Dr. Michele Jermini and Dr. Enrico Polastro11.20.19
China is in the middle of a transformation phase. The country is rapidly transitioning towards a new stage of its development path where quality of life and environmental considerations are increasingly superseding the quest for GDP growth at all costs.
Obviously, this transition is having a major impact on all sectors of the Chinese economy. The chemical industry is no exception. The business model traditionally applied in the country has revolved around low delivered prices leveraging a low cost base—with little regard for elements such as innovation, service or impact on the environment. However, this is more and more being challenged by structural developments, including tighter regulations and a rapid pace of cost inflation. An additional catalyst is represented by the uncertainties created through trade frictions.
This is mirrored in the wave of plant closures affecting mainly small- and medium-sized players—the backbone of the Chinese fine and specialty chemical supply structure—as opposed to large petro-chemical companies better equipped given their size, resources and political clout to cope with the evolving regulatory landscape.
The developments impacting the Chinese fine and specialty chemical industry have far reaching implications in the West, reflecting the increasing dependence on China for the supply of several products—be these intermediates or end molecules ready-to-be formulated. This is a consequence of the closure of local capacity following the availability of low-priced Chinese imports, which is resulting in supply chain disruptions, shortages and surging prices for products such as active pharmaceutical ingredients (APIs), biocides and textile dye-stuffs.
It is therefore not surprising that Western customers have scrambled to develop alternative supply sources, particularly since it is not the first time that the reliability of China as a source of products such as APIs comes under the spotlight. Memories are still vivid of the high profile quality and regulatory compliance problems encountered a couple of years ago by some producers in the country.
As a result, several industry observers predict the demise of China as the world supply hub for fine and specialty chemicals as customer demand pushes for a revival of their production in the West. Such predictions are a complete reversal of the scenarios that prevailed until recently calling for the continued off-shoring of the production base towards China given the fundamental competitive advantages enjoyed by the country.
Most likely these extreme views need to be nuanced once the on-going reconfiguration of the Chinese fine and specialty chemical industry is completed and the associated uncertainties settle. China can expect to see its role as a production center for these types of chemicals revived. However, this will not be based anymore on low delivered prices but rather on factors such as world class scale and innovation. As the supply structure consolidates, a handful of Chinese champions will be able to compete on an equal footing with their Western counterparts.
The old model is doomed
Major forces are at play in China increasingly undermining the competitive advantage traditionally leveraged by local fine and specialty chemical producers revolving around delivered prices. These were achieved through access to an ample and cheap labor pool, disregard of capital costs, limited environmental and compliance hurdles, and facilitated by the benevolent attitude of the authorities eager to favor economic development. It also created a business environment irrespective of collateral damages such as negative impact on the environment, the health and safety of the work force and general population, and a poor use of scarce resources.
The development stage reached by the Chinese economy is the main trigger behind these changes. Following the dramatic increases in purchasing power, education and living standards over the last thirty years, the Chinese population now more than ever before embraces and favors values such as quality of life and a safe pleasant environment—the pursuit of growth and advances in pro-capita GDP are becoming less of a priority. Parallel to this:
• The political authorities realize that, except in some industrial sectors, the country is ill equipped to compete on an equal footing on the world scene given the fragmentation of its industrial base, while the traditional disregard of EHS related issues is becoming increasingly visible threatening not only the health of the population but also risking triggering social unrest. Following high profile industrial accidents such as Tianjing and Yanchen, the authorities had little choice but to vigorously address these problems by issuing and effectively enforcing EHS (Environment, Health & Safety) regulations. As an example, the Central Chinese government has appointed 18,000 environmental inspectors responsible for monitoring the situation throughout the entire country and has made it compulsory for chemical plants to operate only in industrial parks meeting environmental norms while setting strict timelines for implementing the required corrective measures including plant relocation—the alternative being closure.
Following these tighter regulators and their effective enforcement, a pruning of the supply structure is on-going. Several small- and medium-sized players—the traditional backbone of many industrial sectors in China—that are unable to undertake the required investments and bear the additional costs are driving an overdue consolidation. This will eventually result in the emergence of a smaller number of larger players operating in a more sustainable way and in better harmony with the environment and the population. At the same time, they will also able to compete on an equal footing with their Western counterparts both on the domestic and export scene.
