rongsheng petrochemical market cap made in china

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RONGSHENG PETROCHEMICAL CO., LTD. is a China-based company principally engaged in the research, development, manufacture and distribution of chemicals and chemical fibers. The Company’s main products include aromatics, phosphotungstic acid (PTA), polyethylene terephthalate (PET) chips, terylene pre-oriented yarns (POYs), terylene fully drawn yarns (FDYs) and terylene draw textured yarns (DTYs), among others. The Company distributes its products in domestic market and to...More

Rongsheng Petrochemical (brand value up 43% to US$2.3 billion) achieved very strong growth this year, rising two places in the chemicals ranking and jumpingfrom 10th to 8th place amongst global chemicals brands. The Chinese brand owns various globally significant facilities, including an integrated refining-petrochemical complex with the refining capacity of 40 million tons per annum.

And although 2020 chemical earnings fell 22.6% for the 44 of the 50 firms that disclose chemical profits, they fell more—28.2%—in 2019 for the 46 companies disclosing profits on the list, when business in many major markets and economies was beginning to slow.

Oil prices tell some of the story. Early last year, as the economy froze up and people stayed home, crude prices crashed, dragging chemical prices down with them. Petrochemical volumes, however, were relatively strong because some products, such as polyethylene, saw an uptick in demand.

For instance, more than a dozen members of the Global Top 50 have major plastics recycling initiatives. A similar number of companies are looking to make ammonia and hydrogen via water electrolysis rather than from natural gas. Still others are overhauling basic petrochemical processes to make them more energy efficient. Dow, Shell, Sabic, and BASF, for example, are developing ethylene crackers that run on renewable electricity.

Despite the year’s volatility, the survey was marked by few changes. Companies heavily laden with petrochemical operations generally saw declines in sales and fell in the ranking. Companies that make industrial gases or agricultural chemicals tended to rise.

Three companies in the Global Top 50 a year ago didn’t make it this year. Ecolab fell off the list because it divested an oil-field chemical business. SK Innovation and PTT Global Chemical were both victims of declines in petrochemical sales.

Now that it is breaking out chemical sales again, Shell rejoins the Global Top 50 this year after a 5-year hiatus. Rongsheng Petrochemical, which makes polyester chemicals, debuts this year. The former DowDuPont agricultural chemical business, Corteva Agriscience, made the cut as well.

Being China’s largest chemical maker, Sinopec was hit by the COVID-19 pandemic before most of the world’s other large chemical companies. Indeed, the company saw a 24% decline in chemical revenues last year. It also experienced a 38% slump in operating profit. Despite the setback, Sinopec is focused on long-term growth and has a more ambitious capital expansion program than most large chemical companies. For instance, Sinopec will complete construction of new ethylene cracker complexes this year and in the next 2 years in Zhenhai, Hainan, and Tianjin, China. Additionally, it will begin construction next year on a large propane dehydrogenation plant in Zhenhai that it hopes to finish in 2025.

Saudi Arabia’s state oil company, Saudi Aramco, completed its purchase of a 70% stake in the petrochemical maker Sabic in June 2020. The purchase was meant to diversify Aramco, which today depends heavily on oil and gas. But soon after the deal closed, the firms announced they were reevaluating the scope of a planned complex that was to convert 400,000 barrels per day of crude oil into 9 million metric tons (t) per year of petrochemicals. Their new, more modest plan is to build an ethylene cracker and derivatives units that will be integrated with existing Aramco refineries. In another instance of Sabic and Aramco working together, the companies shipped 40 t of ammonia to a power plant in Japan last September. The ammonia is considered “blue” because carbon dioxide emitted during its manufacture was captured and used for enhanced oil recovery and methanol production in Saudi Arabia. In another strategic move, Sabic carved out a stand-alone business that includes its polyphenylene oxide, polyetherimide, and compounding units. The company got the businesses with its purchase of GE Plastics in 2007. Sabic had sought to combine them with Clariant’s masterbatch business, but those talks broke down in 2019.

The $9.4 billion petrochemical complex that Formosa Plastics is planning in St. James Parish, Louisiana, is in hot water. It faces fierce opposition both locally from community organizations worried about pollution and nationally from environmental groups that wish to stop the mounting production of plastics. Sharon Lavigne, head of the local group Rise St. James, recently received the prestigious Goldman Environmental Prize for her efforts, a sign that the Formosa project has high-profile opposition. The project also faces practical hurdles. Notably, the US Army Corps of Engineers suspended a permit for the facility in November. Formosa Plastics had better luck in Point Comfort, Texas, where it started up an ethylene cracker and low-density polyethylene unit last year.

LG Chem and another South Korean firm, SK Innovation, settled a battery technology dispute in April that threatened to snarl US production of electric vehicles. LG had accused SK of trade secret theft and will now get a $1.8 billion cash payment and future royalties. SK nearly abandoned plans to produce batteries in Georgia over the conflict. The settlement was important enough that US president Joe Biden weighed in, noting in a statement that the US needs “a strong, diversified and resilient U.S.-based electric vehicle battery supply chain.” In other news related to batteries, LG announced in April that it had more than tripled its capacity in Yeosu, South Korea, to make carbon nanotubes, used as a conductive additive.

Linde is gearing up to bring its industrial gas and engineering expertise to bear on sustainable chemistry. At a coal-fired power plant in Springfield, Illinois, it is installing a carbon-capture pilot plant. In Burghausen, Germany, Linde aims to make methanol from green hydrogen and carbon dioxide in partnership with Wacker Chemie. And a joint venture between Linde and ITM Power is planning a hydrogen-producing electrolyzer, dubbed the world’s largest to be based on proton-exchange membranes, by 2022. Linde is also working with BASF and Sabic to develop cracking furnaces that run on electricity furnished by alternative energy rather than fossil fuels. With Shell, the company is working on a catalytic oxidative dehydro­genation process to make ethylene.

