Saudi-China Chemical Trade in a Changing Market Landscape
China and Saudi Arabia are key trading partners in chemicals and petrochemicals. How will the implications from the COVID-19 pandemic affect their long-standing partnership?
Over the last few decades, China and Saudi Arabia have emerged as key chemical production hubs, reshaping the balance in the global chemical industry. Today two of the world’s leading chemical players find themselves operating in a very different environment characterized by subdued chemical demand, supply chain disruptions and eroded profit margins.
Like the rest of the world, China and Saudi Arabia are feeling the strain from the coronavirus (COVID-19) pandemic, causing widespread concern and economic hardships. As some of the world’s leading exporters of chemicals and petrochemicals, whose performance is closely linked to global market developments, the impact from the novel virus on their chemical sector and supply chains has been especially pronounced and carry wide-spread implications for the world’s chemical markets.
China’s position in the global chemical industry
China has enjoyed a remarkable period of rapid growth in the field of chemicals and petrochemicals over the last few decades. Today the country occupies the top spot as the world’s largest chemical producer and represents one of the leading chemical markets globally. In the last two decades alone, China tripled its share in the global chemical market to 33.2%, compared to 10.3% in 2010. After China, Saudi Arabia was also able to double its share of global chemical capacity over the same time span from 2.2% in 2000 to 4.5% in 2018. These figures represent the highest industry growth rate on a global level, safeguarding the countries’ position as formidable global players and strategic trend-setters on the chemical market.
Saudi-China bilateral relations in the chemical industry
China is also a key export destination for GCC producers, accounting for about 20% of total GCC chemical exports. Out of all Arabian Gulf states, Saudi Arabia stands out as China’s key strategic trading partner in the region in both volume of chemical trade and investments in joint venture projects.
As one of the world’s largest consumers of chemicals, China accounts for 25% of total Saudi chemical exports. China imported 10 million tons of chemicals from Saudi Arabia, growing by a 14.7% CAGR between 1992-2017. Likewise, Saudi Arabia represents China’s top trading partner in the MENA region in the areas of oil and gas, chemicals and petrochemicals.
“After China, Saudi Arabia was also able to double its share of global chemical capacity over the same time span from 2.2% in 2000 to 4.5% in 2018.”
“Today the economic interdependence of both countries cannot be more significant and reflects the deep relations and growing interest for chemical trade cooperation.”
Apart from trade, China and Saudi Arabia have taken steps to expand bilateral relations by investing in joint ventures. Saudi shareholders have invested or are planning to invest about USD 35 billion in projects in China, which accounts for 45% of total overseas production capacity of Saudi producers overseas. These long-term joint venture projects are designed to cater to China’s huge chemicals demand market and leverage the kingdom’s competitive feedstock advantage.
Today the economic interdependence of both countries cannot be more significant and reflects the deep relations and growing interest for chemical trade cooperation. However, with the industry landscape changing rapidly due to the coronavirus pandemic, it remains to be seen how these relations will evolve in the face of current challenges and emerging market dynamics.
Impact from COVID-19 on China’s chemical market
Nationwide factory closures in China as a result of the COVID-19 pandemic have significantly dented China’s chemical industry. Chemical manufacturing in China was also among the hardest-hit sectors with both output and profits declining. The most recent data from China indicates a substantial decline in manufacturing output since the coronavirus outbreak. Current disruption in China’s manufacturing output is expected to have repercussions elsewhere around the world, including the GCC region, which exports significant quantities of petrochemicals to China.
Restrictions linked to the coronavirus outbreak have caused China’s chemical industry to suffer a 15-25% slump in demand during February. As a result of deceleration in the manufacturing and petrochemical sector outputs, petrochemicals demand in the country is facing significant challenges. IHS estimates that every percentage point decline in GDP in China, translates to a 2.5 million ton decline in chemicals demand. This means, in 2020, Chinese chemical demand will be 4 million tons lower.
For some major polymers, China represents up to 45% of global demand and with demand disruptions in China, a surplus of chemical products will be available. Demand for (polyethylene) PE and (polypropylene) PP in China is expected to have improved post March 2020, as manufactures are expected to ramp up plant operations. Average operating rates of PE conversion in Chinese factories is expected to improve to 60% from the current 20%. A similar trend is expected with PP demand, as Chinese PP converters currently operate at about 30% capacity, which is expected to have improved to 65% as of March 2020.
Impact on supply chains and industry competitiveness
Global chemical supply chains have seen unprecedented disruption as a result of the COVID-19 pandemic, ranging from port closures and delays in shipping, to higher freight rates and major logistical restrictions. The closing of major ports in China has caused significant supply chain disruptions for GCC chemical companies. On the other hand, supply chain for essential products and fertilizers did not face major disruptions. Ocean rates have increased by three times compared to the market average prior to the COVID-10 outbreak. For the GCC chemical industry, where supply chain costs are already high, paying higher rates to ship its goods means significant erosion of profits for producers.
