The past year 2021 started with a big bang — or perhaps the word warning shot would be more appropriate — when 17 of China’s largest petrochemical companies signed a document on January 15 committing to the climate protection targets announced by the government in Beijing shortly before. CNOOC, Sinopec, Wanhua Chemical and other industry giants pledged to support the central planners' plans for emissions reductions.
Market observers are by majority convinced that China’s chemical executives were largely unprepared when state and party leader Xi Jinping promised in autumn 2020 that China aims to have passed the peak of its carbon dioxide emissions by 2030 and will be carbon neutral by 2060.
So, the chemical industry wants or needs to help meet Beijing’s climate targets, but the painful transformation needed to achieve this has only begun. It will hit larger corporations, especially large state-owned enterprises, less hard because they are able to handle the necessary investments in new technology better than private, especially medium-sized and smaller chemical companies. “The strong will become stronger,” writes the investment house Cinda Securities in its outlook for the current year.
Growth under difficult conditions
Major changes are on the horizon in the medium to long term. By 2025, the capacity of all processed crude oil in China is to be limited to a maximum of one billion tons. At the same time, capacity utilization for important products is to be increased to more than 80 percent.
China’s chemical industry is therefore promising a switch to low-carbon energy sources wherever possible, improvements in energy efficiency, an increased focus on low-carbon products and accompanying measures such as carbon storage and recycling (CCUS for ‘Carbon Capture, Use & Storage’). This is according to the document of January 15, published by the China Petroleum and Chemical Industry Federation.
However, since a large part of chemical production involves breaking down complex carbon compounds using large amounts of energy, it is rather uncertain at this stage how the sector can continue to grow in view of Beijing’s climate targets.
A particular problem for China’s chemical industry against this backdrop is the relative strength of coal chemistry — and in macroeconomic terms, the huge dependence of the entire industry on electricity generated by coal. More than 56 percent of all energy in the People’s Republic comes from coal. The chemical industry is the sector that consumes the most energy in China after the power and steel sectors.
In July, there was bad news for ‘Shaanxi Coal and Chemical’ when the largest coal chemical project on earth — in Yulin, Shaanxi province, with an investment of 20 billion dollars — was put on hold by the government. The reason was the new energy-saving and environmental regulations imposed by the central government. It looked like local governments in China were particularly targeting coal chemistry.
Coal dilemma plays a role in deciding the future
However, the headquarters in Beijing is currently sending mixed signals about the future of the chemical industry as well as coal chemistry. On the one hand, it has announced — among other things in a document published in Glasgow — the strict limitation of new refinery and conventional coal chemical projects. On the other hand, modern coal chemistry should certainly continue to play an important role in China, it said.
While the supply side is facing all kinds of risks for the year which has just begun, demand for chemical products in China, on the other hand, is very robust. In the first three quarters of 2021, cumulative GDP growth in China was 9.8 percent, and the key chemical industry is again forecast to grow in 2022 in most analyses, despite all the upheavals.
According to most observers, the impact of the Corona epidemic will continue to weaken China's chemical industry in 2022. Beijing is pursuing a strategy of strict, but also regionally narrow lockdowns that have a limited impact on production in macroeconomic terms.
“Looking ahead, to 2022, price volatility for chemical products will continue to increase. Against the background of climate neutrality, concentration in the industry will continue to increase. On the other hand, driven by strong demand in downstream industries, attention to new materials and those for semiconductors will continue to grow,” says a market outlook by ‘BOC International’, a subsidiary of the Bank of China.
Winners and chances
The winners of the current transformation trends include new energy carriers such as hydrogen, in which many Chinese chemical companies are currently investing massively, and above all the production of new chemical materials for photovoltaics and other ‘green’ technologies.
Nowhere are new industries such as e-mobility, energy storage or energy production with wind and solar power growing as fast as in China, resulting in enormous growth opportunities, especially for modern high-performance materials. It is no coincidence that Hengli Petrochemical (Dalian), for example, is currently investing in new production facilities for new materials with an annual capacity of 1.6 million tons. Many other companies in China are also investing in the sector.
Another example of a company with a lot of optimism for the new year is Baofeng Energy, one of the largest coal-to-olefin producers in China. The company is “accelerating the construction of hydrogen electrolysis projects with solar power nationwide”, according to a market report by Sealand Securities.
Overall, all major chemical companies in China continue to invest heavily in new production lines this year. Wanhua Chemical, for example, is investing in new capacities of 12.45 million tons per year. Taken together, the picture is one of a national chemical industry in transformation pain, but with continued good growth opportunities.
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Source: By Henrik Bork for Process Worlwide