Chinese Overview - Throughout the year 2011, we covered several aspects of the chemical industry in China, ranging from R&D cooperation to strategy development and the tendency of multinationals to localize their China activities. We also specifically looked at the situation in specialty chemicals.

It seems fitting to finalize this series with a general overview of current trends in the Chinese chemical industry. We will describe trends in the production of chemicals, in the market for chemicals and in the way companies adapt their strategies to the changes in China (fig. 1).

Trends in the Production of Chemicals

One of the most striking trends in China is the continued buildup of capacity even for those products for which capacity utilization is already quite low. PVC is a good example for this phenomenon. In 2010, there were approximately 20 domestic projects leading to growth of PVC capacity (either setup of new lines or expansion of existing lines).

Given that domestic consumption increased by 17% from 2009 to 2010 and that China imported substantial amounts of PVC, this expansion at first glance seems to make some sense. However, capacity utilization in 2010 was only around 50%, severely limiting the prospects of the new capacity coming onstream. And China's antidumping tariffs on PVC coming from selected countries shows that the domestic industry may simply not be sufficiently competitive. The overall situation is quite similar for methanol while for other chemicals such as aniline, capacity utilization is far below 50%.

With regard to production technology, China is striving for upgrades. In titanium dioxide, this means that local Chinese producers shift from the low-end anatase varieties to the higher-end rutile varieties.

At the same time, China is also looking at technologies not fully established elsewhere and trying to gain technology leadership. The most prominent example is the rise in coal chemical projects.

Environmental protection is becoming increasingly important in the production of chemicals - particularly as the government has to cope with protests from the emerging middle class, which have occasionally been directed at chemical factories such as a planned PX plant in Xiamen.

This trend is particularly strong in the more developed regions in China's east, where more and more chemical production is shifted to dedicated chemical parks.
At the same time, production capacity is shifted to Western and Central China.

While the weaker environmental regulation in these poorer areas is one reason, another is the government promotion of more evenly spread nationwide development. Currently, Chongqing in central China is such a focal point of investment, with BASF followed by other multinationals in setting up production.

Trends in the Market for Chemicals

Domestic overcapacity has led to severe price pressure for some chemical products in China, such as polysilicone. This will lead to further reduction of investment in this area and has also led to government restrictions with regard to buildup of new capacity. For other chemicals, price pressure comes from cheap imported materials. Antidumping rulings are an indication of such price pressure. Though the number of antidumping cases has been slightly declining, it is still relevant for several important chemicals such as methanol, chloroform, butandiol and phenol.

Exports will increasingly have a positive effect on the Chinese chemical industry. Several producers of bulk chemicals such as acetic acid, but also of more special type materials (e.g., in water treatment) have already done substantial efforts to achieve Reach registration in order to open up the European market.

Strengthening export segments for Chinese producers include areas such as pesticides, which increased by about 20% from 2009 to 2010. Feed additives and vitamins are other well-known segments with strong Chinese exports. For some chemicals such as vanillin, exports probably account for around 80% of Chinese production, and this figure may rise further.

Perhaps the most important trend in the Chinese chemicals market refers less to the type and more the quality of chemical products produced. Indeed the quality of many basic chemicals such as MDI has now achieved global standards, while in other areas such as specialty and high-end chemicals there still is room for improvement.

Indeed, as described elsewhere, the competition between domestic and multinational chemical companies will largely take place in the growing mid-level segment of the chemicals market. This market is targeted by domestic companies from below - which mainly required improving the quality of their products - as well as from the top by multinationals - which requires the adaptation of global products to domestic cost structures.

The underlying reason for the shift towards higher quality is the growth of the Chinese middle class. Apart from this general shift, the more consumption-oriented middle class will also have specific effects on the growth of individual chemical segments. Chemicals used in the production of small and large consumer goods, such as pigments for cosmetics or plastics for cars, will have a higher growth rate than purely investment-driven chemicals.