Manufacturing in China

China Chemicals industry

Chemicals

Industry Environment	Sub-sectors	Regional Disparities
Top Chemical Companies	Entry of Foreign Players

China has become a great country for chemical production and consumption. It is the second largest country for chemical consumption and ethylene production after the U.S. Its outputs of sulfuric acid, ammonia, fertilizer, calcium carbide, dyes, phosphate and synthetic fiber, and its consumption of polypropylene and synthetic rubber all rank first in the world. In 2006, the gross industrial output of the chemical industry reached RMB 2.2 trillion, up 26.8% year-on-year, and the value-added industrial output jumped by 26.5% to RMB 564.6 billion. Figure 2.2.1 shows the output of the major chemical products from 1978 to 2006.

China has become a great country for chemical production and consumption. It is the second largest country for chemical consumption and ethylene production after the U.S.

The chemical industry’s revenue reached RMB 2.2 trillion in 2006, 27.2% higher than previous year. All the subcategories in the chemical industry except fertilizer achieved growth rates of over 20%. Examples include specialty chemicals (34.4%), basic chemicals (29.6%), synthetic materials (24.0%) and pesticides (23.9%). Figure 2.2.2 shows each major chemical product’s share of revenue.

The most profitable categories of chemicals were pesticides and dyes, with profit growths of 44.9% and 48.1% respectively.

Although the chemical industry experienced a significant price increase in coal, power, oil and transport in 2006, its profit still managed to reach RMB 111.3 billion, representing an increase of 20.3% from 2005. The most profitable categories of chemicals were pesticides and dyes, with profit growths of 44.9% and 48.1% respectively. The least profitable categories were fertilizer and rubber, growing by 4.1% and 6.3% respectively.

In 2006, the import and export of chemicals reached US$88.6 billion and US$53.4 billion respectively, up 10.1% and 18.2% from the previous year. Table 2.2.1 shows the import and export of chemicals in 2006.

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Industry Environment

Policy effects

Due to the surging international energy prices and rapid growth of domestic energy consumption, the Chinese government is paying more attention to energy saving efforts. Their main task is to reduce the energy consumption rate by 20% and the major pollutant emission by 10% before 2010. New pollution fares for pollutants and incentive policies for energy saving have been published in 2007, and have had a significant impact on the dye, pesticide and basic organic chemical industries.

Due to the surging international energy prices and rapid growth of domestic energy consumption, the Chinese government is paying more attention to energy saving efforts.

Some industry access policies were also implemented. At the beginning of 2007, the National Development and Reform Commission (NDRC) raised the access condition for the calcium carbide industry. In November 2007, the country’s first coal industry policy was published, designating the areas permitted for developing coal chemical industries. The access conditions for the chlor-alkali industry took effect on December 1 2007, specifying the locations, production scales and techniques for chlor-alkali industry development.

The Ministry of Finance also reduced the export tariff rebate rate in July 2007 to inhibit the export of low value-added chemical products such as caustic soda, phosphate and urea, forcing the chemical industry to develop in the hi-tech, high value-added direction (e.g. producing more titanium dioxide, surfactant, synthetic detergent, chemical agents, etc.).

In August 2007, the “Natural Gas Utilization Policy” was implemented to forbid setting up or expanding existing gas-methanol projects. It also raised the gas price for industrial use by 50%. It is predicted that the price increment will also take place for water, power, petroleum, land and coal.

Effects from other industries

In 2006, the production and sales volume of automobiles reached 7.3 and 7.2 million respectively. The development of the automobile industry increased the demand for synthetic rubber, resin and plastic. However, because more radial tires using natural rubber were manufactured, the demand for synthetic rubber used in bias tires was reduced.

China has increased its investment in agriculture since 2003, as well as stabilized the price of agricultural products. These measures stimulated the enthusiasm of farmers to use more fertilizers and pesticides. In 2006, the total fertilizer consumption went up by 18.0% from 2005, to 2.1 million tons.

The nation’s textile and clothing industry has the advantage of both good quality and low prices. Although there were some international trading conflicts in 2006, this industry maintained its fast growth and benefited from the synthetic fiber industry.

China has sped up its urbanization process in the past few years. About 300-500 million people are expected to move from rural to urban areas in the next 15 years to look for better jobs. The resulting construction boom in the cities will create a significant demand for plastic products (window frames, insulating materials, pipes, etc.) and paint.

Furthermore, due to an increase in income, the Chinese are spending more money on consumer goods such as cosmetics, handsets, and flat screen TVs in addition to food. This will also boost the development of related industries as well as the chemical industry.

Other effects

Since 2006, the exchange rate for RMB to US$ has risen stably, which will reduce the international market’s demand for Chinese products such as clothing. Furthermore, the labor cost has grown rapidly since 2007 due to the increasing inflation. It will continue to rise because of the publishing of a new labor law in 2008. The surging oil prices also raised the price of raw materials and transport costs.

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Sub-sectors

Potassic fertilizer

China has enough nitrogenous fertilizers and phosphatic fertilizers. However, it suffers from a lack of potassic fertilizer. At present, about 80% of the nation’s potassium chloride relies on imports.

