ExxonMobil Boosts Its China Presence

With global demand for plastics still extremely weak, now may seem like an inopportune time to start up a major petrochemical complex. Yet an oil refining and chemical venture in which Exxon Mobil Corp. owns a 25% stake is in the process of being commissioned in the Chinese province of Fujian. The venture should be fully operational before the end of the year.

“We tend not to get put off by particular points in the business cycle because we know that over the lifetime of many of our ventures, there will be several of those cycles,” says John R. Verity, an ExxonMobil Chemical vice president who oversees the company’s global polyolefins business. “Therefore, we look at the ventures in terms of how they can perform over the long term.”

As recently as February, the petrochemical industry in Asia was on the rocks. Chemical complexes in Japan, Taiwan, and South Korea were operating at a fraction of capacity, largely because of weak demand for plastics in China. Chinese demand, in turn, had weakened mostly because consumers in Europe and the U.S. were buying fewer Chinese-made products as a result of the economic downturn in their countries.

But focusing on current conditions is not the way to go, ExxonMobil executives say. At the groundbreaking ceremony for a new ExxonMobil Chemical R&D center in Shanghai last month, company President Steve Pryor said that over the next 10 years, roughly 60% of the increase in world demand for petrochemicals will come from Asia. China itself will account for about half of that growth. The right thing for ExxonMobil to do, he said, is to increase its presence in Asia, particularly in China.

The $70 million R&D center that ExxonMobil Chemical is building in Shanghai’s Zizhu Science-based Industrial Park will initially employ 70 scientists but will be large enough to accommodate 200. It will provide technical support for the company’s customers throughout Asia. When it opens, ExxonMobil Chemical will have three global R&D centers; the other two are in Brussels and Baytown, Texas.

The Chinese market has some unique traits, Verity says. The country’s toy industry is highly developed, and its agricultural sector is unusually large. These characteristics do not profoundly affect the types of plastics that China consumes, but they do call for an R&D facility that does local product development. “Being able to work with the local companies more closely enables us to tailor some of our global solutions a bit more to the local market,” he says.

Compared with the R&D center, the Fujian petrochemical complex is a far more substantial investment. The U.S. firm owns a 25% stake in the $5 billion venture, which features an oil refinery, an 800,000-metric-ton-per-year ethylene cracker, and several plants making plastics. The other partners are Sinopec, with a 50% stake, and Saudi Aramco, which owns 25%. According to Verity, the partners will take products from the complex and sell them through their own sales organizations in China.

Although a China-Saudi Arabia-U.S. partnership may seem like an odd arrangement, Verity says ExxonMobil has a good track record with such multinational ventures. The key, he explains, is for each party to remember how critical the others are. In Fujian, he says, “Aramco has brought feedstock expertise and supply, Sinopec brings a lot of local market knowledge, and we bring a lot of operational expertise.”

Samuel Liew, a Singapore-based consultant with Chemical Market Associates, expects that Chinese demand for polymers in the coming months will be only “moderate.” Western countries will not spend a lot at Christmas, he predicts, to the detriment of Chinese exporters. As for Chinese domestic demand, he says it gained some strength in March, April, and early May but has since weakened again.

Liew expects the Fujian venture to navigate these market conditions relatively well because of its low cost base and a location within China that gives it good market access. Resin manufacturers exporting to China from Europe or North America will have more trouble during the economic downturn, he says.

ExxonMobil’s Verity is convinced that the new complex will be profitable from the start, even if it may not operate at full capacity initially. Although demand for petrochemicals may lack strength this year, he points out that demand is higher now than it was a year ago. “It’s gross domestic product growth that drives demand for our products, and the economies in Asia have continued to grow,” he says.

Besides, customers whom Verity saw at the ChinaPlas plastics trade show in May remain optimistic. “They continue to invest, and they’re very confident about the future of their businesses,” he says. If that optimism is not misplaced, the downturn in the global petrochemical industry could be shorter than many expect.