China Puts Environment Ahead Of GDP As Chemicals Shortages Build

Business, China, Company Strategy, Economics, Environment, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, Sustainability

ChinasmogBy John Richardson

FURTHER evidence has emerged of the Chinese government’s determination to deal with an air pollution crisis that a new study says shortens life spans in China by three years .

Local government officials have long been measured by how rapidly they expand GDP growth. But in a quite stunning reversal of policy, Beijing has changed key performance indicators for local officials. They have now been told that it doesn’t matter if the GDP growth of their province, city or town declines provided that targets to improve air quality are met.

And as the Caixin business magazine writes, failure to meet these targets has serious consequences:

In a document jointly released by the Ministry of Environmental Protection and nine other ministry-level bodies, if a city does not achieve 60% of the emission reduction target, the city’s vice mayor will be held responsible

If the city achieves less than 30% of its target, the mayor will be held responsible; and if the PM2.5 level ends up increasing instead of falling over the winter, the party secretary of the city will be held responsible.

Possible punishment includes party disciplinary or administrative punishments, the document says, without elaborating.

Since July, environmental inspectors have been given the authority to shut down chemicals and other plants for non-compliance with regulations. In January-July as the number of environmental inspections soared, the focus was instead on fining companies that had failed to follow the rules.

“Another important change is that in the past, the inspectors would contact a plant to let them know when they were going to visit,” said a Shanghai-based chemicals industry executive.

“Plant managers would switch on air-filtering systems and waste-water treatment facilities in time for when the inspectors arrived and turn them off again when they had left in order to save on costs. Now, though, inspections are random and unannounced,” he added.

The decision to allow inspectors to close-down plants is said to have led to the shuttering of around 70,000 chemicals and other manufacturing facilities in 18 cities in three provinces – Hebei, Henan and Shandong. This is the result of their failure to meet both safety and environmental standards. It is thought that many of these plants will be closed permanently.

These 18 cities are part of a total of 28 northern industrial cities that the central government said back in April would be a particular focus of the environmental crackdown.

Why this time is different

The sceptics might think that this campaign will peter out once the 19th National Party Congress, which begins on 18 October, is out of the way. Factories have been closed down ahead of previous important political meetings in order to turn the skies blue, only to be then restarted again. This was the case ahead of the September’ 2016 G20 meeting in the city of Hangzhou in Zhejiang province.

But this time is different. Here is why:

  • This environmental campaign is in lock-step with wider economic reforms. Economically inefficient low value manufacturers that are hindering China’s attempt to escape its middle-income trap are often also heavy polluters. So shut them down and you kill two birds with one stone.
  • Some of these manufacturers are having to borrow more money to pay existing debts. Shutting them down therefore also helps China deal with its debt crisis.
  • The environmental campaign is politically very popular as well. As the Chinese middle class gets richer in the more developed coastal and eastern provinces, quality of life has become a much bigger priority to the point where many educated, wealthy people will emigrate unless air pollution is greatly reduced. These are the people that China needs to retain if it is going to escape its middle-income trap.

And of course the very fact that many thousands of factories are being permanently shut down suggests the seriousness of this campaign, as does the pressure being put on local government officials to make improving air quality their No1 priority.

A further indication of the serious of this environmental campaign is that Beijing has put its political reputation on the line by improving the collection of data on air pollution and by making the data very transparent.

Thousands of monitoring stations that detect deadly PM2.5 particulate matter have been installed outside factories. Factory managers and local government officials have been told there will be zero tolerance for anybody who uses mist cannons to distort readings from these monitoring stations. And crucially, also, people  can check in real time the readings from these monitoring stations via smartphone apps.

Chemicals affected – an update

Last week I detailed how China’s key polyethylene (PE) and polypropylene (PP) markets had seen far more shutdowns of downstream plastic processors than upstream PE and PP plants. This remains the case and so I see the environmental crackdown as likely to exert more downward, rather than upwards, pressure on polyolefins pricing.

But in other chemicals value chains there has been upward pressure on pricing as a result of extensive chemicals plant closures – either permanent or temporary. Products that remain in tight supply include caustic soda, polyvinyl chloride, MTBE and propylene oxide (PO).

As Reuters point out in this article, the tightness in the PO market is mainly the result of the closure of plants in Shandong province, as this is where many of China’s PO plants are located. ICIS Consulting estimates that 53% of China’s total PO capacity of 3.2m tonnes/year is in Shandong.

And the same Reuters article adds that some 30 “teapot”, or privately owned, oil refiners have been shut down in Shandong province for environmental reasons. This must obviously be limiting propylene availability to PO and other propylene derivatives plants.

Meanwhile, the government’s drive to relocate chemicals plants from the big cities to chemicals industry parks appears to be gathering pace. A new chemicals industry park is, for example, being established in the city of Cangzhou in Hebei province. Plants will be moved there from Beijing.

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