is b u s i n e s s Profound changes under way in China's chemical industry News
Analysis
The 15th Communist Party Congress that took place in Beijing last week confirmed that a major economic restructuring is under way in China. Although it will take at least a few months to know exactly how China's chemical industry will be affected by new decisions made at the Congress, government officials had mentioned some likely changes for months before, and dozens of articles appeared in the Chinese media. A concrete step was taken before the Congress was held, with the August merger of four Jiangsu Province-based chemical firms (C&EN, Sept. 1, page 16). Among likely changes is a reorganization at the top levels of chemical and petrochemical industry management. Massive cutbacks of overstaffed enterprises are likely. And more listings of chemical companies on Chinese and international stock markets could provide additional means to finance the ambitious modernization drive that China has in mind for its chemical industry. Many of the changes that China will implement are a natural result of the country's evolution from a planned to a market economy, says Zhang Pei Yao, deputy director of China National Petrochemical Corp.'s (Sinopec) Planning Division in Beijing. "In our operations, we are starting to pay more attention to economies of scale and headcount," he says. Sinopec's president, Sheng Hua Ren, was quoted in June in China's Business Weekly as saying that the firm would shed about one-third of its 650,000 workers in coming years in order to improve efficiency. China also has been benchmarking its companies against those in foreign countries. In pronouncements reminiscent of the Great Leap Forward (1957-61), it says it wants to create companies that can compete against the largest international firms. A recent issue of the Chinese-language China Chemical Industry News included a story headlined "Building up China's DuPont." Another story lamented that international chemical firms perceived China only as a market, and not as a source of competition. Additional impetus for the changes afoot is that, despite moving toward a market economy, China's authorities per-
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SEPTEMBER 22, 1997 C&EN
ceive competition between domestic firms as wasteful. China features thousands of overstaffed chemical companies equipped with small-scale, outdated production facilities. They are all eager to upgrade to world-scale, modern technology, something that could lead to domestic oversupply. Merging many of these firms together would at least reduce the number eager to expand production. Eventually, China's chemical industry will be dominated by a relatively small number of large firms. Makoto Takeda, an Asian petrochemical industry researcher at DIA Research Martech in Tokyo, predicts that soon there will be nine very large petrochemical companies in China. For example, he says Shanghai Petrochemical will absorb several firms in the Shanghai area. Similarly, he believes that the recently listed Beijing Yanhua Petrochemical will go forward with the acquisition of Beijing Eastern (Dongfang) Chemical Works, which was the site of a large explosion in late June (C&EN, July 7, page 22). The merger announced in August of Yangzi Petrochemical, Jinling Petrochemical, Nanjing Chemical (Nanhua), and Yizheng Chemical Fibre addresses many of the problems that are endemic to China's chemical industry, and therefore appears to provide a blueprint for similar mergers. The four companies t o gether had 1996 sales of over $3.8 billion, which means that the new entity might gain entry in next year's tally of C&EN's Global Top 50. One benefit of the Jiangsu merger will be to prevent competition between Yangzi Petrochemical and Yizheng Chemical. Yangzi has historically been a supplier of purified terephthalic acid (PTA) to polyester producer Yizheng. The latter had planned to build its own PTA facilities, which could have led to oversupply of the product in the Nanjing area. The merger locks in Yangzi's customer. Prospects are good that job cuts resulting from the Jiangsu merger will be kept to a rninimum, which is a key concern in Beijing. Yangzi and Yizheng are comparatively successful companies, and they therefore should be able to provide some support to Jinling and Nanhua, which have a reputation of being much weaker. The four merged companies will be run by a holding firm whose top official
will report directly to the State Council, a top government decision-making body. As a result, a number of sources have told C&EN that it looks as though Sinopec is losing some of its clout. Both Yangzi Petrochemical and Jinling used to be part of Sinopec. By merging with the Hong Kong stockmarket-listed Yizheng Chemical Fibre, the nonlisted Yangzi Petrochemical is gaining an additional source from which it could finance its share of a multi-billion-dollar venmre under discussion with Germany's BASF. Over the next few years, stock analysts tell C&EN, one benefit of merging Chinese chemical companies could be to improve access to international Hinds. A reputed Chinese economist, Li Yining, was quoted by Dow Jones as saying that a very large number of Chinese companies are likely to issue shares in China's overthe-counter market following the 15 th Communist Party Congress. In his opening address on Sept. 12, President Jiang Zemin gave his backing to selling more shares of state enterprises, but the details don't appear to have been worked out. Foreign companies negotiating ventures with Chinese partners will be affected by the moves under way in China. But they do not know exactly how. Dow Chemical, which hopes to build a petrochemical complex in Tianjin with partners Tianjin Petrochemical and Sinopec, says negotiations are not yet at the stage where financing of the joint venture is being discussed. So it does not know whether Tianjin Petrochemical will be issuing shares on the international market. Phillip H. Cook, a vice president for business development responsible for studying and setting up the venture, in fact, could not foresee how the Communist Party Congress could affect Dow's project. The mood at BASF was less enthusiastic. A spokesman in Hong Kong says it is too early to tell how talks with Yangzi Petrochemical might be affected. But BASF is slightly puzzled by the move, and some of its executives appear concerned by the emergence of an apparently nationalistic tone in the Chinese chemical media. "We've never believed that China would be easy," a BASF spokesman comments. The Jiangsu merger and the 15th Party Congress have set the tone for the restructuring of China's chemical industry. But changes will not happen overnight. According to Hong-Kong based Deutsche Morgan Grenfell oil and gas analyst Fanton Chuck, the full extent of future changes will be felt over months, if not years. Jean-François Tremblay
