The Sirius Effect:
Understanding the complex impacts of the global environment and politics requires a distributor that is anchored in and familiar with its suppliers as well as its customers’ markets.
As Sirius International is auditing yearly every supplier and is being in weekly contact with all of them, we’re on top of the newest tendencies in the chemical industry that you depend on. And with three warehouses in Europe, Sirius can flexibly store raw materials depending on those tendencies. This allows us to foresee major changes and help our partners deal with them promptly.
Today’s global economy is moving so fast, and in such unpredictable directions, that staying on top of things is a great challenge for every business. That’s why it’s crucial not only to be efficient in the present but to use the available experience and knowledge to estimate what could happen in the next months.
If we’re talking about the future of the chemical industry in terms of raw material availability, it wouldn’t be enough to say, “It’s difficult to forecast” even though a lot of factors should be taken into consideration.
We would inevitably have to focus on the current situation in China, and its position on the international market as China’s rapidly growing chemical industry has been the largest in the world (by revenue) since 2011. It’s expanding way quicker than other regions. Nevertheless, the enormous capacity isn’t necessarily a sign of stability.
Recently, Chinese manufacturers have been undergoing an intense transformation. The domestic pressure from the central and local governments, combined with the impact of the trade war with the USA, creates a lot of uncertainties. Despite this fact, we’d like to share some insights which provide a better understanding of the situation’s complexity.
Chemical factories under domestic pressure
Two years ago, the Chinese government started to conduct a series of safety and environmental inspections, which affected the chemical manufacturers directly. A lot of unqualified manufacturers were found and eliminated. As those bad apples held random positions in the complex supply chain of Chinese primary and intermediate raw materials, closing them had its influence on the whole industry. But that appeared only the beginning of a profound transition…
This year, Chinese chemical companies face yet another great challenge. After the unfortunate event on 21 March 2019 – an explosion at the Jiangsu Tianjiayi Chemical Company – the safety measurements have been tightened up even further. And it’s not always clear whether such measurements serve purely environmental or also political interests. Local governments struggle to resist the temptation of closing factories just to exclude any risk.
According to unconfirmed information, more Chinese chemical factories will be closed for good. Northern Chinese enterprises are more affected than Southern. Eastern factories more than Central and Western. There are already European companies that purchase extra quantities of certain materials in order to stock them. This precaution would allow them to keep the regular supply in case of an availability crisis. But they could also be stuck with high priced inventory if the trends change or the next trend neutralizes the previous one.
Another internal factor that plays a significant role in the raw material availability reality is the worsening public image of the industry. The consumers are more and more interested in green and sustainable substances, which leads to increased demand. This could make sourcing some commodities more difficult than it ever was.
Furthermore, with the 70th anniversary of the People’s Republic of China (1 October 2019) approaching, central and local governments will most probably put more and more pressure on chemical manufacturers. There’s a chance that new production restrictions or suspensions will be initiated from end September to early October and dangerous goods transportation may not be allowed on highways.
Last but not least, during the winter, air pollution always gets worse, which usually leads to burdensome regulations and suspended production. In the cold season, local governments always prioritize warming houses over running factories. Hence, when air or water pollution gets too heavy in winter, factories are temporarily closed.
Behind all above influences is the Chinese governments famous long term stamina. Long term Chinese goals always prevail over short term hardship.
The trade war between China and the USA
The complicated domestic situation is not the only difficulty in front of Chinese chemical manufacturers. The trade war between China and the USA also has a significant effect on the industry.
This ongoing economic conflict between the world’s two largest economies was initiated by the president of the USA, Donald Trump. It includes increasing tariffs and establishing other trade barriers on Chinese products imported in the USA.
The China-US trade war has just started, but some Chinese suppliers, in search of solutions, already decided to split the increased US-import tariffs between the American customers and the Chinese manufacturers. The Chinese government has also partly offset the negative impact of US-tariffs by exchange rate adjustment. Since August, the RMB has depreciated against the USDollar from 6.8 to nearly 7.17. So instead of losing the US market, China adapts and moves forward.
The specifics of the Chinese domestic market make the competition within the Chinese chemical industry relatively aggressive. At the same time, the trade war harms the export of chemicals to the USA. All these economic difficulties might actually lead to further issues for chemical companies worldwide.
Sharing costs and depreciation or not, exports to the USA may regress in favor of investing in increased exports to other regions such as Europe. Historically speaking, in any trade war so far, there was no winner, and the consumers were the losers.
Contact us now to discuss further how to transform these changes from obstacles to opportunities, so you don’t run into a wall and keep your eyes on the horizon.
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