Green push set to spur mainland price rises

PUBLISHED : Monday, 10 April, 2006, 12:00am
UPDATED : Monday, 10 April, 2006, 12:00am


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Cost of meeting new environmental rules likely to be passed on to customers

A warning has been sounded that prices for clothes, household goods and other plastic products could rise across the mainland as the petrochemicals sector seeks to comply with new stringent environmental laws.

Scores of new projects, including a British Petroleum chemical plant in Zhuhai , face an uncertain future after the State Environmental Protection Agency (Sepa) last week outlined the results of a two-month nationwide audit of 127 chemical producers.

The high cost of complying with environmental standards would inevitably be passed on to consumers, analysts said. Record oil prices, combined with widespread overinvestment in China's petrochemicals sector, have squeezed profit margins among midstream producers for the past few years.

However, in recent months, demand appears to have been catching up with supply, allowing some petrochemical companies to stabilise their prices, which are allowed to move with market demand instead of being set by the government.

'On a company level, the crackdown would inevitably increase operating costs because the petrochemicals sector would have to improve or upgrade facilities to maintain safe operating environments,' DBS Vickers analyst Gideon Lo said.

Analysts said the crackdown by Sepa, which has effectively frozen new petrochemical projects, would further limit capacity. As a result, petrochemical firms may start charging more for the raw materials they sell to manufacturers of everything from toys to textiles. 'You are starting to see pricing power come back,' said Jonathan Anderson, chief Asia economist at investment bank UBS. 'And one of the things driving that, of course, is the removal of excess capacity from the system.'

The latest move by Sepa follows the recent spate of high-profile chemical spills and industrial accidents on the mainland, and is expected to signal a more stringent approval process for new industrial projects.

In addition to rejecting or suspending approval for 44 projects across a range of heavy industries, the regulator published a 'name-and-shame' list of 20 projects that fell short of environmental standards.

Among these was a planned $3.1 billion extension to a Zhuhai chemical plant 85 per cent owned by BP. The company's purified terephthalic acid (PTA) plant was cited for insufficient co-ordination with local officials on its emergency response plans. The mainland textiles industry consumes massive quantities of PTA, a key component in the production of polyester thread. The proposed extension would increase BP Zhuhai's annual PTA production capacity from 350,000 tonnes to 900,000 tonnes.

BP first announced details of the expansion in September but has yet to receive approval from the National Development and Reform Commission, which oversees mainland industrial policy.

Beijing-based BP China spokesman Michael Zhao said the company still expected to receive approval from the commission.