With Russia’s Help, China Becomes Plastics Making Power In Pandemic

After giving up on recycling — American recycling that is — China is still in love with the plastics biz. In fact. their companies are becoming dominant in all things plastic, one of the most important supply chains in the world.

In other words, it will be yet another segment in global business that the world will need Chinese companies to get supply.

The pandemic has helped the petrochemicals industry make up for losses in oil and gas demand. Plastics are tied to the fossil fuels industry. Stay-at-home orders throughout the U.S. and Europe has led to more take-out food orders and a lot of that is being placed in plastic containers.

I’d like to highlight one thing though: China’s Sinopec is the behemoth in this space, and although you can buy into Sinopec on the U.S. stock market, if the incoming Biden Administration makes good on a Trump order to delist Chinese companies that are not compliant with the financial audit rules under the Sarbanes-Oxley Act of 2002, then Sinopec will probably leave the NYSE.

The market is already discounting this. This is Sinopec stock versus Exxon and the X-Trackers China A-Shares ETF ASHR .

According to industry consultant Wood Mackenzie, petrochemicals will account for more than a third of global oil demand growth to 2030 and nearly half through 2050.

The growth in both plastics consumption and production is mostly coming from Asia where economies are catching up with the western levels of plastics consumption, and becoming a source for plastics exports to the U.S. and Europe.

Within Asia of course, China is the powerhouse. Last year Exxon Mobil XOM began constructing its $10 billion petrochemical complex in Huizhou, China.

Russia Joins China, Wants To Be ‘Indispensible’

Russia’s petrochemical giant Sibur is also locked into China, mainly through a Sinopec partnership. The two companies began work on one of the world's largest polymer plants for plastics making last August, spending $11 billion on the Amur Gas Chemical Complex in Russia.

The two sides are intimately connected in the global plastics biz.

“Amur is a milestone in the cooperation between Sinopec and Sibur,” Zhang Yuzhuo, chairman of Sinopec, says in a press statement, calling it a “model for Sino-Russian energy cooperation.”

The entire industry, while not exactly the sexy and green industry the Davos crowd is promoting heavily in the Western world, is seen by China and still-emerging markets like Russia — as a development tool for regions far away from the big city hubs of Moscow or Shanghai. This is as much about job creation as it is pumping out plastic molds and the ethylene needed to make it.

Russia recently introduced negative excise tax on LPG and ethane used in petrochemicals which was a meaty financial bone thrown to Sinopec and Sibur’s Amur project, among others in the Russian far east. 

The Sibur Russia angle has gained momentum recently due to the ramp up in production from the new ZapSib Siberian facility last year. They make polyethylene and 500 thousand tons of polypropylene there; all must-have ingredients for plastics manufacturers.

Their relationship with Chinese investors, buyers and counterparties was one of the main reasons to even build that manufacturing plant in the first place, and is something the Moscow market likes to give as one of the best reasons to be bullish about a rumored initial public offering for Sibur.

Sibur has said in press statements that they expect “another jump in scale” of plastics chemicals output with the addition of the Sinopec project, Amur.

"Sibur has long built relationships with Chinese clients, partners, and investors and Sinopec has been our strategic partner since 2013,” says Dmitry Konov, Chairman of the Management Board for Sibur. Konov told Reuters recently that there was no timeline for any IPO in the Moscow Exchange. Moscow was home to one of the top four largest IPOs last year, shipping firm Sovcomflot.

Konov said their logistical advantages in the far east, near China, and competitive pricing for its polymers means they will “scale up these relationships to further expand the delivery of high-quality petrochemicals from Siberia to China."

VTB Capital, a Russian investment bank, says those projects would allow Russia to become one of the world’s top four producers of ethylene by 2030. Russia wants to position itself as the indispensable partner to China in this space, much in the way that China has positioned itself as the key source for numerous key inputs, whether its cobalt used in electric vehicle car batteries, or solar panels now expected to criss-cross the U.S. in the Biden Administration.

Due to the pandemic, China has been focused on industries of the future alongside those needed to get itself, and its trading partners, out of the pandemic rut — those polypropylene Olive Garden to go containers might not come from China, but the plastics that made it sure might.

China remains the place for growth in this space, too. Plastics-use patterns and penetration are rising. Figure the Asians are a good 10 to 20 years behind the U.S. in terms of plastics use. They’re gaining fast.

China As Plastics Demand Driver

Plastics aren’t made from tree bark, that’s for sure. It comes from fossil fuels and non-organic chemical compounds that make the stuff designed to last hundreds of years.

And China now accounts for roughly 40% of the demand for the chemicals used in making it, an increase of just 20% in 2005. 

China’s ethylene demand grew by 8.6% between 2014-17 while global demand grew by only half that. 

Looking out five years, Deutsche Bank industry analysts said in a November 25 report that China will account for over half of global consumption growth for ethylene (to which Sibur and Russia are happy as their go-to for now). 

China has 50% self-sufficiency in ethylene and derivative products – the domestic desire to expand capacities and increase self-sufficiency remains high. Russia is a solution. But Sinopec will invest domestically, as will the big Western multinationals who are frowned upon doing similar work back home. Exxon is case in point.

China was a relatively late entrant to the global petrochemical industry, but that does not mean much. They ramp up, and rev up fast due to state subsidies and state-owned companies’ ability to obtain raw materials and pass them along downstream for pennies on the dollar. These are loss leaders, but China doesn’t care about that stuff. They are looking to produce plastics for the locals, and for the export markets, especially U.S. and Europe, which are increasingly disinterested in anything fossil fuels related, at least on paper. 

In the 1990s, the Chinese petrochemical industry was significantly smaller than the U.S. In 1995, China’s ethylene capacity totaled 3% of global capacity. In comparison, Japan had 9% of global ethylene capacity and Korea had 5% of global capacity. Ethylene is naturally occurring.

During the 2000s, China’s petrochemical industry grew substantially driven by government support and strong demand from government-directed infrastructure spending, a burgeoning middle class with rising disposable incomes, expanding residential construction and exports of course.

Between 2004 and 2012, China’s ethylene capacity — the flammable gas used to make ethanol for cars, fruit ripeners, and — more importantly, plastics — doubled to 11 million tons per year. Within 25 years, China's capacity has moved from 3% of global to 16% of global. Who thinks they’re going to slow that down? Need plastic? China will have it. For now, Russia has the chemicals. China might just gain on that next.