© 2013 Platts, McGraw Hill Financial. All rights reserved.

China move to curb excess capacity has petrochemicals sector on edge By Chua Sok Peng, Ng Baoying, Clement Choo, Joycelyn Chua, and Shashank Shekhar in Singapore

(July 30, 2013 )

Reduce feedstock availability for polyvinyl chloride producers

• China's booming petrochemical sector is bracing for change after the Ministry of Industry and Information Technology last Thursday released a list of 19 industries it says are beset by excess capacity and obsolete technology.

• The industries on the list are required to shut down the excess capacity by the end of September and eliminate it by the end of the year, according to the ministry's statement.

• Capacity in the calcium carbide, printing and dyeing and synthetic fibber sectors are among those earmarked for contraction.

• The clampdown on calcium carbide could reduce feedstock availability for polyvinyl chloride producers, further reducing their operating rates, industry watchers said.

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70% of the PVC currently produced is manufactured using calcium carbide

• China is the world's largest PVC producer but imports close to 1 million mt/year of PVC, while its domestic plants operate at 50-60% of capacity.

• China's overall PVC capacity is estimated at 32 million mt/year. More than 70% of the PVC currently produced is manufactured using calcium carbide rather than ethylene, and carbide-based PVC at least $35/mt cheaper than ethylene-based PVC.

• Carbide prices are linked to coal and electricity prices, and ethylene to crude and naphtha. In a similar vein, market watchers expect the purified terephthalic acid industry to undergo a painful restructuring in order to stay afloat once capacity in the synthetic fibber sector, downstream of PTA, is curbed.

• China has been on an expansion spree for PTA, a key component for polyester, since 2010, when production margins exceeded $120/mt due to global demand for China-made garments.

• The country's total PTA capacity ballooned to 26 million mt/year in 2012, when 10.2 million mt was started up during that year.

• Another 19 million mt/year is due to be added by 2015, taking China's total PTA capacity to 45 million mt/year, more than 10 times its 2012 import volume of 4.2 million mt.

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Downstream buyers are currently reluctant to stock up

• Similarly, Chinese caprolactam capacity is expected to increase by 700,000 mt by the end of the year, industry sources said, with at least four new plants starting up in 2013 and an expansion at an existing plant.

• Caprolactam is used in the production of nylon, a synthetic fibber earmarked by the government for reduction.

• Lu Xi Petrochemical started test runs at its 100,000 mt/year caprolactam plant in Liaocheng, Shandong province, mid-July and is expected to start up in a month's time.

• The line is one of two at the company's new 200,000 mt/year caprolactam plant, which will come online in two phases. It is not clear when the second 100,000 mt/year line will be started up.

• Downstream buyers are currently reluctant to stock up on caprolactam inventory due to the uncertainty over the market's direction once the new plants start up.

• Asian caprolactam was assessed at $2,285/mt CFR Far East Asia Thursday, up $5/mt week on week, indicating the directive is already having an impact.

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Printing and dyeing: 2EH, NBA

• The Chinese government has directed new oxo-alcohols producers to shut down for three to four days.

• "The directive came two weeks ago and it was left to the producers to decide the period of their shutdown," a Chinese consumer of 2-ethyl hexanol said.

• "Several of these producers have not yet started up their plants, and the two who did are undergoing shutdowns due to technical problems."

• About 1.2 million mt/year of new oxo-alcohols production – about 600,000 mt/year each of 2-EH and normal butanol -- is expected to come on stream in China over the next six months, and a total 2.4 million mt/year of new 2-EH and NBA over the next year.

• The paints and dyeing sector is a prime consumer of oxo-alcohols in China, alongside the plasticizer, detergent and leather tanning industries.

• Asian 2-EH prices rose $30/mt week on week to $1,440/mt CFR China last Thursday.

• NBA prices firmed $5/mt week on week to $1,275/mt CFR China and $1,300/mt CFR Southeast Asia, Thursday.

• "The impact of the directive has been more pronounced on 2-EH than NBA," a Chinese trader said.

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More industries with excess capacity: Methanol, Polybutadiene rubber

• Outside of the list, other industries in China are also facing excess capacity.

• China has a total methanol production capacity of more than 50 million mt/year, according to sources, who add that typical operating rates were around 30-40%.

• Amid softer feedstock coal prices in recent times, the average operating rate has been around 50-70%, sources said. This higher-than-usual rate has led to a wide gap between domestic and imported cargo prices.

• Last Friday, the domestic price in China was heard at Yuan 2,715/mt or $348.50/mt on an import parity basis, up Yuan 65/mt week on week.

• But this is significantly below the CFR China price, which was $369/mt last Friday, up $4/mt from the week before.

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China's methanol exports surge

• A trader said earlier that it was currently not possible to sell CFR China cargoes in the domestic market, and that he was buying CFR China cargoes for re-export.

• The higher operating rate has also started to affect trading patterns in a market that traditionally imports methanol for its overall requirements.

• China imported 275,337 mt of methanol in June, down 40% from May, according to General Administration of Customs data.

• Meanwhile, China's methanol exports surged over the same period, rising around eight times the volume exported in May to 175,902 mt in June, the data showed.

• Separately, production capacities for polybutadiene rubber were estimated at 1.325 million mt in 2012, and are expected to rise to 1.36 million in 2013.

• Among the new plants that came online in H1 2013 were Sinopec Maoming's 100,000 mt/year BR plant at Maoming in February and the Transfar Group's 100,000 mt/year plant at Jiaxing in April.

• Local market participants said the utilization rates for BR plants will be reduced as oversupply, coupled with weak demand from tire producers, has contributed to a buildup of synthetic rubber stocks

• Stocks at warehouses in Qingdao rose to 52,800 mt on July 17, up from 46,040 mt January 15, according to data from the Qingdao International Rubber Exchange.

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PTA margin turns negative amid oversupply: June 2010 - July 2013

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2-EH, NBA floundering: January 2012 - July 2013

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China methanol prices rebound on re-export interest: August 2012 - July 2013

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Thank You

• www.platts.com/petrochemicals

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© 2013 Platts, McGraw Hill Financial. All rights reserved.

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