China’s mega crude-to-chemicals projects a threat – Woods

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Higher base chemicals demand and feedstock security for heavy naphtha are driving the development of a new wave of mega-integrated refinery and chemical sites in China, says Wood Mackenzie team of research analysts.

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Private Chinese chemical producers, including Hengli and Rong Sheng, are back-integrating their chemical plants with refineries by building mega-integrated facilities which Woods expect will add over 9 million tonnes (Mt) of paraxylene (PX) capacity by 2021

This wave of Chinese investment Wood team said would outpace robust demand growth for the polyester chain and, as a result, we expect China to reduce its PX imports by more than 4 Mt by 2021.

“The question is what happens to Japan and South Korea which are major PX exporters to the world’s largest PX importer? They will have limited alternative export outlets and will almost certainly need to curtail their PX operating rates,” said Steve Jenkins, vice president, Wood Mackenzie.

According to Wood team, these new mega-integrated sites could yield up to 45 wt (weight) % of chemicals (the majority of which is PX, the primary feedstock for China’s massive polyester industry), two to three times more than a traditional integrated site, whilst processing heavy crudes.

Woods also believe that the high capital expenditure required for such sites has an impact on return on investment and development timelines, but that once it’s built, the integrated sites are first quartile in terms of competitive position against their refining and chemical peers. Adding that the margin uplift over refining for these mega-integrated sites could be significant, between $8/bbl and $14/bbl.

Sushant Gupta, research director, Wood Mackenzie said: “The Hengli and Rong Sheng projects could add up to 500,000 barrels per day (b/d) of medium- to heavy-crude demand in the market when they start operation. This additional demand would further tighten the heavy crude market as we expect a shortage of heavy crude at a global level in the medium term.

“As these integrated sites are mostly configured to process Middle Eastern crude, the ongoing trade tension between China and the US is unlikely to affect the projects. US sanctions on Iran crude exports, on the other hand, could limit their crude choices.

“We expect knock-on implications on the refining and fuels markets in Asia and beyond as these projects also produce large amounts of co-products such as gasoline and middle-distillates (jet fuel and diesel/ gasoil).”

China according to Woods team is expected to have a large surplus of about 780,000 b/d in middle distillates and about 500,000 b/d in gasoline in two years time. The team maintain that about 20% and 40% of the surplus in middle distillates and gasoline, respectively, comes from the Hengli and Rong Sheng projects alone. Another consequence for the gasoline market they say is that exporters of PX to China, mainly South Korea and Japan, will need to curtail their PX production which could see more gasoline supply of about 150,000 b/d to 200,000 b/d from these two countries.

“Higher diesel/ gasoil exports from China is welcome as it helps meet the higher demand for marine gasoil in the shipping sector resulting from the IMO regulation starting in 2020.” Additional supply of gasoline from China, South Korea and Japan however would add to the global surplus of gasoline post-2020, the team noted.

Adding that the development of such large and competitive projects, driven by chemicals, could increase the threat of closures for less competitive standalone refinery sites in China and Europe.

Mr Gupta has this to say: “Private refiners’ margins are already challenged by various factors, including tougher government policies, and now these bigger integrated sites will no doubt turn up the pressure.”

 

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