Issue Date: December 8, 2008
Chemical Demand Collapses In China
OVER THE PAST 15 years, China's insatiable appetite for industrial raw materials has been a chief justification for the construction of petrochemical plants throughout Asia, the Middle East, and other parts of the world. In 2007, China imported almost $40 billion in organic chemicals, an increase of nearly one-third over the previous year.
Yet in recent months, Chinese demand for chemicals has all but evaporated. "There is no demand from China," says Tetsuya Kurokawa, the polyvinyl chloride export sales manager at Japan's Shin-Etsu Chemical, the world's largest PVC producer. "Well, actually, there is still some demand, but it's a lot less."
Kurokawa says China is so important to his business that PVC prices are routinely quoted in terms of how much they cost when delivered to ports in China.
The drop in demand has been sharpest since October. Sinopec (China Petroleum & Chemical Corp.), China's largest oil refiner and petrochemical maker, produced roughly as many tons of ethylene, synthetic rubber, and plastics in the first nine months of 2008 as it did during the same period in 2007. But the oil giant has been slashing output since then, primarily by closing smaller, less efficient plants, says Jia Yiqun, the group's Hong Kong-based spokesman.
The most obvious reason for the drop in demand is the grim business conditions faced by China-based exporters of toys, shoes, and garments in their major markets in North America and Europe. Several Chinese manufacturers of toys and other products made largely from petrochemicals have closed their doors, putting thousands of people out of work.
"The export industries have no contracts—there's nothing," Jia says. China's domestic demand is also derailing, he adds. The country's construction boom has stalled, and the growth rate of the Chinese automobile market is about half of what it was last year.
There's more to China's loss of appetite for chemicals than just the financial crisis in the U.S. and Europe, according to David Jiang, president of the Beijing-based chemical consulting firm Sinodata.
Labor-intensive exporters, such as toy manufacturers, consume the most chemicals, and for the past two years, these manufacturers have had to deal with what amounts to an increase in the price of their goods because of the steady appreciation of China's currency, the yuan. Moreover, manufacturers have been hit by a drop in the tax rebate they can claim on goods they export. A few years ago, exporters could get rebates as high as 17% on goods, but in many sectors they now get nothing.
Because several big manufacturers went bust this fall, the government has started to reverse its policy of tax-rebate reduction, Jiang says. Garment manufacturers can once again claim export rebates worth 17%. "The government is now worrying about unemployment, which I agree should be the top priority," he says.
To address the reduction in Chinese demand, foreign chemical companies have been cutting their output. In Taiwan, petrochemical producers have reduced their plant operating rates from 95% of capacity to about 65%. A staggering 70% of Taiwan's petrochemical output is typically shipped to mainland China, says Jack J. H. Shieh, executive manager of the Petrochemical Industry Association of Taiwan. Fortunately, Shieh notes, there isn't much new chemical plant construction in Taiwan at the moment that would exacerbate the overcapacity problem.
IT'S A DIFFERENT STORY in China, where several new petrochemical complexes are being built. Sinopec's Jia says some of these facilities will not open as early as scheduled. He foresees delays of about six months at plants that Sinopec subsidiaries are building in Zhenhai and Tianjin. Companies that are building new plants in the Middle East will most likely also slow the pace of construction, Jia predicts.
Shin-Etsu's Kurokawa sees one bright spot for PVC producers that export to China. Until recently, China had been meeting about 80% of its PVC needs with resin from local producers that use the raw material acetylene, which they generate from calcium carbide. This production method has become uncompetitive following the global collapse in oil prices. Companies like Shin-Etsu that make PVC with ethylene, an oil derivative, are becoming more cost-competitive in China, Kurokawa says.
Otherwise, plummeting oil prices have been terrible news for Shin-Etsu. It takes up to two months for oil-based raw materials bought in the Middle East to reach Japan, Kurokawa explains. So at the moment, Japanese companies are using expensive raw materials to produce commodities that in China have already collapsed in price. For example, PVC sells in China for about $550 per metric ton today, down precipitously from as high as $1,300 per metric ton earlier this year.
Overall, a bleak picture has emerged for companies that had expected China to absorb increasing quantities of commodity chemicals. Even at Sinopec, which should be able to ride the downturn better than other firms because of the strength of its sales channels in China, the mood is downcast. "There is no good news," Jia says. "It's bad now, next year will be worse, and perhaps 2010 will be even worse."
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