In 2013, the Asian petrochemicals industry will be heavily influenced by both the performance of the Chinese market and the interrelated effects of the eurozone crisis on exports, which is contributing to the downturn in Chinese growth. Producers will therefore be looking to tap endogenous sources of growth, which in most cases will be difficult to find.
Despite the increase in capacity, the outlook for the Chinese petrochemicals industry in 2013 is clouded by oversupply in the real estate sector and a large inventory overhang in the manufacturing sector. On the upside, political uncertainty has abated as a result of the conclusion of the changeover in leadership at the head of the Chinese Communist Party and a clearer direction in terms of petrochemicals policy and industrial planning should emerge in coming months. The hope is that China's new political leaders will focus more on domestic consumption and less on investment in manufacturing and exports. As a proportion of GDP, private consumption was around 35% in 2012 ( compared to 70% in the US ) and the government may look to domestic markets for growth instead of continuing to build output for export. As such, there may be a drive towards increasing value - added rather than boosting the output of commodity chemicals. This would relieve the pressure on some low-value chemicals producers such as Thailand and India, but increase competition with more diversified petrochemicals industries such as those in Japan and South Korea.
A surge in Asian basic chemicals capacity in 2012-13 will be followed by another wave of expansion in 2016-17, largely led by China and India but also accompanied by significant additions from Malaysia (1.5mn tpa), Indonesia (1.4mn tpa) and Vietnam (1.4mn tpa). Singapore (with the construction of Shell's Bukom cracker and ExxonMobil's second cracker) and Thailand (focused on new complexes at Map Ta Phut) have already undertaken expansion that is unlikely to be matched over the medium-term. These markets are now seeing increased investment in downstream operations as they seek to add value.
|Ethylene Capacity Additions ('000 Tonnes)|
China And India Continue To Dominate
Already hosting the world's largest chemicals industry in terms of output value, China's latest five-year plan (2011-15) aims to encourage investment in further growth opportunities. Instead of focusing on high volume basic chemicals and polymers production, China is looking to boost its technological expertise in order to diversify, and aims to invest over 3% of sales revenue in R&D. It is also targeting 10% annual growth over the course of the five-year plan, consolidating the country's hold on the global market. As a result, Chinese specialty chemicals will grow faster than commodities, and consumer-related chemicals will grow rapidly, particularly with the government focusing on domestic consumption. Chinese ethylene capacity is expected to rise from an estimated 17.9mn tpa at end-2011 to over 31.7mn tpa by 2016. Of particular interest is the emerging coal-to-chemicals sector, which will utilise the country's massive coal resources and reduce its dependence on imported feedstock.
We expect a rationalisation of the Chinese petrochemicals industry over the medium term, which will have to address the problems of overstocking, lower-than-expected demand growth and a drastic increase in volumes from the Middle East, as well as new start-ups in China and Singapore. Over-expansion of polyvinyl chloride (PVC) production in China has led to a market imbalance. The PVC segment will be the target of rationalisation, with producers having slashed their operating rates in order to stem losses. This is despite regulatory changes, with energy efficiency requirements leading to a greater use of PVC in pipes, windows and doors.
India Has Significant Untapped Potential
China is expecting continued growth in polyethylene (PE) capacity in 2012-2013 with Daqing Petrochemical, Fushun Petrochemical and QiluPetrochemical adding around 1.7mn tpa of PE capacity over the period. With most new polyethylene terephthalate (PET) and polypropylene (PP) projects having come online in 2012, adding 1.7mn tpa and 900,000tpa respectively, BMI expects a slowdown in capacity growth in these segments.
While Shell has concentrated investment in China, Dow Chemical is turning its attention to India, which has greater untapped potential. Foreign companies have yet to take part in large-scale Indian projects, such as cracker development, due to the relatively small scale of operations. Nevertheless, the Indian government has placed petrochemicals at the heart of its development strategy, with the creation of a number of petrochemicals zones.
India is on course to become the third-largest consumer market for high-tech plastics (after the US and China) owing to the growth of the automotive industry, which is set to expand by more than 6% per annum. In the short term, the main engine of the economy - domestic demand - will be fuelled by rising private consumption and fixed investment, as well as the need to rebuild inventories, which should drive petrochemicals demand. However, projects are plagued by delays that are hiking up costs. Land acquisition disputes, concerns about financial viability, a lack of domestic resources and the opaque regulatory and legal systems are significant problems facing investors in the Indian petrochemicals industry.
South East Asia will become increasingly important to the regional petrochemicals industry - supported by strong regional economic growth, low manufacturing costs, investment in infrastructure and proximity to China and India. Singapore, Thailand and Malaysia have already witnessed significant growth in capacity and have highly integrated world-scale production facilities, fed by domestic refining operations.
While South East Asia does not offer the competitively priced feedstock enjoyed by Middle Eastern producers, it has a larger captive domestic market, and some countries have lower labour costs than China. In order to sustain production volumes in a competitive market, Malaysian producers will need to constrain feedstock costs. The prospects for the Malaysian petrochemicals industry depend on its ability to cultivate and maintain competitive advantages over competing countries. Vietnam has attracted interest, but progress has been slow to gather momentum. Indonesia is an increasingly attractive investment destination for petrochemicals producers due to its massive polymers deficit but there are feedstock constraints with regard to building large refineries, and current expansion plans - principally in PP and PE - are insufficient to keep pace with domestic demand.
The growth in demand for feedstock from China and India is proving a serious problem for petrochemicals industries in smaller emerging Asian economies. Rising feedstock prices are also depressing profit margins and damaging competitiveness.
A significant trend is the growth of condensate splitters, with South Korea, China and Singapore building distillation units that can process large volumes of condensate along with LNG for just one seventh of the price of a typical large refinery. By the time these facilities come online, condensate sales from top suppliers - such as Qatar, also the world's biggest LNG exporter - are slated to fall as the nation feeds local demand, which is expected to rise, with more splitters due to come online. This should enable Asia to address its shortage of naphtha, boosting the regional supply of feedstock for aromatics and propylene derivatives.