Specialty chemical industry presents growth opportunities

Specialties transform China

21 September 2009 15:20  [Source: ICB]

The expansion of specialty chemical operations in China is transforming the country's landsape and encouraging diversification

Long known for its leading role as a petrochemical and commodity chemical supplier, China is changing its landscape as the government pushes to expand specialty chemical projects.

"The Chinese government has been trying to raise specialty chemicals’ share of the market to 45% as part of its efforts to transform the industry," says says Li Wang, managing director, Asia, for global consulting firm Kline & Company. "In more developed markets, specialty chemicals generally make up 60–70% of the market. China is now the world’s second-largest specialty chemicals market behind the US."

The market for specialty chemicals in China stood at roughly $175bn (€123bn) in 2008, estimates Kline, representing less than 40% of the total.

Since 2004, China’s specialty chemical market has grown at a compound annual growth rate (CAGR) of 27%, slightly slower than the overall chemical market, which grew at a CAGR of 30%, according to the consultancy.

The commodity-oriented chemical industry is well established in China, and it is necessary as a foundation, according to Zheng Daqing, senior vice president and member of German chemical major BASF’s Greater China country board.

"It is principally consumer demand for differentiated products that is driving the chemical market towards specialities," says Daqing. "Chinese consumers are increasing their purchasing power."

Between 2005 and 2020, China will have added around 500m consumers who have an annual income of at least $10,000. These consumers are asking for more and better goods with higher chemical content, such as lightweight cars, high-quality pharmaceutical products, and construction materials for energy-efficient buildings. These products are being manufactured locally, and that requires the local availability of specialty chemicals, Daqing points out.

"The market potential is still at a relatively early stage and is expanding rapidly. International companies such as BASF can help provide the knowledge of efficient and modern processes, access to the latest technology, and global standards for quality and environmental protection," he adds.

"The trend in China/Asia is still towards higher-quality products and applications in industrial and consumer segments. Demand for specialty chemicals is increasing in China and [other] developing countries in Asia. In exports, Chinese companies are focusing on higher-value products as well," says Christan Vang, regional head of Swiss specialties firm Clariant’s Pigments and Additives business.

Both foreign and local Chinese specialty chemical firms have been investing in research and development centers and production plants, says Wang. "These investments are typically not nearly as capital-intensive as those for petrochemical plants, and thus are much more common,’ he says. "Local companies have tended to invest in areas that are less technologically advanced."

FORGING AHEAD
Major chemical producers are all targeting China as part of their growth strategies.

"China is the highest-growth large market in the world, and growing internal demand is seen as a counterbalance to declines in Western markets," says Wang.

China is also a small but growing percentage of foreign producers’ sales, while its geographic location makes it a strong regional hub in Asia-Pacific, he adds.

BASF IN $1.4BN EXPANSION
Among notable developments that are moving forward in China’s specialty chemical industry is the expansion of BASF and Chinese chemical giant Sinopec’s joint venture (JV) in Nanjing, BASF-YPC (BYC), which was approved in the July.

BASF and Sinopec are jointly investing around $1.4bn in state-of-the-art technologies for production of downstream specialty chemicals for the Chinese market.

The investment includes the expansion of BYC’s existing steam cracker to a total of 740,000 tonnes/year of ethylene, the construction of 10 new chemical plants, and the expansion of three existing ones.

The expanded specialty offering will serve the construction, electronics, pharmaceutical, automotive and chemical manufacturing industries in China.

ARKEMA BOOSTS SPECIALTIES
France-based Arkema has made strong moves to strengthen its foothold in the Chinese specialty chemical market. In September 2007, the company established a JV with China-based Daikin at Arkema’s Changshu site to focus on the production of the refrigerant HFC-125.

"Arkema was planning on investing $400m in the HFC-125 facility. The plant is designed to have an annual capacity of 15,000 tonnes, scheduled to come on stream in 2010," says Wang. "Arkema aims to make its Changshu site its third-largest industrial facility in the world."

In July 2009, Arkema announced a €15m ($21.4m) investment to build a new specialty acrylic polymer plant at its Changshu site, targeting growing markets in coatings, mineral processing, construction and paper. It is expected to be operational by mid-2011.

Arkema has said that the new plant will boost its industrial platform at Changshu, and that the investment is fully in line with the company’s strategy to consolidate its acrylics and downstream acrylics activities.

CLARIANT STRENGTHENS PRESENCE
Similarly, in March 2009, Clariant formed a JV with two Chinese firms – Kunming GaoHeng Huagong Chemical Industry, and Panchem International Trading and Industrial – to secure supply and meet growing demand for phosphorous pentoxide (P2O5). The JV is building a new P2O5 plant, scheduled to come on stream in the first quarter of 2010.

"Both partners are significant players in the Chinese phosphorus industry – one [Kunming] being backward integrated into phosphorus yellow and the other [Panchem] being an expert in logistics and handling in China," says Vang.

"In this partnership, Clariant will contribute the manufacturing know-how and handle the sales of P2O5 from the new plant through its international sales organization," he adds. "The move is going to strengthen our raw material base for growth of strategically important flame retardants and high performance pigments. It is also in line with Clariant’s strategy to make product and expertise available to the local market."

Also in March, Clariant announced that it is building a new surfactants plant in a strategic location in Zhenjiang that will give the company good access to existing customers in Asia. Trial production began at the new plant in July.

