By Ma Yufei, East China Branch of Sinopec Chemical Commercial Holding
Recently, domestic phenol prices have kept decreasing. However, capacity expansion of phenol doesn’t suspend though undergoing severe oversupply. By the end of 2025, China’s phenol capacity will be even more than 7 400 000 t/a. The competition is shifting from single product to industrial chains as the industry accelerates consolidation.
From June 13 to July 15, market prices of domestic phenol have unilaterally dropped for one month. In East China, spot price has decreased from RMB11 750/ton to RMB8 350/ton, with the biggest drop of more than 25% in recent two years, and even on July 13, it fell below the spot price of benzene and formed price inversion. Market price trend of benzene and phenol in East China in recent two years is shown in Pic 1.
Pic 1 Market price trend of benzene and phenol in East China in recent two Years
Localization develops rapidly, forming new competition
From 2017 to 2019, China’s phenol capacity didn’t have substantial change. As for phenol/acetone production, in 2020, phase 1 project of Zhejiang Petrochemical Group Co., Ltd. launched 650 000 tons, the phase 2 project of Lihuayi Co., Ltd. launched 350 000 tons, and Formosa Phenol (Ningbo) Co., Ltd. launched 150 000 tons. Above all, domestic phenol capacity had a significant growth. In 2022, the phenol produced domestically greeted capacity expansion, with three sets of equipment put into mass production, of which phase 2 project of Zhejiang Petrochemical Group Co., Ltd. launched 650 000 tons. In the fourth quarter, it is expected that two sets of 650 000 t/a phenol/acetone equipment from Jiangsu Ruiheng Co., Ltd. and Wanhua Chemical Group Co., Ltd. will carry out. By the end of 2022, China’s phenol capacity will reach 4 640 000 t/a, with a growth of 34.88%. The capacity and growth of China’s phenol in recent years are shown in Pic 2.
Pic 2 China’s phenol capacity and growth in recent years
In recent three years, the imports of phenol have dropped gradually due to mass production of domestic equipment. Pic 3 shows the monthly import volume of phenol in China in recent three years. At the same time, the integration of industrial chain has formed quickly. Till the end of 2022, more than 70% of phenol/acetone equipment will get support from at least one section of industrial chain. Market competition is developing rapidly from single product to industrial chain.
Pic 3 China’s phenol monthly imports from 2020 to 2022
Regional supply and demand differentiation
Judging from phenol capacity distribution, capacity in East China increases year by year, which is estimated to reach 2 820 000 t/a till the end of 2022, accounting for 61% of domestic market, 3 percentage points higher than that of 2020. The distribution changes of China’s phenol capacity are shown in Pic 4.
Pic 4 The distribution changes of China’s phenol capacity in recent years
In recent years, bisphenol A (BPA), the major downstream market of rapid expansion of phenol, has been dominantly launched in North China. Capacity of BPA in North China (including Shandong Province, the same below) is expected to arrive at 1 510 000 t/a, accounting for 36% of domestic market, 16 percentage points higher than that of 2020. The equivalent of phenol is 1 280 000 tons, but given that of phenol-formaldehyde resin and other downstream markets, North China faces tight supply and demand. Regional capacity changes of BPA in China are shown in Pic 5.
Pic 5 Changes in regional distribution of BPA production capacity in China in recent years
Oversupply reduces industry benefits
Chemical industry, faced with macroeconomic downturn all over the world, is tough to make profits due to high oil prices. With dual pressure of high cost and low demand, most of chemical products meet sharp decrease of profits and even the loss. Though in June the logistics gradually got back to normal, sluggish downstream demand and market emerged. With domestic outbreak of COVID-19 at times, oversupply phenol market is difficult to take the initiative under the established raw material market of phenol which is tight but strong.
In the middle of June, benzene’s prices experienced steep decline while phenol market prices dropped much faster than the former. During the second half of June, tropolone plants had deficit. In July, several domestic phenol/acetone plants actively reduced production to minimize losses as the cost increases. Meanwhile, BPA, whose profitability stood out in 2021, experienced constant profits decrease as the capacity expands dramatically. The profit changes of phenol/acetone-BPA industry are shown in Pic 6. In August, individual but non-integrated phenol/acetone equipment suspended operation to conduct maintenance under cost pressure.
Pic 6 The profit changes of phenol/acetone-BPA industrial chain
Change of factory marketing strategy and partial transfer of pricing power
In 2022, it is predicted that substantial increase of domestic supply will bring more intense competitions, and phenol production enterprises all increased contracted sale and direct selling to attain stable production and sales, and avoid spot sales risks caused by rapid price changes. However, it also resulted in some disadvantages: the quotation from plant sides will not have big impact on the market because lots of resources directly flow into terminal plants, which makes suppliers hard to make profits.
Traders actively take countermeasures in such bad environment including increasing initiative to create short-term interest, which makes traders get some pricing power, and market prices more volatile. To some extent, it conversely increases benefit risks of plants.
Despite oversupply, capacity expansion of phenol is still ongoing. In 2023, more than 1 000 000 tons of phenol will be launched, which are from Shenghong Petrochemical Co., Ltd., Qingdao Haiwan Chemical (Group) Co., Ltd., and Huayi Qinzhou Project. By the end of 2025, China’s phenol capacity will be more than 7 400 000 t/a. The chemical industry competition is quickly marching towards integration and diversity, which the phenol/acetone industry is accelerating to get involved in. New equipment introduction will inevitably clear out the uneconomic capacity, and the industry will reshape during the integration. Meanwhile, increasing self-sufficiency will certainly promote international operation, which in turn forces enterprises to seek breakthroughs from export business.
Therefore, in the short-term future, phenol market will inevitably go through difficult integration, which will be a big challenge for the risk tolerance, profits making and general planning of enterprises.