Can China still attract polymer investments?

The recent announcement by energy major BP saying it is looking to divest its 50% stake in its Chinese petrochemicals joint venture SECCO raises two questions: One, is BP’s move a prelude to a wave of divestments by global producers in China’s petrochemicals/polymers industry? Two, if it is not, what are the new strategies being pursued by foreign polymer producers investing in China?

In a knee-jerk reaction to BP’s announcement, some industry observers asked: Was this the right time to divest its share in the cracker complex, when polymer margins were looking extremely healthy? Polyethylene margins against naphtha stood at close to $254/metric ton on August 15, while polypropylene margins were at $140/mt.

The SECCO complex includes a 600,000 mt/year PE plant and a 250,000 mt/year PP unit. The remaining ethylene from its 1.2 million mt/year naphtha cracker goes to feed a 650,000 mt/year styrene facility and a 300,000 mt/year polystyrene unit.

But sources in the banking fraternity concurred that for BP – reeling under the burden of $50 billion clean-up and legal costs for its 2010 Gulf of Mexico oil spill, as well as the sharp drop in earnings this year – this could be a good strategic move. BP’s profit dropped 45% year on year in the second quarter of 2016 to $720 million.

And if BP wants to sell any assets, SECCO is the way to go. There could be many contenders for the stake when petrochemicals, and especially polymers, are raking in good money. ExxonMobil’s H1 2016 earnings for petchems was $2.57 billion, or 73% of the company’s total earnings for H1.

A caveat to the first question that is now doing the rounds is: Will Sinopec, the other major shareholder in the joint venture, buy over BP’s stake? The Chinese state-owned major has been ambivalent so far, but may well be seriously considering the option given the government’s move towards achieving self-sufficiency in polymer production.

On to the second question: Does BP’s exit indicate a potential disinterest among foreign companies  in investments in the Chinese polymer industry?

Going by recent trends, one would be tempted to respond with a 'no'.

In May this year, Saudi Arabia’s SABIC signed a Project Development Agreement with Shenhua Ningxia Coal Industry Group for the joint development of a greenfield petrochemicals (possibly polymers) complex to be located in the Ningxia Hui region of China.

The primary motivation behind this project is a strategy that has been gaining popularity among polymer producers after the oil price plunge – diversification of feedstocks. This is clear from SABIC Vice Chairman & CEO, Yousef Al-Benyan’s statement, “This project reflects our enthusiasm to diversify our sources of feedstock, paving the way for further investment opportunities that depend on different and untraditional sources of feedstock. This protects SABIC against the fluctuations and cyclical movements in feedstock price   in the international markets, which helps ensure a profitable growth strategy.”

Despite its slowing demand growth, China continues to be a major market for polymers and will be a significant production center in the years to come. Hence,the strategy being pursued by producers such as SABIC to extend its footprint, not just as a polymer exporter to China, but also as a partner in local production.

Although China’s PE deficit is expected to narrow in 2016 to 9.2 million mt from 9.8 million mt in 2015, the shortfall is expected to grow post-2017 to 12.5 million mt in 2020, according to S&P Global Platts Petrochemicals Analytics.

The situation is similar, though less pronounced for PP, with the deficit estimated to shrink from 4.7 million mt in 2015 to 2.7 million mt in 2018, and increase to 3.6 million mt by 2020.

What this projection seems to indicate is that in the short term, China’s polymer deficit is set to dip, as a result of slowing demand growth on the heels of a sluggish economy. And it is not a question of demand growth alone. The shrinkage in the polymer deficit is also propelled by the proliferation of coal-to-olefins/polymers plants in recent years.

However,  in the longer term, demand is expected to bounce back, causing the shortfall to balloon, and providing enough incentive for investments to flow into the world’s biggest polymer market.