China Market Insider Industry Report: Mission Self-Sufficiency Promotes and Challenges China's Petrochemical Industry

Author / Editor: Henrik Bork / MA Alexander Stark

In a new series, PROCESS looks at the individual sectors of the chemical industry in China. In the second part of the series, after the fertiliser industry, the focus is on the petrochemical industry. In the wake of the new five-year plan, the industry is expected to grow and secure China's self-sufficiency.

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PROCESS regularly reports on the Chinese chemical and pharmaceutical market in its "China Market Insider" series.
PROCESS regularly reports on the Chinese chemical and pharmaceutical market in its "China Market Insider" series.
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Beijing/China — China's economic policy is introducing new growth to the country's petrochemical industry. In the future domestic companies will increasingly profit from this. This is how the analyses of market observers can be summarised, who give an overview of the situation of the chemical industry on the occasion of the new five-year plan in the People's Republic.

The 14th Five-Year Plan for the years 2021 to 2025 has already been drafted and is to be passed by the National People's Congress in Beijing in March. It is important because China's economic development is largely determined by the plans of the Communist Party and government. The direction in which Beijing is trying to steer the petrochemical industry is already clear.

The trade war with the USA, the Corona crisis and the ideological convictions of state and party leader Xi Jinping have pushed the issue of “self-sufficiency” to the top of the political agenda. This is resulting in concrete changes for the petrochemical industry.

According to market researchers from ICIS it is moving towards complete domestic self-sufficiency in petrochemical products and downstream value chains wherever feasible. “Domestic circulation” is at the core of the new industrial policy, and it will also be applied to the country's petrochemical industry, ICIS believes.

China will therefore further intensify the integration of crackers and aromatics plants with refineries, which was already started in the still ongoing old five-year plan. The production of higher value-added polymers, as well as the overall production of speciality and fine chemicals at domestic Verbund sites, will also be further promoted, the analysts say.

Only for an increasingly small group of petrochemical products, such as PE and ethylene glycols (EG), is China still far from its goal of self-sufficiency, the market analysts said. However, even there China will try to increasingly source imports from friendly countries along its new “belt-and-road” axis in the future.

The strategies of China's largest petrochemical companies also show where the country is heading in the coming years. The emphasis on domestic consumption and the production of important industrial goods within the country's own borders will lead to a strong increase in demand for plastics and thus for certain petrochemical products, writes the agency S&P Global.

Sinopec has identified petrochemical products and the development of new speciality chemicals as the biggest growth drivers for the next five years and is investing in new plants accordingly, writes S&P Global. In the first nine months of 2020, Sinopec invested 21 % more in this sector than in the previous year.

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Rising demand for petrochemical products will also boost China's crude oil imports in the coming years, most analysts predict — even though demand for transportation fuels will gradually decline due to the new promotion of electric vehicles and vehicles with other alternative powertrains such as hybrids or fuel cells.

70-80 % of new refining capacity coming on stream in Asia by 2027 will be plastics-focused in integrated sites, consultancy Wood Mackenzie believes, and China is a big part of that. As early as 2020, China's refineries processed 3 % more crude oil despite the global corona crisis, Reuters news agency recently reported.

The annual volume of crude oil was 674.41 million tonnes last year, according to official statistics from the National Bureau of Statistics in Beijing. That is about 13.45 million barrels per day. Especially the astonishing recovery of China's manufacturing industry from the second quarter of 2020 onwards has boosted demand, experts at SIA Engery believe.

But some observers also warn of future overcapacity in China's petrochemical industry, which is already becoming apparent. “China is investing billions of dollars in new mega-refineries even though demand for fuel will peak within the next five years,” writes the Bloomberg news agency. That suggests it will “flood the region with cheap exports in the future”, the agency writes.

Since 2019, China has added one million barrels per day of refining capacity to its industry, and there are currently four other major projects under construction with a further capacity of 1.4 million barrels per day. China's petrochemical industry is positioning itself to increasingly capture global market share of petrochemical products by continuing to expand its refining capacity, even though demand for fuels will soon decline due to the promotion of e-mobility and other green technologies, Bloomberg quotes Michael Meidan, China director at the Oxford Institute for Energy Studies.

Even if refineries currently under construction in Zhejiang, Jiangsu and Yantai provinces will increasingly convert crude oil directly into petrochemical and plastic products, there will still be increased demand for Chinese fuel exports to Australia and Europe, Bloomberg predicts.

Because so many new refineries are being built in China right now, but the Corona crisis is dampening global demand, China's refineries are likely to have lower utilisation rates in the current 2021 despite rising demand for certain products, S&P Global quotes Han Bing, a manager at Petrochina.

Overall, China's leadership is trying to walk a difficult tightrope with its petrochemical industrial policy between securing economic capacities with a view to the politically desired “self-sufficiency” and the emergence of state-financed overcapacities.

* Henrik Bork, long-time China correspondent for the German Süddeutsche Zeitung and the Frankfurter Rundschau, is Managing Director at Asia Waypoint, a Beijing-based consulting agency specialising in China. “China Market Insider” is a joint project of the Vogel Communications Group, Würzburg/Germany, and Jigong Vogel Media Advertising in Beijing.