China Pollution And The Tianjin Blast: Implications For Global Chemicals

Business, China, Company Strategy, Economics, Environment, Sustainability, Technology

By John Richardson

Warehouse fire in Tianjin, China - 12 Aug 2015JUST about everyone now recognises, albeit very belatedly, that China isn’t going to grow in the future in the way that it did in the past because of the bad-debt issues left behind by the 2008-2013 credit binge.

It is now accepted wisdom that Beijing simply cannot more pour money down the drain by making oversupply in manufacturing and real-estate even worse. So the bad investments that were most of the reason for soar away GDP growth in 2008-2013 are not happening anymore – hence, real GDP growth is in the very low single digits.

This is quite easy to calculate. You can work out how much the building of new factories in already oversupplied sectors such as some chemicals, steel and aluminium contributed to growth in the past and minus this off your forecasts for future real GDP growth.

Similarly, you can look at the pivotal real estate sector and come up with a reasonable estimate of the impact of falling land and home prices and the sharp slowdown in construction activity.

But what is still being defined, and I suspect isn’t even broadly recognised yet, are the full implications on the nature and quantity of growth of tackling China’s environmental crisis.

So in a series of blog posts later this week – planned for Wednesday and Friday, but this timing might change because of more immediate events – I will give you my detailed thoughts of what dealing with this crisis will mean for the global chemicals industry. These posts will focus on different end-use sectors for chemicals.

Here, though, are some thoughts, on how one particular event – the terrible tragedy of the Tianjin chemicals-warehouse explosions – will affect the global chemicals business:

  • Permission to build condos just two thousand feet from warehouses containing potentially deadly chemicals, such as sodium cyanide, will surely no longer be granted in the future.
  • The “break neck” economic growth that Tianjin has enjoyed was also, very probably, partly the result of overlooking existing environmental regulations. Government officials will, for instance, be looking very closely at how and why chemicals storage and distribution was allowed to grow very rapidly at Tianjin’s port – the Binhai New Area.
  • The Tianjin blast, along with five other chemicals explosions since April of this year, are likely to make it harder for foreign and local chemicals investors in China in general.
  • This will apply to both chemicals storage and distribution and, of course, chemicals plants themselves.
  • And when you lose the momentum from chemicals investment, you also lose some of the momentum from downstream investment. These investors are attracted because of either being close to supplies of chemicals or because an area is booming economically, largely because of chemicals. For example, more than half of the world’s top 500 Fortune companies have operations in Tianjin’s Binhai New Area, according to the New Yorker article I have already linked to immediately above.

You can cynically argue that the Tianjin blast, once it becomes a reasonably distant memory, will be forgotten.

But this is a very different China from ten or even five years ago.

Firstly, you have the global phenomenon of social media, which even with China’s Internet controls, greatly amplifies and so prolongs the impact of a disaster like Tianjin.

And secondly, the “social contract” between China’s leaders and its population is changing – certainly in its richer and more developed provinces.

Before, this social contract involved delivering very rapid economic growth, at almost any environmental cost, as the priority was to create hundreds of millions of jobs for hundreds of millions of very-poor migrant workers.

But tighter labour markets have resulted in big increases in wage costs in China’s wealthier provinces.

“Quality of life” has thus become hugely important to hundreds of millions more people,which  Li Keqiang, China’s prime minister, recognised in March 2014, when he declared “war on pollution”.

(Note that in a later post, I shall discuss how the focus in China’s less-developed provinces might be different).

You still don’t buy this argument? Then consider the map below, from this article in The Economist. It maps data from 1,000 air-monitoring stations set up by the government, in response to the “airpocalypse” – the choking smog that affected Beijing in the winter of 2012-2013.

SmogEconomist

American analysis of this data concludes that if you live in Beijing, you don’t have to be a smoker to end up with damage to your health equivalent to smoking 40 cigarettes a day.

The same researchers add that some 83% of Chinese are exposed to air that, in the US, would be deemed by the Environmental Protection Agency either to be unhealthy or unhealthy for sensitive groups.

In the past, China’s government wouldn’t have set up these monitoring stations.

But the reformist elements within the government know that the social contract is changing, and so the stations were built, surely in the full knowledge that there was a risk that the data would find its way overseas.

Adapting the social contract is not just a case of controlling social unrest.

It also fits in with the need to grow an urban middle class who will create the new service and manufacturing companies that China needs if it is to escape its “middle income trap”.

This middle class would likely shrink rather than grow if the government fails to tackle the environmental crisis, as millions more wealthy people would emigrate in order to escape China’s choking air and its heavily contaminated water and soil.

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