The new plant will primarily serve personal care, paints and coatings, and the metal working industries. Chemicals for textile, oil, mining and home care sectors will also be available at the plant.

WACKER RAMPS UP SILICON
Meanwhile, German specialty chemical producer, Wacker Chemie, has been steadily investing in its operations in China since 2005, spending over €100m in the past four years in the production of polymer powders, silicone elastomers, and silicone sealants, according to Wang.

"Together with its partner Dow Corning, Wacker is looking to invest another €200m over the next few years in a siloxane plant and an HDK [Wacker’s brand name silica] plant, creating China’s largest siloxane facility in Zhangjiagang, Jiangsu province," Wang says.

Last November, Wacker and US major silicones producer Dow Corning officially started up raw material production in Zhangjiagang as they began the first stage of production in the newly built pyrogenic silica and siloxane plants there. At the time of start-up, the two companies had invested roughly $1.2bn in expanding the Zhangjiagang site.

Wacker plans to have a combined capacity of roughly 200,000 tonnes/year for siloxane and pyrogenic silica. Full operational capacity is expected to be phased in by the end of 2010, the company says.

The investments in the Zhangjiagang site is a step for Wacker and Corning in the direction of sustainable manufacturing. The now-completed first phase of the siloxane and pyrogenic silica production facilities helps integrate production loops.

The sector is extremely fragmented due to low barriers to entry and intense competition Li Wang, managing director, Kline

The siloxane plant will supply chlorosilane for the production of pyrogenic silica as raw material, while the pyrogenic silica plant will send back its by-product, hydrogen chloride, for the production of siloxane.

This integrated production approach plays an important role in both reducing emissions and decreasing logistical flows. This, in turn, benefits the local community and improves production efficiency, according to Wacker.

RHODIA ENTERS BIOGAS MARKET
In an interesting move, French specialty chemical maker Rhodia took its first steps into the emerging biogas market in Asia in July 2009 when it acquired six pilot production projects in China and Vietnam from Netherlands-based Econcern Group, a holding company once focused on renewable energies projects. Administrators have been divesting the alternative energy assets of Econcern since the company was declared bankrupt by a Dutch court in June 2009.

For its part, Rhodia anticipates the growth of business opportunities in the biogas sector and is relying on these early projects to enhance its operational skills and industrial know-how in the renewable energy sector. The acquisitions are expected to close in the fourth quarter.

Developing a new expertise in biogas production stands at the crossroads of Rhodia’s activities in chemistry and its activities in the energy and carbon markets, according to the company.

IMPLICATIONS AND OUTLOOK
Could this focused and increased development of the specialty chemicals industry in China potentially stave off price competition? Reactions are mixed.

"Specialty chemicals provide the opportunity for differentiation, and allow companies to capture more value," says Daqing.

But price competition will remain an issue, says Vang. While a higher degree of differentiated offerings is possible, with considerable growth expectations and the allowance for more players on the field, price competition will continue to be a challenge.

"That is why cost leadership is an important key for success," says Vang.

Wang agrees with the latter assessment. "Our experience in the specialty chemicals market in China would suggest that the development of a local market will not stave off price competition, and that in fact, prices tend to come under increasing pressure," he says.

For example, in the markets for synthetic latex polymers used in architectural coatings, Chinese producers generally came in at
the low to middle end of the market, and
produced "good-enough" quality products that were able to meet the majority of the market’s needs.

"These local producers have been very successful in taking market share away from the multinationals, which used to dominate this space 12–15 years ago," Wang explains. "The domestic market generally was not willing to pay a premium for foreign products, and domestic product requirements were not as high as those in foreign markets. As a result, prices for all products, including higher-end products from foreign producers, have come under pressure."

Meanwhile, the overall chemical industry in China is expected to grow at an annual double-digit rate for the foreseeable future, outpacing the 6% global average, Wang notes.

Specialty chemicals are expected to continue growing at over 20%/year over the next five years, according to Kline.

Wang attributes this underlying growth to four long-time secular trends in China: urbanization, industrialization, globalization and market liberalization.

In addition to the driving factors mentioned earlier (a growing middle class population and consumer demand for quality products), specific needs in the specialty chemical sector is also driving development and growth.

"The sector is extremely fragmented due to low barriers to entry and intense competition. Most players are small, privately owned companies making only a handful of products," Wang says. "High-quality, large-scale, and technologically sophisticated chemical production is relatively weak, and the country relies largely on imports for these products."

The Chinese government, attempting to reduce reliance on imports and to develop the country’s chemical industry into a global leader, is particularly interested in fostering the adoption and development of key fields and technologies. However, it is open to foreign investment in many areas that require more specialized technology that China does not possess.

SELECTED SPECIALTY CHEMICAL PROJECTS IN CHINA

Company	Project	Location	Estimated completion
Arkema	refrigerants (HFC-125) ­specialty acrylic polymers	Changshu Changshu	2010 2011
BASF, Sinopec	ethylene, downstream ­specialty chemicals	Nanjing	2011
Clariant, Kunming GaoHeng Huagong Chemical Industry, Panchem International Trading and Industrial	P2O5, surfactants	Yunnan, Zhenjiang respectively	2010
Rhodia	biogas (through acquisition)	China and Vietnam	2009
Wacker Chemie	siloxane, pyrogenic silica	Zhangjiagang	2010

SOURCE: company press releases

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