China and the world: Opportunities for growth

10:09 AM | December 2, 2019 | Francinia Protti-Alvarez

Over the last two decades, China has become the largest market for almost every chemical, with demand for chemicals growing six-fold, according to IHS Markit. To meet this demand growth, China has introduced a series of financial and environmental frameworks in recent years that are transforming the country's petrochemical landscape.

As China’s middle class and appetite for chemicals continue to grow, the pressure on already limited raw materials mounts. Leveraging raw material opportunities in North America would allow China’s private-sector producers to continue leading the country’s petrochemical growth and meet the growing domestic demand, provided trade disputes do not get in the way.

New environmental regulations aimed at curbing pollution are restricting the use of coal, which is being replaced with natural gas. However, China’s domestic natural gas production can only meet 61% of the country's needs. The resulting shortfall means natural gas primarily goes to power generation, heating, and fertilizer production. The natural-gas deficit is not the only hurdle for China to overcome, if it is to meet its petrochemical demand.

A drop in US oil exports to China–despite the absence of a tariff–could also exacerbate China’s 5-million metric tons/year light naphtha deficit. This deficit impacts most olefins, which are directly or indirectly dependent on refined product demand, which determines output of refinery byproducts or associated gas used as feedstock.

“There is room for US natural gas to meet at least some of the natural gas demand in China. Similarly, US naphtha imports could also contribute to meet the existing shortfall. There is much room for collaboration on energy and chemicals between the United States and China, but the trade dispute is a significant impediment,” says Mark Eramo, senior vice president/oil, midstream, downstream, chemical at IHS Markit.

Private investment is at the heart of growth in China’s petrochemical sector. Local private chemical producers are taking advantage of the opportunities deregulation presents. The country’s private refiners have spent heavily on building giant petrochemical complexes, and some have moved to backintegrate their production. The share of capacity held by private chemical companies has jumped from 17% in 2000 to 53% of China’s chemical capacity today, IHS Markit data show.

“China’s private chemical companies have taken over most of the growth share from state-owned companies. Of the 14 petrochemical projects currently under construction or planned in China, private Chinese companies are invested into six. Policy changes have paved the way for private investment...private companies are nimble and efficient [compared with state-owned enterprises], and the culture tends to be more entrepreneurial,” Eramo says.

Meanwhile, financial markets have reacted positively to the announced trade truce between the US and China. The agreement includes a freeze in current tariff levels, among other things. However, unlike prior agreements, there is no timetable and no deadlines–this is generally negative, according to IHS Markit.

“Damage from the existing tariffs—albeit small, so far—is hurting trade volumes everywhere and shaving a few tenths of a percentage point off growth. The trade truce is unlikely to reverse the damage done, however, if the agreement halts any further escalation, then the global growth outlook will likely not deteriorate further,” Eramo notes.

Learn more about leveraging growth opportunities between China and the world during the China Forum at the World Petrochemical Conference in New Orleans, Louisiana March 24-27, 2020.