Huge Pressure from Energy Supply and Overheated Investment    

-- analysis of China's Petrochemical and Chemical Industry    

By Feng Shiliang, CPCIA

The economic performance of China's petroleum and chemical industry is comprehensively decided by four major factors now: a. economy grows rapidly, boosting consumption demand; b. supply of energy and products consuming resources tends to be tighter; c. global crude oil price will continue to stay high, driving the production cost of its downstream products; d. the overly rapid increase of investment in fixed assets is difficult to control, so more and more products will face surplus production capacity.
     From the start of 2007, to solve the problems and contradictions that arose in the development of the economy, the central government has made a series of policies and taken measures to help the national economy remain stable and sustain its rapid development. Under the guidelines, the petroleum and chemical industry performed well with stable production increases, high sales/output ratio, hovering high prices, improved economic quality and surging profit. But, the investment put in new projects was still high, in particular, the majority of investment focused on new projects that consume energy and resources heavily, in spite of the big pressure to save energy and reduce pollution, which the whole industry increasingly confronts. Looking toward the remainder this year, good news can be expected with regard to the economic operation of the whole country, and demand from downstream will remain brisk, which will give firm support for the petroleum and chemical industry. It is projected that the GDP in the petroleum and chemical industry will achieve a growth of around 20% for the whole year, and the sales/production ratio will exceed 98%.

Stable Production in the first three quarters  

According to the latest data of CPCIA, the GDP (production value) of the petroleum and chemical industry was RMB3821.1 billion in the first three quarters, up 20.2% year on year. China totally processed 242.89 million tons of crude oil in the first nine months, a growth of 7%. The output of diesel was 91.75 million tons, surging by 6.1%, however, the supply of diesel is tight all over the country.
   Output of herbicide rocketed by 33.3%, making its share in pesticides increase again. The growth of ethylene output in the first three quarters descended to 14.7% from 27.1% of the first quarter and 18.6% of the first half year, due to the high crude oil price. Both methanol and benzene enjoyed a high growth of output, 38.2% and 30.3% respectively. Polymers productions remained double digit growths.
   
Brisk consumption and high prices

China is in a process of augmenting the ratio of industry and city, the rapid development of basic infrastructure, traffic facilities, energy supply, automobiles and construction sectors is certain to drive rapid growth of the demand for energy and raw materials, which in turn leading to continuous brisk demand for the petrochemical industrial chain. The sales/production rate was 98.3% in the first three quarters. Supported by high crude oil prices, energy costs and environment protection costs, prices of petroleum and chemical products have been hovering at high levels this year. Among 1148 products being traced, 663 kinds enjoyed a price increase in September, and 110 kinds remained unchanged.
   The price of sulfur averaged RMB2 000 per ton in September, 42.9% higher than that in the same period of 2006, RMB700 per ton than that in January 2007. Sulfuric acid price therefore moved on. Under the pressure of environmental protection, increased production costs helped the prices of yellow phosphorus and calcium carbide reach RMB1 880 per ton and RMB3 040 per ton, surging by 19.4% and 12.6%. Aromatics prices went down slightly because of the addition of new capacity. Prices of plastics showed slack while rubbers prices climbed.  
   
Exports rebounded again and investment continued to be overheated

Exports of those inorganic chemicals and other products that lost export rebates from July 1st were decreased dramatically in July and August, but rebounded in September. For instance, China exported 52.6 thousand tons of STPP in September, far higher than the 35.7 thousand tons of July, and close to the 55.7 thousand tons of June.
     In the first nine months, the total investment in fixed assets for the petroleum and chemical industry was RMB461.69 billion, up 35.2%. Pressure is big still.

Main Economic Indexes in the Petroleum and Chemical Industry
          from January to August 2007        billion RMB
Sector                                                                                     Sales revenue    Growth    Profit    Growth
Total of the industry
    3301.25    20.4%    355.26    18.8%
Crude oil and natural gas exploration
    522.56    2.4%    225.29    -16.2%
Crude oil processing
    963.26    13.7%    23.07    n.a.
Basic chemical raw materials manufacturing
    450.26    26.9%    28.10    133.3%
Chemical fertilizers manufacturing
    219.27    26.4%    13.97    30.8%
Chemical pesticides manufacturing
    60.61    27.1%    3.85    45.0%
Coatings, inks, pigments and similar products manufacturing
    153.31    29.5%    9.51    25.3%
Synthetic materials manufacturing
    294.56    37.2%    11.25    44.6%
Specialty chemicals manufacturing
    364.07    35.8%    23.94    39.4%
Rubber products manufacturing
    213.86    29.0%    10.81    59.7%
Others
    59.49    n.a.    5.47    n.a.
Source: CPCIA