China is the world’s largest producer and consumer of chemical products, which makes the chemical industry central to its economy. As China’s economic policy shifts toward consumption-driven growth and more sophisticated products, the result is likely to lead to additional growth in the demand for speciality chemicals, writes Kristina Koehler-Coluccia, Head of Business Advisory, Woodburn Global
In China, business segments that are closely connected to the chemicals industry include agriculture, automobile manufacturing, metal processing, textiles and power generation. By providing industries with the raw materials needed to create the products used in various aspects of daily life, the chemicals industry is fundamental to modern society.
The global chemical industry is believed to generate revenues of approximately USD 4 trillion every year, and in 2020, almost 45% of that amount came from China alone. Not only does China generate the highest revenue from the chemical industry in the world, but it is also a leader in chemical exports, with an annual export value of over USD 72 billion. The largest importers of chemicals from China were Japan and South Korea, each importing over USD 20 billion worth of chemicals in 2019, followed by the United States and Germany.
Both chemical exports from China and chemical imports to China have been steadily growing in recent years. However, the value of imports has been slightly higher than the export value, leading to a net import value of around US$ 24 billion in China as of 2019.
The largest chemical companies in China are state-owned. Sinopec and PetroChina are the biggest oil, gas, and petrochemical companies in the country in terms of revenue, with each having generated over US$ 342 billion in 2020.
Another market leader in the global chemicals industry, Wanhua Chemical Group, is listed on the Shanghai Stock Exchange and specialises in polyurethane (PU), selling over 2.8 million metric tons of PU products in 2020.
In 2020, due to the change in consumer habits and suspension of supply chains caused by the Covid-19 pandemic, many global chemical companies reported a lack of growth or even a two-digit year-on-year sales dip, and Chinese companies were no exception. However, with consumption once more gathering speed, China is expected to lead in the growth of the chemical industry as the global manufacturing hub once more.
China’s growth in chemicals over the past two decades has been characterised by rapid investment and intense competition and fragmentation across large numbers of segments. This has particularly been the case where production technology has been widely available and where access to raw materials and financing has been easy to obtain. This combination has led to rampant overcapacity in many sectors.
However, the market and industry are moving into a new phase of development. There has been a shift toward speciality chemical growth, reflecting consumer-demand trends and the rising sophistication of China’s industrial output, while consolidation has started in certain sectors.
New trends in China’s chemical industry
A number of new trends are helping the value-pool growth prospects for parts of China’s chemical industry. However, at the same time, money for investment is becoming harder to come by, and the government is imposing new, stricter environmental regulations. To succeed in this next stage of China’s chemical market development, players will need to embrace a new set of strategies.
As China’s economic policy shifts towards consumption-driven growth, this may result in additional growth in speciality chemical demand. For example, as markets for higher-end personal-care products grow, they are likely to bring with them demand for more sophisticated speciality surfactants and additives, as well as more expensive fragrances.
Similarly, the rapid growth in online ordering of food is likely to increase demand for packaging materials, potentially raising demand for innovative products such as biodegradable polymers.
Moreover, the Chinese government’s Made in China 2025 policy is prioritising the development of several high-tech industries. The strategic directions it indicates could stimulate certain end markets, such as aerospace, electronics, electric vehicles (EVs), and batteries, which could, in turn, create opportunities for expanding production of more sophisticated chemical products in China .
China’s chemical R&D spending is now among the highest in the world. The structure of China’s chemical industry R&D has also changed, moving from one in which initiatives were under government direction, to one primarily driven by individual companies within an ecosystem of collaboration with government research institutions and universities.
The growing prominence of Chinese chemical companies
As a result of the aforementioned R&D investment, there are many examples of Chinese companies gaining technological parity with Western companies. One such company is Wanhua Chemical, which has developed its own methylene-diphenyl-diisocyanate (MDI) technology [MDI is used to make polyurethanes, including rigid polyurethane foams used for home and refrigerator insulation]. Wanhua is now the world’s largest MDI producer in what had historically been a close-knit sector dominated by a handful of Western companies due to the high technological barriers to entry of isocyanate chemistry.
Another example is Kingfa Science & Technology, which started out as a supplier of lower-end products, such as plastics for TV sets, but has become an engineering-resin supplier to the top auto OEMs. Kingfa is also one of the small number of producers in the world making high-tech engineering resins, such as polyether ether ketone and polyamide 10T.
In the fast-growing field of lithium-ion batteries, Shanshan Technology has established a leading presence in cationic- and anionic-anode materials, electrolytes, and separation membranes, with a top three position in all segments.
