Last week, German chemical giant BASF announced plans for yet another mega-scale project in China – an integrated chemical complex that will include a steam cracker and several downstream units. The plan is a strong endorsement of the opportunities in the Chinese chemical market, which despite the ongoing restructuring clearly is seen having considerable headspace for further growth. It is also, to some extent, a way to skirt around the US-China trade war – as it seems to replace a project first conceived for the US to leverage the opportunities afforded by cheap shale gas.
Guangdong – Major industrial centre
BASF’s new project is to be located in Guangdong province, in a highly industrialised part of the country, and just a short ride away by road, rail and ferry from the bustling metropolis of Hong Kong. What is also noteworthy of the project is that it will be fully in BASF’s control – a signal that at least in the chemical space fully-owned foreign entities are still welcome, more so if they are a marquee investor like the German giant is.
China currently accounts for about 40% of global chemicals production, but despite this staggering share there are several value chains in which it is still a net importer and likely to stay that way for the near future at least. Even under the ‘new normal’ of growth that is now the mantra driven down from the leadership in Beijing, it is clear that demand for some large volume petrochemical commodities will outstrip supply. The BASF project will aim to primarily address the local Chinese market, but could use exports as a flywheel, particularly in the initial stages, to keep operating rates high.
Guangdong is amongst the most industrialised parts of China. Though geographically much smaller than several provinces that lie to its north and west, it is the most populated and, arguably, most internationalised. It was amongst the first provinces thrown open to foreign investors, and is famously known for hosting the Canton Fair – one of the longest trade shows in the world and for several years the sole window through which western buyers got a view of China’s manufacturing and trade prowess. Its GDP in 2017 was a whopping US$1.33 trillion – one-tenth of China’s, about the same as Mexico’s, and about half of all of India’s (US$2.85 trillion). The province is also the largest importer and exporter of goods, and hosts three of the six special economic zones – Shenzen, Shantou and Zhuhai – which were the laboratories for the first phase of reforms unleashed tentatively by then party Chairman Deng Xiaoping. Significantly, its GDP is growing at an impressive 7% this year – faster than India’s – and expected to moderate to a still significant annual growth rate of 6% or thereabouts till 2035. The Pearl River, which runs through the province, is an important logistical option, supporting heavy industries such as automobiles and high-tech ones such as electronics.
The automobile industry in the province is growing at an impressive 18% per annum, while electronics manufacture is clocking 11% growth – all from a significant base. These and other sectors such as household and personal care are expected to be important drivers of chemical demand in the province and were certainly factors that led to BASF choosing it as its second Verbund (integrated) manufacturing site in China, after the one in nearby Nanjing.
Steam cracker and derivatives complex
At the core of the new site will be a steam cracker capable of producing 1-mtpa of ethylene (and other olefins and aromatics). As per the product slate planned the C2 olefin (ethylene) will be converted to ethylene oxide, while the propylene will be primarily used for making acrylic acid and esters, butanol and propylene oxide. These will then be converted to a range of intermediates including ethylene glycol, surfactants, amines, super absorbent polymers, acrylic dispersions and polyether polyols, amongst other smaller volume products. The butadiene co-produced at the cracker will be used to make performance polymers, including several synthetic rubbers and thermoplastics.
While the exact quantum of investment has not been spelt out, reports indicate that this could be in the range of $10-bn. A pre-feasibility study will be the next stage of the project, and if the findings are favourable the first plants are expected to come up in 2026, and full project completed by 2030. Clearly, this is a bet for the long term, and it could be a testing ground for ‘smart manufacturing’ incorporating digital tools and techniques – all part of Industry 4.0.
From the US to China?
The announcement is also noteworthy in the sense that a somewhat similar large-sized project was intended for the US, leveraging the abundant finds of shale gas in the country. In March 2015, BASF announced these plans, which were to include a methane-to-methanol complex, and a downstream methanol-to-propylene plant that would provide the feedstock for a C3 oriented downstream product slate. The location was to have been Freeport, Texas – one of BASF’s two Verbund sites in North America (the other being Geismar, Lousiana) and the investment the largest ever by the company in a single plant.
BASF has not linked the China project to the one planned for North America, but industry watchers reckon the new announcement substitutes the other. The simmering US-China trade war, which is expected to significantly alter trade flows between the two countries for all sorts of products, including petrochemicals and polymers, could have had something to do with it.
Going where the feedstock or the market
Petrochemical plants are increasingly being built in regions where the markets are growing or where feedstock is abundantly and cheaply available. China, India and several other emerging markets are where much of the new demand for chemicals is expected to be created and hence obvious targets for investments. Likewise, North America and the Middle East are expected to continue being the most favoured sites from a feedstock perspective, and will continue to attract investors.
While several gas-based olefin (and derivative) plants are now being built in the US – adding up to close to 10-mtpa of incremental ethylene capacity – it has been abundantly clear that the local market simply cannot absorb all of these new flows. Indeed, much of the new production was to go to overseas markets, and China was a natural destination, aside of opportunities in nearby Latin America or Western Europe.
The rethinking at BASF could be that it is better to skirt around the trade issue by locating investments in regions where the markets are, and find ways through technology and manufacturing excellence to overcome some of the additional costs imposed by more expensive feedstock. By locating within China, BASF will ensure unhindered, tariff-free access to a market that still affords immense business opportunities.
Wake-up call for India
The announcement in China should also serve as a wake-up call for policy planners in India that, at least for chemicals, this country is yet to be seen as an attractive destination for large investments by global majors.
There are several reasons for this state of affairs, but the small size of markets is one. For several products for which India is even now import dependent, the market opportunity does not support investments in a globally sized plant. Even in the instances where it does, availability of feedstock, ready infrastructure and regulatory hurdles hinder investments and make for uncompetitive manufacturing. Unless urgent efforts are taken to address these issues, investments will continue to flow elsewhere in the world – including in the region around us – and the Indian market will continue to be increasingly served by imports.
When a large sized investment of the size contemplated by BASF happens in a region, it will deter project activity elsewhere – at least till the project is completed and the additional output assimilated by the market. India it seems has once again missed the bus in attracting a large project to its shores.
In this context it is a pity that the mega-scale refinery and petrochemical complex planned by the public sector oil companies in India, with sizeable investments by Saudi Aramco and ADNOC, is caught in political crossfires. If these are not ironed out soon – even perhaps by shifting to an alternate coastal location (Mangalore?) – the limited foreign interest that now exists may vanish!
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