Only companies that follow the trend are likely to have a bright future. At the beginning of the year, reviewing and summarizing the development trend of China's chemical industry is crucial for companies to understand the situation and determine their industry development direction and development strategy.
China's fast-growing chemicals industry has been the world's largest by revenue since 2022, and its growth rates continue to outpace other major chemical-producing regions. But this sheer size should not be taken as a sign of stability. On the contrary, China's chemical industry is in the midst of profound and rapid transformation.
Market demand: Industrial policies and consumer trends stimulate demand for more specialty products
As China's economic policy shifts from investment to consumption-driven growth and a shift in consumption towards more sophisticated products, the result is likely to be further growth in demand for specialty chemicals . For example, as the market for high-end personal care products grows, they may bring demand for more complex specialty surfactants and additives and more expensive fragrances. Likewise, China's consumer trends will provide new opportunities. For example, the rapid growth of online food ordering may increase demand for packaging materials, which may increase demand for innovative products such as biodegradable polymers.
At the same time, the Chinese government’s “Made in China 2025” policy is prioritizing the development of some high-tech industries. The strategic direction it points to could stimulate certain end markets such as aerospace, electronics, electric vehicles (EVs) and batteries, which in turn could create opportunities to expand production in China of a range of more complex chemical products. Take electric vehicles as an example: By 2030, electric vehicle sales in China are expected to grow at a compound annual growth rate of 25%. By then, 12% of all cars running in China will be electric, and China will account for more than half of global EV sales. Other examples include coatings and new materials for high-speed trains, and advanced composites for the country's expanding aerospace industry
Technological innovation: Improve innovation and technological capabilities and strengthen industry strength
The entire chemical industry is embracing R&D, from industry giants such as Sinochem Group with its “We Believe in Science” slogan, to startups working on a wide range of frontiers including enzymes, catalysis, nanomaterials and battery materials. China currently leads the world in chemical R&D spending. The structure of R&D in China's chemical industry has also changed, from government-guided initiatives to those driven primarily by individual companies in an ecosystem in collaboration with government research institutions and universities, and the system for protecting intellectual property rights has been strengthened.
China's chemical technology capabilities are improving rapidly. There are many examples of Chinese companies achieving technological parity with Western companies. One in the petrochemical sector is Wanhua Chemical, which has developed its own methylene-diphenyl-diisocyanate (MDI) technology. Wanhua is now the world's largest MDI producer, which has historically been a tight-knit industry dominated by a handful of Western companies due to challenging technological barriers to entry in isocyanate chemistry.
In some market segments, China's chemical industry is beginning to gain technological advantages over multinational corporations (MNCs). This is the case with many fermentation-based products, including MSG, vitamin C, and xanthan gum. In all these respects, Chinese companies are now the world's leading producers, and they continue to achieve process and quality improvements based on better-performing technologies. The development of new materials is another example where Chinese companies are well positioned.
Industrial investment: opening up industries to new investors
Before 2015, China's oil refining was considered a strategic national industry controlled by state-owned oil companies. Naphtha biscuits are also under their control and the multinational company can only own 50% of the shares. However, since then, refining and upstream petrochemical investment has been opened up to multinationals and more broadly to Chinese private enterprises (POEs) to establish wholly owned operations.
Several private companies are actively investing in upstream to build petrochemical production and reshape China's petrochemical industry. Our analysis shows that nine POE-backed projects account for more than half of China’s planned 20 million tons of new ethylene production capacity per year. Hengli Petrochemical, for example, is moving upstream into refining to source raw materials for its purified terephthalic acid and polyester production. At the same time, some multinational companies are planning wholly-owned investments, including BASF’s announced investment in an integrated petrochemical complex in Guangdong Province and Exxon Mobil’s refining-petrochemical complex .
Financing credit: supply tightens
The industry is also operating under new restrictions. The Chinese government's policy of tightening credit across the country's economy is a particular hurdle for the capital-intensive chemical industry, which has historically benefited from low-cost capital to expand production capacity.
