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China: An Outlook for Chemical Demand in 2022

05/10/21

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As we draw closer to the end of the year, many observers are thinking about how 2022 will shape up in terms of demand and activity in the specialised products sector. In this piece, we look at China specifically, the engine of global petrochemical consumption and seaborne trade, and some key emerging factors that will impact the market over the coming 12 months.

The latest development seen that directly relates to refining and chemical output in China is a push from the government to meet its twin goals of achieving peak carbon in 2030 and net zero carbon by 2060. China’s economic policy maker, the National Development & Reform Commission (NDRC), restated the obligations of all Chinese provinces to meet their respective energy consumption targets in mid-September. Based on their respective energy consumption for the first half of 2021, nine provinces and autonomous regions are lagging behind their annual energy intensity targets, according to NDRC’s notice.

These include the industry-intensive hubs of Zhejiang and Jiangsu, and the order has prompted a scramble across the affected provinces to curb local industrial production and implement electricity restrictions across different sectors. These power restrictions have also seen smaller coal mines cut production and tightened up supply for other parts of the country. Power rationing is now in effect at 20 of the 31 provinces in mainland China, with coal-based power plants running at reduced rates to stem losses arising from high feedstock costs. Coal accounts for around 70% of Chinese power generation.

With the Chinese manufacturing PMI already showing a steady decline through most of the year to date, September finally saw the index fall into contraction.

Further bottlenecking and electricity rationing in Q4 will only add more downward pressure. Three state-owned refineries in Jiangsu province have cut output as part of efforts to meet the provincial energy consumption targets, and other privately-owned facilities are also trimming output – namely in Jiangsu, Zhejiang and Shandong.

There has already been an upturn on some key chemical markets as supply tightens, with monoethylene glycol (MEG) inventories already dropping to their lowest point in nearly two years despite an influx of typhoon-delayed volumes in August, and local prices are back above $800/tonne CFR for the first time since Q1 2021. With stock levels already below their March 2021 levels, and some larger MEG units facing downtime in Q4 in order to help meet emission targets, this could support increased import activity over the next few months and into 2022.

We are also seeing a similar scenario play out into October, with tightening supply on methanol, acetic acid and MTBE. There has also been a loss of production among non-integrated styrene units through September, though this has to a degree been counterbalanced by lower downstream operations.

The key question for the chemical tanker market is whether the current measures by the government will be sustained into next year, and what the likely impact will be on Chinese chemical production. The subsequent wave of new Chinese petrochemical projects scheduled to start running in Q4 and next year will also be impacted by the policy of the government if it is maintained.

On the one hand, reduced domestic output from China’s refining and petrochemical plants would potentially be a boost to the chemical tanker market if more imports are required from longhaul destinations such as the Middle East and the US, but the current shift in policy could have larger repercussions for the Chinese economy.

Stepping back to look at the wider picture, the current power crunch is prompting a revision of GDP forecasts among observers.

Morgan Stanley has reduced its outlook for Chinese GDP growth this year by 1% as a result of reduced industrial production, while Japan’s Nomura has likewise revised down its full-year GDP forecast for China to 7.7% from 8.2% previously, with Q3 and Q4 growths projected to come in at 4.7% and 3% respectively.

Looming on the horizon in China is the current uncertainty around construction giant Evergrande, who have again failed to meet another payment deadline for overseas investors. As the company scrambles to raise money to cover its debts, many are now wondering whether this will spell an end to the Chinese property bubble of the last decade. Given that real estate currently accounts for 29% of China’s GDP, any rebalancing of the market will have a profound impact on the economy.

The excess of housing and an ageing population – underscored in 2020 by the lowest number of new births recorded since the founding of People’s Republic of China in 1949 – will have profound implications for petrochemical markets. Industries like construction, automotive and consumer goods will all face restructuring.

If we take at face value the renewed commitment by Xi Jinping to “common prosperity” and a levelling of the wealth inequality gap – not to mention a sharper focus on environmental concerns – earlier forecasts and assumptions about long-term Chinese manufacturing and growth will have to be revisited. 2022 is the year when we will begin to see all of this truly unfold.