OGJ FOCUS: Competitive pressures changing Asian petchems

March 8, 2010
Massive growth in Chinese and Middle East petrochemical capacities and prospects of intense competition for Asian markets from Middle East producers are prompting profound change in Asia's petrochemical industry.

Massive growth in Chinese and Middle East petrochemical capacities and prospects of intense competition for Asian markets from Middle East producers are prompting profound change in Asia's petrochemical industry. Growth in Asian capacity could support naphtha pricing, while competition from the Middle East will put pressure on margins and naphtha prices.

It is possible that low-cost exports from the Middle East may force some ethylene plants in Asia to close (especially in Japan). Consuming countries may retaliate, however, by imposing tariffs and dumping regulations to protect their industries.

Asian petrochemicals are witnessing rapid and fundamental changes with the:

• Emergence of China as the largest petrochemical producer in Asia.

• Rise in Middle East production capacity based on cheap natural gas.

• Huge potential Chinese demand for basic chemicals as the country's economy grows.

• Advent of KG-D6 gas in India that will free up naphtha for use in petrochemical production as well as for exports from the region.

Asia's ethylene industry

Already an important player in the global ethylene market, Asia is adding capacity rapidly. With about 43.8 million tonnes/year of ethylene capacity in place at yearend 2009, Asia will add a further 16 million tpy by yearend 2015. In second-half 2009 alone, the region added 4.1 million tpy of ethylene capacity, and Facts Global Energy expects it to add another 5.4 million tpy of ethylene capacity this year.

Figs. 1 and 2 show that about 50% of capacity addition from start of 2009 to yearend 2015 occurs in second-half 2009 and in 2010. These peaks in the capacity additions are mainly due to China and India.

China will be responsible for 54% of the new capacity 2010-15. In 2005, China surpassed Japan to rank second globally in ethylene production capacity. It is currently behind the US by a whopping 25 million tpy, but this gap is narrowing rapidly.

China had 13.9 million tpy of ethylene capacity in place at yearend 2009. Of the 8.7 million tpy capacity the country will add through 2015, 42% will be achieved in the next 2 years. By yearend 2015, China will have more capacity than Japan, South Korea, and Taiwan combined.

Recently, the Sinopec/ExxonMobil/Saudi Aramco joint venture began to produce from its 800,000-tpy ethylene plant at Fujian (OGJ Online, Nov. 11, 2009). Meanwhile, in early November, the Sinopec/SABIC Tianjin joint venture started trial runs at its 1-million-tpy ethylene plant.

PetroChina has also started trial runs at its 1-million-tpy Dushanzi ethylene plant. The construction of PetroChina's Qinzhou and Sinopec'c Zhenhai ethylene plants, both 1 million tpy each, are complete and ready to commence trial runs soon.

At present, China's demand for ethylene equivalent far exceeds its supply. It produced slightly more than 10 million tonnes of ethylene equivalent in 2008, while import needs stood at 12 million tonnes. For 2009, its ethylene-equivalent demand increased by around 25%, thanks to the 4 trillion Yuan ($586 billion) stimulus plan and other policies to boost domestic consumption.

The increase in basic petrochemicals demand in 2009 was largely met by imports. Table 1 indicates that the Chinese net imports of polyethylene in 2009 increased by a staggering 67% year-over-year. In the longer term, strong economic growth promises robust demand but no repeat of the staggering growth seen in 2009.

High import requirements by the Chinese have benefited Korean, Taiwanese, and Japanese firms since early 2009. The Chinese demand surge came at the right time for firms in these countries as the market nose dived in October 2008 (Fig. 3).

Aside from China, India will add 4 million tpy of ethylene capacity by 2015. The key projects in the near-term are:

• Haldia Petrochemicals Ltd., which plans to expand ethylene production capacity to 670,000 tpy from 523,000 tpy at its plant in West Bengal by first-half 2010. "Project Supermax," as the expansion has been dubbed, will result in an increase in ethylene production capacity by about 30%.

• Reliance Industries Ltd. will complete debottlenecking its ethylene cracker at its Hazira plant to 1.0 million tpy from 840,000 tpy in second-quarter 2010. This started in 2006 and is being executed in stages.

• Indian Oil Corp. will commission its naphtha cracker unit at its refinery in Panipat, Haryana. This will produce 857,000 tpy of ethylene and is expected to be commissioned by third-quarter 2010.

In the longer-term key projects include:

• RIL plans to integrate its new 580,000-b/d refinery with a petrochemical complex. The proposed ethylene production capacity is 1.4 million tpy. The cracker will come on stream by 2014. The petrochemical plant will not run on naphtha but use refinery offgases and LPG.

