BMI's latest China Petrochemicals Report warns that China's plans to curb short-term over-capacity could make the country more dependent on petrochemicals imports in the long-term. In H109, ethylene output was down 6.8% year-on-year (y-o-y) to 4.8mn tonnes, while plastic in primary forms was down 0.1% to 16.5mn tonnes and the manufacturing of plastic products was up 4.9% to 20.2mn tonnes. While the results were poor by historical standards, Q209 saw some signs of recovery as a result of the government's economic stimulus efforts; in June, the fall in ethylene output had moderated to 2.8% and plastics output was up 3.2%. Inventories had largely been cleared along the supply chain and demand was showing signs of revival with BMI anticipating an increase in H209. By end-2009, BMI estimates that petrochemicals output grew by 0.5%. However, exports are unlikely to recover until H210, while domestic demand growth is making a gradual but slow recovery. Domestic end-user demand for chemicals has been hit hard by the fall in exports, with external demand for textiles, garments and toys falling sharply. China Petrochemical and Chemical Corporation (Sinopec)'s petrochemicals production saw petrochemical production decline in the first nine months of 2009, with ethylene output down 2.25% y-oy to 4.74mn tonnes, synthetic resins up 1.05% to 7.41mn tonnes and synthetic fibre monomer and polymer up 0.65% to 5.73mn tonnes (including output from BASF-YPC and joint ventures (JVs) between Shanghai Secco and BASF and BP). Output appeared to rally in Q309, assisted by the opening of new petrochemicals units. BMI cautions that while the global economy is in a phase of slowdown, Chinese expansions over the next two years could create a surplus of supply, if not in China then in the international market. We estimate there was a 2.15mn tpa increase in PE capacity and a 2.25mn tpa increase in PP in 2009. With BMI anticipating domestic demand growth of 2%, polymer market self-sufficiency should approach 75% PE and exceed 100% PP in 2010. Overexpansion of PVC production in China in recent years has led to a market imbalance. Demand for PVC has been rising in recent years because of increased consumption from the chemicals and construction industries. However, the China Chlorine-Alkali Industry Association says there will soon be too much PVC, with capacity accelerating further in 2009. Under China's petrochemical stimulus plan, China aims to boost its annual crude oil processing, fuel output and ethylene output to 405mn tpa, 247.50mn tpa and 15.5mn tpa by end-2011. BMI believes that, on the basis of current projects, China could achieve ethylene capacity of 17.91mn tpa by end-2011. However, there are growing concerns that the industry is growing too fast, yet lagging behind in terms of efficiency and cost competitiveness. In response to concerns raised in industry circles, the China Petroleum and Chemical Industry Association (CPCIA) has set out plans for the restructuring of the petrochemical industry. The guidelines recommend that China increase its ethylene output to between 21- 23mn tpa by 2015, which is below the 24.7mn tpa BMI forecasts for 2014 based on current confirmed plans. If implemented, the strategy could lead to the cancellation or delay of two or three ethylene crackers and associated downstream units. While we caution that China will face over-capacity amid a short-term downturn in demand growth, we believe that in the long-term the limits proposed for cracker capacity could make the country more import-dependent and erode its competitiveness.
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