Key Events in the Adipic Acid Market in 2008

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2008 has passed in the blink of an eye, and a brand new 2009 is about to arrive. Looking back at the events of this year, 2008 was undoubtedly a year of tremendous upheaval in China. From the snow disasters at the beginning of the year to the Wenchuan earthquake on May 12th, from the Beijing Olympics to the central bank’s first reduction in loan interest rates in September, from the financial crisis that affected the whole world in the second half of the year to the Central Economic Work Conference at the end of the year, all sectors of Chinese society were impacted in a severe manner like never before. Of course, the polyurethane industry is even more deeply involved in this. Here we provide an overview of the market situation for adipic acid this year. Compared to 2006 and 2007, the adipic acid market had little to offer in 2008, with negative factors consistently dominating the market. Keywords: New plant commissioning, tightening monetary policy, sharp decline in imports, price adjustment for slurries, increased export tax rebates, anti-dumping investigations, financial crisis, 6,500 yuan/ton. 1. Shandong Bohui’s 75,000-ton/year adipic acid plant was commissioned as scheduled, marking the beginning of an increase in domestic production capacity in this sector. Event recap: Shandong Bohui’s 75,000-ton/year adipic acid plant began operations in January this year, as planned. The designed production capacity of this plant is 150,000 tons, divided into two lines; the initial operation of the plant has a capacity of 75,000 tons. The manufacturer originally planned to launch the second production line in May. However, since the demand for adipic acid has never really surged, the second production line was not put into operation this year. Its 75,000-ton per line plant is relatively stable; two maintenance campaigns are carried out throughout the year, at the end of April and the beginning of August, with shutdown times of about two weeks and around ten days respectively. Zhuochuang’s view: After the turbulent changes in the market during 2006 and 2007, many in the industry saw the huge profits associated with adipic acid products, and thus began to launch construction projects for their production. However, after 2006, adipic acid lost its prominence, and since last year it has gradually entered a period of market adjustment. The increase in 2007 was also largely due to a shortage in the pure MDI market for related raw material products, with a peak occurring in the first half of the year. However, since 2008, adipic acid has entered a period of decline. However, the sluggish market conditions have not slowed down the expansion efforts of adipic acid manufacturers. The newly added devices stand out particularly this year. 2. Shandong Hongye’s 140,000-ton/year adipic acid plant began operations as scheduled, but production remained unstable amid a weak market trend. Event recap: At 7:56 on June 19 this year, Shandong Hongye’s plant with an annual production capacity of 140,000 tons of adipic acid started operating, with product output expected by the end of the month. However, after less than a month of operation, it was shut down in late July due to device issues. It was not restarted until late October, but due to the ongoing weak market conditions, the operation of this facility has been unstable, with frequent starts and stops, resulting in a limited supply of goods in the market. Moreover, its main supply area is concentrated in Fujian in South China, so its impact on the market is limited and its reach is not wide. Zhuochuang’s view: Following Shandong Bohui, Shandong Hongye’s adipic acid production facility has been put into operation again. Although the impact of these developments on the market has been limited since the second half of this year, there is potential for an increase in the volume of goods available in the future. Therefore, the dominant position of domestic products in the future domestic market will become even more secure. In the later stage, there is still a new facility for producing 75,000 tons of adipic acid in Xin-Dushanzi that is awaiting commissioning. This year, the issues are mainly due to design or equipment defects. Moreover, Xinjiang is in winter during the second half of the year, and starting operations in such cold weather increases the risks; there are also more uncertainties that arise during operation. The testing is quite difficult, so it will be postponed until early next year. The initial estimate is that it will go into operation in April or May. By 2009, the total domestic production capacity for adipic acid is expected to reach 560,000 tons per year. The domestic self-sufficiency rate will increase significantly, essentially freeing itself from dependence on imported supplies. 3. In the first half of the year, **tight monetary conditions led to difficulties in the chemical trade. Recap: The Central Economic Work Conference, which concluded on December 5, 2007, revealed important information: the prudent monetary policy that had been in place for a decade was set to be phased out, to be replaced by a tighter monetary policy. The Central Economic Work Conference explicitly stated in its plans for economic work in 2008 that a prudent fiscal policy and a tight monetary policy should be implemented. But by the end of this year, looking back at the economic situation throughout the year, 2008 was a year in which China’s monetary policy faced significant controversy. From five increases in the reserve requirement ratio in the first half of the year to five cuts in interest rates in the second half, these dramatic changes have put the central bank, as a policy-maker, at the center of controversy. Zhuochuang’s view: In the first half of 2008, international crude oil prices soared. **Stricter macroeconomic controls were implemented, monetary