It is a Hurricane Harvey moment, in fact even bigger as far as the Asian chemicals industry is concerned. China’s campaign to improve its air quality is causing major, and quite probably unprecedented, disruptions in supply up and down many of the region’s chemicals value chains. Since January, there has been a big increase in the number of environmental inspections taking place throughout China.
The inspections have been aimed at manufacturers which flout rules on plant safety and emissions.
And in a crucial sea change in government policy that took place in July, the inspectors now have the authority to close down plants, quite often permanently, said a chemicals industry source.
The source reports that no less than 70,000 chemicals and other manufacturing plants have been shut down in just three provinces in China since July - in Hebei, Henan and Shandong - and he believes that many of these closures are for good.
There are also reports that chemicals plants have been given notice that they have to relocate away from major population centres in the big cities to chemicals industry parks.
For example, one propylene derivatives producer has reportedly been given just six months to move from Pudong in Shanghai to a nearby chemicals industry park.
IMPACT ON PRICING
The end result is shortages in some chemicals and polymers and therefore firmer pricing. Propylene oxide (PO), methyl tertiary butyl ether (MTBE) and PVC are just some of the products affected.
In PO, a 13 September Reuters story reports that many plants have been shut down in Shandong province. ICIS estimates that 53% of China’s total PO capacity of 3.2m tonnes/year is in Shandong. But in some chemicals and polymers value chains the impact seems to be greater on downstream consumers.
Take polyethylene (PE) as an example. There are as yet no reports of steam crackers being shut down for inspections, but numerous small scale plastic processors are said to have been closed.
It does, however, appear that highly polluting coal-to-olefins plants are being targeted. But only 10% of China’s 24m tonnes/year of ethylene capacity in 2017 will be coal-based, again according to ICIS. Ethylene, is of course, the raw material used to make PE. We have been here before, say sceptics.
China is building up to an important political meeting – the 19th National Party Congress which takes starts on 18 October.
Ahead of previous big political meetings, chemicals and other plants have been shut down only to be restarted once the meetings have been concluded.
The objective has been to create blue skies, and so favourable publicity, during these meetings.
A recent example of this was last September’s G20 meeting in the city of Hangzhou in Zhejiang province, ahead of which chemicals and other plants were shut down only to be re-opened once the gathering was over.
But this time might turn out to be different as 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 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.
As many as 1.6m people die prematurely every year in China because of air pollution – particularly from very harmful PM 2.5 particulate which stays in your lungs and causes respiratory and other diseases.
The chemicals industry source quoted above added that local government officials have had their key performance indicators changed.
No longer are they being measured on how rapidly they expand GDP in their provinces, cities are towns.
They are instead now being told that even if GDP growth declines, this does not matter provided they hit targets to improve air quality.
The sceptics may turn out to be right.
But if they are wrong and this environmental campaign continues, the end result could be stronger long term export opportunities for overseas commodity and speciality chemicals manufacturers.
It also seems possible that the closure of all these manufacturing plants could slightly dampen China’s GDP growth over the remainder of 2017 and into 2018.