Market Updates

Chinese Chemical Sector - Rising Challenges and Known Opportunities

March, 2019

The rise of Chinese factories making it manufacturing hub is undisputed which flagged its dominance on the global platform, making it second largest global economy. The manufacturing growth of China has significant contribution from chemical industry, which itself is part of one of the largest global industries. Chinese economies of scale in chemical processing and final output resulted in ballooned surplus and foreign exchange reserves. Now at the current juncture, where the protectionism is growing rapidly with slowing domestic market growth of China, the chemical industry has been witnessing new unforeseen challenges. The current state of industry can be summarized as given below.

  • Vast Growth Opportunities: The domestic market of China still holds huge potential for growth irrespective of concerns and facts about growth rates. The estimates suggest that if the Chinese per capita matches that of the US, then the Chinese economy would be as much as thrice that of the US because of sheer population it has. This potential for growth offers unmatched growth opportunities for organizations across the globe. This is the very reason why global corporations such as BASF and ExxonMobil have been pouring billions of dollars in the economy for increasing their share in the growing domestic market.

  • Environmental Stance: The Chinese governments has changed its stance on the environmental policies in past 2-3 years, increasing cost associated with the chemical manufacturing. In late 2017, when the Chinese regulatory inspected the factories, it resulted in temporary closure of up to 40% of factories. This not only increased the cost via fines and regulatory implementation charges, but also impacted the supply chain dynamics. Further, the government push towards the natural gas ballasts against the coal fired ballast to limit the environmental pollution took toll on the older ballast owners. Although, the push as taken back stage with ongoing trade spat with the US, these can very well come back to haunt chemical producers in the country.

  • Safety Issues & Demonized Accidents: The Chinese chemical has seen many notorious accidents in recent past. In last six months only, the industry has seen three high profile incidents related to chemical industry with most recent one resulting 78 dead and 617 injured. This incident was the second deadliest incident in the Chinese industrial history since Tianjin factory explosion in 2015 which killed 173 people and injured 1,000 others. The lapses in the safety measures have resulted in the increased chemical factory incidents and this is not only adding the safety measures cost, but also creating mass hysteria against the chemical plants in the general public, which again can prove deterrent to industry in most populated country of the world.

In conclusion we can easily say that the Chinese chemical sector is still a luring segment for the chemical companies across the globe, even though some of the earlier unforeseen challenges have been diminishing the expected returns from the potential investments. The sectoral opportunities still outweigh the current and potential challenges and cost associated with them, given the handling and implementation of solution against the issues are careful enough. Thus, we all can expected further strengthening of Chinese chemical sector at least for next five to ten years.

– Ankur Kalra
Manager – Chemicals & Materials
Infoholic Research