China’s strategy to attract chemicals inland is paying off

Encouraging chemical companies to migrate deeper into the heart of China is central to the government’s development strategy, but the task is far from easy

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Andy Brice/London

CHINA’S OPEN-door policy has helped to transform the sleeping giant into an economic and manufacturing behemoth.

For decades, its coastline has undergone unprecedented change to attract foreign investment and promote trade with the rest of the world. Today, the Eastern seaboard is thriving, with chemical companies from all over the globe fighting to increase their presence in the region.

But with the coastal areas becoming oversaturated, and murmurs of discontent emanating from the poorer classes living inland, encouraging companies to move to the hinterland has become a priority.

“To create balanced growth and a harmonious society, and to maintain the country as a single entity, it was obvious that from a macro point of view the government needed to take action,” says Marcus Huebel, lead partner for the Chemicals & Natural Resources business in Greater China at global management consultancy Accenture.

BAD PRACTICE

It could be argued that such rapid growth has encouraged bad practice and was eventually unsustainable, perhaps not economically but environmentally.

China is the world’s second-largest consumer of oil, after the US, and the third-largest net importer of oil. But it is also home to 16 of the world’s 20 most polluted cities, is among the largest emitters of carbon dioxide, and almost 60% of its rivers are below international standards for potable water. According to the Ministry of Environmental Protection, around 2,500 of the country’s chemical companies pose major risks to the environment.

While it was clear that these well-publicized environmental issues had to change, the administration also acknowledged the imbalance of gross domestic product, city development, wages and wealth between the different parts of the country was creating a cultural divide. Encouraging the movement of chemical firms inland and the construction of new, more efficient plants, addressed each of these issues.

“Of course the Chinese government wants to develop further inland,” says Edouard Croufer, director of chemical practice at consultancy Arthur D. Little. “It’s clearly part of its strategy because there is a huge disparity between the wealth on the coast and that inland. They absolutely have to do this, otherwise they may face social unrest.”

With the chemical sector in China hinging on crude oil and most of the imports arriving by sea, the coastal provinces have dominated in recent years, attracting the majority of foreign investment. Guangzhou, dubbed “the manufacturing shop of the world,” lies near Hong Kong on China’s Southeast coast, and is the capital city of Guangdong province. In 2007, around 1,000 foreign-funded enterprises were established in the city, three times the number that moved away, says Huebel.

IMPETUS TO RELOCATE

Such growth has led to inflation, rising wages, pollution and a lack of land for new plants all providing firms with the impetus to consider relocating to the interior.

Labor-intensive companies, such as those in the textiles or shoemaking industries, are increasingly tempted by the low costs away from the coast wages are generally lower inland because the cost of living is lower.

“The recent move of manufacturing businesses to inland locations is limited to labor-intensive businesses like shoes, toy manufacturers or assembling companies, of which the labor represents a good chunk of their cost,” says a BP spokesman in Beijing. “Even for these kinds of companies, the media reports suggest that the actual benefits of moving out are very much mixed. Therefore, I would not see this as a trend.”

Bernd Blumenberg, president of BASF-YPC, a 50:50 joint venture between BASF and Sinopec, agrees. “I wouldn’t say this is a trend – it’s a fact, which the government has recognized,” he says. “This disparity exists, and there is a clear government program to develop the West and the Northeast because both are lagging behind. For the last two or three years, this has been government policy.”

Some petrochemical producers are shifting their downstream operations closer to their customers further inland, attracted by government tax incentives. Many coal-chemical projects are sprouting up in Inner Mongolia and the Shanxi, Shaanxi and Ningxia provinces second-tier cities such as Chongqing are often preferred because their infrastructure is more developed.

Although there are these exceptions, few companies venture more than 1,000km (620 miles) into the country because of the inadequate road and rail network.

Even Nanjing, which has attracted a number of companies, is only around 300km from Shanghai and some consider it a coastal city.