In some sectors, the Chinese chemical industry is starting to gain a technological edge over multinational companies (MNCs), including fermentation-based products such as monosodium glutamate, vitamin C, and xanthan gum. Chinese companies are now the leading producers of these products and they have continued to achieve both processes and quality improvements.
The development of new materials is another field in which Chinese players are excelling. Cathay Industrial Biotech, for example, has established a leading position in bio-based nylon 5,6, a polymer with wide potential applications.
Prior to 2015, petroleum refining in China had been treated as a strategic national industry to be controlled by state-owned oil companies. Naphtha cracking furnaces had also been under their control, and MNCs could only have a 50% stake. Since then, however, refining and upstream petrochemical investments have been opened to MNCs and, more broadly, to Chinese privately owned enterprises (POEs) to establish wholly owned operations.
Government regulation of the chemical industry in China
The chemical industry in China is operating under new constraints. The Chinese government’s policy to tighten credit across the country’s economy has been a particular handicap for the capital-intensive chemical industry, which previously benefited from low-cost capital to expand capacity.
While the new environmental regulations are likely to force restructuring across significant portions of China’s chemical industry, they could also present the potential for higher profitability for companies that can manage under them and can absorb the higher operating costs that compliance will entail.
Over the past two decades, China’s chemical industry has prioritised growth over environmental quality. The 13th Five-Year Plan for Environmental Protection published in 2016 marked a sharp shift, as China’s authorities have started to address environmental degradation.
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.
The environmental policy aims to move chemical production from its current configuration, in which tens of thousands of plants are scattered across mixed urban industrial and residential areas, to a new one based on specialised chemical production zones where wastewater and hazardous waste treatment infrastructure can be centralised and shared.
Nevertheless, the new environmental regulations are having only limited impact on the big upstream petrochemical and chemical intermediates and polymer plants, most of which are built with appropriate emissions controls and waste-treatment facilities. The biggest impact is being felt by smaller plants that make specialty chemicals, from coatings and dyestuffs and pesticides to food ingredients and surfactants, used by Chinese manufacturing and agriculture and by Chinese consumers.
These are typically privately owned operations, often lacking appropriate waste-management capabilities and located in urban areas. The moves to shut down out-of-compliance plants have affected large numbers of these small operations, but the impact on overall chemical output has been less severe. In Shandong province, for example, the government closed 25% of all the chemical companies operating in the province during 2018, but this affected only 5% of output.
The Chinese chemical industry, in which demand-growth rates had been so high that building a new plant every two years had often been a key to success, now confronts growth rates at half these levels. There is not going to be the same need for new plants, and so limited funding will present less of a challenge and even help restrain some overly enthusiastic companies from contributing to more overcapacity.
At the same time — and perhaps most important — this change in the growth climate will help to push chemical-company-management teams to ensure that their operations are truly profitable. Instead of being able to hide behind new borrowing, companies will need to set a course toward high-quality, profitable growth.
Multinational companies in China’s chemical industry
For MNCs, the chemical industry in China has been extremely difficult.
Historically, MNCs have often entered new geographical markets by making acquisitions, but this has not been feasible in China. This was because SOEs couldn’t be acquired by foreign companies, while private companies were either too ambitious to be acquired or too small to be worth acquiring. Instead, MNCs have had to rely on direct investment, but they have also run into challenges.
In the first round of large investments by MNCs in China starting 20 years ago, their entry was through joint ventures with Chinese SOEs, allowed on the condition that the MNCs brought in needed chemical-process technologies.
Since the change in rules in 2015, MNCs have been able to make wholly-owned investments in upstream petrochemical plants. The size and importance of the Chinese market means that these cannot be ignored by MNCs that want to continue to be leading players in the world chemical market.
A further challenge is that some MNCs are failing to undertake product development tailored to the needs of the Chinese market. As a result, they are finding themselves relying on their original offerings, which were developed for Western markets. Chinese competitors, meanwhile, are increasingly making inroads, resulting in a narrowing area of opportunity.
On top of that, MNCs are still contending with the basic cultural barriers to doing business in China, notably in hiring and keeping hold of the best local Chinese employees. The Chinese government’s decision to open the petrochemical market can be interpreted as a sign of its confidence that local companies have gained strong enough positions against international ones and will maintain a lead.
Foreign companies must understand that future chemical market growth is likely to be more incremental. However, firms that have the flexibility to make the necessary moves – such as tailoring solutions for the local market and participating in the industry’s consolidation trend – should be better placed.
The shifts underway in China’s chemical industry are on a massive scale that mirrors that of the industry itself. The factors driving success will vary among the different groups of players in the industry, but in all cases, they will need to be informed by a readiness to adapt rapidly and innovate to meet the needs of the market.
