China sees energy opportunities in post-COVID recovery

The country that first experienced the wrath of the coronavirus pandemic has been one of the first to recover, both in the overall health of its society and in regard to its economy.

At the beginning of the decade and because of the crisis, nearly all global crude oil and chemical companies experienced some type of price volatility and demand shock along the supply chain, according to experts with IHS Markit, a London-based research and information firm.

The early downturn and subsequent recovery was especially true as it related to oil and gas production, according to a panel of experts at the World Petrochemical Conference, conducted virtually March 8-12.

“China is expected to recover and rebound after the pandemic, with an expected GDP growth of 7.8 percent this year,” said Yating Xu, a senior economist with IHS Markit. “The growth drivers, however, have switched dramatically from investment to consumption, a trend we expect to continue.”

Within China, vaccinations should continue to improve this faster-than-expected economic recovery, Xu said.

“Policy tightening is the main challenge for the short term,” she said. “For the longer term, China will be dependent on effective regulatory reforms, and here the pandemic effect could be more permanent, as the government wants to maintain stability. Expect consumption upgrades and manufacturing upgrades, with a shift away from investment. Supply chain restructuring could provide avenues for future growth in China. China will be one of the least-affected and fastest recovering economies.”

Xu added that the pandemic could intensify income inequality in the country, which boasts the world’s largest oil, gas and petrochemical economy (though the country is dependent upon the U.S. for its ethane capacity).

In particular, the COVID-19 crisis has impacted the MDI space, or diphenylmethane diisocyanate industry, as plant closures and outages, as well as upstream pricing volatility, curbed MDI production in 2020, according to the panelists who spoke during the WPC March 12 panel.

MDI is used mainly in polyurethane foams, which comprise about 80 percent of world consumption. Foams are used in insulation, packaging, refrigeration, automotive, furniture and construction applications.

“MDI consumption continues to go up,” said Ming Ye, general manager of marketing for polyurethane producer Wanhua Chemical Group Co. Ltd., who discussed how China arrived at its decision to diversify into other segments—namely ethane and propane downstream production.

In 2019, Ye said Wanhua announced a significant investment in MDI capacity in China, to the tune of 800,000 metric tons between plants in Ningbo and Yantai. Wanhua has built a 500,000 ton expansion at Yantai, with a planned 300,000 tons in Ningbo, though the latter capacity increase remains on hold.

“Wanhua transformed in the post-COVID era, with strong growth in revenue and profit, a difficult trend to complete in terms of a capital market,” Ye said.

Factors for the MDI consumption increase include “explosive growth,” especially in terms of the polyurethane market that has experienced a “flurry of entrepreneurship” attempts.

“The economy in China is booming since everything reopened,” Ye said. “It is also important that we have enough capacity to seize this opportunity—this is essential—and we have consistently outdone other players in terms of capacity.”

Tanveer Rahman, head of chemicals, oil and gas in Southeast Asia for HSBC, added clarity to the possible state-owned enterprise (SOE) and privately owned enterprise (POE) partnerships and investment opportunities in the oil and gas industry.

The life sciences and electro-chemical industries continue to be a forward-looking focus for China, the world’s biggest market for both.

And the messages are straightforward, Rahman said.

“China is probably the last bastion of size and significant growth, and it is being done in an orderly way,” he said. “China stands out from the crowd. The impact of COVID is everywhere, but China is more insulated.”

With a population of 1.4 billion people and increasing wealth levels, demand allows companies to thrive. And the socialist nation encourages policies for POEs to pursue growth themselves.

“There has been a real proliferation in SOEs, and an even greater proliferation of POEs, as well as the opportunities that come with that growth. Companies have developed their own technologies, with new power generation areas to pursue,” Rahman said. “POEs offer more choices than SOEs. Larger companies like ExxonMobil Corp. and Royal Dutch Shell P.L.C. have partnered on the SOE side in China, but the key is understanding the partnership, the relationship. The pioneering nature of POEs provides an interesting area for a partnership. China has been resilient, with a very impressive rise in the oil and gas markets.”

But with a reliance on ethane imports, mostly from the excess capacity of the feedstock in the U.S., China does have a sustainability challenge with its reliance on coal.

“There is also a single-use plastic ban, which will be increasingly tightened over the next few years,” Rahman said. “That could lead to gains in the agri-chemical space.”

The key for China is how it can differentiate itself in a pioneering manner.

“About 90 percent of the technical developments have been from China, Korea and Japan. Energy security is a factor, and western investors can play a role in filling this technical gap,” he said.

And sustainability—understanding China’s impact on future generations—remains a major issue, a solution that could come through a combination of wind power and bio-based products, eco-friendly coatings, lighter weight materials for autos in the electric vehicle revolution, and resource recycling and reclamation.

Xizhou Zhou, IHS Markit vice president and managing director for global power and renewables, said China President Xi Jinping’s stated goal of achieving zero carbon emissions for the country in the next 40 years is bold, but not unachievable, especially through SOEs that already are implementing such state-mandated benchmarks.

“The chemical sector continues to grow and the economy continues to grow,” he said. “This is a huge challenge for a country that is still growing.”

Zhou noted that this growth means people and companies will be using more energy at the same time the country seeks clean energy solutions. About 44 percent of carbon emissions come from coal plants in China, with chemical companies producing the second-highest amount of greenhouse gases. Third in fossil fuel use is transportation.

“Other major economies have peaked or plateaued,” he said. “We need to replace fossil fuels with clean energy, and these are all very big asks.”

Zhou said the Texas power failures this past winter should serve as a warning to China in the coming years, as well.

“How do we ensure that there is enough capacity in the power sector? We need to have reserve capacity, and that means building more power plants, on-site generation units and transmission lines,” he said. “China is one big grid and state capacity can ensure this, especially for industries that offer products 24/7.”

If a country can streamline its electricity supply toward a more eco-friendly end, Zhou said, it can begin to electrify industries that were not previously electrified, like transportation and others.

“We are trying to clean up our electricity supply by using as much non-fossil fuel as possible,” he said. “China is a big consumer, but it also is the biggest renewable market in world, with solar, wind and other technologies. This is the journey that China is embarking on—and it is not easy. There needs to be creativity in all sectors working on this with urgency.

“This creates other opportunities in other parts of economy, and these things bring jobs and tax revenue to other sectors.”

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