• ONGC PetroAddition Ltd., a joint venture of India's state-owned upstream major ONGC (26%), GSPC (5%), and a few financial institutions, is setting up a petrochemical complex at Dahej in Gujarat state. This will consist of a cracker unit with an ethylene production capacity of 1.1 million tpy that will run on dual feed. The complex should be completed by third-quarter, 2013 but with large cost over runs.

India is not boosting its ethylene capacity as fast as China, and the government expects a shortfall of 5 million tpy of ethylene by 2012.

Will success continue?

FGE believes that the near-term large capacity additions in the Middle East and China will sharply affect the market.

By September 2010 ethylene capacity in China and the Middle East will increase by 5.1 million tpy and 6.5 million tpy, respectively (Tables 2 and 3). Long-term prospects for East Asian petrochemical players look bright. This will entirely depend, however, on the pace at which economies grow and especially the robustness of Chinese demand.

Asian aromatics

Asian aromatics (benzene, toluene, and xylene) production capacity is growing more slowly than its ethylene counterpart (Figs. 4 and 5). FGE expects the Asian aromatics production capacity to increase by about 26% by 2016 with China alone accounting for 59% of those additions.

Two large Chinese aromatics plants came on line in 2009:

1. Locally owned Fujia Dahua Petrochemicals started commercial production from its 1.1-million-tpy aromatics plant (300,000 tpy benzene and 800,000 tpy xylene).

2. Along with its 240,000-b/d Huizhou refinery, CNOOC started its 1.56 million tpy aromatics plant (360,000 tpy benzene, 200,000 tpy toluene, and 1 million tpy paraxylene). More aromatics plants are to come on line in China in the next few years.

With Jurong Aromatics Corp. and the ExxonMobil expansions, Singapore will nearly double its aromatics capacity. In South Korea the Hyundai/Cepsa and S-Oil developments will add to the country's aromatics capacity.

KuoKuang Petrochemical Technology Co. (KPTC), Taiwan, plans to add a 1.45-million-tpy aromatics plant to the planned refinery to create a refinery and petrochemical complex. This greenfield project is to be completed by 2017.

These projects will target growing markets such as China.

Japan has added 580,000 tpy of aromatics capacity (410,000 tpy paraxylene and 170,000 tpy benzene production capacity) through the Kashima condensate splitter-based project. Japan also started trial operation of the 34,000-b/d Mizushima condensate splitter in August 2009.

Unlike in some other Asia Pacific countries, projects in Japan specifically target integration with refineries. Japan has adopted this rationale in order to offset declining fuel demand.

India's current aromatics production capacity stands at a little more than 3.6 million tpy with plans to add another 2.6 million tpy of capacity by 2015. The government is aware that healthy growth in the population combined with rising robust demand for textiles, plastics, vehicles, and other consumer goods will help drive growth in India.

Therefore, its petrochemical policies focus on supporting demand and capacity growth. The government has allowed 100% foreign direct investment in petrochemical projects and established several petroleum, chemicals, and petrochemical investment regions and special economic zones to promote investments and make India a petrochemical hub.

Asian naphtha demand

Most ethylene plants in Asia are naphtha based (Figs. 6 and 7). Therefore, changes in the petrochemical sector will affect naphtha demand. Most of the new Chinese ethylene plants will be naphtha based (Fig. 8).

FGE expects naphtha's share as an ethylene feedstock to rise to 71% from 61%. This takes into account China's intention to maximize use of chemical feed from existing refineries rather than naphtha imports, thus allowing other heavier oil products to be used as petrochemical feedstock. In the next decade, as the planned ethylene plants come on line, there is no doubt that the Chinese demand will drive the Asia Pacific naphtha demand (Figs. 9 and 10).

Asian naphtha consumption 1995-2008 exhibited growth of 112%. The dominant use of naphtha in Asia is as a petrochemical feedstock. Paraffinic naphtha is used mostly for olefins and heavy (N+A) naphtha for aromatics production.

After 25 continuous years of growth, Asian naphtha consumption fell (–1.4%) in 2008, the result of the dramatic slowdown of the petrochemical sector in fourth-quarter 2008 associated with the global financial crisis.

The petrochemical sector bounced back strongly in 2009, especially in second quarter. The naphtha crackers in South Korea as well as Formosa Petrochemical Corp.'s crackers in Taiwan were running full in second-quarter 2009. This turnaround can be attributed to:

• Ethylene capacity that came on line in first-half 2009 being much lower than initially expected.

• The slow start and ramp up of new ethylene plants in the Middle East.

• China's stimulus package that lifted polymer demand in China.

In the future, naphtha will remain the primary feedstock for Asian petrochemical plants. With massive capacities coming on stream within the next year in China and the Middle East, however, FGE expects that Taiwan's, South Korea's, and Japan's crackers will be forced to run at a lower rate in the near term.

