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China's chemical industry: only change is certain

The figures are impressive: The Chinese chemical industry achieved sales of 1.3 trillion euros in 2017 and had a 40% share of the world market. According to Germany Trade & Invest, the Chinese market is larger than the European and US markets combined. But in recent months, uncertainty has grown as to how the industry will develop in the future. A large number of partly contradictory influences are making themselves felt. It is difficult to say which of these will prevail in the end - but one thing seems certain: the chemical industry in China will change fundamentally.

On the one hand, there is the trade dispute with the USA, which is being followed with concern not only in the two countries affected. BDI President Dieter Kempf warned last September: "The new tariffs will also affect German companies as part of global production and value chains. The spiral of protectionism is affecting many other countries - especially trading nations like Germany". Experts are already reporting a decline in Chinese demand for commodities such as PE, and the European chemical industry association Cefic sees a significant decline in chemical exports to China at the end of 2018. Chinese economic growth was 6.5% in 2018 and is expected to reach similar levels in 2019. This may be a dream value for Western industrialized nations, but China is used to other numbers. And German companies, some of which earn every 5th euro in China, have participated in this growth. The Handelsblatt already sees German companies "in a growth dilemma", because "only if the enormous growth in business in China is continued can the growth forecasts of the German companies be maintained.” How strong the dependencies are can be expressed in a few figures: in 2017, the German-Chinese trade volume reached 187 billion euros. This corresponds to almost 30 percent of total trade between the EU and China. For Germany, China is the most important trading partner outside the EU with an export volume of 86 billion euros and imports of 101 billion euros. German companies are investing heavily; according to official figures, direct investments reached 76 billion euros in 2016. The BDI estimates that Chinese players have invested around 13 billion euros in Germany in return.

Multiple factors affect the chemical industry

However, the fact that China's economic growth has slowed is not only due to the US President and his trade policy. Other factors also play a role: consumer confidence has declined sharply, which is particularly noticeable in the automotive industry. There are no major investment programmes in sight, such as in earlier slowdowns, because China must keep its debt within bounds. Concerns about a possible real estate and credit bubble in China's largely unregulated credit business also contribute to an overall deterioration in economic sentiment. At the same time, the growing middle class is placing demands on social infrastructures such as health care, and in the near future the question will arise of how to care for an ageing population without children and grandchildren who are replacing a state pension system.

China has set itself a lot of goals with its "Made in China 2025" strategy - and implementation requires a strong and modern chemical industry, also with support from abroad. Despite all the uncertainties mentioned, Germany Trade and Invest states in a report from November 2018 that the conditions for foreign investors have never been so good. The Chinese process industry is undergoing a series of serious changes. On the one hand, overcapacities are still being removed from the market - one reason for the comparatively weak growth of the chemical industry in China in particular. According to the VCI, production growth in the chemical industry (excluding pharmaceuticals) was still 7.7% in 2016, but only 4.1% in 2017. Preliminary figures suggest similar figures for 2018.

Relocation to industrial parks continues

At the same time, however, the wave of modernisation is continuing: In order to implement the environmental reforms and ensure greater safety, chemical plants are being closed or have to move to industrial parks. The history of Chinese industrial parks goes back to the 1980s and entered a new phase last year: the first special economic zones were established in 1979, and the first industrial parks were established in the 1980s. Some of them were specifically geared to the chemical industry and were modelled on western Verbund sites. Originally, they served primarily to develop higher technological standards, but also to promote regional development. At the same time, they implemented at least a minimum of environmental standards. For example, basic infrastructure for water treatment could be installed there; on the other hand, the concentration of industry and its emissions also led to severe local environmental and health problems. The first "National Eco Demonstration Park" was established as early as 2001; further initiatives followed, which led to the establishment of so-called "Green Industrial Parks" from 2017. In recent years, environmental regulations and safety standards have become key drivers for the bundling of plants in industrial parks throughout the country. Environmental protection requirements at these sites are generally high, and infrastructure for wastewater treatment, waste disposal and emission controls is in place. In view of the growing environmental problems in the "old" industrial hotspots and the growing sensitivity of the population, it is not only the central government that is exerting pressure, regional authorities are now also pulling their weight. For example, the provincial government of Jiangsu, a highly industrialized province on China's east coast, has announced that it will close 1,000 chemical plants within three years whose technology is outdated or less than a kilometer from the Yangtze.

New investment in China’s South-West

Chinese and international companies are planning huge investments in new petrochemical complexes, above all in China's south in the less industrialized hinterland. BASF has announced the construction of a Verbund site in the Chinese province of Guangdong for USD 10 billion. ExxonMobile is also planning a similar project there. A Sino-Kuwaiti consortium is already active and is building a refinery that is scheduled to start operations in 2020.  The region has relatively little heavy industry to date and is attractive for investors for a number of reasons: land is comparatively cheap, labor costs are low and population density is low, so that there are fewer acceptance problems than in densely populated regions with a high environmental load.

The industrial development of the western provinces is closely linked to the "New Silk Road" project, which is intended to connect these areas with new markets. As Gerd Meyring writes in an analysis on the website of the magazine "Produktion", "German mechanical engineers would also benefit if the BRI ["New Silk Road"] were not closely related to the "Made in China 2025" policy. Among other things, this policy envisages strengthening Chinese suppliers of robotics and automation technology in such a way that by 2025 they will have overtaken competitors from industrialized countries. China is already regarded as the technology leader in digital trading platforms, including the chemical industry. And China is also preparing to leave Western industrialized countries behind when it comes to digitization and artificial intelligence. At CHEMonitor 2/2018, 62% of the German managers surveyed attested Chinese companies higher competence in online trading than German companies. At the beginning of 2019, Covestro drew a conclusion from this and set up a joint digitisation laboratory with the Chinese household appliance manufacturer Haier. The aim of the joint venture is to develop digital solutions for the use of polyurethanes in household appliances and thus set a new standard for digitization in the chemical industry. In the press release, Covestro explicitly refers to China's progress in digitizing various industries and the experience Haier brings to the cooperation as a digitization pioneer.

Leadership in digitalisation

With the growing competitiveness up to technology leadership, however, the circle of those who demand to see China less as an emerging country than as a competitor at eye level - with all the resulting rights and obligations - is also growing. In the already cited CHEMonitor 2/2018, 45% of managers stated that the Chinese chemical industry will be a strong competition for their own company in the future (interestingly, 86% of respondents saw strong future competition for the chemical industry as a whole).  Particularly in view of the political developments in China, voices are becoming louder calling for Germany and the EU to show more self-confidence towards China. Last year, China experts noted a "re-ideologization" of state and economy with a stronger tendency towards control. At the same time, China is sending out liberalisation signals with regard to Western investments. However, this should not be overestimated, experts say. At the beginning of January, the BDI presented 54 demands for competition with China; they are summarized in a policy paper entitled "Partners and systemic competitors - how do we deal with China's state-controlled economy? China remains a driver of the global economy and an important sales and procurement market for the chemical industry, said BDI President Kempf at the presentation of the paper. At the same time, however, the BDI is calling for a more ambitious EU industrial policy, more subsidy controls on imports and state-financed takeovers of European technology companies, and a coherent and long-term China strategy from the EU Commission and the German government.

AchemAsia 2019 is the ideal platform to explore business opportunities in China, reach out to the Chinese process industry and learn about technologies on offer in China.

Please note: in a former version of this trend report, the sales volume of the Chinese chemical industry in China was given as 1.3 billion euros; this has been corrected to 1.3 trillion euros

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