Analysis of China's Polyolefins Market in 2014 and Prospects in 2015

By Yang Guiying, the Economics and Development Research Institute of Sinopec Group

China’s polyolefins market in 2014

1. Production

In 2014, China’s polyolefins (including polyethylene (PE) and polypropylene (PP)) industry expanded rapidly. The capacity to make polyolefins increased drastically in recent months with the startup of an ethylene unit of PetroChina in Chengdu as well as coal-to-olefin (CTO) units of both Zhongmei Yulin Energy Chemical Co., Ltd of Shaanxi Yanchang Petroleum (Group) Co., Ltd and Shaanxi Yulin Energy Chemical Co., Ltd of China National Coal Group. By the end of 2014, domestic polyolefin capacity had reached 33.75 million t/a. Output was 26.85 million tons in 2014, up 12.5% year-on-year, and national self-sufficiency with regard to polyolefins increased to 66%. The diversification of raw material sources has become an important trend for the development of the polyolefins industry, and with the startup of four CTO units in 2014, the proportion of polyolefins capacity using non-naphtha route increased to 35%.
(1) PE
By the end of 2014, China had more than 20 PE producers, with a combined capacity of 14.81 million t/a, up 2.1 million t/a year-on-year. In those plants, the capacity to make low density PE (LDPE), high density PE (HDPE), and linear low density PE (LLDPE, including full density PE) was 1.89 million t/a, 5.85 million t/a and 7.07 million t/a, respectively. In 2014, China’s output of PE reached 12.8 million tons, up 12.8% year-on-year, and domestic PE output was mainly produced by Sinopec Group and CNPC, accounting for 55% and 33% of the national total, respectively.
The startup of four CTO units in Zhongmei Yulin Energy Chemical Co., Ltd of Shaanxi Yanchang Petroleum (Group) Co., Ltd, Shaanxi Yulin Energy Chemical Co., Ltd of China National Coal Group, Ningxia Baofeng Energy Group Co., Ltd and Pucheng Clean Energy Chemical Co., Ltd in 2014 greatly increased the proportion of PE capacity using the CTO route, rising from 2.9% in 2010 to 12.2% in 2014. The new CTO units were put into operation in the second half 2014, the released capacity was limited, so the proportion of the year’s PE output from the CTO route accounted for only 4% of the total, much lower than the capacity proportion.
(2) PP
By the end of 2014, China had around one hundred PP producers with a total capacity of 18.94 million t/a, up 3.55 million t/a year-on-year, and output reached 14.0 million tons, a year-on-year growth of 10.7%. China’s PP output was mainly produced in Sinopec Group and CNPC, accounting for around 45% and 22% of the national total, respectively.
In recent years, with the startup of PP units in China by foreign enterprises and other domestic enterprises, the proportion of PP output contributed by Sinopec Group and CNPC has reduced constantly from 87% in 2005 to 67% in 2014.
New units that went on stream in 2014 mainly employ the CTO process. Other new units use the fluid catalytic cracking (FCC) or propane dehydrogenation (PDH). The proportion of PP capacity using non-naphtha routes increased from 39% in 2010 to 52%.

2. Consumption

In 2014, China’s apparent consumption of polyolefins was around 40.5 million tons, up 8.4% year-on-year, basically the same growth rate as in 2013. Of that, the apparent consumption of PE and PP was 21.7 million tons and 18.8 million tons, respectively, up 9.2% and 8.1%. The main reasons for the rapid growth of consumption in 2014 are as follows:
(1)Stable growth of domestic consumption
In 2014, China’s total retail sales of consumer goods reached RMB26.2 trillion, up 10.9% year-on-year, automobile output was 23.895 million vehicles, a year-on-year growth of 7.1%, air conditioner output reached 157.169 million, up 11.5% year-on-year, the output of color TVs was 155.42 million, a year-on-year rise of 6.2%, and the output of refrigerators was 93.371 million, down 1.0% year-on-year. Output of plastic products reached 73.878 million tons, up 7.4% year-on-year. All this consumption growth downstream promoted the demand for polyolefins.
(2) Rapid development of electronic commerce
In recent years, China’s trade via electronic commerce has increased explosively. In 2013, the business volume of domestic express delivery enterprises reached 9.19 billion pieces, being 1.2 times the total business volume during 2006-2010. In 2014, the business volume drastically rose to 13.96 billion pieces, up 51.9% year-on-year. The rapid development of the express delivery sector promoted increased consumption of plastic packaging film.
(3) Growing output of packaging related products
The output of commodities that are closely related with polyolefin packaging bags, packaging containers and packaging film has increased stably. In 2014, China’s output of cement, plastics in primary forms, synthetic detergent and chemical pesticide technical was 2.48 billion tons, 69.507 million tons, 12.289 million tons and 3.744 million tons, respectively, year-on-year growth of 1.8%, 10.3%, 10.8% and 1.4%.
(4) Stable increase of exports
China’s import and export trade was active in 2014, and the export of plastic products that are directly related with polyolefins also maintained stable growth. In 2014, China’s export volume of plastic products reached 13.857 million tons, up 6.7% year-on-year, and the export growth promoted the growth of polyolefins consumption.

