China chemical closures send ripples around the world

Source: ICIS News

2018/01/11

BARCELONA (ICIS)--China’s rigorous environmental inspections and subsequent capacity closures are causing waves across chemical supply chains globally and look set to continue through 2018.

President Xi Jinping’s drive to raise environmental protection and air quality as a priority over GDP growth is having a real impact.

Statistics for 2017 are quite startling and indicate the scale of the programme, suggesting that 40% of China’s total manufacturing capacity was temporarily shuttered last year, and 80,000 factories charged with breaching emissions levels.

In addition, 12,000 local government officials were disciplined from January to November (see China Monthly, pages 22, 23).

A persistent winter smog problem across many Chinese cities and regions has been getting worse as the economy grows and industrial production increases.

According to The Lancet medical journal, this pollution crisis led to 1.8m premature deaths in 2015.

The government chose to act rather than risk social unrest linked to the issue.

When we first became aware of the crackdown there was a degree of uncertainty about the impact.

Not just chemicals but downstream convertors and customers were also being hit which could have reduced domestic demand.

However, it soon became clear that this effect was negligible as downstream production simply transferred to more efficient, cleaner plants.

Indeed, China’s GDP for 2017 is predicted to have been 6.9%, stronger than many estimates.

The real impact is now being felt across many chemicals value chains around the world as significant capacity closures leave Chinese manufacturers seeking imports from chemical companies elsewhere in Asia and the Middle East as well as Europe and the US.

Chinese chemical exports have been reduced too.

CHLOR-ALKALI IMPACT
Chinese caustic soda producers are being particularly affected with the environmental inspections keeping operating rates of Chinese chlor-alkali producers at around 70%, and sometimes reduced to  50%.

According to many market sources in chlor-alkali, the environmental inspections will become a “new normal”, which means the industry can expect similar levels of inspections in 2018 which will very likely curb overall Chinese production.

Another factor restraining Chinese production is the continuous weak performance of chlorine, the co-product of caustic soda, which has been hovering in the negative range – where producers pay buyers to take the cargoes – for most of 2017, with the trend likely to continue in 2018.

China, which produces and consumes about half of global caustic supply, has over the past five years reduced exports by about 100,000 dry metric tonnes (dmt)/year, the result of greater domestic demand and the government’s anti-pollution initiatives, which have closed some plants in coastal cities.

That leaves the US to pick the supply slack for both regions.

As the US becomes a larger global supplier, prices are likely to continue upward as US plants churn at near capacity, and any production upset will ripple through markets around the world.

The global market was also hit by closures in Europe linked to the end-2017 deadline to phase out mercury cell production.

Here, an estimated 1m dmt/year in capacity is expected to close down, turning Europe into a net importer of caustic from a net exporter.

US liquid caustic soda prices saw their steepest price increases in almost a decade during 2017, and 2018 holds prospects for further increases.

MELAMINE MARKET SHIFTS
The Chinese supply and demand balance continues to impact global melamine trade flows, with environmental inspections and gas curtailments affecting supply.

With less volumes exported from China, this is increasing global demand for product, with European producers continuing to receive a high amount of requests.

Before the inspections, China regularly exported between 20,000-25,000 tonnes/month.

There is also less material arriving in Europe because of the limited Chinese supply, with more Qatari product heading to India and Asia, according to market sources.

Material from Trinidad is also somewhat absent, with better netbacks for the producer in sending product to the US and South America.

The combination of local production constraints, limited imports and solid demand have all contributed to an increase in prices for the first quarter.

EUROPE MA
Europe relies on imports to satisfy demand for maleic anhydride (MA) and output from China was curbed in 2017 on the back to the inspections which aimed to reduce pollution by around 15%.

In theory, China suffers from MA overcapacity, but units are estimated to be running at around 50-60% of production capacity.

China, plus other regional issues, contributed to a jump of €100/tonne in November MA spot prices with similar moves expected for the first quarter of 2018.

Another value chain which has been hit is isocyanates. In October, methyl di-p-phenylene isocyanate (MDI) and toluene di-isocyanate (TDI) prices in China reached their highest levels since January 2000.

TDI spreads reached record levels at the end of last year linked to good demand and restricted supply.

Pictured above: High-rise buildings barely seen in heavy smog in Beijing earlier this month
Source: Imagechina/REX/Shutterstock

Focus article by Will Beacham

Additional reporting by Bill Bowen, Patrick Han, Jane Massingham, John Richardson and Katherine Sale