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COLUMN-Reality slams China petrochemicals, oil refining: Clyde Russell
April 30, 2014 / 8:16 AM / 4 years ago

COLUMN-Reality slams China petrochemicals, oil refining: Clyde Russell

--Clyde Russell is a Reuters columnist. The views expressed are his own.--

By Clyde Russell

LAUNCESTON, Australia, April 30 (Reuters) - First it was oil refining and now it’s petrochemicals getting a reality check in China.

The decision by top Asian refiner Sinopec Corp to scale back billions of dollars in petrochemical plants is belated recognition that the days of unfettered expansion are over, and not just because of the U.S. shale gas revolution.

In recent months China has seen a slew of delays and cancellations to oil refinery and petrochemical projects, as the full impact of slower economic growth, pollution concerns and foreign competition hits home.

Sinopec has delayed plans to build a $3.1 billion ethylene plant in Qingdao city, Reuters reported on April 28, citing a company source.

This means Sinopec has delayed or shelved projects with an annual capacity of nearly 4 million tonnes of ethylene, one of the key components for making plastics and synthetic fibres.

China’s other large state-controlled refiner, PetroChina , has also scaled back plans, delaying a $13 billion joint venture with Royal Dutch Shell in east China and another in Guangdong with Petroleos de Venezuela SA.

The suspensions or delays to petrochemical plants follow a similar process in oil refining, where PetroChina has put off until later two new refinery projects and the expansion of an existing plant.

There are different dynamics at work in oil refining and petrochemicals, but the overall message is the same: Projects will now be decided on their economics, and only those that can compete both domestically and globally will get the go-ahead.

OIL REFINING

In oil refining, the rush to build plants has been halted by the realisation that fuel demand has stopped growing as fast as had been expected.

China has around 12.5 million barrels per day (bpd) of refining capacity, with almost 600,000 bpd more slated to come on line in 2014 and plans for another 3 million bpd by 2020.

Problem is that oil demand was 9.96 million bpd in the first quarter of 2014, down 0.6 percent from a year ago.

While the pullback is likely to be temporary, the days of double-digit demand growth appear long gone, with the rise in consumption not likely to exceed 4 percent a year for the foreseeable future.

This means China will continue to have excess refining capacity, which if fully utilised would result in rising fuel exports.

China, the world’s second-largest crude consumer, turned to a net exporter of refined products in March, something that last happened in January 2010 and has only occurred on three occasions since data started in 2004, according to a Citibank research report.

It’s still too early to say a trend has been established, but it does appear more likely than not that China will become a sustained exporter of fuels.

In this China is becoming like the United States, which has also dramatically increased exports of refined products, although for different reasons.

GAS TO CHEMICALS

The boom in domestic oil production, mainly from shale wells, has lowered U.S. oil prices relative to the rest of the world and provided a competitive advantage to U.S. refiners.

Given that crude cannot be exported from the U.S. due to legislation, refiners have turned to exporting fuels, particularly diesel and liquefied petroleum gas.

The corresponding surge in shale gas output hasn’t yet resulted in exports of liquefied natural gas from the United States, although these are coming.

What it has done is improve the economics of U.S. petrochemical plants to the point where they can make ethylene from natural gas at about half the cost of a naphtha-based plant in China.

While U.S. natural gas prices have gained about 14 percent so far this year, they are still about a quarter of their 2005 peak and roughly half of the 10-year average prior to the shale revolution boosting production.

This has prompted a major expansion of gas-based chemical capacity in the United States, with Barclays listing at least 30 projects scheduled for completion by 2017.

HOSTAGE TO OIL

These new chemical plants will provide cheaper plastics and synthetic fibres to U.S. industry, meaning it will become more competitive globally, but especially with China and other Asian countries still reliant on oil-based naphtha for petrochemicals.

Effectively, Chinese and other Asian petrochemical makers are hostage to the price of crude oil.

Crude also looks to have more upside potential over the longer term than U.S. natural gas prices, given rising oil demand in the developing world and the near-constant threat of supply disruptions from conflicts in, or near, major producers in the Middle East, Africa and the former Soviet Union.

It is possible that naphtha prices will decline relative to crude, but so far this isn’t happening, with the premium for naphtha in Singapore over Brent remaining in a relatively narrow band over the past 18 months.

The crack NAF-SIN-CRK was $149.75 a tonne on April 29, down from its peak so far this year of $172.80, but up from the trough of $113.95.

Demand has been strong for naphtha in several Asian countries, such as South Korea, in recent weeks, even as Chinese imports have slipped.

In the first quarter China imported a net 158,042 tonnes a month, down from a net 265,639 tonnes a month in 2013 and 239,536 tonnes a month in 2012.

Part of this is that additional Chinese refining capacity means more domestically produced naphtha, while part is related to slower economic growth, particularly in plastic-intensive manufacturing sectors.

While a stronger economy may fuel Chinese naphtha buying in coming months, the longer-term outlook should be for considerably slower demand growth and lower prices.

But even lower naphtha prices are unlikely to make new petrochemical plants cost competitive with those in the United States. (Editing by Tom Hogue)

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