China’s petrochemical surge is driving global oil demand growth.

Growth of petrochemicals in China. | Posted on 2024-01-02 12:34

Seismic shifts are taking place in the global petrochemical sector

The structural transformation of the petrochemical industry has been reshaping global patterns of oil consumption. Global oil use in 2023 has decisively surpassed pre-Covid levels, rising to 1 million barrels per day (mb/d) above where it stood in 2019. However, this is largely being driven by petrochemical demand and is especially concentrated in China. In 2023, demand for petrochemical feedstocks such as naphtha, liquefied petroleum gas (LPG) and ethane in the country will average 1.7 mb/d more than in 2019. Were it not for the sector’s rapid growth, total oil consumption would remain comfortably short of the pre-pandemic mark.

The global petrochemical industry – essential to the production of clothing, tyres, detergents, fertilisers, and countless other everyday products – is currently going through a momentous period of transition. Driving this change is a towering wave of new petrochemical plants, most notably in China. This is shifting oil demand to the country as it increases production of plastics and synthetic fibres, while generating increasingly cutthroat competition among those that previously dominated the market.

The speed and scale of the expansion of China’s petrochemical sector dwarfs any historical precedent, roughly doubling the pace of earlier capacity additions in the Middle East and United States. Between 2019 and 2024, China is set to add as much production capacity for ethylene and propylene – the two most important petrochemical building blocks – as presently exists in Europe, Japan and Korea combined.

Rising production in China is shifting global trade patterns

As China’s petrochemical sector expands, demand for feedstocks derived from oil is shifting to the country from other longstanding petrochemical centres. It is also significantly affecting global markets for the products made from petrochemicals, such as plastics, synthetic fibres and their intermediates.

China has long been the world’s largest polymer and synthetic fibre importer, accounting for the equivalent of almost 3 mb/d in feedstock terms, or 3% of global oil consumption, in 2019 and 2020. Now, its previous suppliers are under pressure after recent increases in Chinese production, in particular during 2023. Petrochemical activity and related oil demand fell in other regions, including the Middle East and the rest of Asia. Shipments of intermediate and final petrochemical products declined by almost 30% from these parts of the world during the first nine months of 2023 compared with the same period in 2019.

European petrochemical producers are not themselves major exporters to East Asia, but the reorganisation of trade has severely impacted the region. Operating rates appear to be unsustainably low, with many plants struggling to break even. Deliveries of naphtha, transformed into ethylene and propylene by European steam crackers, have fallen by almost 30% since 2021 to levels not seen since the mid-1970s.

Shipments of intermediate and finished petrochemical products to Europe from the Middle East and East Asia, excluding China, have risen slightly – but, in part due to weak local demand for plastics, Europe does not appear able to absorb the additional supply. Production across all these regions has slowed, although declines in Europe have been the largest.

Higher US supply is helping meet Chinese demand

In striking contrast, US producers have substantially increased exports of petrochemical feedstocks, intermediates and polymers. This includes flows to both China and Europe from the expanded American steam cracker fleet, which has been another increasingly disruptive force in global markets. Soaring domestic availability of ethane and propane, the most important US feedstocks, has outpaced increases in consumption, keeping processing margins strong and supporting rising exports. Ethane used in US plants now accounts for more than 2% of global oil demand, doubling over the past decade.

The advantages of this burgeoning feedstock supply have helped US producers expand their global market share. Huge volumes of US ethane and propane have poured into China since the pandemic, approaching three-quarters of the nation’s imports of these products and meeting more than one-third of the increase in China’s overall feedstock demand compared with 2019.

This trend is mirrored in US exporters’ growing dependence on China’s appetite for ethane and propane. More than three-quarters of the 2019‑23 increase in these shipments has gone to China. This symbiosis between the largest global source of demand growth – China – and the largest global source of supply growth – the United States – has enabled the petrochemical sectors in both countries to flourish in a way that would not otherwise have been possible.

The magnitude of the surge in petrochemical activity risks masking major shifts in global oil markets that have already begun to take hold. These structural changes have brought a peak in global oil demand into view this decade, according to analysis in the IEA’s medium-term Oil 2023 report and the latest World Energy Outlook.

One consequence of the growing role of petrochemicals is that carbon dioxide (CO2) emissions from oil will likely peak before overall demand. Petrochemical products are not primarily used as fuels, which means they are not a large source of direct emissions, though they can result in other environmental problems.

Despite marked growth in the world’s economy and population, global oil demand excluding petrochemical feedstocks remains lower than in 2019 and has grown little since 2017. Personal mobility and industrial activity now exceed pre-pandemic levels, but this is outweighed by strong improvements in the energy efficiency of engines, surging sales of electric vehicles and behavioural changes like more widespread teleworking.

IEA projections show that global road fuel use is set to decline from 2025. Total oil consumption by advanced economies is already nearly 10% below 2007 levels and shows no sign of recovering, even to its 2019 mark. Oil use is also expected to plateau before 2030 in China, long the driving force of rising global demand, with economic growth slowing and becoming less reliant on infrastructure and heavy industry.

These changes are set to bring an overall peak in global oil demand this decade despite growing demand for petrochemicals – which, while substantial, is not expected to alter the broader direction of travel.

Article written by :

Ciarán Healy, Oil Market Analyst