China textile chemicals move up the value chain

China’s textile industry and the chemical firms serving it are steadily moving up the value chain. Are they leading the way out of recession?

SUCH IS the economic optimism at the moment that there are even signs of recovery in China’s heavily export-dependent textile and clothing industries. If sustained, this growth would indicate that the recovery has arrived in the West, as well as in Asia.

Synthetic fiber operating rates began to rise from the second half of July on the expectation that apparel and non-apparel orders from the West would improve in September.

“The spring buying season was very weak, and so the real test will be just how strong the recovery is in September,” says a Southeast Asia-based fiber intermediates consultant. “But there are grounds for cautious confidence,” he continues.

Textile and garment exports were valued at $14bn (€9.9bn) in June, up by 13% from the previous month, according to Chinese state body the National Development and Reform Commission.

The June figure, though, still represents a 10% decline on the previous year. And market sources caution that down many production chains, it is not only month-on-month comparisons that are the grounds for optimism.

Comparisons are also being made with growth in 2006 – before the big explosion in commodity chemicals capacity based on the assumption that the global economy would continue to grow at levels seen in 2007 and the first half of 2008.

The synthetic fiber sector has seen a big surge in capacity because of low capital and technology entry barriers. Great growth prospects lured investors into fibers, especially after quota restrictions on exports to the West ended in January 2005.

Polyester staple fiber (PSF) capacity rose from 2m tonnes in 2000 to 9.7m tonnes in 2008, according to data gathered from the industry by ICIS training. Filament yarn capacity increased from 3m tonnes/year to 15m tonnes/year during the same period.

Government efforts to compensate for eroding cost advantages in pure commodities by boosting value-added production are also benefiting the textile and garments industries.

Rising wages have led to a drift of low-end apparel and non-apparel manufacturing to countries such as Vietnam.

Any sustained improvement in demand would, of course, be welcomed by the country’s textile chemicals sector, which suffered badly in 2008. But the long-term potential remains tremendous, as production totaled only around 6,000 tonnes last year, illustrating the lack of penetration compared with developed markets, says Rodger Yang, China consulting analyst from the chemicals, material and food practice at global consultancy Frost & Sullivan.

“The Chinese textile chemicals market is at a development stage,” says Yang. An expanding textiles industry and rising living standards mean strong growth potential over the next five years, he adds.

The greatest opportunities lie in the finishing agents segment. High growth is also expected in environmentally friendly and multifunctional agents. However, printing and dyeing auxiliaries have reached saturation point, along with pretreatment agents.

INDUSTRY STRUCTURE
China has more than 1,000 textile chemical suppliers, estimates Yang, which he divides into three tiers of competition.

First come the multinational players, such as US-based Huntsman, Germany’s BASF and Switzerland-based Clariant, with Dymatic and Transfar the two biggest local producers.

“The multinationals mostly supply high-quality textile chemicals which are priced high,” Yang notes. Dymatic and Transfar provide strong competition for the overseas producers because they manufacture products of a comparable quality at much lower prices.

“The second tier comprises local manufacturers who are focused on medium to low-quality textile chemicals,” continues Yang. “Most of these players have long production histories and well-established reputations.”

This second level includes producers such as Shanghai Tiantan Auxiliaries and Beijing CTA-Tex Chemicals.

The third tier is highly fragmented, consisting of numerous small producers focused on the bottom end of the business, where capital entry barriers are very low.

Transfar is the No. 1 player – reflecting its wide portfolio and acquisition activities, says Yang. But Dymatic is expected to take pole position once it commissions new capacities. The multinationals follow in third place, representing about 10% of the total market

Consolidation is expected in tier three, which accounts for more than half of the total market, because the highly fragmented smaller producers lack economies of scale.

The main concentration of production is in the Jiangsu, Zhejiang and Guangdong provinces which together accounted for 60% of total textile chemical manufacturing in China last year. Shanghai province was responsible for 13% of output, while Shandong and Fujian produced 10% and 7% respectively.

Yang identifies fragmentation and over-capacity as issues that need resolution. Fierce price competition and falling profit margins have been the inevitable results of excess supply.

“For instance, take the production of surfactants for textiles. Supply far exceeds demand and prices keep falling,” he says.

Some producers use processing techniques that are obsolete in other countries, and over-manning is common. Production efficiency is low along with the quality of output – and the lack of innovation results in poor differential, says Yang.

“There are about 15,000 types of textile chemicals produced globally, whereas only around 1,200 are made in China,” he notes. “High-quality textile chemicals are almost entirely imported, with the limited product variety restricting the choices for end-users.”

Regulations designed to better protect the environment and human health are further challenges, continues Yang. He predicts that international textile certification Oeko-Tex Standard 100 and the EU’s Reach legislation will have a major impact on production levels.

“Public and government awareness of product safety is increasing,” the consultant points out. “However, the development of environmentally friendly textile chemicals is moving at a very slow pace.”

THE MARCH OF PROGRESS
It would be wrong to characterize the industry as stuck in the last century, however.

China is moving up the value chain in the textile and fibers sectors, with parallel advancements in dyeing technologies. Higher-performance textile chemicals are coming on stream to meet the needs of rapid growth in more sophisticated mixed fiber and knitted textile production. They include anti-electrostatic, super shrinkage and super-soft texture agents, along with flame retardants.

“The development of new dyeing and treatment technologies is likely to result in high demand for tailor-made textile chemicals,” predicts Yang. “And as dyeing technologies advance, there will be higher demand for color-fastness technologies. This will help solve the long-term problems of the dyeing and printing industries.”

Another positive sign is the development of new technologies for the production of multi-functional and high-functional textile chemicals, he says. Cross-mixing and matching of agents is taking place as the multifunctional segment grows, enabling improvements in functional and technical qualities.

Growth in the high functional sector includes enzyme-based technical companies, produced through biotechnology and nanotechnology-based antimicrobials. Such developments are part of a larger diversification.

On the one hand, China has steadily back-integrated. First it was investment in low-end apparel and non-apparel manufacturing, next it was synthetic fibers, and more recently, the country has added sophisticated refineries with high Nelson Index ratings, which measure a plant’s conversion capacity. At the same time, a parallel movement has seen Chinese firms take on more sophisticated textile and garment manufacturing, spurring a similar transformation in textile chemicals.

Some low-end manufacturers might be able to struggle on for years, meeting the needs of less developed parts of China. But one wonders how long will it be before the eastern and southern provinces are exporting high-end textile chemicals to the West.

Read John Richardson’s Asian Chemical Connections blog