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Chemicals are a key part of modern life. We all depend on them more than we can possibly imagine. You can count the number of things in your life that do not require the modern chemicals industry on one hand. With the Chinese economy now the workshop of the world, and a major chemicals producer, it is important for us all to observe how the industry there progresses, as the route it takes, its successes and failures, will impact us all.

For over three decades, the Chinese chemicals industry has been growing at a phenomenal rate, with all indications of continued expansion and diversification. The Asian market for chemicals is growing at a similar speed, as the middle classes in China, Vietnam, Cambodia, India and the rest of the developing Far East grows. The changing of economies from rural to industrial to modern is fuelling chemicals industry growth.

But as these economies develop and their populations mature, it is predicted that middle class values will begin to be of greater importance. Whilst this will further aid economic development, as teachers, restaurant managers and doctors strive to own a bigger house or a second car, middle class values often also include an increased desire to protect the environment.

At present, China’s rapid growth is launching people into the modern world. By comparison, their parents worked hard to put food on the table and their grandparents may well have lived in genuine fear of starvation.

The desire for personal wealth, and the modern conveniences that this provides, has meant that China has not needed to give the welfare of the environment too high a priority…until now. For possibly a growing Chinese middle class will begin to question China’s green credentials.

For years now, China has been dependent on burning cheap coal to fuel its industries, whilst more sustainable power sources (like the Three Gorges dam), also come with an environmental price for river wildlife or a human cost on the number of homes flooded.

China has been able to largely ignore calls for greater environmental care, despite the smog that covers most Chinese cities, as electricity is in demand, not only for industry, but also for new TV’s, mobile phones and central heating. But second generation middle class people or members of an increasingly comfortable, city dwelling lower class may apply increasing pressure for eco-management.

We already know how mature Western market economies cope with the pressure of being seen to be green. With political will for fossil fuel reduction, efforts to ethically source raw materials, carbon taxes and wind power subsidies, all of which come at a price and seriously affect the competitive advantage of industries.

We can also see how developed Asian economies in Japan, Taiwan and South Korea manage their middle classes’ desire to stay green. They give us a model of how we can expect developing democracies in India, Thailand and Malaysia to mature in this regard. But Chinese industry is largely state-owned, its economic and environmental policy established by central committee. How will they manage their expanding chemicals industry with increased pressure to be environmentally friendly?

For those of you who have not picked up a newspaper recently, you may like to know that the Islamic Republic of Iran is soon to join the wider global community. Given the intensity of political grief between Iran and the West over the past 40 years, the return will not happen overnight, but in small steps, business may soon return to Tehran. As Yukiya Amano, head of the International Atomic Energy Agency recently confirmed, “By December, if all goes well, we are going to start to see the easing off of sanctions.”

But as with any new market, especially one that in 2005 produced 5.1% of the world’s oil, few are waiting till Christmas to begin trading. When and how this begins, however, greatly depends on who you are, where you are from and what your business is.

As William McGlone, a specialist in trade law and economic sanctions explains, “As a general rule of thumb, any US-based business and any US person, unless specifically authorised, will be prevented from doing any business in Iran. There’s this expectation, or assumption, in the business community that the sanctions are being lifted, when in fact the US legal framework is scheduled to stay in place.”

A point confirmed by an aide to President Obama, who said, “We are not removing our trade embargo on Iran.”

However, things are not the same in Europe, with Iran’s ambassador to the UN admitting that, “We are recently witnessing the return of European investors to the country. Even in the past couple of weeks we have approved more than $2 billion of projects by European companies.”

News that is supported by the Iranian Deputy Oil Minister, Abbas She’ri Moqaddam who stated in the Tehran Times that an undisclosed European bank will invest €90m to build a gas-to-propylene plant, with an expected 120,000 ton output.

Even the Americans seem to accept that whilst US firms still have restrictions, the sanctions are falling for most, with Vanessa Sciarra, vice president at the Emergency Committee for American Trade admitting, “I think the practical reality is the Europeans will be there [in Iran] first.”

