China: Still room for growth but it’s slower

PU China/UTECH Asia 2014 took place in Shanghai  in early September. Simon Robinson and Jane Ho report on some of the key exhibitors and trends revealed at the event.

China has been a driver of polyurethane consumption over the past decade and there has been considerable growth in consumption during that time. However, the different market segments have unique drivers.

Insulated boards and panels for construction is a segment in which growth is almost taken for granted at the moment within North America and Europe.

In China, things are different as Kenny Pan, vp Asia Pacific polyurethanes at Huntsman explained: “PU is the best material for insulation but other materials may have better fire properties at the expense of insulation,” said Pan.

This is echoed by Peter Huo, vp sales & marketing at Wanhua: “There are a lot of issues. The fire issue in high-rise buildings certainly will not help,” said Huo.

China-watchers suggest that because China is a one-party state, and no one in the ruling communist party wants to make a mistake, there is a structural political issue around insulation.

 A fit of the jitters

They suggest the problem in China is the implementation of a law. One source suggested that “even if someone issues a very good logical rule and someone chooses to ignore the rule [and there is a fatal fire] it is likely that the person issuing the rule would be penalised.”

This mindset makes government officials very averse to approving what they may view as an unproven technology. On the other side there is competition from EPS (extruded polystyrene foam) and less expensive inorganic insulation material such as rock wool and glass fibre.

The industry needs to find the “right solution with the right technology around fire retardant grades. We can then tick off both properties,” Pan said.

“We are disappointed that the market is not as robust as we anticipated a few years ago. The market is still growing but the size is still too small,” said Huo.

Given these difficulties, why is the PU industry still so optimistic about polyurethane foam building insulation?

The answer lies in a combination of air quality, energy imports and life expectancy. These factors motivate the Chinese government’s interest in greater insulation.

China measures air quality by looking at the PM 2.5 index. This is used by a number of governments to measure the level of pollution in the air. Although different countries use different standards, the higher the number, the higher the proportion of the population is likely to become ill. PM2.5 indices are measures of the number of particles below 2.5µm in diameter in a given volume of air.

China must become more energy efficient to combat this problem. “There’s no other solution,” said Pan.

China imports the most energy in the world. This includes crude oil, natural gas and “is very expensive and makes the case for more insulation stronger,” said Pan. “It is an opportunity,” he added.

This is not only because of the high level of energy imports, which China wants to reduce, but also because of the very cold winters in Northern China, which could have public health implications.

Trading and dealing

In other polymer sectors such as thermoplastics, traders play a lively role in the markets for the materials they distribute, often taking positions in the commodities to sell on to customers.

“We don’t use traders if possible in China,” Pan continued. “Around 90% of our customers are direct and that is one of the reasons that we have made good progress in Japan.”

“Monomeric MDI is a good direct sell for most of the players. Polymeric MDI is probably 30% sold by traders,” said Huo.

Pan said: “Where necessary means that if

I have very small customers with different credit situations I will ask a trader to handle that business. Normally we do it only with some commodity sales.”

Huntsman uses traders in developing countries or counties where it does not have sufficient mass, but the aim is to deal directly with people.

Huo suggests: “You should think system house/traders, this is the difference.”

“The definition of a polyurethane trader in China is totally different to the definition of a trader in Europe and the US. In China, we sell polymeric MDI directly to fridge companies and reefer makers.

“We also sell to systems houses which resell to smaller players. One of the key differences between China and the US/Europe is that the systems houses do not rebrand the isocyanate.

“It is like the Intel Inside concept, having an Intel chip helps you to sell your computer and having Wanhua on the drum helps you to sell on. The costs of the isocyanate are passed directly on to the customer. The market is very transparent and efficient so there is no opportunity to make money by rebranding,” Huo said.

Big in Japan

“Our number one growth opportunity is Japan. You may believe that Japan is a mature market,” Pan said. “But there is plenty of room for polyurethane in the insulation market,” he added.

The majority of the insulation market in Japan is glass fibre, with polyurethanes a single digit percentage of the total market. In the similar US market, polyurethanes account for 20% of the insulation market.

In Japan, polyurethane accounts for around 7% of the insulation market. “This market will triple and, one day may become 50% of the market in, perhaps 10-15 years,” Pan suggested.

There are a number of reasons why Pan is so upbeat about Japan. Firstly, most housing is built of wood, so the fire properties of insulation are less important than in countries where masonry is the preferred building material, he said. Secondly, polyurethane offers much better insulation than other alternatives.

