The China polyester mystery continues in a world turned ...

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By John Richardson

SOMETHING very strange is happening in China&#;s polyester industry which has enormous implications for the global industry, as ICIS data continue to point towards strong local apparent demand growth for paraxylene (PX) and monoethylene glycols (MEG) despite seemingly weak downstream fundamentals. The world &#;enormous&#; is no hyperbole because China completely dominates exports up and down the value chain.

In January-July on a year-on-year-basis (all the percentage comparisons that follow are on a year-on-year basis), China&#;s apparent demand for PX could have risen by 24%. This comprised an astronomical 63% rise in local output, based on our monthly estimates of local output, as net imports fell by 7%.

Note that if you subtract the 723,709 tonne January-July imports from Brunei from the total, as the Brunei Hengyi Petrochemical&#;s 1.5m tonne/year PX plant is 70% owned by Hengyi &#; a Chinese purified terephthalic acid (PTA) producer &#; net imports from other sources were down by 14%. But this doesn&#;t of course make any difference as these imports are in effect local production. So apparent demand was still up by 24%.

Let us assume our monthly estimates of local production are wrong and we go by the 13% rise in annual production we are forecasting in our ICIS Supply & Demand Database. This would still mean that in the January-July period, apparent demand would be up by 9%. The 9% figure was derived by dividing the annual production estimate by 12 and then multiplying by seven before adding the January-July net import number.

Either 24% or 9% growth in January-July apparent demand compares with our estimate for full-year real demand growth &#; which is demand growth adjusted for inventory distortions &#; of minus 1%. This would be the first year of negative growth in China since , when consumption fell by 3%.

It is a similar story in MEG. Net imports were up by 13% in January-July. We don&#;t provide monthly estimates of MEG production, but on an annual basis we are forecasting a 5% increase in domestic output.

If you again divide our full-year MEG production estimate by 12, multiply by seven and add this to the net import figure, you will get a 9% year-on-year increase in apparent demand. Our forecast for full-year real demand is a 4% decline, which would again be the first negative number since when demand slipped by 5%.

Move downstream and one is left scratching one&#;s head a great deal harder. While China is by far the world&#;s biggest importer of PX and MEG, it dominates global exports of polyester fibres, polyester films of polyethylene terephthalate (PET) resins. Add the January-July net exports of these PX and MEG derivatives together and you find that they are down by 23%.

Taking a step back, what about PTA? As a reminder, PX makes PTA and PTA is then reacted with MEG to make polyester fibres, polyester films, PET resins, and a much smaller-volume product &#; polyether sulfone resins (PES resins). The January-July PTA trade data provide little explanation. The data show that China has gone from a small net import position in PTA last year to a tiny net export position in .

Garment industry struggles due to pandemic

Back to the polyester fibre story. We know that global garment sales have collapsed because of the pandemic, as this very useful article from just-style.com suggests. Quoting Chinese government data, the article says that in January-June, China&#;s garment industry saw its earnings fall by 16.4% for major enterprises, with profits down by 23%. China saw the largest decline in apparel shipments to the US on record, despite unit prices falling by 17% to $1.88.

China&#;s decline in polyester fibre net exports (on an individual basis they were down by 20% in January-July) reflects that it is not just the Chinese garment industry that is struggling, as China is a major supplier of polyester fibres to clothing manufacturers in countries such as Bangladesh, Pakistan, India and Vietnam. Some of these countries saw a rebound in clothing exports in August, but this has yet to make up for big declines in shipments in January-July.

In all this mystery, however, it is important note that the same just-style.com article says that China&#;s combined textiles (non-clothing) and apparels exports were 3.2% higher by value in January-June. This was the result of a huge surge in shipments of the textiles used to make personal protective equipment.

But by far the biggest share of polyester fibre consumption has traditionally been in clothing, pillowcases, sheets, curtains and carpets, etc. Polyester and cotton blends, along with non-woven polypropylene, are used to make face masks. This might mean there has been a major shift in the composition of China&#;s polyester fibre demand &#; as of course China&#;s face mask exports have gone up significantly.

As I said, though, polyester fibre net exports are down substantially so far this year, the biggest January-July percentage decline on record. Anecdotally, also, local polyester fibre demand has been consistently described as weak by our ICIS pricing editors and by my sources since the pandemic began.

This leaves the possibility that, despite weaker polyester film and PET resin exports, there has been a huge surge in Chinese exports of rolls of plastic films, PET bottles and other finished plastic products. Film and bottles sales globally have been very strong because of the boost the pandemic has given to demand for single-use packaging in general.

