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China’s petrochemical industry set for downcycle

January 16, 2020
Energy & Chemical Value Chain

China’s petrochemical industry is on the start of a downcycle, according to Wood Mackenzie, as a supply overhang in the paraxylene (PX) market looks set to be joined by similar in the olefins and polyolefins markets.

China is the biggest petrochemical-producing country in the world and is set to receive a new wave of capacity this year from some significant refinery and petrochemical complexes, but senior consulting manager Kelly Cui warns that this supply surge, coupled with a weakening economy, will create severe challenges for China’s petrochemical sector.

“We expect chemical commodity prices to fall further and production margins will continue to be squeezed,” she said.

China will add 5.8 million tonnes per year of ethylene and 5.75m/t of propylene capacity in 2020, accounting for 47 per cent and 75 per cent of global additions, respectively. China’s ethylene capacity addition in 2020 will equate to 57 per cent of South Korea’s total ethylene capacity and 85 per cent of Japan’s total capacity, cites Wood Mackenzie.

Pressured by the supply surge, China olefins operating rates will be forced down in 2020.

“We expect ethylene operating rates to drop from 96 per cent in 2019 to 87 per cent in 2020, while propylene will drop from 8 per cent to around 80 per cent. China’s olefins industry will start to enter a downcycle from 2020,” she explained. “The opening up of foreign investment and the relaxation of crude oil import licences and quota to Chinese private companies have brought on more capacity to the olefins sector. Demand, on the other hand, is expected to remain stable in 2020. This means the market will become more complicated and volatile.”

In 2019, naphtha-based ethylene margins reached their lowest since 2014, averaging US$313/t. In 2020, Wood Mackenzie expects the average ethylene price and margins to drop further.

Weak global economic growth, the US-China trade war, a decrease in automobile production and a booming e-commerce industry influenced China’s polyolefins market last year. The country’s polyethylene and polypropylene incremental growth captured 69 per cent and 61 per cent of total global polyethylene and polypropylene incremental demand, respectively.

But robust domestic demand and a weak export market forged different demand patterns between polyethylene and polypropylene last year.

Senior consultant William Liu said: “We expect polyethylene, benefiting from the ecommerce boom, to achieve a higher-than-GDP growth rate for 2019, at around 7.5 per cent. However, polypropylene demand, impacted by weak global economic growth and automobile production, is expected to have grown at 5.9 per cent, just below the GDP growth rate.

“Although we expect healthy polyethylene demand in 2020, the capacity addition is outpacing demand, which will cause market imbalance. The overcapacity may weigh on operation rates. What is making market sentiment worse is that it is just the beginning of the overcapacity cycle. Meanwhile, polypropylene is facing a more severe market. Slower demand growth dragged down by raffia, automobile and home appliances, coupled with new capacity additions will dampen operation rates significantly.”

The PX market experienced turbulence in 2019. Market supply is lengthening at an unprecedented pace as some of the world’s largest PX buyers have started to operate their own world-scale PX assets. The PX-naphtha spread has more than halved in the past year, and some producers in the region are struggling with negative production margins.

Consultant Arthur Luo said: “We do not expect market fundamentals to improve and it will likely worsen in 2020, as more capacity prepares for start-up. Even more projects are also in the pipeline over the next five years.

“Asset rationalisation, not just in China but also other parts of Asia, will need to happen to help markets to rebalance and allow production margins to recover.”

Source: Plastics in Packaging

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