Aftermath of Xiangshui Explosion

Aftermath of Xiangshui Explosion

It is already one month later after the Xiangshui Explosion on Mar 21, but its aftermath is still impacting Jiangsu Province. Recently, the General Office of Jiangsu Provincial Government carried out the Jiangsu Chemical Industry Rectifying Plan (Consultation Paper) (abbr. as the Plan) and sent it to the Standing Committee of Jiangsu Provincial People's Congress for review. According to the Plan, Jiangsu is preparing a massive inspection. The provincial government hopes to reduce the number of three kinds of chemical enterprises: The ones which are in 1km range of Yangtze River, environmentally sensitive area or populated region; The ones which are outside of the industrial parks; The ones that are below the scale standard. Thus, the total number of chemical enterprises in Jiangsu will decrease to 2,000 by 2020, and the number will drop to no more than 1,000 in 2022. This means that Jiangsu is going to close 80% of its present chemical enterprises. The present 50 chemical industrial parks around Jiangsu will also be checked and assessed, and finally, only around 20 industrial parks could be left.

This news shocked the industry. As the province with the most chemical capacity in the Yangtze River Economic Belt and the province with the second most chemical enterprises in China, the announcement of the shutdown of 80% of its chemical enterprises impacted the market greatly. Generally, East China is always one of China’s chemical production bases, with 43% of the benzene capacity, 43% of the styrene capacity, 17.92% of the methanol capacity and 13.83% of the ethanol capacity. Additionally, SCI found not only Jiangsu but also many other provinces, such as Shandong, Hebei, Jiangxi and so on, carried out their own rectifying plans. Obviously, the operation of chemical plants will be affected greatly in the upcoming period.

The effect will be mainly from two aspects. First, the volume of the gas used as the feedstock of the chemical plants will decrease. However, this volume is not big enough to impact the LNG market originally as the state always holds negative attitudes on such plants. Second, and the most important, some of the gas is used as fuel in the chemical plants, and the volume of this kind of gas will be affected. In 2018, around 30% of the industrial gas consumption (which means the gas that is consumed by industrial users as fuel) was consumed by chemical plants, and the number was around 26.41 bcm. Besides, during the inspection, a certain officer of the industrial park mentioned that the LNG truck traveling in the industrial park could be dangerous sometimes. Due to this, the LNG truck loading sales and the LNG demand to the industrial parks all around China may be affected. In fact, many LNG spot supply projects in China are not safe enough. They have many kinds of problems in this or that aspect. And these projects may be closed for rectification. In addition to the shutdown of the chemical plants, it seems like that winter is coming.

But to what extent will this affect the LNG market? SCI held that the effect would be slight, yet the things changed greatly in the past few days. Jiangsu’s rectifying plan is something that has never been seen since the 1980s. However, could this come true?

Considering the complicated effect of the shutdown, SCI thinks the rectifying plan may be implemented in another way. You may have heard about China’s Industry Transformation and Upgrading project. Reorganization and acquisition are important parts of this project. The state hopes to integrate the industry in the east part of the country and to develop several large-scale competitive industrial complexes. To reduce 80% of the chemical plants? Maybe. But what about employment? Besides, Jiangsu is still ambitious in the gas power with its large LNG import capacity. When a large number of the chemical plants are closed, some of the LNG could also be consumed by its new power plants which may be approved in the future as a kind of compensation. What’s more, the industrial transfer between East China and Central China is not something new. In the recent 3 to 5 years, provinces in Central China were always trying to attract the chemical enterprises to relocate. Enterprises will need to pay the extra freight via shipment on the Yangtze River or railway, but it will be better than just be closed directly.

Anyway, the gas demand and the LNG demand in Jiangsu Province or in East China will be affected in the mid-term, and there is no doubt. SCI will change its forecast about consumption, import and other fundamental data. However, the total effect must be controllable. This prediction is based on such facts: One, the shutdown of chemical plants and many other industries in the east part of China is already in the process. Jiangsu’s radical project is just to accelerate but not to turn over the market. No matter this might be another name of acquisitions. Second, Jiangsu still needs to consider its GDP. Without its pillar industry, we doubt how the province could achieve its aim in the economy, employment and social stability. Third, there are many ways that China could use to achieve its environmental protection target. But to simply close the plants will never be one of them. The economic growth was more important in the past 30 years. And this ideological trend may last another 30 years, especially considering the gap between China and the U.S. And with the firm faith to China’s economic growth and the coal-to-gas reform, SCI is still optimistic.

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