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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.

There is a big battle being played out on planet Earth. The fighting is intense, but the rewards are worth billions. The battle is for the global chemical market and, as any chemicals trader, company CEO or salesman will tell you, competition is hotting up.

There is much thinking at present, amongst economist circles, that the battle is being played out between the giant multi-national corporations of Europe and North America (Dow, BASF, Bayer, LyondellBasell etc.) and the emerging giants of the BRIC countries (Sinopec, Braskem, Reliance, Alpek and Sasol). As both these groups vie for power and influence over the all important chemicals market, as demand increases, there is much money to be made. But of equal importance, is the fact that the battle is intensifying as the number of players in the market increases.

As most chemicals professionals are aware, the real growth area is in the markets of the Far East, India and South America. The more professional, chemicals professionals will also have observed how the emerging giants are taking a larger part of this booming market. Whilst the western multinationals that have moved into these regions have used experience and financial muscle to their advantage, the emerging markets ‘new kids on the block‘ have used their local knowledge and influence in government to their advantage, at the same time as grabbing major market share.

As Nikolaus Lang and Andreas Gocke (of industrial consultants, BCG) note in their recent report entitled, Dueling with Dragons: The Next Phase to Global Competition, “With $60 billion in revenues in 2013, China’s Sinopec is larger than Dow Chemical. Sabic, a $50 billion conglomerate based in Saudi Arabia, is bigger than LyondellBasell Industries, DuPont, and Mitsubishi Chemical.“ The position of these conglomerates has been greatly aided not only by insider government contacts, but also by their contacts with nationalised power generators and oil companies.

These major emerging market conglomerates at present have a strong hold on the raw material markets, as well as basic plastics and polymer production, but many economists believe that this position will soon change.

This theory is based on the success that emerging market companies have had over the last 30 years, changing from small inexperienced start ups into supersized corporations (as the emerging market’s thirst for chemicals has also become supersized). It therefore follows that if the emerging markets have an increased demand for speciality chemicals, that companies based in the emerging markets (like Sinopec and Braskem) will grow into the speciality chemicals sector.

Furthermore, logic states that these companies will be drawn into the speciality sector as their R&D budgets expand, and because of the higher margins to be made there. Indeed, the Chinese government’s last five-year plan included giving additional support for Chinese businesses in speciality materials, advanced polymers, as well as research into new composities and inorganic materials.

Already the growing power of the newer players from the emerging markets can be seen, as Lang and Gocke note, “From 2007 through 2012, the amount that emerging market companies spent on acquisitions [of western companies] grew from $7.9 billion to $10.6 billion [whilst] the transaction volumes of western multinationals‘ acquisitions of emerging-market-based chemical companies dropped from $4.6 billion to $2.8 billion during that same period. Emerging market companies are making bigger deals, too. The average emerging market company outbound acquisition—$881 million—was nearly nine times larger than the average outbound western multinational deal.“

That said, no one is predicting the immediate death of western mulitinationals (like Dow and BASF) anytime soon. As the industry grows there will be room for them, as well as other new players in the market. However, many predict a period of oversupply in the coming years that will further reduce margins. To combat this many of the larger businesses in the industry are adopting strategies like these;

• Continued diversification. A wider range of products will give greater flexibility and stability, given the great price fluctuations to which the industry has historically been prone. Diversifying into speciality chemicals makes sense, not only for their higher margins, but also as part of a trend to apply modern technological solutions to more specialised problems. One such example being the premium product Zetag. Zetag is a specialised polymer developed by BASF to solve a particular, specialised problem (to more effectively remove water from sludge, reducing the cost of disposal for the customer). It is expected that the future growth of the chemicals market will lie in specialised chemicals for specialised problems.
• Localisation. Businesses will increasingly focus on speciality markets. As the BRIC economies become wealthier and have an expanded middle class (with its ensuing consumerist demands), they will demand their own specialised chemical products based on regional and cultural influences. R&D will also become increasingly localised, moving from western universities and research centres to the emerging markets. For example, when in early 2015 the chemicals company Hallstar opened a new polymer research facility in Suzhou, China, at a cost of many millions. This is a new trend that would have been unheard of only a decade ago.
• Sustainability. This final point of action has become a rather overused buzzword in the last few years, mostly because it is becomming an increasingly important factor. An industry with small margins needs sustainability for two good reasons; it reduces waste (at a time when energy and raw material prices are rising), and it improves a companies image in a time when consumers and politicians are becomming more and more environmentally conscious.

Whether these strategies will help western businesses stay competitive when the flow of power is heading east, remains to be seen. However, with such large profits at stake, it is sure to be a major battle for control and influence over this vital economic sector.

