Since the second half of the 1980s, China has developed polymer growth and consumption rapidly and has become one of the major plastic producing and consuming countries in the World. Chinese plastics industry experienced rapid development in H1-08, but has deteriorated rapidly due to the global financial and economic crisis. The production of Chinese plastic products is estimated to be around 36.9 million tons in 2008, with a lower growth rate of 11.7% compared to 14.48% in 2007. Chinese plastics industry is forecasted to face an even tougher period in 2009 resulting in depressed demand, declining prices and even closure of many companies. The growth rate of Chinese plastic products production is expected to be around 10% in 2009. The Chinese government has developed policies to reduce the negative impact of the global economic slowdown on China's growth, by lowering interest rates, strengthening infrastructures, expanding domestic demands, lowering export taxes, raising export tax rebate etc. All these are likely to increase the plastic demand, reduce the cost of manufacturers and ensure the growth of the plastics.
Massive government stimulus package for the Chinese petrochemical industry should help support producers’ capacity expansions over the coming, turbulent year, but BMI’s latest China Petrochemicals Report cautions that excess capacity is a threat to profitability, particularly in the polypropylene, benzene and polyesters segments.
Chinese petrochemicals producers reported a fall in profits in 2008, due to a significant decrease in chemical product prices at a time of rising raw material costs and a decrease in sales volumes in Q4-08. These negative factors have come as the result of a 50% drop in domestic market demand, caused by the global financial crisis. In the olefins segment, production growth stagnated, with ethylene down 2% and propylene up 1%, leading to total olefins production of 19.61 mln tons, representing the country’s first ever recorded decline in olefins production. This reflected patterns in production and consumption of polyolefins, with polyethylene output down 3% in response to a 2% drop in demand; while polypropylene output rose 2% and demand fell 2%. Exposure to external markets will determine segment performance. The most exposed is the polyester industry. PTA was hardest hit, with demand down 11% to 15 mln tons, leading to an 8% drop in output to 9.1 mln tons. As textile producers faced bankruptcy, PTA prices halved in Q4-08 to the lowest level in 6 years. PE and PP were also affected by the first recorded declines. These mediocre results are all the more incredible in a market that has seen double-digit growth rates in recent years.
Going into 2009, China is facing the prospect of negative growth in the petrochemicals sector, as global demand for Chinese plastic goods collapses. Only a CNY500 bln (US$73 bln) government stimulus package has helped prevent Sinopec and PetroChina from delaying their planned cracker expansions over the next three years. The stimulus plan includes CNY100 bln for investments in upgrading fuel quality and CNY400 bln for 20 new large-scale petrochemical projects, including the cracker projects in Dushanzi, Fujian, Tianjin, Zhenhai, Fushun, and Daqing, with a combined capacity of 5.2 mln tpa. The first of these to come onstream is Sinopec’s 800,000 tpa Fujian cracker, which is due to be commissioned in Q2-09. The government’s stimulus plan for the textile industry, which involves raising the export tax rebate rate from 14% to 15%, could also help revive polyesters.
BMI cautions that, while the global economic is in a phase of slowdown, Chinese expansions over the next two years could create a situation over over-supply if not in China then in the international market. It forecasts a 1.15 mln tpa increase in PE capacity and a 2.02 mln tpa increase in PP in 2009. With BMI anticipating domestic demand growth of 1-2%, polymer market self-sufficiency should reach 70% for PE and near 100% for PP. This could drive down international polymer prices more, putting more pressure on Chinese petrochemicals producers’ profit margins even given the easing of naphtha feedstock prices. In this climate, it is doubtful that Sinopec or PetroChina will report a net profit in 2009 with the possibility of further losses in H1-10. Some segments, such as benzene, are already in surplus due to recent increases in capacity and with 2-3 mln tpa of benzene capacity due to come online in 2009. Benzene producers are likely to witness temporary closures and low rates of capacity utilisation, particularly given the poor projections in the styrenics industry.
The Chinese petrochemicals industry is unlikely to experience any further contraction in output, but the chief question remains whether it is in a trough or beginning its recovery phase. BMI’s latest report states that much depends on the strength in the resumption of consumer spending on cars and household items, but there is a growing sense of optimism as monthly growth rates pick up. In March 2009, China’s petrochemicals industry registered 26.3% month-on-month (m-o-m) growth, according to the China Petroleum and Chemical Industry Association (CPCIA). However, total turnover for the sector, including oil and gas extraction, production of refined oil products and manufacture of chemicals, was down 8.4% year-on-year (yoy) to CNY498.4 bln (US$73.06 bln). The CPCIA stated that negative growth was expected to continue in Q2-09. Nevertheless, the sector is still relatively robust, and the five leading petrochemicals companies-China National Petroleum Corporation (CNPC), ChinaPetroleum and Chemical Corporation (Sinopec), China National Offshore Oil Corporation(CNOOC), Sinochem and Shaanxi Yanchang Petroleum - saw their combined profits soar 160% m-o-m and 13.2% yoy in March to CNY28.3 bln. In Q1-09, Sinopec reported an 85.1% yoy rise in profits to CNY11.22 bln (US$1.64 bln). It attributed the strong performance to the government's reforms in prices and taxes on oil products sold in the domestic market and the government’s economic stimulus program. Its refining business also reversed its losses. However, Sinopec's petrochemicals output fell across all segments in Q1-09, with ethylene production down 12.2% yoy to 1.49 mln tons. In Q1-09, PetroChina posted a net profit of CNY18.95 bln (US$2.79 bln), down 35.3% yoy. It produced 205.7 mln barrels of oil, down 5.7% yoy, but its marketable natural gas output raised 7.9% yoy to 523.4 bln cubic feet (bcf). Its refinery throughput fell 14.6% yoy to 185.4 mln barrels.
Ethylene production fell 6.5% yoy to 663,000 tons in the quarter.
BMI believes that demand will have improved in H2-09, with Chinese petrochemicals producers expected to post improvements in earnings and turnover due to cheaper feedstock and improved domestic demand.
This will be supported by the government’s economic stimulus program, although the specifics regarding petrochemicals are due to be announced by the end of Q2-09. Most Chinese petrochemicals producers have said that by Q2-09 they had turned the corner as far as turnover and profits were concerned. Although H2-09 will be an improvement on the poor performance seen in H2-08, levels of demand growth are not forecast to return to 2007 levels until 2010 at the earliest. A positive factor is the low price of naphtha compared to 2008 levels, caused by a fall in oil prices. This will go a long way to support petrochemicals margins. However, feedstock prices are rising and are recovering from the huge declines seen in Q4-08 due to a rise in oil prices caused by increased demand and lower refinery operating rates.