China next: evolution to revolution - IHS Markit...China next: evolution to revolution Paul Pang,...

Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

21 March 2018Hilton Americas | Houston, TX, US

China next: evolution to revolution

Paul Pang, Vice President, APAC Oil, Mid-down Streams, and Chemical, IHS Markit

After nearly two‐decades of fast growth, China has started steering its manufacturing industry from “raw growth’ model to “quality” growth model. Phasing out outdated capacity, upgrading value chain, tightening control on environment, encouraging energy efficiency and “Green” economy will be key themes for the next decade. Some sectors and many plants will be phased out, and replaced with newer, more efficient plants, and the products will be higher quality and higher value‐added. This also will be the next growth arena. The presentation will focus changes happening in China and opportunities for oil and chemical companies.

1


19802010

2017

2


Agenda

What’s next?

Industry review

Macro economy

3


China is the most dynamic economy

© 2018 IHS MarkitSource: IHS Markit

China remains the global growth engine

GDP per cap in 1,000 US$ in 2017

15-2010-158-10< 8

0

3

6

9

0 10 202013

-201

7 av

erag

e gr

owth

rat

e (P

erce

nt)

2017 GDP in nominal trillion US$

> 20

China has now become the world second largest economy. It also has the highest GDP growth rate among all major economies. However, the economic development and wealth distribution in China varies significantly from region to region. Major cities such as Beijing, Shanghai, Tianjin and coastal region are the most developed regions. These places are where most of economic development and manufacturing activities locate. Whereas the inland regions in the central and west provinces, economic development are far behind. Therefore, China still has vast area waiting to be developed.

4


Transforming to sustainable growth

• Export driven

• Meeting basic living

• Investment driven

• Developing coastal region

• Consumer driven

• Satisfying quality living

• Upgrading to high value chain

• Developing interior region

FROM TO

After move than a decade‐long rapid growth, China’s economy is currently undergoing a major transformation. The country is trying to upgrade its industry from low‐end product manufacturing to high value‐added manufacturing and service industries.

5


Despite progress, hurdles remain

• Growing consumer demand

• Quality living

• Innovation

• Fast economic growth

• Industry capability

• Deteriorating environment

• Imitation

• Slow political reform

Desire Reality

VS.

China has already made some success in the transformation. However, there are still plenty of hurdles which it has to be overcome before China can fully unleash its next economic potential. Some hurdles can be overcome relatively easily, but some are much harder such promoting innovation and reforming political system.

6

Industry review: A successful evolution

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• Economic success propels demand growth for chemicals

• Key drivers:

‒World manufacturing floor

‒ Infrastructure buildup

‒Growing domestic consumption

Strong growth continues

Product: Benzene/PTA/MEG/Methanol/PE/PP/PVC/SM/Caustic/Soda ash

Global demand, million ton

Source: IHS Markit

Rest of East Asia Americas Europe Middle East ISC China

0

200

400

600

800

2000 2005 2010 2015 2020

Driven by strong economic growth, China’s demand for chemicals has grown by six folds over the past 17 years. Today, China is by far the largest market for nearly every chemical, and still has the highest growth rate among all major markets. This growth trend is expected to continue in the foreseeable future in the face of development in China’s interior regions and sustained competitiveness of its manufacturing industry.

8


Evolution of policy: opening up but gradual

Launch discharge permitting system

NOV

2019 20202017 20182015 20162013 201420122007

Deregulate most investment in chemical; Restrict less than 1000 KTA refining to JV with

local majority share

JANFDI in oil / gas, and cracker no

less than 800 KTA: JV only with local

majority share

OCTDeregulate

refining/ chemical FDI;

deregulate crude import

FEBDeregulate approval system

JAN

Completely deregulate refining/chemical;

restrict FDI in oil / gas upstream to JV only

JULY

Launch nationwide CO2 trading

DEC Environment protection tax

JAN ???

Carbon tax

Beside strong demand from downstream consumer product sector, the growth should also be attributed to deregulation of the industry. Over the past ten years, the government has lowered the hurdles for foreign and private companies going to refining and chemical industry, particularly within the past five years. Today, the constraint for foreign and private companies investing in refining is significantly lower and the constraint in chemical industry is nearly none.

