China Petrochemicals Report Q3 2016 - New Market Report


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[ClickPress, Fri Jul 01 2016] We expect China's petrochemicals industry to come under pressure from cooling Chinese economic growth over the coming years. Petrochemicals producers will struggle to survive in the face of falling profit margins, sluggish demand and waning support from the local governments. In the present economic environment and with weak oil prices keeping naphtha costs down, the development of coal and methanol based chemicals makes less economic sense.

In 2015, ethylene output grew 1.6% y-o-y to 17.1mn tonnes, while primary plastic output rose 10.5% to 76.9mn tonnes and plastic products rose 1.0% to 75.6mn tonnes. By the end of the year, the rate of production had recovered from a sharp decline in Q215 and was on a consistent upward trend. BMI expects lower capacity utilisation in the context of ethylene capacity growing at a faster rate than output and demand. Coupled with low naphtha prices, there are doubts about the viability of planned coal-to-olefins/methanol-to-olefins (CTO/MTO) projects. The diversification of feedstock away from naphtha now makes little sense, while independents are continuing to fuel investment in the refining sector thereby providing opportunities for naphtha production growth.

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Meanwhile, the rebalancing of China's economy away from fixed asset investment and towards private consumption will significantly drag on demand growth for construction-related materials. PVC will be particularly affected given its heavy exposure to the construction sector, while slowing automotive output growth will hit engineering plastics, particularly PP, as well as synthetic rubber and polyurethanes.

BMI has revised down its forecasts for ethylene capacity over the next five years to 36mn tpa by 2020. This assumes that most of the planned conventional refinery-based cracker facilities comprising around 18mn tpa of capacity will come onstream, and a large portion of the CTO/MTO complexes - amounting to up to 4mn tpa of capacity - will not proceed over the forecast period.

At USD50/bbl, the rate of return on a CTO/MTO project would struggle to reach a sufficient level to account for project risk. Brent crude oil futures need to go significantly above USD70/bbl for CTO/MTO projects to make sense, but BMI's forecasts show crude prices are unlikely to reach this level before 2020.

Petrochemicals consuming sectors such as construction are in the weakest position. China's construction sector will continue to see a structural slowdown as the country shifts from an unsustainable investment driven model to one that is more consumption-led.

China is in joint second place in BMI's Asia Petrochemicals Risk/Reward Ratings table, with 78.3 points, unchanged since the previous quarter and putting it on a par with Japan. It is 5.6 points ahead of Singapore and 2.4 points behind South Korea.

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