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China move to curb excess capacity has petrochemicals sector on edge

By Chua Sok Peng, Ng Baoying, Clement Choo, Joycelyn Chua, and Shashank Shekhar in Singapore

July 30, 2013 - China's booming petrochemical sector is bracing for change after the Ministry of Industry and Information Technology last Thursday released a list of 19 industries it says are beset by excess capacity and obsolete technology.

The industries on the list are required to shut down the excess capacity by the end of September and eliminate it by the end of the year, according to the ministry's statement.

Capacity in the calcium carbide, printing and dyeing and synthetic fiber sectors are among those earmarked for contraction.

The clampdown on calcium carbide could reduce feedstock availability for polyvinyl chloride producers, further reducing their operating rates, industry watchers said.

Analysis continues below...

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China is the world's largest PVC producer but imports close to 1 million mt/year of PVC, while its domestic plants operate at 50-60% of capacity.

China's overall PVC capacity is estimated at 32 million mt/year. More than 70% of the PVC currently produced is manufactured using calcium carbide rather than ethylene, and carbide-based PVC at least $35/mt cheaper than ethylene-based PVC.

Carbide prices are linked to coal and electricity prices, and ethylene to crude and naphtha.

In a similar vein, market watchers expect the purified terephthalic acid industry to undergo a painful restructuring in order to stay afloat once capacity in the synthetic fiber sector, downstream of PTA, is curbed.

China has been on an expansion spree for PTA, a key component for polyester, since 2010, when production margins exceeded $120/mt due to global demand for China-made garments.

The country's total PTA capacity ballooned to 26 million mt/year in 2012, when 10.2 million mt was started up during that year.

Another 19 million mt/year is due to be added by 2015, taking China's total PTA capacity to 45 million mt/year, more than 10 times its 2012 import volume of 4.2 million mt.

Similarly, Chinese caprolactam capacity is expected to increase by 700,000 mt by the end of the year, industry sources said, with at least four new plants starting up in 2013 and an expansion at an existing plant.

Caprolactam is used in the production of nylon, a synthetic fiber earmarked by the government for reduction.

Lu Xi Petrochemical started test runs at its 100,000 mt/year caprolactam plant in Liaocheng, Shandong province, mid-July and is expected to start up in a month's time.

The line is one of two at the company's new 200,000 mt/year caprolactam plant, which will come online in two phases. It is not clear when the second 100,000 mt/year line will be started up.

Downstream buyers are currently reluctant to stock up on caprolactam inventory due to the uncertainty over the market's direction once the new plants start up.

Asian caprolactam was assessed at $2,285/mt CFR Far East Asia Thursday, up $5/mt week on week, indicating the directive is already having an impact.

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