policy was tightened, interest rates rose, and prices of oil, transportation services, coal, and electricity all increased. In particular, the prices of raw materials used in the petrochemical industry climbed sharply, hitting the entire chemical industry hard. The tight monetary policies made it more difficult to obtain discounts or interest subsidies for chemical trade transactions, including those involving adipic acid. In the East China market, it has become common practice to accept partial or full payment in the form of acceptance bills for trades of adipic acid. However, the 8% interest subsidy policy introduced by the central bank at the end of the year further dampened an already declining market atmosphere. As enterprises operating in the downstream sector of adipic acid, manufacturers of paste and sole compounds are also facing increasing difficulties in obtaining loans, which leads to rising funding costs. The impact on these industries is particularly severe; bank lending practices are shifting from inter-company guarantees to collateral-based mortgages, and credit limits are being reduced further. Coupled with the pressures arising from the economic situation at home and abroad, capital flow between companies has slowed down, and many enterprises are experiencing difficulties in managing their cash flows. Under these circumstances, the difficulties faced by downstream enterprises naturally affect the conditions in the relevant raw material markets; the peak season fails to be prosperous, resulting in weak momentum in the adipic acid market. 4. Introduction of new labor laws impacts labor-intensive industries in the adipic acid sector. Recap: Starting from January 1, China officially implemented the new Labor Contract Law. The introduction of this new law has directly increased the costs associated with human resource management for enterprises, having a profound impact on such management as well as on the overall operational management of companies. Rising labor costs undoubtedly place enormous pressure on the labor-intensive small and medium-sized enterprises in the shoe industry. Under the new laws, a worker (an experienced one) is entitled to at least over 2,000 yuan in wages. Employers must also deal with risks such as high employee turnover, issues related to professional ethics, and rising minimum wages. Amidst shortages of labor, electricity, and oil, anti-dumping measures, the appreciation of the RMB, increasing labor costs, rising prices of raw materials, as well as adjustments to export tax rebates and processing trade policies, the new labor laws only add to these difficulties, becoming the final straw that crushes small and medium-sized shoe manufacturing enterprises. Zhuochuang’s view: As the main application area for adipic acid, which is used in sole formulations, the newly introduced labor laws have not only put pressure on labor and management relations but also affected the fate and future of related industries. The new Labor Contract Law has become the final straw that has crushed small and medium-sized shoe manufacturing enterprises. According to experts, over the past year and this year, tens of thousands of export-oriented small and medium-sized enterprises in China’s southeast coastal areas have temporarily ceased operations, reduced their production scale, or even closed down, with a large number of them being in the textile and footwear industries. One of the reasons is that the introduction of new labor laws has increased factory production costs. In addition, the economic recession has led to obstacles in exports, **tight monetary policies, and so on are also contributing factors. Turning to the adipic acid raw material market, the poor performance of downstream enterprises has directly led to a downturn in this raw material market. 5. Downstream manufacturers of paste and sole raw materials have suffered heavy losses, affecting the upstream raw material market. Event recap: Since the beginning of this year, factors such as the appreciation of the RMB, rising raw material costs, export issues, and the impact of the financial crisis have dealt a severe blow to the industries dealing with paste and sole raw materials. The China Textile Industry Association predicts that one-third of the small and medium-sized enterprises in China that are oriented toward exports will go bankrupt in 2008; companies in the synthetic leather and shoe manufacturing sectors in East China are among those affected, with a particularly noticeable decline in the number of shoe manufacturing businesses closing down. Looking at the price trends of slurry and sole raw materials in the market, both saw a downward trend in the second half of the year. (In June and July, the pulp market experienced fluctuations in prices. This was mainly due to a significant increase in the price of the key raw material DMF in June; faced with cost pressures, pulp manufacturers were forced to raise their prices. However, the overall market situation remained weak. In July, the price of DMF stayed relatively stable, which reduced the pressure on pulp manufacturers and led to a decline in prices.) ) Zhuochuang’s view: Pastes and sole resins are the main application areas for adipic acid in China, and the prosperity or decline of these industries directly determines whether the adipic acid market is in an upward or downward trend. The difficulties faced by the downstream industry this year include the following: First, tight monetary conditions and the continuous appreciation of the RMB have led to a significant decline in export orders for China’s luggage, footwear, and apparel products. As a result, manufacturers of resins and shoe sole raw materials have been forced to reduce their production, which in turn has directly reduced demand in the market for various polyurethane raw materials such as DMF, adipic acid, BDO, and pure MDI products. Therefore, as the industries dependent on exports