• The differences in living standards between the highly developed South Eastern provinces and North Eastern or Western China are mounting, potentially creating the risk of social tensions and triggering difficult to control internal population flows. This is leading the authorities to proactively pursue policies encouraging industrial activities including chemical production to move from the South to North and from the East to the West.
• Financial discipline is increasingly becoming the norm as access to financing is more restrictive and higher returns are expected from investments. This is a radical departure from the attitude prevailing until recently where little, if any, attention was paid to the cost of capital—often treated as “sunk” costs.
• Input costs—related to labor, utilities or waste disposal—are rapidly increasing, particularly in Eastern provinces, reflecting supply bottlenecks. The demand for skilled labor is outstripping availability, which is driving employment costs up—a comparable situation being observed in terms of waste treatment capacity. As illustrated in Figure 1, over the last eighteen years average unit employment costs for an entry level worker in the fine and specialty chemical sector in Zhejiang, a coastal province, have more than tripled in USD terms and are now around 13,000 USD/p/y—almost double the 7,000 USD/p/y observed in India. The cost of trained R&D personnel is starting to approach Western levels. Parallel to this, waste disposal costs in China now exceed those noted in the West (Figure 2).


• Investment requirements are escalating rapidly, reflecting the combination of surging manpower costs associated with construction and the tighter standards demanded and enforced by the authorities. These often exceed what is required in the West. For example, the GB Code setting in norms that new units have to meet in China man-dating a minimal distance between the utility building and the production section of at least 37.5 m while prohibiting fitting in the production building of electrical control panels. These having to be located at a distance of at least 15 meters irrespective of the type of chemical process applied.
As a consequence, investment outlays per unit of reactor capacity are rapidly converging with those prevailing in Europe and the U.S. (Figure 3). The competitive advantage traditionally enjoyed by Chinese companies associated with short lead times given the easy permitting having substantially disappeared following the tighter stance adopted by the authorities both at the Central and Provincial/Local level.

The Chinese fine and specialty chemical industry is in a transition phase
Out of the various segments of the Chinese chemical space, the developments on-going in the country are impacting the most the fine and specialty chemical industry.
Contrary to petrochemicals or large-scale inorganic chemicals whose supply structure is dominated by large companies operating plants meeting the required emission controls and equipped with suitable waste treatment facilities, fine and specialty chemicals are characterized by a highly fragmented supply structure. This comprises thousands of small- to medium-sized companies with sales of a few million U.S. dollars—most often privately owned. Several of these operate old plants lacking adequate waste treatment facilities often located close to urban areas or in old industrial parks not anymore in compliance with the new stricter environmental norms.
Consequently, many of these companies have been forced to close or face imminent closure, unable to fund the investments required for relocating their plants and/or bring these in line with the new standards. The number of plants closed is in the thousands and poised to continue to increase. An additional element of uncertainty is represented by the rather unpredictable decisions and actions of the authorities sometimes disrupting the operations of entire chemical parks following violations or incidents caused by just one of the tenants.
As illustrated in Figure 4, the effective tightening of EHS regulations differ depending on the province reflecting factors such as degree of development stage, priorities set by the authorities, environmental conditions and degree of activism of the local population.

The Guangdong province and the “Blue Sky Triangle” area comprising Beijing, Tianjin and twenty six other cities in Heibei, Henan, Sandong and Shanxi have enforced for already several years tight EHS regulations as an example to plants to stop their operations once certain pollution limits are reached. A number of provinces mainly in the area south of the Yangzi like Heibei, Henan, Jiangsu and Shandong provinces have recently declared their intent to aggressively enforce standards going beyond those set by the Central authorities.
