China is the world’s largest producer and consumer of chemical products, which makes the chemical industry central to its economy. As China’s economic policy shifts more to consumption-driven growth from that of investment, and toward more sophisticated products, the result is likely to lead to additional growth in specialty-chemical demand.
Though 2022 was a difficult year due to strict zero-COVID policies, the industry is showing positive signs. In the first 10 months of 2022, profits for China’s chemical manufacturing sector declined by 3.6% from the same period in 2021, to about US$93 billion, according to China’s National Bureau of Statistics. Owing mostly to rising oil prices, industry sales rose by 13.6%, to US$1.1 trillion.
That dim profit picture is a change from 2021 and even the first quarter of 2022, when intense global demand for Chinese electronics and consumer products drove a boom in chemical sales. But the lockdowns that started in the second quarter of 2022, especially the 2-month shutdown of Shanghai, severely injured the local economy, including its chemical sector.
The loosening of COVID restrictions created a very different environment for 2023. A wave of new COVID-19 infections caused a high demand for analgesics, benefiting the pharmaceutical sector. Meanwhile, the agricultural chemical sector is looking forward to a prosperous year as pesticide and fertilizer prices climb.
In China, business segments closely connected to the chemicals industry range widely, from agriculture, automobile manufacturing, metal processing, and textiles, to power generation. By providing industry with the raw materials needed to create the products used in various aspects of daily life, the chemicals industry is fundamental to modern society.
According to Statista, globally, the chemical industry generates a total revenue of approximately US$ 4 trillion every year. Almost 45 percent of that amount came from China alone in 2020. Not only does China generate the highest revenue from the chemical industry in the world, but it is also a leader in chemical exports, with an annual export value of over US$ 72 billion. At the same time, China's domestic chemical consumption amounted to US$ 1.77 trillion as of 2020.
Organic chemical material manufacturing is a key part of China's chemical industry, with US$ 330 billion of total revenue and over 725,000 people employed. It is also China's largest chemical export category, accounting for over 75 percent of exports based on value.
The top destination for Chinese chemical exports as of 2019 was the United States and India, while other major destinations were predominantly emerging countries.
On the other hand, the largest importers of chemicals from China were Japan and South Korea, each importing over US$ 20 billion worth of chemicals in 2019, followed by the United States and Germany, according to Statista.
Both chemical exports from China and chemical imports to China had been steadily growing in recent years, however, the value of imports has been slightly higher than the export value, leading to a net import value of around US$ 24 billion in China as of 2019.
The largest chemical companies in China are mainly state-owned. Sinopec and PetroChina are the biggest oil, gas, and petrochemical companies in the country in terms of revenue, with each having generated over 2.5 trillion yuan in 2020.
Another market leader in the global chemicals industry, Wanhua Chemical Group, is listed on the Shanghai Stock Exchange and specializes in polyurethane (PU), selling over 2.8 million metric tons of PU products in 2020.
In 2020, due to the change in consumer habits and suspension of supply chains caused by the pandemic, many global chemical companies reported a lack of growth or even a two-digit year-on-year sales dip, and Chinese counterparts were no exception. However, with consumption picking up speed, China is expected to lead in the growth of the chemical industry like before as the global manufacturing hub.
China’s chemical industry has been the largest in the world by revenue since 2011, and its growth rate continues to outpace by far other major chemical-producing regions. But this colossal size should not be seen as a sign of stability. On the contrary, China’s chemical industry is going through a profound, and rapid transition.
China’s growth in chemicals over the past two decades has been characterized by rapid investment and intense competition and fragmentation across large numbers of segments. This has particularly been the case where production technology has been widely available and where access to raw materials and financing has been easy to obtain. This combination has led to rampant overcapacity in many sectors.
However, the market and industry are moving into a new phase of development. There’s a shift toward specialty-chemical growth, reflecting consumer-demand trends and the rising sophistication of China’s industrial output, while consolidation has started to take a grip in certain sectors.
These trends are helping the value-pool growth prospects for parts of the industry. In the meantime, money for investment is harder to come by, and the government is imposing new, stricter environmental regulations. To succeed in this next stage of China’s chemical-market development, players will need to embrace a new set of strategies.
Five trends are pushing the changes in China’s chemical-market dynamics. Three are fueling the industry’s expansion and diversification, and two are imposing new constraints.
As China’s economic policy shifts more to consumption-driven growth from that of investment, this may result in additional growth in specialty-chemical demand. For example, as markets for higher-end personal-care products grow, they are likely to bring with them demand for more sophisticated specialty surfactants and additives, as well as more expensive fragrances.
