THE Chinese petrochemical industry faces a big challenge in coming years due to a sharp rise in production capacity in the Middle East where feedstock costs are low, an industry forum was told.
Industry officials said that easier access to feedstock such as natural gas and naphtha will give petrochemical producers in the Middle East a large competitive edge in costs over Chinese peers and that a bulk of the region's upcoming capacity is targeting China.
Between 2006 and 2012, the Middle East is forecast to add 23 million tons of annual ethylene capacity, representing 45 percent of the world's total increase during the period, said Qin Weizhong, vice chief of Sinopec Corp's development and planning department. Sinopec is China's top oil refiner.
Ethylene, made from oil or gas, is the most basic petrochemical building block used to make plastics and synthetic fibers for a wide variety of manufacturing sectors.
"The added Mideast capacity will mainly target East Asia, especially China," as demand in mature markets softens, Qin told the China Petrochemical Focus last week in Shanghai. "Most of the growth will be in Saudi Arabia, Iran and Qatar."
According to Abdulrahman Al-Ubaid, vice president of polymers section at Saudi Basic Industries Corp, the Middle East's ethylene capacity could account for 20 percent of the world's total in 2010 from 2005's 10 percent.
"The Middle East has obvious advantages in costs," said Liu Jie, deputy chief economic adviser of PetroChina Co's chemicals and marketing division. "The average production costs for ethylene and polyethylene is about 50 percent lower in the Middle East than in North and East Asia. This is posing a sharp challenge to China's petrochemical industry."
Polyolefin is another example. Some exporters in Europe and the United States will be the first to be pushed out of the Chinese polyolefin market by 2010. These exporters have higher delivery costs to China compared to those in the Mideast, said Didier Baudrand, president of BP Plc's Asian petrochemicals and venture business.
Polyolefin is a synthetic fiber group represented by polyethylene and polypropylene. It is among the most widely used in plastics.
Although the National Development and Reform Commission, China's top planner, has mapped out a five-year industry plan to more than double its ethylene capacity by 2010, the nation still relies on imports as a large portion of its ethylene needs due to fast rising demand, spurred by automobiles, textiles, electronics and other manufacturing sectors.
China is forecast to have ethylene capacity of up to 18 million tons and output of 14.5 million tons in 2010, with a self-sufficiency rate of 58 percent, said Bai Yi, vice president of the China National Petroleum and Chemical Planning Institute.
The country's ethylene self-sufficiency rate was 43 percent in 2005, against 78 percent in 1990.
China's ethylene supply gap may widen to nine million tons in 2010 and 16 million tons by the end of 2020, said PetroChina's Liu, the country's largest oil and gas producer.
Liu also said China could have problems in securing a stable supply of cheap naphtha with its own rapid construction of ethylene crackers. Naphtha is derived from crude oil and used to produce ethylene and gasoline.
"The tight raw material supply condition, together with rising imports from the Middle East, will force some uncompetitive Chinese producers, typically inefficient, small-scale ones, to quit this market," Liu said.
The government's push for higher quality auto fuel could worsen the shortage, Sinopec's Qin added.
China has been lowering import tariffs for some petrochemicals. Ethylene now has zero import tariffs but the duty is six percent for naphtha. Import tariffs could help protect major domestic petrochemical firms including Sinopec and PetroChina.
Hu Chunli, director of industrial development under the National Development and Reform Commission, said they will be an oversupply of some low-end petrochemicals in China over the coming years. He said chemical fibers and polyester have already flooded the market.