suffer from a downturn, domestic adipic acid prices have continued to fall ； II. In the second half of the year, the financial crisis spread across the world, and China’s polyurethane industry chain could not remain unaffected. Companies in the synthetic leather and artificial leather industry, as well as those in the footwear sector, located in Zhejiang and Fujian – key regions for these industries – have suffered severe impacts from reduced exports. In particular, in the Zhejiang area of East China, demand for resins and raw materials used for shoe soles has dropped significantly, and the upstream adipic acid market has also been affected and declined as a result. III. Export tax rebates for the third phase. Since last July, **the export tax rebate for shoes has been reduced by 2 percentage points. This significant adjustment has increased the operational pressures on shoe manufacturers, severely impacting the shoe and apparel industries; it has also had a negative effect on related sectors such as raw materials for soles, adhesives, and spandex. To mitigate the impact of unfavorable domestic and international conditions on China’s exports, the export tax rebate rates have been adjusted **three times since the beginning of this year**. Starting from August 1 this year, China has raised the export tax rebate rate for certain textile and clothing products from 11% to 13%. Subsequently, on November 1, our country appropriately increased the export tax rebate rates for 3,486 labor-intensive, high-tech, and high-value-added goods, accounting for approximately 25.8% of the total number of goods listed in this year’s customs tariff. Among them are goods such as textiles, clothing, and toys. On December 1, the export tax rebate rates for certain labor-intensive products, mechanical and electrical products, and other products that are particularly affected were **increased again. Among them, the tax rebate rate for goods such as luggage and shoes and hats has been raised from 11% to 13%. It can be seen that **the intention to include footwear in the scope of tax rebate adjustments is obvious, and the benefits for shoe manufacturers have already begun to show effects, especially for those companies that are on the verge of breaking even – the impact of tax rebates is particularly significant for them. At the same time, we note that shoes were not included in the second adjustment this year, which represents a significant blow to the shoe manufacturing industry. This is largely because the export performance of China’s shoe industry during July, August, and September this year was not greatly affected by the financial crisis. This re-inclusion in the adjustment scope also serves as a boost for shoe manufacturers. However, whether the domestic shoe industry can overcome the current difficulties depends on the individual conditions of each company. Furthermore, the increase this time is limited and falls far short of expectations. Coupled with the complex economic situation both internationally and domestically, it is difficult to predict the impact of policies on its upstream markets; as a result, the positive effect on the raw material market is also very limited. 6. Rhodia Polyamides in France raised the price of adipic acid starting from June 1. Recap: Rhodia Polyamides in France increased the price of adipic acid as of June 1, by 100 euros per ton in the European region, and by 150 dollars per ton in the United States and Asia. The main reason for the price increase is the rise in benzene prices. The price increase for adipic acid products will offset the recent rise in the costs of benzene and other key raw materials. The contract price for benzene in June reached 858 euros per ton, up by 97 euros per ton from May. Zhuochuang’s view: In the first half of 2008, costs related to energy, transportation, and raw materials continued to rise, putting significant pressure on the profitability of chemical manufacturers. Under no other choice, global chemical giants have resorted to the two main tactics of raising prices and laying off employees in order to cope with the current severe market challenges. For those chemical products with strong market demand and for which it is relatively easy to pass on costs to consumers, manufacturers have opted for the easy route of raising prices. However, for chemical products facing an oversupply in the market and weak demand, manufacturers are unable to pass on production costs to consumers, forcing them to shut down facilities and lay off employees. For adipic acid products, the domestic market remained relatively stable in the first half of the year, with little decline, and in June the market saw a much-needed slight rebound. The upward adjustment in overseas prices also helped drive the domestic market to some extent. However, this good fortune did not last long; weak demand during the traditional off-season caused adipic acid prices to start falling. The strength in foreign markets is having a diminishing positive impact on the domestic market. 7. Imports of adipic acid declined significantly in 2008, and imported supplies lost their dominant position. Review of the events: According to the import statistics for adipic acid released by the customs, imports of this substance from January to November 2008 were 41% lower than in the same period of 2007. Zhuochuang’s view: By looking at the comparison charts of monthly imports and average prices of adipic acid in 2007 and 2008, it can be seen that the annual import volume showed a gradual downward trend. The decline in imports in 2008 was undoubtedly influenced by the rapid expansion of domestic adipic acid production capacity. Theoretically, a decrease in import volumes should be good news for the domestic market. However, due to an ample supply of domestically produced goods, demand from downstream industries has not increased accordingly. As a result, the adipic acid market has been in a state