China's Rising Chemicals Supply, Lower Demand Squeeze Industry
09 Dezember 2015 - 5:04PM
Dow Jones News
By Brian Spegele
BEIJING--China's ambitions in global chemicals coupled with its
slowing domestic economy has contributed to sharp overcapacity in
parts of the industry, which analysts say is weighing on the
margins of major companies and could contribute to consolidation in
the sector.
Tough market conditions for chemical companies coupled with
rising Chinese technical prowess are among industry-shaping changes
occurring behind the scenes. Dow Chemical Co. and DuPont Co. have
pushed ahead with merger discussions, according to people familiar
with the matter, and could announce a merger in coming days between
companies valued together at about $120 billion.
The companies, with positions in everything from plastics to
agriculture, have substantial operations across Asia. They have
moved to solidify their presence in the growth region even as
China's economy has slowed faster than economists expected.
"In some areas of the chemical industry you see very sizable
overcapacity, which is a result of heavy investment activity that
came online at the moment when suddenly growth expectations had to
be corrected," said Yves Willers, a senior partner at the Boston
Consulting Group. "There is a natural opportunity to
consolidate."
The challenges are steep for companies such as Dow and DuPont,
which depend in part on making chemicals that are building blocks
for everything from plastics to clothes.
China is helping drive a sharp turnabout in the industry. Once
focused on producing enough chemicals for its own use, its chemical
companies now look to export. That has contributed to falling
prices for many chemicals globally.
The chemicals industry and China in many ways mirror what has
happened in other sectors. Chinese refiners have boosted exports of
products such as diesel across Asia as demand at home sinks,
weighing on regional prices. While that helps support jobs at home
in China, it brings Chinese companies into deeper competition with
multinational firms.
At the same time, China remains an important growth market for
companies such as DuPont. The Chinese economy remains heavily
tilted toward industry and manufacturing, and it still relies on
imports of more complex chemical solutions produced by foreign
companies. DuPont said net sales in China last year grew 4% over a
year earlier, to $2.8 billion. Total global sales for the company
fell last year.
Rising Chinese prowess may be partly behind deals talk in the
chemicals sector. Major Chinese companies including state-owned
China Petrochemical Corp. and China National Chemical Corp. have
long been known globally for their size and global presence. At the
same time, a host of smaller players rushed into the market during
the past decade when demand was strong, acquiring technical
know-how along the way.
"If you look at the commodity chemical market in China, it's
extremely competitive, not only for the local players, but also for
the global players," said Sheng Hong, a Beijing-based partner for
McKinsey & Co.
Among the trends, he said, has been growing know-how by Chinese
players that have commoditized once high-margin specialty products
through growing production. "In the past 10 years, the Chinese have
actually demonstrated quite a bit of capability in technology
development," he said.
Write to Brian Spegele at brian.spegele@wsj.com
(END) Dow Jones Newswires
December 09, 2015 10:49 ET (15:49 GMT)
Copyright (c) 2015 Dow Jones & Company, Inc.
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