By John Richardson
THE red line on the map below, from the Washington Post, shows the world’s longest-ever freight-train journey, which began on 18 November in Yiwu, the largest wholesale centre for small consumer goods in China.
It ended 21 days later, in December, in Madrid. The distance that the train covered — more than 6,200 miles — beat the previous longest freight-train, via Russia’s Trans-Siberian Railway (see the yellow line on the map).
And then consider this map, from China’s state-owned Xinhua wire service. It showsthe land route for China’s New Silk Road and the road’s new maritime route.
Print these maps off and use them as the basis for a discussion in your chemicals company.
You can wait another few years to the start the conversation, sure, but then you will be behind the curve, as China’s huge investment in its New Silk Road is set to reshape global chemicals supply and demand.
To give you another idea of just how dramatic these changes will be, it now takes just 14 days to ship goods from Chongqing in south-west China to Duisburg in Germany, via the Kazakhstan rail route used for the world’s longest freight journey.
This compares with up to 60 days to move goods from China to Europe by sea. As The Economist points out, 60 days is an eternity for “fast fashion” products such as I-Pads.
The city of Chongqing is in inland, or western, China. It has enjoyed tremendous economic growth thanks to government spending designed to narrow the wealth gas between eastern and western China.
Manufacturers have flocked to Chongqing because of government incentives and labour costs that are significantly lower than in China’s more-developed coastal provinces.
The next step for China will be to make better use of its inland cost advantages, now that time is no longer a barrier to delivery of goods to the West.
This will involve not just assembling I-Pads, but will also entail designing and building tablets etc. from scratch.
These will be a lot cheaper than I-Pads and will find a ready home in Europe, where demographics are reshaping consumer demand. People in Europe will increasingly want low cost but reliable products that are as good, or almost as good, as top-of-the-range I-Pads and I-Phones etc.
Local chemicals manufacturers in the West supply Apple and their higher-end competitors with chemicals and polymers.
These chemicals and polymers are used to make the components for tablets and smartphones that are then shipped to China for assembly.
I am equally convinced that China wants to secure the whole manufacturing supply chain. It will not be content just to import the chemicals and polymers it needs to make its own components for consumer electronics, as imports will not generate enough new jobs.
We have already seen this in phenol, where China is increasing capacity from 1.5m tonnes/year in 2013 to 3.73m tonnes/year in 2017, according to ICIS Consulting. Phenol is used to make polycarbonate – a plastic widely used in consumer electronics.
How should western chemicals companies respond as they confront lost demand?
One answer is to build chemicals and polymer plants in Chongqing, or elsewhere in China.
But this is a great deal easier said than done for basic commodity chemicals companies, who lack the sophisticated products, technologies and services that the Chinese will increasingly require.
So be realistic. If you have slipped too far behind in R&D and will always lack the connections, relationships and knowledge to crack China, you might be better off focusing only on your home markets.
There could be local manufacturers of cheaper consumer electronics who need your support. If you supply these manufacturers with competitively-priced and guaranteed volumes of chemicals and polymers they might, just, be able to see off the new Chinese import opposition.
I will write more on the subject of China’s New Silk Road in later posts, as this is too complex a development to deal with in one go.
My next post, on Tuesday of next week, will look at how China is using its New Silk Road to grow its “Sphere of Influence” with neighbouring countries such as Myanmar, Laos, Kazakhstan and elsewhere in central Asia.
This will lead to significant changes in the structure and nature of China’s chemicals industry, whilst boosting basic chemicals demand in these neighbouring countries.