Key Factors for Development of China's Petrochemical Industry

  1   Worldwide Market Volume and Development Trends of the
Petrochemical Industry

(1) Periodicity and Fluctuation

The petrochemical industry has a typical periodicity that is
shaped primarily by supply and demand on one hand and on the other
hand by newly added capacity being put into production,
operating rate and other uncertainty factors. It generally goes
through a cycle every 7-9 years, from peak to trough and then
back to the top. Product price, gross production profit and
operating rate are the major signals of cycle changes.
   Twenty years ago, the first peak appeared around 1979, the
second appeared around 1988, the third appeared around 1995, the
fourth started in 2004 and is in high-end level presently.
According to the prediction of CMAI, the EBIT of the olefins and
polyolefins production industry worldwide would reach peak
value in 2006, then enter a descending slope from 2007, reaching
the bottom in 2010, and climbing back to reach another peak value
again in 2014. Wang Jiming, previous president of Sinopec Group,
expressed agreement with this projection. He predicted that
2009-2010 would be a low point for the global petrochemical
industry, when he was interviewed for a Chinese newspaper in
early April 2007.
   Price fluctuation in the cycle of 2006-2014 is going to be
smoother than in the previous cycle, because the petrochemical
industry has now entered maturity with a constant adequate
supply of petrochemical products. And the demand for energy
worldwide in the future will keep growing rapidly, while
shortage of energy also decides that the energy price will not
decline, in particular, the crude oil prices cannot reach the
low level of the several previous cycles. In support of the
foregoing claims, the prices of petrochemical products are
projected never to be as low as before. Mergers among
petrochemical companies promote more centralized and more
professional production and sales of petrochemicals worldwide,
which easily results in rational distribution of investments and
may, to a certain extent, prevent any significant surplus of
production capacity in some sectors.

(2) Global trade and integration of global markets

World trade of petrochemical products is very active because of
regional imbalances between supply and demand. During 2007-2010,
along with the shift of the global petrochemical industry toward
the Middle East and Asia Pacific areas, the flow of world
petrochemical trade will change dramatically. In the coming four
years, demand for petrochemical products in North America will
be stable, with fewer newly built units. In 2010, the export
volume of petrochemical product from North American area will
reduce to 1.5 million tons, while the import volume into Western
Europe will increase to around 4 million tons. Demand of Asia
will continue to increase, with import volume potentially
reaching 17 million tons. The Middle East will become the largest
exporting region of petrochemical products at that time. Wang
Jiming said that the expanded capacity of refining and ethylene
in the Middle East will have a very big impact on China's
petrochemical industry. While it is true that China is rapidly
expanding refining capacity and ethylene production, the Middle
East has an obvious advantage in cost.

(3) Large scale for production units becomes popular

The larger and larger scale of production units is one of the
key measures for reducing the cost of petrochemical industry.
Taking the ethylene production cost of a 750 thousand t/a unit
as a reference, if the capacity is reduced to 500 thousand t/a,
the cost will increase 4%-9%; if capacity drops to 250 thousand
t/a, the cost will increase 14%-33%. With regard to investment,
if the scale of an ethylene unit is increased from 250 thousand
t/a to 500 thousand t/a, the investment only increases 74%; if
the scale increases from 250 thousand t/a to 750 thousand t/a,
the investment will increase 146%. The scale of current ethylene
units is usually 600 thousand t/a and the average scale of
ethylene units constructed after 2007 will increase to 1.2-1.5
million t/a.
   The amplifying scales of petrochemical units benefits from
the enhanced design and manufacturing abilities of super large
equipment, for instance, the maximum production capacity of a
single cracker today has reached 180 thousand t/a. The
improvement of compressor designs manufacturing techniques has
solved the bottle-neck problems on enlargement of ethylene units.
In the downstream, capacities of polyethylene resin extruding
machine and mixing equipment have reached 520 thousand t/a.

(4) Integration of refining and chemicals

Integration of refining and chemicals can ameliorate the
operation of refineries, can also improve operation of
petrochemical units, reduce cost and enhance economic
performance overall. Integration of refining and chemicals can
transform over 25% of input material of refineries into
petrochemical products of higher value, and can raise the
combined rate of return by 2% - 5%.

(5) Environmental stewardship

Sustainable development is the common and pressing topic of the
global petrochemical industry in the 21st century. Every nation
is requiring petrochemical enterprises to reduce polluting
discharges during production processes and is carrying out
research and development on substitute products. Many
petrochemical companies are commencing ‘green’ movements,
affecting raw materials, reaction processes, catalysts,
solvents and products. Shell Group has already infused
sustainable development ideas into its operating concept. While
Dupont has put forwarded the slogan of ‘zero’ influence on the
environment. Bayer has put forwarded the product concept of
integrating ecology and economy.
   This year, EU will implement the REACH regulation, involving
more than 10 thousand chemicals that have rather big influences
on the environment and safety, with implications for the
protection of human health, environmental safety and
sustainable development.


  2   China Has Become the Export Target of Surrounding
Countries' Petrochemical Industry

The world's large petrochemical companies take export-oriented
operation as an important component of their strategies. Since
the beginning of this year, aiming at the good opportunity of
rapid development of the petrochemical industry in Asia and the
Middle East, they have increased investment one after another,
within which China strategy has drawn special attention. The
booming of China's petrochemical industry has absorbed
investments from many top foreign companies. Presently ethylene
production capacity of 3.1 million t/a is under construction in
China, in the way of joint ventures with China by large companies
including BP, ExxonMobile, BASF and Shell. Many of the countries
(regions) surrounding China are paying more attention to
Mainland China as their exporting target market.

(1) Japan, Korea and Taiwan of China

Japan, Korea and Taiwan province have big influences on the
petrochemical industry of Mainland China. Their petrochemical
industry has developed into an export orientation, with export
of five major general purpose synthetic resins accounting for
over 50% of their total production, and the target markets are
eastern China and southern China. Accordi