Finally, Japanese houses are often rebuilt every 30 to 40 years. Pan suggests there is a 35-year window to take market share from other insulation materials before the market becomes mature. For all new house builds, about half are insulated using polyurethane.

Following the Tsunami and Japan’s decision to close its nuclear power generation capacity, the country imports a great deal of energy and has very high electricity costs. It also has very cold winters.

Different rules

Japanese houses are generally two-storey, made of wood and like China has a climate of extremes. In the summer, uninsulated rooms in houses can reach 40°C, said Pan.

Huntsman has a joint venture with a spray foam company in Japan.

“Our jv in Japan insulates the house and shrinks electricity bills for consumers,” Pan said.

“People may be able to afford to turn on air conditioning for an hour or two and polyurethane insulation allows them to live in a more comfortable way,” he said.

“More importantly they can save a lot on their electricity bills. Our calculations show that it could be possible for people to get a payback in less than three years,” Pan said.

Japan has a good quality polyurethane technology, said Pan and his company may be interested in purchasing a systems house there in the future, “if the right opportunity comes along.” (See p7)

Outside of insulation, the Japanese market is growing slowly but “is of high quality” said Pan. “In terms of technology, I believe that Japan is number one in Asia,” Pan added.

Huo said that Wanhua has had a presence in Japan for over 10 years and started marketing products there in 2002.

Small in Japan

Industry watchers suggest that typical north eastern Asia countries petchems industries  are based on naphtha crackers. There is a structural cost disadvantage as they built very small isocyanate plants 20-30 years ago and the domestic market is very stagnant.

“They have to export, which involves high costs and it is a very natural part of evolution that some of the weaker smaller plants may need to be rationalised,” Huo said. However, Japan has significantly more capacity than it can consume internally and is a net exporter.

“Yes it is an opportunity for us but it is a crowded market,” Huo added.

Japan’s market differs from China’s for polyurethane materials. Its chemical markets are traditionally intermediated by a large number of agents and distributors, each of whom has their own agenda.

Huntsman has been able to disintermediate the market, said Pan. “This enables Huntsman and its customers to share all the value in the value chain,” he added.

China: growth moderating

Between 2000 and 2010, growth in MDI demand was around the high teens. There has been some slowdown since 2010 but it is still at double digit growth, said Pan.

Industry insiders suggest that, were to continue growing at that rate, more than half the world’s polyurethane market would be in China.

In China, CASE applications are growing in the high teens as both MDI and TDI, as well as aliphatic isocyanates, can be used in applications where colour is not important, such as elastomers and adhesives.

Economic growth in China may be slowing as the government changes its economic emphasis from high economic growth driven by exports to sustainable growth but, whatever the policy, the Chinese market is growing much more rapidly than the US and comatose Eurozone economies.

 Taking a break

Pan said: “I would say it is just a short break China. China’s government needed to shift its focus. Previously there was a lot of focus on the upstream. Whenever we visited a local government, they would talk about a petrochemical plant.”

“Not any more, the critical thing for them is to go further downstream, to convert the chemicals from the upstream plants into specialty chemicals and that’s what the government will start to do,” Pan added.

It is possible that China itself could account for 50% of the global MDI market by 2020, said Pan.

Huntsman has invested a great deal in China. This includes not only MDI investment, but also downstream investment in splitters.

For Huntsman, that is possibly more important than the crude MDI investment. Pan shed more light on the recently-announced start up of the 240kT/year MDI expansion with BASF.

He said the offtake agreement between the joint venture partners saw approximately 200kT/year going to Huntsman. This volume is refined at its splitter. The splitter gives Huntsman the ability to look at a number of downstream markets, which “is where we really want to focus” said Pan.

Huntsman also has a joint venture with Sinopec at Jinling (Nanjing), for PO/MTBE. This project is due on stream in 2016 and will generate 240kT/year PO and 700kT/year of MTBE. Both parties will work on the downstream applications.

Pan suggested that Huntsman has now more or less built its polyurethane base in China. “We have got some minor investments. These include one with Huntsman’s polyol partner, Ning Wu. We have 30% they have 70%. Ning Wu is one of the biggest polyol producers in China,” said Pan.

In addition, there is a TPU investment in Jinshan, south of Shanghai with 6kT/year capacity.

Wanhua has seen spectacular growth in MDI capacity in China and operates a suite of world scale recently-built MDI assets.

“We reported our second quarter in late August and had revenue growth of 16% but we have seen our net profit drop a couple of per cent,” said Huo. “Reflecting a general price weakness in polymeric MDI in China in the first six months of this year,” he added

 MDI flat

Industry figures put the market growth for MDI in the first six months at essentially flat, moving from a negative number in the first quarter into slight growth in the second.

