Analysis of China's Petrochemical Industry amid High Oil Price
Click:0    DateTime:May.07,2022

Wang Jing, Gao Zhenyu and Fei Huawei

International oil prices have risen sharply since the beginning of December 2021. However, the price of China's petrochemical products didn’t rise accordingly due to the sluggish supply and demand. Oil-based olefin industry suffered serious losses and experienced a large-scale reduction that has not been seen for many years. In the long run, the demand for China's petrochemical products will be generally supported. Because on the one hand, the demand for new materials will maintain rapid growth. On the other hand, under the relevant sanctions, some international petrochemical enterprises could be forced to suspend or reduce production due to the surging cost in production and materials purchasing. It may lead to tighter supply in the international petrochemical product market, therefore export will have certain growth potential.

International oil price has risen sharply, but petrochemical product price was lagging behind

The price of China's 85 major petrochemical products increased by an average of only 7.4%, much lower than that of crude oil over the same period. In December 2021, international oil price began to rise. Till March 8, 2022, Brent crude oil futures reached a maximum of US$127.98/barrel, a cumulative increase of 86% from the beginning of December. According to China National Petroleum Corporation (CNPC) Economics & Technology Research Institute, from December 1, 2021 to March 22, 2022, among the 85 major domestic petrochemical products, there were 52 products going up, 29 falling down, and 4 being stable. The arithmetic mean increase was only 7.4%, much lower than the international oil price of 68% increase in the same period, as shown in Figure 1.

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Figure 1 Price changes of major petrochemical products in China from December 1, 2021 to March 22, 2022    (representative product quotations)

The price transmission this time is weaker than the general pattern and similar extremes in history. Based on the calculation on the correlation and sensitivity between major petrochemical products price and crude oil prices from 2006 to 2021, it shows that their correlation coefficients are all above 0.6. That is to say, for every US$1/barrel increase in oil price, LLDPE, PP, and PX will rise by RMB36/t, RMB55/t, RMB81/t respectively. Under the circumstances that starting level and increase rate are similar, the increases of naphtha, ethylene, polyolefins and PX are all below historical levels compared with the rise in oil prices, despite in 2007-2008 and 2010-2011 when oil price rose rapidly due to non-market fundamentals such as speculation and geopolitics.

High oil prices have significantly changed the competition among the raw materials of petroleum, coal and light hydrocarbon

The production capacity of basic petrochemical products continued to grow rapidly, but the proportion of oil-based products continued to decline. According to the projects under construction and planned, it is estimated that in 2022, China's ethylene and propylene production capacity will increase by 5.65 million t/a and 3.36 million t/a, and the total production capacity will reach 49.33 million t/a and 56.23 million t/a. The growth of production capacity will be higher than that of consumption, so China's self-sufficiency rate of bulk petrochemical products will continue to increase. Among the newly added capacity in 2022, petroleum, coal and light hydrocarbons will be 4 million t/a, 500 000 t/a and 4.51 million t/a respectively. By the end of the year, it is expected that the proportion of petroleum, coal and light hydrocarbons in the raw material of ethylene will reach 65%, 16% and 19% respectively, and in the propylene will reach 55%, 20% and 25% respectively, as shown in Figure 2.

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             Figure 2 Forecast on the proportion of each raw material in China's ethylene (left) and propylene (right)                    production capacity in 2022

Different raw materials have different price characteristics. Coal has maintain stable prices for a long time in history. Coal chemical industry owns greater cost advantage when the international oil price exceeds US$50/barrel. Light hydrocarbon mainly comes from gas associated fields in the United States and the Middle East. Ethane has maintained low price for a long time due to its single application, so it has relatively large profit margin when the oil price is US$30/barrel. Propane can be used as heating and fuel, so it will be greatly affected by natural gas price. Based on historical data, its theoretical profit is basically close to the oil. Starting from September 2021, the global power has been in tight supply, which led to a sharp increase in coal and propane prices, and in consequence, some petrochemical products reached record highs in October

Recently, petrochemical industry has suffered losses, coal chemical industry has recovered to profit, and ethane-to-ethylene profit has increased. Since December 2021, crude oil price has risen by 68%, the U.S ethane and imported propane prices have risen by 27%, at the same time, and China domestic coal price has fallen by 16%. Those fluctuations significantly changed the competitions among different kinds of polyolefin materials in domestic market. According to the average price since March, it is estimated that the profit of each raw material is as follows. The petroleum-based, coal-based and ethane-based of polyethylene (PE) had RMB1 330/t loss, RMB760/t profit, and RMB2 820/t profit respectively. The petroleum-based, coal-based and propane-based of PP had RMB580/t loss, RMB330/t profit and RMB1 420/t loss respectively. Based on the average price of LLDPE at RMB9 400/t and PP at RMB9 000/t since March, the break-even oil price of petroleum-based PE is about US$94/barrel, and the break-even oil price of petroleum-based PP is about US$103/barrel.

