China's chemical enterprises "go overseas" to pay attention to these business opportunities

Since entering 2022, with the regional conflict, global energy prices have soared, inflation in Europe and the United States has deteriorated, currencies have depreciated, and the growth of major economies in the world has slowed down, all of which indicate that the world political and economic pattern is entering a new period of turbulence
.
As the world's largest chemical market and chemical producer, what opportunities and challenges are China's chemical enterprises facing in the face of the changing international market, and how should they adjust their development strategies?

Chapter I: Major uncertainties currently facing the global economy

Since entering 2022, as the world's major economies have successively experienced negative quarterly GDP growth and the impact of many uncertainties, more and more economists and investment analysts believe that the global economy is entering a new round of recession and turbulence
.
The International Monetary Fund's October 2022 World Economic Outlook report has once again lowered its forecasts for GDP growth in 2022 and 2023 for the
world's major economies.

In the first half of 2022, the US GDP contracted, and in the second half of 2022, the eurozone GDP contracted, and about one-third of the world economy faced negative growth
for two consecutive quarters.
According to the latest forecast from the International Monetary Fund, the world economy will grow by 3.
2% in 2022 compared to 2021, with advanced economies growing by 2.
4% and emerging market and developing economies growing by 3.
7%.

In 2023, world growth will grow even more slowly at 2.
7%, with 1.
1% in advanced economies and 3.
7%
in emerging market and developing economies.

The main factors that have led economists and investment analysts to be bearish on global growth in 2022 and 2023 include monetary tightening policies adopted by countries around the world in response to high inflation, geographical conflicts, and global supply chains
that have been hit hard by the pandemic.

1.
High inflation - a hike in the dollar - the depreciation of major currencies

Let's start with high inflation and the monetary tightening that high inflation brings
.

High inflation, which first broke out in advanced economies at the end of 2021, has rapidly spread to most economies around the world, becoming one of
the biggest challenges facing global central banks in 2022.

U.
S.
inflation reached one of its highest levels in about 40 years in 2022, with prices in August and September 8.
3% and 8.
2%
higher than a year ago, respectively.
Inflation in the Eurozone reached 10% in September, while the UK's annual inflation rate was 9.
9%.

Inflation in emerging market and developing economies is estimated to be 10.
1% in the second quarter of 2022 and will peak at 11.
0% in the third quarter
.
This is the highest level
since 1999.

According to the latest IMF analysis data, the global headline consumer price index inflation forecast will rise from 4.
7% in 2021 to 8.
8% in 2022, and decline to 6.
5% in 2023 and 4.
1%
in 2024.
Advanced economies will emerge from inflation faster than emerging markets and development intermediates
.

So far, the impact of inflation on emerging markets and development intermediates in Asia, including China, has been relatively small compared to other regions, in part due to slowing economic activity in China and limited
price increases in most of the food products that make up the diet in these regions.

It is well known that the US dollar is the dominant currency
in global trade.
Although global trade currencies have begun to diversify in recent years, the US dollar still accounts for 40% of global international trade payments and 59%
of global reserve currencies.
Not surprisingly, then, the tightening monetary policy (sustained interest rate hikes) adopted by the United States in response to domestic inflation has directly triggered inflation and currency depreciation
in many economies around the world.
By September 2022, the US dollar had appreciated by about 15% against the euro, more than 10% against the Chinese yuan, 25% against the Japanese yen, and 20%
against the pound.
Since the current round of Fed interest rate hikes has not achieved the expected effect of curbing inflation, it is not ruled out that the Fed will continue to raise interest rates
before the end of 2022.
It is worth pointing out that the biggest difference between this round of inflation and previous US inflation is the constant tightness of the labor market, which is the main reason why the
Fed repeatedly delayed its decision to raise interest rates until March 2022.

2.
Territorial conflicts - global food crisis and European energy crisis

Next, let's analyze the impact of
regional conflicts on the world economy.
The two major direct effects of regional conflicts on the world economy are global food supplies and European energy supplies
.

