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Investment

BASF readies bold moves in China again

Big chemical maker plans multibillion-dollar projects in Nanjing and in the south

by Jean-François Tremblay
December 16, 2018 | APPEARED IN VOLUME 96, ISSUE 49

09649-feature2-ethylenecxd.jpg
Credit: BASF
BASF and Sinopec will be adding an ethylene cracker to this one at their joint venture in Nanjing, China.

A big and systematic company, but prone to bold moves, BASF didn’t announce just one multibillion-dollar investment in China in the past six months—it revealed two.

The German company announced in July that it would invest $10 billion in Zhanjiang in the southern province of Guangdong. Then in October it unveiled plans to nearly double the size of a giant facility in Nanjing that it has operated since 2005 with the state-owned Chinese firm Sinopec.

For any company, an investment of more than $1 billion at a single site is major news. Build the project far away from home, and the news is even more noticeable. Assuming they are ultimately approved by BASF’s board, these two projects will be among the largest BASF has ever undertaken.

The moves are decisive ones, but BASF has a track record of moving decisively in China. To the firm, the investments are necessary to take advantage of growth in a market that is quickly becoming the world’s largest for chemicals. According to the manager overseeing the two projects, BASF is simply grabbing the opportunity to invest in China at a time when the government has relaxed restrictions on foreign investors.

“We are at the right time and the right place,” says Haryono Lim, a BASF senior vice president whose job is to build major integrated sites in China. “China’s central government has been opening up industries like banking and automotive; chemicals aren’t excluded.” A 20-year veteran of BASF, Lim is an Indonesian who trained in Germany as a chemical engineer. He previously headed the Nanjing joint venture.

In 1996, when BASF announced the first project in Nanjing, the plan was arguably even bolder. At the time, the word in the business community was that investing in China isn’t profitable. Anecdotes of joint ventures struggling or even coming apart were common. And parts of the country were wildly corrupt. Government officials in Xiamen, for example, were getting a cut on billions of dollars of chemicals smuggled through the port city to avoid import taxes.

Fast-forward 22 years, and the BASF-Sinopec project is the most profitable joint venture either company has ever launched, Lim says. Over the past 12 years, the two partners have added several new plants in Nanjing, notably a $900 million expansion in 2008.

BASF in China: Big and getting bigger

2017 sales: $8.3 billion
Employees: 9,000
Major current sites: Nanjing (large, integrated complex), Shanghai (two locations and one major R&D center), Chongqing (polyurethane intermediates)
The two major expansions:

 

Nanjing

Zhanjiang

Investment

About $4 billiona

About $10 billion

Products

Olefins and range of unspecified downstream products

Olefins and range of unspecified downstream products

Time frame

Cracker and some facilities on line in 2024a

First facilities on line in 2026

Ownership

25-75 with Sinopec for cracker; 50-50 with Sinopec for downstream plants

P

100% BASF

Major cities within
500 km

Hangzhou, Shanghai, Suzhou, Wuxi

Dongguan, Guangzhou, Hong Kong, Shenzhen

Source BASF
a C&EN estimate.

The new expansion in Nanjing “is a logical consequence,” Lim says. The partners have agreed to build new chemical plants and put up half the capital required to build a 1-million-metric-ton-per-year cracker. The other half will come from Sinopec Yangzi Petrochemical, a Sinopec subsidiary. The new cracker will be structured as a separate joint venture supplying olefins to Yangzi and the BASF-Sinopec complex.

“Both partners have been looking for new options,” Lim says. The chemical market in the eastern part of China, home to major cities like Shanghai, Hangzhou, and Suzhou, has grown rapidly in recent years, he notes, particularly for the specialty chemicals that are BASF’s strength.

Guangdong, in contrast, is a new frontier for BASF. The company’s big sites in the country so far are in Shanghai, Chongqing, and Nanjing. But the province is a natural choice, Lim says. “With a GDP almost equal to South Korea, Guangdong is a no-brainer.”

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With a 1-million-t-per-year ethylene cracker at its core, the project in Zhanjiang will produce a range of still-unspecified chemicals. “Guangdong currently imports products that we manufacture in China and abroad,” Lim says. When the complex is built, it will sell its output in Guangdong, other parts of China, and Southeast Asia.

One of the first regions of China to open to foreign investment, Guangdong has excellent infrastructure, Lim notes. The city of Zhanjiang is already home to a large steel mill and has a Sinopec petrochemical complex under construction. In a few years, Zhanjiang will be served by bullet train, putting it within three hours of BASF’s regional headquarters in Hong Kong.

The most unusual feature of the Guangdong project is not its location but that it will be wholly owned by BASF. China has not traditionally allowed foreign firms to own majority stakes in ethylene crackers. But in July, China’s National Development and Reform Commission announced it was lifting restrictions on investment by foreigners in several sectors, including heavy industry.

Both BASF and ExxonMobil subsequently announced plans to build wholly owned projects in China. Also in Guangdong, in the city of Huizhou, the ExxonMobil project will feature a 1.2-million-t-per-year ethylene cracker.

“The government wants to look like it’s open to foreign investment,” explains David S. Jiang, president of Sinodata Consulting, a Beijing-based advisory firm focused on the chemical industry. For the past year or so, he adds, a slowdown in the Chinese economy has prompted the government to make fewer demands on foreign investors.

“The position of government now is to attract foreign investment as much as it can because it will grow the economy,” Jiang says. In addition, at a time when China is trying to improve industrial safety, companies with good track records, like BASF, are particularly welcome, he says.

It’s clearly easier to run a business alone, as opposed to with a partner that needs to be consulted over any major decisions. With full control in Zhanjiang, BASF will be freer to implement the technologies it wants, be it to maximize safety, health, and environmental performance or to diversify the site’s product lineup, Lim says.

But having a partner like Sinopec in Nanjing does offer some advantages, Lim notes diplomatically. The Chinese firm has supplied a competent labor force over the years. And in the new expansion, Sinopec is contributing most of the capital to build the ethylene cracker. BASF is less interested in the cracker than in what it can make with its output.

Embarking on a big expansion in Nanjing while building a new site in Guangdong will be a huge endeavor for BASF, but compared with its 1996 venture, it will be easier in several ways. BASF now has far more people on the ground in China than it did 20 years ago. And the capabilities of Chinese engineering firms that build chemical plants have improved a lot in the past two decades.

Still, for a few years at least, BASF will need to station many more foreign scientists, engineers, and technicians in China than it currently employs. Even though the firm employs 9,000 people in China, it doesn’t have “a sufficient talent pool currently,” Lim says.

For the engineers working on the two projects, it will be gratifying to build basically from scratch, Lim predicts. Most of the new capacity the firm adds in Europe and the US is at sites it set up decades earlier—or even more than a century ago, in the case of the firm’s biggest complex in Ludwigshafen, Germany.

“It’s a chance to build something properly,” he says, “not to upgrade something that is 153 years old.”

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