Chemical atttraction

As Nanjing strives to keep
pace with Shanghai and its booming satellite cities, the chemical sector is emerging as a
major employer and one of its most important assets.

THF view across picturesque
Xuanwu Lake to the northern ramparts of Nanjing's ancient city wall was once testimony to
the city's past glory as capital of 10 dynasties. These days, the cityscape is a holder
statement about the future a visitor's gaze is drawn beyond the city wall to lofty silhouettes
in progress, crowned with giant construction cranes.
In a bid to keep pace with Shanghai
and booming satellite cities such as Suzhou and Kunshan, Nanjing is pushing hard to
improve the investment environment. The city is busy at work on its third bridge across the
Yangtze River, a modem subway system, new roads and host of commercial and
residential building pro-jects that grind and flash through the night. In May, a USS 100m
traffic tunnel underneath Xuanwu Lake was opened to traffic.
Despite being criticised for
his poor handling of the Sars epidemic in Nanjing, the city's mayor, Luo Zhi-jun, has
earned a strong reputation for his efforts to simplify administrative procedures. Approvals
for for-eign investment have become more efficient. Red tape has been scaled down and
'express service windows' provided at relevant bureaus. "The government is pret-ty on the
ball," says Steve Banu, chief executive of the Nanjing-based consulting firm J&S
Associates. "There are a lot of infrastructure improvements, and the level of service and
general attitude are getting bet-ter all the time."
As the city looks to build its economic
standing, one of Nanjing's greatest assets will be the strength of its chemical sector,
which already holds a leading posi-tion nationally. The basic framework for the new 3.8 sq
km Nanjing Chemical Industry Park NCIP) is com-plete and its US$ 130m first phase
should be finalised some time next year. The park has drawn interest from an impressive
list of international chemical firms, such as Messer, DuPont, Praxair, Shell, Formosa
Plastics and PP. Germany's Celanese received approval earlier this year for a wholly-
owned acetic acid plant in the park, which should be up and running by early 2006.
A
number of the compaaies that are evaluating the park have interests elsewhere in the city.
In October 2002, for example, ChevronTexaco Worldwide Power & Gasification announced
that it would license its gasi-fication technology to Sinopec (China Petroleum & Chemical
Corporation) for use at its naphtha steam reformer plant in Nanjing's northern suburbs.
The following month, Shell Global Solutions International signed a memorandum of
understanding with Sinopec to transfer industry best practices to the Jinling refinery in
Nanjing and improve the facility's profitability.
Of course, Nanjing's jewel in the crown is
the massive US$2.9bn BASF-YPC project, a 50/50 joint venture between BASF and Sinopec
subsidiary, Yangtze Petrochemical.
When completed in 2005, the world-class steam
cracker facility will output 600,000 tounes of ethylene annually. The project's nine
downstream plants will produce I .7m tonnes of chemicals and polymers a year for the
domestic market. Last month the joint venture said it would increase the annual capacity of
its dimethylformamide plant at the site from 10,000 tonnes to 40,000 tonnes because of
surging demand for the solvent.
The powertul potential of China's domes-tic chemical
market excites Nanjing's eco-nomic planners and foreign investors alike and with good
reason. Steady domestic GDP growth of 7-8 per cent can be expected to generate a
corresponding increase in demand for chemical products. "The market demand for
chemical products will increase in the next three to five years at a rate above GDP growth,"
says Andrew Yuen of Eastman Chemical, which has a manufacturing base in Nanjing for
adhesive raw materials. "Assuming a long-term growth of 7 per cent, we are talking about 9-
10 per cent [growth for the chemical sector]."
Rapid economic growth has also led to an
expanding chemicals shortage in China, which the government is addressing by opening
the sector to foreign investment in the hope of bolstering production. "China is rapidly
becoming a global manufacturing base with an increasing need for chemical raw materials
electronics, plastic processing and pharmaceuticals to name just a few industries.
China's chemical industry is in growth mode with a long road to maturity compared with
developed countries. The low cost of capital budgets combined with low operating
expenses makes it very attractive [to investors]," says Yuen.
The outlook is bright on the
policy side, too. The central government has taken impor-tant reform steps, such as
restructuring its petrochemical industry to form three major domestic companies – Sinopec,
China National Petroleum Corp and China National Offshore Oil Corp all of which have
successfully floated shares outside China. In a farther step to reform its down stream
chemical industries, the government intends to combine Blue Star and Haohua Chemical
to create China General Chemi-cal United, with an asset base of US$2.4bn.
Nanjing is
well placed to turn these fac-tors to its advantage and fire up the chemical sector as a
primary engine of growth. Improving road, rail and river links make the city an optimal base
from which to launch distribution networks throughout the Yangtze River basin. Its
chemical infrastruc-ture is also strong, particularly with the imminent completion of the
NCIP. Local chemical enterprises, such as Yangtze Petro-chemical, provide strong
precedents for co-operation with foreign enterprises. "Our Nanjing plant is centrally located
and has close proximity to customers. Yangtze Petro-chemical, our partner, provides good
and steady supply of raw materials and infra-structure, as well as a good labour force,"
says Yuen.
BASF-YPC president Dr. Berud Blumen-berg also speaks highly of co-
operation at all levels and expresses satisfaction with the selection of Nanjing as a
location. "Nanjing has witnessed tremendous change over the last decade," he says. "I am
particularly impressed by the volume of new construc-tions going on, the level of
advancements and the fine quality of the people here."
Blumenberg stresses the
importance of the ties it has developed with the local govermment and banks in securing
US$ l.4bn in limited recourse financing in March. "These tangible and intangible
infrastructures have given us the assurance and confidence to materialise a world-scale
integrated produc-tion site here," he says.
The project is a key part of BASF's China and
Asia strategy, which will have placed nearly a quarter of its total Asia investment in Nanjing
by 2005. "We are confident that Asia, led by China, will be the major growth region in the
world," says Blumenberg. "We'll have invested USSS.6bn in Asia by 2005. Out of the total
sales of E32.2hn achieved by BASF in 2002, the Asia-Pacific region accounted for 12 per
cent. This per-centage is targeted to increase to 20 per cent by 2010, of which 70 per cent
will come from local production."
Despite the worldwide economic slow-down, which
made 2002 a tough year for the chemical sector globally, the BASF-YPC project is on
schedule. Blumenberg says the facility has met all of its major targets and will complete all
engineering work and the procurement of major equipment by the end of this year. "We'll
have this project mechan-ically completed by end of 2004," he adds.
BASF's project may
he drawing most of the limelight in Nanjing, but a host of other companies are also taking
advantage of the opportunities offered by the city's booming chemical industry. US-based
Air Products, which has been operating in Nanjing for five years, is competing with three
other multina-tional companies for a share of the lucrative gas products market supplying
companies in a variety of industries from electronics and steel to other chemical
companies, with gases used in the manufacturing process.
Jason Wang, sales
manager for Air Products Nanjing, expects demand to increase steadily for the foreseeable
future on the back of rising industrial production. "The outlook for the next five years is
good," he says. "Market demand will increase. But… competition has become very fierce
over the last two years, especially for clients among the steel mills, This is because the
demand for steel has increased. The focus has been on steel mills in Zhejiang and Fujian,
where steel owners are increasing production fast."
One of Air Products' competitors,
Prax-air, already operates an air separation unit (ASU) in Nanjing to produce its products
locally. In April Air Liquide Hangzhou, the engineering and construction division of Air
Liquide in China, signed a contract with China Petrochemical International to build a large
ASU to supply the Sinopee Jin-ling chemical complex in Nanjing. Air Prod-ucts is currently
working on its own Nanjing facility in the hope of bringing down costs and increasing
competitiveness.

