China's Chemical Industry Enters a New Era with Sustainability

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China’s chemical SECTORS AND THEMES industry enters a newTitle era here with sustainability Additional information in Univers Green economy45 as light a game-chang12pt on16pt leadinger and growth driver kpmg.com

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Chemicals and Performance Technologies c | China’s chemical industry enters new era with sustainability Introduction

China is in the midst of a great In China, the forces driving transition. No longer willing to be sustainability will come from its new slotted in the class of big polluters, environment-friendly laws. Under it has undertaken one of the most the 12th Five-Year Plan (5YP), the comprehensive sustainability action country is evolving its regulatory plans in history, and the chemical regime to clamp down on energy- industry will be fundamental to turning guzzling industries and incentivising

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network this vision into reality. clean and green energy sectors. Its ambitious urbanisation drive is now Change, however, cannot come at Norbert Meyring being tweaked with ‘green’ regulations the cost of growth, and China will Partner, China and Asia Pacific requiring buildings to be energy- need to take a delicate balancing act Head,Chemicals efficient. There is greater demand as it moves from the older fast-paced KPMG China for smart transport that consumes industrial model to a slower pace of less fossil fuel and an urgent need development based on upgraded value to stabilise water sustainability. All chains and energy-efficient business. these factors and large government The chemical industry, meanwhile, investment will act as major growth has to deal with the current macro- drivers for chemical companies by economic forces brought on by a generating a need for new materials, slow US economy and lingering debt advanced polymers and specialty crisis in Europe that is dragging down chemicals. end-user demand. Emerging markets, As these new range of external especially China, are expected to demands evolve, chemical companies Leah Jin sustain the global economy until the too will need to refashion their internal Partner Western hemisphere begins to grow operations. To be a beneficiary of the Climate Change & Sustainability again. Most big-ticket petrochemical sustainability mega-trend, companies KPMG China and chemical investments are unfolding must embed certain strategies in the Middle East, Latin America or into their core business practices. East Asia, indicating that these regions There is a growing realisation that continue to hold potential, despite the environment can no longer be some slowdown. decoupled from profit estimates as the In 2011, KPMG predicted in its costs of ignoring it are too high. chemical industry report that one of In order to leverage the opportunities the most compelling mega-trends in generated by sustainability and China will be sustainability and the streamlining business costs, KPMG environment protection industry. This suggests a four-pronged strategy for report takes the prediction further chemical companies. A combination and tries to explore how the concept of product innovation, assuming of sustainable chemistry is becoming more stakeholder responsibility, increasingly strengthened, triggering a communication along the supply new generation of demand for chemical chain and a high level of sustainability companies. reporting may be the winning formula for chemical companies in China to achieve their next stage of growth. China’s chemical industry enters new era with sustainability | d independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network Contents

2 China chemical industry: Building business value through sustainability 2.1 Chemical industry on revised growth path 2.2 Sustainability in China: Managing risks, enabling growth 2.3 Four-fold strategy to build sustainability management model

Conclusion

© 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in China. 2 | China’s chemical industry enters new era with sustainability

Chemical industry combats new challenges independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network

1.1 Complex economic environment For chemical companies, the prospect The chemical industry is in a state of going forward revolves around of both optimism and uncertainty. a complex two-speed world. While The world economy has entered a emerging nations manage to buck difficult phase characterised by strong the trend, despite a slowdown in downside risks and fragility. Financial China, a muted American economy and political anxiety generated by and debt-constrained Europe will tend the European debt crisis continues to weigh down industry demand. A to affect high-income countries. continued recession in the developed These uncertainties may be mitigated world may take its toll on East Asian partially by growing consumption in economies unless they are beefed up emerging markets, which may help by more investment spending, higher sustain major end-use demand for the consumption and fresh opportunities chemical industry. in next-generation sectors like sustainability. A combination of macro-economic complexities has led the World Global growth trend and chemical Bank to greatly lower global growth curve projections to 2.5 percent and 3 The global chemicals industry began percent respectively, for 2012 and recovering from late 2009, but 2013. Over the next few years, production continues to be far below GDP growth of developed nations is pre-recession levels. Developing projected to be well below 3 percent, countries fared better compared to even under the best-case scenarios. the relatively mature economies of the For developing countries it will be a West. The recession, however, led to relatively weak 5.3 percent in 2012, a distinct structural shift in the global before strengthening slightly to 5.9 chemicals industry as production units percent in 2013. 1 moved towards Asian countries.3

Chemical makers, however, are Currently, the volume of demand optimistic that they should be able to China or East Asia generates has withstand the pessimism triggered by assumed greater significance. Output austerity measures in Western Europe of chemicals in emerging markets is and will be well-placed to reap the expected to outpace production in benefits from the emerging markets developed countries. India, Africa, as these economies will remain the Latin America and other emerging main drivers of world growth.2 markets will continue to expand,

1 Managing growth in a volatile world, June 2012, The World Bank 2 Cefic forecasts 2012 standstill for EU chem output, 14th June 2012, ICIS News 3 Global chemicals industry to reach US$5.5 trillion by 2015, Global Industry Analysts, Inc. 15 Feb 2012 China’s chemical industry enters new era with sustainability | 3 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network 4 | China’s chemical industry enters new era with sustainability

with the strongest growth in 2012 production recorded a 1.1 per cent expected in specialty chemicals, increase in 2011 compared to 2010 consumer products, and agricultural and total sales were 10.7 percent chemicals. Globally, output is expected higher year-on-year, according to to grow 2.3 percent in 2012 and 4.3 CEFIC Chemicals Trends Report.8 percent in 2013, according to mid-year In 2012, however, uncertainty returned projections by the American Chemistry with the public debt challenge Council. 4 dragging on endlessly. Sector analysts The US chemical sector, which predict a standstill in EU chemicals represents roughly 19 percent of output for the later part of the year global chemicals output, managed to and output during the rest of 2012 improve its profits in 2011 and overall will remain nearly 5 percent below the operating rates rose to 77.4 percent peak levels reached in 2007. Growth for 2011.5 American producers became in 2013 is expected to pick up slightly more competitive globally with access to 2 percent, but only if EU policy to low-cost natural gas feedstock and instills more business confidence and chemical exports reached a new peak rewards firms which innovate, create in 2011, growing 9.7 percent to hit jobs and expand operations.9 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network USD 207.4 billion.6 However, American Producers in the two affluent regions chemicals output is anticipated to are depending on emerging market rise by only 0.5 percent in 2012 due growth, along with favourable energy to lackluster demand growth in North costs stemming from an abundance America and a slowdown in China, of shale gas to shore up their bottom- before accelerating to a 2.3 percent lines. Global chemical companies growth rate in 2013.7 remain focused on exploring growth In the European Union, chemicals opportunities in Latin America and

North America • Dow Chemicals to construct new ethylene plant in Texas by 2017

• Celenese to build methanol production plant in Middle East Texas by 2015 • Saudi Aramco and Dow Chemical building USD 20 billion petrochemical project in Jubail, by 2015 • Borouge expanding polyolefins capacity in Abu Dhabi • Qatar Petrochemicals and Shell building petchem complex in Qatar • Qatar Petroleum and Qatar Petrochemical Company to jointly develop mega-petrochemical complex in Ras Laffan Industrial City, Qatar. • Iran opened three petrochemical projects in South America 2012 • Braskem and Grupo Idesa’s building1.05m ton/ year ethane cracker in Mexico by 2015 • Comperj, Petrobras’ USD 8.4 billion complex near Rio de Janeiro by 2013 • Mexichem MoU with Occidental Chemical to build half million tons/year ethylene by 2016 China’s chemical industry enters new era with sustainability | 5

the lucrative Asia-Pacific region. In and Kuwait Petroleum Corporation Latin America, much of the end-use have set up refining and petrochemical demand is expected to come from bases in China to be closer to the infrastructure projects and a growing market for their value-added products middle class, while the real game- and high-performance polymers. changer could be the discovery of Battling uncertainty: Despite some pre-salt gas reserves in Brazil’s Santos degree of rebound in the early part of Bay and shale gas in Argentina. This 2012, chemical companies worldwide gives Latin America the opportunity are being forced to manage increased to develop competitive feedstock levels of uncertainty. Key demand advantage for its petrochemical areas such as housing and automobiles industry.10 are showing complex trends. With East Asia heavily dependent The US housing sector remains a weak on the Middle East, the relationship end-market with lower electronics and between the two regions remains construction material consumption. strong and interlinked. In the last A key consumer of chemicals, it is four years, most of the increase in

likely to remain soft through 2012. independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network production capacity of commodity New housing in the US fell from petrochemical products has been in 2.1 million units in 2005 to just 0.6 the Middle East and China. However, million units in 2011. According to with the end-use Gulf market so small, American Chemistry Council data, almost all additional production in the each new American home contains Middle East began to flood East Asia approximately USD 15,000 worth of in 2008, leading to oversupply fears. chemicals and polymers in items such But as of 2011, these fears were as paint, adhesives, furnishings and somewhat abated and SABIC, Borouge appliances. Europe

• Sibur plans Russia’s largest petrochemical complex in Tobolsk, Siberia, by 2017, with 1.5 m tons ethylene capacity • Rosneft to build mega complex in Nakhodka, Russia by 2017 with 3.4 m tons/year capacity

East & South Asia • BASF India is planning to invest EUR 150m to build a new chemical production site in western India • BASF and Petronas in agreement for refinery and petrochemical integrated development (RAPID) complex in Johor, Malaysia • Siam Cement Group set up a JV with Qatari partners to build Vietnam’s first petrochemical complex • Saudi Aramco unit signs MOU with Pertamina for integrated complex in Indonesia • Honam Petrochemical will invest up to USD 5bn to set up a petrochemical complex in Indonesia by 2013

4 Long-term growth in chemistry to accelerate, American Chemistry Council, 5 July 2012 5 Looking for growth in the chemical industry, American Institute of Chemical Engineers, Jan 2012 6 Chemical commerce grows and shifts, July 2, 2012, Chemical & Engineering News 7 Long-term growth in chemistry to accelerate, American Chemistry Council, 5 July 2012 8 EU chemicals sector posts full-year 1.1 per cent growth in 2011, CEFIC, 24 Feb 2012 and CEFIC Chemical Trends Report, 27 March 2012 9 EU debt crisis drags down EU chemicals production more than expected, CEFIC newsletter, 14 June 2012 10 2012 Outlook: Will growth endure? IHS Chemical Week, 2-9 Jan 2012 6 | China’s chemical industry enters new era with sustainability

The second major consumer of capital spending until 2016 is expected chemicals and polymers – the to go to emerging economies.12 auto industry – is working with a Given this context, it appears that complicated demand structure. Due China will continue to remain a to massive structural change after beacon of demand and investment for the economic meltdown in 2008, the chemical companies worldwide. In the global auto industry has veered around KPMG Chemical Industry Report 2011, six major auto markets: China, India, ‘China’s chemical industry – The new Japan, Korea, Western Europe and forces driving change’, we predicted the US. Automakers continue to shift five mega-trends which are apparent their production facilities from high- in China. These include – a rise in cost regions such as North America domestic consumption, urbanisation, and Europe to lower-cost regions such high value-added global supply chains, as China, India and South America. growth in R&D and sustainability as a China and South America together major growth driver. are projected to represent more than 50 percent of the growth in global Policy developments in China and

independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network light vehicle production from 2008 to experimentation with new economic 2015.11 To remain competitive, major models over the past year also indicate automakers are designing vehicles that not only will the mega-trends and that will cater to consumers in both investment patterns persist, but certain mature and emerging markets, while forces like sustainability and the green restructuring product portfolios to economy will be the growth paradigm meet new and stringent energy of the future. and environmental polices being implemented worldwide. China economy – A planned slowdown Given the chemical industry’s Early in 2012, the Chinese government sensitivity to the global economy, any cut its annual economic growth target negative current in the macro economy to an eight-year low of 7.5 percent gets reflected in their prospects. compared to the actual 9.2 percent Global producers have responded to GDP growth of 2011, aiming to competitive pressures by streamlining promote a steady and sustainable pace operations, relocating manufacturing of development, keep prices stable and facilities to low-cost regions closer to guard against financial risks by keeping end-markets, while attempting to be the total money and credit supply at an more nimble in responding to market appropriate level. This is the first time opportunities. since 2005 that China has lowered its annual economic growth target after The largest manufacturers operating on setting it around 8 percent.13 a global scale with plants in numerous countries like BASF, Braskem, China has slowed, not only because Celanese, Dow Chemical, DuPont, of weaker global demand but also as Eastman Chemical, ExxonMobil and a result of earlier deliberate domestic Mitsubishi are also exposed to several policy efforts to cool an overheated regulatory and compliance issues property market. Its GDP growth in worldwide. the first half of 2012 of 7.8 percent compared to 9.2 percent of 2011, has The global chemical industry invested caused some jitters in world markets close to USD 511 billion in new plant and China is left trying to achieve and equipment (P&E) in 2011 and this a delicate balancing act between is expected to increase at least 10 slowing its turbo-paced growth and percent, going up to USD 557 billion maintaining a rational level of demand. in 2012. Emerging markets, including Policy efforts to alternate between a China and Asia Pacific, will account for slowdown and boost in 2012 has sent the bulk of this investment, with about mixed signals to the world market. 90 percent of the USD 800 billion

11 Auto Industry Outlook & Review - June 2012, Zacks Equity Research) 12 Looking for growth in the chemical industry, American Institute of Chemical Engineers, Jan 2012 13 World Bank cuts China growth forecast to 8.2 pct, Reuters, 23 May 2012. China’s chemical industry enters new era with sustainability | 7