Of course, this is not to say that trade has stopped completely since the West first put sanctions in place in 1996. As even when they were first established some countries (India, South Korea, Malaysia, South Africa, Sri Lanka, Taiwan and Turkey) were exempt on condition that they reduced their Iranian oil imports. A situation that has only slightly altered, as even today, the World Bank notes that trade has merely slowed, but perhaps more significantly it has also changed direction. Its July 2015 report entitled ‘The Economic Implications of Lifting Sanctions on Iran’, notes that, “The tightening of sanctions in 2012 shifted the direction of Iran’s trade further towards Asia, particularly China and India, as well as Turkey and the United Arab Emirates. Iran’s exports to the EU were halted in 2012-14, and imports declined by more than 50 percent during the same period [whilst] sanctions prohibited almost all US trade with Iran … More than half of Iran’s exports in 2014 went to China and India and about three-quarters of its imports were from UAE and China (China 33%, UAE 39%). But even trade with Asian countries showed a slowdown after 2012 due to the sanctions, which limited trade and financial transactions with these countries.”

Prior to the full imposing of sanctions in 2012, Iran had a buoyant, oil driven economy, with major trading partners in Germany, France, Italy and Greece (who together accounted for more than one third of Iran’s total import and exports.

Chemicals were a key part of this trade, as a world bank report confirms, “During the early 2000s, when oil prices were soaring (and sanctions were not restrictive), the Iranian industries that made progress were the petrochemical and chemicals industries, which received massive subsidies, including subsidies on their consumption of fuel.”

At that time the Iranian chemicals industry was dominated by two or three major corporations, which were closely monitored (some would say even controlled) by the government. For example, in 2005 as much as 43% of investment in the entire industry was from Iran’s National Petrochemical Company, a subsidiary of the Ministry of Petroleum.

The dominance of the big Iranian corporations was aided by their inside influence in government which gave these major players an upper hand in striking deals, with official assistance for everything from planning permission to improved energy prices.

The other major players were large foreign investors, who accounted for as much as 53% of the total funding for chemicals projects. Small and medium sized businesses were notably absent from the market, much as they still are today.

Before the sanctions bit, in 2012, investment was strong, with deals such as the 2006 construction of petrochemicals plants in Asaluyeh and Marun, by the Iran National Petrochemical Company. These production plants are so large that they are expected to propel the company into becoming the world’s second largest chemical producer (after Dow Chemical), when production begins running at 100% (predicted to be sometime in 2016). However, since 2012 there has been limited foreign investment (which in turn has limited local investment), leaving the petrochemical and oil industry in need of updated refineries and processing plants.

That said, this will not stop the oil flow, with the world bank reporting that, “While it will take time to resume oil production because of under investment in the sector, most observers predict that in 8 to 12 months, Iran’s crude oil exports can reach pre-2012 levels [of 3 million barrels a day].“

Naturally, this will have an impact on oil and petrochemical prices, and although the actual effect is difficult to gauge, the world bank predicts that, “Iran’s full return to the global market will eventually add about a million barrels of oil a day, lowering oil prices by US$10 per barrel next year, whilst economic growth in the country [is expected] to surge to about 5% in 2016 from 3% this year.”

The price drop would have been more, but Iran has still been exporting oil throughout the period that sanctions have been in place.

As Greg Myre, International Relations Editor at American radio network, NPR, notes, “Under the sanctions, many European states and other countries stopped buying Iranian crude [whilst] those still importing it have been putting money into escrow accounts. Those accounts are now estimated to total around $100 billion, which [when sanctions are lifted] would be released to Iran.“

Whilst it is true that Iran does hold billions of dollars of currency in foreign accounts, it is being cautious about spending its windfall in a hurry. As Akbar Komijani, deputy-govenor of Iran’s central bank explained, “The foreign asset position of the central bank is around $100bn, but we are bringing back only $29bn to the country.”

Experts predict that this cautious approach to much needed investment is a back up against the return of sanctions, as well as the need to allow room for foreign investment for the technological know-how that will accomany it.

Whatever happens, it seems that investment in petrochemicals there certainly will be, with Golnar Motevalli of Bloomberg Business news reporting that, “Iran’s planned $20 billion petrochemical hub at Chabahar on its southeast coast may be open to foreign investment once restrictions are lifted [as] the port has direct access to the Arabian Sea and Indian Ocean and sits at the end of a natural gas pipeline to Pakistan, across the border.”

Whilst Deputy Oil Minister and National Petrochemical President Abbas She’ri Moqaddam claimed in a June interview that, “The country is investing to tap global markets and could triple petrochemical production capacity to 180 million metric tons. Output at that level could bring in revenue of at least $90 billion.”

