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China faces plastic overcapacity; strains global trade relations
Industry News- Jul 05,24
Some sectors of China's vast petrochemical industry are operating at half capacity as producers scale back.
China's petrochemical industry is facing overcapacity as polyester product exports increase, straining global trade relations. The world's second-largest economy is dealing with significant industrial excess. A surge in Chinese plastic supply threatens to flood markets amid weak domestic demand, creating a new trade issue globally.
Some sectors of China's vast petrochemical industry are operating at half capacity as producers scale back. However, with continued industry expansion, maintaining this restraint is becoming increasingly difficult. "This is yet another example—after steel and solar panels—where China’s structural imbalances are clearly spilling over into global markets," said Charlie Vest, an associate director at Rhodium Group.
Over the past decade, numerous plants have been built along China’s eastern coast to meet the country's demand for plastic and help refiners counter a downturn in transport fuels due to the rise of electric vehicles. Despite thin margins, companies continue production to maintain market share. "Overcapacity in chemicals in China seems to be an underappreciated risk in the sector," noted Michal Meidan, Director, China Energy Research program- Oxford Institute for Energy Studies.
Factories are managing the supply surge through brief shutdowns and low run rates, but as production capacity grows, surpluses are expected to increase. This could turn China into a significant exporter, potentially exacerbating existing trade tensions. China's substantial investments from 2020 to 2027 have reshaped global supply dynamics, leading to a structural surplus in Asia and persistent low or negative profit margins, said Kelly Cui, a principal petrochemicals analyst at Wood Mackenzie.
The International Energy Agency estimates that between 2019 and 2024, China will have completed enough plants to turn crude oil and gas into products like ethylene and propylene—materials used in plastic bottles and machinery—that its nameplate capacity will equal that of Europe, Japan, and South Korea combined. Small, specialised plants converting gas into propylene have proliferated, doubling global capacity since 2019. Local authorities have supported this growth with cheap land and fiscal incentives to stimulate job creation and investment.
Despite the supply surge, domestic demand has faltered. PDH plants, which used to operate at 80-85% capacity, are now running at under 70%, and sometimes as low as 50%. Nevertheless, at least nine new PDH plants are expected to start production between 2024 and 2025, leading to expectations of delays, closures, and increased overseas sales to manage the excess.
This situation is likely to strain trade relations with countries like South Korea, which has its own substantial refining sector. Additionally, with a US presidential election looming, accusations of damaging, state-fueled overcapacity from Washington and Brussels are anticipated. China became a net exporter of polypropylene in March, shipping to countries such as Vietnam, Thailand, Bangladesh, and Brazil. It is also a net exporter of polyester products like PVC and PET, sending them to nations like Nigeria, Vietnam, and India.
Without state intervention to shift producers towards higher-end products, this trend is unlikely to reverse soon. "Everyone in China believes that if they are fast enough, first in the industry, and able to sustain losses long enough, they will survive and dominate the market, eventually raising prices," said Vivien Zheng, Asia Chemicals Analyst, Bloomberg Intelligence. "Most of the new facilities were installed in the last three to five years. They want to endure the downcycle."
(Source: ET)
Vivien Zheng
Bloomberg Intelligence
polypropylene
PDH
Oxford Institute for Energy Studies
plastics
plastic
China
global trade
plastic trade
Michal Meidan
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