By John Richardson
WE LIVE in a murkier world than during the Chemicals Supercycle where a wider range of outcomes are possible. At the same time, shining through the gloom are the ten new market shapers that I highlighted on Monday.
An example of where the clouds have gathered on the horizon, where there is ambiguity and uncertainty, is China’s future role as an exporter.
In practical terms, because China completely dominates some manufacturing chains, there may be no alternatives to China. It could be in the best interests of the West to do “win, win” deals with China.
Take electric vehicles as an example. If you assume that EVs are going to dominate the EU market, and that the EU auto industry cannot catch up with China, why not invite China in to build EV factories in the EU, thereby protecting local jobs?
This is what the Americans did with the Japanese auto industry back in the 1980s. This article from the 23 June issue of the Wall Street Journal gives the historic context of President Reagan’s imposition of quotas on Japanese autos which led to big investments by Japanese auto manufacturers in the US.
The article also explains why the EU may follow this playbook. There would be advantages both creating jobs in the EU and ensuring that Volkswagen and BMW etc keep their access to the Chinese market.
(But I am not convinced that the EV boom is sustainable. Evolving lifecycle analysis could undermine the growth of this business as the real carbon and supply-chain insecurity costs of EVs becomes apparent. This, though, is a story for another day).
Or industrial policy may work in the opposite direction as China’s split with the West widens. A good example is the US Inflation Reduction Act (IRA). This might over the long-term even apply to value chains where China dominates including EVs. The split could widen to the point where we become much less dependent on China for everything from our smartphone components to our polyester shirts.
Or in practical terms, will, as I said, deals be done with the West muddling along with China via Chinese-owned car factories in Europe and in effect Chinese exports from third-party countries like Turkey, Vietnam and Mexico? (Chinese components go to these countries, are assembled and move onto the West, thereby getting around the “sound and fury” signifying not a great deal of antidumping duties. This is of course to some extent already happening).
Green hydrogen, protecting local manufacturing and geopolitics
Maybe the focus will be predominantly on protecting emerging industries in the West because China is so dominant in industries such as EVs and solar panels.
“While it was Germany that led the way on solar energy, it was China that stole the market right from under Berlin’s nose to become the biggest player. Currently, nearly 97 percent of the solar panels glistening on roofs and fields across the EU are imported — and most were made in China’s factories,” wrote Politico in this 7 August article.
Politico added that European businesses were now “terrified” that the same would happen in green hydrogen, as China ended up dominating another clean tech market. Businesses where therefore asking Brussels to impose “Made in Europe” requirements while looking to Japan for help on technology.
Europe had set a target to achieve net zero emissions by 2050. By then, the EU and Japan would be major importers of hydrogen whereas the US [thanks to the IRA] and China {thanks to big state subsidies] were expected to be major exporters, Politico added.
There might be little point in Europe reducing its dependence on Russian gas, following the invasion of Ukraine, to only then become over-reliant on imports of green hydrogen from China.
As far as the European chemicals industry is concerned, the threat from China’s green hydrogen industry could be in the form both of direct imports, via for example ammonia as a carrier, and chemicals and polymers made in China from green hydrogen and carbon that’s been captured.
Synthesis gas could for example then be made into methanol and then olefins, via methanol-to-olefins technologies, and next polyolefins. Lower-carbon polyethylene (PE) and polypropylene (PP) could be exported to Europe. Such exports may gain a competitive advantage under the EU’s carbon border adjustment mechanism which may be applied to organic chemicals and polymers by 2030.
Traceability might be used as one means to limit either or both direct and indirect Chinese green hydrogen imports. If there are any doubts that the power used in China is renewable, a higher CBAM could apply.
Or rather than depending on green hydrogen produced via electrolysers run on renewable energy, perhaps converting liquefied natural gas (LNG) into green hydrogen will be the answer for Europe. As this February 2023 Future Energy Exports media statement details, hydrogen can be produced from LNG shipped to Japan with the resulting carbon captured through existing carbon capture technologies.
This is a good example of how geopolitics may play as significant a role as life-cycle analysis in the green transition. One very possible geopolitical scenario is that the EU ends up much closer to the US and Qatar – two of its biggest suppliers of LNG in 2023 – than China.
Heat maps: Understanding the effects on direct chemicals trade
I hate to sound like a broken record, but this complexity again underlines the need for wider and deeper scenario planning. Chemicals producers need to assess chemicals and polymers demand in each manufacturing chain and assess how this “embedded consumption” could, under a range of outcomes, be affected by the West’s split with China.
Some good news for those who prefer a quieter life is that the future of China’s direct chemicals exports seems to be easier to predict. Once again, the excellent ICIS Supply & Demand Database is instructive here.
The above chart shows China’s percentage shares of global capacities in two polymers – polyester fibres and polypropylene (PP). 2000-2023 are actual numbers and of course 2024-2030 are forecasts.
In 2000, China had a 32% share of global polyester fibres capacity but by the end of this year we expect this to have reached 76%, declining only very slightly to 74% by 2030.
To borrow a phrase from the great John McEnroe, “you cannot be serious” in the proposition that the rest of the world is going to build polyester fibres capacities to push Chinese products out of the markets. This is because:
- Where would the feedstock come from during a period when, perhaps because of electrification of transportation, we won’t need as many new refineries? The polyester fibres value chain starts at the refinery level (mixed xylenes and toluene converted to paraxylene). And the investment cost would be off the charts.
- There’s a “win-win” here at least for the short-to medium-term until maybe China becomes self-sufficient. China is by far the world’s biggest importer of PX and mono-ethylene glycol, underpinning these two global industries.
Not surprisingly, given China’s huge share of global capacity, it is by far the world’s biggest net exporter (exports minus imports) of polyester fibres.
China first became a net exporter in 2006. This year, we forecast that China will have a 74% share of global net exports of polyester fibres, rising to 86% in 2030. This is among the countries and regions expected to export more than they import.
Polyester fibres could thus be a case of what is practical happening. While textiles and garment factories may increasingly move offshore from China because of labour costs and geopolitics, the polyester fibres to run these factories will surely be largely supplied by China.
But PP seems to be a different proposition. True, China’s share of global PP capacity is forecast to rise from just 9% in 2000 to 42% this year and 43% by 2030. But this has still left space for a lot of other significant players who will battle hard to protect their businesses.
Recent examples of protectionist measures in PP include the Brazilian chemical industry association’s call for higher PP and other polymer import tariffs and India’s Bureau of Indian Standards’ polymer import certification requirements.
There is plenty of other PP investments, much of it by major players, to supply global markets aside from China. China only became a major PP exporter in 2021 and is therefore perhaps less established as an exporter than is the case with polyester fibres.
Producers outside China need “heat maps” for every chemical and polymer where China is a significant exporter or where is this forecast to happen. From say light green to dark glowing red, these heat maps will assess the risks from Chinese exports. Contact me at john.richardson@icis.com for the details.
Also contact me about ICIS can help with your broader scenario work in this very murky world.