China’s chemical industry is truly colossal. As a recent report by chemical industry consultants at McKinsey & Company states, “China’s chemical industry now constitutes around $1.5 trillion of sales in 2017, amounting to nearly 40 percent of global chemical-industry revenue.”
The Chinese port of Ningbo
However, despite the economy continuing to expand at rates (currently 6.2% GDP growth) that make Western economies drool with envy, it is not all roses in red China. For chemical producers still face three key challenges that are restricting growth, none of which are easy to solve.
1. Finance Tightening
One key change happening in China’s chemical industry is that investors are finding it harder to gain access to finance. This is due to a 2015 central government initiative that is attempting to reduce investment in industries that are already over-supplied. At the same time, there has been a reduction in the number of government bonds issued, further restricting entrepreneurs an avenue to funds.
As the latest data from McKinsey notes, there has been a distinct drop in investment in the Chinese chemical industry. Their report stating that, “Annual chemical capital expenditures had risen rapidly in the 2010 to 2015 period, when China’s chemical demand was growing at more than 10 percent a year, more than doubling to reach 1.61 trillion renminbi in 2015. [However] Spending peaked in 2015 and fell back 7 percent, to 1.5 trillion renminbi, by 2017.”
Chinese brokers and officials celebrate the opening of Bond Connect linking bond trading in Hong Kong and the Mainland
While some economists may highlight the fact that the industry is continuing to follow a well-trodden path of government driven investment and expansion followed by a surge of private investment, McKinsey lays out a counterargument that sees industry consolidation as the endgame, not further growth and investment.
The report stating that, “Our analysis suggests that the evolution of the country’s different chemical-industry segments is likely to continue to broadly follow the pattern it has shown over the past two decades. This consists of a phase of massive overinvestment and oversupply as state-owned enterprises (SOEs)—often with multinational company (MNC) partners—and privately owned enterprises (POE) rush to move in and produce chemicals that have historically been in short supply in China due to either lack of feedstock or lack of access to process technology. This phase is eventually followed by a shakeout and subsequent consolidation. In that latter stage, profit margins and investment returns for participants stabilize at a sustainable level.”
Sinochem’s Quanzhou petrochemical facility
Adding that, “A number of segments—ranging from commodities, such as soda ash, to specialties, such as vitamin C and monosodium glutamate—have reached that phase. However, there is an impressive list of chemicals for which the battle to ascertain the winner is still very much under way.”
China’s rapid emergence into the global chemical market is impressive, but it also means that the industry has yet to reach full maturity.
2. Environmental concerns
China’s industrial impact on the environment is well-known, especially to residents of Chinese cities, or those living near industrial complexes.
The politburo has therefore begun reform, issuing strict controls on polluters.
As a result, hundreds of industrial chemical facilities and chemical plants have been closed or had reduced operating hours imposed upon them. Fines for polluting either the air or water have also been severe, while many government officials have been removed from their posts for failing to enforce legislation.
Pollution caused by discharge from a nearby textile facility
Most surprising of all, is the speed at which the central government has changed direction; from focusing on profit to promoting environmentalism.
As the McKinsey report notes, “China’s chemical build-up over the past two decades had prioritized growth over environmental quality. The 13th Five-Year Plan for environmental protection published in 2016 enshrining ‘clear waters and lush mountains’ as a national policy has marked a sharp shift, as China’s authorities have started to address environmental degradation.”
Adding that, “New national pollution-control standards are being enforced by a system of requirements for production permits and a push to relocate chemical production to special chemical parks. The 2018 ban on imports of plastics waste, which has disrupted Western countries that had relied on exporting to China, is part of the same new policy.”
Safety has become a major issue in the Chinese chemical industry following years of industrial accidents and explosions.
Perhaps most famous is the series of explosions at the container storage station at the port in Tianjin in 2015. This incident gained worldwide media coverage due to the level of damage and the widely shared video footage of the incident and its aftermath; 173 people died, and hundreds were injured.
The Tianjin port chemical explosion aftermath
More recently, in March 2019, 78 people were killed and 600 injured at the Yancheng industrial park in China’s eastern-central coastal province of Jiangsu. Investigators are still trying to establish what happened, although the South China Morning Post reports that the facility and others around it had been opened ‘in a rush’ and was , “allegedly set up without a proper planning process, and local officials have been accused of taking bribes in exchange for ignoring the safety risks there. The site was already known for its accidents; in 2007, an explosion killed 8 people, while in 2010 a chlorine leak poisoned 30 people.
As a result, authorities have begun dismissing inspectors who are deemed to be lax at law enforcement or suspected of accepting bribes. Additionally, there has been an increase in the number of inspections at chemical facilities, safety standards have been raised, and authorities are scrutinising companies that have had safety issues in the past.
The explosion site at Yancheng Industrial Park
As the industry journal Chemical Watch reported in April 2019, “The Ministry of Emergency Management (MEM) will more strongly enforce its production ‘blacklist’. This exposes companies that have violated the production law and restricts them from establishing new projects, using land, as well as access to finance. Last year’s blacklist named 46 companies in China.”
Meanwhile an anonymous chemical industry insider informed Chemical Watch that the explosion, “… might lead to the government shutting down more chemicals companies and industry parks that have violated safety production regulations or environmental regulations. This could lead to the shortage of some raw materials and higher prices.”
Clearly the government is acting to ensure that breaches in safety are less common. While this will be a long-term boon to the industry, making the necessary safety upgrades will take time and money, as well as hampering output.
While this list does not include the ongoing trade war between the US and China, which is hurting chemical producers’ prospects in the short term, this stand-off is equally harming American chemical manufacturers. Although other countries may have gained an advantage as the two super-economies discuss a way forward, it is expected that a deal will soon be agreed upon.
Even without President Trump’s economic sabre-rattling, Chinese chemical producers have plenty to work on if they are to continue expanding. Raising environmental standards at the same time as improving safety culture across an entire industry is not an easy task. Neither is it cheap.
China’s chemical industry may be colossal, but in some ways, this may be working against it. Many chemical industry influencers see the chemical industry of the future as a much more agile, streamlined, and strategically acute place.
As strategic consultants at PWC note, “The chemical industry may finally be approaching a tipping point, prodded by accelerating technology advances, which are shaping customer purchases and needs, some chemicals companies have begun to rethink their growth strategies, finally moving away from cost-cutting and retrenchment, toward more nimble, coherent, and aggressive business models.”
So, while we all stand in awe at the Chinese chemical industry’s massive size, in the end that may be the biggest factor to limit future chemical production growth.