Oversupply Threatens Base Chemicals Sector

Far-reaching Impacts for Producers

Growth in downstream processing in China has pushed the base chemicals market to oversupply, according to the latest research from consultancy Wood Mackenzie.

A rapid growth in new facilities and reduction in costs over the last year have led to a glut of base chemicals and cut into margins for many producers, particularly the Paraxylene, or PX, market.

“In the second half of 2019, integrated refining-petrochemical project start-ups in China have tipped the PX market into oversupply. These large-scale and cost-competitive projects driven by China’s private polyester companies are being developed for feedstock security. Exporters of PX to China have faced extreme margin pressure, with PX-naphtha spreads dipping to five-year lows, initiating economic cutbacks at many producers,” said Darryl Xu, principal analyst Asia-Pacific chemicals research, at Wood Mackenzie.

Far-reaching impacts
With potential impacts for breakbulk suppliers across the region, many chemicals manufacturers are likely to be reassessing supply and demand dynamics this year, as China’s move towards base chemical self-sufficiency threatens to spread to the olefins market, with several mainland sites set to commission new integrated steam crackers in 2020.

“Self-sufficiency has far-reaching impacts to Asian producers, which have been reliant on Chinese import demand for most of their exports. Supply cutbacks at many Asian base chemical exporters have been in place in second half of 2019, and we expect this to continue into 2020. More drastic rate reductions or even asset rationalizations are needed to rebalance the markets,” Xu added.

Headquartered in Edinburgh, Scotland, Wood Mackenzie is a subsidiary of Verisk Analytics, a global data analytics and risk assessment group. 

China Uncertainty to Hit Commodities
Uncertainty over Chinese trade in 2020 is also set to upset breakbulk demand forecasts as major investment decisions hang in the balance.

“Across my 27 years studying and analyzing China, it’s difficult to recall heading into a new year with quite so much uncertainty over China’s economy. With stimulus options much more restricted than in the past, the country’s economic planners have just called for a ‘contingency plan’ to deal with slowing growth. December’s phase one trade agreement with the U.S. may have garnered headlines but delivered very little substance,” said Gavin Thompson, vice chair of Wood Mackenzie.

Wood Mackenzie goes on to predict that resolution of the current trade tensions will have "major implications" for commodity price volatility over the coming 12 months.