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China Petrochemicals Report Q2 2010
Market |
Energy and Utilities |
Report Type |
Market Research |
Country |
China |
Published |
3 March 2010 |
Number of Pages |
79 |
Download |
|
Immediate |
|
Publisher |
Business Monitor International |
The Chinese petrochemicals market is set to recover strongly in H110, but tighter fiscal and monetary policy aimed at curbing inflation will lead to a moderation in demand growth in H210 and threaten oversupply and low prices, according to the latest China Petrochemicals Report. We see the petrochemicals market following GDP growth rates, rather than the above-trend rates seen in recent years. Government attempts to tighten lending could have a significant effect on petrochemicals demand and pricing, with the potential of a decline of up to 6% in polymer imports, according to our research. Easy lending conditions have in the recent past enabled speculation on commodity chemicals as well as real estate, which has helped boost Chinese polymer demand. This speculation has sometimes led to cargoes being sold at below cost, thereby keeping overall petrochemicals pricing down. Credit has also sustained consumer demand for finished products that utilise petrochemicals, as well as the housing sector, which also creates demand for home furnishings. If a tighter monetary policy with high interest rates strengthens the yuan, it could moderate the impact of a decline in import demand while weakening export competitiveness of finished goods.
We caution that while the global economy is in a phase of slowdown, Chinese expansions over the next two years could create a surplus of supply, if not in China then in the international market. We forecast a 1.65mn tonnes per annum (tpa) increase in polyethylene (PE) capacity and a 1.49mn tpa increase in polypropylene (PP) in 2010, thereby ensuring polymer market self-sufficiency should approach 75% PE and exceed 100% PP. This could drive down international polymer prices yet further, putting more pressure on Chinese petrochemicals producers’ profit margins despite the easing of naphtha feedstock prices. Some segments, such as benzene, are already in surplus due to recent increases in capacity and 2- 3mn tpa of additional benzene capacity came online during 2009. Benzene producers are likely to witness temporary closures and low rates of capacity utilisation, particularly given the poor projections in the styrenics industry. Overexpansion of polyvinyl chloride (PVC) production in China in recent years has led to a market imbalance. Demand for PVC has been rising in recent years because of increased consumption from the chemicals and construction industries. However, the China Chlorine-Alkali Industry Association says there will soon be too much PVC, with capacity set to rise by 1.14mn tpa in 2010 on top of the 3.09mn tpa added in 2009.
In response to concerns raised in industry circles, the China Petroleum and Chemical Industry Association (CPCIA) has set out plans for the restructuring of the petrochemical industry. The emphasis will be on the production of high-end products and reducing the excess capacity in low-end products. The guidelines recommend that China increase its crude oil processing volume to about 550mn tpa in 2015, its annual fuel output to about 300mn tpa and its ethylene output to 21-23mn tpa. The target for ethylene capacity is below the 24.7mn tpa our forecasts for 2014 based on current confirmed plans. These recommendations are intended to steer the industry in the 2011 to 2015 development plan and were submitted to the Ministry of Industry and Information for approval in October 2009. Even before the plan has gone into effect, efforts are being directed at stemming the rate of capacity growth. In Q409, Chinese authorities began rejecting projects in the petrochemicals sector as well as other industries as they try to curb chaotic overinvestment, which the government worries could lead to economic trouble. If implemented, the strategy could lead to the cancellation or delay of two or three ethylene crackers and associated downstream units. While we caution that China will face over-capacity amid a short-term downturn in demand growth, we believe that in the long term, the limits proposed for cracker capacity could make the country more import-dependent and erode its competitiveness.
In the Asia Petrochemicals Business Environment Ratings matrix, China has risen from fifth to second place with an overall rating of 78.1, up 3.7 points due to large capacity increases in 2009 and 2010 and an improvement in its country risk rating. This puts it 2.1 points behind regional leader Japan and 0.9 points ahead of Taiwan.
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