China plans host of domestic petrochemical plants

Eric Watkins
OGJ Oil Diplomacy Editor

LOS ANGELES, May 19 -- China, concerned over forecasts of increased competition from Middle Eastern petrochemicals suppliers, reported plans to construct a host of domestic petrochemical plants.

China's new plans, however, are causing concern in Southeast Asia that production will outstrip demand and lead to lower prices, particularly after recently announced increases in the Middle East.

According to its 2009-11 industry support and development blueprint, China's State Council plans to raise the country's ethylene production capacity by 51.2% to 15.5 million tonnes/year.

Chinese refineries currently produce about 47.6% of the 21 million tpy of ethylene consumed in the country.

The new plants apparently are in addition to current Chinese efforts to increase output capacity, including plans by PetroChina to complete a 1 million tpy addition to its 220,000 tpy ethylene plant in Dushanzi, Xinjiang province.

PetroChina also is doubling the annual capacity of its ethylene plant in Daqing, Heilongjiang province, to 1.2 million tpy, while rival Sinopec is building two 1 million tpy ethylene plants, one in Ningbo and the other in Tianjin.

Eyeing the substantial increase in the production of ethylene, industry observers said the government's plan is aimed largely at enabling the country to compete with Middle Eastern producers, who are boosting output.

Chinese concern over increased Middle Eastern production of petrochemicals emerged in April at Lnoppen's 4th Annual Petrochemical Summit held in Tianjin, China.

"A group of new ethylene and downstream petrochemical projects in the Middle East will be completed and put on stream from 2009 to 2010," said one Chinese oil and gas official, who declined to be named.

"As the demand for petrochemicals in the Middle East is limited, after the completion of these projects great quantities of petrochemicals will be likely to flow into the Chinese market," the official said.

"Petrochemicals from the Middle East have very strong price competitive edge and have great impact on the Chinese market," he said.

According to Hu Jie, the chief engineer of PetroChina Refining & Chemicals Co. Ltd., Middle Eastern refineries will more than double their production capacity of three major types of polyethylene (PE) to 14.81 million tpy in 2012 from 6.04 million tpy in 2007.

Hu said the buildup of ethylene production capacity in the Middle East scheduled to start operation in 2009 and 2010 will lead to "the flooding" of China's market with downstream petrochemicals.

"The Middle East has already exported several hundred thousand tonnes of PE products to the Chinese market in the first quarter of this year, but most of it is of low quality," Hu said.

However, Hu said a much larger volume of higher quality products will enter the Chinese market in the second half of this year once the new Middle Eastern refineries start production.

As a result, he said, the next few months will be a challenging time for China's petrochemical producers as they trying to clear inventories amid an influx of Middle Eastern PE products into the Chinese market.

However, BOC International analyst Lawrence Lau said Beijing's aggressive expansion in ethylene could lead to keen price competition and low profits in the region, given the Middle East's major expansion plans with much of its output aimed at the Chinese mainland.

That view was shared and broadened by Gordon Kwan, head of regional energy research for Hong Kong-based Mirae Assets Securities.

"Given China is about half self-sufficient in ethylene, if PetroChina and Sinopec do realize Beijing's aggressive targets, it will be bad news for regional producers in Japan, Singapore, Taiwan, and Thailand as they rely on exports to China to keep utilization rates high," Kwan told the South China Morning Post.

Stan Park, deputy managing director of Petrochemical Corp. of Singapore, expressed similar concerns, saying that the key issue for the region's industry is new cracker capacity coming onstream in the second half in the Middle East and China.

"We are in for volatile times, and we are all holding our breath," Park told Singapore's Business Times earlier this month, adding that additional facilities in the Middle East and China will affect plants in Singapore as well as Southeast Asia generally.

Still, he noted there has been a sustained recovery in China, with petrochemical demand back to about 90% of what it was before the global downturn. Continued Chinese demand—if it holds up—will offset the new Gulf and Chinese capacity, he said. If not, Park said, sales could fall by 10-20%.

Contact Eric Watkins at hippalus@yahoo.com.

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