China petrochemical expansion, to defeat Japan and South Korean manufacturers

A sharp increase in China‘s manufacturing capacity for paraxilene, a petrochemical used to make textile yarn and bottles, could force major exporters to Japan and South Korea to cut production as early as the second quarter of 2020.

China will add about 10 million tonnes of paraxilene production capacity from March 2019 to March 2020, according to company and official reports, that’s enough to make 22 trillion 500-milliliter plastic bottles.

The world’s top consumer of paraxilene, China imports 60% of its need for chemicals to fuel polyester demand that has more than doubled since 2010. Over half of China’s PX imports come from South Korea and Japan and expected new capacity to reduce Chinese imports by about 50%.

Without Chinese demand, profit margins for regional manufacturers such as Japan’s JXTG Holdings Inc., South Korea’s Lotte Chemical and Hyundai Cosmo Petrochemical and local manufacturer Dalian Fujia are expected to decline further, likely causing a rebound in production and a decline of profits.

“We will see drastic cuts in PX operating rates among many Asian exporters, and rationalization of potential capacity in countries where integrated refining-aromatics thresholds are weak,” said Darryl Xu, chief chemical analyst. Asian at Wood Mackenzie consultancy.

Private companies are leading China’s latest PX boom through a range of projects often integrated with major oil refineries that make them more cost competitive and flexible.

China’s Hengli Group launched in March a PX plant capable of producing 4.5m tonnes per year (tpy) in Dalian city, and Zhejiang Petrochemical is scheduled to start a 4m tonne plant in Zhoushan at the end of 2019.

In July, Shandong-based Hongrun Petrochemicals began testing at its 700,000 flower plant and China Petroleum and Chemical Corp., or Sinopec, will start a plant in Hainan producing 1 million tp in the third quarter.

Helen Yang, a researcher at JLC ​​Consultancy, estimated that China’s PX imports could drop to 7m tonnes next year and further to 4m tonnes in 2021. Imports this year will be 12.6m tonnes, the first annual decline in over a decade, down from a record 16m tonnes in 2018.

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Expectations of rising Chinese supplies disrupted the chemical processing margin, or price of PX over oil, a refinery product used to make PX, at under $ 320 a tonne in mid-August, against $ 600- $ 700 a year ago .

“The $ 600- $ 700 difference was crazy and unlikely to be repeated,” said Ma Xiumei, a purchasing executive at Hengli Group, which has cut its PX imports by nearly half this year.

Ma Cheng, head of purchasing raw materials at Zhejiang Yisheng Petrochemical, part of a joint venture with PX factory builder in Zhoushan, predicted that the PX margin could slide below $ 250 a tonne later this year and even more. low in early 2020 after Zhoushan Plant ramps up.

JXTG Holdings said a deteriorating PX market contributed to lower first-quarter earnings, but the company is still optimistic with rising demand in Asia and also plans to divert some exports to the US.

“One of our main pains for recent earnings was the PX drop limit,” said Yoshiaki Ouchi, senior vice president of JXTG earlier this month after the firm reported an 88% slide in quarterly earnings.

Japanese bank Nomura Holdings Inc cut its forecasts for JXTG earnings during fiscal year 2021 after falling to PX limits.

China could add another 14 million tonnes of additional PX capacity between 2020 and 2023, said JLC’s Yang, who will contribute to increasing gasoline supply in Asia.

South Korean and Japanese PX makers are likely to respond to rising Chinese supply by diverting production to the gasoline mixing pool, as aromatic chemicals such as PX are used to increase the appreciation of gasoline octane. That could add an additional 150,000 barrels a day of gasoline to Asia by 2021, Wood Mackenzie said.

“Exporters in Japan and South Korea will soon face a dilemma – should they continue to fight for a shrinking export market, or dispose of aromatic raw materials in a much larger gasoline market? ” said Wood Mackenzie Xu./Investing.com

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