In the Jiangsu Province, a few days after the explosion of March 21, 2019 in the Xiangshui Chemical Zone of Yancheng City having prompted the permanent closure of that zone hosting more than one hundred plants, the authorities issued an emergency notice often referred to as, “Correction and improvement plan of the Chemical Industry in Jiangsu.” This mandates the reassessment of all the chemical enterprises of the province and more particularly those located close to the Yangzi River and its tributaries, other environmentally sensitive areas or densely populated areas or outside chemical industry parks. Enterprises failing to meet the required standards, or whose location is considered inadequate, face closure. The authorities have set 2020 as a deadline. As a consequence to this credible scenario, out of the more than 7,000 chemical enterprises existing in Jiangsu in 2017 only between 1,000 and 2,000 will survive by 2021.
The Zhejiang Province is also issuing stricter regulations calling for the closure of chemical plants not in compliance with applicable environmental, health and safety standards. The focus is being placed on units operating processes considered hazardousor located outside suitably equipped chemical parks. The province has prohibited the creation of new chemical parks. Here too plants failing to adjust face permanent closure.
Shandong, with its more than 8,000 chemical enterprises is the center of gravity of the Chinese chemical industry. It is at the forefront in terms of environmental, health and safety policies. The provincial authorities have already issued in 2017 standards to be met by chemical parks that are considered to be the strictest in the country. Among various other requirements, these must be located far away and downwind from urban areas and have the equipment to safely dispose of their entire hazardous waste output. As a result, half of the almost two hundred chemical parks hosted by the province are expected to be closed for failing to meet the new standards. At the same time, no new chemical parks will likely be established—an even larger share of chemical enterprises face a comparable fate.
In the North Eastern and Western provinces, respectively the China rust belt and the Chinese “Far West” frontier, regulations remain less stringent reflecting the East to West and South to North industrial redeployment and development targets aiming to attract investments. However, the authorities have made it clear that industrial development cannot come at the expenses of safety and the environment. Within this frame guidelines have been issued calling for locating all chemical plants within suitably equipped industrial parks and mandating the safety measures that newly built plants must meet. Companies have been given 2025 as the deadline for complying.
impact on the world’s fine and specialty chemical industry
By Western standards the number of plants that have closed in China over the last twelve months is mind boggling—there have been thousands, accounting for about 20% of all Chinese chemical enterprises. Surprisingly enough, despite the magnitude of the number, from a macroscopic perspective these closures are only marginally impacting the country’s total chemical output, reducing it by just 5%. This corroborates that the majority of these closures is affecting mainly small- and medium-sized enterprises.
However, this does not mean that the shake out going on in China has had no effect on the global chemical industry. Over the years Western producers of fine and specialty chemicals have become increasingly dependent on small- and medium-sized Chinese suppliers for both intermediates having to undergo further synthesis steps and end molecules ready to be formulated such as active ingredients. For some of these products hardly any alternative suppliers exist outside China. Western sources having either closed or moved production towards lower cost countries—chiefly China—reflecting competition from cheap imports combined with mounting regulatory hurdles.
It is therefore no surprise that the wave of closures observed in China is creating havoc with the global supply chain for several products. The West has faced major shortage situations illustrating its dependence on Chinese sources. Just as a few examples:
• Western producers of benzoisothiazolinone (BIT) biocides are hard pressed to secure access to the key intermediate o-chloronitrobenzene—almost exclusively imported from China—whose supply is disrupted by plant closures. This is resulting in a shortage of BIT biocides prompting the U.S. FDA to issue a list of alternative biocides that can be fast-tracked as substitutes in formulations already on the market by simplifying the regulatory procedures associated with changing a biocidal system.
• Access to p-amino/nitro phenol, the key precursor of paracetamol—is becoming more challenging. With the salient exception of Mallinkrodt, all paracetamol producers depend on China for this raw material whose availability has been curtailed by the restrictions imposed by the authorities.
• Supply of sartan anti-hypertensive API has been threatened by the draconian restrictions imposed by the Jiangsu authorities following the aftermath of the Yancheng explosion, disrupting the operation of ammoxidation capacity producing key intermediates.
• Photo-initiators used in radiation curing coating systems—whose supply is dominated by China—are in short supply following the closure of several producers. Their limited availability has also driven prices up creating a bottleneck hindering market growth.