So where will the money go? Lili Mottaghi at the World Bank reports that, “pharmaceutical industries are expected to get a significant boost … as these firms will now be able to import parts and machinery that have been subject to sanctions in the past two years. It is expected that pharmaceutical exports to Europe, which were worth $2.5 billion prior to 2012, will resume after sanctions are removed.”

But other sectors will also be of focus, and traders should expect an impact from Iranian business in the coming 24 months, as was made clear in a recent study by Dr Anna-Karin Tunemalm, Dr Per Lind and Dr Mohammad Fazlhashemi, entitled ‘Incentives for the Iranian Chemical Boom’ who note that, “Organic chemistry is a keystone in important Iranian industrial sectors like the petroleum and agricultural industries, and also in the growing field of life science and pharmacology. The development of the petroleum industry and further refinement of raw oil into value-added fine chemicals holds a key position in the reinforcement of the Iranian economy and labor market.”

They further observe that, “The fact that organic chemistry holds a strong position in Iran is the result of the fact that the agriculture and oil industries—two industries that are reliant on physical-organic and synthetic chemistry—are responsible for nearly one third of the Iranian GDP. One may argue that a strong organic-chemical profile is desirable to further develop the chemical industry in terms of refining petroleum products to fine chemicals, gasoline, and polymers. This process is a key objective in increasing the national benefit from oil revenues. Such an improvement would also be beneficial for the domestic industry and help create more job opportunities. Furthermore, the growing domestic biotech sector also calls for expertise in organic and synthetic chemistry, as does the pharmaceutical industry.”

So it seems that Iran is preparing itself for more research, more investment and more joint ventures with foreign enterprises to expand its global market share in a wide range of chemicals, even those outside of its natural petrochemical advantage.

Indeed, Mohammad Reza Nematzadeh, Iran’s industry minister made it clear that he sees Iran’s future as a much larger global trader than before sanctions began, stating in a recent speech that, “We are no longer interested in unidirectional importation of goods and machinery from Europe. We are looking for two-way trade, as well as cooperation in development, design, engineering and joint investment for production and export. In mining too, we need a further $20bn of investment by 2025 for the exploration and development of mines.”

Much of the Iranian governments desire to reinvest and to strike up new partnerships is through the opportunity to reignite stagnated areas of the economy. For too long, Iranian oil wells and refineries have been working at under capacity, whilst the opportunity to develop more advanced petrochemical processes has, until now, also passed by.

Iran is run with a strong central government that has strategic control over large sways of public, private and business life. The ruling powers want to see a stronger Iran, that is less dependent on crude oil prices, and one that will not have to face the threat of western sanctions in the future. This is why it is investing so heavily and currently looking for global trade partners and expertise in many fields. As Elena Ianchovichina, Lead Economist in the Chief Economist Office of the World Bank’s Middle East and North Africa region, notes, “Iran has for some time pursued an industrial strategy to be independent regarding the importing of products and expertise in various fields, not least in the chemical and chemical engineering sector.”

This is a point agreed upon by Oliver Jakob, managing director of Zug, a Swiss based Petromatrix GmbH, who notes the strategic value for Iran to invest in chemical production partnerships. He said, “In the long term, Iran wants to move more into selling refined products and having joint-venture refineries abroad. Diversifying exports beyond crude and into higher-value refined products will help Iran boost revenue, and owning geographically dispersed assets would help shield it from potential sanctions in the future”

Certainly it seems that the chemicals industry is about to change yet again. These are exciting times to be trading in chemicals. The value of oil (and its many chemical derivatives) appears to be in constant fluctuation; the growth of the Chinese economy at the heart of global production may or may not have turned a corner. Meanwhile, America and Canada have begun a shale gas revolution, which may or may not be followed by other countries and now Iran is rejoining the global economy.

With an historic lack of small and medium sized chemical firms in Iran, there are certain to be plenty of market niches for the clever entrepreneur of fine and specialised chemicals. The business atmosphere is overwhelmingly upbeat, and clearly has government backing. American traders are seemingly sidelined whilst US economic sanctions continue, so possibly the time is ripe to strike up a co-operation, with Germany already moving in on trade deals.

“Construction machinery, chemicals, food processing, renewable energy equipment – those are some of the areas I think are especially promising for German industry,” said Sasan Krenkler of Krenkler & Partner, a business consultancy specialized in helping German companies enter Iranian markets. Meanwhile, Iranian exports to Germany include crude oil, agricultural products and increasingly petrochemicals produced in Iranian chemical plants, like the €350 million processing unit complex built by the German firm Linde, at Bandar Imam.