Most large chemical companies nowadays are plunging into plastics recycling to counter public backlash, and Lyondell­Basell Industries is at the front of the pack. CEO Bob Patel is one of the founders of the Alliance to End Plastic Waste, formed by industry to address the recycling problem. And Lyondell has its own initiatives. It and the waste management firm Suez bought the plastics recycler Tivaco and are combining it with Quality Circular Polymers, a recycling venture Lyondell and Suez started in 2018. Quality Circular has some high-profile clients. For example, Samsonite is using its resin for a line of sustainable suitcases. Meanwhile, Lyondell continues to grow its core petrochemical business, often on the cheap. In December, the firm bought, for the bargain price of $2 billion, a 50% interest in a new ethylene cracker and two polyethylene plants that the struggling Sasol had built. Similarly, it bought into an ethylene cracker joint venture already under construction in China.

While oil companies such as Shell and BP were redefining themselves as alternative energy players in recent years, ExxonMobil stuck with petroleum. The firm was taking what it considered a realistic position. Oil and gas are cheap and convenient, it argued, and would be hard to dislodge from the energy market for the next few decades. But COVID-19 hit the oil and gas business hard. ExxonMobil racked up a gaping corporate loss of $28 billion in 2020, even as its chemical unit earned an operating profit of $2.7 billion. The company is facing shareholder pressure to change, and it is starting to respond. For example, in April, it outlined a $100 billion plan to store 100 million metric tons per year of carbon dioxide in the Gulf of Mexico. The new environmental consciousness trickles down into chemicals. At a complex in France, ExxonMobil Chemical plans to host a pyrolysis plant that breaks down waste plastics into chemical raw materials. And at its Baytown, Texas, chemical facility, it is testing a plastics recycling process. Separately, in a rare move, ExxonMobil is divesting a business, selling its Santoprene thermoplastic vulcanizate operation to Celanese for $1.15 billion.

Air Liquide has ambitious sustainability goals, including becoming carbon neutral by 2050. As a symbolic gesture in that direction in May, the company provided green, or carbon-neutral, hydrogen to Paris de l’hydrogène, an event where artists color­fully illuminate the Eiffel Tower. More tangibly, that same month, Air Liquide, Rothschild & Co., and the Solar Impulse Foundation announced a $236 million fund to foster environmentally friendly companies. The consortium will invest in areas such as clean energy, sustainable food, the circular economy, smart cities, and sustainable mobility. Air Liquide’s venture capital arm has invested $120 million in 35 companies since it was founded in 2013. In April, for instance, it announced an investment in Inopsys, a specialist in the on-site treatment of wastewater generated while making pharmaceuticals and fine chemicals.

PetroChina will bring a pair of unique petrochemical projects—which cost a total of $2.5 billion—on line later this year. The company is building ethylene crackers in Tarim and Changqing, China, that will use ethane sourced from domestic natural gas fields as their feedstock. These projects wouldn’t be unusual in the US or the Middle East, where oil and natural gas are cheap and plentiful, but ethylene crackers in resource-constrained China are mostly fed with naphtha derived from imported oil. The country also sources petrochemical feedstocks from coal. Both routes to ethylene are relatively expensive and put China at a competitive disadvantage.

Hengli Petrochemical’s growth has been amazing. Last year, the company came out of nowhere to debut at 26 in the Global Top 50. In 2020, and despite the COVID-19 pandemic, the Chinese petrochemical maker’s chemical sales grew by a whopping 46%. Construction at an almost unbelievable pace is responsible for this growth. In 2020 alone, Hengli started two large production lines for purified terephthalic acid (PTA), a polyester raw material, in Dalian, China. The lines, which use technology from Invista, bring Hengli’s PTA capacity to 12 million metric tons (t) per year. In November, Hengli signed a licensing agreement, also with Invista, for two more PTA lines at its site in Huizhou, China. In addition, the company plans to build a plant in Dalian to make a biodegradable plastic from PTA, adipic acid, and 1,4-butanediol. Hengli says the plant will have 450,000 t of annual capacity, a large figure for a biodegradable plastic.

The Japanese chemical maker has emphasized green projects of late. In June, it signed an agreement to use Ginkgo Bioworks’ synthetic biology capabilities to improve the production of an undisclosed biobased chemical and to make other Sumitomo Chemical products. Sumitomo’s similar relationship with Zymergen resulted in a biobased film for displays and touch screens. Sumitomo is also building a pilot plant in Chiba, Japan, that will make ethylene from ethanol supplied by Sekisui Chemical. In addition, Sumitomo is planning a facility in Singapore that will make methanol from carbon dioxide and hydrogen. To investigate even more technologies with low environmental impact, Sumitomo is building a research facility in Chiba.

Shin-Etsu Chemical’s Shintech subsidiary calls itself the world’s largest polyvinyl chloride (PVC) maker. A new investment, announced in January, should help it expand that lead. Shintech intends to spend $1.3 billion to build new capacity in Plaquemine, Louisiana, for PVC and its precursors chlorine and vinyl chloride. The company will complete a previously announced project—of similar cost and scope—at the site this year. Strengthening another business in which it has a strong position, Shin-Etsu will spend $285 million to expand photoresist output in Taiwan and Japan.

