Chemicals Demand Shift Will Not Be Smooth

 

By John Richardson

ADIDAS recently announced that it is to close its only directly-owned sportwear factory in China.

Many other similar factories could shut if Beijing sticks to its 12th Five-Year-Plan (2011-2015) promise to move up the industrial value chain.

The Adidas decision is driven by rising labour costs, which are partly government policy designed to boost domestic consumption and narrow the gap between the rich and poor. Another big factor behind higher wages has been inflation.

“All we are talking about here, in cases such as Adidas, is the relocation of fibre intermediates and polyester demand from one country to another,” said a source with a major Asian mono-ethylene glycol (MEG) producer.

“China’s loss is Bangladesh’s, Vietnam’s, Indonesia’s or Pakistan’s gain as outsourcing operations shift to these lower-cost operations,” he added.

“Chemicals companies need more diversified sales and marketing strategies, including more people on the ground in countries such as Bangladesh and Vietnam in order to understand their markets.”

The transition will not be smooth, however, as this article from Business Insider, quoting the China Hearsay blog, indicates.

“The acceleration of plant closures in some sectors, like textiles, will mean lots of unemployed folks,” writes the author.

“The government will have to deal with the resulting disputes between labour and management, involving things like back pay, social insurance payments, etc.

“But I can’t help thinking about entrenched industries and political power. Maybe I’m simply looking at this like a Westerner, but when you have an industrial sector in decline that has sufficient juice with a government, what usually happens? Well, where I’m from, it ends in recriminations and protectionism.”

The Adidas story is a case in point, as the Western retailer’s former manufacturers in China are planning legal action in an effort to win compensation.

And as the economy weakens, and we worry that there is every chance it will become a lot weaker, Beijing may well be tempted to backtrack on economic reforms.

In the long term, this will not bode well for China’s economic health as it attempts to escape the “middle income” trap.

More immediately, how do you plan a chemicals and sales strategy when there is such a high degree of uncertainty over the rate at which demand will migrate to lower-cost countries?

Evidence of the pressure on Beijing to protect jobs came with yesterday’s release of two China purchasing manager’s indices for July.

 

image72.pngReuters, in a report on the disappointing July indices, (see above chart) said that there was anecdotal evidence of increased job shedding and company downsizing as new manufacturing orders fell.

“Larger firms, which tend to be less sensitive to short-term market movements than their smaller counterparts, are under pressure from rising inventories,” added the newswire.

“The debt-laden steel sector is lobbying for export rebates to offset a domestic supply glut and plunging profits, the China Iron and Steel Association said on Tuesday.”

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