He who roars last, roars longest?

22 August 2005 17:25  [Source: ICIS news]

LONDON (ICIS news)--China was noted for its continuing growing importance as an investment target for chemicals projects in a report published by Nexant Chem Systems last week, a conclusion which will have raised few eyebrows.

 

A much more surprising scenario to emerge from the study, however, was that capital costs associated with investing in chemicals projects in the country are continuing to fall, contrary to precedents in other countries and against the views of many in the industry.

 

“One would have expected it to go up,” said Nexant Chem Systems’ Jim Virosco. “All other parts of the world have seen capital costs rise over a period of time following large scale overseas investment as wages increase and the local currency strengthens.”

 

Indeed, rising capital cost factors in the UAE were exemplified today by Clive Watson, Borealis chief financial officer, who said that estimated costs on the Borouge cracker project had increased by 20% due to skill and capital shortages.

 

And, back in China, maybe the first step towards a higher capital cost factor was taken last month when the Renminbi was "unpegged" against other currencies. The relative weakness of the Renminbi was one of many factors which attracted overseas investors. Just how much the unpegging of the currency will affect future investments in chemicals projects in the country remains to be seen.

 

Now, capital cost has become a differentiator between old plants, relying on high level of imported expertise and investment, and new plants which are using an increasing level of domestic input in their design, creation and running.

 

Other Asian countries, South Korea in particular, have long established process equipment and chemicals technology sectors. But the falling capital cost factor experienced over the past five years in China didn’t happen there.

 

So why is China different? Virosco explains: “China is a big country with an established chemicals industry which has only recently opened itself up to overseas investment. The country has a big population providing a big demand. So the demand was already there, overseas investment has simply stimulated it.”

 

Moreover, he said: “China has a growing, vibrant and active industry capable of providing services and a lot of capital equipment. Lower-end products have been available for some time but now middle-range products, including relatively sophisticated process equipment, are available domestically.”

 

Local content now ranges from engineering, procurement and construction services to locally-developed technology and key process equipment. 

 

Japan, South China and Taiwan combined represent around 70% of the world’s installed petrochemical capacity. So why is China excelling in the 21^st century?

 

“The success of the Chinese has a lot to do with the entrepreneurialism and natural enthusiasm of the people,” Virosco said, “They have succeeded by continuing to do what they know about and the successful implementation of western technology has been promoted by the government.”

 

To reach its unexpected conclusions on capital cost factors, Nexant Chem Systems developed two different scenarios for China. The first, “maximising local content” is a reflection of current practice where the resources of Chinese suppliers are employed as far as possible. This provides sizeable savings in capital costs. The second, “minimising local content”, follows past practices and relies on imported resources, providing only reduced wages as a cost saving benefit.

 

The scenarios adopted in the report  Asian cost competitiveness: the rise of China, were chosen to best illustrate the strong underlying shift to utilising local expertise. “We looked at other alternatives, such as ‘interior and coastal’ but decided on the examples based on the level of local content as we believed they illustrated the extremes very well,” said Virosco.

 

As the Chinese government looks at ways to cool the expansion of the country’s economy, its petrochemicals industry remains a net importer. While the country remains the preferred destination for investment, its petrochemical deficit is the largest in the region. This is likely to continue, the report suggests, despite the large number of projects planned or currently under construction.

 

By: Mark Whitfield
+44 20 8652 3214

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly