China Petrochemicals Report

Sinopec's decision in July to divert naphtha feedstock towards refined fuels has led to the closure of ethylene crackers, leading to a decline in polymer production and increased reliance on petrochemical imports. According to BMI's latest China Petrochemicals Report, this will lead to mounting losses at Sinopec and casts doubt on official forecasts of 12.4% output growth in 2008. Compounding the problem is the closure of the Maoming complex following an accident in early June, bringing 1mln tpa of ethylene capacity offline. As a result of the plant closures, July ethylene output was cut by over 12%. Since it is costly to transport ethylene, China is set to increase imports of derivatives such as PE and monoethylene glycol (MEG). Sinopec's response appears to be to cut output along the petrochemical chain, which will lead to the clearance of inventories, greater dependence on imported products and the tightening of Asian polymer markets. The cuts in ethylene output and the diversion of naphtha feedstock come ahead of the planned opening of new petrochemicals complexes, notably the additional capacity at PetroChina's Dushanzi complex in Xinjiang due to come on-line in Q4-08 with 1mn tpa of ethylene and 1.45 mln tpa of polymers. Other plants that could be affected by feedstock shortages include the joint venture between Exxon Mobil, Saudi Aramco and Sinopec in Quanzhou, Fujian, with 800,000 tpa ethylene and 1.2 mln tpa of polymers, which is due to come on-stream in Q1-09. The Sichuan earthquake in May did not damage large-scale petrochemical complexes, but did bring transportation of chemicals by rail and road in parts of Sichuan to a virtual standstill. Local reports suggested that potential delays to Sinopec's natural gas pipeline project from Sichuan to Shanghai could delay BP's plans for an acetic plant at Nanjing. The earthquake also may force PetroChina to abandon plans for a US$5.5bn refinery and ethylene plant at Pengzhou, near Chengdu. The decline in ethylene output could not have come at a worse time. In 2008, the gap between China's ethylene nameplate capacities and total requirements is forecast to reach 12.82 mln. The actual shortfall is likely to be far higher when taking into account lower operating rates. China is set to remain a net ethylene importer over the next five years, despite an additional 9mn tpa of new production capacity coming online, but will decline throughout the rest of the forecast period as the rate capacity expansion outstrips the rate of demand, with the deficit falling to 8.46mn tonnes by 2012. Recent months have seen progress in terms of petrochemicals capacity expansion. SunVic Chemical Holdings began construction of a 230,000tpa propylene plant at Xiangshui, Jiangsu province, in June 2008. It is due to be completed by December 2009. In June 2008, Qatar Petroleum, Shell China and PetroChina signed a letter of intent to launch a study into the viability of a new petrochemical complex in China. In April 2008, Sinopec announced plans to build a 1mn tpa ethylene facility on Hainan Island in southern China after signing a framework deal with the provincial government. The project has won central government approval and construction is expected to begin before 2010.