PDH investment continues, and the propylene industry needs to be broken

In July, Zhejiang Huahong's propane dehydrogenation to propylene (PDH) plant was put into operation, and the two plants of Donghua Energy and Fujian Midea will be put into operation soon. China's PDH production capacity will grow again, putting pressure on short-term industry mentality.

In fact, the production of these devices has been delayed than expected, which once supported the price. As of the end of August, the Chinese price of propylene CFR reached US$837.5/ton, an increase of 50% from the year low of US$557.5/ton in early April.

In the long run, the PDH investment enthusiasm remains unabated. However, due to the risk of surplus of propylene and downstream polypropylene (PP), the PDH operating rate may decline. During the period, changes in profits and changes in manufacturer behavior will be used for short-term market prices through fluctuations in the PDH operating rate.


Centralized release of PDH production capacity, and the commissioning time was later than expected

In 2020 alone, China will have 4 PDH units put into operation, with a cumulative production capacity of 2.37 million tons. In 2020, China's effective PDH production capacity will reach 6.91 million tons/year, an increase of 155% compared to 2015.

Affected by the new crown epidemic and the price drop in the first quarter, the actual production time of these devices has been delayed to varying degrees. Alleviated the contradiction between supply and demand in the first half of the year, making the price of propylene "outstanding" among trienes. Originally concentrated in the first half of the production, the actual output contribution is expected to be reflected in the 3-4 quarters.

Zhejiang Petrochemical's 600,000 tons/year and Zhejiang Huahong 450,000 tons/year units were both put into operation in July, and the operating rate in August was gradually increased to 80%. It is expected that from September to October, Fujian Meide 660,000 tons/year and Donghua Energy 660,000 tons/year will be put into operation.

The follow-up market focus is on the two devices of Huahong and Midea. These two sets of devices do not directly support downstream, but will integrate the existing downstream devices within the group to achieve upstream and downstream docking; after full-load operation, the monthly output is expected to be about 90,000 tons, which will squeeze its original procurement channels and eventually flow into the spot market.

Propylene produced by Huahong will supply Shanghai Huayi's 320,000 tons/year acrylic acid plant and Zhejiang Hongji's 240,000 tons/year PP plant. Fujian Midea will supply two 350,000-ton/year PP plants each from Zhongjing Petrochemical and Zhongjiang Petrochemical.

The above-mentioned four downstream companies are all major buyers of imported propylene, and their import scale ranks among the top ten Chinese importers of propylene.

In the third quarter, installations and repairs in Japan, South Korea and Taiwan were concentrated, which is expected to support the high level of propylene prices. However, the commissioning of new domestic production capacity may break the "supply tightness" state, causing the price of propylene import market to fall in the fourth quarter.


Propylene production capacity is rapidly expanding, and competition among producers is intensifying

The new crown epidemic disrupted the production pace of some PDH projects, but in the medium and long term, the continuous growth of downstream demand and the availability of raw materials make PDH still the "most cost-effective" way to enter the propylene production link.

After 2020, as many as 4 million tons/year PDH projects will be put into production; more than 6.5 million tons/year projects are in the planning state.

Propylene is widely distributed downstream, and the end products are inseparable from the economic development of food, clothing, housing and transportation. Driven by the advancement of urbanization, the second-child policy, consumption upgrades and other factors, downstream demand for propylene continued to grow. By 2019, the self-sufficiency rate of China's main downstream products of propylene will be 83%-89%; it is expected that with the launch of a large number of new projects, the self-sufficiency rate will reach more than 90% in 2025.

The ICIS database shows that the compound growth rate of China's propylene demand from 2019 to 2025 is 5.6%.

Compared with the import qualification restrictions of crude oil/naphtha, propane has more free circulation and abundant resources. The characteristics of low investment and simple industrial chain also make the entry barrier lower than other processes. As a result, a large number of new PDH projects have been "officially announced." In 2020, PDH-to-propylene production capacity will account for 23% of China's total production capacity, which is doubled from 2015. It is expected that this ratio will rise to 26% in 2025.

ICIS believes that PDH production capacity will continue to grow rapidly in the future. However, there are a lot of uncertainties in the officially announced projects. The structural excess risk brought by the concentrated expansion of the propylene to polypropylene industrial chain is the biggest reason.

More than 60% of the downstream demand for propylene comes from polypropylene. Driven by high profits, the return of the investment boom in refining and chemical integration, coupled with CTO/MTO projects, China's PP self-sufficiency rate is expected to increase from 85% in 2019 to 92% in 2025.

China is the world's most important consumer market for PP, which makes it difficult to adjust polypropylene overcapacity only through import and export, and ultimately forces the domestic polypropylene operating rate to decline.

In this process, competition among olefin/polyolefin producers will intensify, and producers with a relatively single industrial chain layout may face the first impact. However, this kind of shock is more biased towards short-term operating rate fluctuations. In the long run, we still need to look at a comprehensive economic competition.

With the simultaneous increase in the degree of PDH integration and the proportion of polypropylene, the future economic competition may be a holistic comparison. From the perspective of variable profits, the mainstream craftsmanship in the past two years has been "entangled with each other".

In addition, compared with other processes, the proportion of "private enterprises" among PDH manufacturers is higher, which to a certain extent means more flexible manufacturer behavior, and operating rate fluctuations will be more frequent.

We might as well foresee that in the future the propylene market will pay more and more attention to the operation status and integrated profits of PDH plants. The downstream situation of PDH matching may already reflect this trend.


PDH and cracking are linked to realize the diversification of the industrial chain

PDH companies are pursuing a higher degree of integration, and supporting polypropylene is still the main idea. Individual companies explore the possibility of diversified downstream.

In the direct downstream of PDH, the weight of polypropylene has increased significantly in recent years and is expected to remain high. Although the market is worried about whether China's PP will have an oversupply, its wide application, high liquidity, and low technical barriers to market access make it the preferred choice for propylene companies. In 2015, the capacity of equipment with supporting PP accounted for 44% of the PDH capacity that year, and it will increase to 60% by 2020. In contrast, the degree of non-integration will be significantly reduced, from 35% in 2015 to about 14% in 2020.

Diversification from raw materials to downstream products to reduce the risk of a single industry may become the idea of investment in the future. Some new projects are realized by using steam crackers with PDH devices. Zhejiang Petrochemical has planned PDH projects in its two phases of refining and chemical projects.

Among the existing plants, Wanhua has the most abundant downstream equipment, including acrylic acid, propylene oxide, and butanol. With its light hydrocarbon cracking project launched in the fourth quarter of this year, its propylene downstream will also involve PP and phenol acetone in the future.

When supporting downstream products other than PP, acrylonitrile, acrylic acid and phenol acetone attract more investment. Downstream companies extend upstream, such as the Zhejiang Huahong PDH shares held by Huayi Group and its PDH project in Guangxi, which has increased the proportion of acrylic acid in supporting facilities.