The People’s Bank of China cut the offsetting weaker demand in Western reserve ratio requirement for banks economies.19 three times since November 2011 to The domestic sector’s performance increase liquidity. 14 In a surprise move during 2011 was encouraging, with to lift sentiment, it cut the benchmark total profit of the Chinese oil and lending and deposit interest rates by chemical industry touching RMB 807 25 basis points in June, the first such billion, an increase of 18.8 percent rate cut since late 2008. year-on-year. The gross output value of The real estate sector has borne the the Chinese oil and chemical industry full brunt of this contradiction. China rose to RMB 11.3 trillion, increasing is not likely to loosen the reins on by 31.5 percent year-on-year.20 The its property sector soon. It remains sector continued to be a big employer, wary of a real estate bubble and is absorbing 6.69 million people, up by more keen to counter the economic more than 8 percent. Its fixed asset slowdown than to stimulate property investment was RMB 1.4 trillion, up a investment. The Ministry of Housing significant 23.4 percent. and Urban-Rural Development Overall, trading figures were also in the reaffirmed in June that it would stick positive, with gross value of imports independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network with its property-cooling regulations.15 and exports of the Chinese oil and All focus is now on low-cost housing chemical industry touching USD 607 which the central government has billion, a jump of 32.3 percent year-on- been zealously promoting. It has year. 21 authorised RMB 148 billion for the construction of subsidised housing this Chemical trade grew briskly in 2011, year.16 with exports to all regions expanding by 29.5 percent and imports up 26.7 The good news for the chemical percent. By volume, China’s trade sector is that growing urbanisation in organic chemicals leads its other will continue to spawn investment chemical sectors. During 2011, in fixed assets – new factories and China’s negative trade balance for infrastructure. In the first five months pharmaceutical products increased, of 2012, fixed-asset investment, which while its positive trade balance for is seen as the strongest force to fertilizers widened.22 drive the country’s economic growth, increased 20.1 percent compared with Although Europe and the US are the same period last year.17 strongly linked by their trade in chemicals, both regions’ growth in The National Development and Reform trade with China in recent years has Commission (NDRC) has approved been more rapid. In 2011, Europe’s four new airports and about 100 clean exports to China grew 16.8 percent energy projects early in 2012.18 Funds and imports by 17.8 percent. Similarly, for building new highways will be fast- U.S. exports to China grew by 13.3 tracked as well. High-speed railways percent, and its imports by 29.8 will take priority with RMB 500 billion percent.23 going to rail projects this year. 1.2 China chemical market promises Notwithstanding the performance steady growth of 2011, China did succumb to a continued slowdown in the West. The Chinese chemical industry is In 2012, the industry is still facing also trying to respond to the changed downward pressure due to sluggish policy environment and despite demand from export-oriented sectors hurdles and slowing growth, it has such as textiles and toy manufacturing, maintained its pace. Chemical industry as well as rising production costs, a analysts predict that growth should growing tax burden and large-scale be in the high single-digit range,

14 Consumer inflation continues dip, China Daily, 10th June 2012 15 China to stand firm on property controls, China Daily, 9th June 2012 16 ‘Stimulus 2.0’ aims to reboot growth, China Daily, 1st June 2012 17 Consumer inflation continues dip, China Daily, 10th June 2012 18 ‘Stimulus 2.0’ aims to reboot growth, China Daily, 1st June 2012 19 Brief Report of Chinese Oil and Chemical Industry, 2011, Market Info Guide, 23 April 2012 20 Brief Report of Chinese Oil and Chemical Industry, 2011, Market Info Guide, 23 April 2012 21 Brief Report of Chinese Oil and Chemical Industry, 2011, Market Info Guide, 23 April 2012 22 Chemical Commerce Grows and Shifts, July 2, 2012, Chemical & Engineering News 23 Chemical Commerce Grows and Shifts, July 2, 2012, Chemical & Engineering News 8 | China’s chemical industry enters new era with sustainability

losses in the refinery and natural gas 12th FYP calls for raising refiners’ sectors, according to China Petroleum average annual processing capacity and Chemical Industry Federation of crude oil to 600 million metric tons (CPCIF). by 2015, compared with 450 million tons in 2011. The production capacity In the first half of 2012, overall for processing plants will be increased profitability of the chemical industry to 700,000 metric tons per year from hovered around historical low or 540,000 tons.28 middle level. Half-year earnings of multinational companies (MNCs) and Considering the potential of the sector, large domestic firms are down from giant chemical companies are also last year and most companies have had expanding into the refinery sector. to revise their full-year forecasts. Sinochem Corp’s first major refinery, the 240,000 barrel-per-day (bpd) Despite this, the industry federation Quanzhou plant on China’s southeast remains optimistic. The CPCIF coast has won approval from the estimates that the oil and chemical country’s environmental watchdog, industry’s total output may reach RMB paving the way for the state-owned 12.73 trillion this year, a 14.5 percent independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network firm to push on with the USD 4.6 billion rise year-on-year. The industry’s profits venture. The plant, which Sinochem are likely to amount to RMB 860 billion aims to start operating by late 2013, in 2012, up 5 percent from a year would be one of the major greenfield earlier.24 refineries China wants to add during It also holds on to its prediction that this period.29 the combined production value of China National Petroleum Corp’s China’s petrochemical and chemical (CNPC) Guangdong-based mega joint industries will maintain steady annual refinery with Venezuelan partner growth of 13 percent during the Petroleos de Venezuela has started current five-year plan period, which construction and is set to open by late ends in 2015.25 2014. The RMB 58.6-billion project, Petrochemical investment to in which CNPC will hold a 60 percent continue stake and the PDVSA will hold the Investment in the petrochemical sector remaining 40 percent, has a designed has been relatively strong during annual processing capacity of 20 million the early part of the year, with the metric tons, or 400,000 bpd, making combined investment amounting to it the country’s biggest integrated RMB 202.4 billion, up 33.5 percent refining complex ever built at once.30 year-on-year, in the first quarter alone.26 Kuwait Petroleum Corp broke ground The blueprint for development in on a USD 9.3 billion joint venture with China’s petrochemical industry for Sinopec for a refinery with an annual the period until 2015 is now clearer capacity to refine 15 million tons with the government approving (300,000 bpd) and an ethylene plant significant expansion of upstream with an annual 1 million ton capacity to refining capacity, accelerated growth come online in 2015. The project is in of high-end materials and products Zhanjiang in Guangdong province.31 and consolidated operations of 1.3 Feedstock: Shale gas shifts 27 companies. dynamics Government data indicates that The biggest game-changer of recent China has already become a leading times has been the proliferation of supplier of major petrochemical and shale gas drilling in North America and chemical products, but there is room the sudden advent of cheap feedstock. for expansion as domestic production does not meet the high demand. The

24 Petrochemical industry expected to slow down, China Commodity Marketplace, 8th Aug 2012 25 Chinese petrochemical industry gets 5-year-plan goals, Xinhua, 8 Feb 2012 26 China’s petrochemical sector growth slows further in Q1, Xinhua, 30 April 2012 27 China’s petrochemical sector growth slows further in Q1, Xinhua, 30 April 2012 28 China’s petrochemical sector growth slows further in Q1, Xinhua, 30 April 2012 29 Sinochem’s $4.6 bln refinery gets environmental nod, Reuters, 28 July 2012 30 CNPC, Venezuela joint refinery set for 2014 opening, China Daily, 3 March 2012 31 Kuwait Invests in China Petrochemical Joint Venture, Oil Price.com, 28 Nov 2011 China’s chemical industry enters new era with sustainability | 9

Between 2007 and 2009, proven China, where natural gas resources shale gas reserves in the US jumped are substantial and ethylene factory from 23.3 trillion cubic feet to 60.6 capacity is increasing at a rate equal to trillion cubic feet. The US Energy the rest of the world combined, may Administration expects reserves to emerge as another epicenter of cheap continue expanding, driving production feedstock. from just 2.91 trillion cubic feet in China has claimed the largest shale 2009 to 8.09 trillion cubic feet in 2015 gas reserves in the world with and then steadily climb to 13.56 trillion explorable reserves of 25.1 trillion cubic feet by 2035. cubic metres, nearly double US The resulting price impact on the estimates of 13.6 trillion cubic metres. gas market has been significant. The The fields are mostly in Sichuan discovery of ample and low-cost shale province and sparsely populated gas has helped the US Henry Hub regions in the interior.33 Gas Price decouple from the price of It is now planning an investment US crude oil, thereby enabling the US blitz to unlock these vast reserves, market to enjoy historically low gas convinced it can match the energy prices. In March 2012, the US gas independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network revolution under way in the US. Shale price fell to just USD 2 per million gas is seen as an attractive proposition BTU, its lowest point this century. for nations as it offers abundant clean Over the same period, the price of energy or energy with lower carbon US crude has rocketed up almost 360 intensity, an important aspect when percent to reach a four year high in it comes to fixing national goals. March 2012 of USD 18.3 per million But to date, China has not started BTU.32 commercial production of shale gas.

32 KPMG reaction magazine, Seventh Edition, July 2012 33 China claims world’s biggest shale gas reserves, Reuters, 1 March 2012 10 | China’s chemical industry enters new era with sustainability

There is now a growing urgency in five different chemical supply chains: Beijing to encourage the development methanol, olefins, PVC, aromatics and of unconventional energy sources. ammonia/urea. Shale gas remains an integral part of China made an early start in using coal the overall energy strategy and the as a feedstock for chemical production. government has outlined a plan that As oil prices steadily increased, it will see China producing 60 to 100 grabbed the opportunity to convert its billion cubic metres of natural gas cheap and plentiful coal supplies to annually by 2020 from shale sources.34 chemicals, constantly looking out for To further encourage key players, new technologies for converting coal to China has also announced its intentions chemicals. to open up some shale gas blocks for private companies. That in itself is a China’s coal chemical major policy change as the USD 7.8 technology is almost on par trillion industry was until now mostly with global companies. There is 35 restricted to state-owned enterprises. not much gap between China Foreign companies, however, are and other countries when it independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network not too enthusiastic over shale gas comes to high-end technology prospects in China as they are barred and the experience of running from participating in bidding directly for such large projects. The defining blocks. factor, however, will be the Sinopec is in the forefront of price of oil in the future. In case developing the unconventional energy of continuing high oil prices, sector and is now working on a shale coal chemical plants will make gas project in the Fuling block in more financial sense. From the Chengdu. It is also in talks with US environment angle, access to and Canadian companies to secure enough water resources will stakes overseas. Sinopec is exploring remain an overriding concern, other sources like coal-bed methane, -- Bill Zheng, Head of business bio-mass energy and clean utilisation development at Asiachem. of coal, making significant headway in 2011. Coal-bed methane discoveries were made in Yanchuannan, Zhijin About six coal-to-olefins (CTO) and Heshun blocks while shale gas projects are expected to come on was found in Jiannan (west of Hubei stream by 2016, most supporting and east of Chongqing) and Yuanba the manufacture of polyethylene and (northeast Sichuan). The first horizontal polypropylene resins. Another 13 coal- well for shale oil was drilled in the to-chemical projects are at various deeply depressed zone in Biyang stages of development.36 To date, most Depression in Henan Oilfield. coal chemical projects have targeted the fuel market with products such as Role of coal chemicals synthetic oil, methanol and dimethyl While shale gas has turned the ether (DME), but slowly, units are world of petrochemicals upside aiming for higher value-added markets down, another alternative sector, for plastics and fibres. According to coal chemicals, which is now gaining AsiaChem, in 2012, the Ministry of commercial traction, also has the Energy listed 15 deep processing coal potential to change the feedstock projects worth RMB 400 billion in balance. China has the world’s third- investment. Spread over Xinjiang, Inner largest proven coal reserves, holding Mongolia and Ningxia provinces, the 13 percent of the global total, after projects focus on coal to oil, olefins the US and Russia. While most of the and natural gas. coal is for power production, a fast growing sector is the conversion of Recently, Shenhua Group, China’s coal to a range of chemicals. As of largest coal producer, went into a 50:50 now, the coal sector is connected to joint venture with General Electric to

34 Abundant shale gas reserves augur well for China’s clean energy dreams, China Daily, 3 Aug 2012 35 Abundant shale gas reserves augur well for China’s clean energy dreams, China Daily, 3rd Aug 2012 36 China invents and reinvents coal to chemicals, ICIS, 16 April 2012 China’s chemical industry enters new era with sustainability | 11

form the GE Shenhua Gasification 1.4 Bulk to specialties: Product pie Technology Co. The venture combines changes GE’s expertise in industrial gasification China’s chemical industry is now firmly technologies with Shenhua’s skill in the process of upgrading itself and in coal-fired power generation. Coal the demand for more sophisticated gasification is a process that converts chemicals is driving much of the coal from a solid to a gaseous form change. The Chinese government will through catalysis. The gasified try to rationalise the manufacture of products can be used as fuels, raw key products like nitrogen fertilizers, materials for chemical products and for agricultural chemicals, chloro-alkaline, electricity generation.37 sodium carbonate, calcium carbide and vehicle tires. At present, these Zhong Tian He Chuang Energy Co, products are highly concentrated with a joint venture between Sinopec only six companies generating annual and China Coal Group, plans to sales revenue of RMB 100 billion. The build a polypropylene plant in Ordos government plans to allow at least (Inner Mongolia) based on Ineos 10 large companies to operate in this Technologies’ Innovene PP process. segment.40 Ineos licensed its technology to independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network the 350,000-ton/year plant that will More significantly, the 12th 5YP places produce a full line of PP resins, special attention on developing organic including homopolymers, random materials, resins, synthetic fibres and copolymers and impact copolymers, to monomers. In China, there is a general serve the Chinese market.38 oversupply of low-end petrochemical products and a shortage of more Since 2011, however, China has been sophisticated and higher-valued items. implementing stricter controls on The 5YP aims to increase the output proliferating coal-to-chemical projects of new materials, specialty chemicals due to environmental and technology and synthetic materials – all products concerns. Adopting technology for dependent on imports as of now. extracting petrochemicals from the cheapest fossil fuel available poses The current 5YP for the chemical environmental risks, which is now industry will gradually weed out seen to be in conflict with China’s companies and industries of low commitment towards cutting its production efficiency and high-energy greenhouse gas emissions target. consumption but will encourage investments in sectors with high- The Chinese government initially added value.41 Given this emphasis, encouraged capital investments, but commodity chemicals could start to it struggled to rein them in when lag specialties in 2012 after strong the flood of new capacity rolled gains over the last two years. Gains past demand. Last year, the NDRC in basic chemicals will slow in 2012, centralised approval of these projects, with specialty chemicals experiencing stripping local governments of these average growth as end-use industries powers. A coal-based olefin plant further progress. In 2013 as well, must at least have a 500,000-ton/year specialties will continue to grow faster capacity, while a 1m-ton/year limit is than basic chemicals, which is fairly set for coal-to-methanol, coal-to-methyl typical as the global business cycle tertiary butyl ether (MTBE) and coal-to- matures.42 liquids facilities. For coal-to-natural gas projects, the capacity must be at least Boom in specialties: In China, more 2bn cubic metres/year, while a coal- than 50 percent of chemical sales to-monoethylene glycol (MEG) plant come from basic chemicals. As the must at least have a 200,000 ton/year economy matures, specialty chemicals capacity.39 will grow faster than the industry average. According to the National Bureau of Statistics of China, revenue

