China’s growing supply of plastic threatens to spill over into weak domestic demand, turning into a new trade challenge for the rest of the world.
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(Bloomberg) — A surge in China’s plastic supply threatens to spill over into weak domestic demand, turning into a new trade challenge for the rest of the world.
Some parts of the country’s vast petrochemical sector are operating at half the speed planned, with producers scaling back operations. But with the sector still expanding, that restraint is becoming increasingly difficult to maintain.
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“This is another example – after steel and 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 studies U.S.-China relations and Chinese industrial policy.
Plants have mushroomed along the country’s east coast over the past decade, aiming to meet China’s demand for plastics and help refiners cope with an expected decline in transportation fuels as electric vehicles take off. High volumes and weak post-pandemic demand mean margins are slim, but companies have kept producing, hoping to cling to existing market share.
Echoing its plight, from batteries to green energy technologies, the world’s second-largest economy is facing a situation of dramatic industrial excess.
“Overcapacity in the chemical sector in China appears to be an underestimated risk in the sector,” said Michal Meidan, director of the China Energy Research Program at the Oxford Institute for Energy Studies. “Western industry underestimates both the volume and quality of overcapacity that could emerge.”
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Plants are currently managing the supply surge with brief shutdowns and low production rates, but as capacity continues to be added, petrochemical executives and industry analysts say surpluses will grow — enough for many products to turn China into a major exporter, often overselling and potentially exacerbating existing trade tensions.
China’s plastics boom has transformed the global petrochemical industry, with private companies and state-owned refiners creating a dominant force at a time when rivals elsewhere are slowing.
“China’s substantial investment between 2020 and 2027 has reshaped global supply dynamics, leading to a structural surplus in Asia and persistently low or negative profit margins,” said Kelly Cui, chief petrochemical analyst at Wood Mackenzie. The consultancy estimates that nearly a quarter of global ethylene capacity is at risk of closure even as China continues to add more.
Between 2019 and the end of 2024, China will have completed construction of so many plants to transform crude oil and gas into products like ethylene and propylene – materials used in everything from plastic bottles to machinery – that the nameplate capacity is now equal to that of Europe, Japan and South Korea combined, according to the International Energy Agency.
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Take propylene, which has seen one of the most dramatic increases. Small, specialized plants that turn the gas into material—known as propane dehydrogenation units, or PDHs—have proliferated. Chinese producers alone are expected to more than double global PDH capacity between 2019 and 2024, according to the IEA.
That’s partly because small factories don’t need permits from Beijing, unlike large refineries. Local authorities quickly saw an opportunity to use cheap land and tax breaks to encourage job creation and investment. All of these measures were aimed at fueling demand for a plastic called polypropylene, used in plastic packaging, auto parts and electrical appliances.
But as supply poured in, domestic demand weakened.
The problem is that financial and market share pressures are also building. In recent years, PDH plants have typically been running at 80-85%. The supply frenzy has pushed them to cut production, to less than 70% last year, and this year they are sometimes running at levels closer to 50%, according to Joey Zhou, an analyst at ICIS, a data intelligence firm. And yet, at least nine more PDH plants are set to start production in 2024-25, Zhou said, leaving traders expecting further delays, shutdowns — and more overseas sales to deal with the surplus.
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The move is likely to strain relations with neighbours such as South Korea, which also has a large refining sector. With the US presidential election looming, it will also fuel accusations of state overcapacity, which is bad for the US economy and for Brussels.
According to customs data, China has become a net exporter of polypropylene since last March, with shipments going to South and Southeast Asian countries such as Vietnam, Thailand and Bangladesh, and as far as Brazil.
The country is already a net exporter of polyester products such as PVC and PET, used in clothing or food containers, shipping them to countries including Nigeria, Vietnam and India, according to Rhodium’s Vest, creating or worsening trade surpluses again.
Without government encouragement – for example, by encouraging producers to abandon low-end products in favour of specialist materials – none of this looks set to reverse anytime soon.
« Everybody in China thinks that if they are fast enough, if they are first in the industry, able to spend enough money, they will become the survivors who will take market share. And then they will be able to raise prices, » said Vivien Zheng, an Asia chemicals analyst at Bloomberg Intelligence, who does not see PDH plants cutting back further.
« Most of the new installations have been installed in the last three or five years, » she said. « They want to ride out the recession cycle. »
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