European Chemical Machinery Industry Moves to China
In the past three years, the Covid-19 epidemic, supply chain disorder, and energy crisis have been brought three times supply impacts to the global economy, specailly European chemical engineering and machinery manufacturing industry. In contrast, China not only has a complete industrial chain system, a huge domestic demand market, and gradually accumulated technical capabilities, but also has energy cost and stability advantages under the “two systems of crude oil supply”. The strength of China manufacturing has been reassessed.
Table of Contents
The Impact of Russian-Ukrainian Conflicts to European Manufacturing Industry
The Russian-Ukrainian war has divided the global oil pricing system, and European manufacturing, especially high-energy-consuming industries, will be transferred caused by cost impacts.
The parallel pricing system in the oil market has had a significant impact on energy costs across countries. In the second quarter, the average import price of crude oil in China was US$107.1/barrel, 5.6% lower than the European import price; the average price of natural gas was around USD1,000/ton, 33.2% lower than the German gas price. In August, the average wholesale electricity price in Germany rose to 0.5 EUR (0.9805, -0.0011, -0.11%) per kilowatt-hour, an increase of 4.6 times over the same period last year. The single-ton cost difference between aluminum and synthetic ammonia is US$188, US$5,110, and US$3,280.
The Impact of European Energe Crisis to Chemical Machinery Industry
On July 20, the European Commission announced the “European Natural Gas Demand Reduction Plan”, requiring member states to reduce natural gas consumption by at least 15% from August this year to March next year. If there is a serious energy shortage, the government will reduce the gas supply to industry, and give priority to important departments such as families and hospitals. Industrial gas consumption accounts for 38% of the EU’s total gas demand. To ensure that EU citizens can safely pass the winter, it means that industrial gas consumption needs to be reduced by about 40% to meet the goal of “reducing total gas consumption demand by 15%”.
According to the ranking of the gas consumption and energy consumption ratio of the production unit product, the chemical machinery industry with high gas consumption and energy consumption is the first to bear the impact. The chemical machinery industry’s natural gas consumption accounted for 9% of the EU’s total natural gas consumption in 2019, accounting for 24% of industrial consumption; energy consumption accounted for 5% of the EU’s total energy consumption, accounting for 21% of industrial consumption. At the end of July, chemical giant BASF said at its performance conference that natural gas supply constraints may bring about the risk of production stoppages in major European production bases, and consider increasing the capacity utilization rate of production bases outside Europe to partially compensate for the loss of production capacity in Europe. CF Fertilizers company, the world’s largest producer of synthetic ammonia, has closed its ammonia and fertilizer plants in Ince, UK.
Followed by non-metallic minerals, steel, transportation equipment, machinery, non-ferrous metals, etc. ArcelorMittal, Europe’s largest steelmaker, has opted to shut down its electric arc furnaces on an hourly basis due to high energy prices, and has shut down medium-sized steel mills in France and Germany. Nyrstar, one of the world’s largest zinc smelters plant, closed its Dutch zinc smelter in early September. Alcoa cut its electrolytic aluminum plant in Norway by a third at the end of August; global aluminum giant Norwegian Hydro will close an aluminum smelter in Slovakia at the end of September; according to Shanghai Steel Federation statistics, from October 2021 to In August 2022, European electrolytic aluminum production capacity has been reduced by 1.04 million tons per year.
Europe needs to import a large amount of energy-intensive goods to meet its own production and consumption needs. As a result, the EU’s trade surplus is rapidly turning into a deficit. In the second quarter, the EU’s trade balance has fallen to EUR -123.1 billion, and the German trade balance has dropped to EUR 9.8 billion, EUR32.9 billion less than the same period last year, which is the lowest level in 20 years.
Looking at the structure of changes in Germany’s trade balance in the second quarter, except for energy products (-17.41 billion US dollars), the products with the largest changes were (1) organic chemicals (-14.38 billion US dollars), followed by (2) electrical equipment, machinery Equipment (-$5 billion US dollars) and (3) metal (aluminum, copper, steel) products, plastic products, inorganic chemicals, etc. (-$1 billion US dollars).
Germany’s largest trade deficit country in the second quarter was China.
In the second quarter, Germany’s trade deficit with China increased by 245% year-on-year, an increase of US$17.86 billion over the same period last year, accounting for 44% of the change in Germany’s overall trade balance in the second quarter.
