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Improving Competitive Power

The Route for Chinese Acetic Acid Producers

By Shao Shouyan, Xia Jingfeng - Jiangsu Sopo (Group) Co., Ltd.

Since the coming of overseas acetic acid giants and their increasing market share in China, the situation for Chinese domestic producers seems to be more critical, while excessive capacity and weak competitiveness are great troubles. What should domestic producers do to win the tough battle in acetic acid market? The following comprehensive analysis by Shao Shouyan and Xia Jingfeng from Jiangsu Sopo (Group) Co., Ltd. - the biggest local acetic acid producer - might provide the right answer. Current Status: continuous capacity stretching
Like most chemicals, the production of acetic acid in China has increased sharply in the last five years: 23% in capacity, 22% in output and 12% in apparent consumption. Authoritative data shows that in 2009 the capacity and output of acetic acid in China had reached to 4.7 million and 2.721 million tons per year, while the apparent consumption was up to 2.954 million tons which might be the fastest and best in the world. Respectively, in the first half of 2010, China has already produced 1.952 million tons acetic acid, and it was estimated that both output and consumption might exceed 3.5 million tons in accordance with expected 6 million tons capacity by the end of 2010. The main reason for this incredible growth is breakthroughs in acetic acid processing methods; in particular methanol

carbonylation became more popular as main force of acetic acid production. China currently has more than 20 acetic acid factories and Table 1 shows the top ten Chinese factories in acetic acid capacity in 2010. The breakthrough of processing method brought a rapid growth and wild expansion for Chinese acetic acid; nevertheless, the market tended to be more competitive under the pressure of declining product price, and some native factories found it tough to run the business and had to cut down operation scale. In 2010, the average operating rate of acetic acid plants in China just remained approximately 60% including 20% and 45% in those using oxidative fermentation and ethylene oxidation, but the operating rate of methanol carbonylation plants extremely increased to 70% which indicated the potential of innovated processing method. On the other hand, large acetic acid giants shows more ambition and interests to Chinese market, and most of them are trying to built new acetic acid plants or extend their current facilities, Table 2 is statistics of China new-added acetic acid capacity before 2015. Theoretically, the total capacity of China acetic acid would be able to approach to 9. 95 million t/a as long as all the plants shown in Table 2 go into operation on schedule. Anyway, by the end of 2015, the overall capacity of acetic acid in China will definitely exceed 8.5 million t/a even if uncertainty of new-added plants construction and exit of oxidative fermentation and ethylene oxidation.

Table 1 Top ten Chinese acetic acid factories in capacity in 2010

No 1 2 3 4 5 6 7 8 9 10 Company Jiangsu Sopo (Group) Co., Ltd. Shanghai Wujing Chemical Co., Ltd. Yankuang Cathay Coal Chemicals Co., Ltd. Celanese (Nanjing) Chemical Co., Ltd. BP YPC Acetyls Company (Nanjing) Ltd. (BYACO) Hebei Zhongxin Chemical Co., Ltd. Yangtze River Acetyls Company(YARACO) Henan Shunda Chemical Science & Technology Co., Ltd. Jilin Jian New Energy Group Company PetroChina Jilin Petrochemical Company Capacity(kt/a) 600 600 600 600 500 500 350 300 210 210 Processing Methanol Carbonylation Methanol Carbonylation Methanol Carbonylation Methanol Carbonylation Methanol Carbonylation Methanol Carbonylation Natural Gas Methanol Carbonylation Methanol Carbonylation Oxidative Fermentation Ethylene Oxidation

Source: CCR

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Analysis: downturn of Chinese acetic acid industry

History of Chinese acetic acid market 2005-2007 - The Chinese market had a strong demand for acetic acid while domestic supply was unable to meet, and the gap had to be filled by import, therefore acetic acid price remained high in a fairly long period.

to apply coal based methanol carbonylation in acetic acid production, which has obvious advantage in cost and is able to bring considerable profit for producer. Therefore, some Chinese coal enterprises tried their best to build up more acetic acid plants with the purpose of higher profits, and foreign acetic acid giants also joined the competition for market share, which improved methanol carbonylation to some extent. Nevertheless, the whole acetic acid industry tended to be out of order, and supply came to exceeded demand by quite a bit within five years, which must be the root cause of the current downturn.

to staring-up of new larger acetic acid plants, and this circumstance will last until 2014 when the pressure might be relieved for up to 70% capacity, while the demand for acetic acid will just rise 1 to 1.5% more than the Asian GDP increase in the next few years.

