Domestic ethylene products are facing difficulties in finding buyers

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I recently saw this article online, so I’m sharing it with all my friends from Sichuan! Ethylene is a raw material for numerous chemical products and a key product that drives the downstream industrial chain; as such, interest in ethylene projects in China remains strong. Although domestic media kept issuing warnings of \"overheating,\" it seems the \"wolves\" never actually appeared. However, in the past two years, the growth rate of domestic ethylene production has been showing a gradual decline. Especially in 2008, domestic ethylene producers faced unprecedented problems of unsold products and a decline in operating rates. **According to the latest data released by the Bureau of Statistics, domestic ethylene production from January to November 2008 was 9.549 million tons, a 0.5% decline year-on-year, indicating negative growth. 　　Is this downward trend caused by a sneeze triggered by the global financial crisis, or by exhaustion resulting from overcapacity? 　　Reflection: The emperor’s daughters are also worried about finding husbands. The ethylene project does not refer merely to the ethylene production facilities. One reason is that ethylene is flammable and explosive and difficult to liquefy; it must be processed on-site into downstream products that are easier to store and transport. Therefore, ethylene projects generally include multiple sets of downstream processing units for ethylene ； Secondly, ethylene is currently produced by the light hydrocarbon cracking method; alongside ethylene, large amounts of propylene, methane, butadiene, benzene, cracked gasoline, and C10 products are also generated as by-products. Most of these by-products, like ethylene, are not suitable for sale as commodities; the ethylene project must also make comprehensive use of these by-products, utilizing them to the fullest extent, in order to achieve economic benefits for the project. Therefore, the previous ethylene project required huge investment. A 300,000-ton ethylene project includes the entire integrated facility, with investments often exceeding 10 billion yuan. 　　Although ethylene products are described as being in high demand and easy to sell, since 2008, China’s ethylene production has started to decline after experiencing continuous double-digit growth. In 2005, ethylene production was 7.55 million tons, representing a growth rate of 20%. In 2006, ethylene production amounted to 9.41 million tons, with a growth rate of 24.6%. However, in 2007 China’s ethylene production was 10.48 million tons, with the growth rate dropping to 12%. In 2008, the growth rate of China’s ethylene production declined significantly; from January to November, domestic ethylene production amounted to 9.549 million tons, a decrease of 0.5% compared to the previous year. The annual increase in ethylene production is expected to decline by around 10 percentage points in 2008. 　　Zhu Baoqin, deputy chief engineer of Qilu Petrochemical Company, one of the largest ethylene producers in the country, told reporters that Qilu Company currently has an ethylene production capacity of 800,000 tons. The head office has now approved Qilu Company’s expansion of its ethylene production capacity to 1.4 million tons. But now, ethylene products are not as easily marketable as they used to be. In the previous two years, during the period of strong demand for ethylene products, Qilu’s ethylene plants operated at full capacity without pause, with an annual operation rate of over 100 percent. However, since 2008, the operating rate of Qilu’s ethylene plants has been only 80%. In 2008, the ethylene production in Qilu will decline compared to 2007, experiencing a historically rare negative growth. Originally, the downstream product of ethylene, styrene-butadiene rubber, could be sold for 18,000 yuan per ton, but now it cannot even be sold at 7,000 yuan per ton. It seems that there is an oversupply of ethylene production capacity in the country. 　　Analysis: Overcapacity is an undeniable fact. Recently, a reporter interviewed Cao Xiaoxi, deputy chief engineer at Sinopec’s Economic and Technical Research Institute. He told reporters that, based on the information he has and his analysis, it is clear that there is an overcapacity of ethylene production in the country. This is evident from the declining operating rates of existing ethylene plants, which are currently at around 80% on average. You should know that in the previous years, the utilization rate of these facilities was over 100%. Since 2008, domestic ethylene producers have generally faced unsold products, a significant increase in inventory levels, falling prices, and began to incur losses. 　　It is understood that this year, CNPC and Sinopec are expected to commission 5 ethylene production units in China. Among them, 3 sets are from Sinopec, with a total production capacity of 3 million tons. Sinopec’s two joint venture projects in Fujian and Tianjin are scheduled to be completed and put into operation in the first quarter of this year and in September, respectively. Additionally, the Zhenhai Large Ethylene Project, funded by Sinopec with an investment of 21.9 billion yuan, will also be completed in September this year, with operations starting in December following trial runs. The project has an annual production capacity of 1 million tons of ethylene. In addition, CNPC’s refining and ethylene project in **Dushanzi will also be completed and put into operation this year. The total production capacity of this project is 1 million tons. Next year, CNPC will have more ethylene projects coming online, including an 800,000-ton ethylene plant and related facilities at Sichuan Petrochemical, an expansion project for an ethylene production capacity of 1 million tons at Fushun Petrochemical, and an expansion project for an ethylene production capacity of 1.2 million tons at Daqing Petrochemical. Cao Xiaoxi believes that such a high level of capacity expansion will exacerbate the problem of excess ethylene in the domestic market. Even if the units scheduled to come online this year are not put into operation, there is already an excess of ethylene in the domestic market. Since demand is dynamic, it is not certain exactly how large the surplus is, but a surplus does exist. Cao Xiaoxi also told reporters that there is an oversupply of ethylene production capacity not only in China but around the world. The so-called downturn in the chemical industry at present is primarily due to overcapacity. The surplus is expected to worsen in 2009, reaching