Indeed, given the global strategic importance that the chemicals industry has in so many areas (modern weapons, telecommunications, space exploration etc.), it may not be long before other factors, such as politics, start to influence the winners and losers in this field. Furthermore, as control of chemical supply and production means control over almost every part of our daily lives, then the battle for supremacy in the chemicals markets of the 21st century may soon evolve into a war.

When the world became aware of the damaging effect that CFC’s (chlorofluorocarbons; commonly used as a refrigerant) were causing to the ozone layer, it was chemists who developed a replacement product HFC’s (hydrofluorocarbons). Neonicotinoids are currently being studied for the possible negative effects that these effective pesticides have on bee populations. It is chemistry that is at the heart of this study, and it is chemistry that will find an improved ‘pollinator friendly’ pesticide.

A few years ago in the UK, a woman in her twenties died in her tent whilst she slept. The evening before her death, she and her boyfriend cooked food on a barbeque. They then brought the barbeque inside the tent to protect it from rain and thieves. As her boyfriend recounted to the BBC, “The barbecue was cold to the touch. There was no smoke coming off it, no glowing, it seemed to be completely inactive.”

But it was still emitting unseen fumes. The woman died that night of carbon monoxide poisoning. The boyfriend was lucky to survive.

Carbon monoxide is a deadly chemical. She was killed by chemicals – so it still sounds like chemistry is to blame.

Technically it was, but then it was also chemistry that allowed the transfer of oxygen from the air in her lungs and into her blood stream that kept her alive in the first place. Hooray for chemistry, it brings life to all living creatures! Not quite, as I imagine the story was read by people as, “Chemicals kill another innocent person.”

To avoid this negative publicity, perhaps the chemical industry should collectively take on the role of spreading the good news of its work. Focusing news stories less on the problems that chemicals cause, and more on the positive that it does in the world. Making our planet a healthier place to live, whilst at the same time creating jobs and developing businesses.

Take for example the story of a sushi box, that Philipp Moeller, who at the time was business manager at Clarifoil, a uk producer of cellulose acetate, wrote about in a blog on the IHS Chemweek blog page (http://www.chemweek.com/chem_ideas/Guest-Author/By-rethinking-old-ways-the-chemical-industry-can-change-the-world_47952.html). Here he described a problem caused by a Styrofoam box, that was used to package sushi.

The box was not really good enough for the task in hand, as the sushi was rather damaged in transit from the shop to office. It was used only once and then thrown away, quite possibly ending its days slowly decomposing in a landfill site.

According to data from Duke University, “Approximately 55% of 220 million tons of waste generated each year in the United States ends up in one of the over 3,500 landfills.”

This is a bad result for almost everyone, but as the styrofoam container was made by the chemicals/polymer industry, most of the blame falls on them. Not the food industry for using an ineffective, one time user container, not the purchaser, or the shop that sold the sushi, not the waste collection service for using landfill instead of recycling, but the chemicals industry that had developed a product as un-earth friendly as Styrofoam.

Most people at this point would feel a degree of self-loathing at being part of the landfill problem through a personal desire for takeaway sushi, but not so Philipp Moeller. He brought in the engineers and designers from his place of work and they went through a useful thought process, knowing that chemicals could produce a better packaging solution for sushi.

As he explains, “One of the eco-friendly solutions (was) recycled polyethylene terephthalate, or RPET. RPET ticks a green initiative box for many companies; however, RPET products still contain virgin PET and are only up to one-third recycled material. This recycled material comes from manufacturers’ waste rather than plastic bottles consumers place in recycling bins. Also, RPET has a finite lifetime since it can only be recycled a limited number of times and will ultimately end up in landfills.”

So the search for a better solution continued, leading the team to try out a diacetate film that could be thermoformed into the shape of a sushi box. As Moeller explains, this was a better outcome on many levels. “Not only is the cellulose diacetate raw material sourced from sustainably managed forests, the standard film can also be composted according to American and European standards (EN13432 and ASTM D6400). Cellulose diacetate is also 100% biodegradable so it doesn’t stack up in landfills. It is also approved by the US Food and Drug Administration (FDA).”

His team had created a product that was, “… clearer and higher quality than PET, RPET and polylactic acid (PLA) that today are the industry standard.” Thus whilst chemistry was the cause of the original problem, it also became part of the solution.

As Professor Herbert Ipser, of the University of Vienna and President of the GÖCH (Austrian Chemical Society) said in a recent interview, “…a good part of our standard of living is due to the achievements of chemistry.” A message that needs to be spread wider, not only to the public, but also among the industry itself.

The further development of our understanding and application of chemicals can solve the entire planet’s problems. From hydrogen engines to solar panels, from non-toxic food preservatives to fire suppressants and retardants, chemistry has it all.

By thinking a little outside the box (sushi or otherwise), you never know when and how you can use your products to create a new market, find a new purpose and not only profit from it, but also help the good name of chemistry look slightly better.