Most of the attention on the 2017 Chinese Communist Party Congress focused on President Xi’s strengthening of power, however it is likely that the conference will be seen more as a watershed point in the Chinese economy. Historians will see it as a week when there was a sea change from economic expansion at any price, to a more environmentally friendly rate of production. This new direction may significantly impact the Chinese economy, and is already restricting chemical production, closing chemical plants and leaving some chemical suppliers struggling to keep up with demand.
In October 2017, President’s Xi keynote speech made numerous references to the environment. In fact, as Bloomberg Intelligence notes, “Xi used the word ‘environment’ and other related terms 89 times in his monologue, while his predecessor Hu Jintao mentioned it 74 times in his 2012 address. Reference to the ‘economy,’ meanwhile, dropped to 70 from a hefty 104 five years ago.”
Perhaps his speech was influenced by the heavy smog that hung over Beijing during the course of the Congress. The news service WorldBulletin quotes Xi as saying, “We need to prevent pollution from its source, continue the action against air pollution, and win the battle for blue skies.” WorldBulletin also notes that, “The smog appeared to have not received the party directive as it enveloped the city all week, prompting many Beijingers to don masks for protection.”
Despite this setback, it appears that the politburo has significant resolve to improve air quality. Even before the Congress began, factories were being closed or production reduced in high-polluting industries, including chemicals.
As ICIS reports, “Several waves of nationwide environmental inspections have taken place since January to ensure that chemicals and other manufacturing plants are meeting emissions standards.” Adding that, “Since mid-July [2017], the inspectors have also been given the authority to permanently shut down manufacturing facilities in any industrial sector that have failed to meet air-pollution standards. Before mid-July, they could only temporarily shut down plants and issue fines.”
Not only has the number of inspections risen, but the number of punishments handed out to inspectors who are not doing their job properly has also increased dramatically.
One Shanghai source, from a chemical industry logistics supplier observed that, “I have never seen this many inspections take place before. And when the inspectors arrive they really mean business as for the first time I can remember, they are very serious about forcing companies to comply with the regulations.”
Liu Yuhui, an economist with the Chinese Academy of Social Sciences, agrees that China is entering a new era. “This time China is very serious about environmental inspection,” he notes. “It will change the landscape of the economic structure with low-end polluted industries [such as basic chemicals and chemical raw materials] replaced by more environment friendly and higher-end industries. It will wield influence on the economy for the long term.”
Meanwhile, the business daily South China Morning Post, saw first-hand the impact that the chemical plant closures is having, reporting that, “At the Red Star Macalline furniture and building materials mall in Beijing, many merchants said they would not be able to deliver goods in time if production involved baked painting, a process targeted by local environment police.”
Adding that, “Prices of Chinese commodities are surging thanks to supply limits tied to environmental restraints. Prices of coal, steel, non-ferrous metals, petroleum and chemical products rose strongly, partly because these industries are easy targets for the pollution crackdown.”
“All our plants in Tianjin have been shut down recently, [whether] they meet environmental requirements or not,” Zhao Qijun, a sales manager for a radiator maker said in his shop at the mall.”
Other Chinese manufacturers are reporting supply shortages for a wide variety of raw materials, with the China Petroleum and Chemical Industry Association recently declaring supply problems for many basic chemical products, in “sectors ranging from pesticides to coke”.
The result of lower production is that chemical prices are starting to soar. Even chemical products which have seen little impact from the closures have a higher value, as uncertainty of when and where the inspectors will next visit is causing market volatility.
Other processed raw materials are also seeing price hikes, a point highlighted by Xu Gao, chief economist with China Everbright Securities Asset Management Company. Stating that, “Prices of low-end manufactured products will rise in accordance with the government’s strict environmental requirements; environmental curbs that will be in place for a long time”.
To outsiders the effects of so many instant factory closures seems like economic suicide. However, President Xi is no fool, and may well have calculated the economic cost to be worth it. As according to Liu, China’s “Blue Skies” policy, “will sacrifice 0.2 percentage points in economic growth this year.”
Given the tens of thousands suffering and dying in China as a result of poor air quality, this seems like a reasonable trade off, but the impact it will have on the chemical industry and global manufacturing may be more painful yet.
Chemical purchasers are assessing their company needs and re-examining their chemical supply chains. If their chemical products are sourced from China, then they are looking for a potential replacement supplier. They are thinking that as prices for Chinese sources of basic raw materials such as Sodium Tripolyphoshate (STPP), microspheres, potassium hydroxide, potassium sulfate and zinc oxide begin to rise, isn’t it time to find a non-Chinese source?
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Photo credit: Bloomberg Intelligence, South China Morning Post, ChemistryViews, YouTube, CBS News