3. Import

In 2014, China imported 14.14 million tons of polyolefins, up 2.2% year-on-year, of which the import volumes of PE and PP was 9.11 million tons and 5.03 million tons, respectively, a year-on-year growth of 3.3% and 0.3%. China’s import of polyolefins in 2014 had the following characteristics:
(1) Drastic growth of import volume during January-February
During the first two months of 2014, China imported 1.73 million tons of PE and 960 kt of PP, up 42.6% and 14.6%, respectively. A significant widening of the price difference between the domestic market and international market by the end of 2013 was the main reason for the drastic growth of imports. Secondly, the global supply was more abundant, and the Middle East, with its cost advantage, and Southeast Asian Nations (ASEAN), with their preferential tariff, increased their exports to China.
(2) Import sources were mainly neighboring countries and regions
In 2014, China imported around 6.71 million tons of polyolefins from the neighboring countries and regions, accounting for 47.5% of the total import volume, of which the volumes of PE and PP were 3.38 million tons and 3.33 million tons, respectively, accounting for 37.1% and 66.2%.
A new polyolefins unit of Singapore ExxonMobil Corporation was put into operation. Due output exceeding consumption there, the polyolefin products of Singapore are mainly for export. At the same time, benefiting from the preferential tariff policies in the China-ASEAN Free Trade Area, China’s import of polyolefins from Singapore constantly rose to 1.61 million tons, and the proportion of total polyolefin imports that came from Singapore was around 2.3 percentage points higher than that in 2013.
(3) The Middle East has become China’s second largest source of polyolefins
The Middle East, with cheap resources, has vigorously developed the polyolefins industry there: its production scale has expanded especially rapidly, its products have competitive prices, and its exports to China have increased in recent years. In 2014, China imported 5.86 million tons of polyolefins from the Middle East, accounting for 41.1% of the total, of which the import volume of PE was 4.7 million tons, accounting for 51.6% of the PE total, and the proportion of total imports that came from the Middle East was 1 percentage point higher than in 2013. The import volume of PP from the Middle East was 1.16 million tons, accounting for 23.1%, and the proportion of total imports was 0.6 percentage points lower than in 2013.
(4) Proportion of imports from the United States declined
In 2014, China’s import volume from the United States totaled around 400 kt, down 6.3% year-on-year, and proportion of imports that came from the United States was 0.3 percentage points lower than in 2013. In the United States, the development of shale gas technology will promote the development of ethylene chain products. It is expected that the newly added capacity will be released around 2017. The proportion of imported ethylene chain products coming from the United States will probably increase at that time.
(5) Major importing regions
In 2014, China’s main regions importing polyolefin resin were in Guangdong province, Shanghai, Zhejiang province, Shandong province and Jiangsu province – their respective import volumes of polyolefin resin all exceeded 1.0 million tons, and their combined import volume accounted for 80% of the national total. A big economic and coastal province, Guangdong has an advanced household appliance and plastic processing industry, and its import volume of polyolefins has ranked the first for many years. In 2014, Guangdong imported 3.63 million tons of polyolefins, and still ranked first, but the proportion of imports going to Guangdong was 25.7%, down 1.1% year-on-year.
As a big plastic processing province, Zhejiang’s volume of imported polyolefins rose to 2.25 million tons in 2014, ranking second, and the proportion of imports going to Zhejiang declined from 16.9% in 2013 to 15.9% in 2014. As a coastal province, Shandong’s plastic processing industry has developed rapidly in recent years, and its import of polyolefins has become increasingly active. In 2014, Shandong’s import volume of polyolefins reached 2.14 million tons, and the proportion of imports going to Shandong was 15.1%, a year-on-year growth of 1.4 percentage points.
(6) Import prices rebounded slightly
In 2014, the total value of China’s polyolefin imports was US$22.5 billion, and the average import price was US$1 592 per ton, up 4.9% year-on-year.

