The impact of the new policy on chemical manufacturer

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  • Published date: March 18, 2021
    • Arambol, Goa, India
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In the past 50 years, driven by cost-effectiveness and loose regulation, China has become a manufacturing power. However, over time, this has had a huge negative impact on the environment, forcing the Chinese government to take positive measures to implement strict policies and cleaner emission standards. What is the impact on the chemical industry?

Changes in regulations

The government's policy change began in may2017 with its "five step" approach to clean China - inspection, distribution, patrol, interviews and special inspections. China has shifted from growth policy at all costs to blue sky policy. Now, China has strengthened its review, strengthened the field inspection, restricted the number of new plants approved, and reduced the permit to transport and store hazardous materials. As a result of the changes in these policies, chemicals are now managed under a number of laws in accordance with their legal status.

The influence on chemical manufacturing

The new environmental regulations have different impacts on chemical manufacturer. The impact on upstream petrochemical plants, chemical intermediates and polymer units is relatively low, as most of these units have appropriate emission control and waste disposal facilities. The most affected sectors are small units that produce special chemicals such as coatings, dyes, pesticides, food ingredients and surfactants, which generally lack infrastructure to comply with emission standards and waste treatment regulations. In 2017, the gap in emissions levels led to a temporary closure of 40 per cent of China's manufacturing capacity. About 80000 factories were fined. In 2018, there were also a number of business failures, and many companies had to pay huge fines for non-compliance. According to a report in 2018, the government closed 25 percent of chemical manufacturers in Shandong Province, affecting 5-10 percent of production.

Chemical manufacturers affected by the new policy are:

Dongying Aoxing Petrochemical has been closed for a while, and the specific closing time is unknown

Yanshan Petrochemical and Guangzhou Petrochemical have been required to move production bases

Hebei Xinhua holdings is required to close or limit its methanol and formaldehyde production by the end of 2019 and move its hydrogen peroxide sector

The above example highlights the government's efforts to implement these policies over the past few years. In addition to the temporary closure, the government plans to transfer factories that produce toxic chemicals to specialized industrial areas. Although the choice of relocation seems to be better than shutting down production completely, there are also constraints such as the decline in sales in the transition period, buffering inventory planning and capital demand. Small and medium-sized special chemical production enterprises are the first to bear the brunt for their lack of funds and poor economic benefits. In addition, the government has increased the time to approve new plants - from six to 18 months - which will lead to further delays in the restart of production.

With all these changes and the increase in environmental due diligence, the total cost will inevitably increase. Mandatory installation of VOC treatment equipment, water treatment costs, increased raw material costs and higher transport costs will increase the existing manufacturing costs. Industry consolidation is expected to be a recent trend as regulation tightens, as smaller companies will not be able to afford such investments to upgrade their production processes. This will prove to be a good thing, as the problem of continued overcapacity may be addressed to some extent.

Purchase from China

Companies that buy chemicals from China will face challenges as factories are being shut down. Buyers who purchase dyes and agrochemical intermediates from small and medium suppliers will be most affected. These buyers can reduce risk by considering the purchase of certain materials / quantities from other regions. Buyers can also consider diversifying the supply base temporarily to reduce overall supply risk. In 2019 and 2020, monitoring environmental risks facing suppliers and building strong relationships will be key.

Companies that buy rubber chemicals, polyethylene, polypropylene, PVC, methylacetone, etc. will face the challenge of closure. In addition, participants relying on downstream refineries and mixers will also be affected because the blue sky policy prohibits the use of chemical materials in oil mixtures and the sale of the mix in the name of chemical materials.

In general, the regulatory changes in China's chemical manufacturing industry will have an impact on the global chemical industry.

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