China, Polyolefins And The New Five-Year-Plan

By John Richardson

CHINA is still a planned economy, but everything doesn’t always work out as planned – hence the above chart, which shows that:

• Installed ethylene capacity will by the end of this year be around 3.5 million tonnes/year lower than the government’s target of approximately 26 million tonnes/year. This was the capacity Beijing had aimed for its under its 12th Five-Year Plan (2011 until 2015).
• In propylene, the target of the same 12th Five-Year-Plan was for a nameplate capacity of roughly 22 million tonnes/year. China will instead have propylene capacity of around 26 million tonnes/year by the end of 2015.
• In other words, what has happened is almost the exact opposite of what had been planned.

Ethylene capacity is lower because environmental pressures and  concerns over economics led to the postponement of some naphtha cracker  projects. Meanwhile, propylene capacity  has surged. This is the result  of more coal-based (methanol to olefins and methanol to propylene only) plants being built than had been expected. There also been aggressive expansion of propane dehydrogenation-based capacity.

The government’s aim was to achieve an ethylene self-sufficiency rate – local capacity versus demand – of 70% (turn to page 112 of this previous link) by the end this year.

Theoretically, though, when you place the ICIS Consulting estimate for 2015 capacity versus our forecast for demand, this results in a self-sufficiency rate of 109%.

The good news for the global polyethylene (PE) business (PE is the biggest derivative of ethylene) is that China is not running its ethylene capacity at full tilt. PE demand growth also remains robust in non-durable applications such as food packaging, largely because of increasing food-safety concerns.

In January-August of this year, ICIS China data therefore show that real  PE self-sufficiency, which is PE demand versus actual production, was only in the region of  60%.

Returning to propylene, the aim under the 12th Five-Year-Plan was to have a self-sufficiency rate of 75%. But if you once again place nameplate capacity against our forecast of consumption in 2015, self sufficiency is actually at 95%.

Again, though, if you look downstream at polypropylene (PP), the real picture is not quite so grim: In January-August self-sufficiency was at 76%.

As China, however, finalises its 13^th Five-Year-Plan (2016-2020), you have to prepare for what capacity already on the ground might mean for future monomer and so polyolefins supply and demand balances.

Here are ten points to consider.

1. The postponement of 3.5 million tonnes/year of ethylene capacity has still left a great deal of length in the market, thanks to a much weaker-than-expected economy.
2. China might thus decide not to add much more ethylene capacity during its next five-year-plan.
3. But even assuming that this happens, existing ethylene plants may be run harder in order to a.) Create more basic manufacturing jobs in western China by boosting standard-grade PE production and b.) Encourage the move into higher-grade PE production in the east, which would be harder to afford if it were based on expensive imported ethylene.
4. Additions in propylene capacity might also be scaled-back under the next five-year-plan.
5. Existing excess propylene supply might nevertheless accelerate the substitution of PE for PP.
6. Propylene is likely to remain cheap in China because of all the new local capacity added via coal and propane.
7. Globally, propylene will be cheap because of the fall in propane prices. Propane will be lower cost because of greater production, particularly via US shale-gas fields.
8. PP itself is also going to be long because of capacity additions, especially in China.
9. China’s converters will thus try to wherever possible replace PE with cheaper PP.
10. Plastic processors in China have always been very cost conscious. But what will make them even more so is that China’s economy is going to be driven by greater affordability in finished goods and in services.

Disagree with my points above, sure – I would love to hear your views. But the one thing certain about China is much greater uncertainty as the “New Normal” develops, and so I hope that this post helps you get the planning process underway.