Russia and Ukraine are important food suppliers to the world
.
Russia is the world's largest exporter of wheat and plays a pivotal role
in the international grain market.
In 2021, Russia exported 32.
9 million mt of wheat, accounting for 18% of the world; Ukraine exports 20 million tons of wheat, accounting for 10% of the world; The two countries account for 19% of global corn exports, 63% of global exports of sunflower oil, and 15%
of global exports of rapeseed oil.

Russia is also the world's leading supplier of fertilizers, the world's largest exporter of nitrogen and urea, the second largest exporter of potash fertilizers and the third largest exporter
of phosphate fertilizers.
Before the regional conflict, Russia produced 13.
5 million tons of potash fertilizer per year, accounting for 20% of global production; Exports were 10.
84 million tons, accounting for 19% of
global trade.
Since the regional conflict, Russia has announced a ban on the export of fertilizers
.
The main affected regions include parts of
Latin America, Eastern Europe and Central Asia.
These countries and regions are affected by fertilizer shortages, and food and crop production are expected to decrease, further threatening global food supply security
.

Russia is the world's third largest oil and gas producer
.
Before the regional conflict, Russia exported 10% of global oil trade and nearly 20%
of global natural gas.
The main export market is Europe
.
European countries have different dependence on Russian crude oil and natural gas, and many countries are more than 30%~40%.

After the outbreak of regional conflicts, relations between European countries and Russia entered an unprecedented state of tension, which not only led to a sharp drop in the amount of oil and gas supplied by Russia to Europe and soaring oil and gas prices, but also severely damaged the industrial structure of Europe, especially the chemical industry and other high-energy-consuming industries, and will inevitably change the industrial and economic structure
of Europe in the future.

The European energy supply crisis caused by regional conflicts has seriously affected Europe's economic development, and many energy-intensive enterprises have to choose to reduce production or stop production
.
Yara and BASF have successively announced significant reductions in the production of their ammonia plants and other products made from natural gas
.
Many energy-intensive enterprises, including steel manufacturing, have also reduced production and stopped production
.

The main changes in the foreseeable industrial and chemical industry in Europe in the future include: diversification of petrochemical energy imports, increasing imports from the Middle East, the United States and other parts of the world, and reducing dependence on Russian imports; Further accelerate investment in clean energy and increase the proportion of clean energy in the energy consumption structure; Energy-intensive industries will move out of Europe on a large scale; The production of basic chemicals derived from natural gas is losing competitiveness
in the global market.

Due to the similar structure of the European chemical industry and the Chinese chemical industry, the opportunity for Chinese chemical enterprises to export some chemical products to Europe in the short and medium term increases, especially the middle and downstream fine chemicals and high-performance materials
.

3.
Supply chain disruption - rebuilding supply chain - anti-globalization

According to the World Bank's World Development Report 2020: Global Value Chains, Trade for Development, released in October 2019, more than 50% of world trade today involves global value chains
.
The three regions of East Asia/Pacific, Europe/Central Asia and North America are the focus and intertwined
.
The participation of the two regions in East Asia/Pacific and Europe/Central Asia in global value chains is predominantly intraregional, followed by interaction between the two regions
.
North America has a low regional share of global value chains and a higher
dependence on East Asia/Pacific and Europe/Central Asia.
The other four regions, North-East Africa, Latin America/Caribbean, South Asia and Sub-Saharan Africa, have a small share of value chains within the region and a high degree of dependence on East Asia/Pacific and Europe/Central Asia
.
The above four regions participate in GVCs, with Europe/Central Asia as the largest partner, followed by East Asia/Pacific, and North America with a relatively small
share.

According to the WTO Global Trade Matrix study, in 1995, Japan, Germany and the United States were the three major regions
.
In 2017, the East Asia/Pacific region was focused on China, and the regional hub for Central and East Asia remained Germany, but less
important.
North America remains centered on the United States
.
But both Europe/Central Asia and North America are highly dependent on
China's trade.