37 GE, Shenhua form coal tech venture, China Daily, 11th May 2012 38 Sinopec, China Coal JV plans PP project in Ordos using Ineos’ Innovene process, 20 Feb 2012, Petrochemical News 39 China tightens controls on coal-to-chemical projects on risks, ICIS, 14 April 2011 40 CPCIF website 41 China’s petrochemical sector growth slows further in Q1, Xinhua, 30 April 2012 42 2012 Forecast, Can growth endure? IHS Chemical Week 2-9 Jan 2012 12 | China’s chemical industry enters new era with sustainability

growth in specialty chemicals was at Morgan Stanley Private Equity Asia 21 percent for specialty chemicals but has invested USD 300 million in only 7 percent growth for the average China’s Tianhe Chemicals Group and chemical industry.43 created a strategic partnership with the specialty chemicals company in The Chinese specialty chemicals order to aid its expansion overseas. market saw total revenue of USD Tianhe is China’s largest manufacturer 74.6 billion in 2011, representing a of lubricant oil additives that perform compound annual growth rate of 10.9 functions including friction reduction, percent between 2007 and 2011. cleansing and heat dissipation in motor (Source: Specialty Chemicals in China, oil and other lubricants. It also supplies 7th May 2012, Market Research specialist fluorochemicals - commonly Report) A peculiar characteristic of used in waterproofing and solvents.46 the sector, however, is its intense fragmentation. There are almost In April 2012, Sinopec SABIC Tianjin 10,000 domestic specialty chemicals Petrochemical Company launched a companies in China, far more than for polycarbonate production complex with any other chemical segment, but they a 260,000-metric-ton/year capacity, in

This emphasis is also reflected by the Swiss specialty chemicals company rise in direct investment of foreign Clariant is also focused on huge growth specialty chemicals companies. opportunities in China. In late 2011, Belgian-based Solvay plans to build Clariant opened an ethoxylation plant a new plant for fluorinated polymers in Daya Bay in Huizhou, Guangdong at its industrial site in Changshu, province, and expects to see double- Jiangsu province, in 2012, after the digit sales growth in China this year.49 acquisition of French entity Rhodia Pharmaceuticals & fine chemicals: last September. The project, which is Within the specialties market, the fine scheduled to be operational in 2014, chemicals segment has proved to be is expected to need an investment of especially lucrative, with total revenues EUR 120 million. The company’s focus in 2011 rising to USD 25.6 billion.50 will be to manufacture products for end-use markets such as photovoltaic In the pharmaceuticals sector, the and lithium batteries and will serve fine chemicals market is becoming the fast growing markets in China for even more competitive. The main electrical & electronics, wire & cable, dynamic is the shift of manufacturing automotive, consumer and industrial to countries such as China and India. applications.45 The global pharmaceutical outsourcing market is growing, particularly in

43 Specialty Chemicals in China, 19 Oct 2011, Chem Manager 44 Specialty Chemicals in China, 19 Oct 2011, Chem Manager 45 Solvay to invest in Changshu for new plant, 23rd April 2012, China Daily 46 MSPE Asia invests $300m in China’s Tianhe Chemicals, Asian Venture Capital Journal | 22 Mar 2012 47 Sinopec, Sabic joint venture for large scale petchem project in Tianjin, 3rd April 2012, Sinopec website 48 Evonik targets Asian chemicals market, 2nd April 2012, China Daily 49 Clariant looks for sales catalyst as some foreign firms withdraw, 11 Nov 2011, China Daily 50 Specialty Chemicals in China, 7th May 2012, Market Research Report China’s chemical industry enters new era with sustainability | 13

the fields of highly potent active scale of this industry will reach RMB pharmaceutical ingredients (API) and 2 trillion in 2015, with annual growth biopharmaceuticals. exceeding 25 percent.54

China, along with India, has the Companies like Dongyue and China fastest growing domestic pharma Lumena, which have relatively large markets, expected to grow at a CAGR market capitalisations, will be the of 14 percent from 2010 to 2015. new face of the chemical sector. (Pharmaceuticals: Cover Story, IHS Dongyue manufactures and sells Chemical Week, 6-13 Feb 2012) In green refrigerants, fluoro-polymers, fact, China’s pharmaceuticals industry organic silicone, and chloralkali output is expected to reach USD ion-exchange membranes, and is 1.57 trillion by 2020, offering great China’s largest manufacturer of opportunities for development.51 Chlorodifluoromethane (HCFC-22) refrigerant and polytetrafluoroethylene According to the international (PTFE) polymer. Its core products healthcare market researcher IMS have a broad spectrum of applications, Health Inc, it forecasts that the market including the water treatment industry. will grow at an average annual rate of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network 20.1 percent to reach RMB 694 billion China Lumena New Materials, by 2015.52 a leading manufacturer, is also engaged in mining, processing and 1.5 Industry structure - Moving manufacturing of natural thenardite towards upgrade and integration products. The company manufactures The main concern of the 12th 5YP for and sells polyphenylene sulfide (PPS) the chemical industry is to upgrade products, including resins, compounds the sector to meet China’s longer- and fibres. In 2011, Lumena acquired term sustainability and energy saving Sino Polymer New Materials and targets. The government has set established itself as an important new and more restrictive standards manufacturer of specialty chemicals. concerning the consumption of water and energy, carbon emissions, New demands in advanced polymers, polluting chemical exhaust and the engineering plastics and new volume of industrial waste created materials is forcing the chemical during petrochemical production sector to change. Many small and processes. Energy consumption at medium-sized mainland enterprises oil refineries will also be lowered. are developing new materials with Tighter restrictions will have an impact applications in various industries, such on enterprises with less efficient as nanotechnology, superconductivity, manufacturing processes. and specialty glass. As China’s environmental regulations get more According to the China Petrochemical stringent, demand for newer, energy- and Chemical Industry Federation, efficient products with wide-ranging in 2012, the petrochemical industry applications will rise as will a need for will focus on technological innovation chemical companies themselves to be and new growth points, including environmentally compliant. new materials, new energy and coal chemical engineering.53 Industrial parks aid integration China’s determination to meet The focus will be on new materials as its energy targets and streamline China enters the next stage of growth the chemical sector may be an by developing high-end equipment achievable goal due to the nature of manufacturing, energy saving and its industrial structure. The country environmental protection, biomedicine developed a successful model for and new energy vehicles. The Ministry industrial parks ever since its opening of Industry and Information, in its plan up three decades ago. Alongside released this year, estimates that the multi-functional development zones,

51 China’s pharmaceutical industry to hit 10t yuan, China Daily, 6th July 2012 52 The right chemistry for pharma firms, China Daily, 9th Jan 2012 53 Petrochemical industry ‘11 output to exceed 11tr yuan, Xinhua, 12 Jan 2012 54 Stocks that can benefit from the ‘12-5’ Plan for China’s new materials industry, South China Research Limited, 27th March 2012 14 | China’s chemical industry enters new era with sustainability

specialised chemical industrial parks established the SCIP Natural have also come into their own, with Wastewater Treatment System. This huge investments flowing into them is a model project for the treatment for more than a decade. Over the of industrial effluent and marks the years, these investments have sparked onset of an expanding market in off a high-performance chemical natural water treatment systems in industry producing not only basic China. AECOM is leading the 74-acre chemicals, but increasingly fine and Natural Wastewater Treatment System special chemicals. designed to treat over 6 million gallons per day of partially treated industrial The main goals of the chemical parks wastewater. It will polish effluent in had originally been to restructure preparation for recycling water back to and improve technological standards the industrial facilities and discharge in the Chinese chemical industry into Hangzhou Bay.55 SCIP also has and promote regional economic an ‘utilities island’ integrating the development by making investment supply of water, electricity, steam and more attractive to foreign and industrial gases. domestic companies. Now, they are independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network important locations from which the Integration is taking many forms. At targets of carbon emissions can be Jilin Chemical Engineering Economy met. The traditional parks in Shanghai, Park in northeast China’s Jilin province, Nanjing and Tianjin, apart from those the management is trying to promote in the coastal region, have consistently a circular economy by integrating been upgraded and serve as platforms recycling within the large-scale to trial new environmental regulations. petrochemical base. Recycled products Chemical industrial parks have been at such as plastic bags made of coke the forefront of integrating services for tins, tissues transformed from varied eco-friendly use. petrochemical materials and toothpicks made of amylum, are some of the Recently, the Shanghai Chemical by-products. The Jilin park houses Industrial Park (SCIP), which is one more than 90 percent of the province’s of the largest modern petrochemical essential production factories for industrial complexes in China, petrochemicals.56

Industrial parks – blowing in clean change

Since 15 September 2011, has jointly developed the first local authorities are required to chemical industrial park evaluation suspend approval for construction, system in China which was due reconstruction or expansion of to commence in June 2012. This projects and activities related to system, based on industrial park manufacturing or storing dangerous and industry cluster theories and the chemicals outside industrial parks, Scientific Outlook on Development, the exception being made for includes five areas: comprehensive technical reform projects that can economic power; infrastructure save energy and reduce emissions and facilities; cost of public utilities; to ensure environmental protection. environmental protection, energy saving and emissions reduction and The working committee of China independent innovation. Petroleum and Chemical Industry Federation and the Research Ma Cong Yue, CPCIF division Centre for Technological Innovation, chief, specializing in chemical Tsinghua University, and related industrial parks research and data collection,

55 AECOM website 56 Recycling park breathes new life into old industry, China Daily, 21st June 2012 China’s chemical industry enters new era with sustainability | 15

The SOE-dominated petrochemicals Selecting right location industry, where foreign investment is restricted, is trying to upgrade its Embarking on a manufacturing Apart from the selection criteria, we systems through R&D partnerships. green-field investment can be also develop end-to-end financial The government intends to harness quite a daunting task for an models to assess the investment the relatively strong research organisation, especially in China. feasibility and financial projections capabilities of multinationals as it Selection of the right location with including the comparison of key improves its own domestic industries. a suitable business environment, costs and incentives across the infrastructure, proximity to locations. KPMG China can Sinochem Group, one of the largest suppliers and customers, talent, provide a direct ramp-up approach SOEs, has taken the issue of systems cost and strategic alignment to the leveraging on our relationships and operations upgrade seriously. overall China plan are important with the provincial, city and Its stated objective is “to organise considerations. KPMG China takes industrial zone governments; global resources and market in a holistic approach to analyse we are supported by our Centre a smart way,” while carrying on and recommend suitable options of Excellence, a research unit constant transformation. In the past, across these evaluation criteria to to compile and benchmark key Sinochem Group was a specialised assist organisations to conduct due market data and cost including past state-owned foreign trade company, independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network diligence and obtain board approval incentives & subsides given by the with a monopoly over operating and for their investment plan. During government. import and export rights of bulk stocks the course of our approach, we such as oil and fertilizer. Over the Ning Wright, partner, KPMG will conduct key interviews with years, it has reformed its systems to China, Management Consulting tenants in the shortlisted industrial improve the industrial chains for its zone to ascertain the commitment major businesses and organise its and ‘after-sales’ support of the local global resources. Sinochem intends government. to leverage its market operation and services to take advantage of its “M&A, integration and collaboration” channels. The company has also Chinese companies opt for smarter strengthened its cooperation with systems upstream and downstream partners at A significant change which chemical home and abroad by means of stock companies in China will see in future equity and covenants and is slowly is of business process and supporting integrating low-carbon economy in its operating system upgrades. Local business model.57 companies will have to start leveraging ChemChina is making safe production their deep knowledge of the market a top priority according to its 2011 and customers to develop new sustainability report. It has put in place systems that go beyond the basic an improved safety management chemical value chain. With MNCs system called SHE, which stands offering customer-tailored solutions for safety, health and environmental based on performance-driven pricing, protection. The group based the Chinese firms have a long way to go system on an approach used by before they catch up. Qenos, an Australian plastics maker A move into providing solutions acquired by ChemChina’s subsidiary and services requires a significant China National Bluestar in 2008 upgrade of a company’s go-to-market and adapted the process to meet capabilities. It is critical to identify its own needs. The ChemChina the markets in which companies can SHE system has 20 elements for sustain leadership. Chinese companies safety management that involves are now beginning to experiment with all employees, risk control and idea generation, cross-functional and responsibilities at all levels. ChemChina regional cooperation and adopting a is also focusing on finding ‘hidden disciplined process that holds project dangers’ in its production process. It managers responsible for strategy has developed a remote system that execution and portfolio management. can monitor seven major danger points and pollution sources with online video.58 57 Focus on Transformation of Development Model and Independent Innovation, 8th March 2012, Sinochem Group Website 58 ChemChina stresses need for safety in the workplace, China Daily, 4th July 2012 16 | China’s chemical industry enters new era with sustainability

