GCC Outlook – Exploring the factors that are shaping the regional chemical industry’s future direction
By John Richardson, Senior Consultant, Asia, ICIS
Difficult choices lie ahead for Middle East and other exporters of polypropylene (PP), styrene monomer (SM) and paraxylene (PX) to China. From next year onwards, the country’s imports will start to decline and by 2023-2025 complete self-sufficiency may be reached in all these products.
Just how significant this shift will be for global markets we can see from the ICIS Supply & Demand Database estimates of China’s 2020 share of total global net imports. This is among the countries and regions in the world that will import more than they export. In PP, China’s share of global net imports is estimated at 43%, at 69% for SM and a huge, eye-wateringly disproportionate 90% for PX.
The chart below shows Saudi Arabia’s exposure to exports to China as a proportion of its total January-2020 exports in these products. The second chart shows scenarios for China’s PP net imports/net exports in 2021-2031.
Alternative approaches for PP and SM exporters
Perhaps in PP, alternative destinations can be found that can repair most of the holes in China-centric business models. This could be combined with moving into higher-value grades of copolymers that China will perhaps still need to import.
And maybe, too, SM that can no longer be shipped to China can be turned into derivatives. But producers will have to pick and choose their derivatives and grades of derivatives. China dominates global production of general-purpose polystyrene (PS) and high-impact PS for instance.
And to a limited extent, membership of the Regional Comprehensive Economic Partnership (RCEP) trade deal may provide support, which could put Gulf Co-operation Council (GCC) countries at a disadvantage as the GCC is not part of the RCEP.
The long-negotiated trade deal includes harmonisation of rules of origin. If PP and SM are exported from member countries to China – which is also of part of the RCEP – tariffs will be reduced if the imports are to be re-exported as finished goods. This is provided exports go to any of the 15 RCEP members.
China’s top 10 PP trading partners based on 2020 import data and in descending order of market shares that are part of the RCEP are as follows: South Korea, Singapore, Thailand, Malaysia, Vietnam and Japan. Out in the cold as non-members of the RCEP could be Taiwan, the United Arab Emirates (UAE), Saudi Arabia and India – again in descending order of their share of Chinese PP imports.
In SM, Saudi Arabia appears to be particularly vulnerable as it is China’s No 1 source of imports. In 2020, Saudi Arabia has taken a 33% share of total China imports. It may in future face stiffer competition from Japan, Singapore, South Korea and Malaysia, which are also amongst China’s top SM trading partners and are members of the RCEP.
But membership of the RCEP will not make a great deal of difference over the long term, in my opinion. I can see no scenario under which China will stop pushing hard towards PP and SM self-sufficiency.
China will continue to build PP plants as this is a polymer that China can use to help escape its middle-income trap. The focus will thus not just be on homopolymer production but also on copolymers.
“In SM, Saudi Arabia appears to be particularly vulnerable as it is China’s No 1 source of imports.”
“The history of manufacturing in general in China is full of examples where China has surprised the sceptics with its technological progress.”
It is widely and I believe wrongly assumed that China will remain a big importer of copolymers because it lacks the technologies. But this conventional thinking ignores history. The history of manufacturing in general in China is full of examples where China has surprised the sceptics with its technological progress.
And you must think about China’s pressing need to escape its middle-income trap to justify wages that will continue to rise as its working-age population keeps on shrinking.
Government subsidies will therefore be maintained at high levels for research into locally owned higher-value technologies. Why shouldn’t PP be amongst the technologies that attract this kind of support?
Because SM is a highly commoditised petrochemical, the logic of self-sufficiency is almost entirely about local supply security in a very uncertain geopolitical world (this is a secondary factor behind the push towards PP self-sufficiency).
The difficult choices made by PP and SM exporters to China may sadly not just relate to downstream diversification; plant closures may also be necessary.
In PX there appears to be no “maybe” about plant closures
Plant closures in PX seem inevitable because China will account for 90% of global PX net imports in 2020. If China becomes self-sufficient, and I think this will happen, remaining global imports would be too small to accommodate today’s capacities.
China also completely dominates the global downstream polyester fibres, polyethylene terephthalate (PET) film and PET bottle markets. This leaves no opportunities for PX exporters to add derivatives capacity as a means of absorbing their surpluses.
Members of the RCEP might again be able to win market share over the short term versus non-members. But this would only delay some very difficult calls by a few years.
As with PP and SM, China’s PX capacity additions are about supply security in a very uncertain geopolitical world.
“If China becomes self-sufficient, remaining global imports would be too small to accommodate today’s capacities.”
“China is making great progress in building alliances with the rest of the developing world as part of its struggle with the US.”
Separating the winners from the losers
It does seem as if China will remain a substantial polyethylene (PE) and ethylene glycols (EG) importer over the next ten years. But substantial declines in imports are possible.
China’ shift to self-sufficiency fits in with two of today’s four megatrends: demographics and geopolitics. Its ageing population is obviously a demographic trend. An ageing population means higher labour costs. Hence the push into higher-value manufacturing, including copolymer grades PP, that compensates for the economic disadvantages of higher wages.
China’s big split with the US, which began around four years ago, ended a benign period in world history that started with the fall of the Berlin Wall in 1989. During this period there was no Superpower competition.
China is making great progress in building alliances with the rest of the developing world as part of its struggle with the US.
But China cannot possibly know, as the rest of us cannot possibly know, how the Superpower struggle will ultimately play out and who will end up as its trading and geopolitical partners versus its adversaries. So, why would China take the risk of remaining heavily dependent on petrochemicals exports given the risk of geopolitics-related supply disruptions?
The ability to recognise and work effectively with the megatrends will separate tomorrow’s winners from losers.