So clearly there is business to be done in Iran, if not for any other reason, than the fact that there are 80 million Iranians waiting to buy products. Given this final number, isn’t it time we all started thinking about trading with Iran.

As every economist knows, China has become the workshop of the world over the last twenty years. Everything, and almost anything, can be made in China. It is a much different world from the years of Mao Zedong’s forlorn five year plans which led to famine and poverty and a $227 per capita GDP in 1978. Today, the transition is almost complete, as China has the second largest economy in the world. It is now the world’s largest manufacturer (overtaking America’s 110 year hold of the role), has a $7,600 per capita GDP and 7% growth. It is even the world’s leading sex toy producer, with 70% of market share and is a major exporter of goods including, as Wikipedia reports, “almost every single category of industrial products.”

This includes chemicals, which make up a large part of China’s industrial power (including 20% of global chemical shipments). But historically, there has been one area where the Chinese economy has been out of pace with the rest of its astronomical growth; and that is in specialty chemicals.

As Dr Kai Pflug of Management Consulting – Chemicals, stated in his August 2015 report entitled, ‘Specialty Chemicals in China’, “Historically, specialty chemicals have not been a strength of China´s chemical industry. Generally, the maturity of the specialty chemicals segment in China is lower than in Western markets, as most state-owned chemical companies, but also many of the private ones, focus on standardised high-volume chemicals that do not require any particular application knowledge.“

But why should this be? If China has in the space of two decades become a producer of high-spec medical equipment, has a large share of all technological markets (TV’s, mobile phones, laptops, communications, automobiles), if it can send rockets to the moon and build aircraft carriers, then why isn’t it also a major player in the specialty chemicals market?

Historically, the problem lies in a lack of expertise and the ease with which chemical manufacturers have been able to make handsome profits producing basic chemicals. As Dr Pflug explains, “While local companies can typically provide the most common basic molecules, they often struggle to provide customised products and true solutions and are even further away from including value-added services in their business model. As a consequence, many specialty chemicals are either produced locally by multinational producers or are imported into China.“

The fact that multinational firms have built plants in China is well known, and according to Andrew Thomson, a director at KPMG China in his report ‘Specialty Chemicals in China; Catalysts for Growth’ this is not something that is about to change soon. He states that, “Looking at the multinational players, all of the major international companies have a manufacturing presence in China in one form or another and are approaching the market with relatively aggressive growth strategies. However, many are concerned by China’s relatively weak supply chain and poor record of intellectual property rights.”

But there are other factors behind China’s slow development into specialty chemicals, including the erratic recent history of the sector itself, as industry data specialists at IHS reported in July 2015 in their ‘Overview of the Specialty Chemicals Market’. “During the last 10 years, the speciality chemicals industry has experienced slower growth and lower overall profitability within a more competitive environment than in the preceding period. Since the Great Recession [of 2008], global consumption of specialty chemicals has grown in fits and starts. After plunging 10% in value from 2008 to 2009, consumption grew 16% in 2010, only to fall again in 2011. After very poor growth of less than 1% in 2012, consumption rebounded 7% in 2013 and grew another 4% in 2014.”

This may go some way to explain China’s hesitant participation in specialty chemicals, but  that may now well change, as IHS also note that, “Despite an unsteady macroeconomic environment, global manufacturing and construction industries grew in 2014 and specialty chemical demand followed in consequence.”

This demand is not only global, but also local. As China has progressed into more and more high-tech end products, the domestic demand for specialised chemical products has also grown. A fact supported by Pflug, who notes that, “Chinese and Indian manufacturers have become key players in several specialty chemical markets, [and] the concept of China as a low-cost producer has now gone, since China is shifting from an export focus to meet growing domestic needs for higher-value, downstream products. [So that] in the past few years, [Chinese] growth in the speciality chemicals segment has tended to be 2-4% above that of all chemicals, indicating that the share of specialty chemicals in China will in the future approach the higher level typically found in Western markets.“

But there are still some major problems facing China if it is to compete successfully. It is renowned for having poor infrastructure and relatively basic logistics capabilities. Its safety and environmental record is suspect and there are also concerns from investors over intellectual property rights.

Furthermore, China lags behind other global players in electronic chemicals, in which China has a self-sufficiency rating below 50%, as well as high-end adhesives (despite its position as the world’s largest adhesives producer). At present China suffers in these two areas largely because of technological limitations. It is able to produce products with impurities on the parts per million range, but not in the parts per trillion.

