By John Richardson
CHINA IS IN the process of drafting its 15th Five-Year Plan (2026-2030) in a geopolitical and economic environment that suggests the need for greater self-reliance.
Logically, therefore, it seems fair to assume that this will involve a continued push towards greater petrochemicals self-sufficiency.
But as I first discussed back in June 2024, China is to cap its refinery capacity from 2027 onwards because of the rapid growth in electric vehicles.
Reduced need for additional gasoline molecules might mean insufficient new supplies of naphtha, LPG and other refinery-derived petrochemical feedstocks to justify new petrochemical plants.
Why not, however, just import the feedstocks from, say, the Middle East—given that China’s relationship with the US, another major supplier of petrochemical feedstocks, may have suffered a long-term fracture?
And/or existing refineries, even if no new ones are built, can be retooled to produce more petrochemical feedstocks. This is already underway through, for example, Saudi Aramco investments in refineries and petrochemicals in China, as part of Aramco’s push to support oil production—again because of electrification of transport.
What further muddies the water are unconfirmed rumours of plans by China to rationalise coal-to-petrochemicals capacity for environmental and economic reasons, but probably not the bigger and newer coal-to-olefins plants.
Further murkiness comes from suggestions that smaller and older refinery-based petrochemicals plants could be shut down for cost-efficiency reasons.
Conflicting Messages on Construction Activity
Confused? Here is yet another aspect to this ambiguity.
Because of the trade war, there are suggestions out there that China might be slowing down its rate of petrochemicals construction.
“The mood has switched from ‘build, build and build’ to ‘let’s wait and see’ since 2 April [the launch of President Trump’s reciprocal tariffs],” a Middle East contact said a couple of weeks ago.
But before you run away with the idea that this comment provides some degree of clarity, I heard exactly the opposite from another contact, again from the Middle East.
His team of analysts attending the recent Chinaplas trade fair in Shanghai were told that China intends to press ahead with building new plants, and in the short term at least intends to raise operating rates at existing plants to the mid-80% range.
This was in response to supply concerns resulting from the trade war, he said.
Capacity utilisation has been in the high-70% range since the downturn began following the Evergrande Turning Point.
Then there is the issue of demand.
The weaker China’s demand growth this year and the higher the local operating rates, then of course the less need for China to import petrochemicals.
Before 2 April, it looked as if China’s petrochemicals demand growth would be in the low single digits.
This would have been sharply down from the double-digit growth rates during the 1992–2021 Chemicals Supercycle, but still of course positive.
Might China’s economy now experience a recession based on the unofficial rather than the official economic data?
The official data always paints a more positive picture. In such an event, petrochemicals consumption could go negative in 2025.
Planning for Trade War Outcomes
Such is the muddle over China’s economic growth—and the rest of the world’s—given the trade war, that I am recommending a scenario-based approach centred on the following four assumptions:
- The US does lots of preferential deals with individual countries and trading blocs, including China, and the trade war goes away.
- An all-out trade war results in a global recession.
- US-China tensions persist and China floods global markets with its exports. As manufacturing sectors elsewhere are undermined, trade barriers against China rise.
- Trump backs down and declares victory. Watch the dollar and Treasury yields as what might be an indication of the likelihood of this scenario.
Swirling beneath or around these four scenarios, as one of them plays out over several quarters if not years, could be increased dollar volatility.
As the dollar frequently weakens and strengthens, this would make it difficult for China’s petrochemicals importers to predict the affordability of cargoes in yuan or RMB.
It is what it is. You cannot run away or hide from today’s complexities, which is why petrochemical companies simply must set up or strengthen their trade war scenario-planning teams.
In line with the themes of this blog, the big exporters of petrochemicals in the US, the Middle East, South Korea and Southeast Asia need a wide range of scenarios for China’s net imports in 2025 and beyond.
And for the purposes of this blog, using the excellent ICIS Supply & Demand Database, let’s consider what all this muddle could mean for net imports of one product—PP.
Before the scenarios for net imports, however, consider the chart below and yet another layer of complexity: the 125% import tariff that appears to still apply to US propane.
On Friday 25 April, a document started to circulate markets, apparently from the China Customs department, indicating that tariff waivers would apply to imports of US PE and ethane, but not to EG (see my later post on EG) and propane.
As the chart describes, almost 60% of China’s propane imports came from the US last year.
In theory, these shipments could be replaced by cargoes from elsewhere.
But cargoes from, say, the Middle East to India that might be diverted to China are subject to long-term contracts.
The contracts would therefore need to be unpicked as US supplies India, and the Middle East shipments that were sent to India are diverted to China.
But given all the geopolitical uncertainties, how willing will buyers of Middle East propane be to switch to the US?
US propane could be more cost-effective on an FOB basis, but not perhaps when logistics are taken into account.
As a result, the ICIS view is that assuming the 125% tariff remains in place, China would not be able to replace all the US propane imports in the short term.
As recently as 2012, there was no propane dehydrogenation (PDH)-based propylene capacity in China.
This year, we expect 32% of China’s propylene capacity to be based on the PDH process, with 70% of Chinese propylene used to make PP.
ICIS thus expects that China’s PDH-based propylene operating rates will fall to below 59% in 2025 from 70% in 2024.
Will this mean a shortage of propylene to make PP?
Not necessarily, as cracker, refinery and coal-based propylene production could be increased if, as the second Middle East contact quoted above believes, the focus will be on increased PP self-sufficiency in response to the trade war.
The chart below includes different assumptions for China’s PP operating rates in 2025 and in 2027 and 2028, which would be determined by the factors above.
We also need to consider different outcomes for demand and capacity growth, as the words on the slides describe.
Yet another consideration is the extent to which China is able to export PP, depending on the level of trade tensions. China’s exports were at 2.4m tonnes in 2024, up from 1.3m tonnes in 2023.
If you require the full data behind the slide, then contact me at [email protected].
Suffice to say here, our Base Scenario would result in China’s net PP imports in 2025–2028 averaging 3m tonnes a year.
Alternative Scenario 1 would see net imports average 600,000 tonnes a year and Alternative Scenario 2 at 1.4m tonnes a year. Both these alternative scenarios would see some years of net exports.
Conclusion: Maybe It’s a Lot Simpler Than This
Having laid out all this muddle and confusion, my gut feel—and of course, as always, I could be wrong—is as simple as this: China will do its best to boost petrochemicals self-sufficiency in response to the trade war and, where it has to import, it will look to do so from the countries and regions with which it has the strongest trading relationships.
On balance, I see it as likely that China will raise its self-sufficiency over the next 1–3 years.
But you cannot take my always fallible words as the final words. You must extend and deepen your scenario planning in this ever-more murky environment.