a peak in 2011, by which time the excess production capacity will exceed 10 million tons. Cao Xiaoxi revealed that several large ethylene production projects under construction by the two major groups have seen their construction speeds slowed down and the dates of commissioning postponed, as under the current circumstances, operating one day earlier means incurring losses of one day. The reason for the loss is mainly the decline in product prices, while the price of crude oil did not drop accordingly. This involves **the issue of oil pricing mechanisms, and companies are powerless to do anything about it. Especially in the current global financial crisis, the prices of petrochemical products led by ethylene, including the three major synthetic materials and organic raw materials, are declining. As key end-market sectors such as construction materials, light industry, and textiles are severely affected, they are unable to absorb the price increases transmitted from upstream. The significant impact on export-related industries and the negative growth in durable consumer goods industries will both have a certain effect on the demand for the three major synthetic materials and organic raw materials. Under the cyclical impact of an oversupply of products globally, the financial crisis will have a more negative effect on the petrochemical industry. Suggestion: The mindset of focusing solely on output needs to change. The journalist also learned from the Petroleum and Chemical Planning Institute about a negative development: in recent years, global multinational companies have taken advantage of the favorable conditions in resource-rich areas and market regions to build facilities of world-class scale; in particular, the petrochemical industry in the Middle East and Asia has seen rapid growth, with ethylene serving as a key component in this development. Leveraging the advantage of cheap raw materials, the Middle East region partners with international corporations to build world-class ethylene plants using advanced global technologies, thereby making its downstream ethylene products highly competitive. According to the forecasts of CMAI, between 2005 and 2009, the Middle East will see an additional 14 million tons of ethylene production capacity added. Among them, Iran has over 6 million tons, while Saudi Arabia has over 4 million tons; the ethylene production capacity of Qatar and the UAE is also set to double. By 2010, the ethylene production capacity in the Middle East will increase to 24 million tons, and its share in the global ethylene market will rise to 17%. Given that the demand for ethylene derivatives in the Middle East remains low at present and for some time to come, the products will primarily be used for export. These products will compete fiercely for the Chinese market. Because the local oil and ethane raw materials are very cheap, the production costs are low, making its products highly competitive. Their prices are much lower than before, which could exacerbate the difficulties in the domestic chemical industry. Cao Xiaoxi said that some analysis firms, seeing that China’s imports of downstream products derived from ethylene remain high, believe that there is significant room for the development of ethylene production capacity in China, which could replace those imports. This view is debatable. One reason is that these products are imported from the Middle East, where raw materials are inexpensive; some of them are processed locally using natural gas released from oil fields, giving them a price advantage that domestic companies cannot match. As a result, it is certainly difficult for ethylene produced in China to replace these imports ； Secondly, some of this imported ethylene is brought in as raw material for processing under contract; the import of such raw materials is specified in the processing contract, so it is certainly difficult for domestic products to take its place ； Thirdly, with the advancement of economic globalization, bulk ethylene-based products are shifting to resource-rich regions such as the Middle East, where they gain a foothold in local markets – this is an inevitable trend. Importing such products into China is equivalent to importing crude oil; therefore, China is bound to increase its imports. Cao Xiaoxi suggests that domestic chemical companies need to assess the current situation clearly and make timely adjustments; reducing production volume and limiting capacity expansion are both viable strategies. If we keep waiting, we will only suffer greater losses. Furthermore, at present, China’s chemical products are mainly sold domestically; efforts should be made to increase exports in order to capture foreign markets. Gu Zongqin, director of the Petroleum and Chemical Planning Institute, suggested that in light of the current changes in the global development landscape of the ethylene industry, especially the significant economic shifts caused by the financial crisis in the United States, domestic ethylene producers must reevaluate their existing development strategies. Ethylene expansion and new projects need to be arranged in order; the economic benefits of both new and expansion projects must be recalculated. For some new projects, careful decision-making is necessary under the current circumstances; those that don’t need to be launched urgently can be put on hold, but the preliminary work still needs to be done so that they can be started immediately once the opportunity arises. Zhu Baoqin, deputy chief engineer of Qilu Petrochemical Company, believes that in the face of the new situation of excess ethylene production capacity in China, Sinopec, which accounts for over 60% of China’s ethylene output, should change its approach to development. First, it is necessary to control the expansion rate of ethylene production. Most of Sinopec’s current ethylene products are standard-grade goods, so it’s definitely not feasible to expand production capacity any further. Second, it is necessary to vigorously develop high-value-added downstream products of ethylene in order to extend the industrial chain. For example, if rubber from Qilu is no longer easy to sell, can we produce tires on our own? That’s how large foreign petrochemical companies operate. Michelin was originally also a pure petrochemical company, but it later evolved into a company that mainly focuses on tires. In short, with the development of China’s ethylene industry to its current stage, the approach to growth should shift from focusing solely on production volume in the past to emphasizing the development of downstream products with high added value.