China Strives to Bolster the Specialty Chemicals Market
Posted on 06 February, 2010 | Tags: Guest Column
Dr. Neil Wang is Managing Director Frost & Sullivan China
E-mail : Xin_Wang@frost.com
In late 2008, the Chinese Government embarked on Four-trillion Yuan (USD 586 billion) Stimulus Plans to finance programs in ten major measures over the next two years, of which USD 219.6 billion was allocated for infrastructure and urban power grid and USD 146.4 billion for disaster rebuilding. Both these categories require a huge input of specialty chemicals. In addition to some new regulations on the industry, the package is forecast to have a huge impact on the Chinese specialty chemicals market.
The global financial crisis is expected to have a negative impact on the global and Chinese specialty chemicals markets. However, the Chinese market may have a comparatively higher growth rate, due to the huge potential offered by the domestic demand. According to the Chinese Chemical Industry Yearbook, sales revenue for the specialty chemicals market was USD 124.5 billion in 2008, which amounted to 12.9 percent of the total chemicals market. Till 2012, the Chinese specialty chemicals market is likely to grow at a compound annual growth rate of 12.9 percent, which is higher than 10.7 percent, the average growth rate of the Chinese chemical market. With this high growth, China is likely to acquire an increasingly more market share in the world specialty chemicals market. The country contributed about 12.0 percent of the world specialty chemicals market in 2006, and this share is expected to reach 20.1 percent in 2012. China is on its way to become a major hub of the specialty chemical manufacturers worldwide.
The given chart shows the revenue share of Chinese specialty chemicals market in the global specialty chemicals market during 2006 and 2012.
Unlike other chemical products, specialty chemicals are featured by higher flexibility, smaller production volume, more product categories, and various types of added value for each category. With both high technology barrier as well as profit potential, specialty chemical manufacturers usually require high investment in R&D and marketing in order to succeed. In China, food additives, paints and coatings are considered as traditional and sophisticated specialty chemicals industries with high market share, while APIs, water treatment chemicals, and agrochemicals are key sectors for future growth, which are expected to experience high penetration rate in the future.
In 2008, the Chinese specialty chemicals market has shown high attractiveness for foreign investment, with total foreign investment to Chinese chemicals industry added up to approximately USD 60 billion. Investors are mainly from Hong Kong, the United States, Japan, Singapore, South Korea, and others. They mainly select the Chinese coastal regions such as Jiangsu, Fujian, Guangdong, Zhejiang, Liaoning, and Shandong as their prior choices for production and distribution bases, due to the huge demand base, established infrastructure and service facilities, and convenient transportation.
The Chinese chemical industry parks have their respective advantages in attracting foreign investment. At the provincial or national level, there are about 350 chemical industry parks in China. These industry parks are preferable in terms of preferential taxation system, well-developed public utilities, efficient logistic system, up-to-date environmental protection, and administration services to the chemical companies. Currently, a majority of the chemical industry parks are mainly located in the coastal areas due to the relatively developed economy, huge domestic demand and geographic and transportation advantages, and these include the Nanjing Chemical Industry Park and Shanghai Chemical Industry Park in East China and Dayawan Petrochemical Industry Park in South China. Meanwhile, many chemical industry facilities are being built in West China, due to its rapid development and competitive labor cost, and these include the Hejiang Chemical Industry Park in Sichuan province.
In terms of competitive landscape, the Chinese specialty chemicals market has a relatively low market concentration with many companies competing head to head, in which multinational companies (MNCs) are the leaders in most of the segments. These MNCs such as Henkel Corporation, The Dow Chemical Company, and E. I. du Pont de Nemours and Company, enjoy advanced technology level and high brand awareness among the end users. They normally charge a higher price premium by offering comprehensive product portfolio and reliable product quality than their local counterparts. Besides, they are able to offer value-added products and solutions to the customers, which is expected to attract many large downstream companies. However, by embracing the advantage of sales flexibility, government relationship, and other institutional advantages, leading local manufacturers such as China National Bluestar (Group) Corporation, Transfar Group Co., Ltd., and Shanghai Chemspec Corporation are playing an increasingly more important role in the global arena.
Although the Chinese specialty chemicals market has witnessed high growth and foreseen future prosperity, it also meets with severe inspection and cross-regional trade protectionism, which is likely to affect the export of specialty chemicals. First and the foremost is the REACh legislation (Registration, Evaluation, and Authorization of Chemicals), which came into force on June 1, 2007. Under this legislation, above 800 categories of chemicals that China exports to the EU market have to be tested to comply with safety monitoring regulations in aspects such as registration, evaluation, authorization and restriction. It is likely to increase the costs and impact margins of several export companies, and even force some small and medium exporters and producers to exit the market. However, in the long term, the legislation is expected to help industry upgrade, a much needed direction for China's existing economic structure. In addition, ever increasing anti-dumping investigations in Europe, the United States, India, Japan, and Korea's for Chinese specialty chemicals shows trade protectionism is rising during the recession. The Chinese suppliers are expected to meet higher entry barriers for international markets.
In confrontation with the ever-improving international standards and rising trade protectionism, the Chinese Government has initiated several measures to improve the quality and quantity of the products. One such measure is China's RoHS (Restriction of Hazardous Substances in electrical and electronic equipment), which became officially effective on March 1, 2007 and suggests that chemical enterprises should develop halogen-free and heavy metal-free products, in order to accelerate technology upgrade. The Chinese Government is also encouraging export by adjusting export rebates on some chemical products from January 1, 2009. The policy was designed to help companies overcome the difficulties during the financial recession.
The industry is presently taking initiatives to meet the following trends. Firstly, industry integration and upgrade are likely to take place. Suppliers tend to choose either vertical integration or horizontal integration, in order to achieve higher market share and meet the internal and external challenges. Besides acquisition, manufacturers concentrate on internal improvement in R&D, management, and marketing. Due to the increasing market competition and global economy slowdown, more low-end market participants are anticipated to be eliminated from the market in two to three years. Only the suppliers that provide high-quality product and service are likely to survive and gain a larger market share. China is considered as a global manufacturing center currently, but the country is expected to go one step further to become a value-added product supplier. In the next five years, the industry upgrade of specialty chemicals in China is forecast to be accelerated further.
Secondly, green innovation is another trend, irrespective of whether it is from passive reaction toward the international standards or from aggressive initiation by the companies themselves. More companies are beginning to accept the concept of sustainable production, which means the use of goods and services that respond to basic needs and bring a better quality of life, while minimizing the use of natural resources, toxic materials, and emissions of waste and pollutants over the lifecycle, so as not to jeopardize the environment for future generations. At the time of financial crisis, although trade protectionism is rising and the companies are troubled by diminished demand, the Chinese specialty chemicals market is forecast to experience some turbulence, but the stimulus plan, new legislations, and innovative ideas of the companies are drive the market in the long term.