Polyurethane growth in China is slowing as stimulus packages stop, and car makers and appliance producers struggle to balance supply and demand. Report by Liz White, editor
For some time now, China has been the powerhouse of the world's economy. As the developed world battled the economic rns1s, in many sectors, including polyurethanes, China remained one place where suppliers could depend on seeing consistent high growth.
But commentators now report that this unparalleled growth in the country's automotive, appliance and construction sectors is starting to come a little unstuck.
And this has direct consequences for the polyurethanes business in China, as these slowing sectors are ones that typically use a large amount of PU foam of all types.
As a result, growth rates in polyurethane are slowing - although they are still far higher than in other regions.
Japanese MDI supplier Nippon Polyurethane Industry Co.Ltd (NPU) has, "recently felt some slowing down of the Chinese economy," according to Takafumi Kiuchi, business manager for the isocyanates division, in an interview at UTECH Asia/PU China 2011.
"Now the most serious concern is that the Chinese government is tightening credit and that means cash flow is more difficult, and interest rates are higher," Kiuchi added. As a result "customers are saying they don't have enough money ... and the prices of chemicals are dropping," Kiuchi said.
NPU keeps a close eye on the market in China, since some 50-60 percent of its MDI (methylene diphenyl diisocyanate) sales are to Chinese PU processors, making it a very important region for the Japanese producer.
"We believe there will be a strong recovery in future," said Kiuchi, although he doesn't have a feel for when this might happen.
"The PU market in Asia Pacific is seeing double-digit growth, but the 22-percent growth in MDI in 2010 will drop to 13 percent in 2012," commented Azita Owlia, who heads BMS's Asia Pacific polyurethanes business - or did until September, when she resigned, to be replaced by Dr Bernd Steinhilber, most recently head of the BMS speciality films unit.
China's government is tightening credit to get to grips with a potential housing bubble, commented Peter Huo, global marketing manager for Yantai Wanhua Polyurethane Co. Ltd in an 8 September interview during the UTECH Asia/PU China 2011 event in Shanghai,6-8 Sept.
According to Huo, the Chinese economy grew last year at 9.4 percent and this year is predicted to grow at 8 percent. The government's tighter credit control is, “a residual effect from the crisis. Because of a potential asset bubble, the government wants to slow house prices - but not house-building activity," Hua pointed out. China plans to build a lot of rent-controlled housing for low-income families, which will produce much potential for PU use, he added.
Crazy automotive growth now slowing
Meanwhile China's automotive sector has helped drive high PU demand, with "crazy growth rates of up to 30 percent," recently - although this is now stabilising at perhaps 18-20 percent, sa id Steven Hulme, Air Products global marketing manager for polyurethane chemicals.
Andrew Chan, general manager of Hennecke Machinery (Shanghai) Ltd, also thinks automotive growth will level off at a lower figure - 10 percent - but he feels at the top end, growth will remain high, at 20-30 percent.
Meanwhile the appliance sector "may have reached overcapacity; for sure some consolidation is likely," commented Wong Lee Meng, managing director of Cannon Far East.
Wong also noted that the "refrigeration boom is partially because of the subsidy programme," as is the huge automotive growth.
Looking in more detail at the past year, experts at UTECH Asia/PU China 2011 said the PU business grew well in the first half of this year. At Yantai Wanhua, Huo said the PU business in Q1 was "very robust," versus Q1 2010, with a little pre-buying in March and the MDI business grew 12 percent from H1 2010 to Hl 2011.
But Yantai Wanhua, a significant supplier of MDI, saw a slowdown during May to July, and Hua said the government's credit tightening may have had an effect here.
Some of the government stimulus packages have either faded away or are having less impact, Hua said, noting that these are sometimes a double-edged sword as the stimulus produces artificially high demand.
Owlia also commented that cessation of the stimulus packages is one reason production rates have dropped.
As a result of these effects, Hua said, the growth seen from 2009 to 2010 may not be sustainable, although this year has seen six months growth and it is still very healthy.
China has a huge PU base now with MDI demand at 1.4 million tonnes annually - a figure which is at least the size of Europe's market, the Yantai Wanhua executive said.
Polymeric MDI growth high
Noting that MDI growth is high in polymeric MDI (crude) and lower in pure MDI, Owlia said the appliance sector is still showing about 13- percent growth. Compared to 2010, the 201l growth numbers are not so high, "although the base is now quite large," said Owlia.
Hulme of Air Products thinks for PU in Asia there is growth across the board of 8- 10 percent, with China at perhaps 12- 15 percent annually. Appliance production has been growing at a rate of 10- 15 percent, while construction is seeing a 20-percent annual increase. Here there is some use of insulated panels, spray foam and solar panels with PU sealing/insulation, Hulme noted.
To put these rates into perspective, Hulme said, during the same time frame, growth in Japan and Korea was 2-4 percent, in India 15-20 percent, and in South-east Asia 6-8 percent.
Hulme sees similar rates going forward, although he said China is slowing down in automotive and appliance manufacture as the government tries to contain inflation by licensing fewer new plants.
In automotive, Yantai Wanhua is quite optimistic about growth, but Hua said government policy also plays a role here. Local authorities have policies to control the number of vehicles to prevent emissions, cut pollution, raise energy efficiency and keep traffic flowing.
In Beijing, the authorities have instituted a quota, while in Shanghai, people must buy a permit to drive, Hua explained.
Hulme also noted that the Shanghai municipality has instituted this car license plate costing, he said, RMB 53 000 ($8310) - which is more than the cost of the cheapest models.
Such strategies cut into the sales by local OEMs, which make the smaller models, and so affect growth of China's car sector, he added.
Restricting car production is one of the government's strategies to curb inflation, Hulme added.