Recently, Evonik Industries has been favoring small acquisitions that provide access to new technology. In June, it inked an agreement to buy Infinitec Activos for an undisclosed sum. Infinitec specializes in delivery methods—such as peptide-studded gold and sapphire nanoparticles, lipid vesicles, and nanoscale alginate hydrocolloid capsules—for cosmetic ingredients. In November, Evonik bought Houston-based Porocel Group, a provider of refinery catalysts and catalyst regeneration services, for $210 million. Evonik has built a burgeoning business in lipids for the delivery of messenger RNA (mRNA) used as a COVID-19 vaccine. And it recently launched a collaboration with Stanford University to develop a degradable polymer–based system for delivering mRNA therapeutics. In more traditional industrial chemistry, the company is building a $470 million plant in Marl, Germany, for making nylon 12, a high-end polymer critical for automotive applications such as brake lines. Evonik is considering the sale of its superabsorbent polymer unit, which employs 800 people.

Many people would think of Dow and BASF as the technology giants in industrial chemistry. But Braskem, a Brazilian petrochemical maker, is a technological heavy hitter too. It is partnering with the University of Illinois Chicago on a route to ethylene based on the electrochemical reduction of carbon dioxide from flue gas. At its chlor-alkali complex in Maceió, Brazil, Braskem will host a pilot plant to make ethylene dichloride using a novel process developed by the start-up Chemetry. In this energy-saving process, called eShuttle, chloride ions react with cuprous chloride (CuCl) to form cupric chloride (CuCl2), which reacts with ethylene to form the polyvinyl chloride raw material. In Pittsburgh, Braskem recently completed a $10 million expansion of its technology and innovation center to allow work on recycling, 3D printing, and catalysis.

Mitsui Chemicals is increasingly emphasizing sustainability. In June, the Japanese company announced that it will investigate, with BASF, the efficacy of the chemical recycling of plastics—such as using pyrolysis to break them down into an ethylene cracker feedstock. Mitsui is also spending $370 million to triple capacity for the polyurethane raw material methylene diphenyl diisocyanate in Yeosu, South Korea. The company is seeing increased demand for the product in energy-saving insulation. In a small acquisition in October to build on its eyeglass lens business, Mitsui acquired Cotec, which makes hydro­phobic and antireflective ophthalmic lens coatings.

In June 2020, Bayer attempted to ensure its financial stability by settling 125,000 lawsuits claiming its Roundup glyphosate herbicide, which it acquired with its 2018 purchase of Monsanto, contributed to defendants’ non-Hodgkin lymphoma. Bayer is now trying to limit future liability related to the product. It is considering withdrawing glyphosate from the residential lawn and garden market, which has spurred the “overwhelming majority of claimants,” the company says. Bayer may form a scientific panel to review Roundup-related safety information, and it is launching a new website where it will host studies related to the product.

Solvay has been trimming its portfolio to focus on specialty chemicals. In a major recent move along these lines, the company is carving out its soda ash unit into a separate business, a possible precursor to divesting the operation, which generates about $1.75 billion in annual sales. The business is Solvay’s oldest, dating back to 1863, when Ernest Solvay developed a process to make soda ash out of brine and limestone. Now the mineral is also extracted from trona, which Solvay mines in Green River, Wyoming. In addition, the company completed the sale of a basket of businesses to the private equity firm Latour Capital in March. Those businesses include a barium and strontium carbonate unit, a sodium percarbonate business, and a barium chemical joint venture with Chemical Products. In 2020, Solvay sold its nylon 6,6 business to BASF.

The Chinese polyurethane raw materials supplier bucked the general trend of sales decline in 2020 with a nearly 8% increase in chemical sales and a 10% rise in profits. After a weak first half of the year, demand bounced back in the second half, the company says. The COVID-19 “pandemic in China was rapidly and effectively controlled,” Wanhua Chemical says in its annual report. “Domestic market demands and the downstream export overseas were resumed rapidly, and growth of prices of chemical products was recovered.” Wanhua sought to build a beachhead in the US with a $1.25 billion project to build a methylene diphenyl diisocyanate plant in Louisiana. But US-China trade friction and a jump in construction costs appear to have prompted the firm to shelve the initiative.

Indorama built itself up into one of the world’s largest chemical companies via aggressive growth in the polyester chain, both by buying businesses and by constructing massive new plants. Now the Thai company is looking to diversify. In 2020, it bought Huntsman’s intermediates and surfactant business, which makes surfactants and ethanolamines. And it is negotiating the purchase of Oxiteno, the specialty chemical arm of the Brazilian conglomerate Grupo Ultra and the second-largest producer of ethoxylates in the world. Indorama is also developing its capabilities in recycling. It is buying CarbonLITE’s polyethylene terephthalate (PET) recycling plant in Dallas and building a US PET depolymerization plant with the Canadian start-up Loop Industries.

The Japanese chemical maker is rolling out key expansion projects. In March, aiming to meet demand for electric vehicles, Asahi Kasei unveiled plans to spend $270 million to increase capacity for its Hipore lithium-ion battery separator membranes in Hyūga, Japan. The project will bring the firm’s overall separator capacity to 1.9 billion m2 per year by 2023. Asahi is building a second microcrystalline cellulose plant in Kurashiki, Japan, at a cost of $125 million. The product is used as a binder for pharmaceutical tablets. The company is also closing a plant in Wakayama, Japan, where it makes acrylic latex and photocatalyst coatings and employs 38 people. Asahi says domestic demand has been weak.

