CDI Global

China's Chemical industry is Becoming More Environmentally Friendly

China's chemical industry has historically not been known for being environmentally friendly. On the contrary: air pollution, water pollution, disposal problems, and chemical accidents still shape the image of industry not only in western countries but also in China itself.

The first initiatives to improve the situation were image campaigns rather than serious efforts. But since around 2015 the situation has changed significantly, and the 14th Five-Year Plan for 2021-2025 will continue that trend. The reasons for this trend and the core elements of future environmental policy will be presented below and illustrated using examples from the Chinese chemical industry, before briefly discussing the effects on foreign chemical companies.

President Xi Jinping has made environmental protection a central point of his policy. Why? On the one hand, the political leadership has recognized that the increasing prosperity in the country has led to a higher assessment of the quality of the environment in large parts of the population.

In order to avoid a significant protest movement from developing from this, the leadership has appropriated these goals. Solid economic interests also play an important role. On the one hand, this concerns the negative economic effects of environmental pollution - a study by the Center for Research on Energy and Clean Air cites annual costs of 600 billion US dollars for air pollution alone for China.

On the other hand, there is also the recognition that leading environmental technology (such as electric cars) is an important factor in the economic competition between nations. Environmental protection - including the new technologies required for it - fits in well with China's goal of becoming a leading technology nation.

In a recent article, Dong Zhanfeng, a deputy director of the Chinese Academy of Environmental Planning, cites three main problems of the local chemical industry with regard to environmental protection: the high emission of carbon dioxide, the high energy consumption, and the unfavorable industrial structure, which means that above all the presence of Means overcapacities based on outdated technologies. Accordingly, he describes three approaches to improve the situation on the basis of government initiatives.

On the one hand, the chemical industry should focus more strongly than before on innovative, differentiated, and high-quality products. Secondly, the carbon dioxide emissions of industry are to be reduced in a targeted manner - one instrument that seems suitable to him is a market for carbon dioxide emissions. Thirdly, compliance with environmental legislation should be monitored more closely.

However, these are still not very specific statements. The following examples are therefore intended to show how authorities and chemical companies react specifically to the greater emphasis placed on environmental protection by the central government.

Examples of Stricter Regulations

  • Guangdong Province has adopted a carbon dioxide allocation plan that also affects 12 petrochemical companies. The initial free emission quotas cover 97% of the historical emissions, which means that the initial effect is only minor. However, it is likely that this will be extended to other chemical companies and the quotas will be reduced.
  • Shanghai banned the use of non-biodegradable plastics for food packaging earlier this year
  • Since 2017, the import of plastic scrap into China has been largely banned
  • At the end of 2020, new, stricter guidelines for handling hazardous waste were issued

 Examples of Company Closures and Relocations

  • Chemical production has been completely banned within one kilometer of the Yangtze. Penalties for non-compliance can reach 5 million RMB. 8,000 chemical companies have therefore already been relocated.
  • Many chemical parks have been closed for failure to meet set standards, for example, 4 out of 35 in Guangdong. This is remarkable because at the same time the pressure on companies to relocate to chemical parks is increasing and there is thus great demand for commercial space in chemical parks
  • In Jiangsu, about 2,000 chemical companies - half of the existing ones - have closed in recent years
  • Two subsidiaries of the large dye manufacturer Jiangsu Yabang have to leave the chemical park in Lianyungang because they do not meet the requirements of the park. They will receive a compensation payment of approximately RMB 300 million from the state, which illustrates the seriousness of the state's efforts

Promotion of New Technologies

  • In early 2021, a group of 17 Chinese chemical companies and chemical parks the declaration "China Petroleum and Chemical Industry Carbon Peak and Carbon Neutral Declaration", which includes the promotion of research to reduce carbon dioxide emissions
  • Sinopec cooperates with 3 leading academic institutions with the aim of achieving maximum carbon dioxide emissions by 2030 at the latest
  • Sinopec also wants to increase the number of operated hydrogen filling stations from 27 to 1000 by 2025 and is positioning itself as the future market leader in the hydrogen sector.
  • Japan and China will jointly start a project in Yulin to produce methane from carbon dioxide and excess industrial hydrogen

Eliminate Obsolete Technology

  • In Shandong, a total of 9 companies stopped producing ammonia in 2020 as part of a campaign to eliminate obsolete technologies
  • In Shandong, 13 refineries with subcritical capacities below 2 million tons and mostly outdated technologies were closed
  • The production of propylene oxide using the chlorohydrin process was included in the list of limited processes due to the high level of wastewater production and, since 2015, may no longer be used for new plants.

Despite these many examples, it must also be mentioned that China's environmental policy with regard to the chemical industry appears contradictory in some respects.

For example, authorities in eastern provinces such as Jiangsu have individual production facilities such as Jiangsu Yabang closed, but this only results in them relocating their production to western provinces such as Gansu in this case. This shift to the west is also a trend that cannot be overlooked for pesticide production.

This improves - politically attractive - the environmental situation in the populous eastern provinces. However, it does not represent a net benefit for the environment without a simultaneous change in production technologies. A similar case is the ongoing political support for chemical production on the basis of coal. New coal chemistry projects are also being approved, and the reasons for some canceled projects in this area were mostly economic ones.

This is understandable given China's dependence on imported oil and China's know-how in the field of coal chemistry, but it contradicts the goal of reducing carbon dioxide emissions. And while the number of chemical accidents has decreased in recent years, the main reason for the remaining accidents is still the failure to follow simple rules. So, the implementation of the guidelines is still very incomplete.

What do these developments mean for foreign chemical companies? Even if many of these companies are directly affected by individual rules and, for example, had to relocate their chemical production from cities like Wuxi and Suzhou, the overall effect is rather positive. In the past, foreign companies were checked for compliance with environmental guidelines much more strictly than local companies.

The tightening of the implementation, therefore, hits local companies harder, making competition between local and foreign companies fairer. Due to their experience at western production sites, foreign companies should also be able to react faster and at lower costs to tightening of e.g. emission limits. Another aspect is that western companies are usually already more focused on the production of specialty chemicals. Due to the smaller production volumes, these tend to be less affected by environmental regulations and, due to their higher price, have a larger buffer to absorb the costs of stricter environmental regulations.

In addition, the situation in China also offers a large potential market for new products and production technologies. In extreme cases, this can lead to entire western companies being bought by Chinese companies, as the example of Ehrfeld Mikrotechnik (acquired by Shaoxing Eastlake) shows.

It is more common that new, environmentally friendly production technologies developed in the West will primarily be used in China - on the one hand, because, as shown above, there is growing interest in these technologies, on the other hand, because China continues to support the global chemical industry is the most attractive location for new investments.

By: Dr. Kai Pflug,
Partner, CDI China, Shanghai
kai.pflug@cdiglobal.com

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