China’s Plastics Boom Is Set to Create Another Trade Headache

(Bloomberg) -- A surge of Chinese plastic supply is threatening to overflow in the face of weak domestic demand, morphing into a fresh trade challenge for the rest of the world.

Parts of the country’s sprawling petrochemicals sector are running at as little as half capacity as producers cut back. But with the industry still expanding, that restraint is becoming harder to sustain.

“This is yet another example — after steel, solar panels — where China’s structural imbalances are clearly spilling over into global markets,” said Charlie Vest, a New York-based associate director at Rhodium Group who looks at US-China relations and Chinese industrial policy.

Plants have mushroomed along the country’s eastern coast over the last decade, built in a race to satisfy China’s hunger for plastic and to help refiners counter an expected downturn in transport fuels, as electric vehicles take off. Vast volumes and lackluster post-pandemic demand mean margins are paper thin — but companies have kept producing, hoping to cling to existing market share.

In an echo of its predicament from batteries to green-energy technology, the world’s second-largest economy is staring down a situation of dramatic industrial excess.

“Overcapacity in chemicals in China seems to be an under-appreciated risk in the sector,” said Michal Meidan, director of the China Energy Research program at the Oxford Institute for Energy Studies. “The industry in the West underestimates both the volume and quality of overcapacity that could emerge.”

Factories currently navigate the supply surge with brief shutdowns and low run rates, but as production capacity continues to be added, petrochemical executives and sector analysts say surpluses will grow — enough in many products to turn China into a significant exporter, often selling into a glut and potentially exacerbating existing trade tensions.

China Produces More Petrochemicals Than it Needs | Capacity for all key segments will outgrow consumption by 2025

China’s plastics boom has transformed the global petrochemicals industry, with private outfits and state refiners creating a dominant force at a time when rivals elsewhere are slowing down.

“China’s substantial investments between 2020 and 2027 have reshaped global supply dynamics, leading to a structural surplus in Asia and persistent low or negative profit margins,” said Kelly Cui, principal petrochemicals analyst at Wood Mackenzie. The consultancy estimates that almost a quarter of global ethylene capacity is at risk of closure, even as China is still adding more.

Between 2019 and the end of 2024, China will have completed construction of so many plants to turn crude oil and gas into products like ethylene and propylene — materials behind everything from plastic bottles to machinery — that nameplate capacity is now equal to Europe, Japan and South Korea combined, according to the International Energy Agency.

Take propylene, which has seen some of the most dramatic increases. Small, specialized plants that turn gas into the material — known as propane dehydrogenation, or PDH, units — have proliferated. Chinese producers alone have more than doubled global PDH capacity between 2019 and 2024, according to the IEA.

Part of the reason is that smaller plants do not require approvals from Beijing, as large refineries do. Local authorities were quick to see the opportunity to use cheap land and fiscal perks to encourage job creation and investment. All sought to feed demand for a plastic known as polypropylene, used for plastic packaging, automobile parts and electrical appliances.

But as supply flowed, domestic demand faltered.

Now the trouble is that financial and market-share pressures are also adding up. In past years PDH plants would usually run at 80-85%. The supply spree pushed them to lower runs, under 70% last year, and this year at times they are operating at levels closer to 50%, according to Joey Zhou, an analyst at data intelligence firm ICIS. And yet at least another nine PDH plants are expected to begin producing in 2024-2025, Zhou said, leaving traders expecting fresh delays, closures — and more sales overseas to cope with the excess.

The switch is likely to strain relations with neighbors like Korea, which has its own substantial refining sector. With a US presidential election looming, it will also stoke accusations of damaging, state-fueled overcapacity from Washington and Brussels.

China Establishes Itself as Net Exporter of Key Plastics Product | Exports of polypropylene are now consistently overtaking imports

China turned into a sustained net exporter of polypropylene from March this year, according to customs data. The cargoes have made their way to South and Southeast Asian countries such as Vietnam, Thailand and Bangladesh, and as far as Brazil.

It is already a net exporter of polyester products such as PVC and PET, used in clothing or food containers, shipping them to countries such as Nigeria, Vietnam and India, according to Rhodium’s Vest, again creating or worsening trade surpluses.

Absent state encouragement — for example, a push for producers to lean out of low-end products and into specialty materials — none of that looks set to reverse soon.

“Everyone in China has this notion that if they are fast enough, if they are the first in the industry, able to burn cash long enough, then they will become the survivor that takes market share. And then they can raise the price,” said Vivien Zheng, Asia chemicals analyst with Bloomberg Intelligence, who does not see PDH plants scaling back much further.

“Most of the new facilities were installed in the last three or five years,” she said. “They want to endure the downcycle.”

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