The price increase in the international potassium chloride market has raised the domestic price as well. The major domestic potassic fertilizer manufacturers are in Qinghai and Xinjiang, such as Qinghai Salt Lake Potash Corp.

New material

In 2007, the polyurethane market maintained stable growth and there is a strong demand for MDI, TDI and BDO. The growth rate of the demand for MDI will remain at over 15% for the next three years.

In May 2007, the Ministry of Construction released guidelines for external wall insulation technology using polyurethane. This, coupled with the effects of the building insulation market, will cause the demand for MDI to grow even more rapidly.

Silicone is another important new material. The universality level of silicone use in China is only 10% of the world’s average level and the domestic demand for silicone is predicted to grow 20% per year. Dow Corning, Xinan Chemical Corp and Blue Star are currently the major players in this field.

Coal chemicals

China has abundant coal reserves but lacks oil, thus developing the coal chemical industry will be an important way to ease the energy shortage.

The related standard for methanol gasoline and DME vehicle fuel will be major factors affecting the industry’s development. According to the “Coal Chemical Industry Mid And Long Term Development Plan” published by NDRC, China will invest over RMB 1 trillion in the coal chemical industry in the following 13 years.

Major products in this industry will change from the traditional coke, chemical fertilizer and calcium carbide to methanol, dimethyl ether, olefin and oil.

Forecasts show that the demand for methanol will reach 19 million tons by 2010. Figure 2.2.3 demonstrates the targeted production of methanol, dimethyl ether, olefin and oil in 2010, 2015 and 2020.

Ethylene

Ethylene is the basic raw material for producing synthetic fiber, synthetic rubber and synthetic plastic. 75% of petrochemicals are produced from ethylene.

By the end of 2007, the country’s ethylene output reached 10.4 million tons, ranking second in the world after the U.S. The ethylene consumption kept up an average annual growth of 16.1% over the past 15 years. It is predicted that the ethylene output capacity will reach 17-18 million tons by 2010, and the self-sufficiency rate will reach 58% by that time.

In 2007, eight ethylene projects were launched, including four 800,000-ton projects in Fujian, Hubei, Sichuan, Liaoning, three one-million-ton projects in Tianjin, Zhejiang, Xinjiang, and one 1.2-million-ton project in Heilongjiang.

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Regional Disparities

Jiangsu is the nation’s top base for chemical production and scientific research. It has the longest history of chemical industry development. There are more than 12,000 chemical enterprises in this province, including over 4,000 designated-scale companies. Its quantity ranks first in China. The province can produce over 30,000 kinds of chemicals in 20 subcategories.

Jiangsu is the nation’s top base for chemical production and scientific research. It has the longest history of chemical industry development.

The revenue of Jiangsu’s chemical industry reached RMB 423.2 billion, up 27.24% over 2005, accounting for about 10% of the province’s total industrial revenue and nearly 20% of the nation’s total revenue from the chemical industry. Its output of acetic acid, pesticides, dyes, primary plastics, synthetic rubber, latex and polyester are all ranked first in China, and the output of soda, ion-exchange membrane, caustic soda, caprolactam, dyes, paints and tires are ranked second.

Jiangsu’s export of chemicals reached RMB 59.1 billion in 2006, accounting for 24.19% of the nation’s gross chemical exports, much more than other coastal provinces such as Shandong, Guangdong and Zhejiang. Its production of phosphate, indigo, glyphosate, fluoride and saccharin are highly competitive in the world.

In 2006, Shandong stood out as another key province for the chemical industry. Although its revenue from the chemical industry was RMB 419.8 billion (lower than Jiangsu’s), its revenue from the entire petrochemical industrial chain reached RMB 676.3 billion, 32.6% higher than that of Jiangsu. The output of organic chemicals, specialty chemicals and petrochemicals had the fastest growths at 61.2%, 41.9% and 34.4% respectively. Its output of tires, caustic soda, soda ash, ammonia, fertilizer, nitrogen fertilizer, urea, hydrochloric acid, concentrated nitric acid and asphalt are all ranked first in China, and its output of sulfuric acid, polyvinyl chloride and methanol are ranked second.

Shandong’s chemical export value reached RMB 35.3 billion in 2006, up 31.0% over 2005. Among them, the rubber products, specialty chemicals and synthetic materials took the largest share, and had fast growths of 46.5%, 16.6% and 28.0% respectively. Its export of fertilizer was reduced significantly in 2006 due to the high fertilizer export tariff.

Other provinces noted for its chemical industry are Zhejiang and Yunnan. Zhejiang’s chemical fiber output reached 8.3 million tons in 2006; Yunnan’s Sulfuric Acid output reached 6.9 million tons, all ranking first in China. Table 2.2.2 shows the top 15 provinces in this industry and the outputs of key chemicals.

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Top Chemical Companies

China Petrochemical Corp (Sinopec Group) is the nation’s largest chemical company. Its output of petrochemical products ranks first in China. In 2006, it produced 6.3 million tons of ethylene, 9.6 million tons of synthetic resin, 1.5 million tons of synthetic fiber, 0.9 million tons of synthetic rubber, 1.6 million tons of urea and 1.1 million tons of ammonia. In 2006, Sinopec’s revenue from its chemical business amounted to RMB 215.8 billion.

