China's petrochem industry likely to witness beginning of recovery in H2-09

Bolstered by modest signs of domestic demand revival spurred on by a massive government stimulus program, the Chinese petrochemicals industry is likely to witness the beginning of a recovery in output in H2-09, according to BMI's latest China Petrochemicals Report. In H1-09, ethylene output was down 6.8% year-on-year (y-o-y) to 4.8 mln tons, while plastic in primary forms was down 0.1% to 6.5 mln tons and the manufacturing of plastic products was up 4.9% to 20.2 mln tons. While the results were poor by historical standards, Q2-09 saw some signs of recovery as a result of the government's economic stimulus effort. In June, the fall in ethylene output had moderated to 2.8% and plastics output was up 3.2%. Inventories had largely been cleared along the supply chain and demand was showing signs of revival with the report anticipating an increase in H2-09. Petrochemicals producers in China should also post an improvement in turnover and margins due to cheaper feedstock. Yet while on a monthly basis the performance of the petrochemicals industry should improve, on an annual basis it will still be disappointing, reflecting the impact of the global economic crisis from September 2008. Integrated petrochemicals producers are breathing a sigh of relief at lower oil prices, having had to absorb the acceleration in crude prices to up to US$150 per barrel (bbl) in 2008 under government restrictions on fuel prices. However, the report cautions that investment in new refineries and petrochemicals plants, boosted by the stimulus program and increased bank lending, risks over-capacity and lower product prices over the short-term. Much will depend on the strength of the recovery in the automotive and home appliance sectors, which are expected to recover before the construction sector. The government stimulus plan includes CNY100 bln for investments in upgrading fuel quality and CNY400 bln for 20 new large-scale petrochemicals 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 800,000tpa Fujian cracker, which is due to be commissioned by end-2009. A Sinopec-Sabic JV is due to come onstream in H209 with total petrochemical production capacity of about 3.2 mln tpa including 1.2mn tpa of ethylene. The government's stimulus plan for the textile industry, which involves raising the export tax rebate rate from 14-15%, could also help revive polyesters. The report cautions that while the global economy is in a phase of slowdown, Chinese expansions over the next two years could create a surplus of supply, if not in China then in the international market. We forecast a 1.15 mln tpa increase in PE capacity and a 2.02 mln tpa increase in PP in 2009. With the report anticipating domestic demand growth of 1-2%, polymer market self-sufficiency should reach 70% PE and near 100% PP in 2009. This could drive down international polymer prices yet further, putting more pressure on Chinese petrochemicals producers' profit margins despite the easing of naphtha feedstock prices. In this climate, we doubt that Sinopec or PetroChina will report a net profit in 2009 and there is also the possibility of further losses in H110. Some segments, such as benzene, are already in surplus due to recent increases in capacity and 2-3mn tpa of additional benzene capacity is due to come online during 2009. Benzene producers are likely to witness temporary closures and low rates of capacity utilisation, particularly given the poor projections in the styrenics industry. The Chinese polymer resins market is set to expand by an average of around 6.5-7% in 2009-14. However, with domestic demand likely to continue to outstrip supply, China will remain a net polymers importer over the medium-term and the largest importer in the world. In 2009, China depended on imports for at least a third of polymer demand. Most of the increase in demand will be covered by both Chinese and Middle Eastern supply from new petrochemicals plants due to come onstream in coming years. By 2014, China could represent 35% of the global PP market and 20% of global PE demand.