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Sharp decline in 2008 profits in petrochemical industry in China

Sharp decline in 2008 profits in petrochemical industry in China

15-Jul-09
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Sharp Decline In 2008 Profits In Petrochemical Industry In China

Sharp decline in 2008 profits in petrochemical industry in China

 

Massive dips in margins and fuel prices have led to a huge decline in net profits in China's petrochemical industry. In the first 7 months of 2008, petrochemical production in China rose 32.4% and exports increased by 23.5%. Petrochemicals companies were unable to pass on rising raw material prices to customers due to price controls, and insufficient level of state subsidy to cover losses. High inventory, aggressive price competition and the deteriorating global economy led to weaker profits in Q3-08. The slump in prices is related to higher working capital costs. The slowdown in West has caused serious financial problems to the producers in Shanghai and Guangdong provinces as they rely on exports for more than 50% of their sales. Affected by slow moving exports and reduce liquidity, smaller polyolefin compounders were unable to borrow to purchase PE and PP feedstocks and are facing bankruptcy. The surge in crude during H1 was followed by the collapse in price of oil and the demand for chemicals in H2. PetroChina posted a 22% fall in net profit to CNY114.43 bln on an increased domestic windfall tax on crude oil, the cap on domestic fuel prices and the economic crisis. Shanghai Chlor-Alkali Chemical saw net profit tumble by 80.81% to CNY10.8 mln due to rising feedstock costs in H1, followed by the H2 collapse in polyvinyl chloride (PVC) and chlorine prices. Sinopec expects over 50% rise in net profit from the CNY6.7 bln recorded in the Q1-08 as a result of its refining operations returning to profitability. The company incurred a huge loss in chemicals between August and December 2008, compared with a profit for the first 7 months of the year. However, 2009 ushers some good news as d emand is estimated to be better than in H2-08 due to cheaper feedstock, improved domestic demand and a boost to the economy due to Government spending as announced in the stimulus package of March. The industry is estimated to post earnings and turnover improvements in 2009, as per a report by ICIS. However, it is estimated that growth is unlikely to recover to 2007 levels. While month-on-month performance will improve, year-on-year returns will not, because of the global economic crisis. This is mainly due to government restrictions on diesel, gasoline and other fuel prices that have prevented producers from passing on the full cost of rising crude to customers.
China 's petrochemical majors are a crucial source of tax revenue and big employers. As a result, sources indicate that they will be given the necessary government support to avoid bankruptcy, with restructuring initiatives. Small and medium-sized chemical players may not be so lucky and will have to reduce manpower levels. End-user demand for chemicals has been hit hard by the fall in exports, with overseas orders for textiles and garments and toys having fallen very sharply. China announced stimulus packages for 10 sectors earlier this year, including petrochemicals, automotive, textiles and garments, electronics and information technology. Direct spending on petrochemicals will involve speeding up construction of new refineries and petrochemical plants, raising concerns over near-term oversupply. Other simultaneous government stimulus initiatives such as increased bank lending and discounts off the cost of home appliances for rural residents continue. Market players fear that recent chemical price increases have been driven mainly by a recovery in feedstock prices, tight petrochemical supply resulting cuts in refinery and petrochemical operating rates and some restocking by end-users. While feedstock costs remain cheaper than the all-time highs of H1-08, crude and naphtha prices have rebounded from the huge declines since Q4-08. Domestic demand may improve as a result of government spending relative to H2-08, but the collapse in exports will continue to be a major drag on earnings. Chemicals exports accounted for around 6% of total exports and around 2% of GDP in 2008, but are unlikely to see any improvement until end-2010. China has hiked export-tax rebates on semi and finished goods 6 times since H2-08, because of the fall in overseas trade. From April 1, China increased export-tax rebates on an extensive list of products including textiles and garments, steel, nonferrous metals, petrochemicals, electronics and light-industrial products. The measures will boost exports to a certain extent, but if overseas demand does not improve, exports will continue to shrink. Rebates were raised on April 1 for polyols, PVC and styrene butadiene rubb er (SBR) exports. The increases are unlikely to deliver any immediate boost because of weak overseas demand. China's chemical exports slipped by 31.5% to US$6.04 bln in January 2009 as compared to figures in January 2008 according to the China Petroleum and Chemical Industry Association.
China's imports of most petrochemical products surged in March from a year ago levels, as local manufacturing industries felt the positive effects of the government's aid, but the strong volumes may not be sustainable. The unclear recovery prospects of its major trading partners in the West are likely to limit petrochemical imports from this month onwards. To see sustainability in China , the economy in US and Europe must stabilize.
China 's petrochemicals stimulus plan will lead to the de-bottlenecking of the entire industry through the acceleration of domestic refinery and cracker expansions as per ICIS. The incentive plan, which was announced in February, has aroused widespread oversupply concerns at home and abroad when set against the backdrop of the global economic downturn. However, the latest China ethylene study from CBI suggest there is a need for China to build large-scale refineries and crackers, even under the pessimistic assumption that industries downstream from ethylene would only manage zero growth in 2009-10. According to the CBI data, China 's cracker capacity in 2008 was 9.78 mln tons and unchanged for the second year since 2006. In support of the government incentive plan, China will bring on-stream 4.55 mln tons of new capacity in 2009 and another 1.40 mln tons in 2010, including four Sinopec crackers and four PetroChina projects.
This will push China 's ethylene capacity up to 14.33 mln tpa in 2009 and 15.73 mln tpa in 2010.
China 's cracker expansion plans (kt/year) as per CBI Research and Consulting

 
No. Company Project Location 2009 Expansion 2010
Expansion
2011
Expansion
Start-up Time
Sinopec (including joint ventures)