investment has risen four-fold since Information and integration 2003, while the number of new The 12th 5YP’s ‘Integration of qualified integration and upgrade. manufacturing projects has declined 59 Information and Industrialization’ from 118 in 2003 to just 16 in 2011. KPMG is one of the companies that urges the upgrade of ERP provide supervision services for the According to Dutch specialty chemical systems and also a higher level of whole program as an independent company DSM’s research, per capita sustainability, covering the whole third party. demand for chemical products in process of purchase, sales and developed economies was five to management. We see that most This is also a big challenge for six times greater than in emerging SOEs and private enterprises use those who want to open the economies, showing the latter’s huge different ERP systems in their door to overseas business. We market potential. This awareness subsidiaries, which makes it difficult can see that the systems are has propelled DSM to accelerate to combine data at a group level. sometimes behind regarding the its deployment rate in China. In late high speed of business expansion. For the purpose of maintaining 2011, it opened its China Science We are now helping those big sustainable growth, operational and Technology Center as part of a players on building up their own efficiency and return on investment strategy to be a MNC with a local ‘enterprise based centre’ in terms improvement, it’s necessary for approach in both the Chinese and independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network of strategic systems. We also those big players to conduct a Asian markets. The Shanghai Center focus on IT management and series of business transformation will be the company’s main innovation operation capability after system and IT construction projects. Lacking base in China and form a vital part of implementation in the ‘post- large-scale program management DSM’s global science and technology integration’ state.” 60 experience and difficulty of ensuring innovation network. Philip Ng, partner, KPMG China, vendor delivery quality are the two In some sectors, foreign companies Management Consulting key areas for them to conduct a are being edged out by competitive Chinese manufacturers in the commodity chemicals sector. But Role of global companies in they are still well placed to respond research and upgrade to rising Chinese demand while also Multinational chemicals companies developing new types of specialty currently represent nearly 20 percent chemicals to serve both global and of total FDI in China’s chemicals China-specific markets. In this race to sector. Major players such as Bayer, expand in specialty-chemical-related BASF, Dow Chemical, and Akzo new materials, multinationals are Nobel, who have established bases seeking to expand organically and via in China, are changing the nature M&A activity as quickly as they can. of their operations. Much of their In expanding operations in China, investment is going into the specialty multinationals must grapple with chemical sector which requires high- increasingly complex supply chains. end engineering. Companies are Companies originally geared toward working on products ranging from export manufacturing are now chemical inputs in personal care establishing distribution and sales products to high-performance tyres, networks in China and greater Asia. pharmaceuticals, food and healthcare. These companies are now planning More importantly, they are changing to integrate pan-Asian facilities and the way they conduct customer- ancillary R&D facilities within the oriented research. Foreign companies overall manufacturing and distribution are increasingly investing in R&D footprint. For instance, Qatar Petro and design and development (D&D) Chemical and Exopack Advanced operations to better serve the Chinese established logistics and distribution market. Proximity to customers is facilities earlier this year. Strategies essential to ensure innovations are like these offer companies new ways driven by local requirements. As a of taking advantage of the market. result, there is a large increase in Also, foreign companies are now investment in R&D capabilities in more willing to contribute significant China. The annual number of design intellectual property while executing and development projects with foreign their growth plans in China.

59 Market research by US consultancy group 60 DSM Opens Its China Science and Technology Center, DSM Website, October 2011 China’s chemical industry enters new era with sustainability | 17

Solvay, which acquired Rhodia, will centres, R&D centres, procurement combine the R&D facilities of both and financial management centres. It companies into one world-class will also encourage foreign companies R&D centre at Rhodia’s campus in to invest in advanced service sectors Changshu’s Xinzhuang Industrial Zone. such as modern logistics, software A new EUR 4-million building will be development, engineering design, added to the existing Rhodia research consultancy and intellectual property centre with sections dedicated to service industries.64 polymer formulation and processing More outbound investment means that and will include an injection molding Chinese companies need to swiftly facility for customer trials. The learn effective post-merger integration merged R&D campus will also include or joint-venture management. several state-of-the-art fully equipped Strategies for manufacturing, R&D, laboratories aimed at radically reducing staff recruitment, talent development, time-to-market product development.61 and customer service must be Chinese outbound investment seals developed that take into account the integration combination of multiple organisations

While acquisitions and partnerships into an efficient, seamless operation. independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network involving multinationals have come ChemChina announced two large to play a central role in the chemical outbound deals in 2010-11, each industry, the tide is turning with exceeding USD 2 billion. Additionally, more Chinese companies going large Chinese chemical companies are overseas. Local companies have even considering mid-cap chemical become particularly aggressive in its MNCs for acquisitions. Zhejiang Hengyi acquisitions abroad. Outbound direct Group Co, China’s largest chemical investment (ODI) is set to soar in the fibre supplier for the textile industry, coming years, with double-digit growth will build a petrochemical plant in rates predicted. It grew 1.8 percent in Brunei with a total investment of 2011 from the previous year to USD 60 USD 6 billion. The project, the largest billion.62 overseas investment by a privately- The trend is clear – ODI is on a fast- owned Chinese firm, is designed to growth track and this will continue process 15 million tons of crude oil a for some decades, mainly due to year and churn out products such as increasingly appreciating currency, p-xylene and aromatic hydrocarbon.65 China’s large foreign exchange 1.5 Chemical sector in transition reserves and domestic companies mode expanding abroad. Asia, Europe and The main concern of the 12th 5YP is Africa are the top three destinations to meet longer-term sustainability and for China’s ODI targets. But since the energy saving targets. The government European debt crisis broke out, Europe has set new and stringent standards has led the growth and will probably concerning carbon emissions and is continue to do so.63 promoting energy-efficient sectors with The government will also shift its determination. Those who respond direct-investment focus, both foreign to the challenges early will find and outbound, to quality instead opportunities waiting. of quantity. The NDRC, in its FDI Availing this space, however, will not and ODI development plan for the be easy. The chemical sector needs to 12th 5YP, reiterated its intention set its house in order by weeding out to bring home advanced foreign low efficiency, high-energy consuming technology, talent and management units and focusing on value-added when attracting foreign capital or products. Internally, companies seeking overseas acquisitions. must modernise and streamline their The government will encourage operation to be globally competitive multinationals to set up regional

61 Solvay to invest in Changshu for new plant, 23rd April 2012, China Daily 62 ODI growth rates set to increase sharply, China Daily, 1 June 2012 63 Energy sectors remain major focus of China’s ODI, 9th Aug 2012 64 Government stresses quality for FDI, ODI, China Daily, 27th July 2012 65 Chinese company invests $6b in Brunei, Xinhua, 1 Dec 2011 18 | China’s chemical industry enters new era with sustainability

Target identification is key

For large outbound M&A when it comes to outbound skills are still lagging. KPMG’s transactions, state-owned companies acquisitions. SOEs are eyeing high- network can help local companies usually partner with banks or private tech and specialty sub-sectors, along gain an insight and industry equity firms for financial integration. with energy. Chinese companies, knowledge about target companies. Inbound investment has declined these days, are careful not to plunge Local markets may not always be due to the financial crisis in Europe. head-long into big buys and are transparent and KPMG can provide For multinationals, large overseas instead taking up to two years to financial and business insights. We acquisitions have slowed and internal study the market. can help domestic companies look funding is only available for medium- These companies are only going for for sector differentiation while picking sized acquisitions. Foreign companies those specialty sectors which have up targets for acquisition, be it South remain concerned about the future large application potential in the America or Africa for resources or trends of the Chinese economy and domestic market, such as the auto Europe and US for technology. will take some time to define their sector. China strategy. Rainbow Wang, partner, KPMG Although Chinese companies have China, Transaction & Restructuring

and invest more in R&D to make show the world how big a market it products tailor-made to the local is; it then turned itself into the ‘factory market. Chinese companies are also of the world’ to become a productive pursuing overseas investment in a manufacturer and a strong competitor. strategic and planned manner, intent Foreign companies were invited to on taking advantage of weakness in set up production bases, and now, the European economy. Overseas in this crucial transitional phase, acquisitions will give them access to Chinese planners have realised the more sophisticated product lines which need to create a base for innovation can be harnessed to meet demand and a green economy. Central to the back home. growth and profitability of chemical companies will be their ability to derive China has gone through several opportunities from this new age-of- development phases in the past three sustainability model. decades. Initially, the focus was to © 2012 KPMG Advisory (China) Limited, a wholly foreign owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in China. 20 | China’s chemical industry enters new era with sustainability China chemical industry: Building business value through sustainability independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network

2.1 Chemical industry on revised The concept of sustainable chemistry growth path is thus becoming increasingly The chemical industry is fundamental strengthened in the developed world – to turning the vision of sustainability involving a wide range of stakeholders into reality and is at times better from the scientific community, placed than any other sector to tackle corporations, public authorities and environmental challenges. Due to its environmental and consumer advocate deep integration in the supply and associations.66 China, which has taken value chains, the onus often falls on the first steps to adopt sustainability the industry to manage chemicals as an industrial model, has a long way safely throughout their life cycle and to go, but there is reason for optimism translate research and innovation because of the scale and swiftness into action, while making businesses with which change can occur here. fundamentally viable. Sustainable chemistry: From global Ever since the path-breaking Rio to local Earth Summit of 1992, there have For the chemical sector, this is been drastic changes to the world perhaps the most appropriate time business environment. A KPMG to accelerate adoption of ‘sustainable report in April 2012, ‘Expect the chemistry’ models, while working out unexpected – Building business value-creating business strategies that value in a changing world’, highlights factor in sustainability. how the human and environmental ‘Sustainable chemistry’ is commonly footprint of industry sectors has been defined as, “the design, manufacture growing at an unsustainable rate and use of efficient, effective, safe and some sectors could even lose and more environmentally benign profits through exposure to external chemical products and processes. environmental costs. Business leaders Within the broad framework of in the chemical sector, however, are sustainable development, government, uniquely placed. Not only can they academia and industry should strive to adopt strategies and structures that maximise resource efficiency through minimise environmental footprint, activities such as energy and non- but actually provide solutions to the renewable resource conservation, risk industrial and consumer world to minimisation, pollution prevention, move towards sustainable solutions. minimisation of waste at all stages

66 German Federal Environment Agency website China’s chemical industry enters new era with sustainability | 21 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network 22 | China’s chemical industry enters new era with sustainability

of a product life-cycle, and the industry to play a key role in ensuring development of products that are that by 2050, over 9 billion people live durable and can be re-used and with clean water, food and sustainable recycled.”67 energy, within the resources of the planet.68 The CEFIC report provides The evolution of sustainable chemistry 17 key performance indicators that into a business model, however, serve as a benchmark of industry is extremely challenging and time- sustainability efforts that the sector consuming, requiring collaboration plans to measure itself against in the between international bodies and future. The 70-page document lists governments at the macro level, a three pillars of sustainability – planet, change of mind-set at the corporate people and profit – which need to be level and their commitment to micro- addressed in a holistic manner.69 manage sustainability along the value chain and communicate effectively The role of governments, however, in with the last stakeholder at the promoting mandatory regulation cannot consumer level. All the while, the be understated, but the emerging challenge for chemical companies trend is an emphasis on combining the independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network remains identifying opportunities voluntary and mandatory approaches. from the sustainability agenda set The challenge for governments is to by governments and regulations and determine the appropriate minimum converting them to meet product level of mandatory requirements. demand. China regulation evolves to set Regulatory framework defines industry standards direction There is wide recognition that The architecture of sustainable international regulatory standards chemistry involves, first and foremost, need to be followed worldwide good monitoring systems and effective as environmental degradation is a regulations and efforts to minimise complex problem involving local risks related to the use and release of governments, businesses and chemicals. communities. China, as one of the world’s most industrialised nations Over the last four years, the regulatory with a maturing consumer base, landscape has evolved substantially has made efforts to refine its laws worldwide, but it is far from being and regulations to achieve a balance standardised. While regulatory between environmental pressures and instruments are purely voluntary at business viability. the global level, at the national level, a network of voluntary and increasingly A number of laws enacted over the mandatory legislation and reporting years have had wide ramifications standards are being put into practice. for business, especially the chemical sector. Enlightened and strengthening A voluntary, yet critical, element in legislation over the years has moving towards sustainable chemistry compelled companies to be more is the European Chemicals Regulation compliant, weave in risk factors into (REACH), which emphasises their cost model, provided growth transparency in information about opportunities and helped improve chemicals and the importance of reputation. identifying risks from chemicals and making the knowledge public. These One of the most comprehensive requirements apply in particular to legislation in recent years is the annual production volumes of 10 tons Circular Economy Promotion Law, or more per producer and importer. which became effective from 1st January 2009. Meant to encourage In its first ever sustainability report, sustainable economic development, released in May 2012, the European the law when fully implemented, Chemical Industrial Council (CEFIC) will have a profound impact on declared the intent of the European foreign-invested companies and the