But Hua noted that in rural areas, the government is still promoting car ownership, with no limits. The Yantai Wanhua executive explained that it is still the case that in the countryside, culturally, people feel they are somebody if they have a car. And of course, the Chinese are good savers. So first they have a house and then a car, and they feel they are participating in China's wealth.
"The penetration of cars into rural areas has surprised everyone," Hua said.
Owlia pointed out that China is a very diverse market, with its mid-size cities quite large, so urbanisation is well-developed
"China has multiple sub-segments of markets and clusters and they are at very different growth points, at every point along the growth/need curve," she commented.
"We all know that as we go inland, everything is quite different," she said, so rural areas are generally poorer.
Owlia also noted another factor: that China's 12th five-year plan is "very balanced" and includes a lot of social aspects, health and benefits such as pensions.
Cannon's Wong also commented on continuing gap in wealth between inland regions and the developed coastal strip, where people are "getting very rich now," he said.
People from China are "queuing up for branded goods in Hong Kong. As you go inland, they're poorer," Wong said, adding that government policy is to raise the standard of living inland and in rural areas.
Investment in railways and infrastructure and in inland cities such as Chongqing is all part of this attempt to equalise wealth distribution, Wong commented.
Owlia put China's GDP growth for 2011 at 9 percent, a decline over previous years, and did the rest of Asia Pacific (APAC) will also see a decline in GDP. But she feels prospects in the region are "still strong and good." As evidence of this, she said APAC has only 1.6 kg/head of annual PU use, NAFTA's is s kg/head, EMEAl's is about 2.0 kg/head - but that's low because of the inclusion of Africa and India, she said.
Generally, developed countries have annual PU use per capita of about 5 kg. So China has a way to go here, Owlia commented.
Discussing the global economic climate, Hua said the consensus is that austerity measures will have to be followed to cut government debt both in the US and Europe.
That will have some impact on general economic growth, but the fact remains that high energy costs mean that promotion of insulation se becomes more important.
"We feel the potential for a secondary dip in the west," said Hua, as a result of the tight controls on government spending in the EU.
Some segments are exceptional, Owlia commented, noting that the container sector is rowing "magnificently." Some of this increased demand for insulated containers is a result of the slowdown and the following lift out of cession increasing demand and also, as ships low their speed to conserve energy, customers need more containers.
Where does MDI go?
Out of the estimated 1.4 million tonnes of MDI China will use this year, Huo said one third (about 450 kt) is as pure MDI, which goes into spandex fibres, synthetic leather, shoe soles, adhesives, sealants and thermoplastic polyurethanes.
About another 400 ktpa goes into appliances, for the 80-million plus refrigerators China is going to make this year, Hua said.
Of the remaining 600 ktpa, some goes into one-component foams and traditional spray foam, some into pipe insulation, and some for solar water heaters, for example.
Insulated building panels are still not a huge market in China versus the West, Hua pointed out. China does use a lot of spray foam and also some discontinuous panels, for cold warehouses, with the total here quite large, he added.
"Pipe-in-pipe insulation is a huge sector," Huo said, for uses such as city water heating, and oil transport.
Some MDI is also used for car seat foam, but the figure here may depend on the price of TDI, and on the type of vehicle under discussion,for example, whether it's an Audi or a RMB 30 000 local model, Hua commented.
The huge amounts of low-end local models may not offer designers much choice, as they will be very price sensitive and MDI-based foams are unlikely to be the first choice Huo said. Here Huo pointed out that while the number of vehicles made in China may have surpassed that in the US, a large part of Chinese automotive product ion is at the low end, by OEMs which are highly price sensitive.
Globally MDI may get tight...
Looking at global supply and demand in MDI. Huo said growth is generally healthy, but with the global economy slowing there might be some impact.
Not a lot of new MDI capacity will be coming on stream in the West, so there is potential for shortages in some regions over the next two years, the Yantai Wanhua executive said.
Operating rates in Asia are "pretty high," at about 90 percent and in other regions is going up to a healthy level, he added.
Asked about the TDI market in China, Huo said, "I would say this is not so rosy as other segments." Some players are struggling and others are getting bigger, with some "now having over 100 ktpa plants," he said.
But there are opportunities for growth in TDI in flexible foam, he said, noting that "a survey of smaller Chinese hotels would convince you that China needs foam mattresses."
In terms of PU demand. "Asia Pacific remains the growth engine," said Joachim Wolff, the new head of the BMS polyurethanes business. He characterised Europe as "quite differentiated," with no big turnaround in construction expected in next few years in Spain and Italy, for example.
France and Germany have GDP growth of 3 percent, while Eastern Europe continues to see good eastwards from the EU to take advantage of cheaper labour.
In Europe, Wolff said BMS sees "a certain slowdown coming" - adding that this will not be too severe.
The construct ion market is slow, automotive has recovered a little, but debt is still high and liquidity low, with governments the only source of cash, he added.
Because many investments in MDI were delayed globally, BMS also sees the market for MDI getting a little shorter i11 2011/12.
This will not be as short as they originally thought -but that depends on the slowdown, he noted.
Discussing polyurethane growth in Asia, Owlia said in India, automotive is growing strongly.
"India still has a lot of infrastructure issues," she added, but that means there are significant opportunities.
Indonesia is growing also very fast, Owlia said, "and if you put China, India and all the AS EAN countries together (they make up) perhaps 65 percent of the world's population," largely with low incomes and levels of spending.
"All these people need stuff," - footwear, furniture, housing, appliances, cars. Owlia said. As a result, she thinks this region will have "at least 30 to 40 years growth."
In this context growth will be tightly linked to construction which is still growing very rapidly, at 20- 30 percent a year, with furniture demand growing with that, and hence foam demand rising.
- Many thanks to Christian Chen for his able interpretating during the UTECHAsia/PU China 2011 event
