September 22, 2023

An overabundance of Made-in-China plastic will dent oil’s growth machine

(Bloomberg) — Once touted as a major driver of global oil profits, the plastics industry is looking at years of anemic margins as giant factories in China look poised to send a deluge of production to market.

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Construction on more than 20 petrochemical projects — to produce raw materials used to make everything from plastic packaging to clothing and detergents — will be completed across China this year, industry adviser ICIS said.

While some of their production will go to factories in what is still the world’s largest consumer, a slower-than-expected rebound in China’s economy and excessive investment means oversupply is imminent. As a result, revenues for making petrochemicals such as ethylene and propylene will shrink, extending the slump from this year, when margins in June were about 40% below 2019 levels.

China is expanding enthusiastically in the industry as domestic demand growth for plastics began to outpace that of other oil-derived products such as transportation and industrial fuels. While the initial idea was to move up the value chain and offset the drop in gas mileage as more people move to electric cars, the completion of so many plants at once leads to glut and squeezed profits, but also to a sudden increase of market share and dominance.

China can no longer cope domestically and is exporting more cheap plastics to the rest of the region, taking the market share of traditional manufacturing giants such as South Korea and Japan. That’s bad news for major producers in the region, such as Formosa Plastics Corp., Lotte Chemical Corp. and GS Caltex Corp., now competing with China’s power.

“The market expected China’s recovery from the pandemic to be sharp and robust, but it hasn’t,” said Salmon Lee, global head of polyesters at Wood Mackenzie. Now there is supply that even growing markets such as Vietnam, Turkey, South Africa and India may not be able to fully absorb.

In polyesters, for example, the Chinese surplus already means producers now see little to no margins, Lee said.

There could be an oversupply this year, said Larry Tan, vice president of chemical consulting in Asia at S&P Global Commodity Insights in Singapore. S&P sees global margins weak until demand and capacity are balanced again in 2025.

Of the roughly 50 million tons of new ethylene capacity ready to come online between 2020 and 2024, nearly 60% will come from China, Tan said. He points out that the increase in land over that period is 400% of Japan’s current capacity.

And China continues to invest more in these factories. In May this year, Sinopec announced a 27.8 billion yuan ($3.85 billion) investment in a new factory in Luoyang city, which local media said will be ready in 2025. Petrochemicals will also be at the heart of Saudi Arabia’s latest investment in Rongsheng Petrochemical Co. Ltd.

“China has an advanced petrochemical sector, the advantage of a huge and growing domestic market and potentially competitive output for export,” said Michal Meidan, director of the China Energy Research Program at the Oxford Institute for Energy Studies.

“As we have seen with BASF investments and the recent Saudi investments in China, it is clear that the country will become an important market, even as it becomes a growing competitor.”

But for Western countries, the question is what the impact of China’s expansion will be. According to ICIS data, China’s petrochemical capacity will account for nearly a quarter of the world’s total by the end of this year. That’s a jump from five years ago, when it was just 14% of global production capacity. And it is significant at a time when China is flexing its muscles in other parts of the supply chain as countries worry about supply disruptions and industrial safety.

“China can leverage its strength as the world’s largest refiner to also become the leading and most competitive supplier of petrochemicals,” said John Driscoll, director of JTD Energy Services Pte in Singapore.

“The West will one day wake up to China as the largest supplier of all things plastic as more mature economies in the US, Europe and places like Australia drastically cut production without addressing their continued need for these materials.”

In light of those risks, countries like India and Vietnam may choose to build their own production facilities on their own coasts, says S&P’s Tan, arguing that countries will weigh return on investment against other objectives, from national economic growth to jobs and reducing imports.

“This year and next year is the tipping point for the petrochemical industry,” added Lee. “North Asian countries such as Japan, South Korea and Taiwan used to be the leader, but now China will continue to be a major force in the coming years.”

–With help from Sarah Chen, Rachel Graham, Serene Cheong, and Kevin Dharmawan.

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