WPC 2021: Opportunities and challenges in post-COVID China

07:17 AM | March 12, 2021 | Kartik Kohli

The chemical industry in mainland China faces an unprecedented set of challenges, and also sees opportunities, this year and beyond, as the world continues to grapple with the COVID-19 pandemic.

Speaking at a China forum held on Friday during IHS Markit’s World Petrochemical Conference (WPC) 2021, being held in a virtual format, Ming Ye, head of marketing and supply chain at Wanhua Chemical Group (Yantai, China), said that the company is optimistic about the chemical sector's prospects. Ming said that the pandemic had created pent-up demand that will accelerate the need for commodity chemicals. Under-investment in upstream supply due to poor returns has created a situation where downstream demand will not be easily met. This will drive future investment and generate demand for basic chemicals, he added.

The COVID-19 pandemic and US-China trade conflict have led companies to consider redistributing their international supply chains, said Ming. This would help offset the realities of risk and provide a degree of security against geopolitical tensions. It would also create opportunities for chemical growth worldwide, according to Ming.

Wanhua's business units are polyurethanes, performance chemicals and materials, and petrochemicals.

Yating Xu, senior economist at IHS Markit, said at the forum that China’s GDP would grow 7.8% in 2021. Growth drivers may shift away from industrial production and investments in 2020 to consumption and services this year, said Xu.

Resilient Chinese chemical sector

Tanveer Rahman, head of chemicals/Asia and of oil and gas/Southeast Asia at HSBC, said that China has been relatively insulated from the negative impact of the pandemic because of the country's large population, increasing wealth levels, and the latent demand that allows companies to flourish.

Rahman said that China's fundamentals remain strong and that the country is recognized as a key destination for leading international chemical companies searching for growth. China is a key manufacturing hub requiring commodity- and intermediate chemicals to convert to higher-value finished goods for export, he said.

Demand in China has been hurt by COVID-19, but it recovered faster than in other major economies, said Rahman. This has been supported by the strength of the domestic chemical sector, and domestic consumption has partially mitigated falling export demand. “Additionally, there are limits to any supply-chain shift outside China,” he said.

Rahman noted that Chinese companies are expanding to meet domestic demand with internally developed technology and capabilities in new growth areas such as electric vehicles (EVs) and battery chemicals, ahead of their counterparts in the West. “Growth is supported by many factors including state policy, lower capital costs, a large and capable workforce, and financing from banks and provinces,” he said.

China has been resilient throughout the pandemic, notwithstanding weaker export markets, and there is domestic demand, Rahman said. “If we look at the EBDITA of the listed top companies, there is no downside in 2020 and it is still a very impressive rise," he said. This is underpinned by local market needs. There are companies trying to grow by supplying domestic as well as international markets with sophisticated chemical products, according to Rahman. Rahman noted that China has pioneered the EV battery materials space.

Domestic chemical companies are developing pioneering technologies within a new generation of chemical segments. “Capital expenditure has increased significantly, to access the technology in part to make sophisticated products,” Rahman said. Some of the firms have acquired the technology through joint ventures, he said.

Proliferation of private enterprises

Sectors of China's chemical industry have become generally open to all domestic players, according to Rahman. With a loosening of regulations for entry into capital-intensive sectors such as refining and petchems, and access to oil imports, privately-owned enterprises (POEs) have expanded their presence alongside state-owned enterprises (SOEs). Despite the entry of several POEs, many segments remain a priority for SOEs with additional greenfield capacities planned. Rahman said that the government’s policies to encourage investment have led to proliferation of SOEs as well as POEs in the refining and petchem industries.

Rahman noted that the number of POEs is now far greater and that the way they are taking advantage of growth opportunities in new-generation chemicals is impressive. “A lot of these have developed their own technology and are growing,” he said. Several SOEs are also growing and developing plans to ensure they stay relevant in the new chemical sectors, Rahman said.

Feedstock supply critical to growth

Rahman said China is a big importer of oil and that domestic petchem players, especially POEs, are backward integrating with security of supply an important goal. “Looking closer at the feedstock mix provides an interesting perspective, whether it's liquids, gas, or coal,” he said. Rahman said that gas is increasing its share at the expense of coal. However, liquids remain the dominant feedstock with significant medium-term growth expected, he said.

“It is probably not a surprise, because ultimately mixed-feed crackers are more likely to be pursued for greater flexibility,” Rahman said. He noted that chemical companies facing crude-price and feedstock volatility will look to develop better integration backward and forward into engineering plastics and a range of specialties.

“Companies in China, especially those in the commodities sector, rely on feedstock,” according to Rahman. There is coal in China and many companies are switching over to gas, but the country's reliance on oil imports raises questions about energy security, he said.

Policy directives to raise environmental standards

Xizhou Zhou, vice president and managing director/global power and renewables at IHS Markit, said there has been a lot of action in government policies and company strategies since September 2020 when Chinese president Xi Jinping announced the country’s pledge to be carbon-neutral by 2060. Any SOE that uses energy extensively or is in the field of oil and gas plans to attain peak carbon emissions by 2030 and achieve carbon neutrality by 2060. Zhou noted that this is a huge task for a country with such strong growth.

Per-capita energy consumption in China is 67% below that of the US and 40% lower than Germany, said Zhou. “So, people and industries will be using energy and it's happening at a time when we have to meet new energy demand with clean energy,” he said. China must replace fossil fuels with clean energy in its consumption. This is different from Europe or North America, where fossil-fuel demand growth has peaked or plateaued, he added.

About 44% of carbon emissions in China emanate from power generation using coal. The second-biggest sector for carbon emissions is industry, which accounts for about 22% and includes the chemical industry. “If coal, liquefied petroleum gas [LPG], and natural gas is burnt, it will produce carbon emissions and it has to be managed,” Zhou said.

The third-largest sector that generates carbon emissions in China is transportation. Gasoline, diesel, or any other fossil fuel must be replaced with cleaner forms of energy, he added.

“These are very big asks and the solution is to clean the electricity supply,” Zhou said. China is the biggest renewables market in the world and 40% of renewable projects are being built in China.

The transportation sector can be electrified and EVs can be used instead of gasoline- and diesel vehicles, he said. Zhou noted that certain industrial processes could be hard to electrify and that hydrogen or biofuels could be used. 

“China is raising environmental standards and more sophisticated requirements are coming out than ever before,” said Rahman. China’s 14th five-year plan entitled Beautiful China Construction, its carbon-emission restrictions, and its latest initiatives targeting single-use plastics starting January 2021 will all result in the creation of chemical companies with more specialty products, said Rahman. Many domestic players are stepping up to meet these challenges, he said.

Zhou said that industry in China is working urgently to accelerate the process of energy transition, which creates opportunities for many parts of the economy. These are brand new sectors that create jobs and generate tax revenue, according to Zhou. “China has recognized this and is pushing policies; it regards these sectors as the new sectors of the economy,” he said.