Consumption of Propylene Oxide Increases Steadily

Accelerated capacity growth

The development of the propylene oxide (PO) sector in China is
affected by 3 factors including technical level, environmental
protection and raw material supply and some units can hardly make
full-load production. Since 2001, both the capacity and the
output have failed to increase greatly. In the meantime, however,
the demand of PO in downstream consumption sectors such as
polyurethane has maintained rapid growth. The supply deficit in
the domestic market has therefore been further widened.
   With the completion of the 250 thousand t/a unit in CNOOC and
Shell Petrochemicals Co., Ltd., the expansion unit (from 80
thousand t/a to 140 thousand t/a) in Tianjin Dagu Chemical
Industry Co., Ltd. and the 30 thousand t/a unit in Shandong
Dongda Chemical Industry Co., Ltd., the capacity of PO in China
already reached more than 900 thousand t/a at the end of 2006.
The completion of the 250 thousand t/a PO unit using ethyl
benzene co-oxidation process in CNOOC and Shell Petrochemicals
Co., Ltd. has broken the mode of purely relying on the
chlorohydrination process for the PO production and will play
a positive role in the improvement of PO production technologies
in China.
   CNOOC and Shell Petrochemicals Co., Ltd., Jinhua Chemical
(Group) Co., Ltd., Tianjin Dagu Chemical Industry Co., Ltd.,
Sinopec Shanghai Gaoqiao Petrochemical Co., Ltd. and Shan-dong
Binzhou Chemical Group Co., Ltd. hold important positions in the
PO market in China. Most major PO units in China produce
polyether at the same time. Only Shandong Binzhou Chemical Group
Co., Ltd. and Baling Petrochemical Co., Ltd. have no polyether
production.
   PO in China is mainly used to produce polyether polyol and
in turn to produce polyurethane. Since 2001, the rapid
development of the polyurethane industry has led to a rapid
consumption growth of PO. The apparent consumption of PO in China
was 654 thousand tons in 2005 and the average annual growth of
the apparent consumption was 15.6% from 2001 to 2005.
   With the completion of the 250 thousand t/a PO unit in CNOOC
and Shell Petrochemicals Co., Ltd., the apparent consumption of
PO in China has increased considerably in 2006 and is expected
to reach 800 thousand t/a.

Declining price in 2006

On the basis of rapid price rise in 2004, the price of PO in the
domestic market increased further in 2005 and hit the historical
high of RMB17 000 per ton in October 2005. Main reasons for the
price rise were as follows. The demand of polyether in China
increased remarkably in 2005, large polyether producers made
full-load or over-load production and the demand of PO was
stimulated. The overhaul in some PO producers aggravated the
market supply tension. The import amount also reduced compared
with 2004. For example, the amount imported from Japan reached
90 thousand tons in 2004 but was only around 50 thousand tons
in 2005. As NOC of Japan added a new 100 thousand t/a PG
(propylene glycol) unit in April 2004, it needed to use great
quantities of PO itself. The 50-day overhaul conducted by the
company for capacity expansion in the second half of 2005 also
resulted in the reduction of the export amount and stimulated
the drastic price rise of PO in China.
   There were quite a lot of PO construction and expansion units
in China in 2006. The newly added capacity in 2006 was
approximately 400 thousand t/a, much higher the growth of the
apparent consumption. The completion of the 250 thousand t/a PO
unit in CNOOC and Shell Petrochemicals Co., Ltd. and the high
price and supply shortage of TDI (toluene diisocynate) also
helped to cause a price reduction of PO in 2006.
   The PO market was relatively stable at the beginning of 2006.
Major PO suppliers increased their export amount afterwards and
downstream clients also started to build up their inventory
because of the approaching Spring Festival. The market resources
therefore became tense and the price rose. Due to the slack
polyether market in March and April 2006, the price of PO reduced.
Besides, the PO unit in CNOOC and Shell Petrochemicals Co., Ltd.
started production in March 2006 and the market resources
increased. The PO market price has always maintained stable with
a slight drop in the following months.
   The crude oil price rise in the international market led to
a price increase of propylene in the domestic market. The
production cost of PO therefore increased drastically. Major PO
suppliers were forced to increase their price offer, but the
price growth of PO was much lower than the price growth of
propylene. A supply shortage of TDI appeared afterwards and the
price once went to as high as RMB38 000 per ton. Major downstream
sponge producers had to greatly reduce their operating rate and
the demand of polyether was affected. With the price downturn
of polyether, the price of PO has dropped drastically from the
highest of RMB15 300 per ton in September 2006 to RMB12 800 per
ton today. The price of propylene and liquid chlorine is however
still maintained at a high level. The profit margin of the PO
production has therefore been seriously affected.

Market in 2007 will still not be optimistic

The PO market in China was already slack in 2006. Nevertheless,
quite a few construction and expansion projects will still be
launched in the next few years. The capacity of PO in China will
reach over 1.42 million t/a in 2009. A status of serious
oversupply will appear at that time.
   The market trend in East China and South China in 2007 will
mainly be determined by the capacity expansion of the PO unit
in Fujian Meizhouwan Chlor-Alkali Industry Co., Ltd. After the
expansion, the capacity of the PO unit in the company will reach
40 thousand t/a. As the capacity of polyether will also expand,
PO will still have to be purchased from outside sources. Due to
the large demand of PO, East China and North China have always
been the markets that major PO suppliers are competing for. Due
to the factor of geographical location, the market change in
Northeast China will not be very big and will mainly be
determined by the supply of PO from Jinhua Chemical (Group) Co.,
Ltd. and Shenyang Jinbilan Chemical Co., Ltd.
   The price trend of PO in 2007 will mainly be up to upstream
and downstream markets. As there will be considerable capacity
expansion, the supply of PO will not be a major market affecting
factor. Market trend of upstream propylene and downstream
polyether will constitute major factors for the PO market. Due
to fierce competition, the price of PO in 2007 will not likely
reach the high price level of RMB17 000 per ton as was seen in
2005.

Table 1  Major PO Producers in China in 2006
(thousand t/a)
Producer                                                                                  
Capacity
CNOOC and Shell Petrochemicals Co.    250
Jinhua Chemical (Group) Co.    120