The French firm has been trying to migrate toward the high end of the specialty chemical spectrum. In May, Arkema completed the sale of its polymethyl methacrylate business to the styrenic polymer maker Trinseo for $1.4 billion. The business generated sales of about $620 million in 2020. In June, Arkema turned around and announced two initiatives to increase production of the insulation foam-blowing agent hydrofluoroolefin-1233zd, which has lower global warming potential than current blowing agents. Arkema is spending $60 million to expand capacity in Calvert City, Kentucky, and is contracting with chemical maker Zibo Aofan to make it in China. In January, Bostik, Arkema’s adhesives arm, invested $11 million to form Crackless Monomer Company with the Taiwanese cyanoacrylate maker Cartell Chemical.

The industrial gas maker sees its future in energy. Last month, it announced a $1.1 billion investment to make “blue” hydrogen from natural gas in Edmonton, Alberta. The project calls for Air Products to capture the by-product carbon dioxide and send it into a pipeline system where it will be used for enhanced oil recovery and ultimately sequestered. The hydrogen will fuel local trucks and buses as well as a power plant. The company is participating in the world’s most ambitious green ammonia project: a $5 billion undertaking in Saudi Arabia to make ammonia from hydrogen produced by water electrolysis. The hydrogen-carrying molecule will be shipped to hydrogen-fueling stations around the world. The company is also planning a coal-to-methanol project in Indonesia.

The US chemical company is making a large divestiture with the $800 million sale of its tire additives business to the private equity firm One Rock Capital Partners. The deal includes many products that Eastman got in 2012 when it bought Solutia for $4.8 billion, including Crystex insoluble sulfur and Santoflex antidegradants. Eastman is jumping into the chemical recycling of polyethylene terephthalate in a big way, spending $250 million on a plant at its flagship facility in Kingsport, Tennessee, that will use methanolysis to break down as much as 100,000 metric tons per year of the polymer. The company intends to use the resultant dimethyl terephthalate and ethylene glycol to make specialty polyesters.

Recent years have seen Chinese petrochemical producers, often involved in the polyester supply chain, join the Global Top 50. Hengli Petrochemical is one of those firms. And now Rongsheng Petrochemical is another. The company is one of the largest producers of purified terephthalic acid in the world, with 13 million metric tons of capacity at plants in Dalian, Ningbo, and Hainan, China. It also makes polyester resin and fiber. It is an investor in Zhejiang Petrochemical, a large oil refinery and petrochemical complex that is currently starting up.

Sustainability continues to be a focus for the Austrian petrochemical maker. In June, the company signed an agreement to buy oil from Renasci Oostende Recycling, which uses a thermal process to break down postconsumer plastic. Borealis will turn this feedstock into plastics again at its complex in Porvoo, Finland. Borealis also started up a demonstration unit at its polyethylene plant in Antwerp, Belgium, to test a heat-recovery technology developed by the start-up Qpinch. The technology is modeled on the adenosine triphosphate–adenosine diphosphate cycle in biology. Separately, Borealis put its fertilizer business up for sale in February.

Sasol ended a saga in November when it started up a low-density polyethylene plant in Lake Charles, Louisiana. The unit was the last of the plants the South African company built as part of a $12.8 billion petrochemical complex. The project went $4 billion over budget, leading to the ouster of its co-CEOs. To strengthen its balance sheet, Sasol aims to divest $6 billion in assets. To that end, the company formed a joint venture with LyondellBasell Industries to run the ethylene cracker and two polyethylene plants it built in Lake Charles, essentially selling half these operations for $2 billion. Sasol is keeping alcohols, ethylene oxide and ethylene glycol, and ethoxylation plants at the site. Separately, Sasol sold its 50% interest in the Gemini HDPE high-density polyethylene joint venture with Ineos for $400 million.

This year, China is expected to overtake the United States as the world’s largest oil refining country.[1] Although China’s bloated and fragmented crude oil refining sector has undergone major changes over the past decade, it remains saddled with overcapacity.[2]

Privately owned unaffiliated refineries, known as “teapots,”[3] mainly clustered in Shandong province, have been at the center of Beijing’s longtime struggle to rein in surplus refining capacity and, more recently, to cut carbon emissions. A year ago, Beijing launched its latest attempt to shutter outdated and inefficient teapots — an effort that coincides with the emergence of a new generation of independent players that are building and operating fully integrated mega-petrochemical complexes.[4]

China’s “teapot” refineries[5] play a significant role in refining oil and account for a fifth of Chinese crude imports.[6] Historically, teapots conducted most of their business with China’s major state-owned companies, buying crude oil from and selling much of their output to them after processing it into gasoline and diesel. Though operating in the shadows of China’s giant national oil companies (NOCs),[7] teapots served as valuable swing producers — their surplus capacity called on in times of tight markets.

Four years later, the NDRC adopted a different approach, awarding licenses and quotas to teapot refiners to import crude oil and granting approval to export refined products in exchange for reducing excess capacity, either upgrading or removing outdated facilities, and building oil storage facilities.[10] But this partial liberalization of the refining sector did not go exactly according to plan. Swelling with new sources of feedstock that catapulted China into the position of the world’s largest oil importer, teapots increased their production of refined fuels and, benefiting from greater processing flexibility and low labor costs undercut larger state rivals and doubled their market share.[11]

Meanwhile, as teapots expanded their operations, they took on massive debt, flouted environmental rules, and exploited taxation loopholes.[12] Of the refineries that managed to meet targets to cut capacity, some did so by double counting or reporting reductions in units that had been idled.[13] And when, reversing course, Beijing revoked the export quotas allotted to teapots and mandated that products be sold via state-owned companies, it trapped their output in China, contributing to the domestic fuel glut.