The polyolefin plant suffered a large scale reduction, so the market supply declined significantly. Shandong Shouguang Luqing Petrochemical Co., Ltd. and Sinopec Zhenhai Refining & Chemical Company put new polyolefin units on stream this year but the operating rates remained low. Recently, several enterprises reduced their operating rate of chemical plants including Sino-Korea Petrochemical, Zhenhai Refining & Chemical, Wanhua Chemical, Sinopec Zhejiang Petrochemical and others. It is estimated that the domestic PE production will drop by 150 000 tons in March. At the same time, the propane dehydrogenation (PDH) plant also had reduction so the polypropylene production may drop by 220 000 tons in March compared to the same period last year. In April, PE and PP will have new production capacity of 400 000 t/a and 300 000 t/a officially put into operation, but the operating rate will remain low. Enterprises operating at a loss, the reduction will continuously expand. It is expected that the plant maintenance of PE and PP (including the active reduction) in April will reach 340 000 t/a and 490 000 t/a, and the effective supply capacity will continue to decline by 40 000 t/a and 100 000 t/a compared with March.

In the medium term, under the influence of national regulation and control, domestic coal price is relatively controlled, and therefore coal chemical industry will maintain a certain cost competitiveness. Regional conflicts have intensified geopolitical risks. International oil prices are likely to remain high, and it is difficult to quickly fall below US$80/barrel. In addition, petrochemicals production capacity is still in expansion. In this case, China's relatively inefficient petrochemical production capacity will encounter greater pressure.

Weak demand in short term, focus on the timing of economic recovery and high-growth fields

Demand in short term is weak due to a variety of factors. Crude oil price has risen rapidly since December 2021. However, the overall macroeconomic demand was relatively weak due to factors such as the Spring Festival, the Winter Olympics, and the COVID-19 pandemic. The terminal demand for petrochemical products was sluggish, so downstream processing enterprises reduced production and purchase materials as needed. As a result, enterprises had low acceptance to the increasing raw material cost.

In 2022, the demand for petrochemical products will be generally supported. In response to the triple pressure on China's macro-economy, this year's government work report proposed to boost economic growth by appropriately increasing infrastructure and real estate investment, stimulating residents' consumption and by other means. The annual growth target is set around 5.5%, slightly higher than the 5.2% average growth in 2020 and 2021, which will provide a overall support for petrochemical downstream products. However, the high international oil price and the outbreak of the pandemic in many provinces have obviously restricted the growth of downstream demand. It is estimated that the domestic petrochemical product consumption in 2022 will be 185 million tons comprising the equivalent consumption of ethylene and propylene and apparent consumption of aromatic hydrocarbons, with an increase of 8.7% year-on-year, which is basically the same as the average growth rate in 2020-2021, but 2.8 percentage points lower than in 2019. Among them, the equivalent consumption of ethylene and propylene is expected to increase by 9.0% and 7.5% year-on-year, and the apparent consumption of aromatic hydrocarbons will increase by 8.5% year-on-year.

China’s new energy and other fields are developing rapidly, so there is a strong demand for new chemical materials. For example, China's photovoltaic installed capacity increased by 21% in 2021, and it is expected to increase by 26% in 2022. Together with photovoltaic modules exported to overseas markets, it is estimated that China's photovoltaic-grade EVA consumption will increase by 23% year-on-year in 2022.

Relevant sanctions will likely lead to tighter supply in the international petrochemicals market

The export arbitrage window for China’s petrochemical products has been opened gradually. In 2021, the overseas supply chain experienced a serious crisis and prices surged due to the impact of the pandemic and extreme weather, which brought opportunities for the export of China petrochemical products. The export volume of organic chemicals and synthetic materials has increased significantly by 30.1% and 68.1% year-on-year respectively.

The impact of regional situations on the petrochemical product market will gradually emerge. Russia and Ukraine already have small scale of international trade in petrochemical products so they have limited direct impact on the market. However, Europe is an important production place of petrochemical products, with petroleum-based ethylene production capacity of 25.3 million t/a, and pure benzene and PX production capacity of 12.68 million t/a. Judging from the proportion of petrochemical raw materials such as crude oil, naphtha and light hydrocarbons exported from Russia to Europe, 38% of the petrochemical production capacity will be effected in Europe. European refining plants and traders have started to avoid buying crude oil from Russian after the sanctions were imposed. In addition, the Asia-Pacific region is Russia's second largest oil export destination, and refining plants in the region also reduced their purchases of crude oil and naphtha from Russia. According to the production cycle of 1 to 2 months, there may be a certain supply gap in the market after April or May. Since March, the international polyethylene price has risen more quickly than the China domestic price. In addition, the polypropylene price in the United States has risen significantly, so the export arbitrage window for China has gradually opened. Figure 3 shows the international and China CIF prices of LLDPE and PP.

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                   Figure 3 The international and China CIF prices of LLDPE and PP since March, 2022                                               (representative products quotations)

       In 2021, the development of China's chemical industry was beyond expectations. The cumulative revenue and profit were RMB8.7 trillion and RMB793.22 billion, a year-on-year increase of 31.1% and 85.4%, both hitting record highs. At the beginning of 2022, the surging oil price, regional conflicts and pandemic situation have brought challenges to the smooth operation of China's petrochemical industry. It will still be an important issue for the sustainable development of China’s petrochemical industry to figure out how to continuously reduce costs and increase efficiency, and explore a differentiated, high-end and superior quality development path.