China National Petroleum Corp (CNPC) is the nation’s second largest chemical company. In 2006, it produced 2.1 million tons of ethylene, 3.3 million tons of synthetic resin, 0.2 million tons of synthetic fiber, 0.4 million tons of synthetic rubber, 3.6 million tons of urea and 2.5 million tons of ammonia. It has three large ethylene production bases in Daqing, Jilin and Lanzhou. Its network covers the whole country and it sold 13.52 million tons of chemicals in 2006.

Sinochem Corp is the country’s third largest chemical company. Its fertilizer sales network mainly covers the central and eastern regions of China. In 2006, it sold 12.57 million tons of fertilizer, up 13% over 2005, accounting for a 14% share of the fertilizer market. Besides fertilizer, its main chemical products, such as fluorine chemicals, pharmaceutical raw material and products, pesticides, rubber and petrochemical raw materials, have also taken a leading market share.

China National Offshore Oil Corp (CNOOC) is the nation’s third biggest oil company. In 2006, it produced 0.6 million tons of ethylene and 1.9 million tons of urea. In 2006, it finished a joint venture with Shell in Guangdong Province to produce chemicals from ethylene. Its subsidiary, China BlueChemical Corp, is the country’s largest granular urea manufacturer. It also has China’s largest methanol production unit.

China National Chemical Corp (ChemChina) is a state-owned enterprise on the same level as China National Bluestar Group Corp, China National Haohua Chemical Group Corp and other companies affiliated with the former Ministry of Chemical Industry. In 2006, its revenue reached RMB 68.6 billion.

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Entry of Foreign Players

Since 2005, the chemical market in China has become the third largest market after the U.S. and Japan in terms of industry output, reaching US$223 billion. The FDI in China’s chemical industry has been the highest in the world for five successive years. After joining the World Trade Organization, China has made it easier for foreign companies to enter the domestic market. This has forced domestic enterprises to face competition from foreign players, at a time when they were changing their strategy to focus on capital output instead of goods output.

The foreign players have acquired mature technology for the production of some chemicals which are still considered “new materials” by domestic companies (e.g. silicone, polyurethane and engineering plastics). While domestic companies are still in their research and development stage, foreign rivals have already entered these markets.

For example, the U.S.’s Dow Corning and Germany’s Wacker have set up factories in China to produce 200,000 tons of siloxane and fumed silica per year. Dow Corning and General Electric also control the advanced technology for the development and production of the high value added products in the silicone industrial chain.

Titanium dioxide is one of China’s key exports but none of the domestic companies have mastered the chlorination technology. DuPont from the U.S. has started to build a 200,000 ton titanium dioxide facility with chlorination technology in Shandong Province, which is three times bigger than the largest domestic factory. The Australian Astron also signed an agreement with Liaoning Coastal Industrial Base in 2008 to build a 400,000 ton titanium dioxide facility in Yingkou City.

In the polyurethane field, after Germany’s BASF and U.S.’s Huntsman set up their 240,000 ton MDI and 160,000 ton TDI facilities in the Shanghai Chemical Park in 2006, BASF built a new 400,000 ton MDI factory in Chongqing, which will commence operation in 2010. Germany’s Bayer is also building its 350,000 ton MDI and 160,000 ton TDI facilities in the Shanghai Chemical Park, and plans to launch them in 2008 and 2009 respectively.

In the near future, environmental protection and the conservation of both energy and resources will be a major challenge in this sector.

In the polycarbonate (PC) field, Bayer is now constructing its 100,000 ton PC unit in the Shanghai Chemical Park and plans to expand its capacity to 200,000 tons by the end of 2008. Japan’s Teijin has also set up two 50,000 ton PC units in Zhejiang and intends to build a new 60,000 ton unit which will commence operations by March 2009. GE Plastic will cooperate with CNPC to build PC units using the non-phosgene, melting method.

In other chemical fields, multinationals are also strengthening their direct investment in China. By the end of 2005, the world’s top 10 tire manufacturers had all set up their factories in the country. Their total output volume reached 76 million units in 2006, accounting for 30% of the nation’s total tire output. The multinationals also bought nearly all of the domestic car-use semi-steel tire manufacturers and took 80% of the market share. In the field of carbon black, Cabot, Degussa, Colombia Chemical Corp, India Bola Group and Japan Tokai Carbon have already entered the domestic market.

China’s chemical industry suffers from a shortage of resources, owing mostly to the surging oil prices and lack of water. In the near future, environmental protection and the conservation of both energy and resources will be a major challenge in this sector. The government will pay more attention to quality instead of the industry’s growth speed, and its main concern will be the adjustment and upgrading of the chemical industrial structure. Exports of high value-added chemicals will be encouraged while the development of enterprises with high energy consumption and high pollution will be inhibited by new policies. Nevertheless, the nation’s high demand for chemicals will provide great opportunities to investors.

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