2021 marked the start of the central government’s latest effort to consolidate and tighten supervision over the refining sector and to cap China’s overall refining capacity.[14] Besides imposing a hefty tax on imports of blending fuels, Beijing has instituted stricter tax and environmental enforcement[15] measures including: performing refinery audits and inspections;[16] conducting investigations of alleged irregular activities such as tax evasion and illegal resale of crude oil imports;[17] and imposing tighter quotas for oil product exports as China’s decarbonization efforts advance.[18]

Last October, Beijing reduced crude oil import quotas awarded to small independent refineries for the first time since they were allowed into the market while raising them for larger, more efficient private plants. Among the primary beneficiaries of these new allocations are a new generation of provincial-backed independent players long interested in expanding into the oil refining business.[19]

The politics surrounding this new class of greenfield mega-refineries is important, as is their geographical distribution. Beijing’s reform strategy is focused on reducing the country’s petrochemical imports and growing its high value-added chemical business while capping crude processing capacity. The push by Beijing in this direction has been conducive to the development of privately-led mega refining and petrochemical projects, which local officials have welcomed and staunchly supported.[20]

Yet, of the three most recent major additions to China’s greenfield refinery landscape, none are in Shandong province, home to a little over half the country’s independent refining capacity. Hengli’s Changxing integrated petrochemical complex is situated in Liaoning, Zhejiang’s (ZPC) Zhoushan facility in Zhejiang, and Shenghong’s Lianyungang plant in Jiangsu.[21]

But with the start-up of advanced liquids-to-chemicals complexes in neighboring provinces, Shandong’s competitiveness has diminished.[23] And with pressure mounting to find new drivers for the provincial economy, Shandong officials have put in play a plan aimed at shuttering smaller capacity plants and thus clearing the way for a large-scale private sector-led refining and petrochemical complex on Yulong Island, whose construction is well underway.[24] They have also been developing compensation and worker relocation packages to cushion the impact of planned plant closures, while obtaining letters of guarantee from independent refiners pledging that they will neither resell their crude import quotas nor try to purchase such allocations.[25]

To be sure, the number of Shandong’s independent refiners is shrinking and their composition within the province and across the country is changing — with some smaller-scale units facing closure and others (e.g., Shandong Haike Group, Shandong Shouguang Luqing Petrochemical Corp, and Shandong Chambroad Group) pursuing efforts to diversify their sources of revenue by moving up the value chain. But make no mistake: China’s teapots still account for a third of China’s total refining capacity and a fifth of the country’s crude oil imports. They continue to employ creative defensive measures in the face of government and market pressures, have partnered with state-owned companies, and are deeply integrated with crucial industries downstream.[26] They are consummate survivors in a key sector that continues to evolve — and they remain too important to be driven out of the domestic market or allowed to fail.

The changing structure and dynamics of China’s refining sector, specifically with respect to Chinese teapots, has impacted energy relations with Middle East producers. Indeed, Chinese teapot refiners, which just a few years ago arose as attractive crude oil spot market targets, have lately emerged as outlets for longer-term crude exports from the region.

In 2016, during the period of frenzied post-licensing crude oil importing by Chinese independents, Saudi Arabia began targeting teapots on the spot market, as did Kuwait. Iran also joined the fray, with the National Iranian Oil Company (NIOC) operating through an independent trader Trafigura to sell cargoes to Chinese independents.[27] Since then, the coming online of major new greenfield refineries such as Rongsheng ZPC and Hengli Changxing, and Shenghong, which are designed to operate using medium-sour crude, have led Middle East producers to pursue long-term supply contracts with private Chinese refiners. In 2021, the combined share of crude shipments from Saudi Arabia, UAE, Oman, and Kuwait to China’s independent refiners accounted for 32.5%, an increase of more than 8% over the previous year.[28] This is a trend that Beijing seems intent on supporting, as some bigger, more sophisticated private refiners whose business strategy aligns with President Xi’s vision have started to receive tax benefits or permissions to import larger volumes of crude directly from major producers such as Saudi Arabia.[29]

The shift in Saudi Aramco’s market strategy to focus on customer diversification has paid off in the form of valuable supply relationships with Chinese independents. And Aramco’s efforts to expand its presence in the Chinese refining market and lock in demand have dovetailed neatly with the development of China’s new greenfield refineries.[30] Over the past several years, Aramco has collaborated with both state-owned and independent refiners to develop integrated liquids-to-chemicals complexes in China. In 2018, following on the heels of an oil supply agreement, Aramco purchased a 9% stake in ZPC’s Zhoushan integrated refinery. In March of this year, Saudi Aramco and its joint venture partners, NORINCO Group and Panjin Sincen, made a final investment decision (FID) to develop a major liquids-to-chemicals facility in northeast China.[31] Also in March, Aramco and state-owned Sinopec agreed to conduct a feasibility study aimed at assessing capacity expansion of the Fujian Refining and Petrochemical Co. Ltd.’s integrated refining and chemical production complex.[32]

Commenting on the rationale for these undertakings, Mohammed Al Qahtani, Aramco’s Senior Vice-President of Downstream, stated: “China is a cornerstone of our downstream expansion strategy in Asia and an increasingly significant driver of global chemical demand.”[33] But what Al Qahtani did notsay is that the ties forged between Aramco and Chinese leading teapots (e.g., Shandong Chambroad Petrochemicals) and new liquids-to-chemicals complexes have been instrumental in Saudi Arabia regaining its position as China’s top crude oil supplier in the battle for market share with Russia.[34] Just a few short years ago, independents’ crude purchases had helped Russia gain market share at the expense of Saudi Arabia, accelerating the two exporters’ diverging fortunes in China. In fact, between 2010 and 2015, independent refiners’ imports of Eastern Siberia Pacific Ocean (ESPO) blend accounted for 92% of the growth in Russian crude deliveries to China.[35] But since then, China’s new generation of independents have played a significant role in Saudi Arabia clawing back market share and, with Beijing’s assent, have fortified their supply relationship with the Kingdom.

