Developments in China's
chemical industry and lessons for India
The tightening of environmental norms in China has been a mixed
blessing for chemical producers elsewhere in the world. In some segments of the
industry where significant overcapacity had diminished margins, there has been
a semblance of balance between supply and demand, which is welcome news. But
there have been disruptions to global supply chains as well, and this has
caused some consternation. Both impacts have been felt in India and will
continue to do so, at least for the near future. The important lesson here is
that over-dependence on one country and a handful of suppliers for key raw
materials could have repercussions that are neither predictable nor fully
understandable, but have the potential to be disruptive.
Building a trillion dollar plus industry
China’s chemical industry has been the world’s largest since
about 2014, when it overtook the US’ chemical industry. At about $1.3-trillion
in size – compared to India’s $250-bn or thereabouts – the industry is bigger
than in the next six countries combined (USA, Germany, Japan, South Korea,
Brazil and France), and about the same size as the countries in the EU and
NAFTA put together!
As the Chinese economy transitions from a developing to a middle
income one, national priorities are changing. The economy is now settling down
to a more sustainable path of growth, in contrast to the ‘growth at any cost’
model that underpinned the investment binge for the last 15 years or so.
The Chinese chemical industry is also in a state of flux, and is
seeking to emerge as a great power, leading on technology innovation and trade,
and prevailing in international markets. The pace of investments in the
industry has slowed down considerably. In 2015, for instance, China’s chemical
industry spent a whopping €75-bn in building assets, dwarfing the €20-bn spend
in USA. In that year, China represented half the amount invested by the eight
largest countries of the world!
Innovative capability
Innovation is an important driver of growth in the chemical
industry, and China’s does have some successes. R&D spend by China’s
chemical industry was about €9.1-bn in 2015, comparable to the €8.9-bn spend in
the EU and only behind €11.9-bn in USA. There have been some significant
technological breakthroughs from China that have caught the world’s attention.
Technologies for leveraging coal as raw material to make methanol and then
olefins, developed by research institutes, have been commercialised at a
significant scale, as have alternate coal-based routes to polyvinyl chloride
and monoethylene glycol. In the fine chemicals space, indigenous technologies
have been developed for several products, including the food additive vitamin
C; the agrochemical, glyphosate; the polysaccharide, xanthan gum; and the
synthetic sweetener, aspartame. What is remarkable about the research efforts
is the quick commercialisation and rapid build-up of capacity, once initial
problems have been ironed out. Some have characterised this ramp-up as
‘reckless’ and a ‘waste of capital’ but there is no denying that local
entrepreneurs have been willing to make large bets – an aspect missing even in
some of India’s largest chemical companies that repose little faith in indigenous
technologies, even their own.
Slowing demand
China’s growth story for the last decade has been about meeting
local needs and grabbing global markets. In several chemicals (e.g. PET resin,
PVC, epichlorohydrin, acrylic acid), the country went from short to long in
less than a decade. In others, such as commodity polyolefins, the import
dependency continues. Where capacity is in excess, China’s producers have
looked to export their way out of trouble.
There is no doubt that chemical demand in China is slowing.
According to McKinsey, a consultancy, while chemical demand grew at 11% CAGR
between 1990-2014 – a staggering achievement, considering most developed
markets grew at 1-2% – between 2014-2020 the pace is expected to moderate to
about 6% CAGR. This will still be about twice the global average, and on a base
that is a trillion dollar plus! At this modest pace, China will account for 62%
of global incremental growth to 2020 – driven by continued industrialisation,
urbanisation and rise in disposable incomes.
Spate of plant closures and their impacts
The last two years have seen a significant tightening of
environmental standards in China that have led to several plant closures, and
forced several others to reduce operating rates in a bid to lower their impacts
on the environment. Three questions are relevant here: Are these measures here
to stay? Will they have impacts for India’s chemical companies? Do they pose
opportunities?
The answers to all three is in the affirmative.
Companies critically depending on China for key raw materials
are revaluating supply options, and seeking vendors in other geographies. Some
are also reconsidering manufacturing in their own plants or in their
neighbourhood – a much more difficult task considering the assets are not always
there and business priorities have shifted from manufacturing to outsourcing of
non-critical functions.
India’s fine chemical industry, in particular, is seeing
increased interest from western companies – a trend likely to continue. For
western companies looking to outsource fine chemical production to India, the
cost benefits can be substantial – of the order of 15-20% at the very least,
stemming from lower fixed manufacturing costs, R&D expenses and general
sales & administration costs.
Another positive for Indian (and international) companies is the
improvement in margins stemming from a more balanced demand-supply situation as
plant closures eliminate some excess capacity. Over time several Chinese
companies will make the necessary investments in technology to address their
environmental issues. Given their technical skills and innovative ability, all
but the most intense of the environmental challenges will be overcome. But
these improvements will come at a cost that will need to be factored into product
pricing. This can only be good news!
There have been disruptions in some supply chains due plant
closures in China, and price escalations have been common. The dynamic between
buyers and sellers has turned in favour of the latter, but so far there have
been no catastrophic disruptions to supply.
Lessons for India
There are lessons to be learnt here, especially by India’s
agrochemical and pharmaceutical industries that have come to be dependent on
raw materials from China – be it active ingredients or advanced intermediates.
Capacity to manufacture them domestically were shuttered to take advantage of
cheap supplies from China, but that strategy is now beginning to hurt.
Restarting these plants will take time and effort, and despite promises,
government aid is unlikely to be forthcoming. The good news is that in several
large- to mid-sized companies, there is now a rethink on this dependence, and
strategies are being put in place to either develop vendors locally for
critical molecules or to make it captively. These efforts must be put on fast
track.
For local manufacturing initiatives to work, they need to be
supported by the domestic consuming industries that must buy into the vision of
India developing as a well-integrated and competitive supplier of chemicals.
While there may be small savings by importing, local sourcing and
collaborations will offer long-term security and comfort.
China’s entrepreneurs have built a sizeable industry by taking
bold actions to build businesses based on core competencies – be it technology,
raw materials, customer connect etc. Sadly, the proverbial fire in the belly,
so abundant in that country, seems to be missing in India’s chemical industry!
Ravi Raghavan
Chemical Weekly Issue date: 23rd October 2018
No comments:
Post a Comment