrochemicals demand growth, and, in turn, for the country’s petrochemicals self-sufficiency.

This is a theme I shall explore in detail in later posts with the help of my ICIS colleague, Kevin Swift. Kevin is our Senior Economist for Global Chemicals.

Thirdly, we must also consider the impact of China’s sustainability push on petrochemical demand growth – and again its levels of self-sufficiency. A “less is more” drive, aimed at reducing carbon emissions and clearing-up plastic waste may negatively impact petrochemicals consumption growth.

But in a further indication of the grey and muddled world we now live in, if China succeeds in becoming a green economy this might help it escape a middle-income trap made especially deep by its demographics. Economic growth could be stronger than under a downside scenario of failure to escape its middle-income trap. Maybe the stronger the economic growth the higher the growth in petrochemicals consumption, despite the counteracting force of less is more.

As I’ve been stressing over the last three years, events in China point to a much more confused and blurred picture. Don’t panic and embrace confusion as this is the only sensible response.

From confusion should come wider and deeper scenario planning, supported by our excellent teams of analysts and consultants in China and elsewhere.

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