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’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. They suggest that 40% of China’s total manufacturing capacity was temporarily shuttered last year and 80,000 factories were charged with breaching emissions levels. In addition, 12,000 local government officials were disciplined from January to November.

melamine graphA persistent winter smog problem across China 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. Chinese chemical exports have 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 by 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, curbing production.

Chinese production is also impacted chlorine, the co-product of caustic soda, which has been negative – where producers pay buyers to take the cargoes – for most of 2017 and into 2018.

Domestic demand and the closures in China has cut exports by about 100,000 dmt/year. 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 dry metric tonne (dmt)/year in capacity is expected to close down, turning Europe into a net importer of caustic from a net exporter.

MELAMINE MARKET SHIFTS

The Chinese supply and demand balance continues to impact global melamine trade flows, with environmental inspections and gas curtailments impacting 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 China, with more Qatari product heading to India and Asia, according to market sources. Local production constraints, limited imports and solid demand all helped push Q1 2018 prices up.

EUROPE MA

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

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