Chapter 6.10: The Petrochemical Industry | Doing Business with China

Overview

Li Yong, Deputy Secretary General, China Association of International Trade

After 50 years of development, China has become one of the world's largest crude oil producers . For 13 consecutive years, China's crude oil production has ranked 5th after the US, Saudi Arabia, Russia and Iran and in 2001 its total output was 165 million tons. China has the largest refining capacity in Asia at 276 million tons, which makes it the third largest in the world after the US and Russia. China is also the third largest consumer of gasoline, diesel oil and kerosene after the US and Japan.

The petrochemical industry is basically dominated by three major groups; China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec) and China National Offshore Oil Corporation, which was a result of the industry reshuffling in 1998. The total assets of the three groups amount to nearly RMB1 trillion, about 12 per cent of the total state-owned assets. Sinopec has the largest oil refining capacity in the country, accounting for 53 per cent of China's total refining capacity. CNPC takes the second position with 40 per cent, while the remaining 7 per cent is distributed among smaller local refineries. After years of effort to develop independent technological capabilities, China's crude refining technology can now meet the refining requirements of the country.

China's ethylene capacity ranks fifth in the world; sixth in synthetic resins; fourthin synthetic rubber and first in synthetic fibre. With the deepening of economic reform and opening up of the market, China introduced a number of petrochemical processing technologies, which have enhanced local R&D capabilities in developing local technologies for downstream processing. The once import-dependent catalysts, for example, are now mostly produced by local producers and the rate of localized production of catalysts is well over 85 per cent. Some catalysts have reached international quality standards and are exported to foreign countries , reversing the one-way import situation of the past.

However, with the growth of China's economy, the gap between the development of the petrochemical industry and the increasing demand for petrochemical products has been widened. The main problems in the petrochemical industry are the low levels of industry concentration and an inability to supply the necessary products. There are over 130 crude refineries spread over most of the provinces , autonomous regions and municipalities. Eighteen ethylene plants are scattered over 15 cities. This contrasts sharply with the high concentration level of petrochemical operations in more developed countries. At the same time, the average plant size is also much smaller than the world average. Fragmentation and poor plant economics have led to a small market share of the petrochemical products being produced at home such as synthetic resins, synthetic rubber, synthetic fibre and organic chemical raw material, which make up about 50 per cent of the market. The industry has also been troubled by the problem of fewer grade varieties, generally low quality and smaller product ranges. The required grades and products of high enough quality have to be imported in great quantities from abroad each year. In addition, the insufficient supply of organic raw material at home has also hindered the development of downstream fine chemicals, leading to a lack of coordination between the petrochemical and traditional chemical industries.

In the 1990s, the demand for ethylene in China grew at an average annual rate of 17 per cent, much higher than the average GDP growth in the same period. The growth in the production of ethylene in the period, however, averaged only 12 per cent per annum, leading to a widening gap between supply and demand. As a result, the import of petrochemical products has been increasing at an average annual rate of 32 per cent. Import of petrochemical raw materials as expressed in its ethylene equivalent accounts for about 50 per cent of China's total consumption of petrochemical products. For some petrochemical products such as polystyrene (PS) and ABS, the rate of dependence on import can be as high as 80 per cent.

As shown in Table 6.10.1, the self-sufficiency rates for synthetic fibre and rubber increased in 2001, while that for synthetic resins declined. This demonstrates the problem of a lagging supply of synthetic resins compared with rapid increasing demand.

Table 6.10.1: The gap between supply and demand of three major synthetic materials
		Synthetic resins			Synthetic fibre				Synthetic rubber
	1999	2000	2001	1999	2000	2001	1999	2000	2001
Production	8.417	10.80	12.03	5.487	6.15	7.599	0.684	0.836	1.045
Net imports	12.59	11.40	14.39	1.285	1.54	1.395	0.65	0.65	0.638
Apparent consumption	20.70	22.20	26.43	6.72	7.69	7.772	1.25	1.481	1.683
Rate of self-sufficiency (%)	39.2	48.6	46	81	80	82	48	56.5	62

The production pattern of China's petrochemical industry has the following characteristics:

The production of ethylene, petrochemical raw materials and their products are largely concentrated in Sinopec and CNPC operations, whose total capacity now accounts for 90 per cent of the country's total. These two majors own 16 of China's 18 ethylene projects.
State-owned enterprises at the local level, small- to medium- sized collectively-owned factories and private operators mainly operate in the downstream production of petrochemical products.
Foreign-invested petrochemical enterprises produce those downstream products that are in short supply in China. Their products are typically concentrated in polymer and synthetic fibre categories and their production is based on imported feeds.

As shown in Table 6.10.2, Sinopec and CNPC have a dominant role in China's production of polyolefin resins. The two majors also own the majority of the production and capacity of synthetic rubber and synthetic fibre raw materials. In the case of PVC, production is dispersed among local operations as a legacy of the historical distribution of production and diversification of raw material supplies . Styrenic resins such as PS and ABS are largely concentrated in joint venture operations. Synthetic fibres such as polyester, acrylic , polyamide and polypropylene fibres are produced by local enterprises.

