Despite a plethora of new environmental regulations in China over the last decade or so, for a long time it felt as if “the more things changed the more they stayed the same”.
One reason was that local governments fought against the enforcement of environmental regulations introduced by Beijing, as they saw job creation and local GDP growth targets as more important than cleaning up the air and the land.
Plus, selling land for industrial development was a vital source of revenue for local governments – and allegedly, a great way for officials to make money on the side via corrupt payments from companies eager to gain approval for their new factories.
The government is finally making real efforts to improve air quality
“2013 turned out to be the year of environmental protection in China, driven by new leadership, growing public disquiet over pollution and tougher enforcement,” wrote HSBC in a February 2014 report on China’s environment and its steel industry. “For HSBC’s Climate Change team, the positive surprise was the change in enforcement which for a long time has been the weakest link in forcing change through.”
Public anger has stemmed from grim statistics such as:
- Air pollution reaching 40 times above the World Health Organisation safety limit in Beijing in January 2013.
- One-third of the water in the country’s major rivers being too toxic for human contact, never mind for human consumption, according to official statistics.
- A World Health Organisation claim that China is home to seven of the world’s 10 most-polluted cities.
And late last year, the Ministry of Environmental Protection said: “One-sixth of China’s arable land – nearly 50m acres – suffers fromsoil pollution. More than 13m tonnes of crops harvested each year are contaminated with heavy metals, and 22m acres of farmland are affected by pesticides”.
The situation is particularly acute in Hunan province, which produces one-sixth of China’s rice and is also a major producer of nonferrous metals, according to a 30 December article in the New York Times.
“Pressure to maintain economic growth means that the province is also China’s leading polluter of cadmium, chromium, lead and non-metal arsenic,” the newspaper said.
Hence, HSBC expects to see even better nationwide enforcement of environmental regulations in 2014, along with the effective introduction of new legislation.
The bank forecasts that, for example, oil refineries, iron and steel plants and coal-fired power generation facilities will be forced to install more desulpherisation units and other equipment that cuts back on air pollution.
An overall industrial energy reduction target of 20% has been set for 2017 compared with 2012, which would mainly involve tightening energy efficiency standards for key industries and the development of more green buildings, said the bank.
Relevant ministries would also be given more power to prevent the construction of illegal projects – i.e. those that flouted environmental regulations, added HSBC.
Getting approval for new chemicals projects in China might, as a result, become even harder in 2014.
Last year, the approvals process had already been toughened up to the point where one industry source told ICIS: “In the future, I think that whilst it might be possible to further develop existing chemicals complexes in China, a tougher approvals process will make it harder to create new sites.”
“Excess and outdated capacity in high energy and high polluting industries (iron & steel, cement, chemicals, petrochemicals and non-ferrous metals) is to be eliminated,” said the study.
PVC could be a particular target for rationalisation, given that China mainly uses the old carbide route to make the intermediate vinyl chloride monomer (VCM), which is then polymerised into PVC.
This route, which was phased-out in the West in the 1970s, is viewed as highly polluting because it starts with coal and also involves the use of mercury catalysts. China is trying to reduce its dependence on coal because of the high level of air pollution that burning coal creates. The safe disposal of mercury catalysts is another problem.
But in the case of PVC, there remain doubts over whether environmental imperatives will trump local economic needs.
Several industry sources also pointed out that because oversupply of PVC is so great in China, it would take a long time to bring the local industry back into balance, even assuming that environmental enforcement was highly effective.
“Chinese capacity totals well in excess of 20m tonnes/year or so with local demand at around only 15m tonnes/year,” said a source with an Indian PVC producer.
“You would need 30-40% of capacity to shut down to bring the market into reasonable balance and that is not going to happen because of the socioeconomic factors,” he added.
“You have low cost sources of local coal, with perhaps not enough alternative local customers to keep coal mines operating at rates high enough to guarantee sufficient employment,” the Indian PVC producer source said. “And the waste sludge produced from converting acetylene into VCM goes into cement production. Cement is obviously crucial for the construction industry – the major driver of growth across China.”
China’s VCM plants are often also back-integrated to local sources of chlorine. Chlorine has many other industrial uses, along with the wide range of applications for caustic soda, which is also manufactured in the same chlor-alkali plants that make the chlorine.
As PVC is the biggest consumer of chlorine, the closure of PVC plants might make it difficult for chlor-alkali plants to carry on operating – thus creating further harmful knock-on economic effects.
There is a further barrier to consolidation in PVC, according to the source with the Indian producer.
“The big surge in PVC capacity has occurred over the last five to six years, with most of the capacity additions during these years comprising bigger plants because of government regulations stipulating larger projects,” he said. “Big plants are, of course, less likely to be closed down than smaller ones due to their superior economies of scale.”
The problem for overseas PVC competitors is not only oversupply in the China market, but also the increasing willingness of local producers to export their surpluses. In 2000, exports totalled around just 40,000 tonnes, but by 2012 they were in excess of 400,000 tonnes, according to ICIS Consulting.
PVC is, of course, just one product. Similar analysis will therefore need to be done in each oversupplied chemical and polymer in China in order to calculate the likely extent of plant closures resulting from this new focus on the environment.
We will look at methanol – which, as we said earlier, is also heavily oversupplied in China – in a later article.
And as for the macro picture, what if GDP growth falls off a cliff in China over the next few quarters?
Many economists believe that if this happens, Beijing will launch a new round of economic stimulus that will prioritise job preservation and job creation. This might lead to the sidelining of plans to close chemicals plants in general.