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• Policy change paves way for private investment

• Private companies are more nimble and efficient

• Strong entrepreneurship

• Grow big to survive: eat or be eaten

Private investment is leading the growth

Product: olefins, PX, Bz, PTA, MEOH, MEG, Caustic, soda ash

Percent of capacityCapacity (million ton)

0%

20%

40%

60%

80%

0

100

200

300

400

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

Sinopec PetroChina CNOOC Foreign

Local Private

Capacity Comparison between SOEs and Private

Private & Local

As a result of deregulation, China’s private companies have taken over majority of growth share from the State‐owned‐enterprises. The surge in private ownership started in 2007 as a result of deregulation in the industry. In 2000, private companies accounted for only 17% of capacity; today, they account for 53%.

10


Capital investment in billion US$


Conventional petrochemical leads growth again

• Coal chemicals

– High CAPEX

– High emission

– Less policy incentives

– Competitive cash cost

• Conventional

– High profitability

– Lowered entry barriers

0

5

10

15

20

25

30

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

CTO/CTP MTO PDH CTMEG PX Cracker

Petrochemical

Unconventional

Over the past eight years, China has put a massive amount of investment in unconventional chemicals. These unconventional chemicals include coal chemicals, methanol to olefins and PDH. However, these unconventional chemicals have been depressed by low crude price since 2015. Over the past two years, the profitability for conventional petrochemical recovered and reached record high, and as a result, new investment into integrated refining/petrochemical complex has surged.

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North & Northeast

Middle & West

South

East

A wave of integrated refining / petrochemical complexes

8.Wanhua Chemical

2.SP Chemicals

Standalone light feed cracker

4.Sinopec Wuhan

14.Panjin-Aarmco

7.Shandong Yuhuang

9.Hengli PC

13.Shenghong PC

12.Zhejiang PC-Rongsheng II

3.Zhejiang PC-Rongsheng I

6.Sinochem QZ

10.Sinopec Gulei

1.CNOOC-SHELL

11.Sinopec Hainan

5.Sinopec/KPC

Integrated complex

Capacity addition (2018-2021), million ton

0

30

60

90

120

Refinery CDU0

5

10

15

20

C2 C3 PX

Currently, eight new petrochemical complexes are under construction, and another six are under planning. They are scheduled to be started up by 2021. Among them, eight are grass root integrated refining/olefin/aromatic complexes. Six of new complexes are invested by domestic private companies. This is a major change to China’s both refining and petrochemical industries.

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17%

North America

Commodity and specialty chemicals by value

• Strong in commodity but weak in specialty

• Short-term focus investment strategy

• Short history in the business

• Insufficient investment into R&D, due to poor IP protection

Commodity versus specialty

Source: IHS Markit

8%

China

Specialty Commodity© 2018 IHS Markit

Despite of strong growth in commodity chemicals, the growth in higher‐value added chemicals is comparably slow. In comparison to developed markets, specialty chemical accounts for much less the market share. This is mainly due to lack of investment into R&D and therefore lack of innovation. Although China’s market is significantly larger than the US and Europe, its chemical industry is fairly young. Technology accumulation is much less than the developed countries. In the meantime, IP protection in China has been poor, and there has been little incentive for the companies to invest in R&D.

13

What next?A revolution

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Change from volume growth to quality growth

•Focus on higher quality rather than higher volume

•Move up the value chains

• Increase technology content

•Enhance integration to increase competitiveness

Under Chinese government’s 13th Five Plan, the country is trying to move away from labor intensive, energy intensive and high pollution sectors, and instead upgrade its industry into high quality and high‐value‐added manufacturing and services industries. The government also promote industry consolidation and integration to increase efficient and competitiveness.

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•Phase out outdated capacity

•Move plants into industry parks

•Consolidate industry

Stepping up supply-side reform


Capacity rationalization, million ton

-

5

10

15

Capacity rationalization, million ton

(2013-17)

Soda ash PVC Caustic Methanol

Rationalized

(2018-20)

Rationalized or relocated

As part of industry consolidation, in recent year the government has stepped up the effort in closing down outdated plants, moving refineries and chemical plants into dedicated industry parks, and also consolidating small companies into integrated/large size enterprises. This is to improve environmental and safety standard, increase energy efficiency and ultimately revolutionize the industry’s global competitiveness.

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• Nation-wide carbon trading

• “Gas for coal” in “2+26” regions

• Enforcement of new regulations

• Ban on waste imports

Pollution issue: too serious to be ignored further

After a nearly two decade long of fast economic growth, China has achieved huge success in growing its economy and generating wealth for its citizens. However, this success comes at a large cost – a rapidly deteriorating environment. Air pollution and waterpollution are particularly serious in the economically developed North and East regions. In2017, the government started aggressively tackling environmental issues. Multiple hard measures have been implemented. This round of enforcements applies nation‐wide with a focus on the regions most affected by pollution.

