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After 30 years of high-speed growth, the Chinese economy is due
for correction. In China,real-term GDP grew at an average of 8.4%
per year from 2007 to 2017. However, GDP growth is projected to
slow to 6.6% in 2018, 6.3% in 2019, 6.0% in 2020, and 5.9% in 2021.
The big problems include non-performing assets - including
excessive production capacity and non-competitive companies - and
significant environmental pollution. The manufacturing industry
struggled for the last five years with excessive competition,
mainly based on low-price strategies and expanding capacity. To
restructure the supply side, the Chinese government implemented a
deleveraging policy and optimized non-performing assets. These
changes reduced excessive production capacity and caused some
non-competitive companies to exit the market. In the short-term,
however, these policies created an economic slowdown.
The other major factor affecting the Chinese economy is the
acceleration of China's environmental protection campaign since
early 2017. Tightening environmental protection added new business
operating costs and led to factory closures in high-polluting
sectors, which weighed on industrial production. The 2017 Annual
Economic Work Conference further emphasized environmental
protection as one of the major policy focuses of the government in
the coming three years. These policies mainly affect small and
private companies, causing some to close their factories. In
contrast, large enterprises can afford to install equipment and
upgrade technology to meet the standards, allowing them to survive
and benefit.
Stricter environment regulations have negatively impacted
industrial output since 2017. As indicated in Figure 1, industrial
output growth remained weak as light-manufacturing output declined.
Under these circumstances, the growth of the Chinese specialty
chemicals market also has been slowing. In addition, recent trade
friction between the United States and China reduced Chinese
exports.
Specialty chemicals are widely used in everything from household
items such as detergents, cosmetics and processed food to high-tech
products such as aircraft and mobile phones. With 24% of the
world's 2017 consumption, China is the largest consumer of
specialty chemicals. Therefore, slowdown of the Chinese economy
significantly impacts the world's specialty chemical market.
Recently China experienced an 8% to 10% annual growth rate in
specialty chemicals. However, lower GDP and tighter regulations
directly impact the consumption of related specialty chemicals. As
a result, we project that China's specialty chemical growth rate
will slow to 6% between 2017 and 2022 (see Figure 2).
Specialty chemical growth rates in China vary widely depending
on industry trends, ranging from 1.7% for specialty paper chemicals
to 15% for integrated circuit (IC) processing chemicals. For
example, specialty chemicals used for paper processing are
decreasing mainly because of digitalization, creating stagnant
industry growth. Many small to mid-sized paper processing mills
have closed in response to strict environmental regulations,
reducing specialty paper chemicals consumption. Another low growth
specialty chemicals sector is that for textile industry. China's
rapidly increasing labor costs are causing textile industry to move
to Southeast Asia, which results in lower growth rate for the
specialty chemicals. In contrast, strict environmental regulations
have catalyzed the replacement of some non-environmental friendly
or harmful chemicals, such as bleaching agents containing chloride
[hydro-fluorocarbon used as blowing agents, and some types of
brominated flame retardants].
Although the average growth rate for chemicals used in
manufacturing has declined, some Chinese manufacturing markets are
still growing. For example, specialty chemicals for personal
services and goods, including cosmetics, nutraceuticals, and flavor
and fragrances are growing at a faster pace because they have low
elasticity relative to GDP. Another high-growth market is specialty
chemicals for production of ICs. Because China heavily relies on
imported ICs, its government implemented a policy to increase
domestic manufacturing ICs from the current 20% to at least 50%
within the next five years. Electronics chemicals growth is also
stimulated by high-technology advances, including artificial
intelligence and the Internet of Things. Consequently, China is
investing in R&D for electronics and related manufacturing
industries. Automotive computerization and the development of
electric vehicles also positively affects the consumption of IC
chemicals. In the coming years, we expect the market for IC and
semiconductor processing chemicals to rise 15% and the market for
printed circuit board and IC packaging materials chemicals to
expand 8%. High-performance thermoplastics, which are mainly used
in automotive and electronic products, also will grow quickly.
Another factor changing the specialty chemical market is the
evolution of Chinese lifestyles and consumer attitudes. A focus on
rapid growth has shifted to improved quality, and price-conscious
consumers stress quality. Because these conditions make it
difficult to achieve high growth rates based on volume, the
government and investors are paying more attention to quality.
Trade friction between the United States and China may
indirectly influence consumption of some specialty chemicals. For
example, reduction of plastics exports to the U.S decreases the
consumption of plastic additives in China. As China is the largest
producer of electronic end-use products, a decrease in exports will
reduce consumption of electronics chemicals. Fewer exports will
also negatively affect the Chinese economy, further decreasing
domestic consumption of specialty chemicals.
Many other Asian countries that export large volumes to China
are affected by its economy. For example, Taiwan and South Korea
send 30% to 40% of their total exports to China on value basis.
Singapore and the Philippines export 20% to 30%. And Japan,
Malaysia, Thailand, and Indonesia export 10% to 20%. Therefore, any
slowdown in the Chinese economy will negatively impact these
countries.
Other Asia excluding China accounts for 23% of the world's
specialty chemical markets. IC chemicals represent the largest
market segment, especially in North Asian countries. Taiwan, Japan,
and South Korea are major producers of ICs, many of which are
exported to China. These countries increased their IC exports to
China as the Chinese electronic industry grew. However, IC imports
are falling with the Chinese demand for electronics ICs. Chinese
imports of ICs from Taiwan, South Korea and Japan have been
decreasing since November 2018. In December 2018, Chinese imports
of ICs decreased from Taiwan by 21%, South Korea by by14% , and
Japan by 9%, compared with December 2017. This trend will continue
for at least the first half of 2019.
The slowdown of the Chinese economy will affect the specialty
chemical market not only in China, but also in Asian countries that
trade large volumes with China. These countries should prepare for
lower Chinese growth by stimulating domestic consumption of
specialty chemicals. In addition, trade friction between the United
States and China could worsen the Chinese economy, although the
precise impact is still unknown.
Posted 14 May 2019 by Masahiro Yoneyama, Executive Director, Special Chemical Insight, IHS Markit and