China's anti-involution policy: what it means for PX

Recently, due to policies aimed at curbing excessive competition (termed "anti-involution policy"), commodity market and prices have experienced significant fluctuations in China.

The petrochemical industry, in particular, has been impacted by the release of a draft soliciting opinions on the Assessment Methods for Aging Chemical Facilities and a notice requiring evaluations of outdated equipment, with special attention given to production facilities over 20 years old. This has led to market expectations of "capacity reduction" in petrochemical products, further influencing market dynamics.

Chinese government's policies regarding the shutdown and upgrading of aging petrochemical and refinery equipment are not new. Many of these policies and requirements were introduced years ago and even under implementation.

For example, in June 2024, the State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Industry and Information Technology (MIIT), the State Administration for Market Regulation (SAMR), and the Ministry of Emergency Management (MEM) jointly issued the Work Plan for the Phase-out and Upgrading of Outdated Chemical Equipment.

The Work Plan outlines specific tasks, stating that all production facilities in operation for 30 years or more as of the end of 2023 must be phased out by the end of 2029.

Moreover, in recent years, China has intensified energy conservation and carbon reduction efforts by setting clear energy consumption standards for various products in the refining and chemical sector, as well as through policies such as the Implementation Guidelines for Energy-Saving and Carbon Reduction Transformation and Upgrading in Key Areas of High-Energy-Consumption Industries. These measures aim to phase out and shut down outdated production facilities.

According to the newly enforced national standard GB 30251-2024 (Energy Consumption Limits per Unit Product for Key Refining and Chemical Products), which took effect on May 1, 2024, the energy consumption limits for PX are categorized as follows:

Grade 1 (Advanced Level) :≤370 kgoe/t

Grade 2 (Benchmark Level) :≤380 kgoe/t

Grade 3 (Minimum Entry Level) :≤550 kgoe/t

The standard explicitly stipulates that existing PX production facilities must meet at least Grade 3 energy consumption requirements, while newly built or expanded PX units must comply with at least Grade 2 efficiency standards.

Additionally, the Implementation Guidelines for Energy Conservation and Carbon Reduction Transformation and Upgrading in Key Sectors of High-Energy-Consumption Industries (2022 Edition) proposed the following target:

By 2025, the PX industry will see significantly improved scale efficiency in its production facilities, with over 50% of production capacity reaching benchmark energy efficiency levels and essentially eliminating capacity with energy efficiency below minimum entry level, resulting in notable energy conservation and carbon reduction effects and substantially enhanced low-carbon development capabilities.

From the current operational status of enterprises, since the announcement and implementation of these policies, some companies have already reduced their energy consumption levels through technological upgrades and other measures.

Based on investigation, according to the calculation method specified in the national standard, nearly all existing PX capacity now meets the energy consumption requirement of below 550 kgoe/t. Meanwhile, to comply with the national requirements for phasing out outdated capacity, some enterprises have already planned capacity replacement or shutdowns.

Currently, over 500,000 mt/yr of PX capacity has been idled, gradually taken offline since 2022, because of that policy.

Therefore, the upgrading of PX capacity has always been driven by the policy. It's just a shift from the earlier energy-saving and carbon-reduction policy to what is now being termed as "anti-involution" policy.

From the perspective of PX capacity, there remains a portion of older production lines with long operating histories.

The chart below shows the development of PX capacity in Chinese mainland since 2000. It reveals that China's PX expansion occurred mainly in two cycles: 2009–2015 and 2019–2023.

Before 2009, although the growth rate was relatively high due to the small amount, the actual capacity increase was limited. This was also partly due to technological constraints at that time.

Currently, within China's total PX capacity of 43.67 million mt/yr, approximately 900,000 mt/yr of total have been in operation for over 30 years, capacity aged 20-30 years accounts for over 2.4 million mt/yr (about 5.5% of total capacity), including 530,000 mt/yr (1.2% of total capacity) that are currently idled.

Therefore, facilities older than 20 years take up capacity of 3.3 million mt/yr, with currently operational capacity reaching nearly 2.8 million mt/yr.

Therefore, from a long-term perspective, China's PX industry does indeed face the potential phase-out of some aging production facilities. However, considering factors such as economic growth demands, the need for stable long-term operations, the gradual implementation of policies, and current fundamentals such as China's approximately 20% import dependency and an overall average operating rate consistently above 85%, the elimination and upgrading of PX capacity would be a gradual process. The upgrading could even come in the way of replacement to outdated capacity rather than elimination.

From a trading perspective, markets, particularly futures market, reflect the expectation of price in future and react to marginal variables. From the latest developments, efforts to "anti-involution" may not only be reflected in production capacity control but also influence the price as a guidance and regulation. Consequently, this affects commodity prices.