How petrochemical investment could head East

The US-China trade war is expected to hit polyethylene exports to China just as new U.S. capacity is starting up. Demand in other regions will help for a while, but a big wave of new investment in the East comes by the middle of the next decade.

The U.S. will add 6.5 million tonnes/year of polyethylene capacity through 2019 or roughly 39% of US capacity. Image: Dow

The U.S. is expected to be overrun with polyethylene just when the US-China tariffs hit.

Less capacity additions elsewhere in China and the Middle East through 2020 will help the U.S. scenario for a little while. But a big wave of new investment in China, the Middle East and India comes around 2025.

First, nine new crackers are expected to come online in the U.S. by 2020 representing 10.7 million tonnes/year of new ethylene capacity. 9.2 million tonnes of that will be online by the end of 2019 in the U.S. Gulf.

An additional 1.4 million tonnes of ethylene is coming online because of cracker expansions for a total of 9.2 million tonnes of additional ethylene capacity in the U.S Gulf or 35% of existing US capacity by 2019, according to ICIS.

Most of the crackers being built are ‘cracker plus’ projects and the plus is usually a polyethylene plant.

The U.S. will add 6.5 million tonnes/year of polyethylene capacity through 2019 or roughly 39% of US capacity, based on ICIS data.

That number nearly doubles by 2022 with 12.1 million tonnes of capacity added assuming plants are built. This is 74% of total US capacity, according to ICIS.

“Of the new plants coming online, polyethylene is mostly for export. The U.S. polyethylene market is well supplied, and the market is only growing at U.S. GDP levels,” Joseph Chang, Global Editor for ICIS Chemical Business said.

Image and Data: ICIS 

The top export destinations for the US are Canada, Mexico and China. 

China expansions

At the same time the added capacity floods the US markets, China will have limited new capacity come online before 2020.

“For many years, many in the industry had a fear that China would flood the market with cheap capacity. This is not as likely anymore due to China’s crackdown on pollution. The pollution changes are a game changer for the industry,” Chang said.

“China’s coal to olefins (CTO) and methanol to olefins (MTO) polyethylene capacity are not as big a factor as previously feared because of the environmental factors and high investment costs,” Chang added.

In April 2017, China began air pollution inspections in Beijing, Tianjin and 26 other cities in the Northeast, a result of their ‘2+26 Plan.’

Stringent environmental regulations have shut down chemical plants – many permanently.

Chemical markets have tightened. Only larger, well-funded players can compete. As a result, it is now unlikely there will be a flood of cheap capacity in China.

Just 1.7 m tonnes of new polyethylene capacity is expected between 2018 and 2020, plus 2.5 m tonnes from naphtha crackers through 2020 in China, according to ICIS.

China may see another 2.1 m tonnes of CTO or MTO capacity come online between 2021 and 2024, but the next big wave will not take place until 2025, according to ICIS.

Some of that new capacity coming on in China later in the 2020s could be from foreign owned companies as the tariff war pressures new laws into place.

Foreign business in China

The Chinese government has been facing increased pressure over the demands it makes on foreign firms seeking to gain access to the Chinese market. The Trump administration is pointing to unfair practices by Beijing as some of the reasons for the tariffs.

A downstream example recently is with Tesla. China has put an import tariff of 40% on Tesla vehicles compared with an import tariff of 15% for other types of vehicles.

Tesla said it costs 55% to 60% more to make its vehicles than "the exact same car" made by Chinese producers. The market in China is "by far the largest" in the world for electric vehicles, Tesla said.

Tesla said it is responding to the heightening tensions and increasing costs by "accelerating construction of our Shanghai factory," which the company announced in July.

That announcement came days after Tesla said it was raising prices on its vehicles by 20% in China to respond to the first round of tariffs.

The Shanghai factory is "roughly" two years from producing vehicles and about five years from pumping out "around 500,000 vehicles per year," Tesla said.

One consequence of the tariffs could be that China attracts more foreign investment.

Greater access to chemical investment

China is now allowing greater access to its chemicals market to feed plastics, coatings and adhesives as witnessed by two massive investment announcements by companies not based in China.

ExxonMobil Corp signed a deal in September to build a petrochemical complex and liquefied natural gas (LNG) terminal in southern China.

The deal would include an integrated cracker complex in Guangdong province, a 1.2 million tonne/year flexible feed cracker, two performance polyethylene lines, two performance polypropylene lines. Start-up is targeted for 2023.

Exxon would be one of only a few international oil majors to invest in LNG infrastructure in China.

Exxon's plan comes after a similar agreement announced in July by BASF to build a $10 billion plant, also in Guangdong.
BASF intends to build a world-class Verbund site in South China to serve fast-growing customer industries in the region.

The parameters are that it is 100% BASF owned and operated. A potential investment of up to $10 billion until around 2030 with the investment to evolve in phases.

Startup of first plants would be by 2026 at the latest. The plant would be the most advanced Verbund site with smart manufacturing, environment, health and safety concept according to BASF’s global standards.

Local laws and regulations would be applied. The next step for BASF is a pre-feasibility study.

The rise of big national oil is coming in the Middle East in 2025 as well, Chang said.

“The oil companies recognize that demand for oil for fuel is depleting as with the rise of electric cars, they are looking to invest in using their crude for petrochemicals,” Chang said.

“They are not going to sit by and let their oil investments fall. The Middle East will wake up in 2025.”

By Heather Doyle