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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 Phasing out outdated capacity, upgrading value chain, tightening control on environment, encouraging energy efficiency and “Green” economy will be key themes for the next decade.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.
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
19802010
2017
2
Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Agenda
What’s next?
Industry review
Macro economy
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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.
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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.
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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.
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Industry review: A successful evolution
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
• 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.
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
• 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%.
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Capital investment in billion US$
© 2018 IHS MarkitSource: IHS Markit
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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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.
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What next?A revolution
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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
•Phase out outdated capacity
•Move plants into industry parks
•Consolidate industry
Stepping up supply-side reform
© 2018 IHS MarkitSource: IHS Markit
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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
• 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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
• 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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
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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Confidential. © 2017 IHS MarkitTM. All Rights Reserved.
Contact details
Paul PangVice President \ IHS Markit\ APAC Oil, Mid-down Streams, and Chemical
+86 21 24229016
paul.pang@ihsmarkit.com
Shanghai, China
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