Strength in service delivery
But as Wang explains, competition in
the gas products market, in which the end products are very similar, depends on service
levels. "Some customers are only interested in price, but others compare relative
strengths," he says. "Safety is one of our strengths… Some customers don't know how to
use the gas, so we provide them with the technology. We have engineers on hand locally. If
we need, we can also invite foreign experts in."
BASF, meanwhile, is building its compet-
itiveness in China by introducing top tech nologies to its production facilities, including the
BASF-YPC venture. In the past, the world's 'big five' chemical companies were party to a
verbal agreement not to export key production technologies to developing coun-tries,
particularly China, say analysts in some cases, this was practised to the extent that even
outdated technologies were off lim-its. EASE, however, sees cutting-edge technology in
China as a key component of its strategy. "With China's accession to WTO., we expect
keener competition from other foreign investors and local companies," says
Blumenberg. "BASF will benefit because our local operations are already running
effectively. We are building world-scale plants using modern technologies."
Blumenberg
is confident that top technol-ogy and close partnerships will help to ensure the group's
leading position among chemical companies in China.
However the domestic chemical
sector" shapes out over the coming few years, Nanjing's planners are confident the city will
benefit. Large ventures such as BASF-YPC should help to draw more overseas invest-ment
and serve as an example to local firms' as they brace themselves for further competi-tion
from foreign entries. And, of course, China's huge market potential means there will be
plenty of opportunities for foreign investors, so long as they approach the mar-ket
cautiously and with a strong sense of real-ism, says Eastman's Yuen.
"As a whole, as
long as investors proceed with caution and not with too much optimism, there are many
opportunities."