By Chen Aizhu and Yuka Obayashi
SINGAPORE/TOKYO (Reuters) - A massive surge in China's manufacturing capacity for paraxylene, a petrochemical used to make textile fibres and bottles, could force leading exporters in Japan and South Korea to cut production as early as the second quarter of 2020.
China will add about 10 million tones of paraxylene manufacturing capacity from March 2019 to March 2020, according to company reports and officials, that is enough for making 22 trillion 500-millilitre plastic bottles.
The world's top consumer of paraxylene (PX), China imports 60% of its need for the chemical to feed polyester demand that has more than doubled since 2010. Over half of China's PX imports come from South Korea and Japan and the new capacity is expected to cut Chinese imports by about 50%.
Without Chinese demand, the profit margins for regional manufacturers such as Japan's JXTG Holdings Inc, South Korea's Lotte Chemical and Hyundai Cosmo Petrochemical and domestic producer Dalian Fujia are expected to drop further, likely causing a rollback in output and decline in earnings.
"We will see drastic cutbacks in PX operating rates among many Asian exporters, and potential capacity rationalization in sites where integrated refining-aromatics margins are poor," said Darryl Xu, principal analyst for Asia chemicals at consultancy Wood Mackenzie.
Private companies are leading China's latest PX boom through a string of projects often integrated with big oil refineries which make them more cost competitive and flexible.
China's Hengli Group launched in March a PX plant capable of producing 4.5 million tonne per year (tpy) in the city of Dalian and Zhejiang Petrochemical is slated to start a 4 million tpy plant in Zhoushan late in 2019.
In July, Shandong-based Hongrun Petrochemical began trial runs at its 700,000 tpy plant and China Petroleum and Chemical Corp, or Sinopec, will start a plant in Hainan producing 1 million tpy in the third quarter.
Helen Yang, a researcher at JLC Consultancy, estimated China's PX imports could fall to 7 million tonnes next year and further to 4 million tonnes in 2021. Imports this year will be 12.6 million tonnes, the first annual decline in over a decade, down from a record 16 million tonnes in 2018.
MARGINS NOT REPEATED
Expectations of surging Chinese supplies squashed the chemical's processing margin, or PX's price over naphtha, a refinery product used to make PX, to below $320 a tonne in mid-August, versus $600-$700 a year ago.
"The $600-$700 margin was crazy and unlikely to be repeated," said Ma Xiumei, a purchasing executive at Hengli Group, which has cut its PX imports by nearly half this year.
Ma Cheng, the head of feedstock purchase at Zhejiang Yisheng Petrochemical, part of a joint venture with the builder of the PX plant in Zhoushan, predicted that the PX margin could slide below $250 a tonne later this year and even lower in early 2020 after the Zhoushan plant ramps up.
JXTG Holdings said that a deteriorating PX market contributed to its shrinking first-quarter earnings, but the company is still upbeat with demand growth in Asia and also plans to divert some exports to the Americas.
"One of our headaches for the latest earnings was falling margins of PX," said Yoshiaki Ouchi, JXTG's senior vice president earlier this month after firm reported a 88% slide in quarterly profit.
Japanese bank Nomura Holdings Inc cut its forecasts for JXTG's earnings through the 2021 fiscal year following the slump in PX margins.
China could add another 14 million tonnes of PX capacity between 2020 and 2023 said JLC's Yang, which will contribute to rising gasoline supply in Asia.
South Korean and Japanese PX makers are likely to respond to the rising Chinese supply by diverting output to the gasoline blending pool, as aromatic chemicals like PX are used to raise the octane rating of gasoline. This could add another 150,000 barrels per day of gasoline in Asia by 2021, said Wood Mackenzie.
"(PX) exporters in Japan and South Korea will soon face a dilemma - should they continue to fight for a shrinking export market, or divert aromatics feedstocks into a much bigger gasoline market?" said Wood Mackenzie's Xu.
(Reporting by Chen Aizhu in SINGAPORE and Yuka Obayashi in TOKYO; Additional reporting by Jane Chung in SEOUL)