BP to build chemical factory in China

The Chinese obsession with manmade sweaters was one of the factors behind a $2.5bn (pounds 1.6bn) deal announced yesterday by the UK oil giant BP, the company's biggest joint venture in the People's Republic and its second substantial investment there in the space of a year.

BP Chemicals said it had signed a letter of intent with one of China's biggest chemicals producers, the Shanghai Petrochemical Company, for the construction of a plant to make 650,000 tons of ethylene a year. Both sides stressed that the agreement was part of a long-term partnership to use BP's expertise in technology, management and marketing which could have other lucrative spin-offs.

It follows BP's first large-scale move into China last December with Sinopec, the largest state petrochemical firm and the majority shareholder of the Shanghai Petrochemical Company.

Construction has already started on the $200m (pounds 126m) project in which BP has a 51 per cent stake. Called the Yangtze River Acetyls Company, the plant makes acetic acid, a base chemical widely used in the manufacture of textiles, paints and herbicides.

Construction work on the latest project is unlikely to start for a year and the first phase is expected to involve the building of a plant making acrylonitrile, a key component in the production of manmade fibres. BP's acrylonitrile production technology, developed in the 1980s, is used in 95 per cent of the world's manufacturing capacity, either in the form of joint ventures or under licence.

BP said the initial intention was that the two partners should each own 50 per cent of the venture, though the value of the British investment would include cash and technology, while Shanghai Petrochemical would provide some of its existing plants.

The deal is a further demonstration of BP's drive to gain a significant foothold in the vast Chinese market, most recently through close ties with Sinopec.

The company has been keen to show its commitment to the country and yesterday's signing ceremony, held in Peking's Great Hall of the People, was attended by John Browne, BP's chief executive.

"BP has been quite aggressive to get into China, despite the fact that historically it didn't have a very high exposure in Asia," said Fergus MacLeod, an oil analyst with NatWest Markets.

The first BP deal with the Chinese, a chemical licensing agreement, was signed in 1973 as the country took the tentative steps towards opening its economy.

More recent investments have included $200m invested in onshore and offshore oil exploration.