Domestic factories: weak competitive power

Raw materials - Most overseas acetic acid giants use natural gas as raw material to produce acetic acid, which has obvious advantage in cost compared with oil and coal. Respectively, the cost of acetic acid from natural gas ranges from RMB1100 to RMB 1200 per ton, and the import price is no more than RMB1600 per ton, but the cost of acetic acid from coal (the means used by over 70% Chinese acetic acid factories) approaches RMB2200 per ton. In consequence, domestic acetic acid generally has little cost advantage, as the increasing imports in the first half of 2010 confirmed.

2007-2009 : From 2007 that global fiFinancial crisis postpones nancial crisis started, Chinese acetic acid industry recovery market was badly hurt and the price of acetic acid slumped in the situation of increasing capacity, which resulted in a very low The excessive capacity gave huge impact to operating rates and even shutting down acetic acid market, but the capacity will spontaneously accord with demand evenfactories. 2010-2011 : In 2010, global economic t u a l l y b y t h e i n f l u e n c e o f m a r k e t took a turn for the better and it seemed to adjustment; obviously it needs a procedure. bring a new life for Chinese acetic acid However, Chinese acetic acid producers market, in the presence of acetic acid in- have to be more patient to wait the coming dustry recovery. However, the two-year of industry recovery because the impact of Production technology - compared to Chidownturn still had a serious impact for the financial crisis in 2008 still exists. Celanese nese traditional methanol carbonylation Chinese acetic acid industry and the market - the world's leading acetic acid producer plants, multinational acetic acid corporaturned to be more depressed after few considered that the rise of demand in the tions own strong technology background Asian acetic acid market slowed down in and their acetic acid plants perform fairly months' recovery. Currently, the excess capacity of acetic 2010, and it is expected that excessive ca- well in production scale and product quality. acid still troubles Chinese producers and pacity may trouble all the Asian market in Celanese said its improvement of AOPlus the government, but interestingly, foreign the next few years. Celanese also said that technology would increase acetic acid cagiants reinforce the investment of acetic acid the demand for acetic acid in Asian would pacity and be able to bring 1.5 million tons production and downstream products in the be not able to keep pace with supply due per reactor from the current 1.2 million market downturn, which shows the potential imaginaTable 2 Statistics of China new-added acetic acid capacity by 2015 tion of Chinese acetic acid Company Capacity Available for makers, and it is worth pay(kt/a) Production ing closer attention. Jiangsu Sopo (Group) Co., Ltd. 600 Q2 2011
Celanese (Nanjing) Chemical Co., Ltd. 600 200 400 400 400 200 300 650 200 3950 2012 Undetermined 2012 2012 2012 2011 2011 Before 2015 Before 2015

Disorderly capacity expansion The root cause leading to the acetic acid downturn in China is disorderly capacity expansion. Since oil price were rising from 2005, most acetic acid producer could not afford the high cost of oil and turned

Yunnan Yunwei Group Co., Ltd. Yankuang Cathay Coal Chemicals CO., Ltd. Henan Longyu Coal Chemical Co., Ltd. Shandong Heze Fu-Hai Energy Development Co., Ltd. Huaibei Coal Mining Group Henan Yima Shengyuan Chemical Science & Technology Co., Ltd. Yangtze River Acetyls Company (YARACO) Chongqing Wansheng Coal Chemical Co., Ltd. To t a l Source: CCR