67 OECD website 68 CEFIC Sustainability Report, 2012 69 Chemicals policy and pollutants, REACH, Sustainable chemistry, 17 April 2012 China’s chemical industry enters new era with sustainability | 23

entire Chinese economy. ‘Circular often acted as a catalyst for the sector, economy,’ specifically refers to helping boost demand.72 “reducing consumption, reusing More far-reaching regulations like products or components and the Ozone Depleting Substances recycling activities conducted in the Regulation has had significant impact process of production, circulation and on industries. In June 2010, China consumption.” This mandate must enacted ODS Regulations that would be factored into industrial, economic control over-consumption, trade, and social planning at every level of import, export and production of ozone government and its impact is expected depleting substances. It has imposed to be felt at every stage - from water annual quota limits for ODS producers use in public and private spheres to and consumers. Servicing firms and planning of industrial parks.70 recovery and recycling businesses The Energy Conservation Law, must register with their local or first promulgated in 1997, and later Provincial Environmental Protection amended in 2008, helped initiate a Bureau. system of accountability making local The latest amendment to the Clean governments and officials responsible independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network Production Promotion Law, which for energy conservation targets and came into force on 1st July 2012, will energy evaluation. The amended be a landmark step towards upgrading Energy Law was intended to be the industries. Under this law, “production basic law to guide and co-ordinate technologies, processes, equipment other laws in China’s energy sector, and products which waste resources covering all forms of primary energy and seriously pollute the environment including coal, oil, natural gas, will be phased out within a stipulated renewable energy and nuclear energy period.” Various government as well as secondary energy such departments will have to prepare as electricity, thermal power and and release such lists to enable petroleum products. It also defined implementation. Strict regulations have ‘new energy’, ‘renewable energy’, also been issued regarding packaging ‘clean energy’, ‘low carbon energy’ of products, directing enterprises to and ‘high carbon energy’, setting the reduce waste and avoid excessive paradigm for a sustainable economy.71 packaging. The ruling will have long China has consistently fine-tuned term impact on the polymer industry and amended its laws, making them as grades used in packaging will need relevant to changing industry status. to be compliant.73 The Renewable Energy Law of 2005, Under this broader framework, the was amended in December 2009, chemical industry was brought under to address the gaps in producing greater scrutiny and regulation. In and transmitting renewable energy. 2011, the government decided to The ‘mandatory connection’ policy limit the construction and expansion required grid companies to connect of chemical plants and launch a and purchase all renewable energy nationwide safety campaign to generated. This policy, however, target all enterprises involved in the remains mired in complexities. The production and use of hazardous second aspect of this law is aimed at chemicals. In a notification, it said streamlining the renewable energy that the Ministry of Environmental fund that provides financial incentives Protection (MEP) will no longer accept for the renewable energy industry. applications for any new projects China has instituted feed-in tariffs related to the production and storage for a variety of renewable energy of hazardous chemicals outside technologies to compensate grid industrial parks from 15 September companies for the additional cost of 2011.74 purchasing this expensive energy source. The incentives regime has

70 China Law Update 71 China Environmental Law Initiative 72 China Environmental Law 73 Ministry of Environment website 74 China MEP to restrict the construction of chemical plants and launch a nationwide inspection, 16 Sept 2011, REACH Website 24 | China’s chemical industry enters new era with sustainability

In late 2010, authorities beefed up the to embrace green economics, further chemicals management system with encouraging companies to embed a revised version of ‘China REACH’, sustainability concerns into their long- affecting all production activities term business plans. and the import and export of new So far, efforts to transform the chemicals in China. The regulation Chinese economy from its growth- expands China’s existing regime driven frenzy into a sustainable model for new chemical substances by remained a top-down approach, increasing the volume and complexity scripted by grand blueprints. The onus of data that must be supplied to the of sustainability cannot remain with authorities before import or production. the government alone and companies The revised ‘Regulations on the control in China need clear-cut strategies over safety of hazardous chemicals to ensure future growth. Within the (Decree No. 591)’ came into effect on sustainability paradigm, at one level, 1 December 2011, incorporating more companies must have well-laid out risk reforms and stringent enforcement assessment and management strategy provisions from the Chinese to build a safe operating environment authorities.75 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network for their business. At another Higher environmental standards for level, sustainability itself provides chemical plants near water bodies tremendous growth opportunities and harsher penalties for those for the long term, which chemical who break the law are becoming companies must identify and work on. increasingly important. In June 2011, The Chinese government’s target- the State Administration of Work oriented planning is likely to unleash Safety announced that they would an unprecedented wave of demand for prioritise and strengthen inspections of ‘green products’. As newer forms of companies which manufacture, store, end-use demand grow, the chemical sell or use chemicals contained on the sector will need to find ways to list of hazardous chemicals. Chemical harness these opportunities,while companies doing businesses in/with minimising their own roles as China need to pay more attention to contributors to environmental regulatory compliance as enforcement degradation. Chemical companies of chemical legislation becomes thus find themselves uniquely stronger. These recent developments placed in China – as key players and in chemicals management regulations beneficiaries of the sustainability have undoubtedly created more agenda. challenges for foreign chemical enterprises involved in the Chinese a. Risk management – key strategy market, but the development is a in sustainable development positive one. European regulatory For chemical companies, the standards, although crucial, cannot framework of sustainability as a remain a stand-alone experience, business model starts with assessing, as the complexity and scale of managing and minimizing risk. Each environmental degradation needs to be company, with the help of internal and handled in every part of the globe. external experts, must analyze and 2.2 Sustainability in China – assess for itself the risks involved in Managing risks, enabling growth operating a business in a particular country – both at various levels. At the In an increasingly globalised macro level, the regulatory framework economy, sophisticated international is vital to risk assessment. China regulation can be effective only when has so far been able to identify and implemented and integrated at the characterize the hazards and risks ground level. Over the past few years, associated with the chemical sector China has strengthened regulation, and identified appropriate preventive compelling industries to assess measures, penalties and incentives.76 the risks associated with flouting This has set clear parameters for environmental norms. It has started

75 ‘China’s chemical regulatory innovations’ paper by Olivia Sun presented at the 2012 GlobalChem Summit, US, 13 March 2012 76 Priorities in chemical risk assessment and management in China, UNEP, ILO, WHO China’s chemical industry enters new era with sustainability | 25

foreign and domestic companies between RMB 50,000 to RMB in China to work out their risk 200,000. In case of ‘serious’ violations, assessment and management goals. businesses can be shut down. Businesses that import prohibited Over the past few years, China has materials or equipment may be fined worked closely with the European as much as RMB 1 million, with a Union China has reformed its minimum fine of RMB 100,000. The regulatory framework for managing law also provides for a variety of other the risks posed by chemicals. Its fines and the possible revocation of current regulations, measures and business licenses. guidelines cover hazardous chemicals and the testing and registration of The more benign aspects of the new chemicals. It has also developed law include incentives to foster a far more comprehensive national development of sustainable economy. policy, legislation, law enforcement The circular economy law encourages and made efforts at public participation provincial and municipal governments and worked closely with the European to establish funds to support Union to reform standards, procedures development of sustainable economy,

and legislation integrating it into including funds for research and independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network China’s regulatory framework.77 development of new technology and information products. Tax preferences For any risk assessment, companies are given to industries and activities must work around the fine prints of that promote the conservation of relevant regulations and guidelines. energy, water and materials. For instance, the Circular Economy Promotion Law identifies ‘key Chemical companies in China enterprises’ in industries (such as steel have worked out elaborate and and coal) that use large amounts of innovative strategies to assess and energy or water and put them under mitigate risks. Dow Chemicals has special supervision and administration. extended its ‘product safety and The law also mandates regular risk management’ strategy to China. publication of a catalogue listing According to the company, “Risk techniques, materials, equipment management refers to the steps and products that are ‘encouraged,’ taken to prevent adverse effects of a ‘restricted’ and ‘eliminated.’ chemical, taking into account societal values, legal requirements, and the In addition, enterprises have to wade costs of the control option.” Dow through a complex criss-cross of requires industrial workers to wear laws and regulations enacted over personal protective equipment to years. Chemical companies have prevent exposures; ensuring proper to be cognizant of the Energy Law ventilation at workplace to reduce (amended 2008) which encourages exposure; providing warning labels to foreign investment in developing inform users about potential effects clean and alternative energy, yet it is of working with a product; mandating important for them to assess other air permits or water permits to reduce regulations like Renewable Energy releases from industrial facilities, Guidance Catalogue and a Catalogue among others.78 for the Guidance of Foreign Investment Industries (Revised 2007) to ensure BASF too has an extensive strategy for the target investment is indeed risk assessment and mitigation. It is ‘encouraged’ and is not ‘prohibited’ or focused on compliance, environmental ‘restricted.’ protection, health and safety and adherence to these standards are Companies must also acquaint monitored by different systems and themselves with legal liabilities. For checked by internal and external instance, under the Circular Economy audits. The main areas of sustainability Promotion Law, enterprises that and risk management include product produce or sell prohibited equipment safety, climate and energy, water, or products can be fined anywhere human and labor rights, human capital

77 Towards 2020, Making chemicals safer, 2009 European Commission 78 Dow Chemicals website 26 | China’s chemical industry enters new era with sustainability

development, biodiversity, renewable tolerance policy for breach of its ‘code resources and sustainable products. of conduct.’ (Risk management - Akzo Nobel report 2011) BASF has taken risk management further by going beyond company Risk assessment and its mitigation is borders. It has involved supplier a continuous process - dealing with and external stakeholders in its current threats, as well as identifying sustainability standards. Based on emerging risks. Companies use risk matrices, BASF evaluates and internal and external expert teams audits new and existing suppliers. to isolate and identify risk scenarios Business partners, especially agents, and work with the management to distributors and contractors are incorporate it within the business subject to compliance checklists with planning and review cycle. Typically, a transparency in communication.79 chemical company faces macro risks like weakening economic climate and For Akzo Nobel, risk management is a high raw material prices which can key strategic process and an essential be managed through comprehensive element of corporate governance. plans to improve performance in the Its risk management framework has independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network areas of supply, sourcing and margin provision for higher risk appetite and management. is tackled from strategic, operational, financial and compliance platforms. b. Ambitious green economy plan Strategically, Akzo Nobel is willing spawns growth opportunities to take considerable risk related to The 12th Five Year Plan - 5YP (2011- growth, innovation and sustainability. 2015) calls for total transformation Although return on investment may be of China’s economic structure while slow and uncertain, the company says tackling sustainability at two levels. At substantial funds go into research, the preventive level, it incorporates development and innovation. With new limits on energy consumption respect to operational risks, the and sets targets for reducing pollution company engages in high safety and carbon emissions. On the standards, employee engagement and proactive level, China is making heavy talent development. It opts for prudent investments to promote a green financing strategy and strict cash economy through products, clean management policy and gives high technologies and renewable energy. priority to compliance issues, with zero The chemical industry is pivotal to ensuring that the goals of sustainability Chemical companies set sustainability targets in China are met effectively. Besides managing and regulating the intrinsic The Dow Chemical Company (Dow) Addressing climate change – Dow hazards of the industry, developments has set strong sustainability goals will maintain absolute greenhouse in four major sub sectors – energy, for 2015 in 2005. According to Dr. gas emissions below 2006 levels. construction, water sustainability Dong Lingzhen, Asia Pacific EHS Energy efficiency & conservation and transportation – are likely to and Sustainability Director, Dow, the – Dow will reduce energy intensity shape the growth trajectory of company’s ‘Sustainable Chemistry by 25% by 2015 – from a 2005 the chemical industry as a whole. – by 2015’ commitment aims to baseline. Innovation portfolios of major increase the percentage of sales companies operating in China are now to 10 percent for products that are Product safety leadership – designed to address these emerging highly advantaged by sustainable Dow will publish product safety opportunities by offering solutions chemistry. assessment for all products by 2015. for some of the most pressing needs Breakthroughs to global challenges arising out of urbanisation and climate – The company is committed Contributing to community success change. to achieving at least three – By 2015, achieve individual breakthroughs by 2015 that will community acceptance ratings for Local protection of human health & significantly help solve global 100% of Dow sites where we have environment – By 2015, Dow will challenges. On June 25, Dow a major presence. achieve on average a 75 percent announced their 1st breakthrough. improvement of key indicators for EH&S operating excellence from a 2005 baseline.

79 BASF China website China’s chemical industry enters new era with sustainability | 27

Emission targets spell growth and four waste gas control projects and five risks flagship projects focusing on waste The 5YP lays out a series of water treatment, among others.82 targets aiming to instill sustainable development practices into domestic New energy and emerging industries: industries. By 2015, China will slash China is building its renewable energy domestic energy consumption per architecture with specific targets and unit of GDP by 16 percent, and carbon heavy investment. It plans to increase dioxide emission per unit of GDP by non-fossil fuels in overall primary 17 percent, from 2010 levels. It also energy use from the current 8 percent intends to cut carbon intensity by to 11.4 percent by 2015, making it an 40-45 percent from 2005 to 2020 as important growth driver for chemical part of a longer-term plan.80 companies providing energy efficiency solutions.83 Other goals include efforts to reduce major pollutant emissions, such as According to revised targets set by the heavy metal and chemical waste from National Energy Administration (NEA) manufacturing processes, by around in 2012, renewable energy – including 8-10 percent.81 The plan has made solar, hydro, wind, geo-thermal power independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network energy-guzzlers in China, including – would account for more than 9.5 steelmakers and coal-fired power percent of the country’s total energy 84 plants, scramble to reduce emissions consumption by 2015. In fact, with to avoid having their business licenses China’s solar energy sector surging revoked by the government. ahead, the NEA revised its 2015 target for installed solar power capacity to 21 Ambitious targets aimed at reducing gigawatts (GW) from 15 GW in 2011.85 the carbon footprint is a very pressing risk factor for Chinese companies. It is estimated that the transition to a Sinopec is re-working its energy mix global green economy may generate trying to increase unconventional a market exceeding USD 1 trillion by 86 and renewable resources, upping the end of the 5YP period. The State investment in unconventional Council last year earmarked seven hydrocarbon resources like shale strategic emerging industries - energy gas and coal-bed methane, bio-mass saving and environment protection, energy and the clean utilisation of next-generation IT, biotechnology, coal. It has signed up for the major high-end manufacturing, new energy, pollutants discharge reduction target new materials, clean energy vehicles and has tightened environmental – as core to China’s new growth protection regulations. The company is model, with these sectors expected to trying to integrate R&D capacities with account for 8 percent of China’s GDP in 2015 and 15 percent by 2020.87 In Renewable energy development targets by 2015 May 2012, the State Council planned Chemical sectors affected (a sample) to launch 20 major projects related to these seven industries, the details of 2015 2009 which are pending.88 Hydropower capacity (GW) 260 196 Environment market and chemical end Pumped storage hydropower capacity (GW) 30 N/A use demand: Since 2009, China has On-grid wind power capacity (GW) 100 1 7. 6 invested nearly USD 50 billion annually in the renewable energy sector as Solar power capacity (GW) 21 0.16 the combination of industrial pollution Biomass power capacity (GW) 13 1.09 and increasing urbanisation grew alarmingly. The 5YP estimates that Geothermal, tidal power capacity (MW) 110-120 28.1 about RMB 3.4 trillion in investment Ocean power capacity (MW) 50 N/A will be needed to fund environmental protection efforts until 2015.89 Source: National Energy Administration 80 Government funds green purchases, 17th May 2012, China Daily 81 12th Five Year Plan hailed as ‘greenest FYP in China’s history’, China Briefing, 5 April 2011 82 Sinopec sustainability report, company website 83 12th Five Year Plan hailed as ‘greenest FYP in China’s history’, China Briefing, 5 April 2011 84 China hikes 2015 solar power target by 40 pct, Reuters, Aug 8, 2012 85 China hikes 2015 solar power target by 40 pct, Reuters, Aug 8, 2012 86 China set to vigorously develop green economy, Renewable Energy World.com, 1 Feb 2012 87 12th Five Year Plan, China Water Risk Website 88 China boosts strategic emerging industries, 30th May 2012, Xinhua 89 Swedish firms tap China’s green tech market, China Daily, 25th April 2012 28 | China’s chemical industry enters new era with sustainability