But here is the thing: This year we expect 81% of China&#;s total polyester polymer demand (polyester fibres, polyester film, PET resins and PES resins) to consist of consumption of polyester fibres. This of course means that the bulk of PX and MEG demand will, as always, be into polyester fibres.

It therefore appears that local PX and MEG production and net imports have got ahead of demand. How much ahead of demand?

• Assuming a 24%% growth in January-July apparent demand growth for PX, and assuming our forecast for annual real demand growth is right at minus 1%, this implies overstocking of 3.5m tonnes. Assuming the lower estimate of 9% apparent demand growth, overstocking would be 1.2m tonnes.
• Overstocking of MEG would amount to 1.3m tonnes, based on 9% apparent demand growth in January-July and our estimate of a full-year decline in real demand of 4%.

But in this strange world, anything is possible

We live in a very strange and much-changed world. The nature of end-use demand for all the petrochemicals has been radically reshaped by the pandemic in ways that we are only just beginning to understand. It is therefore possible that polyester fibres, polyester film and PET resin demand has been turned on its head by the virus, meaning there is no major overstocking in PX and MEG. But this to me seems unlikely.

What is more likely is that there is overstocking, but it represents a calculated risk by PX and MEG importers and local producers. They have built stocks on the assumption that when global clothing demand comes roaring back later this year &#; and there are tentative signs of at least a modest recovery &#; inventories will quickly and comfortably be depleted by higher downstream demand. Will the risk pay off? We shall see.

But what is again crystal clear is that you need ICIS data and analytics more than ever before to keep track of PX, MEG and other petrochemicals markets. Markets have never been as complex and as uncertain in my 23 years at ICIS. This makes an independent and objective external view a critical success factor for your business.

 

Credit: Jiutai Group

Clothing and drinking bottles made from coal? In China, that&#;s more and more the case. Widely viewed in much of the world as dirty, planet warming, and on its way to obsolescence, coal is on the ascent in China&#;s chemical industry, where it is increasingly a raw material for making polyester fiber and resin.

China&#;s chemical industry is at a chronic cost disadvantage compared with other countries&#; because of a lack of domestic crude oil and natural gas. But China has a lot of coal. The only country to do so on such a scale, China produces millions of metric tons of polyvinyl chloride, polyolefins, and liquid fuels every year using coal as a raw material.

Until recently, polyester wasn&#;t on the list of materials made from coal, but this is changing rapidly. Relatively new processes that use coal to obtain ethylene glycol&#;a raw material for making polyester fiber and packaging resin&#;have gained traction in China.

And the pace of adoption of coal for making ethylene glycol may accelerate if a new technology takes hold. In Inner Mongolia, a Chinese company is building a huge facility using a new process that, its backers say, makes ethylene glycol at a lower cost and with improved plant safety.

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Every year, China imports about one-quarter of the world&#;s ethylene glycol output of 31 million metric tons (t), says Atul Shah, licensing development director at Johnson Matthey (JM), which codeveloped the new process with Eastman Chemical. &#;China imports a lot of ethylene glycol, and the government wants to reduce this.&#;

Most of the world&#;s ethylene glycol is produced from ethylene, a basic chemical that is typically made by cracking oil or natural gas in a petrochemical plant.

But the pace at which coal-based production is being implemented in China is spectacular. From nothing in , China now has 3.5 million t of coal-based ethylene glycol capacity, says Cao Mengting, a polyester consultant at CCFGroup, which is focused on the Chinese fiber industry. By , this capacity will have doubled, she expects. Today, coal-based facilities represent about 40% of China&#;s ethylene glycol production capacity and 14% of actual output, according to Michael Zhao, another CCFGroup consultant. In five years, he expects coal-based facilities will account for 20% of the country&#;s output, while production capacity will be half of the country&#;s total.

The basic technology for producing ethylene glycol from coal has been around for decades. In the s, Japan&#;s Ube Industries developed a process that harnesses synthesis gas (syngas), often made from coal, to produce ethylene glycol through a multiple-step reaction involving the consumption and regeneration of methyl nitrite.

The process didn&#;t catch on at the time, but about 10 years ago it resurfaced in China. HighChem, a Japanese chemical producer and process licensor focused on matching Japanese capabilities with Chinese needs, worked with East China Engineering Science and Technology, an engineering firm, to update the Ube process. The effort came to fruition in when China&#;s Xinjiang Tianye opened a 50,000 t plant using the Ube process.

Concurrently, the Shanghai-based company Pujing Chemical Industry tweaked the methyl nitrite process and began to license a competing version of it. According to CCFGroup&#;s Cao, the processes sold by HighChem and Pujing differ mainly in the catalysts they use. &#;The catalyst is key,&#; she says.

