China Accelerates Chemicals Plant Relocations As Supply Disruptions Build

Hebei

By John Richardson

THE RELOCATION of all chemicals plants classified as producing toxic products from China’s big towns and cities to chemicals-industry parks is being speeded-up.

Relocation work first began in 2014. But earlier this month, a new directive from the State Council stipulated that:

  • All of the country’s small- to mid-sized chemicals plants that fall into the toxic category must have completed their relocation work by end-2020 – and if they haven’t started removal work yet, this must begin next year.
  • All of the larger plants classified as producing toxic chemicals must relocate by end-2025, and must start the process by no later than 2020.
  • Plants can also be re-engineered to produce non-toxic products, or must be permanently closed if re-engineering or relocation are impossible.

In parallel, the Chinese government is doubling down on its campaign to improve air quality in China’s big towns and cities.

Several waves of nationwide environmental inspections have taken place since January to ensure that chemicals and other manufacturing plants are meeting emissions standards.

“I have never seen this many inspections take place before. And when the inspectors arrive they really mean business as for the first time I can remember, they are very serious about forcing companies to comply with the regulations,” said a source with a chemicals industry logistics supplier, who is based in Shanghai.

Since mid-July, the inspectors have also been given the authority to permanently shut down manufacturing facilities in any industrial sector that have failed to meet air-pollution standards. Before mid-July, they could only temporarily shut down plants and issue fines.

The direction of environmental policy is coming from the very top, as the South China Morning Post made clear when it wrote in this article:

China intensified its environmental work after President Xi Jinping told the country’s provincial governors and ministers in July that pollution treatment is one of his top three priorities for the coming years, along with controlling financial risk and reducing poverty.

Xi has thus staked his personal political legacy on making this environmental campaign work.

And his speech in July followed the disciplining of 12,000 local government officials for failing to adhere to air-pollution guidelines. Few, if any, provincial, city or town government officials must now be in any doubt that they need to get into line.

Crucially, also, how local government officials are assessed for promotion has been changed. No longer will be this just on the basis of how rapidly they expand GDP, but assessments will also be tied into how successful they are in sticking to air clean-up targets.

Returning to the issue of plant relocations, my ICIS China colleague Fanny Zhang writes in the excellent article I linked to above that companies are pushing back because they lack the necessary funds. But I sense that they will very often have little choice but to do as they are told because of the firm policy direction.

More policy initiatives targeting air, water and soil pollution  seem inevitable over the coming months and years as China sees its environmental clean-up as being an integral part of building a new economic- growth model.

Direct implications for the chemicals industry

The above map shows the 35 chemicals plants in the northern Chinese province of Hebei that provincial officials must be relocated, reconfigured to produce non-toxic chemicals or shut down.

Click again on the ICIS news article for our infographic that allows you so select which plants are affected across different cities in Hebei. Products affected include ammonia, ammonium phosphate, methanol, formaldehyde, dimethyl ether, paints and solvents.

The effect on other provinces will be far greater. Take the eastern Chinese province of Shandong as an example. Here some 185 plants have been identified for relocation of which 70 have started the process, according to a local government official.

It will also be important to track relocations in other provinces and:

  • The impact on chemicals pricing. Some products will be in short supply as these relocations take place.
  • Opportunities for chemicals exporters to China in the products where local supply will tighten.
  • How traders and logistics suppliers will benefit from increased export opportunities.
  • The extra work generated for engineering, construction and procurement (EPC) contractors as the relocations accelerate.

The temporary and permanent shutdowns of chemicals plants for air-quality reasons have over the past few months led to higher polyvinyl chloride, propylene oxide and MTBE pricing. Of late, though, pricing has weakened because of resumed production at some plants and seasonally weaker demand.

More volatility in pricing as a result of the air-quality campaign in these and other value chains seems highly likely.

Meanwhile, modern world-scale plants will be immune from both the relocation and air-quality campaigns as these plants a.) Are already located in chemicals industry parks, and b.) Adhere to the emissions standards.

These state-of-the art plants are also the type of manufacturing facilities that China wants more rather than less of as it tries to escape its middle-income trap. This is why we can expect China to continue to aggressively build new and very sophisticated refinery and steam cracker complexes. It, for example, plans to raise its ethylene capacity by as much as 71%.

Implications for the overall economy

China will have sacrificed some 0.2 percentage points of GDP growth by the end of 2017 as a result of the air-quality campaign, according to by Liu Yuhui, an economist with the Chinese government’s Chinese Academy of Social Sciences.

This is hardly a big deal given the strong GDP growth that China will achieve in 2017. But what about 2018 as the air-quality campaign continues along with greater efforts to rein-in the lending bubble? Expect a bigger negative impact on GDP.  The extra economic activity from relocating chemicals plants could, however, support growth.

Don’t forget the picture, though. You cannot separate China’s overall efforts to clean-up it environment with all its other economic reforms. The reform programme in its entirety has to work, otherwise China faces much-lower long term GDP growth.

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