China’s small-scale, inefficient “first generation” teapot refiners have come under mounting market pressure, as well as closer government scrutiny and tightened regulation. Though some have already been shuttered and others face imminent closure, dozens of China’s teapots, concentrated mainly in Shandong province, continue to operate thanks to the creative defensive measures they have employed and the important role they play in local economies.

Vertical integration along the value chain has become a global trend in the petrochemical industry, specifically in refining and chemical operations. China’s drive to self-sufficiency in chemicals is a key factor powering this worldwide trend.[42] And it is the emergent “second generation” of independent refiners that it is helping make China the frontrunner in developing massive liquids-to-chemicals complexes. Following Beijing’s lead, Shandong officials appear determined to follow this trend rather than risk being left in its wake.

As Chinese private refiners’ number, size, and level of sophistication has changed, so too have their roles not just in the domestic petroleum market but in their relations with Middle East suppliers. Beijing’s import licensing and quota policies have enabled some teapot refiners to maintain profitability and others to thrive by sourcing crude oil from the Middle East. For their part, Gulf producers have found Chinese teapots to be valuable customers in the spot market in the battle for market share and, especially in the case of Aramco, in the effort to capture the growth of the Chinese domestic petrochemicals market as it expands.

In 2016, China ethyl alcohol and other basic organic chemicals markets and plastic materials and resins market were valued at $137 and $184 billion respectively, which had 9% and 10% growth rates.

China is the largest producer and exporter plastic materials market in the world. The main driver of this market is the expanded application of ethanol in China. The demand for ethanol in China is about 2.3 million tons now.

Sinochem and Shanghai Chemical Industry Institute have set up a laboratory for composite materials. The two sides will jointly develop technology, transform the results and apply in the industry of carbon fiber and its curing resins, in order to promote the technologies and products of high-performance composite materials and facilitate its industrialization and marketization. At present, this laboratory has launched a project to research and develop the spray-free carbon fiber composite material. At first, this material will be applied to new energy cars, which can not only reduce the weight of the cars but also reduce the cost of applying composite materials while improving production efficiency significantly.

Chinese companies plan to go into the specialties side of the market, and some of them already become one of the players in the market, such as Zhejiang NHU, a vitamin maker; Yantai Wanhua, an isocyanates maker; and Bairun, the leader in the Chinese flavors-and-fragrances market.

1978-1990: China"s market was opened to the world in 1978, and the government knew the importance of the chemical industry, so permitted the foreign direct investment get into domestic but control heavily. Meanwhile, China"s domestic chemical demand increased, so most companies decided to invest in produce.

More broadly, PetroChina remains levered to oil prices, and a >$80/bbl scenario should keep upstream profitability elevated. Strong earnings will be well-received by income investors - assuming an in-line 45% payout, a dividend per share of RMB0.32 (or an attractive >10% yield) seems likely. There could be incremental upside to the capital return as well, should management opt to distribute proceedsfrom recent asset disposals. While there are risks to investing in China at this juncture, the deeply discounted ~0.4x P/B valuation offers an adequate margin of safety to investors.

Heading into its latest print, oil prices were down QoQ, so expectations were low. Yet, PetroChina"s gross profit declined by a lesser amount QoQ, outpacing the oil price weakness due to the outperformance of the upstream and natural gas segments. To recap, E&P EBIT was up ~29% QoQ against a low-teens % QoQ decline in benchmark oil prices. While some of the delta was down to the lagged effect of its oil realizations vs. the benchmark, E&P profitability would still have been strong, highlighting PetroChina"s operating leverage gains in the current oil price regime. As a result, the Q3 free cash flow was also robust, further helped by favorable working capital changes and a YoY decline in capex spending.

While refining profits were down on inventory losses and weak product spreads, PetroChina"s refining segment is still in the black, albeit with a slim operating margin. By comparison, domestic peers like Sinopec (OTCPK:SNPTY) posted an operating loss, while Rongsheng Petrochemical had even lower margins at ~0.5%.

Despite the larger gas import losses, PetroChina"s natural gas marketing business sustained a positive ~2% operating margin in its latest quarter. Of note, import gas losses narrowed slightly this time around amid reduced import volumes QoQ in reaction to the acceleration in domestic gas supply growth. Additional drivers include off-season domestic gas price hikes and a favorable mix shift toward terminal gas sales. With domestic sales volume also up ~4% YoY (relative to flattish gains for the rest of the Chinese market), PetroChina has likely made good domestic market share gains as well through the headwinds.

PetroChina"s strong quarter saw the E&P and Natural Gas division outperform, with even gas import losses coming in better than feared. The refining division was also more resilient than expected, remaining profitable for another quarter despite the headwinds. Over the mid to long term, PetroChina"s upstream business should continue to benefit from tighter supply and higher oil prices, while a favorable mix shift toward low-cost Russian piped gas imports and domestic gas production bode well for gas profitability. Finally, the asset disposals earlier this year, at a premium to book, presents upside to the already high capital return going forward (the current yield stands at >10%). At the current ~60% discount to book, the stock offers compelling value to investors.

Podcast: China"s petrochemical refiners are making their presence felt way beyond the country"s borders. How will this impact global supply, demand, and trade balances? Will global operating rates be reduced?

Textile giants Rongsheng and Hengli have shaken up China"s cozy, state-dominated oil market this year with the addition of close to 1mn b/d of new crude distillation capacity and vast, integrated downstream complexes. Petrochemical products, rather than conventional road fuels, are the driving force for this new breed of private sector refiner. And more are on their way.