In order to boost demand for a US industrial gas producer, plans to environment friendly products, China invest up to USD 880 million in China in will provide financial subsidies to the 2012 and unveiled two large-scale gas- tune of RMB 26.5 billion (USD 4.2 processing plants late last year. It will billion) to encourage consumption bring its most advanced technologies, of energy-saving products, mainly including those that can ‘capture’ automobiles and household appliances. carbon dioxide, to China and help local The subsidies will be available for companies reduce emissions.91 household appliances including air Construction makes space for green conditioners, refrigerators and washing products machines for one year. Of these China’s frenzied urbanisation has subsidies, RMB 6 billion will be used to rendered sustainability a tremendous promote use of energy-saving vehicles challenge, but there is hope that with engine capacities of 1.6 litres or construction of megacities will throw less, and RMB 2.2 billion to subsidise up opportunities as well. Global energy-conserving light bulbs and boomtowns are known to generate LEDs. green innovations, and given China’s independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network With this amount of public investment, ambitious target of reaching a 70 China’s environmental protection percent urbanisation rate by 2030, it industry is expected to continue is imperative for urban life to be more growing at an average of 15 to 20 energy efficient. percent per year, and its industrial Over recent years, Chinese planners output is expected to reach USD 743 have shown enthusiasm for adopting billion, up from USD 166 billion in 2010. green practices in urban life by The multiplier effect of this emerging improving upon regulatory practices. sector is estimated to be 8 to 10 times The focus has gradually shifted from larger than other industry sectors.90 pollution control to framing mature Chemical companies are already regulations and providing incentives for launching plans to ride the wave of sustainable urban construction. This China’s energy efficiency drive. For shift in focus can have tremendous instance, Air Products & Chemicals, implications as the building sector

90 China set to vigorously develop green economy, Renewable Energy World.com, 1 Feb 2012 91 Air Products to invest $880m in China, 16th Dec 2011, China Daily China’s chemical industry enters new era with sustainability | 29

alone accounts for 40 percent of all crisis. More than 300 million rural energy consumption and greenhouse Chinese lack clean drinking water gas emissions worldwide.92 because of polluted waterways—over half of China’s major rivers and lakes, The Chinese government, in its and 35 percent of groundwater supplies own study, has estimated that its are undrinkable as of now.98 construction sector will possibly account for more than 30 percent of Traditionally, China’s water policy total social energy consumption by has focused almost entirely on flood 2020, becoming a major energy user.93 control. Water conservation and the This number can be effectively lowered need to protect the environment by investing in ‘green buildings’. The appeared on the policy agenda only Ministry of Finance and Ministry of in the early eighties and as the crisis Housing and Urban-Rural Development deepened, water management and set a target in May 2012 that ‘green conservation got more attention. buildings’ should account for 30 The 5YP tackles the problem more percent of new construction projects extensively, stressing on elaborate in China by 2020.94 This target, if investment in water infrastructure and implemented, would leverage a green construction of water conservation independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network market worth trillions of Yuan, as structures, improved irrigation and developing energy-efficient buildings clean-up and treatment of water would also effectively drive the growth bodies. It also proposes accelerating of new chemicals, special polymers, the construction of wastewater building materials, new energy and treatment and recycling pipes related service sectors.95 Despite and stringent water management the uncertainties of China’s property systems.99 market, chemical companies have been China’s State Council has approved investing in developing construction plans to spend USD 536 billion on chemicals geared toward sustainability. environmental protection before the Products including concrete additives, end of 2015, of which USD 60 billion insulation materials and pigments help will go on urban wastewater systems, in reducing energy use of buildings. including re-use.100 Significantly, Since 2008, BASF has tracked the the 5YP, for the first time, puts the energy-saving targets and guidelines spotlight on reducing water pollution of the government and worked on its in non-urban areas. During this period, products accordingly, by launching wastewater treatment coverage should insulation technologies such as rise to 85 percent nationwide. Larger, polyurethane foam for roof and exterior more developed cities will be required walls as well as double-glazed polyvinyl to attain treatment rates of 90 percent, chloride framed windows and energy- while smaller cities and towns need to saving flooring systems.96 Dow Building reach 80 percent.101 & Construction too has come up with This opens up new demand regions elastomeric reflective roof coating for the chemicals sector. The market solutions to achieve a 25 percent for specialty chemicals and services reduction in energy consumption. in water treatment in China is worth These coating materials are effective in USD 8-10 billion a year and leading reducing energy cost and reducing the producers have set aggressive growth urban heat island effect.97 targets for water treatment chemicals Water sustainability: A major growth and services.102 Moreover, this sector is driver not subject to cyclical booms and busts Over the past ten years, China has and growth rates are likely to remain made massive efforts to tackle its above industrial and GDP growth rates. severe water pollution and scarcity

92 Chemical firms increase investments in green construction, January 2010, ICIS 93 Tackling Sustainability in China, 13 Jan 2012, Policy Innovations Website 94 China to boost construction of green buildings, 7th May 2012, Xinhua 95 China to boost construction of green buildings, 7th May 2012, Xinhua 96 BASF China website news 97 Dow Construction Chemicals Asia Pacific Website, Dec 2011 98 Chemical Insight & Forecasting: IHS Chemicals 99 China Water Risk Website 100 Five years to clean up China’s wastewater, January 2012, Global Water Intelligence 101 Five years to clean up China’s wastewater, January 2012, Global Water Intelligence 102 Water treatment: Scarcity and sustainability drive growth, Chemical Week, 16-23 Jan 2012 30 | China’s chemical industry enters new era with sustainability

BASF, a leading provider of water the promotion and high-end research treatment chemicals, expects strong related to lithium batteries and battery growth and is adding capacity in China materials.105 with the production unit at Nanjing Chery Automobile, one of China’s Chemical and Industrial Park expected largest auto manufacturers, has tied to be fully operational by end of 2012. up with SABIC Innovative Plastics The unit will produce quaternised- for advanced materials solutions that cationic monomer and cationic raises fuel efficiency through weight polyacrylamide flocculants used in reduction.106 water treatment.103 Dow Chemicals has ambitious sustainability targets and is China has also been promoting public attempting to reduce desalination costs transport in successive five-year plans. by 35 percent by 2015. Subway construction, high-speed rail Advanced polymers ride on smart network and bus rapid transit systems transport wave are high priority in many large centres. Analysts expect a boom in China’s Urban transport will have a great railway equipment manufacturing impact on sustainable development. industry in the coming years, along independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network China is now the leading producer of with demand for advanced materials.107 motorised vehicles, but in the long Companies such as Dow Corning see run, this may turn out to be counter- tremendous potential ahead. Dow productive as riders are a significant Corning provides silicone structural contributor to pollution. Although sealants that help make the Shanghai the auto sector is an important pillar Metro’s platform screen doors more industry, there is also a strong political effective and energy-efficient. Its will to encourage energy saving via weather-proofing sealants also reduce environment-friendly transportation. the amount of energy consumed by The 5YP has earmarked electric the environmental control system, vehicles as a sector to be promoted including heat in winter and air- intensely. A new industry development conditioning in the summer at metro plan for energy-saving and new-energy stations.108 2.3 Four-fold strategy to build Sustainability risk and opportunity assessment sustainability management model In the long run, the environment KPMG can assist in identifying and prioritising sustainability market in China will see quantum risks and opportunities, developing responses and related changes and what the chemical implementation plans, and providing recommendation on industry does now will set the tone integration with existing systems. for its future growth. The sector is grappling with ambitious goals set by Sustainability management maturity assessment China’s planners and must find ways to KPMG can assist in assessing the current state of your leverage the opportunities generated sustainability management practices, identifying gaps by sustainability targets, while handling with where you want to be and providing prioritised new and emerging risk factors. improvement recommendations. To be successful in this complex market and achieve growth, companies need to internally restructure their vehicles has set a production and sales organisations to integrate sustainability target of 500,000 all-electric and plug- into core business practices. For this, in hybrid vehicles by 2015 and more they will have to execute strategies than 5 million by 2020.104 China intends in line with its business costs and to become the biggest producer of targets and establish a series of KPIs new energy vehicles by 2020. In 2011, (key performance indicators) to achieve China announced a grant of RMB results. 100 billion specifically focusing on

103 BASF Website 104 More green cars needed, China Daily, 24th April 2012 105 Fourth annual China clean energy vehicle-green transport summit, 2011) 106 SABIC Innovative Plastics helps Chery take the fast lane to the global auto market, Case Study, SABIC website 107 China Plans 40,000 km high-speed rail network by 2015, 25th July 2012, RTI News) 108 Dow Corning website news, July 2012 China’s chemical industry enters new era with sustainability | 31

A four-pronged strategy that technology possible and companies includes product innovation, such as Bayer have seen an increasing stakeholder responsibility, supply demand for energy-efficient solutions chain management and sustainability provided by its LED technology. reporting may be the winning formula In the energy market, generation and for chemical companies in China to storage of renewable energy will be achieve their next stage of long-term the fastest growing segment for the growth. next 20 years. DuPont is a critical a. Enabler’s role with product player in the solar industry and its innovation materials have set new photovoltaic The chemical industry plays its biggest (PV) industry standards around the and most important role as ‘enabler’ of world. Patented products are said to a sustainable economy with its product have doubled the efficiency of solar innovation skills. While sustainable modules over the last decade. DuPont development means achieving a spent USD 2 billion in 2011 on R&D, a balance between people, planet and significant portion of which is focused profit, for the chemical industry, the on reducing global dependence

most fundamental element remains on fossil fuels through advanced independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network ‘products.’ materials and technologies that improve efficiency, lifetime and cost- Innovative products and initiatives from competitiveness of solar energy. the chemical industry will play a crucial role in addressing the challenges the Evonik, a leader in specialty chemicals, world faces today, and in helping broke ground on its new organics provide solutions to those that lie production facility in Shanghai in early ahead. 2012. The plant will supply innovative ingredients and specialty surfactants Renewable or green chemicals and based on renewable raw materials renewable energy form the core for personal care, household care of the evolving carbon economy. and the industrial specialties industry. Enlightened regulations and customer Evonik is also expanding its research demand for green products are major and development center in Shanghai catalysts driving the global renewable with an investment of EUR 23 million, commodity plastics and chemicals focusing on developing materials which market.109 Most products of the can be used by Chinese manufacturers consumer industry, from household of fuel-efficient vehicles. Evonik will goods, through medical appliances or also spend more than EUR 350 million electronic devices to automotive parts, to construct new production facilities could only be developed on the basis for specialty chemicals in China, to be of product innovation by the chemical operational in 2014.111 industry. BASF and Sinopec are working on The potential for ‘green plastics’ is high the feedstock end of next-generation in China and companies are focusing materials. The two have signed an on advanced polymers and materials MoU to explore the possibility of with niche applications. Some of building a world-scale isononanol (INA) the commodity polymers and their plant in Maoming, China. INA is used renewable counterparts which will as the feedstock for production of see demand growth are high-density next-generation plasticizers such as and linear low-density polyethylene, diisononyl phthalate (DINP) and non- polypropylene, polystyrene, polyester phthalate plasticizer Hexamoll DINCH. fibres, polyethylene terephthalate (PET) DINP is widely used as a plasticizer bottle resin.110 in industrial applications such as Other examples include automotive, wires and cables, flooring, polycarbonates, which have become building and construction while the basis for optical storage media. Hexamoll DINCH is the plasticizer of Liquid crystals make flat-display choice for sensitive applications.112

109 IHS Chemical Renewable Commodity Plastics - Mapping a Sustainable Market 110 IHS Chemical Renewable Commodity Plastics - Mapping a Sustainable Market 111 Evonik targets Asian chemicals market, 2nd April 2012 112 BASF and Sinopec sign MoU to explore building a world-scale isononanol plant in Maoming, 31st July 2012, BASF website news 32 | China’s chemical industry enters new era with sustainability