The two variants have proved attractive to Chinese coal producers, Cao says. &#;Coal chemistry is very profitable.&#; The coal-made ethylene glycol is also attractive to cost-conscious polyester producers, she adds, because it usually sells at a discount to traditionally made ethylene glycol owing to lower purity and inconsistent availability.

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The process has some shortcomings, Cao says. The technology is complex, and plants are plagued by unscheduled shutdowns. One reason for outages, she says, is that some producers source their syngas from external suppliers, an often insecure arrangement.

But a key challenge in the Ube process, according to JM&#;s Shah, is its reliance on the intermediate material methyl nitrite, a hazardous gas. According to IHS Markit, an industry consultant, methyl nitrite is reacted with carbon monoxide over a catalyst to yield a mixture of dimethyl oxalate and nitric oxide. The dimethyl oxalate is in turn converted into ethylene glycol, and the methyl nitrite is regenerated.

To reduce the risks associated with methyl nitrite, producers using the Ube process tend to build relatively small plants, Shah says&#;sometimes several in one location. In contrast, the huge Inner Mongolia facility, being built by China&#;s Jiutai Group, will consist of only two production lines.

China imports a lot of ethylene glycol, and the government wants to reduce this.

Atul Shah, licensing development director, Johnson Matthey

Although it starts with coal and ends with ethylene glycol, the process to be used on those lines takes a completely different route. It processes syngas into methanol and then into formaldehyde using a commercially proven JM technology. Then, using the process developed by JM and Eastman, formaldehyde is reacted with carbon monoxide, hydrogenated, and refined to yield ethylene glycol and the coproduct diethylene glycol.

Eastman and JM worked for about a decade on the formaldehyde-to-glycol process and tested it at a mini plant in the UK, Shah says. Jiutai&#;s plant will mark its first commercial implementation. Jiutai is deploying it on a massive scale, building an ethylene glycol plant with a capacity of 1 million t that will be fed by a 1.5 million t formaldehyde plant.

Wang Zongzhen, chairman of Inner Mongolia Jiutai New Material, the Jiutai subsidiary that is building the plant, insists his firm did its homework before selecting the commercially unproven Eastman-JM process. Negotiations with JM went on for over four years, and several Jiutai employees, including Wang, went to the UK, some more than once.

He and his colleagues grew confident about the technology after reviewing test results, inspecting the demonstration plant, and testing the ethylene glycol it produced. &#;No one is better than Johnson Matthey at catalysts,&#; he adds.

Economically, Wang says, the project is a solid one. Its output can easily be sold to polyester plants in eastern China, he says. Demand in eastern China is very strong, and the ethylene glycol will be of higher quality than the product made by the Ube method, he says. Moreover, in recent years, he says, producers of diethylene glycol have enjoyed good margins in China. Currently under construction, the plant is scheduled to open in late .

Wang expects that the plant will produce ethylene glycol more cheaply than both the Ube and traditional petrochemical routes. And by relying on Air Products and Chemicals for syngas, Jiutai is reducing its outlay for the huge facility. The US firm is spending $650 million to build a syngas plant at the Jiutai site that will use low-grade coal.

When it comes to discussing chemicals from coal, the elephant in the room is the large amount of CO2 emitted in the production process. China is by a wide margin the world&#;s largest source of CO2, with annual emissions nearly twice as high as those from the US, the world&#;s second-largest source.

Asked about the problem, Jiutai&#;s Wang is unperturbed. Soon, he expects, China will launch a national scheme to control the country&#;s carbon emissions. &#;The more you emit, the more you will be taxed,&#; he predicts.

In a November update of its climate change policy, China&#;s Ministry of Ecology and Environment noted that in recent years the country has tested emission-trading schemes in several cities. The ministry stated that the Chinese government is currently drafting a national climate change law that will address CO2 emissions at the national level.

JM&#;s Shah similarly says that CO2 emissions associated with the new process aren&#;t a major issue. &#;Oil-based ethylene glycol also has CO2 emissions,&#; he says. &#;I suspect the difference is not that big taking into consideration the CO2 emissions associated with shipping oil into China.&#;

In fact, Shah expects that other countries will likely start producing ethylene glycol from coal in the future. Some of the prime candidates, he says, are India and Indonesia. &#;If you don&#;t want to build a cracker but want ethylene glycol, you can consider our technology,&#; he says.

By Shah&#;s reckoning, the Eastman-JM process is competitive against the petrochemical route whenever the price of oil is above $50 per barrel. With oil at about $55 per barrel these days, the process is very competitive, he says.

Environmentalists perhaps won&#;t be heartened, but it looks like the polyester in shirts and dresses sewn in China will increasingly be made from coal.

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