• Substantial price increases are reported for some textile dyes involving in their synthesis intermediates such as BONA or m-phenylenediamine, now in short supply due to the disruptions facing several Chinese sources, including JTC, one of the largest world producers of m-phenylenediamine
Facing this situation Western customers are scrambling to develop alternative sources. This is prompting some industry observers to predict a massive return to the West of activities that have been off-shored to China over the last twenty years. They are comforted in these views by the on-going trade frictions and rhetoric between China and the U.S. as well as by the set-backs suffered by some Western companies having burned their fingers trying to develop China as a supply source.
This represents a complete swing of the pendulum compared to what was observed until a few years ago. The consensus was that a massive off-shoring outside the West towards China of fine and specialty chemicals was inevitable, if not even desirable, given compelling competitive advantages enjoyed by the country—including lower input costs, fewer operating hurdles and local demand making Western companies rush to China to develop local sources.
These extreme views must be nuanced as the pendulum is poised to swing back to an equilibrium situation. In such a scenario, once the dust has settled and the on-going shake out of the supply structure is complete, China will continue to be a major supply hub for the world’s fine and specialty chemical industry. The fundamental change will be represented by the levers China-based producers will act upon to compete. These are most unlikely to revolve around low delivered prices achieved through access to cheap labor, disregard for the cost of capital or environmental and safety shortcuts structure.
Rather, the fewer Chinese producers eventually emerging will have the size and re-sources to compete on an equal footing with their Western counterparts, leveraging more sustainable advantages such scale and technology.
This stresses the imperative for Western players wanting to tap China as a source of fine and specialty chemicals. They must develop an intimate understanding of the realities of the local scene—the on-going changes and applicable rules of the game—in order to identify the likely survivors and avoid embarking on ventures with doomed companies.
Note: The authors would like to thank Ms. Dai Lu of Alfa Chemicals Nanjing for her invaluable contributions to this article.
Dr. Michele Jermini is the Managing Director of Alfa Chemicals (Suisse) SA; mjermi-ni@alfachemicalsint.com.
Dr. Enrico Polastro is a Vice-President of Arthur D. Little; polastro.enrico@adlittle.com.
Obviously, this transition is having a major impact on all sectors of the Chinese economy. The chemical industry is no exception. The business model traditionally applied in the country has revolved around low delivered prices leveraging a low cost base—with little regard for elements such as innovation, service or impact on the environment. However, this is more and more being challenged by structural developments, including tighter regulations and a rapid pace of cost inflation. An additional catalyst is represented by the uncertainties created through trade frictions.
This is mirrored in the wave of plant closures affecting mainly small- and medium-sized players—the backbone of the Chinese fine and specialty chemical supply structure—as opposed to large petro-chemical companies better equipped given their size, resources and political clout to cope with the evolving regulatory landscape.
The developments impacting the Chinese fine and specialty chemical industry have far reaching implications in the West, reflecting the increasing dependence on China for the supply of several products—be these intermediates or end molecules ready-to-be formulated. This is a consequence of the closure of local capacity following the availability of low-priced Chinese imports, which is resulting in supply chain disruptions, shortages and surging prices for products such as active pharmaceutical ingredients (APIs), biocides and textile dye-stuffs.
It is therefore not surprising that Western customers have scrambled to develop alternative supply sources, particularly since it is not the first time that the reliability of China as a source of products such as APIs comes under the spotlight. Memories are still vivid of the high profile quality and regulatory compliance problems encountered a couple of years ago by some producers in the country.
As a result, several industry observers predict the demise of China as the world supply hub for fine and specialty chemicals as customer demand pushes for a revival of their production in the West. Such predictions are a complete reversal of the scenarios that prevailed until recently calling for the continued off-shoring of the production base towards China given the fundamental competitive advantages enjoyed by the country.
Most likely these extreme views need to be nuanced once the on-going reconfiguration of the Chinese fine and specialty chemical industry is completed and the associated uncertainties settle. China can expect to see its role as a production center for these types of chemicals revived. However, this will not be based anymore on low delivered prices but rather on factors such as world class scale and innovation. As the supply structure consolidates, a handful of Chinese champions will be able to compete on an equal footing with their Western counterparts.
