Have you heard of the butterfly effect? Anecdotally speaking, this is simply a description of a situation in which a very tiny variable (e.g. butterfly wings flutter in the Amazon) can origin disproportionate effects (e.g. tornadoes in Texas). This expression is besides commonly utilized to illustrate the effects of decisions or actions taken in 1 place and having a crucial impact and consequences in completely different places, frequently amazing to the 1 who made those actions or decisions. In today's column, I would like to focus on the second meaning of the butterfly effect.
Trump's decision (supported so far by Biden) to block access to microprocessors for selected Chinese companies has caused certain effects in the industry. Firstly, China has stepped up its efforts to build its own production base. The river of money flowed not only to increase the production capacity of current factories and to build fresh ones, but besides to research, and improvement in promising fresh production technologies. Secondly, this has contributed importantly to the current crisis (no microprocessors in the market), as almost all Chinese companies have started building strategical stocks of chips. Companies that have so far produced in the "just-in-time manufacturing" mode have switched to stock-building for periods from 6 months to up to 2 years! Given that China "uses" almost 60% of the world's chip production, the effect was easy to predict.
However, I would like to draw your attention to another aspect of this decision to ban the sale of chips, an aspect which can be described as the "effect of a butterfly", and we are observing it in .... the Chinese chemical industry.
The changes presently taking place there will have far-reaching consequences – very painfully felt by Western companies – all thanks to 1 Trump decision. I'll explain.
At the time erstwhile the Chinese authorities realised that the US would take advantage of technological improvement in circumstantial areas as a weapon and would not hesitate to usage it, a number of actions were taken to minimise the negative effects of specified actions in the short word and to destruct them completely in the long term. I have already mentioned investments in the semiconductor manufacture (more than 1 trillion yuan, over PLN 600 billion). But that did not end there.
The Chinese authorities have set up respective working groups supported by specialised think-tanks to survey all elements of the logistics chains related to the production of semiconductor components (from ready-to-use chips, machines and software needed for their production, to semi-finished products and chemicals from which semiconductor materials are manufactured, or whose usage requires all subsequent technologies utilized in the production of semiconductor components), to detect all the ‘narrow throats’ and to specify the strategy and plans for how to destruct them. This is simply a subject so extended that it is suitable for dissertation or book, but in this article I will focus on the chemical industry.
During the work of the above working groups, it was found that industrial gases are utilized for the production of microprocessors. And these are mostly imported. This is another possible component of ‘shant’ and blocking the production of microprocessors in China by restricting access or banning the sale of a semi-finished product without which they cannot be produced. Therefore, a thorough analysis of the full manufacture in China was carried out. It turned out that 80% of the world's industrial gas marketplace and 90% of China's marketplace are controlled by 4 companies:
- Linde (Germany),
- Air Products and Chemicals (USA),
- Air Liquide (France) and
- Taiyo Nissan (Japan).
Of the 50 to 60 most crucial specified gases, only a 3rd is produced in China. It is besides worth noting that industrial gases are needed not only for the production of microprocessors, but besides for liquid crystal screens, solar panels and medicaments – in which China has the largest share in the world. At the same time, the Chinese marketplace for industrial gases is developing much more dynamically than the world. In 2010-2018, it was 16% and 9% respectively. It was so decided to importantly subsidise Chinese companies operating in this sector, specified as Huate Gas, Jinhong Gas, Yingde Gas Group, Hangyang, Jiangsu Nata Chem or Jiangsu Yoke Technology. In particular, the erstwhile can anticipate large financial support as it produces high-quality industrial gases essential for lithographic processes in the production of microprocessors, specified as carbon tetrachloromethane tetrachloride or carbon octanofluoropropane.
The effect of these actions will be easy to predict. Threatened by possible cessation of production by US sanctions, both state-owned (SOE) and private companies will initially diversify as far as possible and later control completely to supplies from local, national producers. Over the years, the profits of abroad companies from industrial gas sales to the Chinese marketplace will systematically decrease. The backing for R & D and plant improvement will so be smaller. After gathering the request on the home marketplace (with the expected growth rate of 10% per year over the coming decades), Chinese producers will start to compete and displace global companies from the markets of the countries of the RCEP and the BRI (i.e. the full mediate East Asia, Africa and the mediate East).
However, the butterfly effect is not over. Looking at logistics chains for semiconductor production, attention was given to another chemical sector – construction materials. This name is defined as plastic materials which have much better mechanical and/or thermal properties than commonly utilized plastics. An example may be polythalamide -PPA (used in both automotive and electronic industries), Liquid crystalline polymers — LCP (also the automotive industry, but besides military, aerospace and construction equipment up to 5G) or PEEK (air, space, automotive, telecommunications.
Although each of these construction materials is manufactured in China, it is in insufficient quantities. For PPA, the current yearly local production is about 16,000 tonnes, with an estimated request of 50,000 tonnes. ‘None’ quantities are imported and the main suppliers are’
- Dupont (USA),
- BASF (Germany) and
- Mitsui Chemicals and Kuraray (both Japan).
Similarly, the situation with LCP – 80% of request is met by imports and PEEK – here the marketplace is "ordered"
- Victrex (UK),
- Solvay (Belgium) and
- Evonik (Germany).
The effect of these analyses? Yes, you have guessed – crucial investments in this sector to increase production as rapidly as possible to a level that ensures a unchangeable improvement of the home market, even at a complete cut-off from external sources.
If A (investments in the method gas sector) and B (investments in the construction materials sector) are said, why not say C?
These C are plans to consolidate the full chemical manufacture in China in 5 industrial clusters.