of oversupply this year, with prices continuing to fall. 8. The correlation between international crude oil (crude benzene) prices and adipic acid is increasing. Event recap: Starting in October of this year, domestic market prices for adipic acid began to drop sharply, with negotiation prices continuing to fall as well; Liaohe Chemical also reduced its listed prices for two consecutive months. The price of adipic acid dropped from 12,500–13,000 yuan per ton at the beginning of October to 7,500 yuan per ton by the end of November. Comparing it with the trend of the raw material, pure benzene, it is easy to see that the trend of adipic acid is largely similar to that of pure benzene. Reduced cost pressures have continued to widen the downward margin for adipic acid. Zhuochuang’s view: In China, aside from Shandong Bohui which uses crude benzene as a raw material, the other two manufacturers employ the nitric acid oxidation method that relies on refined benzene as a raw material; therefore, the price of refined benzene in China has a significant impact on the production costs of adipic acid. Foreign companies also primarily use benzene as a raw material to produce adipic acid; therefore, the price of crude oil (petroleum benzene) in the international market has a significant impact on the production costs and selling prices of adipic acid worldwide. This, in turn, becomes one of the main factors affecting the market price of adipic acid in China as well. In 2008, crude oil prices experienced sharp fluctuations. After exceeding $145 per barrel in the first half of the year, crude oil prices plummeted to the current level of $39 per barrel; raw material costs, which had risen sharply in the first half, dropped significantly in the second half. Affected by the continuous decline in crude oil prices, pure benzene, which is an upstream material for adipic acid, also experienced a trend of first rising and then falling. With falling costs, there is even more room for a decline in the price of adipic acid, which has led to a continuous drop in domestic market prices; meanwhile, prices in the US dollar-based market negotiations have also fallen accordingly. 9. Anti-dumping investigation into adipic acid: muted market reaction. Background: On October 8, 2008, the Ministry of Commerce of the People’s Republic of China officially received an anti-dumping investigation request submitted by the Liaoyang Petrochemical Branch of China National Petroleum and Natural Gas Corporation on behalf of China’s adipic acid industry; the applicant requested an anti-dumping investigation into imported adipic acid originating from South Korea, the European Union, and the United States. The period under investigation for the dumping determination in this investigation is from July 1, 2007, to June 30, 2008, while the period for investigating industrial damage is from January 1, 2005, to June 30, 2008. This survey began on November 10, 2008, and was supposed to be completed by November 10, 2009; under special circumstances, the deadline could be extended to May 10, 2010. Zhuochuang’s view: On November 10, the Ministry of Commerce officially launched an anti-dumping investigation into imported adipic acid originating from South Korea, the EU, and the United States, as submitted by CNPC Liaoning Chemicals Branch. Following the release of this news, the market reacted indifferently. Based on this period of investigation, the prices of domestically produced goods and imported goods were not very different during this time ； Moreover, since April of this year, the volume of imported goods entering the domestic market has decreased significantly; at that time, the main supply of imported goods in the market consisted largely of inventory accumulated from previous periods. As a result, the market generally believes that this development has little impact on the market, and there are doubts regarding the final establishment of anti-dumping measures. 10. Export tax rebates for adipic acid increased; domestic exports are expected to rise. Recap: On November 17, the Ministry of Finance issued a notice announcing the range of goods and the corresponding tax rates for which export tax rebates were increased for the third time this year. These include 3,770 different goods, such as certain labor-intensive products, mechanical and electrical products, and other items. Among them, the tax rate for AA, namely adipate acids and esters (2917120000), has been raised from 5% to 9%. The adjustment to the tax rebate rate took effect on December 1, 2008. Zhuochuang’s view: The inclusion of adipic acid in the scope of this adjustment to export tax rebates is aimed at stimulating exports. Due to low exports of adipic acid and rapid expansion of domestic production capacity, some domestic suppliers are beginning to consider exporting it, and China’s adipic acid industry will ultimately develop into an export-oriented one. 11. Domestic price of adipic acid drops to lowest level since 2000. Event recap: In early December 2008, the lowest negotiated price in China’s East China adipic acid market was 6,500 yuan per ton, the lowest level since 2000. Throughout 2008, the market showed a consistent downward trend. Apart from slight pullbacks in March and June, adipic acid has generally shown a downward trend, with the pace of decline accelerating starting in October and continuing until the end of the year. Zhuochuang’s view: Analysis shows that the main reason for the accelerating decline is the continuous drop in the price of pure benzene, which has led to a significant increase in the cost of adipic acid. The relationship between pure benzene and adipic acid has become increasingly evident, putting pressure on adipic acid prices to fall further. Furthermore, as cost pressures eased for foreign suppliers, the quotes for adipic acid dropped significantly, further removing support from the domestic market and leading to a sharp drop in prices.