The old model is doomed
Major forces are at play in China increasingly undermining the competitive advantage traditionally leveraged by local fine and specialty chemical producers revolving around delivered prices. These were achieved through access to an ample and cheap labor pool, disregard of capital costs, limited environmental and compliance hurdles, and facilitated by the benevolent attitude of the authorities eager to favor economic development. It also created a business environment irrespective of collateral damages such as negative impact on the environment, the health and safety of the work force and general population, and a poor use of scarce resources.
The development stage reached by the Chinese economy is the main trigger behind these changes. Following the dramatic increases in purchasing power, education and living standards over the last thirty years, the Chinese population now more than ever before embraces and favors values such as quality of life and a safe pleasant environment—the pursuit of growth and advances in pro-capita GDP are becoming less of a priority. Parallel to this:
• The political authorities realize that, except in some industrial sectors, the country is ill equipped to compete on an equal footing on the world scene given the fragmentation of its industrial base, while the traditional disregard of EHS related issues is becoming increasingly visible threatening not only the health of the population but also risking triggering social unrest. Following high profile industrial accidents such as Tianjing and Yanchen, the authorities had little choice but to vigorously address these problems by issuing and effectively enforcing EHS (Environment, Health & Safety) regulations. As an example, the Central Chinese government has appointed 18,000 environmental inspectors responsible for monitoring the situation throughout the entire country and has made it compulsory for chemical plants to operate only in industrial parks meeting environmental norms while setting strict timelines for implementing the required corrective measures including plant relocation—the alternative being closure.
Following these tighter regulators and their effective enforcement, a pruning of the supply structure is on-going. Several small- and medium-sized players—the traditional backbone of many industrial sectors in China—that are unable to undertake the required investments and bear the additional costs are driving an overdue consolidation. This will eventually result in the emergence of a smaller number of larger players operating in a more sustainable way and in better harmony with the environment and the population. At the same time, they will also able to compete on an equal footing with their Western counterparts both on the domestic and export scene.
• The differences in living standards between the highly developed South Eastern provinces and North Eastern or Western China are mounting, potentially creating the risk of social tensions and triggering difficult to control internal population flows. This is leading the authorities to proactively pursue policies encouraging industrial activities including chemical production to move from the South to North and from the East to the West.
• Financial discipline is increasingly becoming the norm as access to financing is more restrictive and higher returns are expected from investments. This is a radical departure from the attitude prevailing until recently where little, if any, attention was paid to the cost of capital—often treated as “sunk” costs.
• Input costs—related to labor, utilities or waste disposal—are rapidly increasing, particularly in Eastern provinces, reflecting supply bottlenecks. The demand for skilled labor is outstripping availability, which is driving employment costs up—a comparable situation being observed in terms of waste treatment capacity. As illustrated in Figure 1, over the last eighteen years average unit employment costs for an entry level worker in the fine and specialty chemical sector in Zhejiang, a coastal province, have more than tripled in USD terms and are now around 13,000 USD/p/y—almost double the 7,000 USD/p/y observed in India. The cost of trained R&D personnel is starting to approach Western levels. Parallel to this, waste disposal costs in China now exceed those noted in the West (Figure 2).

Figure 1: Labor costs in China (entry level worker Zhejiang province USD / p / y)

Figure 2: Solid Waste treatment costs (Zhejiang province USD / t)
• Investment requirements are escalating rapidly, reflecting the combination of surging manpower costs associated with construction and the tighter standards demanded and enforced by the authorities. These often exceed what is required in the West. For example, the GB Code setting in norms that new units have to meet in China man-dating a minimal distance between the utility building and the production section of at least 37.5 m while prohibiting fitting in the production building of electrical control panels. These having to be located at a distance of at least 15 meters irrespective of the type of chemical process applied.
As a consequence, investment outlays per unit of reactor capacity are rapidly converging with those prevailing in Europe and the U.S. (Figure 3). The competitive advantage traditionally enjoyed by Chinese companies associated with short lead times given the easy permitting having substantially disappeared following the tighter stance adopted by the authorities both at the Central and Provincial/Local level.

