Few things have changed the chemical industry in the last 30 years more than the growth of the Chinese economy. With China becoming the workshop of the 21st century, it has also become the hungry man at the raw materials table, consuming vast amounts of chemical supplies from across the globe.
Fuelled by consumer goods exports to Europe and North America while being fed basic raw materials from Africa (copper, cobalt, nickel) and the Middle East (oil), the Chinese economy has helped the international chemicals industry exceed $5 trillion in value in recent years. But the effects of geopolitics, consumer trends, and technology mean that the chemical industry will be for ever changing.
Part of this changing landscape is China’s Belt and Road initiative, which was unveiled in 2013 by Chinese President Xi Jinping. It is aimed at developing Chinese economic ties across the Asian continent through the Middle East and into Europe and North Africa; bringing geopolitical influence with it.
While the Chinese government hails the project as ‘a bid to enhance regional connectivity and embrace a brighter future’, critics label the plans an over-extension of Chinese authority. Both sides agree that the outcome will impact global trade for decades.
Due for completion in 2049 (the 100th anniversary of the founding of the People’s Republic of China) the project is a massive investment surge into a ’belt’ of rail and road connections that mimic the ancient ‘silk road’, whereas the ‘road’ refers to enterprises for expansion in sea trade routes, expanding China’s merchant fleet and port facilities. But how far reaching will these changes be?
With political and economic power behind the Belt and Road initiative, is the chemicals industry about to enter a new phase?
Whereas originally the venture began as a ‘nice to have’ scheme to aid development, the trade war with the US has created an urgency for investment as the strategic importance of the project has become more evident.
While the current American foreign policy conducts an aggressive, almost protectionist stance, towards trade, the significance of improved infrastructure and economic links between China and the rest of the world (excluding America) become clearer.
Upon completion, the Belt and Road will be within reach of half the world’s population, accounting for 40% of global GDP. As such, it seems that completion of the Belt and Road will usher in a new era in global chemical markets.
How will European chemical manufacturers be impacted by the Belt and Road initiative?
Can Europe revive its chemical industry with its new location on the end of the ‘Silk Road of the 21st Century’?
Nigel Davis, ICIS Insight Editor, notes the challenges that the enterprise will create for European chemical producers when he discussed the impact of Belt and Road in a recent ICIS podcast. He cites data from Cefic which observes that, “China’s share of the chemicals export market has nearly tripled in 10 years, from 4.3% in 2006, to 12% in 2016.”
“We rely so much on China for petrochemical demand, and while that demand will not diminish, it will be replaced by internal [Chinese] production. Then European chemical companies are going to have a problem of where are they going to export to and where are they going to get that value from exports.”
Even more worrying for European chemical producers is the, “Threatening potential for chemical products to flow the other way from China back into Europe.” This led to further questions, for while Davis, doesn’t foresee that happening with petrochemicals, he does believe that, “What we will see in petchems is the way that product moves around. For example, what does the Belt and Road mean for the Rotterdam, Antwerp, Amsterdam area, one of the biggest hubs for petrochemicals trade in the world? How will that knock on to production in the Rhine basin? Will chemical products begin to flow from the Middle East and North Africa into the port of Athens? Or does the area around Venice become hugely important, the old silk road meeting the new?”
How will North American chemical manufacturers be impacted by Belt and Road?
The key to the Belt and Road, is that it is more than just an infrastructure project that will modernise trade routes, but an ability to connect as a trade zone.
This was a point highlighted by John Richardson, Asia Consultant for ICIS, in the ICIS podcast. Here he stated that, the Belt and Road creates, “… a situation where we have a protected free trade zone that excludes the United States which becomes a self-sufficient trading zone for chemicals and polymers.” Adding that he, “… sees the world splitting between these China dominated countries and those that align with the US.” On trade terms, that split could be divisive, as a major player like Saudi Arabia will be torn between its geopolitical and security alliance with the US and a potentially more productive trade partnership with oil hungry China. As Richardson observes, “when thinking about chemicals the real monster for demand is China, which is worth 30% or more of global demand.”
However, this merely leads to questions about what kind of future America’s chemical industry can have outside of a Chinese led trade consortium. Will the American chemicals industry continue its shale gas aided revival, as it has over the last 10 years? And will chemical markets in the Americas be able to prosper if they are excluded from market access to large parts of a bi-polar trading world?
Again, the influence of the Belt and Road compelled Richardson to question US chemicals' long term prospects without China as a trading partner. Stating that, the shale gas boom had made polyethylene a major American chemical export product, but noted that, “Polyethylene demand in South America is beginning to tighten, and while European demand remains strong, the big player for demand is China, which imported around 14 million tons of polyethylene last year. By far the biggest importer anywhere in the world.”
Without that market and others like it, US chemical producers will need to adapt quickly, or they will struggle.
This is the first part of this story on China's Belt and Road Initiative and it's impact on the chemical industry. You can read Part 2 here.