Chemicals consultancy group Wood Mackenzie predicts the start of a downcycle in China’s petrochemicals industry.

A supply overhang has hit the country’s paraxylene (PX) market, with olefins and polyolefins markets almost certain to follow.

The PX market experienced turbulence last year. Market supply is lengthening at an unprecedented pace as some of the world’s largest PX buyers have started to operate world-scale PX assets. The PX-naphtha spread has more than halved in the past year, and some producers in the region are struggling with negative production margins.

“We do not expect market fundamentals to improve and it will likely worsen this year, as more capacity prepares for startup. Even more projects are also in the pipeline over the next five years,” says Wood Mackenzie consultant Arthur Luo.

Last year, PX capacity increased by 36% year-on-year to 17.2-million tons a year, while production also increased by 30% to 13-million tons a year. In 2018, exceptional downstream demand growth drove China’s overall use rate up to 80%. But in 2019, use rates dropped to 76%, as new producers stabilised megaplants, and some existing producers scaled back production. Wood Mackenzie expects domestic PX capacity to grow by another five-million tons a year this year.

“Newcomers to the PX market are expected to face a slowdown in the downstream polyester market. We expect consumption growth to moderate to 9% in 2019 and to slow down further to 4.6% this year. Additional capacity will weigh on margins and depress the overall PX use rate towards 70%,” Luo comments.

“This supply surge, coupled with a weakening economy, will create severe challenges for China’s petrochemicals market. We expect chemical commodity prices to fall further and production margins will continue to be squeezed,” says Wood Mackenzie senior consulting manager Kelly Cui.

China will add 5.8-million tons a year of ethylene and 5.75-million tons a year of propylene capacity this year, accounting for 47% and 75% of global additions respectively. China’s ethylene capacity addition this year will equate to 57% of South Korea’s total ethylene capacity and 85% of Japan’s total capacity.

Pressured by the supply surge, China olefins operating rates will be forced down this year. The company expects ethylene operating rates to drop from 96% last year to 87% this year, while propylene will drop from 82% to around 80%. China’s olefins industry will start to enter a downcycle from this year.

“The opening up of foreign investment and the relaxation of crude oil import licences and quotas to Chinese private companies have brought on more capacity to the olefins sector. Demand, on the other hand, is expected to remain stable this year. This means the market will become more complicated and volatile,” Cui stresses.

Last year, naphtha-based ethylene margins reached their lowest since 2014, averaging $313/t. Although last year’s average margin does not appear to be so tight, the market has been in a transition period since the fourth quarter last year when the ethylene market price dropped below $800/t. This level has already hit some production cost lines, forcing some producers to cut operating rates to stabilise the market.

This year, Wood Mackenzie expects the average ethylene price and margins to drop further.

Weak global economic growth, the US-China trade war, a decrease in automobile production and a booming electronic-commerce industry influenced China’s polyolefins market last year. The country’s polyethylene and polypropylene incremental growth captured 69% and 61% of total global polyethylene and polypropylene incremental demand respectively.

But robust domestic demand and a weak export market forged different demand patterns between polyethylene and polypropylene last year.

“We expect polyethylene to achieve a higher-than-gross domestic product (GDP) growth rate for last year, at around 7.5%. Polypropylene demand, however, impacted by weak global economic growth and automobile production, is expected to have a growth rate of 5.9%, just below the GDP growth rate,” says Wood Mackenzie senior consultant William Liu.