With the rise of trade protectionism, there were already signs of anti-globalization before the outbreak of the new crown epidemic
.
Since the end of 2019, with the outbreak of COVID-19, the globalized supply chain that has been developed for decades has been hit
hard.
As major economies reshape their industrial chains and tense geopolitical relations, the future global economy is likely to form several relatively independent economic cycles based on geographical location and political alliance on the basis of previous globalization
.

Chapter II: The Current Situation of Globalized Industry

According to the latest chemical industry report of the European Society of Chemical Industry in 2022, the total global sales of chemicals reached 3,471 billion euros
in 2020.
China is the world's largest producer of chemicals, accounting for 45%
of global chemical sales in 2020.
It is followed by the EU27 and the United States, which account for 14% and 12%
of total global chemical sales, respectively.

In 2021, with the recovery of the global economy and the strengthening of demand for chemicals, the total global chemical production increased by 5.
8%, the output value increased by ~12%, and the capacity utilization rate increased to 82.
3%, and it is expected that the growth rate of global chemical production will remain above
3% until 2025.

Since 2021, oil prices have begun to rise sharply due to factors such as economic recovery after the epidemic, OPEC production cuts, and inflation; After the outbreak of regional conflicts in 2022, global oil prices soared
further.
Although countries around the world, including the United States, have thrown out oil reserves to stabilize oil prices, international oil prices are expected to remain high in 2022 and the first half of 2023 due to the leak of the Nord Stream natural gas pipeline in Europe, the oil production cuts that OPEC began to implement since November 2022 (2 million barrels per day), and the European Union will completely stop oil imports from Russia by the end of the year
.

The United States, the largest producer of oil equivalent per day and a net exporter of emerging energy, has been trying to change the global energy supply landscape
in recent years.
Recently, the United States and OPEC+ countries have had great differences on the issue of oil production cuts, which has added another destabilizing factor
to the global oil market in the future.

The chemical varieties with a high proportion of production capacity in Europe are mainly concentrated in the agricultural and construction industries, and have a relatively high
global share in the fields of fertilizer, feed additives, building insulation, and coatings.
From the perspective of product structure, European companies and Chinese enterprises have strong product competitiveness, with the further expansion of production capacity in the Chinese market and the high energy prices in Europe caused by the Ukraine problem, the market squeeze of Chinese chemical companies to European traditional enterprises will be more obvious
.

On the contrary, petrochemicals between China and the United States are highly complementary
.
China's petrochemical imports from the United States mainly include: liquefied natural gas, crude oil, primary shape plastics, and basic organic chemicals
.
China's petrochemical exports to the United States mainly include: plastic products, basic organic chemicals, etc
.

Despite persistent inflation and supply chain shortages, the U.
S.
chemical industry grew strongly in 2021-2022, driven by stronger downstream demand and rebuilt inventories.
Basic chemical production will drive the growth of the U.
S.
chemical industry in the coming years; The U.
S.
will be the fastest-growing major chemical market outside China (simultaneous growth in production and consumption).

In 2021, U.
S.
GDP grew by 5.
6%, industrial output by 5.
5%, and chemical production by 1.
4% (-3.
4% in 2020).

In 2022, basic chemicals production is expected to increase by 5.
1% and specialty chemicals production by 4.
1%.

From 2023 to 2025, with the restoration of the balance of supply and demand and the stabilization of end-market demand growth, the growth rate of US chemical product production will be slightly above 2%.

The new U.
S.
raw material advantages that have emerged in recent years and the re-integration and spin-off of leading companies will put it in the leading position
until 2025.

The competition path of the world chemical industry chain has changed from technological competition and global expansion from the 60s to the 90s of the last century to the capital-led competition in the first two decades of the 21st century, and resources and markets are the main direction followed by the globalization of the chemical industry chain; Since 2020, with the continuous superimposed epidemic war with anti-globalization, multinational enterprises have re-sought the core competitiveness
of science and technology.

