26 July 2007 16:58 [Source: ICIS news]
By John Richardson
SINGAPORE (ICIS news)--The nature of the Chinese chemicals market is changing as the government attempts to shift the focus away from low value, resource-draining downstream industries to those that make more efficient use of energy and add more value.
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Two measures to achieve these ends have been introduced over the past few weeks.
In late June, the government announced a radical overhaul of the VAT rebate system for exports. This affected a wide range of chemicals and finished goods bought locally in yuan. Local buyers who buy imported material priced in yuan via traders are also affected.
And then earlier this week there was an increase in the number of businesses that have to put money on deposit when they buy US-dollar priced imported raw materials for re-export as finished goods. .
Previously, re-exporters in the eastern and southern coastal provinces such as
Now they have to lodge 50% of the duties on deposit until they provide certification to prove they have re-exported finished goods. They can then claim back the full import taxes and VAT.
All three categories of businesses – A, B and C – remain exempt in central and western
The VAT rebate overhaul was, according to the research publication the China Economic Quarterly (CEQ) “aimed mainly at the least sustainable part of
The CEQ makes the point that
Plastic processors making low-end finished goods have, for example, already started to shift in large numbers to
The Ministry added that the new regulations would also lower exports of low value-added and low technical-content products, while easing “the tension caused by an ever-increasing trade surplus”.
So, if the nature of the chemicals industry is changing as a result of government policy, what does this mean for overseas and domestic producers?
In the short term, the answers are as obvious as the effects of melamine-tainted pet food on American cats and dogs.
Chemical and polymer import volumes are likely to decline as cash-flow crippled manufacturers attempt to adjust to the new deposit rules.
Weak manufacturers in oversupplied, low value-added industries could go to the wall because of a failure to secure enough extra credit. This will further reduce import demand.
And as for Sinopec and PetroChina, the VAT rebate overhaul could represent the completion of a double whammy.
The state-owned giants are already forced to price petroleum products at substantial discounts to international pricing – and more importantly their costs – because of government price controls.
They will now see big pressure for price reductions from petrochemical buyers, because the buyers have seen their export margins damaged by the VAT drawback changes.
Many consumers of local material could be forced to the wall, thereby further dampening pricing and consumption.
Could the government reverse these policies?
This seems unlikely because first of all, although these measures seem big in the chemicals world, they won’t mean for much for the overall economy; and secondly, as we’ve already said,
The industries that will be affected are, to repeat, on the way out anyway.
Plus, adjusting the VAT and deposit rules as a means of getting the protectionists off its back are much lesser evils than a drastic revision of the value of the Yuan.
If the government succumbed to calls by some US politicians to increase the currency’s value by up to 50%, export competitiveness across all industries would be devastated.
The yuan will appreciate further but only modestly and gradually, says to the CEQ.
As for the second reason why the policies will stick, resource efficiency means getting the maximum value out of each barrel of oil or other unit of energy.
This is hardly surprising given the current price of crude oil, much of which
There is also the environmental impact of the wasteful use of locally supplied energy, such as coal, and the rapid depletion of domestic reserves.
Higher value-added industries using up-to-date environmentally friendly technologies will survive these initiatives. They are also likely to be encouraged by other legislative changes.
Many producers who will go to the wall because of the reduction in the VAT discounts had margins only as big as the discounts themselves. This was hardly a sustainable, long term economic model.
Finally, what will this amount to for the chemicals industry in the long term? More on-the-ground innovation and customer focus are the answers.
It will be interesting to see how overseas chemical companies balance the challenge of meeting ever-more sophisticated customer needs against lingering intellectual property right problems.
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