China’s petrochemical industry is expected to become more competitive with a surge of larger-scale capacities launching in the next five years. Producers are looking to upgrade derivatives capacities and diversify feedstocks with the country reaching a higher degree of petrochemicals self-sufficiency as they do so.

The 14th five-year plan, covering 2021-2025, is expected to herald a new era for the country’s olefins and derivatives industries. There will be a new round of olefins capacity expansions pushing self-sufficiency into a new range.

We expect that China will have to shift its attitude towards the chemicals industry and tighten new project approvals as the self-sufficiency drive continues.

China revealed the framework of its 14th five-year plan at the end of October and the market expects more details will be released in Q1 2021.

Capacity boom

With the new capacity launched this year, China’s ethylene and propylene capacity will reach around 31m tonnes/year and 40m tonnes/year, respectively in 2020, up by 18.7% and 12% compared with 2019.

This is only the beginning of the capacity boom, however, considering expected strong derivative demand growth and the remarkable margins enjoyed along the olefins value chain.

China’s petrochemical demand has remained resilient despite the global economic slowdown. We expect demand to remain healthy given China’s large population and deepening urbanisation.

Profits earned upstream are being transferred to derivatives like styrene monomer (SM). And over the past 12 months the SM chain margin has been moved to polystyrene (PS) and expandable polystyrene (EPS). As a consequence, some investments have been driven by more marginal (in terms of profitability) derivatives demand.

It is clear that polyethylene (PE) will remain the engine for ethylene demand growth in next five years. PE demand has been activated by the rapid development of e-commerce, express deliveries, upgraded consumer demand and other areas of market growth.

Most of the new olefin derivatives capacities will be integrated with steam cracker projects due to cost and transportation issues.

As a result, China’s ethylene capacity is expected to rise to above 51m tonnes/year in 2025, representing a 2020-2025 compound annual growth rate (CAGR) of 10.4%. China’s propylene capacity in 2025 is expected reach 56m tonnes/year, with a 2020-2025 CAGR of 7%.

In order to ensure raw materials for these new capacities, a large number of refinery projects will come on stream. Around 31% of China’s steam cracker projects in 2021-2025 will be integrated with a refinery.

Higher petchem yields

Such capacity growth will aggravate the supply glut of fuel-type refined products like gasoline and diesel, so some companies are looking to produce more petrochemicals. Zhejiang Petrochemical, for example, has a 40% petrochemical yield theoretically for its first phase integrated complex. The company plans to increase the ratio in follow-up projects.

A considerable volume of new olefins capacity will be based on alternative feedstocks such as liquefied petroleum gas (LPG), ethane and coal.

Besides naphtha, we foresee the new olefins capacity using more LPG as the major feedstock. The demand for ethane will also increase. But there won’t be a lot of new ethane-based steam cracker capacity built in the next five years, mainly because of the higher uncertainties on imported ethane, which are heavily impacted by the relationship between the China and the US.

Based on varying feedstock prices, variable margins from different routes, including steam cracking, CTO/MTO (coal-to-olefins/methanol-to-olefins) and PDH (propane dehydrogenation ) have become heavily intertwined in China, because there hasn’t been an absolute winner among the different processes.

MTO and PDH process routes continue to operate well in China. Even in the low crude oil price environment this year, light olefins margins from MTO and PDH exceeded naphtha-based margins from June to September.

As a result, there will be even more feedstock diversity in China’s olefins market. The speed of development of CTO and MTO may be a bit slower than that for other production routes, however, because of economic uncertainty and environmental concerns.

Greater self-sufficiency

We foresee larger steam crackers in the future versus the past five years. The average ethylene capacity of the top 10 steam crackers in China is expected to be 1.3m tonnes/year in 2025, up by 23% compared with the 1m tonne/year average in 2019.

As a result, China’s self-sufficiency in olefins and derivates is expected to increase. In the next five years, we expect nearly 70% of China’s major chemical products to be over 80% self-sufficient.

Concurrently, some derivatives will be oversupplied, including acrylonitrile (ACN), propylene oxide (PO), styrene and polybutadiene rubber (PBR). There could be overcapacity in C6-C8 products and their downstream derivatives such as purified terephthalic acid (PTA), polyethylene terephthalate (PET) and caprolactam.

Given the potential for overcapacity, ICIS foresees tightened approval of new olefins projects or expansions through 2025. More detailed regulation might be implemented. The policy is likely to be further tightened with high standards set for scale, technology and environmental investments linked to the projects.

In the ‘Guidance catalogue of industrial structure adjustment’ published by the Chinese government in 2019, only steam crackers of 800,000 tonnes/year ethylene capacity or above were to be approved, although there was flexibility if lighter feedstocks were used.

Investors in China have also been seeking economies of scale in bigger projects. Several integrated projects, which are based on existing capacity, including Hengli Petrochemical Phase II, Zhejiang Petrochemical Phase III and Fujian Gulei Petrochemical Phase II may be approved in the 14th five-year period. Each of these projects is expected to have an ethylene capacity of more than 1.2m tonnes/year.

Petrochemicals upgrade

China is expected to further promote the consolidation of outdated capacity as part of its refining and petrochemical industry upgrade. Meanwhile, investment in higher value products and those that are more technologically advanced or environmentally friendly is likely.

Some petrochemicals products may have large-scale capacity but be less competitive on a global basis – such as coal-based MEG.

The major olefin derivatives producers will continue to upgrade their product slate and develop higher value-added products, in particular in special grades, like metallocene PE and polyolefin elastomers. Some consumption habits have been changed by the coronavirus pandemic and will accelerate this progress.

This will typically take place in the PP market. Although China PP will be in surplus, the market will still rely on imports for some technical grades, like high-transparency PP. In the framework of 14th five-year plan, China’s government will particularly encourage development of the country’s high-tech industries. ■