AkzoNobel : Sustainability through products

Strategy and planning: chemicals. As of 2011, AkzoNobel Sustainability is a constant Sustainability is now a top priority owned 29 manufacturing facilities, consideration factor in investment while framing management strategy including the €370 million Ningbo decisions. at AkzoNobel, China. In September multi-site, an innovation center, a • Sourcing – The company educates 2010, AkzoNobel announced a service center and a nationwide and monitors suppliers on new ‘Value and Values strategy’ network of sales offices in China. sustainability performance and encompassing stakeholders, These operations are supported by capability to influence consumers financials, safety performance, a team of 7400 people. AkzoNobel to choose environment-friendly eco-efficiency improvement and sees long-term demand by coating materials. products. Going forward, these customers for sustainable solutions; ambitions will form the basis of innovative technologies that help • Manufacturing - AkzoNobel AkzoNobel’s reporting culture and reduce the use of raw materials and prioritizes sustainability during the further development of the local simplify manufacturing processes. entire process from manufacturing market. to distribution. Developing the value chain: Production: AkzoNobel China’s AkzoNobel has an edge over independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network • Research, development and sustainability theme is reflected in its competitors because: innovation - Each business unit will products, which have strong impact implement the global sustainability • Sets an example before suppliers on reducing energy consumption; framework with China specified caring for customers’ health and • The company makes itself strategy. AkzoNobel continues to working environment; reducing responsible for the claims it invest in environmental-friendly carbon footprint and wastage, etc.. makes products in future. The company makes a wide range Dr. LIN Liang Qi – president of of paints, coatings and specialty • Investment decisions – AkzoNobel China

b. Stakeholders extend sustainability China too has been consolidating its dialogue network of stakeholders from the The chemical industry’s products chemical industry to enhance their and services play a crucial role in sensitivity to sustainable practices. The addressing environmental concerns Association of International Chemical by providing sector-wise solutions. Manufacturers (AICM) represents An important aspect of this is more than 40 major foreign-investment conducting stakeholder dialogue at enterprises in China’s chemical every level. Externally, joining forces industry, whose members’ business with stakeholders ranging from covers manufacturing, transportation, governments, suppliers, vendors, to distribution and disposal of chemicals. local communities and customers in The organisation is committed to order to communicate a company’s promote globally recognised chemical beliefs and targets is an essential part management principles among all of operations these days. Internally, stakeholders and build a contributive communication flow between role of the chemical industry to the shareholders, directors and employees economy. is also becoming critically important to modern companies. Multinationals have made holistic efforts to introduce the concept of Organisations such as CEFIC stakeholder responsibility in China. are making it their core agenda BASF, together with nine partners, to communicate the chemical kicked off the third round of its industry’s contribution to sustainable ‘1+3’ Corporate Social Responsibility development by joining forces with all project in 2012, a program designed stakeholders, including governments to improve sustainability performance and civil society. CEFIC is investing in along the chemical industry value chain. encouraging processes and products Supported by the China Business that have reduced the environmental Council for Sustainable Development burden by using tools such as risk (CBCSD), the ‘1+3’concept connects a assessment, risk management and life major stakeholder such as BASF cycle assessment. China’s chemical industry enters new era with sustainability | 33

with three types of business partners made up of Chinese and international along the supply chain – the customer, companies, government and local supplier and logistics service provider community representatives. Akzo – which are mostly small and medium- Nobel also has a number of projects at sized (SME) enterprises – with the the community level in China, mostly aim of promoting sustainability by related to health.113 sharing best practices in the area of For Bayer, diversity in approach environment, health and safety. This is one of its strengths. It recently business model for sustainable supply developed the ‘Bayer-China Rural chain management gives space to Development Project’ in Wanzhou, small enterprises to act responsibly Chongqing. The project is an example as they form the bulk of the industrial of effective communication between space. the local government, community and Dutch companies DSM and AkzoNobel company representatives using Bayer’s have also invested in stakeholder participation in diversified industries, relationships. DSM maintains close covering education, agricultural, communication with CBCSD, which is healthcare and infrastructure. independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network

113 AkzoNobel, DSM websites

The Dow Chemical Company– Engaging stakeholders

Dow has played an active role in University (Beijing), Fudan University ensure the spread of Responsible engaging various stakeholders - (Shanghai), and Shanghai Jiao Tong Care and to work with many Asia including customers, suppliers, University in China. pacific countries’ local authorities to communities, civil society, academia, develop a science-based, risk-based, The company works with and governments. cost-effective regulatory framework governmental institutions and for chemical management programs Since 1992, Dow has developed agencies worldwide to advance based on Global Product Strategy a strong advisory team called the role of chemistry in addressing (GPS) principles. Dow has provided the SEAC (Sustainability External various challenges and promote speakers/ trainers for Responsible Advisory Council), which provides safe management of chemicals. For Care conferences and Global Product an important outside-in perspective example, Dow has collaborated with Strategy workshops in Asia pacific on environment, health and the United Nations Environment region (including China, India, safety; sustainability; and business Programme (UNEP) and the Ministry Indonesia, Japan, Korea, Malaysia, issues for the Company. Council of Environmental Protection of the Philippines, Singapore, Taiwan, members include leaders from People’s Republic of China (MEP) Thailand, and Vietnam, etc.). non-governmental organizations, on a joint project of “Promoting academia, the business community Safer Operations and Emergency Dow has also provided product and environmental and sustainability Preparedness in the Value Chain of stewardship and product regulatory communities. the Chemical Sector” via workshops, training to >475 distributors in drill and project review to promote various countries in the Asia Pacific Dow has established strategic safer production, chemical safety region since 2008. partnerships and collaborations management and emergency with academic institutions across According to Dr. Dong, Dow wants preparedness in the chemical sector the globe to advance scientific to be a leading company in advancing in China. The learning would allow research and develop the world’s all aspects of sustainability, openly for the replication of project results next generation of scientists and collaborating with key stakeholders, and promotion of industrial chemical leaders with sustainability thinking. and contributing to the development safety in other industrial areas and It includes the global Sustainability of local economy and the sustainable sectors, both within China and Innovation Student Challenge Award growth of the chemical industry and globally. (SISCA) program since 2008 to preserving value for its investors, encourage sustainability innovation Dow has committed experts to assist customers and potential customers. among young generations as well International Council of Chemical Dr. Dong Ling Zhen, Asia Pacific as scholarship programs at local Associations (ICCA) to build capacity EHS and Sustainability Director, universities, such as Tsinghua in the global chemical industry to The Dow Chemical Company. 34 | China’s chemical industry enters new era with sustainability

along respective product chains. Stakeholder engagement Adopting recognised environmental management systems such as the KPMG can assist in identifying your key stakeholders, international ISO 14001 standard mapping and prioritising sustainability issues material to and EU Eco-Management and Audit the business, understanding stakeholder concerns and the Scheme (EMAS II) that emphasise associated weighting of the different sustainability issues, environmental performance indicators as well as developing plans to engage stakeholders. will make Chinese businesses internationally competitive and open up new markets.

Companies in China are focused c. Greening the supply chain not only on manufacturing, logistics, Over the last 30 years, China’s distribution and exports, but on turbo-charged industrial policy has growing consumer demand for helped push it to the centre of the sustainable products. The development international stage, transforming of China’s supply chain infrastructure and its sustainability is one of the

• The Shenzhen Stock Exchange • The State-owned Assets • The Shanghai Stock • The UN announces the Beijing releases a set of guidelines on Supervision and Administration Exchange issues guidelines Declaration on Climate Change social responsibility for its listed Commission (SASAC) of the on strengthening listed • The Shanghai Municipal Bureau of companies State Council issues CSR companies’ assumption of Quality and Technical Supervision guidelines for centrally owned social responsibility and their issues local CSR guidelines and in and managed enterprises environmental performance effect from 1 January 2009 disclosure

2003 Jan 2008 May Sept

2006 April Jun Nov

• The State Environmental • 11 national industrial • The China National Textile and • The Ministry of Commerce circulates Protection Administration federations and associations Apparel Council launches guidelines on draft “Guidelines on Corporate (SEPA) issues a bulletin issue guidelines on social sustainability reporting for apparel and Social Responsibility Compliance by regarding information responsibility for industrial textile enterprises in China Foreign Invested Enterprises” disclosure of corporate corporations and federations • The Ministry of Environmental Protection environmental and the China Securities Regulatory performance Commission set out requirements for enterprises to undergo environmental assessment before initiating an IPO or obtaining refinancing

Source: KPMG CSR presentation 2012

114 China CSR Imperative: Integrating Social Responsibility into the China Supply Chain Industry Insight 2012, American Chamber of Commerce, Shanghai China’s chemical industry enters new era with sustainability | 35

Increased regulation, cost optimisation until very recently had a relatively measures, and rising consumer small chemical industry, has seen concerns about business ethics need growth outpace the rest of the world. to be at the core of supply chain Transport Intelligence estimates operations. that from 2011 to 2015, Asia Pacific will experience the highest levels Dow Chemicals and BASF have of growth of chemical logistics, invested heavily in the sustainability expanding by an average of nine of their supply chains. One of Dow’s percent per year between 2011 and ongoing efforts is through redesigning 2015.116 supply chain networks by maximising equipment loading and increasing the Companies such as Sinochem use of product exchanges and swaps International have invested to help lower mileage and reduce significantly in logistics by developing the company’s carbon footprint. Dow the entire chain of shipping, tank has also customised transportation container multimodal transport, freight channel networks, which saves forwarding and warehousing, terminal millions of dollars in energy costs. and depot services. Sinochem owns BASF has been evaluating and the largest hazardous chemical fleet independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network identifying high-risk suppliers through and ISO tank lorries in China, which its Safety Matrix program, which was the company claims is in accordance established several years ago.115 For with the strictest safety standards. Akzo Nobel, collaboration is the key In terms of shipping, Sinochem word when it comes to implementing International has established a a sustainable supply chain that comprehensive and effective safety ensures seamless, integrated material management system in line with the flow from supplier to customer. ISM code, and won ISO9001-2000 Sustainable logistics: Sustainable standard certification. It is China’s only chemical logistics forms an important qualified company to transport high- part of the supply chain. China, which end chemical products like TDI and

• Chinese Academy of Social • China Insurance Regulatory • At different press events, various Sciences releases China’s Commission releases high-level officials from SASAC Corporate Social Responsibility Management Measures for stress that all SOEs must issue a Reporting Guidelines, version 1.0 Insurance Information Disclosure. 2011 CSR report in 2012.

Jan 2009 Mar 2010 Mar 2011 May 2012

Nov Dec May May

• The China Banking Association • SASAC releases Interim • Chinese Academy of Social • SASAC announce to build releases CSR guidelines for Measures for Governing SOE Sciences releases China’s up the committee of Social China’s financial institutions Energy Saving and Emission Corporate Social Responsibility Responsibility, urging all SOE Reduction. Reporting Guidelines, Version 2.0. should release their CSR report • The Shanghai National complying with their own Accounting Institute releases its sustainability strategy first CSR Index

115 Sustainability tools strengthen chemical supply chain, ICIS, 30 March 2009 116 China to drive chemical logistics market, 29 March 2012, Logistics Asia 36 | China’s chemical industry enters new era with sustainability

MDI. In 2011, Sinochem strengthened The need to recycle more chemicals its partnership with Newport, a and materials is now an economic US company, to make inroads imperative for the chemicals industry. into international logistics, winning Historically, the main driver behind contracts from BASF, Dow Chemical the recycling and reuse of chemicals and Optimal. and materials was concerns about environmental pollution and the C2C practice: As a concept, preservation of the Earth’s resources. sustainability in the supply chain needs Now, a new impetus stems from to be built up over time and must be worries about shortages of raw understood by all parties along the materials which are pushing up value chain. Closing the loop is an commodity prices. important aspect of the supply chain paradigm. The cradle-to-cradle (C2C) The recycling and reuse of chemicals philosophy of designing chemicals and materials is thus becoming that can harmlessly decompose or be essential not just for the sake of the reused and regenerated infinitely is environment but for the future of considered one of the holy grails for a global economies. A growing number

Bayer – Sustainability at Its Core

Bayer is committed to the concept of The company is just as dedicated As a thought leader, Bayer is also sustainable development. In specific to improving its internal processes actively engaged in the community terms, this entails a commitment to in order to ensure sustainability. At in efforts to promote environmental safeguard the long-term commercial Bayer’s manufacturing sites, striving stewardship. The company success of the company through for energy efficiency is a constant champions more climate friendly innovative products, environmental effort. Production technologies are production processes in the chemical stewardship, and stakeholder first of all designed to achieve more industry, offering solutions like E2. In dialogue. energy efficiency. For example, china, the largest construction market Bayer’s Oxygen depolarized cathode in the world, Bayer has established Bayer focuses on green solutions technology revolutionizes chlorine an Eco-construction & Material and often spearheads market production as it requires 30% less Academy in collaboration with Tongji trends that can better contribute to electrical energy in this crucial step of University in order to promote and climate protection. For instance, the chemical production process. The drive this concept in China. Indeed, the company leads the ECB (eco- company’s gas-phase phosgenation Bayer continues to pursue dialogue commercial building) program, a for TDI production in its Shanghai with its stakeholders by engaging in green solution concept initiated site uses up to 60% less energy continuous and intensive exchange in 2010. The ECB program builds and emits 60,000 tons fewer CO2 of views with interest groups related an interdisciplinary network of compared to another world-scale to the company: stockholders, construction industry players like plant of the same size. Energy business partners, staff, media, non- suppliers, planners, engineers and efficiency efforts at Bayer’s plants go governmental organizations, suppliers service providers to offer customized beyond finely designed technologies, and authorities. and one-stop solution for energy- they also include a systematic optimized buildings and even zero- Dr. Michael Baum, Chief Financial approach to reducing energy emissions buildings. In 2011, Bayer Officer & Deputy General Manager, consumption in running units with incorporated 28 more partners to the Bayer (China) Limited a tool called E2 (energy efficiency). global ECB network to ensure that Via this check & improvement tool, durable, high-performance materials Bayer has successfully identified such as Bayer’s own polyurethane economic and technologically feasible insulation solutions become measures that could realize CO2 even more firmly established in reduction of up to 350,000 tons each construction practices. year. China’s chemical industry enters new era with sustainability | 37

more effective recycling schemes business imperative. Today, companies by adopting reuse of materials as a are beginning to discover that business venture. corporate reporting not only provides financial value but new business BASF, Dow Chemical, Eastman opportunities as well. Chemical, Solutia, PPG Industries and SABIC have been working on finding According to a KPMG study, financial solutions. A group of mainly Dutch value overwhelmingly comes from chemical companies, including DSM two sources: direct cost savings and and AkzoNobel, consultancies and enhanced reputation in the market. technology specialists, have set up a ‘Green’ products, for example, project called Factory of the Future not only reduce waste and cost to demonstrate the feasibility of a to provide direct savings, but also chemical plant designed to operate a provide dividends by way of enhanced continuous loop system derived from reputation, from both investors and C2C principles.117 consumers.118

d. Sustainability reporting: Over the years, companies have Buzzword for future growth evolved to produce corporate

Chemical companies which manage sustainability reports (CSR) for independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network to integrate product innovation with both internal and external reasons. enlightened supply chain management Internally, it can identify and and transparent communication with manage sustainability risks and stakeholders will have an edge over opportunities; assess the progress of others. The fourth and final step in this its initiatives and ensure employee sustainability management programme welfare. Externally, sustainability is sustainability reporting - a process reporting protects and enhances a for publicly disclosing an organization’s company’s brand and reputation; economic, environmental and social meets regulatory, legislative, performance and the way it is being government and listing requirements; managed. addresses stakeholder demands and demonstrates a management that is proactive. Supply chain review Applying a ‘sustainability lens’ to KPMG can assist in conducting supply chain audits corporate reporting can result in four against your supplier code of conduct or international/ major benefits. A company can achieve industry standards to help you gain confidence over revenue growth – by introducing your suppliers’ sustainability performance environmentally or socially responsible products and services, penetrating new ‘responsible’ consumer markets and increasing market share due to improved competitive positioning.