Similarly, Chinese consumer trends will offer new opportunities. The rapid growth in online ordering of food is likely to increase demand for packaging materials, potentially raising demand for innovative products such as biodegradable polymers, states a report from McKinsey.
At the same time, the Chinese government’s Made in China 2025 policy is prioritizing the development of several high-tech industries. The strategic directions it indicates could stimulate certain end markets, such as aerospace, electronics, electric vehicles (EVs), and batteries, which could, in turn, create opportunities for expanding production in China of more sophisticated chemical products.
Electric-car sales in China are projected to rise at a 25 percent compound annual growth rate through 2030. By that date, 12 percent of all cars running in China would be EVs, and the country would account for more than half of worldwide electric-car sales. Other examples include coatings and new materials for high-speed trains, and advanced composites for use by the country’s expanding aerospace industry.
China’s chemical-R&D spending is now among the world’s leaders. The structure of China’s chemical-industry R&D has also changed, moving from one in which initiatives were under government direction to one primarily driven by individual companies within an ecosystem of collaboration with government research institutions and universities.
China’s chemical-technology capabilities are rapidly advancing. There are many examples of Chinese companies gaining technological parity with Western companies. One in the petrochemical field has been Wanhua Chemical, which has developed its own methylene-diphenyl-diisocyanate (MDI) technology.
Wanhua is now the world’s largest MDI producer in what had historically been a close-knit sector dominated by a handful of Western companies due to isocyanates chemistry’s challenging technology-entry barriers.
Another example is Kingfa Science & Technology, which started out as a supplier of lower-end products, such as plastics for TV-set cases, but has become an engineering-resin supplier to the top auto OEMs. Kingfa is also one of the small group of producers in the world making high-tech engineering resins, such as polyether ether ketone and polyamide 10T.
In the fast-growing lithium-ion-battery area, Shanshan Technology has established a leading presence in cationic- and anionic-anode materials, electrolytes, and separation membranes, with a top three position in all segments.
In some sectors, the Chinese chemical industry is starting to get a technology edge over
multinational companies (MNCs). This has been the case in fermentation-based products, including monosodium glutamate, vitamin C, and xanthan gum.
In all of these, Chinese companies are now the leading producers in the world, based on better-performing technology, and they have continued to achieve process and quality improvements. Development of new materials is another field in which Chinese players are excelling. Cathay Industrial Biotech, for example, has established a leading position in bio-based nylon 5,6, a polymer with wide potential application.
Prior to 2015, petroleum refining in China had been treated as a strategic national industry to be controlled by state-owned oil companies. Naphtha crackers had also been under their control, and MNCs could only have a 50 percent stake. Since then, however, refining, and upstream petrochemical investments have been opened to MNCs and more broadly to Chinese privately owned enterprises (POEs) to establish wholly owned operations.
The industry is also operating under new constraints. The Chinese government’s policy to tighten credit across the country’s economy has been a particular handicap for the capital-intensive chemical industry that has in the past benefited from low-cost capital to expand capacity.
While the new environmental regulations are likely to force restructuring across significant portions of China’s chemical industry, they could also present the potential for higher profitability for companies that are able to manage under them and can absorb the higher operating costs that compliance will entail.
China’s chemical buildup over the past two decades had prioritized growth over environmental quality. The 13th Five-Year Plan for environmental protection published in 2016 enshrining “clear waters and lush mountains” as a national policy has marked a sharp shift, as China’s authorities have started to address environmental degradation.
New national pollution-control standards are being enforced by a system of requirements for production permits and a push to relocate chemical production to special chemical parks. The 2018 ban on imports of plastics waste, which has disrupted Western countries that had relied on exporting to China, is part of the same new policy.
The environmental policy aims to move chemical production from its current configuration, in which many tens of thousands of plants are scattered across mixed urban industrial and residential areas, to a new one based on specialized chemical-production zones where wastewater- and hazardous-waste-treatment infrastructure can be centralized and shared.
While several regions—for example, Shanghai—have long enforced tight standards, most of the country’s industrialized regions have been facing serious chemical-pollution issues.
The new environmental regulations are having only limited impact on the big upstream petrochemical and chemical intermediates and polymer plants, most of which are built with appropriate emissions controls and waste-treatment facilities.
The severe impact is on the thousands of smaller plants that make specialty chemicals, from coatings and dyestuffs and pesticides to food ingredients and surfactants, used by Chinese manufacturing and agriculture and by Chinese consumers.
These are typically privately owned operations often lacking appropriate waste-management capabilities and located in urban areas. The moves to shut down out-of-compliance plants have affected large numbers of these small operations, but the impact on overall chemical output has been less severe.
In Shandong province, for example, the government closed 25 percent of all the chemical companies operating in the province during 2018, but this affected only 5 percent of output.