At least not yet. For huge strides are being made with China’s infrastructure, that will greatly help China’s geographically diverse chemicals industry. As Moi-Fung Goh and her team observed in the recent ATKearney report, ‘China 2015: Transportation and Logistics Strategies’ stating that, “The Chinese transportation and logistics industry is poised for major growth over the next five years, portending significant changes for its five main segments; express, road freight, rail freight, contract logistics and international freight forwarding. As the boundaries between these segments blur, consolidation will accelerate and network coverage and density will grow.”

Other experts believe that China will grow into the specialty market, but that it will simply take time, especially given the state of the producers at present, and the time it takes for research to develop into end products. One of them is John Morris, Global Head of Chemicals at KPMG, who said that, “China is moving up the value chain, but this process cannot happen overnight. At present the specialty chemicals sector is unregulated and fragmented. Many companies in the sector are privately owned and make just one or two products.”

This fragmentation and slow expansion is a point taken up by Andrew Thomson of KPMG, who states that, “Although Chinese companies are growing, and likely to become stronger as the industry consolidates, the process may take years. To date, domestic companies have tended to integrate towards the upstream end of the value chain – looking to buy up suppliers of their inputs in order to reduce and control their costs, rather than develop more sophisticated products and services and thereby raise margins.”

Certainly China has already taken a foothold in the feed additives market. It is a major producer of vitamin, mineral and amino acid additives, and following ChemChina’s 2006 acquisition of Adisseo, it is now a part of the methionine market. So it seems that the process of moving towards the wider margins of spec chems is underway.

This is an increasingly logical step; as manufacturing in China continues to expand, the need to have suppliers of all products close to demand becomes more pressing. This is after-all, one of the reasons why western firms started moving East in the first place, a fact that hasn’t changed as the Chinese chemical market will soon represent one third of global demand.

As the Chinese economy matures, salaries and land prices have risen, which reduces the profit margins in all Chinese goods, but makes the draw towards specialty chemicals, with their larger margins, all the more attractive.

Indeed, as the world economy matures, and standards of living rise across the planet, the overall demand for specialty chemicals will too, as a June 2015 report from MarketsandMarkets outlines. “The specialty chemicals market is projected to register a CAGR of 5.42% between 2015 and 2020. Asia-Pacific is also expected to witness the highest growth between 2015 and 2020. This region is the largest and fastest-growing market for specialty chemicals with a CAGR of 6.35% expected between 2015 and 2020.”

The report continues to define how much of this global market growth will be centred on Asia, and China in particular, as it states that, “Growth in the developed nations is constrained by debt, adverse demographic factors, and tighter fiscal policies. However, growth in emerging markets will be much higher. In particular, China will have the highest growth rate of all regions during the next five years. China is seeing some short-term setbacks in its economy and the forecast of consumption for specialty chemicals has been downgraded slightly from the historical range of 8-9% to 7% per year. Nevertheless, it will continue to power the growth of global specialty chemicals during the next five years.”

Business consultants at PWC agree that demand is rising, stating in their report entitled ‘New Opportunities in China for the Chemicals Industry‘, that “Market demand in China is shifting from chemical commodities to specialty chemicals, creating new market opportunities for multinational corporations. Chemical companies can take advantage of new business opportunities from the rising demand for specialty chemicals in China.”

It is often generally perceived that it is easier for Chinese businesses to start producing specialty chemicals due to the vast array of government regulations set up to control the industry. Whilst these can be a problem for all producers, when demand is running high, local officials often turn a blind eye to enforcement for local Chinese businesses, as they are eager to get the plant up and running rather than ensure all the necessary safety and environmental procedures are in place. This can often be to the disadvantage of foreign companies hoping to set up in China, especially those without local market and cultural knowledge.

But still there are reasons for non-Chinese firms to look to the Chinese specialty chemicals market to do business. As Pflug notes, “China’s local companies frequently still do not have a strong position in higher-end specialty chemicals. Approaching specialty chemicals with a commodity mindset, they generally do fairly well as long as customers simply require specific molecules that can be produced without further service. However, they struggle to offer formulations and services.“

With this in mind, whilst there may be numerous problems to overcome and whilst the competition may be fierce, it does seem that an entrepreneur with the right specialised product, formulated and serviced with a market in mind, can still reap the benefits of the growing Chinese specialty chemicals market.