Sep 22 2005
Over the next five to 10 years, China's continuing and rapid economic growth and its programme to liberalise trade will offer very significant business opportunities for foreign chemical companies. These will include opportunities to export products to China and to manufacture and trade within the country, Shell Chemicals' Colin McKendrick today told Chemical Week's Shanghai conference.
However, he said there are also significant challenges in prospect including the volatility and cyclicality of petrochemicals, global cost competitiveness, emerging competitors and the changing structure of China's domestic market. Furthermore, both partners and customers in China will become increasingly focused on achieving added value in their transactions with foreign chemical companies.
Mr McKendrick, who is Shell's joint venture manager for the petrochemical complex built jointly with CNOOC at Daya Bay in the southern province of Guangdong, said China has become an economic powerhouse with well above average GDP growth, and where demand for basic petrochemicals products such as ethylene, styrene and ethylene glycol is soaring. "According to some estimates by 2020 China is likely to become the second largest chemical market in the world," he noted.
As an example of China's huge market potential, Mr McKendrick compared China's current per capita consumption of plastics - around 22 kg per year - with Japan's, which is around 87kg per year. He also noted how Asia and particularly China will likely dominate global demand growth for basic petrochemicals such as ethylene and styrene over the next 10 years. Much of this demand growth - despite significant increases in domestic manufacturing capacity - will be met though huge quantities of imports, which are expected to flow into China from plants in Asia-Pacific and to an increasing extent fro m new Middle East capacity.
Turning to some of the opportunities for direct investment in China's chemical sector, Mr McKendrick said China's accession to the World Trade Organisation in 2001 was a key enabling factor. "Currently, the three key changes in regulations affecting chemicals are: Substantially reduced import duties on the vast majority of chemical products; Fewer restrictions on the size of investments which can be done as a 100% foreign invested enterprise; and Foreign companies are now able to establish wholly owned trading and distribution companies with low capital requirements."
The first two measures are being progressively introduced in line with agreed timeframes with import tariffs for major petrochemicals and polymers reducing to agreed levels by 2008. The requisite regulatory measures that will liberalise trade and distribution started coming into effect in late 2004 and as a result, the structure of China's domestic market is likely to undergo significant change in the next few years, he continued. "Under changes to meet China's WTO accession commitments, foreign companies are now able to establish foreign invested commercial enterprises - or FICEs - and existing foreign and domestic companies can change their business licenses to trade. For this reason, it is likely there will be significant restructuring of the trading business with the major global players establishing major operations in China. Certainly we think it is likely that there will be consolidation - that is fewer players - and major changes in the role of traders and distributors in relation to the principals," said Mr McKendrick.
In terms of a timeframe for change, the Shell executive said: "My guess is that in five years time the landscape of China's domestic market will look very different. For example, it seems likely that domestic companies will review their approaches to marketing. International majors can be expected to have significant marketing entities in China to complement their manufacturing entities, and there will probably be fewer Chinese importers and traders. Some key domestic players will continue to be prominent, but the current plethora will be reduced. We are also likely to see partnerships between some of the major foreign entities and the significant Chinese distributors - certainly more so than today."
Turning to manufacturing opportunities, Mr McKendrick said it seems likely that the cracker-plus-derivatives projects may be tougher to progress in the next few years. These are still designated as "pillar industries" by the Chinese government and will continue to be undertaken only as Sino-foreign joint ventures. "One thing is certain: To be given the opportunity to invest in one these key "pillar industries", foreign partners will have to offer things that the Chinese government and Chinese companies value. But as Chinese companies become more sophisticated and experienced, we can expect it to become increasingly difficult to be an attractive partner for major Chinese enterprises."
While technology and management and marketing skills may remain attractive, the Shell executive suggested future winning attributes could include "access to strategic resources such as crude oil. Opportunities to partner internationally could also be of interest, as will the establishment of R&D and innovation centres in China. It will surely be a complex combination of the best operating, marketing and strategic know-how."
A key challenge highlighted in the speech is China's domestic market: "There are several segments to the Chinese market: In order to access these profitably, it is necessary to have a clear strategy on which segments to focus on . There is the true domestic market in China itself, where all transactions are in RMB. There is also a large re-export market, which is essentially focused around the free trade zones. Chemicals are imported, processed and are then re-exported for further processing or as finished goods. This market is not really in China, but rather in the China export zones. Finally, China is very large and logistics are very challenging with costs varying by up to US$50 plus per tonne. So what we really see is a number of totally different regional markets."
Turning to Shell's strategy for petrochemicals in Asia and China, Mr McKendrick said: "Shell's strategy is quite simple. We want to be an industry leader, with global reach, world-scale assets and low cost production. In terms of products, we're concentrating on base chemicals - lower olefins and aromatics and first line derivatives such as ethylene oxide, higher olefins, styrene and propylene oxide. In the last few years, we have been in the process of shifting the balance of our global production. In 2000, about 25% of our assets were in Asia-Pacific and the Middle East. By 2010, our intention is to have over a third of our production in these two regions. This will enable us to make use of advantaged feedstock in the Middle East while enhancing our ability to supply the region which has the highest growth potential - Asia-Pacific - from close range.
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