China still sparks global chemicals growth: IHS

China remains the global chemical industry’s key demand driver despite slower gross domestic product (GDP) growth, according to Paul Pang, vice president at consultancy IHS Chemical. 

“In reality, demand in China is reasonably strong,” Pang told attendees this week at the IHS Chemical World Petrochemical Conference in Houston. 

In 2015, plastics demand grew at 1.5 times GDP, or 10%. Demand growth last year was driven by inventory buildup, substitution for other materials, and strong consumer spending. China accounted for 30% of the global basic chemicals demand in 2015.

Profitability varies by product chain. 

“Despite falling chemical prices, the profitability for base chemicals has been strong,” Pang said. “However, intermediate and performance material producers have been hurt by weak demand and large surplus capacities.” 

China’s GDP growth rate in 2015 was 6.9%, one of the slowest rates in the past 20 years -- and IHS predicts China’s growth rate will further decline to 6.3% in 2016. 

“The government has set a target growth rate of 6.6%/year through 2020, the slowest target in a long time,” Pang says. 

Overcapacity, high debt levels, and low or negative return on the investment in the heavy manufacturing, utilities, and mining sectors have been the principal drags. 

“On the other hand, the service sector and light manufacturing are proving more resilient,” Pang said.

Elsewhere, he rise of private and provincial investment in chemicals is changing China’s industry structure. 

“The dominance of state-owned enterprises has been challenged,” Pang said. 

Market share for private and provincial chemical producers has grown from 24% in 2010 to 41% in 2015. That share will grow to 47% by 2018, Pang projects. 

“Within five years, private and provincial ownership will account for half of China’s chemical industry," he said.

Most of the investment made by private and provincial investors are in unconventional chemical production, including coal-based production, methanol-to-olefins (MTO), and propane dehydrogenation (PDH). Investment in conventional petrochemicals has been falling since 2011, signaling a slowdown in petrochemical investment during a high oil price era.

China has invested heavily in unconventional chemical production since 2010. Investment in unconventional production peaked in 2015 and will remain at elevated levels for the next two years before declining rapidly after 2017, IHS says.

“It is expected that the investment in petrochemical will regain momentum after 2018 as petrochemical economics become more favorable,” Pang said.

Chinese olefins growth since 2010 has been driven by unconventional projects, including coal-to-olefins (CTO), MTO, and PDH. In 2010, nearly all of China’s 28 MMtpy of light olefins capacity was oil or naphtha based. 

“By 2015, 11 [MMtpy] of unconventional capacity was added, and it now accounts for 23% of country’s total light olefin capacity,” Pang says. “By 2020, it will reach 28 [MMtpy] and account for 41% of total ethylene and propylene capacity.”

Despite initial skepticism, coal-based chemicals production in China has arrived in a big wave, led by CTO units. The process uses thermal coal to produce methanol, ethylene, and propylene as intermediates, and eventually polyolefins as end-products.

China has commissioned eight CTO plants with a total of 4.6 MMtpy of light olefins capacity in recent years. An additional nine projects are under construction, with another 7 MMtpy of capacity expected to be brought on-stream by the end of 2017. Other projects have been announced, but are likely to face delays or cancellation. 

“The total planned capacity can be as high as 15 [MMtpy],” Pang said. “However, most of these planned projects are unlikely to be built due to water supply constraints in the coal-rich west, carbon taxes, and lower oil’s impact on capital returns.”

China’s long-term growth drivers remain unchanged, the IHS executive believes. “Economic development and infrastructure in the interior central and west China is still far behind these in the coastal region,” Pang said. “The government has an ambitious plan to further urbanize and close the wealth gap between inland and coastal regions, and eventually create more middle class consumers. There is still a huge demand potential for various commodities for construction and sustained consumer spending.”