China's mega crude-to-chemicals projects may deal knockout blow to regional PX exporters
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. Private Chinese chemical producers, including Hengli and Rong Sheng, are back-integrating their chemical plants with refineries by building mega-integrated facilities. Wood Mackenzie expects these projects to come on stream in the next 12 to 24 months.
Both the Hengli and Rong Sheng projects are expected to add over 9 million tonnes (Mt) of paraxylene (PX) capacity by 2021. This wave of Chinese investment outpaces 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.
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.
However, the high capital expenditure required for such sites has an impact on return on investment and development timelines. But once built, the integrated sites are first quartile in terms of competitive position against their refining and chemical peers. 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 is expected to have a large surplus of about 780,000 b/d in middle distillates and about 500,000 b/d in gasoline by 2020. About 20% and 40% of the surplus in middle distillates and gasoline, respectively, comes from the Hengli and Rong Sheng projects alone. There is another consequence for the gasoline market. 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. However, additional supply of gasoline from China, South Korea and Japan would add to the global surplus of gasoline post-2020.
Furthermore, 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 said: "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."