According to experts, China’s environmental authorities will continue to push enforcement energetically in the designated “radical change” regions, which account for nearly 50 percent of China’s chemical production, as well as push for improvements in the “moderately strengthened” enforcement regions.
The Chinese chemical industry, in which demand-growth rates had been so high that building a new plant every two years had often been a key to success, now confronts growth rates at half these levels. There is not going to be the same need for new plants, and so limited funding will present less of a challenge and even help restrain some overly enthusiastic companies from contributing to more overcapacity.
Meanwhile, capacity closures forced by environmental regulations will be less disruptive in a moderately growing market than in one growing at more than 10 percent a year.
At the same time—and perhaps most important—this change in the growth climate will help to push chemical-company-management teams to ensure that their operations are truly profitable. Instead of being able to hide behind new borrowing, companies will need to set a course toward high-quality, profitable growth.
State-owned enterprises (SOEs) have led China’s chemical-industry development over the past two decades. Best known are the central SOEs, while the group of SOEs owned by provincial governments are sometimes overlooked. However, some players in this latter group have, in fact, followed a more dynamic and entrepreneurial trajectory.
One example is Wanhua, of which the majority owner is Shandong province. Wanhua’s path to MDI leadership started 40 years ago making synthetic leather, and it now has impressive profitability and aggressive expansion plans.
Another company, Shanghai Huayi, diversified from producing chlor-alkali and fine chemicals to production of tires and entry into fluorochemical manufacturing. It has a slate of projects, including a coal–chemical complex in Qinzhou, to sustain its growth in the medium term.
The major central SOEs, meanwhile, are continuing with their historic mandate from the Chinese state to provide a stable supply of basic chemicals and maintain steady employment. At the same time, new challenges are emerging for these companies. Maintaining the scale of their operations will need to be balanced with pressure to improve profitability by starting to retire their less-competitive older production assets. They must navigate this while facing increasing competition for their refining and petrochemical business from aggressive new-entrant POEs.
Some of these companies also face underlying questions about their long-term strategies. While they have been successful in the goal of providing basic-chemical supply, that focus may have left some of these companies less well positioned in the kinds of specialty-chemical businesses needed to serve China’s next stage of economic development. Unlike basic chemicals, these kinds of technologies are not usually available for licensing.
Chinese private-sector chemical companies are moving from the buccaneering days of China’s peak chemical-market growth to ones of more discipline—a shift enforced by new financial and environmental constraints and the evolution toward a higher level of maturity in the market.
The challenge facing the many companies in this group is to professionalize their operations. Large numbers of these companies are still run by their founders, who are still very much in the driver’s seat as executive chairs, even if they have public shareholders.
This drive to professionalize covers business processes, for which they need to embrace best business practices on decision making, strategy selection and execution, as well as hiring and training. It also includes building up their innovation and technology capabilities.
For multinational companies, the chemical industry in China has been extremely difficult.
Historically, MNCs have often entered new geographical markets by making acquisitions, but this has not been feasible in China. This was because SOEs couldn’t be acquired by foreign companies, while Chinese POEs were either too ambitious to be acquired or too small to be worth acquiring. Instead, MNCs have had to rely on direct investment, but they have run into challenges there.
In the first round of large investments by MNCs in China starting 20 years ago, their entry was through joint ventures with Chinese SOEs, allowed on the condition that the MNCs brought chemical-process technologies needed in China.
Since the change in rules in 2015, MNCs have been able to make wholly owned investments in upstream petrochemical plants. The size and importance of the Chinese market means that it cannot be ignored by MNCs that want to continue to be leading players in the world chemical market.
A further challenge is that some MNCs are failing to undertake product development tailored to the Chinese market’s needs. As a result, they are finding themselves relying on their original offerings, which were developed for Western markets. Chinese competitors, meanwhile, are increasingly making inroads, resulting in a narrowing area of opportunity.
On top of that, MNCs are still contending with the basic cultural barriers to doing business in China, notably in hiring and keeping hold of the best local Chinese employees. The Chinese government’s decision to open the petrochemical market can be interpreted as a sign of its confidence that local companies have gained strong-enough positions against international ones and will maintain a lead.
Foreign companies must understand that future chemical-market growth is likely to be more incremental. However, firms that have the flexibility to make the necessary moves—such as tailoring solutions for the local market and participating in the industry’s consolidation trend—should be better placed.
The shifts under way in China’s chemical industry are on a massive scale that mirrors that of the industry itself. The factors driving success will vary among the different groups of players in the industry, but in all cases, they will need to be informed by a readiness to adapt rapidly and innovate to meet the needs of the market.
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