It can have better risk management by identifying and managing The bottom-line to sustainable operational events and risks; development now means integrating responding to regulatory changes environmental protection and social appropriately and understanding issues responsibility into business processes that will impact on clients’ business so they contribute to long-term and creditworthiness. economic success for a company. Sustainability reporting is thus an CSR helps build corporate reputation essential tool for a company aiming to & brand enhancement by aligning be a responsible corporate citizen with key trends affecting customers and long-term growth prospects. clients and identifying opportunities to enhance corporate reputation. Finally, Why do we need CSR: Corporate cost optimisation through increased Responsibility (CR) reporting, once resource and operational efficiency; seen as fulfilling a moral obligation to reduction in waste and compliance society, is now being recognised as a with regulatory requirements makes a 117 Rocking the cradle, Specialty Chemicals Magazine, 2011 118 KPMG Survey of Corporate Responsibility Reporting 2011 38 | China’s chemical industry enters new era with sustainability

company better prepared for growth. Quality: Although the quality of reports has improved, the overall level Reporting trends in China: In recent remains far from satisfactory. Despite years, the number of companies growing momentum in reporting, data releasing sustainability reports has quality remains questionable. Lack increased at a phenomenal pace, of data measurement and collection globally as well as in China specifically. guidance, weakness in data quality Egged on by the central government, control and the lack of independent Chinese state-owned companies, third party opinion are major problem including oil and chemical giants, areas.122 However, report structures adopted a policy of ‘corporate social have become more comprehensive and responsibility’ and began to explore standard, over a period of time, with what constituted CSR.119 more emphasis on the human factor. Under pressure from the government, Many reports now include stakeholder regulatory and supervisory bodies like evaluation or third party assessment to SASAC and stock exchanges, Chinese enhance their credibility. companies have been compelled to Credibility: Reporting creditability increase reporting activities. In 2006, independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network has also improved and the number the Shenzhen Stock Exchange issued of reports adopting multi-compiling guidelines on CSR, while the Shanghai standards has increased. Most Stock Exchange issued its own norms companies have been able to present in 2008. their social responsibility performance Quantity: Reporting trend gathered objectively. They include stakeholder momentum between 2009 and 2011 evaluation from the government, with a large number of CSR reports employees, media and industrial being released in China. According to institutions. The number of reports a survey published by KPMG in 2011, compiled according to specialized at least 95 percent of the 250 largest standards, such as Guideline on global companies now report their Fulfilling Social Responsibility by Central corporate responsibility activities, while Enterprises issued by the State-Owned reporting rates in the global chemicals Assets Supervision and Administration and synthetics sector has gone up from Bureau, GRI G3, CASS-CSR, reached 62 percent in 2008, to 68 percent in 152 in 2011, with 73 percent increase 2011. year-on-year.

Over the last few years, sustainability Country reports: The number of reporting in China has also seen a Chinese versions of social responsibility substantial increase. In 2004, only six reports released by foreign-funded reports were released here, but that companies has also gone up. Country number grew to over 600 by 2009. By reports have become the main form of 2011, almost 60 percent of China’s social responsibility reports released largest companies have been reporting by foreign-funded companies. To on corporate responsibility metrics, adapt to the fast evolving standards bringing the country on par with global in China, foreign-funded enterprises leaders.120 release Chinese reports, which comprehensively present social A total of 817 CSR reports were responsibility concepts, measures released in mainland China from and performance implemented in January 1st to October 31st in 2011, China. However, the total number of up 23 percent from a year earlier, reports released by foreign-funded which had 663 CSR reports. While enterprises is relatively small – a gap SASAC requires all state-owned these companies need to fill. Moreover, enterprises to issue reports and appoint these reports tend to disclose relatively CSR departments, the good news is more about social and environmental that reporting by private enterprises activities and less information on increased 41.7 percent in 2011 from a sustainability as business integration 121 year earlier. model.

119 Carrots and sticks – Promoting transparency and sustainability, KPMG Advisory, United Nations Environment Programme, Global Reporting Initiative, Unit for Corporate Governance in Africa, 2010 120 KPMG Survey of Corporate Responsibility Reporting 2011 121 Overview of CSR Reporting in China, 14th Dec 2011, CSR-China 122 Corporate Social Responsibility, March 2012, KPMG presentation China’s chemical industry enters new era with sustainability | 39

How to ensure quality: For some like GRI (Global Reporting Initiative), years now, leading companies have Sustainability Reporting Guidelines combined their corporate reporting and or UN Global Compact in disclosing a financial reporting, often by merging company’s sustainability performance. the two into the annual report. KPMG, The GRI Sustainability Reporting however, believes that there is greater Guidelines is globally applicable value to be gained once both sets and sets out general principles and of information are treated as part indicators that companies can use to of the company’s comprehensive measure and report their economic, business performance reporting, both environment and social performance. to internal management and external Future of reporting in China: stakeholders. As corporate reporting gathers The problem, however, often stems momentum, the question now is from a proliferation of reporting not who is reporting, but who is not standards at the global and national reporting. However, given the relatively level. Indeed, in an increasingly recent development of reporting in globalised and complex world, China, it is too early to make a detailed international standards, codes and assessment of progress and impact. independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network guidelines addressing sustainability Not surprisingly, the quality of reporting reporting are continually evolving. varies significantly depending on the This wealth of standards is a sign level of commitment by a company of an increasingly diverse and and the quality of its underlying mature international framework for internal management systems. When sustainability reporting. However, there reporting in China, there is still a strong is a risk of overlapping, conflicting, and emphasis on social commitments and sometimes even competing standards activities although many companies may crowding the reporting landscape. do attempt to produce extensive quantitative data. Since there is a need to promote synergies between the different Looking ahead, one of the challenges initiatives and enhance coherence and for China will be to extend reporting convergence, some governments, to companies beyond the larger, stock exchanges and industry bodies state-owned enterprises and publicly are now referring to global frameworks listed companies. A second challenge 40 | China’s chemical industry enters new era with sustainability

will be to extend reporting to SMEs, Multinationals, on the other hand, which often have limited incentive often do not produce China-specific to invest in environmental and social sustainability reports, although they management. Independent third party may publish comprehensive global audit and assessment is necessary to integrated reports. If foreign companies establish credibility.123 want to make a mark in China, they would need to package their best practices for the local market. BASF Sustainability reporting China has taken an early lead and KPMG can assist in addressing the challenges of collating has been publishing country-centric quality report information by adopting a sustainability reports. In mid-2012, the company report indicator system, as well as developing or published its fourth integrated report, improving your entire China sustainability report, or ‘BASF in Greater China Report 2011’, on economic, environmental and social to provide independent assurance over the report or performance. selected indicators/claims. According to the report, BASF recorded sales of over EUR 6.5 billion

123 Carrots & Sticks - Promoting transparency and sustainability, KPMG, Global Reporting Initiative, Unit for Corporate Governance in Africa, UNEP 124 BASF in Greater China Report 2011 China’s chemical industry enters new era with sustainability | 41 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network 42 | China’s chemical industry enters new era with sustainability

Conclusion Chemical industry to sustain transition to green model

China is trying to transform its In the long term, growth will investing in new products, seeking powerful industrial model into an depend on the macro direction alternative feedstock, communicating economy driven by sustainability. The Chinese planners carve out for the with all stakeholders and training next decade of transition is likely to country. Economists indicate that supply chain participants to be independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network be difficult as shortage of resources China has entered a ‘later phase of more environment conscious. More and growing environmental pressure industrialization’ and this is the key importantly, the chemical industry is increase the cost of its economic stage where it needs to upgrade the becoming aware of the importance of growth. A rising income gap and loss current industries while developing being transparent and reporting their of cheap-labor cost advantage will strategic emerging ones. The activities in a manner that stands up also begin to hurt China’s industrial chemical industry will play a vital role to high standards of scrutiny. development as it tries to transition in affecting this transition – both as a Chemical companies operating in to the next stage. participant and beneficiary. China agree that they will have to In the next few years, the chemical The government has outlined two deal with complex human resource industry will face several challenges, mega goals – First, cutting carbon issues. Most foreign companies are but there is room for optimism too. emission on an ambitious scale and relying increasingly on local staff to According to a survey conducted promoting clean energy. This means play upper management roles and by KPMG, in April and August 2012 every sector of China’s economy this trend will continue. Companies among chemical industry players and industry will be affected in a surveyed by KPMG agree that in China, the mood was positive. fundamental manner. Second, it will sustainability will be crucial and will Chemical enterprises surveyed by us make more efforts to improve the become an integral part of strategic predict a 10 percent growth for their quality and structure of industrial planning process and key business companies in the next five years, products in the next five years. decisions. The difficulty lies in mainly from the China market. overcoming the knowledge gap as These targets have tremendous most organizations are unable to link Macro-economic factors, however, implications for China’s chemical their business strategies to larger remain a cause for concern. industry. Companies will need to sustainability goals. Companies anticipate three major constantly assess, manage and factors which will influence their format their risk mitigation strategies These hurdles will need to be business plans - performance of so as to remain compliant with worked out. In the coming years, developed economies, upstream regulatory regime changes and China can make a smooth transition supply situation from Middle East other macro economic factors. to a cleaner economy only if and regulatory changes in various Sustainability targets are unleashing chemical companies succeed in countries. Although regulations and new waves of demand for upgraded making sustainability a core business enforcement will get more stringent, material and companies will need practice, deeply embedded in their multinational companies feel they to apply themselves intensely into cost and profit structures. are ahead of the curve and will not product innovation and invest more be adversely affected. For foreign in research and development. enterprises, challenge to growth Sustainability, however, cannot in the next five years will come remain the sole preserve of the from strong domestic players who government, which is why big have cost advantage. Change in companies will need to shoulder government policies and intellectual their share of responsibility. This, property continue to be risk factors. enterprises are doing effectively by China’s chemical industry enters new era with sustainability | 43 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network 44 | China’s chemical industry enters new era with sustainability

KPMG China KPMG Global Chemicals

Norbert Meyring Terry Chu Mike Shannon Partner, China and Asia Pacific Partner in Charge Global Chair, Chemicals Head,Chemicals Industrial Markets KPMG in the US KPMG China KPMG China T: +1 973 912 6312 T: +86 (21) 2212 2707 T: +86 (10) 8508 7017 E: [email protected] E: [email protected] E: [email protected] Paul Harnick independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. PrintedAll rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network Candice Zhang Cheng Chi Global Sector Executive, Chemicals China and Asia Pacific Executive Partner, Transfer Pricing KPMG in the US Chemicals KPMG China T: +1 215 407 1911 T: +86 (21) 2212 4085 T: +86 (21) 2212 3433 E: [email protected] E: [email protected] E: [email protected]

Leah Jin Chris Ho Partner, Advisory Partner, Tax Climate Change & Sustainability KPMG China T: +86-(21) 2212 3633 T: +86 (21) 2212 3406 E: [email protected] E: [email protected]

Miguel Montoya Ning Wright Partner, Advisory Partner, Advisory KPMG China KPMG China T: +86 (21) 2212 3590 T: +86 (21) 2212 3602 E: [email protected] E: [email protected]

Rainbow Wang David Xu Partner, Advisory Partner, Advisory Transaction and Restructuring KPMG China T: +86-(21) 2212 3557 T: +86 (10) 8508 7099 E: [email protected] E: [email protected]

Philip Ng Partner, Advisory Management Consulting T: +86-(10) 8508 7093 E: [email protected] China’s chemical industry enters new era with sustainability | 45 independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Printed All rights reserved. in China. © 2012 KPMG (China) Limited, a wholly foreign Advisory owned enterprise in China and KPMG Huazhen, a Sino-foreign joint venture in China, are member firms of the KPMG network

Acknowledgement

This report was developed by KPMG’s China Chemical team, with contributions from numerous KPMG subject-matter experts. We gratefully acknowledge the following team members who contributed their understanding, insight, experience and administrative support for this report – Chi Zhang, Candice Zhang, Rainbow Wang, Miguel Montoya, Philip Ng, Ning Wright, Limin Tang, Rohan Baker, Nick Lindsey, Paul Harnick, and Suranjana Roy Bhattacharya.

We are also grateful to our interviewees, Mr. Cong Yue Ma from CPCIF, Mr. Bill Zheng from Asiachem, Dr. Lin Liang Qi from AkzoNobel, Dr. Dong Ling Zhen from Dow, Mr. Michael Baum and Ms. Huimin Tzeng from Bayer.

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Publication number: CN-IM12-0001

Publication date: September 2012