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tons. Once this technology was put into operation, the overseas competitive power will give much more pressure to Chinese acetic acid industry. Production scale - with the addition of new plants and extension of current plants, the capacity of Chinese acetic acid has sharply increased and the gap between overseas and domestics in production scale seems to be much smaller in the last few years. For example, Jiangsu Sopo (Group) Co., Ltd. - biggest domestic acetic acid producer updated original two acetic acid plants and each plant currently has an annual capacity up to 600 000 tons, which still has potential to be 1 million tons. Overall, Chinese acetic acid factories now are trying to extend production scale to improve competitiveness. Downstream products - Over the years, the industry chain of acetic acid in China has basically become fully formed, but the industry concentration and depth of the industry chain - which cannot compare with the multinational giants - still need to be refined. Celanese - the global leader has numbers of high profit downstream products as a basis of its competitive power, and now the firm is building an acetyl production base in Nanjing, Jiangsu province, which is considered to be the first one in the world and has capacity to produce acetic acid, vinyl acetate monomer (VAM) and ethylene latex. The same as Celanese, BP is also trying to realize its dream of an acetic acid base in Nanjing and Chongqing, southwest China. According to officer statistics, the total capacity of BP and Celanese might be able to reach 2.5 million t/a before 2015, which take approximately 30% of domestic capacity in China. Therefore, the coming of overseas downstream products will be a great threat for domestic producers. Resource integration - the concept of resource in acetic acid industry involves raw materials, industry chain, people, technology, funding, management and market and it is believed that the integration of resource enable to maximize resource utili-

zation and improve enterprise efficiency, eventually increasing the competitive power of the company. Obviously, the overseas acetic acid giants in China has global raw materials network, a strong innovation team and comprehensive market structure, which is the foundation of competitive power, to some extent, they use the global resource to join the game in China. On the other hand, Chinese producers currently have no advantage in global resource integration and what they could do is to rely on domestic producers, and initially realize domestic resource integration and before extending to the international scene. Market - It is considered that the Chinese acetic acid market has attained a balance of production and consumption, and current acetic acid producers each have regular market share. This being the case, the suggestion for domestic producers is to investigate the potential market and try to develop new acetic acid products rather than just keep eyes on current fixed market. In the international market, Chinese producers need to pay closer attention to new demand markets those are currently growing fast because the current international market has been fixed and also stable in supply and demand in a quite long time.

Chinese producers just put head down for production and have no international horizon, and then certainly they lose the chances to know what their competitors doing, acetic acid industry development and innovation of new products. So, it is necessary to have a comprehensive information system to collect all the information around the world, which might be the easiest and fastest way to improve competitive power of locals. 2. Invest in R & D Strong technology background is the core of a powerful company, such as Celanese and BP, who have a full R&D team and numerous technology centers. Besides fast growth in the Chinese market, the original impetus for overseas giants to invest in China is their well developed technology in downstream products which enable them to be more confident in products sales rather than being concerned in excessive capacity. Therefore, owning core technology could guarantee local producers to win the competition in spite of multinationals' huge investment and long history of development. 3. Integrate resources The purpose of resource integration of Chinese acetic acid producers is to build up a few giants in the industry, all of which must be taking the fastest routes to win the competition. Multinational acetic acid companies such as Celanese are predominant in technology, talents and funding, and domestic producers could pursue them in a short period. However, the situation in China allows most domestic acetic acid producers to integrate separate resources or bring other advantages to bear. In that case, the total competitive power of domestics would be improved greatly, even being a giant domestically, and might be able to cope with Celanese and BP. Theoretically, the potential of resource integration of Chinese producers can be pursued with confidence because it has succeeded in other chemical industries.

The paths to be powerful

The analysis above indicates the coming of tougher competition in China's acetic acid sector; in other words, it would be a good time for domestic producers to change their thinking style. In face of competition, the first thing to do for domestics is to build up a healthy market environment, which enables local acetic acid factories to grow and get stronger. The following points will be the tips for local producers to learn in the next few years. 1. Build up a full information collection system The current excessive capacity in China has strong relationship with a shortage of information collection; in particular, most

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