China slowing down but room for some optimism

Simon Robinson talked to some of the key players at UTECH Asia 2016 about how business has been in 2015 and about how 2016 looks.

The Chinese market, which roared ahead like a tiger at the turn of the century and into the first half of the 2010s, is slowing down as the country refocuses its production efforts, “Growth is patchy,” Kenny Pan, vice president Asia Pacific, Huntsman said.

“The market in the second half of 2015 was not good and in 2016, the demand side has been relatively weak but business has come back through the supply side.”

His view is shared broadly by Peter Huo, vice president at Wanhua Chemical.“The Chinese market has been slowing for the past two years,” Huo said.

“The [polyurethane industry saw a] compound average growth rate between 2002 and 2012 of approximately 20% or two times GDP. Between 2015 and 2016, the Chinese MDI market was stagnant or demand dropped,” Huo said.

He added that this was “partly due to overbuilding the capacity or customers over--harvesting the future. It’s normal, just a digestion time.”

Slowdown

The last year has seen the PU industry deal with the end of stimulus packages to a number of sectors such as appliances and China devalued its currency in 2015.

Huo said: “The August 11, 2015 devaluation of 3% shocked everybody a little. The second half of last year was what I call ‘chasing the bottom phase’. The first half of 2016 has seen more devaluation, but people have reacted rationally, the global financial markets also.

“The mini-stimulus package in the spring helped reach a certain equilibrium,” Huo added.

Tony Lanchak, vice president, Momentive Performance Materials said: “I believe the chemical industry is doing better this year compared to 2015, incrementally better.

“The global markets/exports are not happening, that business has all but gone,” for the PU production in China, with one exception “high-tech, the Visco market is good, and systems for application manufacturers. So we are doing much better than in the last couple of years,”.

“Looking at applications, bed and footwear volumes are growing in the upper single digit percentages, in some segments higher,” he added.

His business is “doing well in appliances and automotive is reasonable. Growth is stable but slow. That reflects slowdown in China’s performance,” said Lanchak.

Martin Manson, global business director flexible foam Evonik, added: “The flexible foam business in China is exporting less. It is a little weaker than in the past, exports have dropped, and the housing market is slower. Some production is transferring to Vietnam, which is a strong growth area for flexible foam.”

Wanhua’s Huo confirmed this: “The Chinese home furnishing market saw an uptick following the stimulus package but not by a big amount. It is not as robust as 4 or 5 years ago.”

Refocus

Lanchak explains: “China’s foam has to be focused on the domestic market. The middle classes are suffering a squeeze and focus has shifted to the lower end. People tend to buy what they can afford,” he said.

Does that pose a problem to western firms operating in China? Momentive is not suffering said Lanchak: “Our production is totally local, so that we can complete with anyone who wants to build share in the lower end. You have to pay attention to the lower end,” said Lanchak.

Looking at the bigger picture once more, Wanhua’s Huo continued: “Chinese economic growth is reported to be around 6.5%, but it is a two-tier economy, heavy chemical, machinery and such are growing very slowly, but new economy and the service sectors are not bad.”

Huntsman’s Pan said: “MDI growth overall in the market was 4% in 2015, and I would be surprised if it is more than that in 2016. The market is still tough.”

“We are seeing even 10% growth in MDI sales for Huntsman as MDI can replace TDI and the automotive industry is growing at around 7-8%,” Pan added.

Lanchak agrees that China is attractive: “It’s an opportunity, we are investing in China we do everything here from raw materials, work in progress through to finish goods.”

His company is taking a strategic look at what it does though.

“Momentive has just announced a VP for greater China,” said Lanchak. He continued: “This role has no profit and loss responsibility and will be able to look across all Momentive businesses across China to ensure that our approach is right so that we can invest in the right areas.”

This is not a unique role. “Similar roles for Latin America south-east Asia and India have been appointed and Japanese role will be appointed soon. These people are respected knowledgeable members of the polyurethane community.

Momentive is investing in marketing, sales, research and development in China, he said. “We have just bought on a third finish goods reactor, and we are upgrading reaction vessels. We need to do this to make sure we have the capacity in China and also in Europe.”

China’s One Belt, One Road policy offers opportunities for polyurethane, Huntsman’s Pan said.

One Belt, One Road

“The programme needs infrastructure such as roads, refrigerated transport, refrigerated warehousing. Cities which could be built in the west of China to support travelers along the road will also need to have insulation,” he said.

The policy, commentators suggest, is a way for China to access deep sea ports through countries such as Pakistan and Bangladesh as a way of counteracting the effects of the Trans Pacific Protocol (TPP) trade deal between the US and a number of south east Asian nations.

Thomas Faenger, global business director, rigid foam comfort & insulation, Evonik said. “There is good demand in China, but China is not the best export market because of the TPP. This has led some companies to transplant production into countries such as Vietnam, which is benefiting from shoes and appliances too. Some new white goods manufacturers are moving to Vietnam and other countries in the rigid polyurethane space.

However, while China’s economy has slowed it is still large and experiences a considerable amount of incremental growth in slow years, which means demand for polyurethane is continuing to grow.

Wanhua’s Huo said: “China’s GDP is around $11 trillion which gives between $600 and $700 bn incremental growth each year. Back in 2002, China’s GDP was about $1.5 trillion, just over twice the size of today’s incremental growth.”

“China is still the global manufacturing hub and we still have the dominant manufacturing sites. This part I don’t believe has changed yet but other regions are starting to grab some small market shares as well.”

Should China act to increase demand again? “A stimulus package in certain region might help MDI use but I have a little doubt about this. I root for long-term sustainable strategy,” Huo said.

Stimulating

He cites China’s 2009 stimulus package. This was, among other things, designed to increase the number of refrigerators in rural areas. This “gave people an incentive to buy fridges which they probably didn’t need back then, but also pre-harvested the rural market. This is now slowing the market and I think we should let the market sort itself out. I would like to see a sustainable growth instead of an artificial one.”

But China remains something of an enigma “The fridge market is down slightly in China’s domestic market for sure. And I see no growth in total amount for last year, exports included. Saturation is high and the market is moving into a replacement mode,” said Huo.

However, Huntsman’s view is that “insulation and refrigeration are about 60% of the Chinese market in product applications and domestic refrigeration is growing at 2-3%,” according to Pan.

Covestro: keeping an ear to the market 

Speaking in Shanghai, at a customer event which preceded UTECH Asia 2016, Markus Steilemann, head of Covestro’s polyurethanes business unit said:

“China is really strong in innovating new business models. We always keep an ear to the market so that we can create as many ideas as possible,” he said.

Covestro is involved in a number of customer-centric innovations in China including the “Haier open innovation ecosystem. This gives us a chance to understand what Haier’s customers want from Haier’s products. We can work with Haier to meet their needs, Steilemann said.

Steilemann declined to quantify the size of the individual market areas for Covestro’s polyurethane business by revenue or volume in China. “We don’t break down individual applications for each region,” he said.

He explained: “The Asia-Pacific region is not particularly different from the global picture in some areas. We see very strong growth in automotive this year and last year. Construction is slowing down a little but it is still a huge market in the Asia Pacific region.

“The furniture market is definitely weaker than in recent years and still has some room for improvement in terms of general growth,” he added.