Tom: Hello, and thank you very much for joining us for the latest in our series of podcasts, "China Connection." I"m Tom Reed, VP for China Crude and Products. I head our oil analysis and pricing for the Chinese market.

Tom: And today we are discussing the advent of petrochemical refineries in China, refineries that have been built to produce mainly petrochemical feedstocks. Just a bit of background here, these two big new private sector firms, Rongsheng and Hengli, have each opened massive, shiny new 400,000 b/d refineries in China this year. Hengli at Changxing in Northeast Dalian and Rongsheng at Zhoushan in Zhejiang Province on the East coast. For those unfamiliar with Chinese geography, Dalian is up by China"s land border with North Korea and Zhoushan is an island across the Hangzhou Bay from Shanghai. And the opening of these two massive new refineries by chemical companies is shaking up China"s downstream market. But China is a net exporter of the core refinery products, gasoline, diesel, and jet. So, building refineries doesn"t sound like a purely commercial decision. Is it political? What"s behind it? How will it affect the makeup of China"s petrochemical product imports?

Chuck: And clearly, the driver here for Rongsheng and Hengli, who as Tom mentioned, are chemical companies, they are the world"s largest producers of purified terephthalic acid, known as PTA, which is the main precursor to make polyester, polyester for clothing and PET bottles. And each of them were importing massive amounts of paraxylene, paraxylene being the main raw material to make PTA. And paraxylene comes from the refining of oil. And really the alternate value for paraxylene or its precursors would be to blend into gasoline to increase octane. So, when looking to take a step upstream in terms of reverse or vertical integration, they"ve quickly found themselves not just becoming paraxylene producers, but in fact becoming refiners of crude to begin with, which of course, is quite complex and it involves all kinds of co-products and byproducts. And as many know, the refining of oil, the primary driver there, as Tom has mentioned, is to produce motor fuels. So, we"re reversing this where the petrochemicals become the strategic product and we look to optimize or maybe even limit the amount of motor fuels produced.

So, just as an order of magnitude and to show the numbers aren"t so massive in terms of global PX demand or paraxylene demand. Back in 2010, the global demand for PX was around 30 million tons for the year, of which Chinese demand was about a third or 9.8 million tons. And then last year in 2018, global demand had increased to 43.5 million tons, but of which now China was consuming 25 million of those 43.5 million tons. So, you can see that China is consuming more than half of the global PX demand and yet their production or their capacity to produce PX was far below that. And as a result, China imported last year nearly 16 million tons of PX or about a third of the global production was actually shipped into China by producers who are in the Middle East or the primary sources are from Northeast Asia, Japan, Korea, Taiwan, and then Southeast Asia as well.

Tom: And presumably then, the creation of so much petrochemical feedstock production capacity is going to have a pretty major impact on global supply-demand and trade balances.

Chuck: And margins, of course, as well because no one wants to shut down their unit just to accommodate the new Chinese production. And what remains to be seen is global operating rates for these PX units will be reduced to maybe unsustainable levels. And as margins come down, they"ll be down for everyone, but the most efficient suppliers or producers will be the ones that survive. And in the case of Hengli and Rongsheng, low feedstock costs, if you"re driving down the cost of paraxylene, you take the benefit on the polyester side because now you have very competitive or very low-priced feedstock.

Chuck: Well, clearly anyone who"s not integrated downstream into PTA, which many of those Northeast Asian producers are not, will be strategically challenged. And how do they react? Do they look at somehow producing more gasoline for instance, because they"re not able to achieve the values into chemicals? That could be an option. Or do they reduce capacity by shutting down a unit here and a unit there? I think the answer is all of the above. Then it will be fairly choppy between now and then. The U.S. has already shut down one of its units. Chevron in Pascagoula shut down its paraxylene production capacity earlier this year, and so we could actually see the U.S. become more and more of an importer of PX whereas 10 years ago, we were a very large exporter.

Tom: That"s a really interesting point actually. Looking at it from a refining economics point of view, if you were trying to diversify your revenue stream, for example, you probably wouldn"t want to increase your gasoline production. And gasoline margins in Europe are barely breaking even, they"re about $4 a barrel. In China, gasoline crack spreads are actually negative. So, fine, they"re self-sufficient in the paraxylene they need for weaving, but are they just... the refiners themselves, Hengli and Changxing, are they now just soaking up losses from the sales of their transport fuels? I think they may be initially, but they"re not just giving their gasoline away, obviously, these refineries were conceived as viable commercial concerns. Hengli anticipates profits, I think, of around 12 billion Yuan per year from its Changxing refinery giving a payback period on that investment of around five years. And each company, interestingly enough, has a distinct marketing strategy for their transport fuel.

Rongsheng is trying to build itself into a retail brand around Shanghai and the Zhejiang area. And Hengli is trying to muscle into the wholesale market on a national level, so it"s gonna be selling products across China. And in that respect, as we were discussing earlier, in fact, Rongsheng appears to have an advantage because where it"s located on the East Coast of China, that region is net short still of transport fuels, but Hengli in the Northeast, that"s a very competitive refining environment. It"s a latecomer to an already pretty saturated market: PetroChina, a state-owned oil giant, is a huge refiner up in Northeast China with its own oil fields, so a ready-made source of low-cost crude. And it"s also very close to the independent sector refining hub in Shandong Province, which is the largest concentration of refineries in China. So, I think there are definite challenges for them on the road fuel front, even if it sounds like they"re going to be pretty competitively placed further downstream in the paraxylene market.

