Although China's chemical industry posted good figures in their mid-year reports, there could be a shadow looming on the horizon
By Hepeng Jia/Beijing, China
China’s chemical industry experienced an ’unexpected’ harvest in the first half of the year, although the good days might not last long due to the expected oversupplies which have long harassed the nation’s chemical sector.
The mid-year economic performance figures released by China Petroleum and the Chemical Industry Federation (CPCIF) on 27 July indicates that with a growth rate of 34 per cent, major firms in China’s petrochemical industries have realised a total output valued at 5.32 trillion yuan (?504 billion) in the first half of the year, while the profits of the major firms grew by 32.2 per cent to 356 billion yuan in the first five months.
’The performances in both industrial output and profits are really out of our expectation,’ says Li Yongwu, president of CPCIF. At the end of last year, Li voiced concern at CPCIF’s annual briefing on the impacts of higher costs of raw material and poor demands on the chemical industries.
In the first half of the year, the growth rate for petrochemical industries’ is 5 percentage points higher than the average figure of China’s overall industry, and the profit growth rate is 4.3 percentage points higher than national average. The Chinese chemical industry, categorised under petrochemical industries, achieved a profit of 156.2 billion yuan), a rise of 55.8 per cent year on year, and the growth rate is two times the average industrial profit growth in the country.
The higher sales and profits are mainly the result of price hikes of chemical products driven by higher oil prices, particularly in the second quarter, says Zhu Fang, deputy director of market and information department at CPCIF.
The crisis in Libya, the Japanese earthquake, and Middle East turmoil are all factors pushing oil price higher than US$100 (?60) per barrel in most of the first half. Meanwhile, the robust developments of China’s electric appliance, auto, paper-making and textile industries have made strong demands on the chemical sector.
Among chemical industries, agrochemicals, basic chemical materials like sulfuric acid, and fluorochemicals have experienced more significant growth.
According to Li Jianan, a chemical analyst at the Chinese consulting firm CI Consulting, most chemical enterprises have harvested an optimistic profit growth in the first half of the year. By 19 July, 70 per cent of listed chemical firms had shown growth in their profits in their mid-year reports and some, such as fluorochemical firms Shanghai 3F New Material and Zhejiang-based Juhua Chemical, even recorded several multiples of profit growth.
The booming picture has been reflected on job demands. Mu Xiaojuan, an analyst at 800hr.com, the largest professional employment website in China, reveals in her report on the website that in the first half, employment in China’s chemical industry grew by 122.9 per cent as compared with the same period last year.
Shadow looming ahead
According to Mu, the number of job postings grew much slower in July. In southwestern metropolitan Chongqing where such demands grew by 240 per cent year on year in the first seven months, the July demand only grew by 9 per cent over June’s.
That trend is echoed by the prices of chemical products. Since June, among 100 typical chemical products monitored by Chemnet.com, the largest chemical website in China, 62 products experienced price cuts while only 29 saw higher prices.
’In the short term, the price reductions of chemical products are not a big problem, as long as they are lower than the petroleum price’ says Liu Xintian, editor-in-chief of Chemnet.com.
But the downward trend could continue with the reducing economic growth, lower oil price and product oversupplies as early as the latter half of this year.
A major driver of the demands on chemicals, the auto industry in China, is now expected to grow by only five per cent this year, as compared with more than 30 per cent in the previous year.
’The problem of low operation rate remains in some chemical sectors despite the good overall picture,’ says Zhu of CPCIF.
For example, calcium carbide facilities only have an operation rate of 66.5 per cent in China, polyvinyl chloride (PVC) 60 per cent and the urea industry is about 77.5 per cent.
The most striking sector is methane, whose worldwide production has been dramatically expanded due to the expectation on its use as an auto fuel. In the first half of the year, more than half of the methane manufacturing facilities were operated outside China.
Calling for innovation
The low operation rate is a result of repeated investments in mainly low-end chemicals. For more expensive fine chemicals, China still largely relies on imports and the local sites of international chemical firms, says Zhu. Excessive investments now take place mainly in the fluorochemical and coal chemical industries.
’So far, the oversupplies of conventional chemical products cannot drive Chinese chemical firms to upgrade their products in the short term,’ Li of CI Consulting tells Chemistry World.
The policies to wash out the excessive production capacities of chemicals are not clear, complete or strong enough, he adds.
On the other hand, the innovation capacity and technology transfer in the Chinese chemical sector remains poor, and, wary of the competition from Chinese low-cost manufacturers, international chemical giants have become more cautious and reluctant in selling fine chemical equipment to Chinese firms, so that it is very difficult for China’s chemical firms to beat oversupplies of conventional products by upgrading to high-end products, Li says.