4. Analysis of the price

In the first quarter of 2014, affected by the increase of imported goods, the price of polyolefin fell slightly. In the second quarter, agricultural film processing entered into the peak season, and at the same time, the imported resources were also constantly consumed, so the price of polyolefins climbed slightly. In the second half of 2014, affected by the drastic price slide of crude oil prices, the price of polyolefins was reduced drastically.
In 2014, Ningmei second phase coal-to-propylene (MTP) unit and methanol-to-olefin (MTO) units of Zhongmei Yulin Energy Chemical Co., Ltd of Shaanxi Yanchang Petroleum (Group) Co., Ltd and Shaanxi Yulin Energy Chemical Co., Ltd of China National Coal Group were put into operation, aggravating the competition of LLDPE and PP homopolymers and causing a differentiation of polyolefin prices to a certain extent. The average annual price of LDPE, LLDPE and PP homopolymers decreased slightly, while the price of HDPE and PP copolymers rose slightly. For example, the average annual prices of LDPE for film materials and LLDPE for film materials were RMB12 157/t and RMB11 282/t, respectively, down 0.2% and 0.2% year-on-year, the average annual price of HDPE for drawing materials reached RMB12 122/t, up 2.5% year-on-year, the average annual price of PP homopolymers was RMB11 029/t, a year-on-year decrease of 1.1%, and the average annual price of PP copolymers reached RMB11 632/t, up 1.7% year-on-year.