1

Fujian United Petrochemical

Fujian , South China

800

1H, 2009

2

Shanghai Secco Petrochemical

Shanghai, East China

300

Aug, 2009

3

Tianjin Petrochemical

Tianjin , North China

1,000

Sep, 2009

4

Zhenhai Refinery and Petrochemical

Zhejiang , East China

1,000

Oct, 2009

5

Guangzhou Petrochemical

Guangdong , East China

1,000

In Planning

6

Wuhan Petrochemical

Hubei , Middle China

800

In Planning

PetroChina

1

Dushanzi Petrochemical Xinjiang, Northwest China 1,000

Q1, 2009

2

Panjin Petrochemical Liaoning , Northeast China 450

Oct, 2009

3

Fushun Petrochemical Liaoning , Northeast China 800

In Planning

4

Sichuan Petrochemical Sichuan , Southwest China 800

In Planning

5

Daqing Petrochemical Heilongjiang , Northeast China 600

In Planning

Total new capacity 4,550 1400 2,600
 

China imported 40% of its domestic polyethylene (PE) requirement in 2008, 74% of mono ethylene glycol (MEG), and 53% of styrene (SM), according to CBI data. These three ethylene derivatives accounted for around 82% of total ethylene consumption in the same year.

Pessimistic forecasts of China 's ethylene demand (kt) as per CBI Research and Consulting

 

Derivative

Item

2007

2008

2009

2010

Polyethylene (PE)

Equivalent ethylene consumption

7,369

7,129

9,828

11,203

Import reliance

39%

40%

16%

5%

 

Mono ethylene glycol (MEG)

Equivalent ethylene consumption

1,153

1,156

1,650

1,700

1,889

Import reliance

73%

74%

62%

58%

 

Styrene monomer (SM)

Equivalent ethylene consumption

701

675

1,185

1,254

ImportrReliance

54%

53%

17%

13%

 

Ethylene equivalent consumption of the three Sectors

9,224

8,961

12,713

14,346

Consumption proportion of the three sectors

84%

82%

85%

85%

Total Ethylene consumption

10,937

10,963

14,956

16,878

Ethylene capacity

9,780

9,780

14,330

15,730

 

China 's ethylene supply will be unable to satisfy demand from downstream industries in the next two years even with such fast cracker expansion, CBI says. This is based on the assumption that total demand in downstream industries remains flat in 2009-2010 and that domestic producers run at the average operating rates as during 2007-2008. This would be at the expense of a sharp decrease in the reliance on imports. The worst affected product would be PE, the import reliance of which could fall from the current level of 40% to as low as 5% in 2010.

Massive government stimulus package for the Chinese petrochemical industry should help support producers' capacity expansions over the coming, turbulent year, but BMI's latest China Petrochemicals Report cautions that excess capacity is a threat to profitability, particularly in the polypropylene, benzene and polyester segments.
Chinese petrochemicals producers reported a fall in profits in 2008, due to a significant decrease in chemical product prices at a time of rising raw material costs and a decrease in sales volumes in Q4-08. These negative factors have come as the result of a 50% drop in domestic market demand, caused by the global financial crisis. In the olefins segment, production growth stagnated, with ethylene down 2% and propylene up 1%, leading to total olefins production of 19.61 mln tons, representing the country's first ever recorded decline in olefins production. This reflected patterns in production and consumption of polyolefins, with polyethylene output down 3% in response to a 2% drop in demand while polypropylene output rose 2% and demand fell 2%. Exposure to external markets will determine segment performance. The most exposed is the polyester industry. PTA was hardest hit, with demand down 11% to 15 mln tons, leading to an 8% drop in output to 9.1 mln tons. As textile producers faced bankruptcy, PTA prices halved in Q4-08 to the lowest level in 6 years. PE and PP were also affected by the first recorded declines. These mediocre results are all the more incredible in a market that has seen double-digit growth rates in recent years.
Going into 2009, China is facing the prospect of negative growth in the petrochemicals sector, as global demand for Chinese plastic goods collapses. Only a CNY500 bln (US$73bln) government stimulus package has helped prevent Sinopec and PetroChina from delaying their planned cracker expansions over the next three years. The stimulus plan includes CNY100 bln for investments in upgrading fuel quality and CNY400 bln for 20 new large-scale petrochemical projects, including the cracker projects in Dushanzi, Fujian, Tianjin, Zhenhai, Fushun and Daqing, with a combined capacity of 5.2 mln tpa. The first of these to come onstream is Sinopec's 800,000 tpa Fujian cracker, which is due to be commissioned in Q2-09. The government's stimulus plan for the textile industry, which involves raising the export tax rebate rate from 14% to 15%, could also help revive polyesters. BMI cautions that, while the global economic is in a phase of slowdown, Chinese expansions over the next two years could create a situation over over-supply if not in China then in the international market. It forecasts a 1.15 mln tpa increase in PE capacity and a 2.02 mln tpa increase in PP in 2009. Anticipating domestic demand growth of 1-2%, polymer market self-sufficiency should reach 70% PE and near 100% PP. This could drive down international polymer prices yet further, putting more pressure on Chinese petrochemicals producers' profit margins even given the easing of naphtha feedstock prices. In this climate, it is doubtful that Sinopec or PetroChina will report a net profit in 2009 with the possibility of further losses in H1-10. Some segments, such as benzene, are already in surplus due to recent increases in capacity and with 2-3 mln tpa of benzene capacity due to come online in 2009. Benzene producers are likely to witness temporary closures and low rates of capacity utilisation, particularly given the poor projections in the styrenics industry.

 
 
 
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