Coronavirus could cut Chinese base chemicals demand by 4 MMt, says IHS Markit

19:50 PM | February 6, 2020 | Clay Boswell

Economic disruption surrounding the Wuhan coronavirus outbreak will significantly complicate petrochemical markets, not only cutting into demand globally, but also tightening access in China to feedstock and slowing capital projects, says Dewey Johnson, vice president/base chemicals at IHS Markit. He estimates that each 1% decline in China's GDP growth this year will translate into about 2.5 million metric tons/year (MMt/y) of lost base chemicals demand.

Measures to contain the virus have brought large parts of China to a standstill, with quarantines forcing residents to stay home and many companies suspending operations until 10 February and beyond. Assuming the economy remains locked down through the end of February, IHS Markit expects GDP growth in mainland China to be 4.2%, down 1.6% from the original forecast of 5.8%. The result could be 4 MMt of lost base chemicals demand.

China has enormous influence over the global petrochemical market. Home to 33% of the world's 750 MMt/y of petrochemical production capacity, it also accounts for 37% of global demand and about half of annual demand growth.

On a net-equivalent basis, China imports over 60 MMt/y of base chemicals, IHS Markit estimates. Of that, about 24 MMt/y is ethylene, mainly as polyethylene (PE) and ethylene glycol (EG); 15 MMt/y is para-xylene or derivative purified terephthalic acid (PTA); 10 MMt/y is methanol; 10 MMt/y is propylene, mainly as polypropylene (PP); and 7 MMt/y is benzene or derivatives cumene, phenol, styrene, and various intermediates and plastics. Any reduction in imports will create a surplus in the rest of the world, putting prices under pressure.

Within China, the petrochemical industry will face an array of additional challenges, says Johnson. One is feedstock supply. With transportation in China severely curtailed, lower fuel demand will drive down crude oil refining rates, reducing the production of key petrochemical feedstock naphtha. Where will petrochemical producers obtain feedstock? One possibility would be to adjust refinery operations to produce a greater proportion of naphtha. Another would be in increase imports of naphtha and other feedstocks such as liquefied petroleum gases (LPGs) and methanol.

Another consideration is the potential mismatch between production and consumption at different points along the supply chain, which could create surges in inventory growth or depletion. A related issue is the potential for rebounding demand during the second half of 2020.

The coronavirus could also affect the pace of capital investment in China. "There's significant amount of capacity being added today in China," Johnson notes. "Labor may be a key bottleneck in this period, and the question is, how does that affect the [engineering, procurement, and construction] schedules and plant start-ups?"