Top 4 Industries of German Chemical Machinery Moves to China
From the structure changing of the China-German trade balance in the second quarter, we can see which Chinese products are benefiting from the transfer of European manufacturing shares under the “two oil systems”.
There are four main categories of products with the largest transfer from Germany to China:
Germany Organic Chemistry Industry
The first category is organic chemistry, of which the Q2 trade balance of lactams decreased by US$11.13 billion compared with the same period last year, which almost dominated all changes. Other products with relatively large volumes and large changes include melamine, citric acid, methionine, and acetic acid. esters, etc. Organic chemicals are downstream of the chemical industry. Affected by the shutdown of synthetic chemicals, the supply of fine chemicals is limited. According to Tiantian Chemical.com, the organic chemicals with a large global production capacity (over 25%) in Europe mainly include additives such as vitamins and methionine, and polymers such as TDI, MDI, caprolactam.
Electrical Equipment Manufactering industry
The second category is electrical equipment. The products with large changes in the trade balance include batteries, semiconductor devices, integrated circuits, and transformers. Electrical equipment is a dominant industry in Germany. Production is affected by energy costs and supply chain stability. The key products are resistors, capacitors, condensers, inductors, passive and hybrid microcircuits, and electromechanical components (connectors, switches), as well as semiconductors and printed circuit boards.
Large Machinery and Equipment Industry
The third category is machinery and equipment. The products with large changes in the trade balance include valve bearings, engines, machine tools, agricultural machinery, and bulldozers. The machinery is the downstream of steel and non-ferrous metals, and the risk of production constraints is high. The products with a large share of Germany are more likely to see a significant transferring in orders in the future, mainly including (1) general equipment and components, such as drive technology machinery, compressed air and vacuum technical machinery, precision instruments, processing machinery, hydraulic pumps, hydraulic equipment, measuring machinery, industrial furnaces and metallurgical equipment, valve fittings, machine tools; (2) special equipment, such as material handling machinery, agricultural machinery, food and packaging machinery, plastic and Rubber machinery, printing machinery and paper technology equipment, textile machinery, wood processing machinery, construction machinery, cleaning machinery and equipment.
German Automobiles and Auto Part Industry
The fourth category is automobiles and auto parts. Gearboxes and body parts are the products with the largest changes in the trade balance. Other products with larger changes include not only brakes, suspension systems, shock absorbers, drive axles and other auto parts, but also Some types of vehicles. According to the statistics of the Association of Automobile Manufacturers, in the first seven months of this year, China exported 1.507 million vehicles, a year-on-year increase of 52.3%; pure electric vehicles exported 219,000 vehicles, a year-on-year increase of 146.1%.
In addition to the above four categories of industries, the products that Germany has largely transferred to China also include steel and steel products, aluminum and its products, plastics and their products, clothing and shoes and other high-energy-consuming categories with low added value.
The Current Situation of Chinese Manufacturing Industry
Not only the EU, but also the energy-intensive industries in Japan and South Korea are also affected by the “two oil systems”. Japan has had a trade deficit for consecutive 12 months. In July, the export volume of chemical products, non-metallic mineral products, and machinery and equipment fell by 10%, 5.9% and 3.1%, respectively, which was weaker than the overall export performance in the past four months. South Korea recorded a continuous trade deficit from April to August this year, the first time since 2008. The output growth rate of chemical products, mechanical equipment, and electrical equipment in the second quarter fell by 5.1pct, 3.4pct, and 2.7pct, respectively, compared with the first quarter. The magnitude is higher than the overall level of the manufacturing industry.
In the past three years, the covid-19 epidemic, supply chain disorder, and energy crisis have brought three supply shocks to the global economy. In contrast, China not only has a complete industrial chain system, a huge domestic demand market, and gradually accumulated technical capabilities, but also has the advantages of energy cost and stability under the “two oil systems”, and exports have increased in the past three years. It is no accident that the speed continues to exceed expectations.
In the current world environment, insufficient supply is the main contradiction, and the global comparative advantage of China’s manufacturing industry has to be reassessed. Especially chemicals (organic chemicals such as lactam, melamine, citric acid, methionine, acetate, TDI, MDI, vitamins, etc.), automobiles (vehicles, transmissions, brakes, suspension systems, body parts), machinery (valves) The four major industries of bearings, engines, machine tools) and electrical equipment (batteries, transformers) are reducing technological differences while accumulating supply advantages, and the trend of increasing share is expected to continue.
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