EQUITIES ● CHEMICALS
2 July 2018Beyond China’s Big 3
China’s chemical industry is moving rapidly away from the Big 3 with
private players set to control half the market by 2023
At the same time, we note that more chemical investments globally
are being driven by oil majors looking to move downstream
These shifts appear underappreciated with scepticism about this new
capacity making investors complacent about supply risks
Decline in Big 3’s share of capacity set to accelerate
China’s domestic chemical industry has long been dominated by the three big state-owned
integrated oil majors: Sinopec, PetroChina and CNOOC. In reality, the Big 3 is actually the Big 2
as Sinopec and PetroChina combined including their joint ventures have in the past two
decades owned an average of c90% of the domestic capacity base for basic commodity
chemicals such as ethylene.
However, this domestic capacity construct has been changing over the past few years at a
relatively slow pace although the changes now look set to accelerate in the next five years. By
2023, we estimate that the Big 3’s share of in China’s ethylene capacity will fall to 53%
from 94% as recently as 2010. We view this move as having meaningful implications for asset
integration, feedstock choices, access to capital and how new projects are built and run and
how the product is marketed.
Some historical context
Before we get into why the role of the Big 3 is diminishing within China’s chemical industry, it is
useful to have some context as to why the industry has been dominated by the domestic
integrated oil majors.
Share of the Big 3 in China’s ethylene capacity
Source: IHS Chemical, HSBC estimates
1990199520002005201020152018e2023e
Big 3Others
By 2023, the share of the Big
3 operators in China’s ethylene
capacity is set to fall to 53%
from 94% as recently as 2010EQUITIES ● CHEMICALS
2 July 2018
China: Energy intensity per unit of
GDP growth
China: Rise in energy and oil consumption
Source: BP Statistical Review of World Energy, IMF dataSource: BP Statistical Review of World Energy
The simple reason for the Big 3’s dominance has been integration of feedstock production into
the refining asset base. For the past 25 years as China’s demand for both fuel as well as
petrochemicals has grown rapidly, the solution to domestic supply needs has been to build
naphtha-based ethylene assets that were integrated into the refining assets being built by
Sinopec and PetroChina.
Over the past 15 years, China’s large state-owned enterprises (SOEs) expanded their
integrated refining and chemical capacity by rapidly building both wholly owned and JV assets
alongside their major global partners. The opportunistic investment partnering included ventures
with crude oil suppliers (Aramco), those with experience in sour crude oil processing (SABIC)
and those with ambitions to profit from China’s growing demand (for example XOM and BP). All
of these partnerships were based on capital sharing and in some cases technology sharing.
For the past few years, however, as China’s economy has matured, the energy intensity of GDP
growth has fallen meaningfully as have growth rates for both primary energy and oil
consumption. There has also emerged a meaningful surplus in terms of domestic refining
capacity, which has meant that refining capacity growth plans have slowed amid the present
strategic focus that is guided largely by industrial and environmental policies.
The policy changes place an emphasis of concentrated development away from urban centres.
Thus, the majors are being boxed in to a certain degree. Greenfield expansions are challenging
as the approval process is full of roadblocks.
China: Refining capacity vs oil consumption (kbpd)
Source: BP Statistical Review of World Energy
Big 2 367 373 373 367 375
Other 110 130 149 174 193
CHINA RUNS, MTPA 478 503 522 541 568
Other/Total 23% 26% 29% 32% 34%
Big 26 -1 -6 9
Other19 20 25 18
CHINA RUNS Y-o-Y MTPA25 19 19 27
Big 22% 0% -2% 2%
Other17% 15% 17% 11%
CHINA RUNS Growth5% 4% 4% 5%
Source: CEIC, company reports
The chemical capacity question …
What has not slowed, however, is chemical demand, which is consumption linked and continues
to grow at 1-1.2x GDP. And this leads to the issue of the need to build capacity to meet this
growing demand. There is a clear disconnect between the fuel and chemical demand growth
rates. Indeed, there is a refining capacity surplus and a big chemical capacity shortfall (China
currently imports c40% of its total polyethylene consumption). As most of the ethylene base was
historically integrated with the refining base, the question arises as to where the new chemical
capacity will come from given that refining capacity growth has slowed. The answer is via other
feedstocks – and if China gets a new set of feedstocks, then it also gets a new set of players.
Indeed, we saw pretty much exactly this shift from 2010 to 2015 as coal to olefins (CTO) and
methanol to olefins (MTO) projects started to get commercialized, marking the first set of non-
naphtha routes to ethylene production.
However, the drop in oil prices post 2014 resulted in challenging economics for both CTO and MTO
units, primarily impacting the returns on capital for the more capital intensive CTO units and the cash
cost economics for the non-feedstock integrated MTO units. For more on this issue, please see our
Global Chemical notes Methanol’s spike and MTO: Gas troubles of 15 January 2018 and Advantage
naphtha of 12 October 2015.
China ethylene capacity share by feedstock