Figure 3: Investment costs
The Chinese fine and specialty chemical industry is in a transition phase
Out of the various segments of the Chinese chemical space, the developments on-going in the country are impacting the most the fine and specialty chemical industry.
Contrary to petrochemicals or large-scale inorganic chemicals whose supply structure is dominated by large companies operating plants meeting the required emission controls and equipped with suitable waste treatment facilities, fine and specialty chemicals are characterized by a highly fragmented supply structure. This comprises thousands of small- to medium-sized companies with sales of a few million U.S. dollars—most often privately owned. Several of these operate old plants lacking adequate waste treatment facilities often located close to urban areas or in old industrial parks not anymore in compliance with the new stricter environmental norms.
Consequently, many of these companies have been forced to close or face imminent closure, unable to fund the investments required for relocating their plants and/or bring these in line with the new standards. The number of plants closed is in the thousands and poised to continue to increase. An additional element of uncertainty is represented by the rather unpredictable decisions and actions of the authorities sometimes disrupting the operations of entire chemical parks following violations or incidents caused by just one of the tenants.
As illustrated in Figure 4, the effective tightening of EHS regulations differ depending on the province reflecting factors such as degree of development stage, priorities set by the authorities, environmental conditions and degree of activism of the local population.

Figure 4: Environmental tightening differs across the various Chinese provinces
The Guangdong province and the “Blue Sky Triangle” area comprising Beijing, Tianjin and twenty six other cities in Heibei, Henan, Sandong and Shanxi have enforced for already several years tight EHS regulations as an example to plants to stop their operations once certain pollution limits are reached. A number of provinces mainly in the area south of the Yangzi like Heibei, Henan, Jiangsu and Shandong provinces have recently declared their intent to aggressively enforce standards going beyond those set by the Central authorities.
In the Jiangsu Province, a few days after the explosion of March 21, 2019 in the Xiangshui Chemical Zone of Yancheng City having prompted the permanent closure of that zone hosting more than one hundred plants, the authorities issued an emergency notice often referred to as, “Correction and improvement plan of the Chemical Industry in Jiangsu.” This mandates the reassessment of all the chemical enterprises of the province and more particularly those located close to the Yangzi River and its tributaries, other environmentally sensitive areas or densely populated areas or outside chemical industry parks. Enterprises failing to meet the required standards, or whose location is considered inadequate, face closure. The authorities have set 2020 as a deadline. As a consequence to this credible scenario, out of the more than 7,000 chemical enterprises existing in Jiangsu in 2017 only between 1,000 and 2,000 will survive by 2021.
The Zhejiang Province is also issuing stricter regulations calling for the closure of chemical plants not in compliance with applicable environmental, health and safety standards. The focus is being placed on units operating processes considered hazardousor located outside suitably equipped chemical parks. The province has prohibited the creation of new chemical parks. Here too plants failing to adjust face permanent closure.
Shandong, with its more than 8,000 chemical enterprises is the center of gravity of the Chinese chemical industry. It is at the forefront in terms of environmental, health and safety policies. The provincial authorities have already issued in 2017 standards to be met by chemical parks that are considered to be the strictest in the country. Among various other requirements, these must be located far away and downwind from urban areas and have the equipment to safely dispose of their entire hazardous waste output. As a result, half of the almost two hundred chemical parks hosted by the province are expected to be closed for failing to meet the new standards. At the same time, no new chemical parks will likely be established—an even larger share of chemical enterprises face a comparable fate.
In the North Eastern and Western provinces, respectively the China rust belt and the Chinese “Far West” frontier, regulations remain less stringent reflecting the East to West and South to North industrial redeployment and development targets aiming to attract investments. However, the authorities have made it clear that industrial development cannot come at the expenses of safety and the environment. Within this frame guidelines have been issued calling for locating all chemical plants within suitably equipped industrial parks and mandating the safety measures that newly built plants must meet. Companies have been given 2025 as the deadline for complying.
impact on the world’s fine and specialty chemical industry
By Western standards the number of plants that have closed in China over the last twelve months is mind boggling—there have been thousands, accounting for about 20% of all Chinese chemical enterprises. Surprisingly enough, despite the magnitude of the number, from a macroscopic perspective these closures are only marginally impacting the country’s total chemical output, reducing it by just 5%. This corroborates that the majority of these closures is affecting mainly small- and medium-sized enterprises.