Table 6.10.2: Distribution of petrochemical production by player
Products	Sinopec share (%)	CNPC share (%)	Others' share (%)
Ethylene	61	32	7
Polyethylene	63	32	5
Polypropylene	67	22	11
PVC	8	1	91
PS	43	7	50
ABS		89	11
BR	77	23
SBR	34	34	32
PET chip	35	10	55
PTA	78	11	11
glycol	70	30
ACN	40	45	15
Hexanolactam	100
Terylene (polyester fibre)	17	3	80
Acrylic fibre	53	21	26
Polyamide fibre (nylon)	7		93
Polypropylene fibre	10	5	85
Source: Beijing Yigou Petrochemical Consulting

China's ethylene industry will continue to develop over the next 10 years or so. The priority of development for domestic ethylene plants is on expansion of capacity to improve plant economics or increase economies of scale. Table 6.10.3 lists the 18 ethylene installations, their capacities and expansion plans.

Table 6.10.3: China's ethylene capacity by plant and capacity expansion plans (thousand tons)
Company	Planned	Current	Expansion	Completion
Yanshan Petrochemical	300	660	660	2001
Shanghai Petrochemical Plant 1	300	400	700	2002
Shanghai Petrochemical Plant 2	110	145	145
Yangtze Petrochemical	300	400	650	2002
Qilu Petrochemical	300	450	600	2003
Maoming Petrochemical	300	380	800	2004
Tianjin United Chemical	140	140	200
Zhongyuan Ethylene	140	140	200
Guangzhou Petrochemical	140	140	200
Beijing Oriental Chemical Plant	140	140	200
Daqing Petrochemical	300	480	600	2005
JilinPetrochemical Plant 1	300	300	400
Jilin Petrochemical Plant 2	115	145	145
Fushun Petrochemical	124	144	144
Liaoyang Chemical Fibre	88	88	88
Lanzhou Petrochemical	80	160	160
Dushanzi Petrochemical	140	140	220	2002
Panjin Ethylene	130	160	160
Total	3,447	4,612	6,272
Source: Beijing Yigou Petrochemical Consulting

According to the estimates in China's petrochemical industry's tenth Five Year Plan, the demand for ethylene expressed in ethylene equivalent will grow at an annual rate of 8.5 per cent and reach 15 million tons of ethylene equivalent by 2005. To capture the growth, foreign investors have invested heavily in China's ethylene projects (see Table 6.10.4).

Table 6.10.4: Key foreign-invested ethylene projects
Project	Planned capacity (thousand tons)	Chinese investors	Foreign investors
1. Huizhou Nanhai ethylene project	800	CNPC and Guangdong province	Shell
2. BASF-YPC Integrated ethylene project	600	Sinopec and Yangtze Petrochemical	BASF
3. Shanghai BP ethylene project	900	Sinopec and Shanghai Petrochemical	BP
4. Fujian Ethylene project	600	Sinopec and Fujian province	Exxon and Saudi
Total	2,900		Arabian Petroleum

In the tenth Five Year Plan period (2001 “2005), China's economy is predicted to grow by between 7 and 8 per cent, which will drive the demand for ethylene downstream products, particularly the five major synthetic resins PE, PP, PVC, PS and ABS. According to estimates by China Packaging Technology Association, the market for the five major synthetic resins will develop at a rate of 6.1 per cent in this period. By 2005, the total demand will reach 24.45 million tons. Another estimate indicates that the demand for the five major synthetic resins will be between 25 and 27 million tons. However, it is important to observe the following trends in relation to the demand changes in the five major synthetic resins:

In the PE category, LLDPE will gradually gain greater market share over LDPE. As LLDPE technology improves , LLDPE will not only perform better, which will expand its application areas, but will also become competitive on price against LDPE. The demand for LDPE will gradually reduce while that for LLDPE will pick up and the consumption of LLDPE will eventually surpass that of LDPE. In addition, LLDPE and LDPE applications in agricultural films will subside against the trend of demand for long-life, thinner, low unit-usage and multifunctional agricultural films. The rate of growth in the demand of LLDPE/LDPE will slow in the next five years. However, the applications of LLDPE and LDPE will increase in other industries such as wires and cables, whose development is largely driven by the prospering telecommunications industry.
The consumption pattern of HDPE will change little by the year 2005. With the increase in the usage volume of materials in the packaging industry and the shift of packaging operations from Japan and Europe to China and other south-east Asian countries, this growth in demand for HDPE will be sustained. HDPE films will remain the largest area of HDPE application. With the development towards diversification of HDPE applications in hollow products, production of HDPE products such as multi-layer extruded tubes, plastic bottles in pharmaceutical and food applications and large- to medium-sized plastic containers will increase, leading to a moderate increase in the share of HDPE application in hollow plastic part manufacturing.
The usage of high value-added PP is growing. In some applications, high value-added PP, with its improved properties, has replaced engineering plastics, as a result of which the share of PP consumption in the injection moulded products is expected to rise. At the same time, PP fibre will find an expanded area of application in the development of civil engineering materials. Rapid growth of PP application in the production of films for packaging purposes is also expected over the next five years, but the traditional application of PP in woven products will decline.
Driven by the development of so-called chemical construction materials, PVC has gained a strong momentum of growth over the past few years and will continue to be a key material for the production of door and window frames and pipes. Some large cities have formulated policies to encourage the use of plastic materials in property development projects, which will stimulate the growth of demand for rigid PVC products. PVC flexible products will face a mixed scenario, with increases of applications expected in the manufacturing of shoes and synthetic leather, while growth in film and cable applications will slow. PVC film will have to face the challenge posed by PE film.
Environmental concerns about white pollution have already had a negative impact on the demand for EPS in the applications of lunch boxes and fast-food containers, which has slowed in the last couple of years. Generally, the pattern of consumption for GPPS and HIPS will not see major changes and their applications will increase with the development of the end-use industries such as household electrical appliance and office automation. The negative impact of the ban on the use of EPS containers in the food service sector will be offset by the increase in the application of EPS in the building materials sector.
Under the pressure of increased application of PS in the household electrical appliances, ABS consumption in large electrical appliance items is expected to decline, while its application in small household appliances will increase. More importantly, the development of China's automobile industry will be the key driving force for future growth of demand for ABS.