“The weakness in polymeric MDI is related to the macroeconomic situation in China,” said Huo. “This is a hangover from the stimulus packages used in the aftermath of the global economic meltdown in 2008.

“Since the stimulus package was slowed, China has seen some deleveraging as smaller component manufactures like shoe sole producers have had difficulties with their suppliers. Many of these problems have been a result of SME enterprises in China over-expanding and over-extending their credit in the last six years,” Huo added.

“Generally, I don’t think it’s [growth is] over yet, it’s not. But you don’t expect again a double digit growth because the market has been pre-harvested by the policy.” This applies to areas such as domestic appliances such as refrigerators, Huo explains.

China’s domestic refrigeration market is now moving into replacement rather than initial purchase phase. “Fortunately it is an upgrading market place. People used to have a smaller one now they want to buy a bigger one and that helps demand but it’s not going to be 20% growth every year,” he said.

That change is hitting sales of MDI in China.

Growth by sector

“The automotive sector is fine and generally healthy. As for infrastructure for public housing and other areas related to government spending, with the budget now tight and the local government credit expansion, those will probably be delayed or be partially financed so that area will be less good than the last few years,” said Huo.

“We are particularly excited about the automotive opportunity in China,” said Pan.

The automotive sector saw around a 12% increase in the number of vehicles made from January to September 2014 compared with the same period in 2013. “But our business has been growing much faster than that, and there are several reasons for this,” Pan said.

Following the economic crisis in 2008 the Chinese government started a stimulus programme and encouraged investment. One result was that China developed the concept of “the economic car,” said Pan.

“These are small cars, but they’re built in large numbers,” said Pan. Now these cars are four or five years old and are being replaced. “Now people can afford to buy a bigger car and they start to look at luxury cars,” Pan added.

From 2013 to 2014, the number of cars made increased and the size of cars also grew. This multiplier effect is helping sell more polyurethane into the Chinese auto market, he said.

Pan added that there is a third factor helping Huntsman grow in China and it is the increasing popularity of MDI systems over TDI systems in the auto sector for seating.

“The MDI-based solutions are growing much faster than TDI-based solutions in this sector,” he said.

 Mapping it out

“A lot of people still organise their business into China and Greater China, but that only ends up with China greater,” said Pan. As he explained at PU China last year

In terms of technology, China is where the market is but the most advanced technology used in China comes from Japan, Korea, Taiwan and Australia.

It is transplanted from outside the region. The footwear sector in China comes from Taiwan, Korea, Japan, he explained. In the auto sector, the first people into it were Japanese, Koreans and Taiwanese, he said.

“I believe that one day we will see the Chinese transplant technology outside and it will start to export technology. We will start to see a balance in the future.

“We started to organise our business three years ago and we started to separate China from Greater Asia because we believe that we need a balanced portfolio inside and outside of China. If we put enough emphasis on outsiders, we will see that balance and will see growth in Asia,” said Pan.

Pan prefers to see the business structured into North Asean is countries in the greater Mekong region, South Asian: Philippines, Malaysia, Brunei and Indonesia in the South.

Korea looks good for Huntsman for the automotive, appliance and liquefied natural gas (LNG) opportunities that it offers.

To ship LNG, it must be kept at very low temperatures. For that you need polyurethane insulation and “who builds ships?” Pan asked. “Korea,” he said. Industry estimates suggest that over 80% of the world’s LNG shipping is built in South Korea.

Getting to the market

The next most interesting markets are Indonesia and Vietnam. In Indonesia we made a systems house investment which was commissioned in 2012. The next one is Vietnam with its population close to 100m whereas Indonesia’s is 230-240m. Vietnam is sizeable and the number one footwear maker in the world and PU is one of the major applications.

Market segments

Elastane fibres and TPU are both healthy. The elastane fibres segment continues to grow into areas such as cotton goods. Here some stretch is desirable so elastane is substituting 1 or 2% of cotton in cotton goods.

In the TPU segment, the adipic acid and BDO are really low priced today in China. This gives TPU a cost advantage compared to other materials.

Places like Bangladesh and Pakistan are starting to pick up some of the business. But there is a supply chain cluster effect.

It would be very difficult to move in an area. There is a long slow induction time.

For example today I don’t think anyone gains any financial benefit by moving PU leather production to Vietnam. Workers may be paid less but they are much less efficient and there is no support to do it. So, financially, it may not make sense. Once a critical point is reached the change could be quite fast, like the movement of business to China was in the past, Huo said.

There is still a bright future and if you chose the right focus, we still see the best opportunity in the world, said Huo.