China chemicals grow profits in moderate-growth economy | KPMG | BE

China chemicals grow profits in a moderate-growth economy

China chemicals grow profits in moderate-growth economy

Even with a gradual decline in GDP growth, China remains the world’s second largest economy and a market leader across Asia. As for the nation’s chemical sector, profits continue to rise as top line growth levels slow to levels below overall GDP growth. China chemical companies are expected to capture 40 percent of global market share by 2020. Key issues such as overcapacity and debt levels are a concern for much of China’s manufacturing industries, but leaders in the chemical sector, especially those in the specialty subsector, have been generally pleased about company performance in 2016, and they remain optimistic about future growth in 2017.

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A two-track economy

China is now in the middle of a fundamental and challenging transition: moving from an investment-intensive, export-led model of growth, to a consumption- and innovation-driven one. This transition can be best understood in terms of a ‘two-track economy.’ The first track — characterized by slowing growth — includes the country’s traditional secondary industries such as steel, shipbuilding, mining, construction and basic manufacturing. (Agriculture in China is considered the ‘primary’ industry.) Companies in secondary industries are now facing multiple challenges like overcapacity, the need for companies to move up the value chain and increased pressure to comply with stricter international and environmental standards.

The other growth track — moving much faster — consists of tertiary industries that support China’s growing number of consumers in multiple sectors: retail, health and beauty services, real estate, e-commerce, medical devices and high-end fabrication to name a few. These areas have seen impressive growth and are poised to continue this momentum. In fact, the second track is the new engine of China, driving 90 percent of GDP growth in 2015.

Steady growth for the chemical sector

China remains the most important driver of chemical demand in the world, and this leadership is expected to continue, growing to 40 percent of global market share and over 70 percent of Asia Pacific production by 2020.

Commodities continue to dominate the industry, with over 67 percent of market share. At the same time, economic and demographic growth trends for China continue to support downstream demand growth for products in the chemicals sector. A rapidly growing middle class will support growing markets for consumer goods, healthcare, construction and other areas relevant to the chemical sector.

As we reported two years ago, the news is generally positive for the Chinese chemical sector, and company leaders remain optimistic. Revenues and profits are on the rise, innovation has led to the introduction of new products, secondary industries such as automotive and construction support continued demand, and tertiary industries ensure the steady growth of markets for services and consumer products.

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