Chapter Three: Overseas Business Issues and Development Opportunities of Common Concern to Chinese Chemical Enterprises

In 2021, the foreign trade of China's petroleum and chemical industry continued to grow rapidly, and the total import and export volume reached a record high
.
Customs data show that the total import and export volume of the whole industry was 860.
08 billion US dollars, accounting for 14.
2% of the country's total import and export, an increase of 38.
7%
over the previous year.
Among them, the total export volume was 295.
55 billion US dollars, an increase of 41.
8%; Total imports were US$564.
54 billion, an increase of 37.
1%; The trade deficit was $268.
99 billion, an increase of 32.
3%.

In October 2022, a survey of some Chinese chemical companies by Sinochem showed that nearly two-thirds of Chinese chemical companies have export business, covering various fields
from upstream petroleum refining to downstream fine chemicals and high-performance materials.
After nearly 20 years of development, Chinese chemical products have been widely sold all over the world; For the companies surveyed, the main export destinations are Europe, Southeast Asia, the United States and India
.
About one-third of the Chinese chemical companies surveyed have overseas branches or offices, and more than half of them have offices in the United States and Europe, in addition to Southeast Asia and India are also very active regions
for Chinese chemical companies.

The United States and Europe are traditional export destinations
for Chinese chemical companies.
In recent years, with the gradual transfer of many downstream industries to Southeast Asia (such as clothing, footwear, automobiles and electronics, etc.
), Chinese chemical enterprises have shown a rapid growth trend
in expanding sales and investing in factories in Southeast Asia.
India is an emerging market
for Chinese exports and outbound investment in recent years.

Two-thirds of the chemical companies participating in the survey have plans to further explore overseas markets, with Europe and Southeast Asia as the main target overseas markets, followed by the United States and India
.
The U.
S.
-China trade friction since 2018 and the ongoing tensions between China and the United States have made many Chinese companies wary of further expanding exports to the United States and expanding their business in the United States
.
The European market has a large overall demand, a standardized market environment, and little political conflict with China, so it is an ideal development destination
for Chinese chemical enterprises in recent years.
Benefiting from a new round of industrial transfer, Southeast Asia is one of the fastest growing regions in the world in the past decade; In addition, adjacent to China and convenient transportation and logistics, it has become a hot spot
for Chinese enterprises to expand overseas in recent years.

Chinese chemical enterprises have begun to enter an era of development and transformation, from the global upgrade of Chinese manufacturing and exports to transnational operations
.

According to experience, the final consumption market for most of the world's chemicals is one-third in the Americas, Europe, the Middle East and Africa, and the Asia-Pacific region, which explains why the global layout of leading multinational chemical companies is basically divided into three regions: the Americas, the EMEA and APEA
.

1.
Americas Market:

Divided into North and South America
.
The North American market is centered on the United States, and most of the commodity US market accounts for about 90% of
the entire North American market.
The North American Free Trade Agreement, which has been in effect since 1992 (replaced by the new United States-Mexico-Canada Agreement in 2018), is a package of trade agreements between the United States, Mexico and Canada, constituting the trade integration market
of the North American continent.
The South American market is smaller
than the developed North American market.

2.
Europe, Middle East and Africa market:

The market is mainly in Europe, and the market volume in the Middle East and Africa is very small
.
Compared with the North American market, the European market is scattered, there are many regulations, and the market development requires greater
investment.

3.
Asia-Pacific market:

The top priority for the Asia-Pacific market is China
.
The Southeast Asian and Indian markets have grown rapidly
in recent years.
The development degree of countries in the Asia-Pacific market varies greatly, and the industrial chain support, logistics, infrastructure, etc.
still need to be improved
.

From the perspective of chemical exports, the soaring prices and supply shortages of chemicals and industrial products caused by the European energy crisis will bring more export opportunities to China's chemical midstream and downstream product manufacturers in the short and medium term.
Demand from Southeast Asia and India will remain relatively strong
in anticipation of a global economic slowdown.

From the perspective of overseas investment and factory construction, based on the main factors such as raw material supply, proximity to the market, and avoiding the risk of geopolitical conflicts and trade frictions, the United States and Southeast Asia should become the first choice
for Chinese enterprises to build factories overseas.