China and Saudi Arabia have enjoyed strong chemical revenue growth over the years. Of the USD 3.9 trillion of global chemical revenue in 2018, according to the latest figures, China has the highest market share of 35.8% CAGR. Meanwhile, Saudi Arabia saw the most dramatic rise in ranking since 2000, rising 21 places and becoming the 11th top nation globally with the fastest growing share in global sales revenue. Due to the current pandemic and continued market volatility, it remains to be seen what the financial impact on two of the world’s leading chemical producers will be in 2020 and beyond. Nevertheless, forecasts remain bleak for the short to medium term.
Petrochemical prices in 2020 have been under significant pressure not just because of lower than ever demand due to the COVID-19 pandemic, but also due to the oil price collapse in the last two months, which saw prices plunge into negative territory for the first time in history. As demand growth weakened, petrochemical prices fell sharply in Q1 2020. Latest ICIS data published in April 2020, shows that the global ICIS Petrochemical Index (IPEX) fell by 11% in March compared to January, and the year-on-year decline was even steeper. Compared to March 2019, global IPEX fell by 21.1% and by 27.1% in Asia. On the bright side, for some key chemicals which are used to fight COVID-19, prices are moderate in the short to medium term and fertilizer prices have improved by 3% in March 2020 compared with February 2020.
“Restrictions linked to the coronavirus outbreak have caused China’s chemical industry to suffer a 15-25% slump in demand during February.”
“Petrochemical prices in 2020 have been under significant pressure not just because of lower than ever demand due to the COVID-19 pandemic, but also due to the oil price collapse in the last two months, which saw prices plunge into negative territory for the first time in history.”
“Those who stand to benefit from this changed market landscape are naphtha-based producers in Asia which is creating greater competition for GCC chemical producers in the Asian market.”
Changing market competitiveness
All recent market disruptions ensuing from the coronavirus pandemic have altered the competitive landscape of the chemical industry today. China is forecast to see its economic growth slow down to 1.2% in 2020, which is a near 30-year low. Saudi Arabia, on the other hand, is expected to have a -2.3% economic decline in 2020, similarly to neighboring countries in the region. The slowdown of China’s economy and the COVID-19 impact on chemical demand in China in combination with the low oil prices are driving down the cost of naphtha and narrowing the cost advantage of producers based on ethane feedstock.
In Asia, ethylene cracking has rapidly shifted towards naphtha cracking, which is having a significant impact on producers based on ethane cracking such as those in the GCC. As a result, the historic ethane advantages of Arabian Gulf producers are declining rapidly. Those who stand to benefit from this changed market landscape are naphtha-based producers in Asia (e.g. Japan, South Korea, etc.) which is creating greater competition for GCC chemical producers in the Asian market.
In order to sustain their competitive advantage, Arabian Gulf ethylene producers must develop a new set of capabilities, continue to invest in new technologies and focus on cost efficiencies. Developing a technology edge over other market players will be an essential enabler of long-term competitiveness in Asia. GCC producers should focus on eliminating supply chain inefficiencies and even consider relocating or ramping-up chemical production closer to their end-markets. This is already evident in China, where GCC investments in chemical joint ventures are currently under construction. It remains to be seen how these investments will be affected, as the impact of the virus evolves.
What next for Sino-Saudi chemical trade relations?
The trade relations between China and Saudi Arabia in the chemical industry will remain strong despite ongoing challenges associated with the coronavirus pandemic and the related global disruptions. Significant gains can still be achieved by lowering trade barriers and improving bilateral coordination of national regulations.
According to the King Abdullah Petroleum Studies and Research Center (KAPSARC), the elimination of import duties for selected plastic products would lead to USD 410 million in incremental annual sales for the GCC chemical industry, with Saudi Arabia being the largest GCC beneficiary. GPCA further estimates that a Saudi-China FTA could yield between USD 600 million (low end) and USD 4.5 billion (high end) of savings per year, which accounts for 1% to 8% of Saudi revenue in the chemicals sector, respectively.
The next phase of development for China is self-sufficiency in key chemicals, and for Saudi Arabia, product diversification and value addition through an extension down the chemical value chain. Expanding chemical manufacturing into high-margin value added chemicals will allow Saudi Arabia to maintain growth, capture value along the value chain and contribute to new job creation in the downstream industries. And forming strategic partnerships will play a key role in fostering a win-win cooperation between the two nations.
Post COVID-19, analysts predict a revival of domestic manufacturing, particularly in the West, as governments seek to build up strategic resilience in the aftermath of the current crisis. How that will impact Sino-Saudi chemicals trade and joint venture projects currently under construction is yet to be seen. As China slowly returns to work, with factories reopening and resuming operations, all eyes are on Asia’s largest economy to see how quickly it will recover from the pandemic and whether a second wave of infection will ensue.
One thing is for sure, both Chinese and Saudi Arabian producers will need to adjust their modus operandi to the “new normal” created by the pandemic. Rebuilding their supply chain resilience after COVID-19 will be particularly important as will be managing disruption in the long-term. To successfully navigate the changing chemical landscape, China and Saudi Arabia will need to focus on mutual partnerships, hone their competitive edge and capture new market opportunities now and into the future.
“Both Chinese and Saudi Arabian producers will need to adjust their modus operandi to the “new normal” created by the pandemic.”
The insights in this article are based on the findings of a recent GPCA report entitled ‘China-Saudi Relations: Through the Lens of the Chemical Industry’. The full report is available exclusively for GPCA members. Learn more about this report.
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