The decision of where to locate a new complex is an important one for petrochemical companies. Two major staging grounds in recent years have been China and the Middle East, and there seem to be equally valid reasons to locate facilities in both areas.
Indeed, depending on circumstances, it can appear as though either location is the better place to be. When announcing new complexes in China or the Middle East, the companies sponsoring the projects typically affirm that, wherever the plant might be, its unique location will provide it with a superior competitive advantage.
The main reason to set up a petrochemical complex in the Middle East is the region's abundance of attractively priced gas feedstock. By contrast, China is attractive for its ferocious and growing appetite for all kinds of petrochemical products and basic chemicals. If one believes official customs statistics, Chinese imports of organic chemicals jumped 49% last year. China imported nearly $24 billion worth of organic chemicals, recording a deficit of almost $15 billion for organics alone. Overall, the country's trade deficit for all chemicals was $18 billion.
In an interview with C&EN in 2002, Rein Willems, then-head of global procurement at Shell Chemicals, said, "China is the engine of growth; it is inconceivable that with this huge market you can depend on facilities from abroad." Putting its money where its mouth is, Shell is completing construction of a major complex in southern China. But several other petrochemical producers have no firm plans to build major facilities in China.
Dow Chemical, the world's largest chemical company and an important producer of polyolefins, has quietly moved on since announcing about 10 years ago that it planned to build a world-scale petrochemical complex with China Petroleum & Chemical Corp. (Sinopec) in Tianjin in northeast China. Dow executives told stock analysts at a briefing in Midland, Mich., in 2003 that having access to competitive feedstock is more important than proximity to a growth market.
Theo Walthie, who heads Dow's hydrocarbons and energy and ethylene oxide/glycol businesses, says Dow is still interested in a petrochemical complex in China, but that it is trying to come up with a viable, integrated concept. Meanwhile, earlier this month Dow started building the second phase of its Equate Petrochemical complex in Kuwait. With its partner Petrochemical Industries Co. of Kuwait, Dow will add an 850,000-metric-ton-per-year ethane cracker to the complex.
JAPAN'S SUMITOMO Chemical announced last year that it would team up with Aramco in a $4.3 billion project involving a petrochemical complex and the upgrading of a refinery in Rabigh, Saudi Arabia. Sumitomo does not have any major investment in China, nor has it ever stated that it was studying the feasibility of building a petrochemical complex there. Its eyes are on China, however.
"We are interested in China, because in China there is a market that is growing," says T. Wakabayashi, general manager of planning and coordination for Sumitomo's petrochemicals and plastics business. Explaining why Sumitomo has yet to become involved in a major petrochemical project for China, he says, "It's more that we have not had a good opportunity in China so far to firm up a project."
Wakabayashi adds that China loomed large in Sumitomo's forecasting of which geographical markets would consume the output of the Saudi complex. "Although we are looking at the global market, it's more specifically growth in demand from China and India" that justifies investing in Saudi Arabia, he says. Sumitomo may add a dedicated sales force in China to sell the output of the Saudi facilities, he adds.
Wakabayashi is quick to note that locating facilities in the Middle East is not necessarily better than building in China. He points out that producers like ExxonMobil and Shell have facilities in the Middle East and are planning additional ones in the region, but they are also planning or building similar plants in China. "You can look at both ends," he says.
Garrie Li, director of olefins studies in Asia at market consultants Chemical Market Associates Inc. in Singapore, says that companies operating plants in the Middle East and exporting from there will likely weather periods of oversupply better. But he adds that operating plants in China confers many advantages.
He notes that Middle Eastern plants tend to use ethane gas as feedstock, whereas facilities in China tend to use the oil-based feedstock naphtha. The latter yields a broader spectrum of products, which is an advantage in China because demand is strong for many petrochemicals.
Some products are difficult to transport, and this may be another reason to build facilities in China, Li says. Chinese demand for ethylene oxide and propylene oxide derivatives, for example, is particularly strong. But it is impractical and costly to ship ethylene oxide, Li says, because it is explosive. Most producers prefer to make ethylene oxide and propylene oxide intermediates close to the market, Li says. The BASF-Sinopec joint-venture being built in Nanjing features a large ethylene oxide facility.
ANOTHER ADVANTAGE of setting up in China is quick delivery and response to consumer needs. Companies building petrochemical plants in China routinely attach technical centers that provide assistance to buyers and can work with plant staff to adjust product properties. These buyers also receive their orders more quickly if the plant is nearby. Li says that shipments from the Middle East often take 20 to 30 days to arrive in China. Delivery may be further delayed by discharging to a storage terminal, transshipment onto a barge or rail car, or administrative problems at customs.
But even within China, quick delivery only happens if the buyer is located close to the plant. A shipment that must cross several Chinese provinces may be no faster than one from the Middle East, Li points out. Petrochemical plants set up in China are most competitive in serving the region where they are based, not the entire country.
Summing up, Li says that whether the Middle East or China is a better project location depends on what the sponsors intend to make. "If you want to make high-value ethylene oxide derivatives, then you have no choice but to build where the market is. But if it's commodity polyethylene and ethylene glycol, then it might be better to be in a low-cost location so that you're competitive over the whole cycle."
But the relative merits of investing in China may become a moot point for Western chemical companies. Ten years ago, Chinese firms needed the financial muscle of foreigners to set up multi-billion-dollar petrochemical facilities. In recent years, however, Chinese producers have been achieving record profits. Two major petrochemical complexes announced recently for China--in Dushanzi and Zhenhai--are entirely local affairs. The door may be closing on foreign petrochemical producers interested in China.