“The government was talking about moving inland in the early 1990s but it took more than 10 years before it became a reality,” says Croufer. “I think it’s going to be another 10-20 years before we see a move further inland.”

Although huge investment has been plowed into transportation over the past few decades, the less-developed areas still suffer from poor road networks. Access to crude oil and essential raw materials is therefore restricted.

IMMATURE INDUSTRY

“The logistics situation is driven by large underinvestment in recent decades, particularly in rail,” says Huebel. “China has a very immature logistics industry the whole sector is severely underdeveloped.”

The government has recognized that the roads need considerable work, pledging some $250bn (€160bn) toward their development over the next 30 years.

The rail infrastructure is also inadequate the density of China’s railways is among the world’s lowest, while it boasts among the largest volumes of traffic. However, there has been significant improvement and around $20bn has been earmarked through to 2010 to upgrade it further.

It is, therefore, of little surprise that companies have tended to settle in proximity to the Yangtze river – the vein that runs 6,300km in to the heart of the country (see this issue, page 32 and ICIS Chemical Business, April 14, 2008).

Huge investment is being plowed into the Yangtze to increase port capacity, improve lifting equipment and transport connections. The construction of the Three Gorges Dam – the world’s largest hydropower project – will also significantly help to increase the commercial shipping capable of operating along the river and encourage internal migration.

“I see two other factors that could fundamentally help,” says Huebel. “China could reduce its dependency on crude oil by realizing the impact of its coal-to-chemicals initiatives. Strengthening other transportation modes – like rail and pipeline – could also make it possible Shell is examining opportunities to transport oil produced in Kazakhstan to China. This would make crude available in other parts of the country.”

Chemical majors BP and BASF were among the first foreign investors to build worldscale plants inland in Chongqing and Nanjing, respectively. Each formed joint ventures with Chinese producer Sinopec. Both are working on expansion projects.

In January, BP and Sinopec signed a memorandum of understanding to add a 650,000 tonnes/year acetic acid plant at their Yangtze River Acetyls Co. (Yaraco) joint venture in Chongqing. The unit is expected to come onstream in 2011. This follows investment in the BP Yangtze Petrochemicals Acetyls Co. (Byaco) in Nanjing.

“For companies like ours, the criteria for plant sites includes feedstock supply, market size and its potential, and skilled workforce availability,” says the BP source. “These apply to all our ventures, be it Yaraco or Byaco.”

BASF-YPC, meanwhile, is working to raise the capacity of its 600,000 tonne/year cracker in Nanjing to around 750,000 tonnes/year. It is also expanding existing downstream plants and building new units as part of the $900m project.

The development is expected to come on stream in phases through to 2011, beginning with an oxo-alcohol and propionic acid expansion later this year.

“We are located 300km west of Shanghai, in the largest and fastest-growing chemical and industrial market in China,” says Blumenberg. “The textbooks say that you have to be at the coast – this is true, but the Yangtze river means we can be serviced by ships of 50,000 tonnes.”

The initial move away from the coast by companies such as BP and BASF all those years ago came as a surprise to many, but Croufer thinks more will follow.

“It all really depends on whether they’re building a commodity plant or a specialty plant. If you look at companies like [Belgium-based] Solvay or [coatings maker] Akzo Nobel, they may well build more inland because they want to be nearer their customers. On the other hand, if you deal with commodities, you need to be with your source of raw materials. Since most refining is near to the coast, they have to be there.”

The coastal area is the largest market and also the fastest-growing, generating far more opportunities than inland. But things are changing.

If the government has half as much success attracting firms to the country’s interior in the coming years, it will clearly not only have a major effect within its own borders.

“Growth is not driven by developed countries as it was five to 10 years ago but the emerging economies like China and India,” adds Huebel. “You see that in many aspects: the global war for talent, the flow of capital, the battle for natural resources, emerging consumers and innovation. With the current rise of inflation and cost of raw materials and staple food, we are on the brink of the next phase of globalization.”

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SOURCE: ACCENTURE