China still key for chems, Brazil and India out of favour – KPMG

LONDON (ICIS)–The future of the chemical industry will continue to have China at its epicentre while emerging economies India and Brazil fall out of favour due to their investor-unfriendly legal and tax regimes, the chief operating officer (COO) for chemicals at auditor KPMG said this week.

Paul Harnick said western chemical companies will continue finding a large market to sell their products in China despite the country’s economic shift to a services- and consumer-based economy, presenting opportunities which neither India or Brazil will be able to equal.  

Moreover, he added that while in the past two decades western players in the country were at a disadvantage to domestic peers on the back of the lessez faire approach the government had with local chemical companies, environmental concerns were pushing Chinese authorities’ to enforce more western-like regulations.

“In the last three to five years we have seen how the Chinese chemical regulations, which on paper were written very similarly to those in the West, are starting to be taken literally by the Chinese authorities, whereas before they were never really enforced,” said Harnick.

“Moreover, the environmental lobby in China is gaining weight, and more people in the country are concerned about dirty chemical plants [and the government is responding to that]. At the same time, that has levelled the playing field for western producers, who had been for more than one decade following their own home-made regulations and were at a disadvantage with local producers.”

However, Chinese authorities are still looking to take advantage of the large resources of feedstock coal the country owns by building coal-to-chemicals (CTC) plants, which could come at a great environmental cost.

The International Energy Agency (IEA) warned in November the use of coal for both energy and chemicals production would stop China reaching a significant CO2 emissions reduction, unless carbon capture and storage (CCS) technologies were implemented.

The IEA was more upbeat in December following an agreement at the UN’s Conference of the Parties (COP) in Paris for a substantial reduction of CO2 emissions compared with 1990 levels, which would bring less coal usage post-2020.

However, today’s reality in China is that CTC plants continue to be built at a fast pace, despite the collapse in crude oil prices registered in the last 18 months. Some experts have speculated CTC plants would only break even if crude prices are around $80/bbl. Crude oil futures stood on Wednesday’s European midday around the $40/bbl mark.

“China is currently producing chemicals from coal, but there are still big challenges surrounding the technology. Although some experts do suggest those plants would only break even when crude prices are in the $80/bbl region, the Chinese authorities take a more long-term view and not based on current economics,” said Harnick.

“Even with crude prices at $40/bbl they are still building CTC plants. Another problem of this technology, however, is the huge amount of water required, and China’s North, where the coal is, has important shortages of water.”

Harnick described some reporting about the Chinese economy and its adjustment towards a more services- and consumer-driven economy as “sensationalised” and added GDP expansion per year around the 6% mark was still a “massive growth” which will continue to represent an opportunity for global chemicals companies.

The IMF predicted on 12 April that India will overtake China as the world’s fastest-growing economy in 2016 and 2017. Many analysts have placed hopes the Indian economy will be the next Eldorado for chemicals and petrochemicals. Harnick has, however, the opposite view.

“Five years ago, our discussions with global chemical executives about their growth strategy in emerging markets always had China in the first place, then India, then maybe Brazil and not much else.

“In the last two years, the same executives still mention China in the first place, but India is now so right down the agenda and Brazil has disappeared from it. The second place for chemical growth most people speak about now is the ASEAN region,” said Harnick.

The Association of Southeast Asian Nations (ASEAN) includes Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam.

While India would have the same dynamics as China when it comes to economic growth – a large population, deep urbanisation and growing middle classes – the chemical executives Harnick is in touch with seem to be favouring now other geographies.

“It’s very frustrating. While it has the same dynamics than China, which would drive up chemicals demand, it is complex in terms of business environment regarding legal and tax regimes. Moreover, chemicals are constrained in terms of feedstocks and the infrastructure remains hugely challenging,” he said.

Brazil, the once hope of Latin America’s economy – and with it, of chemicals – is currently going through one of its worst-ever recessions while embroiled in a political crisis which is likely to see the president, Dilma Rousseff, be driven out of office.

While the slowdown in China has impacted Brazil’s commodity-centred economic model that on its own would not explain the current headwinds the country is facing, according to Harnick.

“Look at the year 2010 – the country was going to host a FIFA World Cup, the Olympic Games… There was going to be a massive expenditure in infrastructure which would have helped chemical demand. But again, the business environment in Brazil is very challenging. It is almost without doubt the most complex tax regime anywhere in the world, together with a complicated legal regime,” he said.

“It’s just about basic corporate things – setting up a company can take up to six months, for example. Equally, if a foreign-headquartered company makes money in Brazil, it will be almost impossible to expatriate cash to its headquarters. For now, and with the political challenges going on, the country is not a part of the world our clients are focusing on.”

Interview article by Jonathan Lopez