China chemical plant relocation plans lack funding

China plans to complete a massive relocation of chemical plants away from cities by 2025, but financial constraints may hamper the project, which is estimated to cost Chinese yuan (CNY) 800bn ($121bn), industry sources said.

The country intends to speed up the site transfer of plants manufacturing dangerous chemicals out of densely populated city areas to industrial parks, based on a document released in September by China’s State Council.

For small- to mid-sized plants, the relocation must start in 2018 and be complete by the end of 2020, while larger plants must begin the process in 2020 and finish by the end of 2025. These plants can also be re-engineered to produce non-toxic products, or permanently close if relocation is not possible.

Local governments are being required to submit detailed work plans, including company lists and timelines for relocation before the end of this year.

The project is expected to translate to CNY400bn worth of demand for mechanical equipment, as well as generate about CNY60-80bn in information technology-related demand, based on estimates from China’s Ministry of Industry and Information and Technology.

Lack of funding has been the primary impediment. Industry players believe the Chinese government must foot the total bill, citing that in most cases, the plants have been operating for years before the cities expanded.

But China has a huge fiscal deficit, which stood at CNY2.83tr ($427bn) in 2016.

Since 2014, provincial governments have been submitting to the central government a list of toxic chemical plants up for relocation and/or re-engineering. China has stopped approving projects in cities, requiring that all new projects be located in industrial parks.

IMPLEMENTATION DELAYS

However, the average implementation rate for relocations has been less than 20%.

In the case of Sinopec subsidiary Shanghai Gaoqiao Petrochemical, initial discussions were held for relocation in 2011, with completion originally expected by 2014-2015.

But the negotiation process for the CNY60bn relocation took much longer than expected.

In mid-2016, the Shanghai government finally agreed to cover 90% of the cost by paying Sinopec CNY50bn for the relocation but no further development was heard since, according to market sources.

Sinopec’s other subsidiaries, namely, Yanshan Petrochemical and Guangzhou Petrochemical, had also previously received requests to transfer their production sites.

Based on the new schedule by the State Council, these large plants will have to complete their relocation by 2020.

FINANCIAL SUPPORT

Industry sources said actual financial support from the government was usually less than 10% of the total capital required and comes in the form of land, low interest rates on loans and tax breaks.

These were deemed insufficient to speed up the relocations. “It’s too difficult for companies and governments to agree on terms of relocating. Who should pay for the bill? There’s no such a law that defines… responsibilities. No one would compromise,” said a source from the economic and information commission of Sichuan province.

Plants up for relocation with an original investment or current value of less than CNY100m receive no cash subsidies from the government.

Some 51 chemical plants in Sichuan need to be relocated, requiring a total capital outlay of CNY23.8bn, according to media reports.

Only two of the total have completed the move, with two others underway, while the rest have no definite timelines.

In Shandong province, some 185 plants have been identified for relocation.

Of which, 70 have started the process, according to a local government official.

The eastern province houses 9,505 chemicals producers, of which 2,485 are categorised as producing dangerous chemicals, the official said.

“The central government has agreed to provide financial support of CNY57.6bn for 42 of the relocations, but only 11 have materialised and the rest still pending. In one word, money decides the pace,” he said.

LACK OF ACCESS TO LOANS

In Hubei province in central China, relocation projects are being stumped by lack of actual access to bank loans following assessment of risks.

“It’s a systematic task – very complicated. We all know what’s the problem, but just [not the] way to fix it,” a local government official said.

The northern province of Hebei, which is adjacent to Beijing and where pollution is very severe, has moved faster to implement the central government’s plan by providing both a list and timeline in August. Based on its plan, 35 plants will move out of cities before 2020.

For 15 of them, the deadline is before December 2018, with three expected to complete the process as soon as March 2018.

But most of the companies in the list have yet to start the process, sources from the companies admitted. In the case of Hebei Xinhua Holdings, it will have to spend nearly CNY1.5bn to relocate and it simply does not have the capital, a company source said.

It operates a 200,000 tonne/year methanol plant; a 50,000 tonne/year formaldehyde plant; and a 150,000 tonne/year hydrogen peroxide plant at the Hebei capital city of Shijiazhuang and is being required to complete relocation by October 2019.

“We’re actually not in the very central area but in a county town. The industry park we’re moving to is just 4-5km away. I’m bewildered of the necessity to move,” the company source said.