Chinese Plastic Excess Weakening Oil Growth Mechanism

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Workers produce plastic horns, also known as vuvuzelas, at a factory in Ningbo, Zhejiang province, China, Thursday, June 14, 2012.  (Nelson Ching/Bloomberg)

Workers produce plastic horns, also known as vuvuzelas, at a factory in Ningbo, Zhejiang province, China, Thursday, June 14, 2012. (Nelson Ching/Bloomberg)

By Elizabeth Rowe, Kevin Crowley

(Bloomberg) – The plastics industry, once touted as a major driver of global oil profits, has seen its margins plummet for years as China’s giant factories look set to pump a ton of production into the market. facing a slump in

Industry consultancy ICIS said construction of more than 20 petrochemical projects across China will be completed this year, producing raw materials used to make everything from plastic packaging to clothing and detergents.

Some of the output will still go to factories in China, the world’s largest consumer, but China’s slower-than-expected economic recovery and overinvestment have raised concerns about oversupply. As a result, earnings from petrochemicals such as ethylene and propylene are expected to shrink, continuing a slump from this year when profit margins in June were about 40% below 2019 levels.

China is keen to expand in this industry as domestic demand growth for plastics begins to outpace other petroleum-based products such as transportation and industrial fuels. The original idea was to move up the value chain to compensate for the decline in gasoline use as more people switched to electric vehicles, but with so many factories completed at once, oversupply and squeezed profits. Not only will it be triggered, but it will happen overnight. Increased market share and dominance.

Unable to produce more at home, China exports more cheap plastic to other regions, eroding market share of traditional manufacturing giants such as South Korea and Japan. This is bad news for the region’s major manufacturers such as Formosa Plastics, Lotte Chemicals and GS Caltex, which are currently competing with Chinese power.

“The market expected China’s recovery from the pandemic to be rapid and strong, but that has not been the case,” said Salmon Lee, global head of polyester at Wood Mackenzie. There is currently supply that even growth markets such as Vietnam, Turkey, South Africa and India may not be able to fully absorb.

In the case of polyester, for example, China’s glut has left producers with little or no profit, Li said.

Larry Tan, vice president of Asian chemistry consulting at S&P Global Commodities Insights in Singapore, said there could be a glut this year. S&P sees lower global margins until demand and capacity rebalance in 2025.

Nearly 60% of the roughly 50 million tonnes of new ethylene capacity scheduled to come online between 2020 and 2024 will come from China, Tan said. He points out that Japan’s increase during this period is equivalent to 400% of Japan’s current production capacity.

And China continues to pour more investment into these factories. Sinopec announced in May this year that it would invest 27.8 billion yuan (US$3.85 billion) in a new plant in Luoyang, which is scheduled to be completed in 2025, according to local media. Petrochemicals are also at the core of Saudi Arabia’s recent investment in Rongsheng Petrochemicals.

“China has an advanced petrochemical sector that has the advantages of a large and growing domestic market and potentially cost competitiveness,” said Michal Meydan, head of the China Energy Research Program at the Oxford Energy Institute. We have the advantage of a certain amount of export production,” he said.

“As we have seen with the investment in BASF and the recent Saudi Arabian investment in China, it is clear that while the country will grow as a competitor, it will also be an important market.”

But for the West, the problem is the impact of China’s expansion. China’s petrochemical production capacity will account for nearly a quarter of the world’s total by the end of this year, according to ICIS data. That’s up from five years ago when he accounted for just 14% of global manufacturing capacity. And at a time when countries are concerned about supply disruptions and industrial security, while China is focusing on other parts of its supply chain, it’s a pretty big deal.

“China can leverage its strengths as a world-class refiner to become the most important and competitive supplier of petrochemicals,” said John Driscoll, director of JTD Energy Services in Singapore. Stated.

“As more mature economies such as the United States, Europe, and Australia slash production without addressing the continued demand for these materials, the West believes that one day China will become the single largest producer of all plastics. You will awaken to be a provider of

Given these risks, countries such as India and Vietnam may choose to build their own production facilities on their shores, S&P’s Tan said, citing countries that could shift away from national economic growth to jobs and dependence. He argued that the return on investment would be weighed against other goals, such as reducing heat consumption. Imported goods.

“This year and next year will be a turning point for the petrochemical industry,” Lee added. “Once led by North Asian countries such as Japan, South Korea and Taiwan, now China will be the dominant force for years to come.”

© 2023 Bloomberg LP

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