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UNCLAS SECTION 01 OF 02 GUANGZHOU 000276 
 
SENSITIVE 
SIPDIS 
 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LEE 
 
E.O. 12958: N/A 
TAGS: ECON ETRD EINV CH
SUBJECT: ECONOMY TOXIC FOR SOUTH CHINA'S CHEMICAL INDUSTRY 
 
 (U) This document is sensitive but unclassified.  Please protect 
accordingly.  Not for release outside U.S. government channels.  Not 
for internet publication. 
 
¶1. (U) SUMMARY: It doesn't matter too much where you fall in the 
supply chain - upstream manufacturers in the Pearl River Delta (PRD) 
are suffering the same impact from the global economic downturn as 
their downstream customers.   The chemical industry in South China 
has been hit hard with orders from the U.S. and Europe falling 
sharply during the fall of 2008.  Domestic demand, however, has 
remained relatively steady, leading many export-oriented firms to 
shift focus to the local market.  Many firms have seen possible 
signs of recovery in recent months, and their optimism about the 
future may bode well for the PRD's manufacturing industry as a 
whole. END SUMMARY. 
 
Bulging Warehouses 
------------------- 
 
¶2. (SBU) The warehouse at the Sartomer Chemical plant in Nansha 
clearly shows effects of the economic downturn.  The massive space, 
roughly the size of two airplane hangars is stocked floor to ceiling 
with drums of chemical resins ready for shipment to customers in the 
United States.  Those orders, however, have long since been 
cancelled.  Sartomer saw a dramatic drop in U.S. orders beginning in 
November of last year and leading to a 1,000 ton surplus.  "We never 
thought that we'd fill it," Sartomer Chemicals Operations Director 
Phil Jackson said of the warehouse.   Sartomer manufactures polymers 
and oligomers for use in inks, paints, CDs, and many construction 
related applications.  The company's largest customers are 
construction material producers and printing shops.  U.S. demand was 
propped up through November by the printing industries need for inks 
to make campaign signs, according to Jackson, but fell abruptly 
during the final weeks of 2008.  In China, the company depends 
heavily on the construction industry.  While sales within China are 
still robust, the company is waiting for an indication that 
international demand will pick back up. 
 
¶3. (SBU) Sartomer's experience is consistent with what other 
chemical makers in the PRD have told us.  The South China's chemical 
industry was hit hard by the economic downturn.  Many factories 
showed record sales during 2008, but demand collapsed during the 
fall as orders from overseas customers plummeted.  Domestic demand 
has remained relatively strong, insulating companies that produce 
primarily for the domestic Chinese market.  But companies dependent 
on demand from the U.S. and Europe have been severely affected, many 
enduring the worst stretch in their respective histories. 
 
¶4. (SBU) The chemical industry's exhibition hall at this year's 
Canton fair was lined with about the same number of booths as in 
years past.  Chemical company representatives passed out glossy 
brochures to anyone who happened by, but companies expressed 
frustration over the lack of customers.  Stephen Zhao of Sundia 
Chemical Industry Limited complained that attendance at the fair was 
significantly down, and a nearby vendor worried that as of 4:00 pm 
on the opening day he had yet to make a single sale. 
 
Eyeing the Local Market 
----------------------- 
 
¶5. (SBU) Several export-oriented companies have reported re-thinking 
their business strategy and adopting a new focus on domestic demand 
in response to the crisis.  Last year, both Sartomer and Sabic were 
selling over 70% of their output overseas.  This year, Sartomer 
predicts that it will sell over 90% of its total production on the 
Chinese market.  Sartomer has seen its largest sales growth in the 
domestic construction supplies industry, which according to Jackson 
has continued to increase orders despite the downturn.  Sabic's 
Maggie Wang said that her company hoped Chinese sales will soon 
account for 75% of its total business.  Sabic is a high-end 
manufacturer whose plastics are used in a wide range of products 
including electronics, automobiles, medical supplies, and sporting 
goods.  Their major customers include Microsoft, Canon, Nokia, Dell, 
GM and Toyota, but their new focus on the domestic market has led 
them to increase sales to customers within China including 
rechargeable battery producer BYD, Huawei and Lenovo.  Wang 
predicted that the firm's sales to Chinese customers would remain 
strong in part due to growing demand within China for small laptops, 
which require high-end plastics. 
 
 
GUANGZHOU 00000276  002 OF 002 
 
 
Signs of Recovery? 
------------------ 
 
¶6. (SBU) While international orders for the PRD's chemical makers 
remain well below the levels they reached in mid 2008, some 
companies have reported signs of recovery.  Many have seen orders 
begin to increase slowly in the first few months of 2009 and a few 
have already returned to their pre-downturn sales levels.  According 
to Maggie Wang, Microsoft, which uses plastics produced in South 
China in many of its consumer electronics, has predicted that by mid 
2009 their orders for Sabic's plastics will return to their 
pre-downturn levels.  Many chemical manufacturers still express a 
great deal of confidence in the industry's future in South China. 
Exhibitors at the Canton Fair expressed optimism despite 
disappointing sales at the trade event.  Some firms have continued 
to show some growth even during the economic crisis.  Firms such as 
Sabic, LG, and Guangdong Chemical have all moved forward with large 
expansion projects in the region despite lagging sales. 
 
¶7. (SBU) Anticipating a recovery in orders, some companies are also 
bracing themselves for a lack of raw materials.  Sabic CEO Mohamed 
¶H. Al-Mady has warned that the company may face a serious shortage 
during the second half of this year.  The downturn has caused a 
major shakeup in the market for the industry's raw materials.  Ketty 
Zhu of Guangzhou Ganglian Chemical, a producer of chemicals for use 
in health and beauty products, says that many low-end producers were 
driven out of business in recent months.  Zhu worries that if demand 
picks up again, competition for raw materials may push prices to 
much higher levels. 
 
Frustrated by Regulatory Environment 
------------------------------------ 
 
¶8. (SBU) Even as they remain focused on the challenges posed by the 
economic downturn, foreign-owned chemical companies in Guangdong 
express frustration with the province's complex and non-transparent 
regulatory environment.  Phil Jackson of Sartomer recently learned 
firsthand how difficult working with the Chinese government can be. 
The company's new plant opened last spring, but only after years of 
struggling to obtain all the proper permits.  Jackson expressed 
frustration at the overly complex process that included many 
different rounds of inspection and lacked transparency.  Among the 
requirements that delayed the issuance of the permits were the 
installation of a complex fire-fighting system, the requirement for 
a greater distance between buildings than would have been called for 
in the U.S. or Europe, and a $20,000 piece of equipment to clean the 
emissions from the plant's cafeteria. Several companies complained 
that regulations often change so fast that they are unable to keep 
up with them, a criticism we heard frequently from U.S. firms across 
a broad range of industries. 
 
GOLDBERG