Even a commanding position in the fastest-growing plastics market in the world is not enough to keep China's two state-owned petrochemical giants, Sinopec and PetroChina, from worrying about the flood of lower-cost resin from the Middle East.
The two firms have a commanding presence in China — with more than 90 percent of the domestic production of polyethylene and 75 percent of the polypropylene capacity.
But the prospect of Middle Eastern resin up to 40 percent cheaper flooding China has them looking nervously over their shoulders and plotting strategies to upgrade.
“The considerable impact of Middle Eastern products will emerge in China in 2010, especially in polyethylene,” said Yu Jiao, deputy director of Sinopec's Economics and Development Research Institute in Beijing.
“[Middle Eastern producers] will aggressively open the China market and the competition will be more severe in 2010.”
Yu and other analysts spoke at the Flexpo 2010 conference, held June 9-11 in Beijing. The conference was hosted by Houston-based Chemical Market Resources Inc. and Beijing-based China National Chemical Information Center.
The price advantage to the Middle East firms, from their much lower-cost feedstocks, can be substantial, analysts said.
If Chinese PE costs about $1,120 per metric ton, for example, Middle Eastern PE can sell in China for between $640 and $720 per metric ton, even with transportation costs and import duties factored in, Yu said, citing an analysis from CMR Inc.
PetroChina presented a similar estimate. If Chinese-made high density PE sells for $800 a metric ton in China, for example, Middle Eastern material will sell for between $300 and $400 a metric ton there, said Wang Zhengyuan, a senior engineer with the company. Middle Eastern raw materials are 40 percent cheaper than the world average, he said.
“When we develop ethylene materials, we are very concerned about the raw-material cost,” Wang said. “It is not necessary in the Middle East. … The raw material for them is very cheap.”
Both companies said they need to upgrade their product offerings. Wang said PetroChina wants to shift away from commodity offerings and focus on higher value-added products in areas including pipe, wire and cable, biaxially oriented PP film and impact-modified PP for automotive and household appliances.
The Middle East price advantage is not nearly as strong in PP, he said.
“We should resort to technical support to give more development to the high-end products,” he said. “We cannot hold a candle to the producers in the Middle East” on cost, he said.
One Chinese analyst at the conference suggested that the lagging technology and small scale of China's polyolefin process units could get in the way of those upgrades, however.
Wang Fei, vice director of the consulting department of conference sponsor CNCIC, said China's polyolefin technology is “inferior” to world-leading technology.
Japan, for example, can produce more than 3,200 grades of PE, while China can make only about 100 varieties, Wang said.
He also said that the process units of China's polyolefin factories are smaller, generally about 2.2 billion pounds of capacity, compared with about 6.6 billion pounds for overseas plants, and the domestic plants consume more energy than what is typical worldwide.
As a result, foreign firms tend to dominate in the more expensive, higher-performance areas. In the PP market, for example, many of the specialized materials needed for high-end uses like washing machines and automobile parts are imported, said Sun Weishan, vice general secretary of the Beijing-based China Petroleum and Chemical Industry Association.
Imports made up about 48 percent of the PE market and 33 percent of the PP market in 2009 in China, and are expected to continue to be a large part of Chinese consumption, even as China's domestic production is expected to jump substantially, according to figures from CPCIA.
Even with intense competition from the Middle East, both Sinopec and PetroChina analysts said China's growing domestic market still offers many opportunities.
Wang said Chinese firms have advantages in logistics and responsiveness to markets, and can work more closely with local firms. He also said the Chinese resin industry can explore more joint venture opportunities with foreign firms.
The key for PetroChina, he suggested, is not to try to compete on price with the Middle East.
China may have built its economy on exports and being the world's lowest-cost labor spot, but that option isn't available to its resin industry. Instead, it will need to build a regionally competitive position, he said.
“We are not ready to surpass the Middle East but we can surpass other countries and companies,” Wang said.
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