Buyers not enamored with available supply sources
When it comes to commodities, China's huge industry imports more than it exports
Tom Stundza -- Purchasing, 1/13/2005
China is the world's biggest producer and market for chemicals, but it isn't much of a supply resource for North American buyers. Census Bureau statistics show that buyers, who sourced some $160 billion in all kinds of products from China, only imported $1.7 billion worth of chemicals and plastics.
That's a miniscule percentage of the $84.2 billion in chemicals, resins and related products in 2004 that the U.S. bought from foreign sources. Indeed, after subtracting exports, the net trade deficit was $8.4 billion.
But while not buying from the Chinese market, chemical process companies worldwide are taking advantage of China's vast and inexpensive labor force by moving some of their operations there. But the majority of the estimated 180,000 chemical products made in China by these joint ventures and home-grown firms are sold in China.
Government data shows that China participates in only 2.1% of the U.S. chemicals and plastics trade. That aligns with data from PURCHASING magazine's latest offshore buying survey, which found that chemicals and resins accounted for just 2% of all materials bought from Chinese raw materials, fabrications, parts and components suppliers. The reason: Quality still is the top concern, according to buyers who have purchased chemicals from China. Atop that, logistics problems and freight costs are an issue. Those polled also report that overall savings are less than had been expected.
China has a $97 billion (annual sales) chemical sector but is a net importer of most chemicals, plastics and pharmaceuticals. Latest available data (2002) shows net imports of $26 billion. And that doesn't look to change anytime soon. Minister of Commerce Bo Xilai, in a late November speech, said that since April, his ministry has been studying commodity and product areas where China might expand the current buy from the U.S. That's because of the large U.S. trade deficit already existing with China.
Data from the Ministry of Commerce shows annualized 2004 exports of plastic products (including resins) of just about 4.85 billion pounds to the U.S. and Canada. That's about 4% of the estimated 124 billion-plus pounds of plastic used in the region last year.
Interestingly, this data meshes with the buyers' poll, which found less than 8% of the purchases from that country by the 573 buyers polled were plastic products and packaging materials.
Part of the problem may be the dynamics of the plastic fabrication industry, which is complicating the sourcing of injection-molded plastic items from the former supply-source center in the Guangdong Province of South China. Consultant Christopher W. Runckel, former trade minister-counselor of the U.S. Embassy in Beijing, says that "South China operations are becoming relatively high priced and often are falling second place to newer injection molding companies like those in Zhejiang Province and other second-generation injection molding locations."
Update on China's industryChina has about 30,000 companies producing chemical and resin products, and about 20% of these firms are connected with such electronic-sourcing sites as eBigChina.com, the China Chemical Network (www.chinachemnet.com) and ChemIndex.com. However, chemical manufacturing, marketing and sales is in the early stages of redevelopment by the Chinese central government. Government associations have been working with Beijing political leaders since 2001 to reform the industry. And, while the development of quality management and quality control programs at existing chemical plants and the attraction of foreign investment in raw materials industries rank high on a list of their priorities, expansion of home-market sales chemical products is last on the list—and expanded exports didn't make the cut.
Also, trade data from Beijing shows that China's export of fertilizer and other agricultural chemicals is more than double the volume of commodity and specialty chemicals shipped to industrial and commercial buyers worldwide. Chinese officials describe the country's chemical export policies as "very cautious and responsible" anyway, because of a long-standing commitment to keep its materials away from terrorist nations or groups making chemical weaponry.
Then, late last year, the government announced plans to shutter uncompetitive chemical plants and to ban construction of any new facilities that had been engineered with outdated technologies. The government also has decided to limit expansions of certain chemicals and resins to avoid margin-depressing overcapacity. The construction ban—similar to one placed on small, inefficient steelmaking plants last year—targets local entrepreneurs who have built numerous small-scale chemical units throughout China during the last few years.
Many of these to-be-closed facilities are based on obsolete technology—so they are both inefficient and a potential threat to the environment. Some of the plants received local government approvals earlier, but the central government now says they may lead to overcapacity of low-grade capacity in chemical-product sectors that would be sold below market levels. Thus, mercury-process, chlor-alkali projects and all dimethyl terephthalate projects are being banned. Small-scale plants producing ethylene, polyethylene, polypropylene, polystyrene, acetic acid, acrylonitrile, polyester, polyvinyl chloride, acrylonitrile butadiene styrene, dyestuffs, paints, pesticides, and pigments either will be closed.
Still, that doesn't mean the country's chemical industry is stagnating. Authorities are looking to establish a major petrochemicals complex in China's Xinjiang Uygur autonomous region. They are seeking investors to build $380 million worth of plants to produce methanol, acetic acid, acetic anhydride and polybutylene terephthalate (PBT) at Nanjiang. The proposed 800,000 metric tons/year methanol unit would consume natural gas from the Tarim field. The 550,000 metric tons/year acetyls portion of the complex would use methanol feedstock. The cost of the acetic anhydride plant is estimated at $100 million. The 40,000 metric tons/year PBT unit would source purified terephthalic acid feedstock from the already operating and nearby Urumqi Petrochemical complex.
Also note that in just one autumn month in 2004, Western firms an-nounced new subsidiary plants or joint ventures that would expand Chinese production of carbon black, synthetic rubber, aniline, polymers, polyesters and fibers, ethylene, propylene, acrylate resins, methyl ethyl ketone (MEK), polyether ether ketone (PEEK), soda ash, potash, vinyl chloride monomer (VCM), polyvinyl chloride (PVC) and various catalysts, aroma ingredients, food colors, and personal care chemicals.
BASF says it is expanding its coil coatings facility at Shanghai because, the company says in a press release: "China is undergoing enormous growth in demand for color-coated steel, fueled by the expanding construction industry." Similarly, Akzo Nobel's coatings business will focus on growing in China, says the chief executive, Hans Wijers, because just his company's coatings sales there are expected to more than double, to $878 million, by 2009.
This is a continuation of the North American industry's shifting of chemical production and downstream plastic processing activity overseas. According to the American Plastics Council, the downstream polymer chemical processing industry, as recently as 2000, registered a $1.55 billion trade surplus; in 2003, the trade deficit in plastics products was $1.47 billion.
| Products | |
| Industrial organic chemicals | $708.6 |
| Industrial inorganic chemicals | $514.5 |
| Fertilizers, pesticides, and insecticides | $230.9 |
| Photo chemicals, printing inks, paint, others | $222.6 |
| Plastic materials | $119.7 |
| Total | $1,796.3 |
| SOURCE: PURCHASING FROM CENSUS BUREAU DATA | |
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