This headline about China creating petrochemical deflation is largely based on the rate of capacity addition within China and that base chemical pricing in China still sits well above costs – but the argument may be flawed on a couple of levels. First, costs may not fall materially, given the increased thirst for imported naphtha and propane, as well as crude to fill new refining capacity. If crude prices fall, China will see lower costs, but then so will others. The margin issue is also in question because the wave of China’s new base chemical capacity is arriving amid a surge in demand growth, and this is why margins in Asia have not fallen closer to costs yet. China remains a meaningful importer of many base chemicals – less than two years ago for many products, but still meaningful, and it is the surpluses in the US and the Middle East that may drive deflation should supply chains stabilize and production rates remain high.
Most of the structural deflation in petrochemicals was achieved 20 years ago through economies of scale and consolidation and integration. China can add to the cyclicality of the industry with new capacity but it does not have a material impact on the global cost curve. As we showed in yesterday’s Weekly, ethylene prices in Asia would have to fall by around $400 per ton to get to the marginal cost of production.
Source: Bloomberg, C-MACC, May 2021