Chuck: Well, and beyond paraxylene, they are looking at...to maximize paraxylene, not to get too technical, but you wanna split the naphtha into two different qualities and the high N+A, or the heavier naphtha is what yields the most paraxylene per ton of feed. But then you"re left with a lighter paraffinic naphtha, which is not particularly good to blend into gasoline. And so, therefore, both are building ethylene steam crackers using that naphtha and then taking the ethylene down into polyethylene plastics. Not strategic markets for these two players necessarily, but China also has massive deficits in terms of meeting its domestic polyethylene demand. China is the largest importer of polyethylene and polypropylene. So, these projects will help offset some of that as well. But I"m concerned, you mentioned about the road fuels and if they are making retail gasoline, one needs octane, and it"s precisely the precursors to the paraxylene that are needed, you have to buy those away from the chemical sector in order to blend up to the appropriate octane level. Is there a chance that they might be able to export fuels products or is that left to maybe some of the other established refining players in China?

Tom: Well, that"s one of the peculiarities of the Chinese market. As private sector companies, neither Rongsheng nor Hengli are allowed currently to export transport fuels. That"s a legacy concern of the Chinese government to ensure energy self-sufficiency downstream to make sure there"s adequate supply on the domestic market of those fuels. So, that is a real impediment for them. And when they ramp up production of gasoline, diesel, and jet, they are driving down domestic prices and they are essentially forcing product into the seaborne market produced by other refineries. So, in that respect, the emergence of Hengli in Northeast China on PetroChina"s doorstep has created a huge new sense of competition for PetroChina in particular. And I think certainly when you look at their recent financial data, it"s quite clear that they are struggling to adapt to the new environment in which it"s essentially export or die, because these new, massive refineries are crushing margins inside China.

I think globally it"s increasingly a competitive environment for road fuels. China is already a net exporter of over 1mn b/d combined of gasoline, diesel, and jet. It"s the fastest-growing exporter of those fuels in the world. But over-supply is also percolating through into the seaborne market: Indian diesel exports are rising; everyone is trying to desperately seek out net short regions and they"re having to ship product further and further overseas. And we"re seeing a situation emerge now in China where these refineries are importing crude perhaps from Latin America and they"re exporting finished products to those same markets from which they took the crude. It"s a tricky arbitrage, one would imagine.

Chuck: And going back specifically to the Hengli and Rongsheng projects, it"s interesting to note, again, going to an order of magnitude or perspective, Hengli is producing or has capacity to produce 4.5 million tons of paraxylene. And in phase one, Rongsheng will have capacity to produce 4 million tons. And I know those are just large numbers, but again, bear in mind that last year, global demand was 43.5 million. So, effectively, these two plants, they could account for 20% of global demand. Just these two projects themselves to give you an idea of just how massive they are and how impactful they can be. Impactful or disruptive, it remains to be seen.

Tom: A sign it doesn"t do things by halves. Although that said, one of the interesting things they have done is essentially halved their transport fuel yields. So, where in a conventional refinery, your combined output of gasoline, diesel, and jet, those core products, might be in the region of 80%, when you look at these new refineries, they"ve really cut that back down to 40% or 50%. And there are new petrochemical refineries springing up, and it"ll be very interesting to see how disruptive those are to the petrochemical market. But in the conventional refining market, they are, I think under pressure to do even more to reduce their exposure to already weakened gasoline and diesel markets. I mean, Shenghong — this new textile company who"s starting up another massive new conventional refinery designed to produce petrochemical products in 2021, I think — they"ve managed to reduce that combined yield to around 30%. They"ve reduced that from an original blueprint.

Chuck: It"s remarkable, but just a note of caution, there have been other petrochemical and refinery projects built recently in Saudi Arabia and in Malaysia, in particular, with established engineering and established chemical and refining companies. And they"ve had trouble meeting the targeted dates for startup and it"s one thing to be mechanically complete, it"s another thing to be operationally complete. But both Hengli and Rongsheng have amazed me at how fast they were able to complete these projects. And by all reports so far, they are producing very, very effectively, but it does remain to be seen why these particular projects are able to run whereas the Aramco projects in Malaysia and in Rabigh in Saudi Arabia have had much greater problems.

Tom: It sounds like in terms of their paraxylene production, they are going to be among the most competitive in the world. They have these strategies to cope with oversupplied markets and refined fuels, but there is certainly an element of political support which has enabled them to get ahead of the pack, I guess. And suddenly in China, Prime Minister Li Keqiang visited the Hengli plant shortly after it came on stream in July, and Zhejiang, the local government there is a staunch backer of Rongsheng"s project. And Zhoushan is the site of a national government initiative creating oil trading and logistics hub. Beijing wants Zhoushan to overtake Singapore as a bunkering location and it"s one of the INE crude futures exchanges, registered storage location. So, both of these locations in China do enjoy a lot of political support, and there are benefits to that which I think do allow them to whittle down the lead times for these mega projects.

Chuck: Exactly. And there are projects downstream as well to add additional PTA capacity to consume much of this additional paraxylene, but there will be some lag effect as well. But to the extent that both of these firms and these projects are integrated, they stand to benefit by either profiting on the PTA and the polyester, the downstream or upstream on PX depending on market conditions.

So, thank you for joining us today, and it"ll be interesting to follow all of these developments because there still are so many moving parts. And you can follow this on the petroleum side with China Petroleum, the publication in which Tom edits out of London or some of our petrochemical reports. We do daily assessments on the paraxylene markets as well as monthly outlooks, which include global price forecasts. And we have databases which show supply, demand, and trade flows, etc. And then also please tune in for future episodes of the "China Connection." And we thank you for your time and attention.