Based on these observations, FGE forecasts little change in naphtha demand in 2010 year-over-year. During 2011-15, however, FGE expects Asia-Pacific naphtha demand to pick up and average 4.6%/year, with China leading the way.

Country focus

In 2008, South Korea overtook Japan as the largest naphtha consumer in Asia. With development of the petrochemical sector in South Korea, its naphtha consumption climbed steeply but is now leveling off.

Its total naphtha demand in 2008 was 844,000 b/d and will increase in 2009 to 871,000 b/d. In 2010, however, FGE anticipates a drop in demand of around 5% to 825,000 b/d. For 2011-15, FGE expects South Korea's naphtha demand to grow at a 2.9%/year, to reach 954,000 b/d in 2015.

Japan is a large but declining consumer. Its naphtha demand in 2008 was 779,000 b/d, down by 8.3% from 2007. Japan's naphtha demand will decline at 2.8%/year 2008-15.

As with so much else, China will drive naphtha demand in Asia-Pacific. In 2008, its naphtha demand was 605,000 b/d, and it was a net exporter at 17,000 b/d. In 2009, estimated Chinese naphtha demand increased by 10%, to 665,000 b/d, and the country became a net importer. Between January-September 2009, China's net naphtha imports totaled about 40,000 b/d.

China's naphtha demand will grow at 14%/year 2009-15 and will overtake South Korea to become Asia's largest naphtha consumer by yearend 2011. China's net imports will rise to 240,000 b/d from 18,000 b/d by yearend 2012, rising further to 370,000 b/d by yearend 2015.

Taiwan's naphtha consumption pattern has been similar to South Korea's from 2001, but the growth rate was less pronounced. Taiwanese demand is also leveling off.

In 2008, Taiwanese naphtha demand was 350,000 b/d. In 2009, its estimated demand decreased by 5% and will drop by 8% in 2010. For 2011-15, naphtha demand will grow at 4%/year.

India is not a large naphtha consumer (317,000 b/d in 2008) nor does the country import large quantities (125,000 b/d). But it is a key player in the region because of its exports. In 2008, India exported 188,000 b/d of naphtha.

The country is also unique because naphtha is used as a swing fuel by the country's power and fertilizer producers to run their units when natural gas is unavailable and LNG is expensive. This is changing with the arrival of RIL's KG-D6 gas (OGJ Online, May 5, 2009), which is mainly directed to the power sector. India will thus emerge as a key exporter of naphtha.

FGE expects India's naphtha demand to decline at 1.8%/year 2008-15 largely due to substitution by gas in power and fertilizer sectors. During this period, India's exports will rise at 7.6%/year, reaching 314,000 b/d, and imports will drop to 45,000 b/d by 2015. A drop in demand coupled with a rise in naphtha production due to increasing refining capacity drives this trend.

Overall, naphtha imports into Asia-Pacific will increase to around 1.05 million b/d in 2012 and 1.3 million b/d in 2015 from 995,000 b/d in 2008. China will be the front-runner.

China, Japan, South Korea, and Taiwan, due to their dependence on naphtha, will remain exposed to the market volatilities associated with this product. In order to protect themselves from high naphtha prices, Japan, South Korea, and Taiwan have tried to revamp their naphtha crackers to achieve greater flexibility to use more LPG as feedstock.

The authors

Liutong Zhang ([email protected]) is a senior analyst, East Asia Information and Analysis Group in the Singapore office of Facts Global Energy. Before joining FGE, Liutong worked briefly as a market and strategy analyst with Standard Chartered. At FGE, he covers the downstream Asia-Pacific oil and gas sector, focusing on Taiwan and China. In addition, Liutong conducts in-depth research and analysis on the refining and petrochemical sectors. Liutong holds a bachelor's in chemical engineering with First Class honors from the National University of Singapore.
Praveen Kumar ([email protected]) is a senior consultant and head of the South Asia Oil and Gas Team for Facts Global Energy, Singapore. Before joining FGE, he worked briefly as a consulting engineer specializing in modeling. At FGE, Praveen has participated in projects dealing with refinery investment, LNG sourcing, strategic planning, market feasibility studies, storage, and product quality. His research focuses mainly on the downstream oil and gas industry pertaining to the Indian subcontinent that includes demand forecasting and pricing projections as well as in-depth refinery analysis. Praveen completed his PhD and MSc (2007) from Queen Mary, University of London and a bachelor's in chemical engineering from the Institute of Chemical Technology, Mumbai (formerly known as UDCT). He is a member of the Society of Chemical Industry and the Institute of Materials, Minerals and Mining.

More Oil & Gas Journal Current Issue Articles
More Oil & Gas Journal Archives Issue Articles
View Oil and Gas Articles on PennEnergy.com