Given the economies of scale, synergy and simplification of environmental risks, Chinese planners have decided to make 5 national chemical clusters. They will apply both much more favourable taxation and investment rules as well as much stricter rules on production and environmental surveillance.
This will surely be a long-term process – for the petrochemical sector itself, there are presently over 670 tiny "chemical parks" scattered throughout China – but this process has already been initiated. China will yet have 5 main chemical clusters, the location of which is described below.
Below is simply a brief description of each of these clusters:
Hangzhou Bay
One of the most modern chemical clusters. It covers both the Hagzhou Bay area and the Yangtze River deltas. This includes the office of members of the club ‘100 billion yuan’, i.e. chemical parks and industrial zones, which make over 100 billion yuan of gross annually. The 3 most crucial are:
- Shanghai chemical industrial park – it covers an area of about 30 square km. It is home to petrochemical companies (oil and gas), producing fresh synthetic materials, ethylene, isocyanates and polycarbonates. These are both global companies – BASF, Covestro, Dupont and Mitsui Chemicals, as well as local companies – Sinopec, HUayi Group, Shanghai Gaoqiao Petroleum Chemical Company
- Petrochemical, economical and Technological improvement region Ningbo – covers an area of about 40 square kilometres. 1 of the 3 largest chemical parks in China. This includes Zhongjin Petrochemicals (aromatic compounds), Zhenhai Refining & Chemical (petroleum), and Ningbo ZRCC Lyondell Chemical (styrene).
- Technology park of fresh Nanjing-Jiangbei materials – fresh polyurethane materials, synthetic rubber and advanced quality polymers will be produced here. These are located factories specified as Sasol, Eastman, Celanese, Heraeus and BASF.
Petrochemical cluster of the large bay area
This cluster has 2 centres: 1 around Daya Bay and the another close Zhanjiang Town on Leizhou Peninsula (some 400 km west of Hong Kong). There are 2 chemical parks here:
- Economic and Technological improvement region of Huizhou-Daya – so far 91 chemical projects have been implemented here for a full of 230 billion yuan. The office include CNOOC Huizhou Petrochemical, Shell Hizhou and Exxon Mobil Huizhou Project.
- Zhangjiang-Maoming Petrochemical Base. Here the biggest investor is BASF
Petrochemical industrial cluster of Bohai Bay
Over 60 tiny and medium-sized chemical companies are based here. In addition, 4 cities – Dongying, Yantai, Binzhou and Weifang and 9 close chemical parks are to make a fresh area of modern petrochemical industry. The “Flag” task in this cluster is simply a petrochemical complex close Longkou. For 132 billion yuan, an ethylene mill with a mark production of 3 million tonnes per year is to be built here.
Haixi Petrochemical Cluster
There are 2 main chemical parks in this region located vis-a-vis of Taiwan:
- Meizhou Bay Petrochemical Base – The 3 largest chemical parks in the area are Quangang, Quanhui and Dongwu.
- Gulei Petrochemical Base – The most crucial investment in this area is the combined efforts of Fujian Petrochemical and Sabic (Saudi Arabia). It is to make an ethylene mill with a capacity of 1.5 million tonnes per year.
“Golden Energy Triangle” – Industrial Cluster for Coal Chemistry
The name is taken from a triangle whose peaks designate Yulin in Shanxi Province, Ningdong Province, Ningxia Province, and Ordos state in interior Mongolia. It is here that there are deposits containing about 200 billion tons of coal, and it is here that China's efforts to usage coal in energy and manufacture are concentrated in the least environmentally harmful way possible.
There are factories and chemical companies working on projects specified as coal gasification, and there is besides a model for combining conventional coal production with "green hydrogen" production. These projects aim to gradually decision distant from coal for renewable energy through a gradual transformation of the company's structure, while maintaining employment and avoiding bankruptcy.
At the end of the words a fewer with a broader perspective. I described here (very generally) changes in the chemical industry. It is crucial to be aware that the same is presently happening in another sectors and sectors of the Chinese economy. "Commercial War" stated by Trump to China and the measures it utilized in it outside of customs duties (blocking of sales of products and semi-finished products, force on global standardisation bodies to retreat certificates of conformity issued to Chinese companies, etc., etc.) resulted in China a national overview of all logistics chains in all areas defined as crucial to national security. We could prepare akin articles for the aviation, rail, automotive, telecommunications, IT and many others. Right or wrong, the Chinese authorities believe that it is no longer possible to trust the "free market", the "invisible hands of the market", globalisation, due to the fact that the West could at any time usage the dependence of Chinese companies on Western technology as weapons (gifters, pressures as any man would like) against China. This applies to all sectors of production, but besides finance, and services.
I believe that this trust will no longer be restored. China will do everything in their power (and can truly do a lot) to completely, or to the maximum degree possible, become independent of the West in all areas – production, financial and services.
Hence investments in fresh production facilities, creation of independent financial networks (CIPS alternatively of SWIFT, digital yuan, bilateral swap agreements in yuan, etc.) and services (own operating systems – Kirin, Harmony OS, own software, own cloud services, etc.). To add to all this is the gradual, but accelerating work on our own standards (China Standards 2035) to halt global standards conducive to the Chinese economy (as the US economy now favours) in areas specified as 5G, 6G, net of Things, Artificial Intelligence, Quantum Computers, etc. Unreflective – and possibly the most delicate word, although other, more pronounced force on the mouth – the usage of global standardisation organisations as "arms" against China led to the launch of work in China to make its own standards besides in another industries – not only modern technologies, but besides more mundane and on the local market.
Recently I had my hands on a study on the review and exchange of all Chinese standards in force in the railway industry.
Editorial: Leszek B. Glass
Email:[email protected]
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