INDUSTRY INSIGHTThought Leadership

China’s chemicals self-sufficiency may still increase despite the cap on refinery capacity

By John Richardson, Senior Consultant, Asia, ICIS

China has set itself of a target that 40% of all the vehicles on its roads will be electric by 2030. And by that year, the aim is that all new-vehicle sales will be electric vehicles (EVs). The country wants to reach peak carbon emissions before 2030 and carbon neutrality before 2060.

“After 2030, it is going to be pretty much impossible to get approval for a heavy industry project because of the emissions targets,” said a petrochemical industry source.

This has led to suggestions that the resulting lower availability of feedstocks from local refineries will slow China’s push toward complete petrochemicals self-sufficiency. I disagree for the following reasons.

The refinery cap versus more focus on petrochemical feedstocks

From 2027 until 2040, China has capped its refinery capacity at around 1 billion tons a year, according to ICIS analysis. This compares with between 2000 and 2027 when China’s capacity is forecast by ICIS to increase by 230%.

The decline in fuels demand because of electrification may also exert downward pressure on refinery operating rates, especially if China struggles to export its gasoline and diesel surpluses because of trade tensions.

But I’ve been told that local supply of naphtha etc. shouldn’t be a problem until up to at least 2030 because refineries will be increasingly turned into petrochemical feedstock centres.

More naphtha and gasoil crackers are expected to be added to refineries ahead of the 2030 cut-off point. Heavier fractions from refineries are also forecast to be increasingly used as petrochemical feedstocks.

Competitive overseas feedstock supply and weaker demand growth

And even if local feedstock supply does become constrained after 2030, we shouldn’t assume that this will restrict domestic production because of the weaker economics of importing raw materials.

China’s closer geopolitical relationships with the Middle East, along with increased availability of natural-gas liquids in the Middle East, suggest that imports of feedstocks will be available at the right costs.

My view is that China’s economic challenges will result in annual average petrochemical consumption growth of 1-3% per year up until 2030. Beyond 2030 I see growth falling to around 1%.

Weaker demand growth will of course make it easier to increase petrochemical self-sufficiency.

Demographics are the main reason why I see growth declining to these levels from the double-digit increases we saw during the Petrochemicals Supercycle in 1992-2021.

These challenges are neatly summarized by Yi Fujian, a demographer at the University of Wisconsin-Madison, in a 22 May article for Project Syndicate.

“The WHO [World Health Organisation] defines the start of an economy’s ageing phase as the point where the share of those aged 65 and older exceeds 7% – a demographic milestone China reached in 1998,” he wrote.

“By 2023, the share of Chinese people over 65 increased to 15.4%. Historically, no country has managed to achieve 4% growth in the subsequent 12 years after the elderly made up 15% of the population. The average growth rate for high-income countries during this period is just 1.8%,” he added.

Yi said that an ageing population affected production, consumption, entrepreneurship and innovation.

Shrinking labour forces had caused GDP per capita in Spain, Greece, and Portugal, respectively, to fall from 73%, 66%, and 51% of the US level in 2008 to 39%, 27%, and 32%, he said.

Sustainability and supply security

Because recycling is mainly a “local for local” business due to the restrictions on moving plastic waste across borders, the growth of recycling in China will increase the country’s self-sufficiency in polymers.

Recycling is exactly the type of higher-value industry China needs to nurture as it attempts to escape a middle-income trap made very deep by its demographic challenges.

A further reason to expect strong growth of recycling in China is the need to guarantee local supplies of raw materials in a more uncertain geopolitical environment.

Local petrochemical plants will be run at high operating rates for the same reason. These high rates will be achieved by maximizing supplies of feedstocks from local refineries, and by competitive imports of feedstocks from China’s geopolitical partners.

Potential self-sufficiency in specialities as well as commodities

Don’t be therefore distracted by suggestions that the growth of EVs in China and the country’s emissions targets will necessarily be good news for petrochemical exporters to China.

China will become a vast continent-sized market that could become just about entirely self-sufficient. This may apply to speciality chemicals and polymer composites as well as commodities.

An industry source described his visit to super-efficient very modern sites in China where the focus was on how China can make all the grades of chemicals and polymers it needed as it became a more developed economy.

This is said to apply to polyethylene (PE), polypropylene (PP) and polyurethane (PU) where local producers are reported to be tripling their range of grades as they broaden their licensing of technologies.

The source saw no reason why China wouldn’t meet all its own needs in PP quicker than was commonly assumed, including sufficient local output of high-impact, block- and random copolymer grades.

He saw the future winners in China as being what he called the Tier 1 suppliers. These suppliers would make all the grades necessary to serve ever-more sophisticated local end-use markets, which would require constantly successful R&D and good technical services, he said.

“These Tier 1 guys have highly skilled and knowledgeable sales and marketing executives with many years of experience, and who are loyal – they tend to remain with their employees for a long time,” added the source.

I believe China has moved into an era of much lower GDP growth because of a rapidly ageing population, the collapse of the real-estate bubble and the geopolitical split with the West.

With lower GDP growth will come much-reduced annual percentage increases in demand for commodity chemicals. Increases will be in the low single digits compared with around double-digit growth rates during the 1992-2021 Supercycle.

But what has always been different about speciality chemicals and clever compounding solutions is that growth is much more divorced from GDP than in commodities.

As China’s economy continues to develop, albeit at a slower headline rate, speciality and compounding markets should continue to boom.

A lot of this strong growth will likely be driven by sustainability and cost efficiencies, as of course is the case with specialities and compounding everywhere.

Let’s use the building sector as an example. China wants 25% of new homes to be built by 2030 using modular materials. Achieving this target may involve innovations in compounding including the use of polymers.

Modular buildings in China are said to take three months to build as opposed to the six months for conventional buildings, save on costs, and are more sustainable because the materials can be recycled.

Sure, China has a huge oversupply of housing in its richer provinces. But you cannot move housing across provincial borders to poorer provinces where the quality of housing is low.

Conclusion: Focus on other markets

This means that overseas producers must focus on markets elsewhere. As the above chart shows using high-density PE (HDPE) as an example, the opportunities in other countries and regions are big.

China lifted all petrochemical boats during the 1992-2021 Supercycle, making even the least-competitive companies successful. This is no longer the case.