 "Changes underway in China pose challenges for chemicals industry: Dr Mosongo Moukwa")
During the past two decades, China experienced extraordinary growth. As it became the factory of the world, it was possible to reliably predict the constant double-digit annual growth rates for all chemicals and polymers. Then, came the 2008 economic crisis that put an end to the credit boom in western countries, making future demand for Chinese exports very uncertain. Since then, the government is defining a pathway to transitioning the economy from dependency on investment for growth to reliance on private consumption. Private consumption relative to GDP is the lowest among major economies.
China has traditionally posted 10% GDP growth or more over the past three decades. However, for 2013, it has posted a 7.4% growth, and it is the slowest year on year growth. Its economic model is changing and this will have profound effects on the chemical industry.
There are a number of elements to consider.
The fast demand growth of the past decade has encouraged a wave of investments, which has led to overcapacity in the face of economic slowdown. The chemical industry has not been spared, with overcapacity not only in commodities like methanol and polyvinyl chloride but also in some specialties sectors such as vitamins, depressing profitability. The chemical industry is entering a phase of consolidation and a more selective growth.
A multi national company (MNC) ready to invest in China must now face a more selective appraisal by the Chinese authorities. They must provide access to feedstock or to technology that China lacks. As growth in the commodities market slows, more Chinese companies will be shifting to the specialties side of the market. They are already making efforts to move up the value chain and leverage their lower production costs capabilities and their knowledge of the local markets. This would make the Chinese market highly competitive.
According to ICIS, while in 2007, $ 1 of credit added 83 Cent to GDP, in 2013, $ 1 was adding only 17 Cent. Some are suggesting that in 2014, $ 1 will add 10 Cent. Paradoxically, in order to maintain a GDP growth of 7.5%, the People’s Bank of China (PBOC) would have to allow lending of more than Rmb 19 trillion ($ 3.14 trillion). Investments have topped up GDP, but have not contributed to the health of the overall economy. Inefficient, subsidised state-owned enterprises have gobbled up credit while more nimble private firms have starved. The danger for a credit bubble is real.
Local populations and the government are becoming more environmentally conscious. The Chinese government has begun to question the model of ‘growth at all costs’, responsible for the country’s environmental woes. A growing number of planned chemical projects have been withdrawn or modified, following protests by local populations. New investments by MNCs in chemical facilities are likely to become increasingly contested by the local population.
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China will still continue to import commodity chemicals, particularly where it lacks feedstock. As a result, substantial volumes of petrochemical imports are expected to be required through 2020. It will also need more technologically advanced products. This favours foreign companies because such products have high technology barriers. As China will be focusing on employment for millions of Chinese still coming into the work force every year, exports will be a key element in the government policy during this transition phase. This may also bring deflation as the country is focusing on keeping factories open rather than making profits. What is certain is that China has slowed down.
At 7% growth, China is set to become the largest economy of the world by the end of this year, according to the World Bank. The biggest risk for the world, and indeed the chemical industry, is that China does change its failing growth model. The transition to a new economic model is a good think.
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The author is an Independent Consultant based in Chapel Hill, NC, USA, and was recently Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association. Email: mosongo@mosongomoukwa.com
China has traditionally posted 10% GDP growth or more over the past three decades. However, for 2013, it has posted a 7.4% growth, and it is the slowest year on year growth. Its economic model is changing and this will have profound effects on the chemical industry.
There are a number of elements to consider.
The fast demand growth of the past decade has encouraged a wave of investments, which has led to overcapacity in the face of economic slowdown. The chemical industry has not been spared, with overcapacity not only in commodities like methanol and polyvinyl chloride but also in some specialties sectors such as vitamins, depressing profitability. The chemical industry is entering a phase of consolidation and a more selective growth.
According to ICIS, while in 2007, $ 1 of credit added 83 Cent to GDP, in 2013, $ 1 was adding only 17 Cent. Some are suggesting that in 2014, $ 1 will add 10 Cent. Paradoxically, in order to maintain a GDP growth of 7.5%, the People’s Bank of China (PBOC) would have to allow lending of more than Rmb 19 trillion ($ 3.14 trillion). Investments have topped up GDP, but have not contributed to the health of the overall economy. Inefficient, subsidised state-owned enterprises have gobbled up credit while more nimble private firms have starved. The danger for a credit bubble is real.
Local populations and the government are becoming more environmentally conscious. The Chinese government has begun to question the model of ‘growth at all costs’, responsible for the country’s environmental woes. A growing number of planned chemical projects have been withdrawn or modified, following protests by local populations. New investments by MNCs in chemical facilities are likely to become increasingly contested by the local population.
Dr Mosongo Moukwa
The one child policy has resulted in a quickly aging population with fewer younger people to replenish. China’s labour pool declined in 2012 (by 345 million) for the first time in 50 years. The ratio of taxpayers to pensioners is expected to drop from 5 to 1 in 2 years, and 2 to 1 by 2030. This will affect the demand for the chemical based products. The government still needs to provide well paid employment to the millions of new graduates, thus factories would continue to crank even at a loss.ALSO READ: Emerging markets could triumph from crisis
China will still continue to import commodity chemicals, particularly where it lacks feedstock. As a result, substantial volumes of petrochemical imports are expected to be required through 2020. It will also need more technologically advanced products. This favours foreign companies because such products have high technology barriers. As China will be focusing on employment for millions of Chinese still coming into the work force every year, exports will be a key element in the government policy during this transition phase. This may also bring deflation as the country is focusing on keeping factories open rather than making profits. What is certain is that China has slowed down.
At 7% growth, China is set to become the largest economy of the world by the end of this year, according to the World Bank. The biggest risk for the world, and indeed the chemical industry, is that China does change its failing growth model. The transition to a new economic model is a good think.
____________________________________________________________________________________________________
The author is an Independent Consultant based in Chapel Hill, NC, USA, and was recently Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association. Email: mosongo@mosongomoukwa.com