SHANGHAI (ICIS news)--China's petrochemicals stimulus plan will lead to the de-bottlenecking of the entire industry through the acceleration of domestic refinery and cracker expansions, CBI analysts believe. The incentive plan, which was announced on 19 February, has aroused widespread oversupply concerns at home and abroad when set against the backdrop of the global economic downturn. "We also had such worries of the hastened cracker expansions," said a senior Sinopec official. ICIS reported in late 2008 on Sinopec and PetroChina announcements to postpone 3.45m tonnes of new crackers capacities due to shrinking demand and deteriorating profits. However, the latest China ethylene study from CBI suggest there is a need for China to build large-scale refineries and crackers, even under the pessimistic assumption that industries downstream from ethylene would only manage zero growth in 2009-10. According to the CBI data, China's cracker capacity in 2008 was 9.78m tonnes and unchanged for the second year since 2006. In support of the government incentive plan, China will bring on stream 4.55m tonnes of new capacity in 2009 and another 1.40m tonnes in 2010, including four Sinopec crackers and four PetroChina projects. This will push China's ethylene capacity up to 14.33m tonnes/year in 2009 and 15.73m tonnes/year in 2010. China's cracker expansion plans (kt/year) No. Company Project Location 2009 Expansion 2010 Expansion 2011 Expansion Start-up Time Sinopec (including joint ventures) 1 Fujian United Petrochemical Fujian, South China 800 1H, 2009 2 Shanghai Secco Petrochemical Shanghai, East China 300 Aug, 2009 3 Tianjin Petrochemical Tianjin, North China 1,000 Sep, 2009 4 Zhenhai Refinery and Petrochemical Zhejiang, East China 1,000 Oct, 2009 5 Guangzhou Petrochemical Guangdong, East China 1,000 In Planning 6 Wuhan Petrochemical Hubei, Middle China 800 In Planning PetroChina 1 Dushanzi Petrochemical Xinjiang, Northwest China 1,000 Q1, 2009 2 Panjin Petrochemical Liaoning, Northeast China 450 Oct, 2009 3 Fushun Petrochemical Liaoning, Northeast China 800 In Planning 4 Sichuan Petrochemical Sichuan, Southwest China 800 In Planning 5 Daqing Petrochemical Heilongjiang, Northeast China 600 In Planning Total new capacity 4,550 1400 2,600 Data Source: CBI Research and Consulting China imported 40% of its domestic polyethylene (PE) requirement in 2008, 74% of mono ethylene glycol (MEG), and 53% of styrene (SM), according to CBI data. These three ethylene derivatives accounted for around 82% of total ethylene consumption in the same year. "Cracker expansion will help reduce the reliance on imports for the ethylene downstream products,"said Tao Hong of the consulting group. Pessimistic forecasts of China's ethylene demand (kt) Derivative Item 2007 2008 2009 2010 Polyethylene (PE) Equivalent ethylene consumption 7,369 7,129 9,828 11,203 Import reliance 39% 40% 16% 5% Mono ethylene glycol (MEG) Equivalent ethylene consumption 1,153 1,156 1,700 1,889 Import reliance 73% 74% 62% 58% Styrene monomer (SM) Equivalent ethylene consumption 701 675 1,185 1,254 ImportrReliance 54% 53% 17% 13% Ethylene equivalent consumption of the three Sectors 9,224 8,961 12,713 14,346 Consumption proportion of the three sectors 84% 82% 85% 85% Total Ethylene consumption 10,937 10,963 14,956 16,878 Ethylene capacity 9,780 9,780 14,330 15,730 Data Source: CBI Research and Consulting China's ethylene supply will be unable to satisfy demand from downstream industries in the next two years even with such fast cracker expansion, CBI says. This is based on the assumption that total demand in downstream industries remains flat in 2009-2010 and that domestic producers run at the average operating rates as during 2007-2008. This would be at the expense of a sharp decrease in the reliance on imports. The worst affected product would be PE, the import reliance of which could fall from the current level of 40% to as low as 5% in 2010. "China's decreasing imports could be a blow for its trading partners, especially Asian economies that rely on Chinese producers as major buyers of their exports of raw materials and industrial components," Jing Ulrich, JP Morgan's chair for China equities said in a recent report. However, things may not be that simple given the 7m tonne/year cracker capacity increase expected in the Middle East in 2009. China will, without doubt, become one of the major target markets for these new capacities given the slowdown in the West. But whether these Middle East projects can launch production on schedule still remain to be seen, the Sinopec official said. China also wants to lift refining capacity to 515m tonnes by 2010. A CBI survey in early 2009, covering around 90% of China refinery output, showed that the average naphtha yield ratio was 11.3% between 2005 and 2008. Based on that ratio, China naphtha output is expected to reach 46.56m tonnes in 2010. The survey also showed that ethylene accounted for 75% of naphtha consumption in 2008 and the average usage of naphtha in ethylene production was around 2.4 tonnes per tonne of ethylene. That level of domestic naphtha output could only support 14.55m tonnes of ethylene output in 2010 compared with estimated ethylene consumption of 16.88m tonnes for the same year and projected domestic ethylene capacity of 15.73m tonnes. Most ethylene plants in China are naphtha fed. Naphtha supply is expected to be tight in short term. But CBI says the situation could be improved easily by raising the naphtha yield ratio and increasing the consumption proportion in ethylene sector. Two thousand and eight was an exceptional year, it adds, when increased volumes of naphtha were blended into gasoline on the back of strong demand and the high gasoline price. The tax-free policy for naphtha used in ethylene and aromatics production, which has been implemented since 1 January 2009 will help trigger the ethylene consumption, it says. And in a long run, the restrictions on naphtha supply are expected to be fully relieved. China's Bureau of Energy said on 3 February, two weeks before the approval of petrochemical stimulus package, that it had planned three 30m tonne/year scale refining hubs in Shanghai, Ningbo, and Nanjing. Detailed timings and locations for the new refinery and ethylene projects will be announced soon along with details of the petrochemicals incentives details, which are expected to be out in the first half of 2009. To discuss issues facing the chemical industry go to CBI Research & Consulting