Projection for China’s polyolefins market in 2015

1. Projection of supply and demand

In 2015, China’s adjustments of economic structure will continue, GDP growth in China will slow down from 7.4% in 2014 to around 7.1%, and the slowdown will affect demand.
(1) Projection of supply
In 2015, China’s capacity to make polyolefins, especially PP, will still expand significantly. The newly added domestic polyolefins capacity will exceed 5.0 million t/a in 2015, and will mainly consist of CTO units in western China, MTO units using imported methanol as raw material and PDH units in eastern China.
The new polyolefins projects in the west include a 160 kt/a PP project of Qinghai Salt Lake Industry Group Co., Ltd, a 300 kt/a LLDPE and 300 kt/a PP project of Mengda New Energy Chemical Co., Ltd of China National Coal Group, a 300 kt/a LLDPE and 300 kt/a PP project of Jiutai Energy Co., Ltd, and a 300 kt/a LLDPE and 300 kt/a PP project of Shenhua Group in Shaanxi province. Among these, the new units of Qinghai Salt Lake Industry Group Co., Ltd and Mengda New Energy Chemical Co., Ltd of China National Coal Group are expected to start up in the first half of 2015, and the new units of Jiutai Energy Co., Ltd and Shenhua Shaanxi will be put into operation in the second half.
The new polyolefins projects in the east include Zhejiang Xingxing New Energy Technology Co., Ltd’s MTO project, which can produce LLDPE and PP at 300 kt/a and 390 kt/a, respectively, and will be put into operation in the first half of 2015, a 200 kt/a MTP project of Fude Energy Co., Ltd, the MTO project of Jiangsu Sailboat Petrochemical Co., Ltd, a PDH project of Fujian Zhongjing Petrochemical Co., Ltd with a capacity for PP of 350 kt/a, and a PDH project of Zhongjiang Petrochemical Co., Ltd with a capacity for PP of 350 kt/a. It is expected that the units mentioned above will be put into production in the second half of 2015.
There will be many new projects in 2015, and considering that the 600 kt/a MTO unit of Pucheng Clean Energy Chemical Co., Ltd and the 600 kt/a MTO unit of Ningxia Baofeng Clean Energy Co., Ltd started up in succession in the fourth quarter of 2014, and that 1.2 million t/a polyolefins capacity will be released in 2015, China’s output of polyolefins will still increase significantly and reach 30.50 million tons in 2015, up 13.5% year-on-year. Within that, the output of PE and PP will reach 14.1 million tons and 16.4 million tons, respectively, up 9.9% and 16.9% year-on-year.
(2) Projection of demand
In 2015, the global economic development driven by the economy of the United States will help to promote the growth of polyolefins demand, and considering that China’s economy is in a period of structural adjustment with GDP growth reduced slightly, it is expected that the growth of demand for polyolefins will be slower than in 2014.
The packaging industry is the largest application sector for polyolefins. It mainly includes PE packaging film, biaxially oriented polypropylene (BOPP) film, woven products, and small, medium and large hollow containers. With the improvement of people's the standard of living and the changes in life styles, the greater use of small packaging for grain and food has increased the demand for packaging materials. The small packaging of products is a powerful factor supporting the growth of demand for packaging materials.
The application of agricultural films is an effective means to increase the output of crops, and the annual growth of agricultural film consumption has hovered around 5.6%. The manufacture of agricultural films mainly uses products like LDPE, LLDPE and ethylene-vinyl acetate copolymer (EVA), and the growth of demand for synthetic resins among the makers of agricultural films will remain around 5%.
Due to their advantages of light weight, excellent plasticity and corrosion resistance, plastics have been applied in the auto industry for 50 years, and the consumption of plastic automobile parts has increased year-on-year. At present, China’s consumption of plastics is 80-100kg per vehicle in economy cars, 40-50kg per vehicle in light and medium duty trucks, and around 80kg per vehicle in heavy duty trucks. In 2014, China’s output of automobiles reached 23.895 million vehicles, a year-on-year growth of 7.1%, and the growth was 11.3 percentage points slower than in 2013.
It is expected that by 2015, China’s demand for polyolefins will increase to over 43.0 million tons, of which the demand for PE and PP will climb to 22.9 million tons and 20.1 million tons, respectively, up around 5.6% and 6.7% year-on-year.

2. Projection of price and gross margin

In 2015, the price of crude oil in the international market still has a long way to fall, and it is expected that the average annual price of Brent crude oil will be around 50% lower than in 2014. According to the cost calculation, it is expected that the prices of ethylene and propylene using naphtha as raw material in the Northeast Asia regions will be US$800-860/t and US$670-730/t, respectively, down more than 40% from last year. Six new CTO units were put into operation in China in the second half of 2014, making the year’s newly added polyolefins capacity 3.7 million t/a. In 2015, China’s surge of polyolefins capacity expansion will grow even more intense – the newly added capacity is expected to be 5.41 million t/a and mainly consist of units using low cost processes, pulling polyolefins prices downward.
Considering the price trend of crude oil, the development trends of the domestic economy and the international economy, and the supply and demand for polyolefins in China, it is expected that by 2015, the domestic price of polyolefin will hover at a low level and probably increase slightly in the second half. The average annual price of polyolefins will remain at RMB8 500-9 500/t, down more than 20% from last year.
What about gross margin and the competitiveness of products made by different processes? The global supply, especially of PP, is more abundant, and demand is relatively weak. Due to the drastic price drop of crude oil, the competitiveness of polyolefin products using naphtha as raw material will improve considerably, and the gross margin of polyolefins that is calculated on the basis of naphtha will generally remain at last year's level.
To sum up, it is expected that by 2015, the price of polyolefins will first decrease and then rebound, the average annual price of polyolefins will drop over 20% from 2014, and the gross margin of polyolefins will generally remain at last year's level or decrease slightly. The drastic price drop of crude oil has weakened the competitiveness of the MTO units using imported methanol as raw material and influenced the startup date and operation of new units using non-naphtha routes. However, the price of crude oil may not remain at the low level of US$50 per barrel in the long term, so seeking the diversification of raw materials and improving the competitiveness of products will still be the development trend in the future.