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2017: toughest action ever on pollution

• Reduce energy consumption

• Enforce strict waste discharge permit

• Implement tight control on VOC emissions

• Close down uncompetitive capacity

• Scrutinize environmental impact and energy-saving for new project approval

• Key target sectors: ‒ aluminum‒ coal coking, steel ‒ construction materials ‒ carbide, and ammonia

Key targeted regions

North

East

North China ‐ China’s most heavily polluted area is the main target. “2017 environment protection act in Beijing, Tianjin, Hebei and surrounding area” (‘2+26 Act’) issued by the Ministry of Environment Protection and NDRC in March. The key element for this Act includes: reducing energy consumption; enforcing strict waste discharge permit;implementing tougher control on volatile organic compounds (VOC) emissions; eliminating redundant capacity; tightly scrutinizing environmental impact, and energy‐saving evaluations for any new project approval; strict pollution control targeting aluminum, coal coking, steel, construction materials, carbide, and ammonia sectors.

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Result: mostly positive

• Led to short-term shock on energy sector

• Disrupted certain supply chains

• Speed up supply-side reform

• Winner - large and established companies; Loser - small and medium companies

• Concern: unpredictability of policy and way of implementation

• Strict environmental control will last

This round of policy enforcements have a profound impact on energy sector. Coal has been the dominant fuel for power and heating. As a means to combat air pollution, the central government requests local governments and manufacturers to reduce the consumption of coal and replace with natural gas and/or electricity. As such, there was a huge shortage of gas in North China and cause disruption on the industry. The impact on large companiesand small companies are very different. Most large companies, especially large state‐owned enterprises, are equipped with modern plants and implement tighter waste and emissions control. These companies were little impacted and instead benefited from tighter supply, higher product prices, and thus enjoyed higher margins. However, small and medium‐sized companies, which are generally privately owned and have less systematic control on waste discharge and emissions, were forced to shut down.

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Ban on waste import: a big impact in recycling materials

© 2018 IHS MarkitSource: IHS MarkitDomestic Import

0

2

4

6

8

10

12

2000 2003 2006 2009 2012 2015 2018

China recycled PE/PP consumption, million ton

Ban waste import

China used to be the largest industrial scrap import country and the world scrap processing floor. As part of environmental protection measure, China bans any import of unprocessed industrial scrap and waste materials from September 1, 2017. This ban created a short‐term supply shock in plastic supply as previous recycled materials has to be replaced with virgin materials.

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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.Confidential. © 2017 IHS MarkitTM. All Rights Reserved.

EAST ASIA:Most economically

active region

WEST EUROPE:Well developed

region

• Takes advantage of international transport routes, core cities and key ports

• Connects Asia, Europe and Africa along five routes

• Covers massive economic areas

One Belt One Road”: a global ambition

Silk Road

Another development is China’s “One‐belt‐one‐road” initiative. This initiative is to connect East Asia and Europe, two largest economic regions with various land and sea routes.

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• Expand China’s soft power

• Move products efficiently within common trade beltways

• Access to huge consumer base

• Access to vast natural resources

• Capture business opportunity in infrastructure buildup

• Strengthen RMB role as a global currency

People-to-people bonds

Financial integration

Trade integration

Policy coordination

Facility connectivity

It is far beyond regional expansion

China sees this “One‐belt‐one‐road’ as a way to extend its economic momentum within and beyond China. The objectives can be summarized as: 1. expanding China political influence and its soft power along the Belt and Road regions; 2. capturing huge business opportunity for Chinese companies from the infrastructure buildup along the economic beltways; 3. the common trade beltways allows moving products efficiently across the regions, and enables Chinese companies to access to huge consumer base; and also allows Chinese companies to access to vast natural resources along the beltways; 4. strengthening RMB role as a global common currency; challenging US dollar’s dominance in global trade.

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Just need a “revolution”!

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Strategic implications

• China is reaching a turning point for revolutionizing its refining and chemical industry

• Macro policy change is expediting the change

• To stay in the lead, companies need to upgrade to higher-end and “greener” products

• China’s global ambition creates a new growth space

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Contact details

Paul PangVice President \ IHS Markit\ APAC Oil, Mid-down Streams, and Chemical

+86 21 24229016

[email protected]

Shanghai, China

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