However, this does not mean that the shake out going on in China has had no effect on the global chemical industry. Over the years Western producers of fine and specialty chemicals have become increasingly dependent on small- and medium-sized Chinese suppliers for both intermediates having to undergo further synthesis steps and end molecules ready to be formulated such as active ingredients. For some of these products hardly any alternative suppliers exist outside China. Western sources having either closed or moved production towards lower cost countries—chiefly China—reflecting competition from cheap imports combined with mounting regulatory hurdles.
It is therefore no surprise that the wave of closures observed in China is creating havoc with the global supply chain for several products. The West has faced major shortage situations illustrating its dependence on Chinese sources. Just as a few examples:
• Western producers of benzoisothiazolinone (BIT) biocides are hard pressed to secure access to the key intermediate o-chloronitrobenzene—almost exclusively imported from China—whose supply is disrupted by plant closures. This is resulting in a shortage of BIT biocides prompting the U.S. FDA to issue a list of alternative biocides that can be fast-tracked as substitutes in formulations already on the market by simplifying the regulatory procedures associated with changing a biocidal system.
• Access to p-amino/nitro phenol, the key precursor of paracetamol—is becoming more challenging. With the salient exception of Mallinkrodt, all paracetamol producers depend on China for this raw material whose availability has been curtailed by the restrictions imposed by the authorities.
• Supply of sartan anti-hypertensive API has been threatened by the draconian restrictions imposed by the Jiangsu authorities following the aftermath of the Yancheng explosion, disrupting the operation of ammoxidation capacity producing key intermediates.
• Photo-initiators used in radiation curing coating systems—whose supply is dominated by China—are in short supply following the closure of several producers. Their limited availability has also driven prices up creating a bottleneck hindering market growth.
• Substantial price increases are reported for some textile dyes involving in their synthesis intermediates such as BONA or m-phenylenediamine, now in short supply due to the disruptions facing several Chinese sources, including JTC, one of the largest world producers of m-phenylenediamine
Facing this situation Western customers are scrambling to develop alternative sources. This is prompting some industry observers to predict a massive return to the West of activities that have been off-shored to China over the last twenty years. They are comforted in these views by the on-going trade frictions and rhetoric between China and the U.S. as well as by the set-backs suffered by some Western companies having burned their fingers trying to develop China as a supply source.
This represents a complete swing of the pendulum compared to what was observed until a few years ago. The consensus was that a massive off-shoring outside the West towards China of fine and specialty chemicals was inevitable, if not even desirable, given compelling competitive advantages enjoyed by the country—including lower input costs, fewer operating hurdles and local demand making Western companies rush to China to develop local sources.
These extreme views must be nuanced as the pendulum is poised to swing back to an equilibrium situation. In such a scenario, once the dust has settled and the on-going shake out of the supply structure is complete, China will continue to be a major supply hub for the world’s fine and specialty chemical industry. The fundamental change will be represented by the levers China-based producers will act upon to compete. These are most unlikely to revolve around low delivered prices achieved through access to cheap labor, disregard for the cost of capital or environmental and safety shortcuts structure.
Rather, the fewer Chinese producers eventually emerging will have the size and re-sources to compete on an equal footing with their Western counterparts, leveraging more sustainable advantages such scale and technology.
This stresses the imperative for Western players wanting to tap China as a source of fine and specialty chemicals. They must develop an intimate understanding of the realities of the local scene—the on-going changes and applicable rules of the game—in order to identify the likely survivors and avoid embarking on ventures with doomed companies.
Note: The authors would like to thank Ms. Dai Lu of Alfa Chemicals Nanjing for her invaluable contributions to this article.
Dr. Michele Jermini is the Managing Director of Alfa Chemicals (Suisse) SA; mjermi-ni@alfachemicalsint.com.
Dr. Enrico Polastro is a Vice-President of Arthur D. Little; polastro.enrico@adlittle.com.