Upgrading of the Chinese Chemical Industry
China’s Focus on Environmental Protection Provides an Opportunity for Equipment Producers
At a study session earlier this year attended by members of the Political Bureau of the Communist Party of China (CPC) Central Committee, Xi Jinping, the general secretary of the CPC, highlighted the increasing importance of environmental protection in the country. He said the country should protect the environment "like one protects one's eyes" and treat the environment "as one treats one's life."
In fact, this focus on environmental protection, which is also one of the five key points of the current Five-Year Plan (2016-2020), already has a strong impact on China´s chemical industry. But what will confront chemical manufacturers with challenges will open up opportunities for equipment suppliers and service providers. Three aspects are particularly relevant.
Stricter regulation: The laws regulating the allowable emissions of chemical plants are getting stricter, and their scope increases. Costs of releasing pollutants into the environment will increase substantially. In fact, even the European chemical companies active in China seem to feel the pressure of regulation, as witnessed by a statement in their annual position paper.
Stricter implementation: While in the past lax implementation often prevented existing regulation from having a strong effect, the current anticorruption campaign has led to significantly increased compliance with environmental laws – not only in Western companies producing in China but also in domestic companies. In a recent case at a dye manufacturer (DyStar), several managers of the company were punished with jail terms for releasing spent sulfuric acid into a river.
Forced move to chemical parks: While currently only about half of the chemical production plants in China are located in dedicated chemical parks, this share is to increase drastically to 2020, with some provinces having set targets of 90% or more. This is partly a consequence of the Tianjin accident in 2015, which highlighted the need for a better separation of residential and industrial areas.
Growing Pressure on Chemical Companies
These are factors which indicate growing political pressure on chemical companies in China.
At the same time, a number of economic factors push in a similar direction. Salaries have been rising dramatically in the past 10 years and now exceed those in many South East Asian countries. Cost pressure on producers of chemicals is increasing as there is overcapacity for many chemicals, and as the markets do no longer grow at the very high rates of the recent past, this overcapacity issue will not vanish easily. Finally, production of many chemicals is still very fragmented (for example, there are 158 producers of caustic soda), giving producers very limited pricing power and putting additional pressure on their costs.
In combination, the forces of economics and regulation will compel many chemical producers in China to upgrade their equipment, with the two main objectives of being allowed to maintain production (something that is not necessarily given any longer, as some companies such as dye manufacturer Hubei Chuyuan have experienced) and to reduce production costs to increase competitiveness. A forced move to another site at a chemical park may give an additional incentive to use this disruption of production as an opportunity.
A Need for Know-how and Equipment
And there is substantial potential for such upgrading. Even though Chinese chemical companies are already global leaders in the production of a large variety of chemicals, their production processes often lag behind world standards with regard to yield, quality, safety, waste and other aspects. Providing the know-how and equipment to upgrade these processes should therefore be an opportunity for producers of chemical production equipment and related services, both for Chinese and for foreign companies.
A number of areas seem to offer particularly exciting opportunities for equipment providers.
Control of air pollution: This topic will become more and more relevant as China will implement an environmental tax starting 2018, replacing the current emission fees and increasing the burden on heavy polluters. Companies with experience in controlling NOx emissions, e.g., by scrubbing and/or oxidation, or offering exhaust treatment by gas pervaporation should benefit from this.
Waste water treatment: Due to the previous limited interest in this topic in China, there is substantial room for improvement via introduction of modern processes such as oxidative pretreatment, ultrasonic treatment of waste, or processes that recycle waste, such as the Deacon process for recovering chlorine from HCl-containing streams in the chemical industry.
Automation: A higher automation level and introduction of a distributed control system (DCS) can lead to process cost reduction, better process control and much improved documentation. It also increases the stability of the process and consequently enhances product quality. As the Chinese government is promoting a shift towards “Industry 4.0”, the trend of automation and data exchange in manufacturing technologies, the installation of DCS can be seen as a first step in this direction.
Change of process type: Switching from a batch to a continuous or quasi continuous process (if possible) usually also leads to a better controlled and more robust process, better quality and lower investment and operation costs. As labor costs in China keep rising, such a switch may in the future be the only way for some Chinese chemical manufacturers to stay competitive. Companies that can help chemical producers to make that switch will benefit.
Introduction of membrane processes: Many Chinese production routes have been developed in the laboratory, and have never been properly optimized for large-scale use. This includes under-utilization of membrane processes. The introduction of a membrane process can lead to elimination or reduction of environmental problems, and reduce costs.
Improvements related to quality and safety: Apart from being beneficial on their own, optimizing existing processes with regard to these two parameters will be highly relevant once a Chinese company aims to supply to Western chemical companies. These companies tend to have rather high safety and quality standards, and when partnering with other players will audit their suppliers. As a consequence, quality and safety of processes need not only be established but also be documented transparently. This will bring opportunities not only for providers of quality, health, safety and environment (QHSE) equipment, but also for those providing related services such as audits.
Increasing importance of reliability and lifetime cost: Contrary to the general trend, in some areas of chemical equipment foreign players have actually gained market share at the expense of local players. For example, in chlor alkali electrolyzers the Chinese Bluestar has lost market share, which was gained by the Japanese and German competitors Asahi and Uhde. This is despite Bluestar offering by far the cheapest product. However, customers are increasingly aware of the reliability differences between the local and the foreign offerings and the associated difference in lifetime costs. This demonstrates that foreign players can successfully charge higher prices if there is a clear rationale. This also points to one of the challenges of targeting Chinese customers – the development of a clear value proposition that is adapted to the specifics of the Chinese market.
Growing importance of chemical parks: The Chinese government has stated the clear objective to standardize chemical parks along the lines of best practice. Currently there is strong competition among the more than 500 chemical parks in China. For providers of chemical equipment and services, it may be worthwhile to approach them directly, with the objective of helping them create an attractive infrastructure at the respective site. This could cover areas such as safety services, information services, logistics services, provision of utilities etc. In turn, chemical park owners may benefit from the established reputation of Western service providers, making it easier for them to attract new chemical companies to their park.
There are many factors which will force Chinese chemical companies to upgrade their production processes including cost pressure, environmental regulation and increasing quality standards. This should be a substantial opportunity for high-end providers of equipment and services for chemical companies and chemical parks. In particular, Western providers with an established track record should have an advantage over less experienced Chinese providers as the size of chemical plants increases and safety and quality levels rise.