The oil business is rarely dull, and the Chinese petrochemical industry faces a mixed year in 2009. Consumption is rising, domestic production still does not meet demand, and oil prices are expected to rise then fall again.
As more and more people own cars, the demand for oil and chemical products will expand, paving the way for the rapid development of the petrochemical industry.

In 2008, China sold 3.4 million motor vehicles, an increase of 30% year-on-year (see the April issue of BizShanghai for several articles on this booming sector). The number of cars owned by urban families rose from six per 1,000 households in the first three quarters of 2001 to nine per 1,000 households in the first three quarters of last year a 50% increase. Spending by urban families on transport and telecommunications reached RMB 460 per capita, up 300% year-on-year, with the proportion in total consumption rising from 8.7% to 10%. With the further lowering in motor vehicle tariffs in 2009, the competition among motor vehicle manufacturers will be intense and the car market will continue to boom. More cars mean more petrol.

But at present, the supply of many petroleum and chemical products falls short of demand in China, which has to depend on imports (see the June issue of BizShanghai for an article about China’s plans to limit this dependence). China?s self-sufficient rate of five major synthetic resins is only 74%. A forecast shows that the amount of ethylene consumed will reach 15 million tons annually by the end of 2011, and production capacity will be 8.3 million tons annually.

There will still be a big gap between the demand and supply. In addition, China’s consumption of plastics will go up 51% to 25 million tons by the end of 2011 and its production capacity of plastics will increase 74% to 15 million tons, leaving a gap of 10 million tons. By the end of 2012, import of high-density polyethylene (HDPE), low-density polyethylene (LDPE), linear low-density polyethylene (LLDPE) and polypropylene (PP) will still account for 50% of the total consumed. But this does of course offer new opportunities for the domestic petrochemical industry, as well as foreign companies.

Another opportunity is China’s low per capita consumption of many petrochemical goods. One example is ethylene. At present, the amount of ethylene owned by Chinese people averages 4.9 kilograms, lower than the average level of 13 kilograms per capita in the world, 78.3 kilograms in Western Europe, 76.8 kilograms in the United States, 47.5 kilograms in Japan, 71.6 kilograms in the Republic of Korea and 16.6 kilograms in Thailand. So the ethylene industry has room for development.

On the other hand, there are, however, some unfavourable factors that will affect the development of the industry.

In 2009, international oil prices are expected to fluctuate, rising initially, and then falling. Soon after the end of the US-Iraq war, oil prices fell, although there have been some rises after further terrorist activity. However, with oil being the staple raw material for the petrochemical industry, any price fluctuation directly influences its development.

Generally speaking, rising oil prices will cause rising production costs. If increased production costs cannot be shaken off, economic performance of petrochemical enterprises will fall. A price fall, on the other hand, would help cut production costs, boost enterprises economic return. However, if enterprises shake off the increased production costs without delay, and the oil prices rise further, companies can grow. This is because inflation would stimulate the “middleman’s” demand for petrochemical products, and this rise of demand would accelerate petrochemical production growth.

On the contrary, once oil prices go downwards, the “middleman’s” demand for oil will drop. and they will wait patiently to buy after the prices drop, thus slowing down the production speed of petrochemical enterprises. Therefore, fluctuation of oil prices on the international market will force the production to go up first and then down in 2009. The economic returns of petrochemical enterprises will not be optimistic, further reductions on certain petrochemical products this year, in order to keep the promises made during WTO negotiations. This will further help foreign products to compete with China’s petrochemical industry. In addition, the import quota for oil products, chemical fertilizer and tyres will rise by 10-15% annually, further intensifying competition.

At a time when the petrochemical industries of economically developed countries are mature, China’s industry is still at the stage of shifting from extensive operation to intensive operation. It is faced with dual pressures of adjusting its industrial structure and catching up with the third industrial restructuring of the international petrochemical industry.

Therefore, China’s petrochemical industry is expected to grow rapidly initially this year, but growth will slow later. Annual production will rise a little. The gross output value will remain at 17% this year, and the production of major products such as oil products, ethylene, chemical fibre and synthetic resin will increase rapidly. Overall, China’s oil executives are not likely to have any shortage of work this year!