Bank loans are harder to get: China's main banking regulator issued a decree in 2014 that would control investment in oversupplied industries, including parts of the chemical industry, leading banks in 2015 to tighten rules on loan eligibility for oversupplied industries. Over the past year, banks have shifted to demanding more collateral, terminating loans early and refusing to renew them, putting chemical companies at a further disadvantage in borrowing. Chemical companies are also being charged interest rates that are higher than the market average. Further limiting options is tighter monitoring of companies borrowing using mutual guarantees - a mechanism used by some provinces where groups of companies can mutually guarantee each other's loans while effectively putting them all at risk if one company goes bankrupt.
Equity financing remains out of reach for most chemical companies: domestic investors are increasingly picky, and chemical companies are not considered attractive enough to be candidates for Chinese outbound IPOs. The Chinese government's continued policy of controlling debt suggests that the financing outlook for the chemical industry will remain challenging in the coming years.
This has had significant consequences. China's annual chemical capital expenditures rose rapidly between 2010 and 2015, when China's demand for chemicals grew at an annual rate of more than 10%, more than doubling to 1.61 trillion yuan in 2015. Spending peaked in 2015 and fell by 7% to 1.5 trillion yuan in 2017.
Environmental regulations: New environmental regulations lead to industry restructuring
Over the past two decades, China’s chemical accumulation has prioritized growth over environmental quality. The 13th Five-Year Plan for Environmental Protection, released in 2016, lists “lucid waters and lush mountains” as a national policy, marking a dramatic shift as Chinese authorities begin to address environmental degradation.
New national pollution control standards are being enforced through a system of production license requirements and a push to move chemical production to special chemical parks. A 2018 ban on the import of plastic waste, which disrupted Western countries that rely on exports to China, is part of the same new policy.
Environmental policy aims to transform chemical production from its current configuration, in which tens of thousands of plants are dispersed in mixed urban industrial and residential areas, to a new configuration based on specialized chemical production zones, where wastewater and hazardous waste treatment infrastructure can be centralized and share. While some areas, such as Shanghai, have long enforced strict standards, most industrialized areas in China face severe chemical pollution problems.
New environmental regulations will have limited impact on large upstream petrochemical and chemical intermediates and polymer plants, most of which have established appropriate emission control and waste treatment facilities. Severely affected are the thousands of small factories that produce all specialty chemicals, from coatings, dyes and pesticides to food ingredients and surfactants, used by Chinese manufacturing and agriculture as well as Chinese consumers. These are typically private enterprises, often lack adequate waste management capabilities, and are located in urban areas. The move to close non-compliant plants affected a large number of these small plants, but the impact on overall chemical production was less severe. In Shandong Province, for example, the government closed 25% of all chemical companies in the province in 2018, but this only affected 5% of output.
Looking forward to the next three to five years, we expect China’s environmental protection authorities to continue to vigorously promote enforcement in designated “radical change” areas that account for nearly 50% of China’s chemical output, and to promote improvements in “moderately strengthened” enforcement areas.
This could lead to continued disruption in the specialty chemicals market. The impact could be significant: Environmental enforcement authorities in 2017 and 2018 shut down 30% to 40% of China’s production capacity for sodium glutamate and certain dyes and pesticides. This supply cutback has led to significant price increases in these industries in China - with prices for disperse dyes and glyphosate pesticides rising by nearly 50%.
While new regulations may force significant parts of the industry to restructure, they may also provide greater profitability for companies that are able to manage under them and absorb the higher operating costs that come with compliance. Even after making environmental investments, they can continue to have a highly competitive global cost position and then compete in less crowded fields.
Survival of the fittest, Chinese style
What do these new developments mean for the development of China’s chemical industry and the growth of its future value pool?
How Chinese Chemical Industry Enterprises Position themselves in the New Era
Facing the changes in the Chinese market, how should major player groups position themselves?
The large-scale changes taking place in China's chemical industry reflect changes in the industry itself. Players in the world's largest chemicals market must make the necessary adjustments to ensure success at less than half the pace they have seen recently. At the same time, they must adapt to a world of scarcer financing and stricter environmental regulations. The factors driving success vary among the different groups of players in the industry, but in all cases they need to be ready to adapt and innovate quickly to meet market demands.