As predicted in the petrochemical industry's tenth Five Year Plan, consumption of synthetic rubber between 2001 and 2005 is expected to grow at annual rate of 4 per cent to reach 1.1 million tons by 2005. Synthetic fibre, on the other hand, will experience a growth rate in the range of 5.4 “8.3 per cent, with the total demand being between 10.8 and 12.6 million tons by 2005.

China's entry into the WTO will certainly impact by varying degrees on the development of its petrochemical industry. However, compared with other highly protected industries, the impact of the WTO will be less significant because protection has been gradually lifted since the 1980s and the majority of petrochemical products have been 'marketized', which means that the demand, production, purchase, sales and prices have been integrated with international market trends. However, it is speculated that the tariff reduction will stimulate the already large influx of imports, which will challenge the survival of low-efficiency petrochemical enterprises.

The expected increase in imports following China's accession to the WTO has caused concerns about further decline in the market share of domestically produced petrochemical products. The market share of imported synthetic resins rose from 33 per cent in 1990 to 52 per cent. The share of imported synthetic rubber has risen from only 9 per cent to the current 44 per cent and that of imported synthetic fibres is now 53 per cent.

Table 6.10.5: Committed petrochemical tariff rates post WTO entry
	Specific commitment
Product description	Tariff rate 2002 (%)	Committed at the accession date (%)	Finalcommitted rate (%)	Implementation
Organic chemicals Ethylene	2.8	3.5	2.0	2003
Propylene	2.8	3.5	2.0	2003
Butylene	2.8	3.5	2.0	2003
Butadiene	2.8	3.5	2.0	2003
Isopentene	2.8	3.5	2.0	2003
Benzene	4.0	4.7	2.0	2005
Toluene	5.0	6.0	2.0	2005
Ethylbenzene	5.5	6.7	2.0	2005
Paraxylene	5.0	6.0	2.0	2005
Alkylbenzene	5.5	6.7	2.0	2005
Phenol	5.5	7.0	5.5	2002
Acetone	5.5	5.5	5.5
Glacial acetic acid	5.5	5.5	5.5
Phthalic Anhydride	6.6	8.3	6.5	2002
Synthetic fibre raw materials and polymers
Glycol	8.8	10.5	5.5	2004
Acrylonitrile	6.5	6.5	6.5
Hexanolactam	10.8	12.5	9.0	2003
PTA	12.8	13.9	6.5	2008
Polyester (other)	12.8	13.9	6.5	2008
Nylon 66 salt	6.5	6.5	6.5
Synthetic resin
LDPE	14.2	15.4	6.5	2008
HDPE	14.2	15.4	6.5	2008
Polypropylene	10.0	13.9	6.5	2008
PS	12.8	13.9	6.5	2008
ABS	12.8	13.9	6.5	2008
PVC	12.8	13.9	6.5	2008
Synthetic rubber
SBR	7.5	7.5	7.5
BR	7.5	7.5	7.5
NBR	7.5	7.5	7.5
IR	3.0	4.5	3.9	2002
EPR	7.5	7.5	7.5
Synthetic fibre
Polyester filament	11.4	14.6	5.0	2004
Polyester staple fibre	10.6	13.4	5.0	2004
Acrylic filament	8.3	10.0	5.0	2004
Acrylic staple fibre	8.3	10.0	5.0	2004
Acrylic top	8.3	10.0	5.0	2004
Nylon filament	9.8	12.2	5.0	2004
Nylon staple fibre	9.8	12.2	5.0	2004
PP staple fibre	9.8	12.2	5.0	2004

The increasing market share of imported petrochemical products puts a great deal of pressure on Chinese petro- chemical enterprises in their competition with their foreign counterparts. The lifting of restrictions on trading rights and distribution within China will lead to head-on competition with foreign distributors of petrochemical products. Domestic companies will have to make further and greater efforts to reduce costs and enhance their ability to develop new products. As well as this, their marketing systems and adaptability to market changes will have to improve if they are to increase their chances of winning in the competition.