China Price Index: From Energy Double Control Policy to Carbon Double Control Policy
25 July 2022 Editor’s note: Contributing writer David Li offers a snapshot of current price trends for key herbicides, fungicides, and insecticides in the Chinese agrochemical market in his monthly China Price Index. This month he provides insight on the current economic development status and sustainability efforts in China and how its impacting the agrochemical industry.
The Annual Central Economic Work Conference was held in Beijing from 8 –10 December, which is an important barometer of China’s future economic development and policy direction. According to the report of People’s Daily, the purpose of the annual meeting is to summarize the economic work in 2021, analyze the current economic situation, and make the plans for economic work in 2022.
For summarizing the current China economic development status, there are three kinds of pressures for China’s future economic growth: the demand contraction, supply shock, and weakening expectation.
In 2021, China’s economic growth was mainly contributed to the strong global demand. In 2022, the global demand was predicted to be a soft landing with uncertain levels of decrease. Future slow investment and consumption was thought to put more pressure on China’s economic growth. Demand contraction is mainly affected by the slow investment and consumption. COVID-19 was one factor to pull down the investment enthusiasm not only for China’s domestic market but also for the global market. So the demand contraction would become a key pressure for China’s future development in the principle of human community with a shared future.
In 2015, China started to pursue sustainable, high-quality growth. Which meant, from my point of view, they implemented efforts to respect nature and take care of the people.
Since 2017, the environmental protection storm hit the China agrochemical supply chain. The illegal output of waste was strictly regulated by the government. Till 2021, most of the key agrochemical companies moved into industry parks. The emission of pollution is fully under control by the Law of Environment Protection. Companies with illegal pollution emissions were phased out.
Such a turning around of a national development trend changed China’s economy development fundamentally. As a result, China society will cherish the entrepreneurs who want to develop the industry and invest in innovation and high-technology manufacturing in the future. Like the European Union and United States, China is investing in more sustainable efforts, which will bring huge benefits to the world’s 1.4 billion people in the East.
Like the possible GM crop adoption in 2022 or 2023, it will provide a new engine for China agriculture growth. The higher income of farmers by GM growing will stimulate the society consumptions accordingly. In 2008, China invested a huge amount in agriculture infrastructures. During a similar economic situation in 2022, agriculture will become a brand new engine. Accordingly, the performance of demand growth will be rising from 2023. So it would be most critical to keep stable, prudent, and effective growth in 2022. As an advantage, people in agribusiness always know that patience is a key capability in long-term management of return of investment (ROI).
Supply shock is the event that suddenly increases or decreases the supply of a commodity or service. This sudden change affects the equilibrium price of the good or service or the economy’s general price level. The sudden increasing of prices could lead to a series of problems. The final result could be stagflation due to a combination of rising prices and falling output. The global buyers and China domestic manufacturers are very familiar with supply shock during the pandemic of COVID-19 and double control impact. From the suspension of production to the shortage of energy, the world is facing the challenge of disruptive supply chain management. There is still much uncertainty on the global effects of COVID-19 due to the new varieties. In 2022, supply shock is still putting pressure on everyone around world, since the resilience of supply chain is very difficult and complicated.
For China’s 2022 economic growth, supply shock needs to be controlled for continuous supply. Global disruptive supply chain, especially for the key basic materials like crude oil and LNG, will impact China’s energy supply and key intermediate manufacturing. High prices of commodities could become stable, which will put pressure on China’s production in the next year.
Different from strong overseas demand, China’s domestic economic circulation became a higher priority. The basic policy will focus on domestic economic circulation and the development of inner-outer dual circulation for economy growth in the next year. Weakening expectation could be coming from the uncertainty of global economic growth in 2022. Even though there was a strong demand of agrochemical in 2021, we must understand that the strong demand could be coming from the psychological anxiety of farmers. The higher safety inventory in distributors and farmers warehouses also pushed the strong demand in 2021.
As for the manufacturer side, unstable business during COVID-19 pushed many manufacturers to find potential growth in segmented markets. Like the agrochemical industry, more companies started to develop domestic market B2B businesses, or tried to establish business in China’s local agriculture market.
In 2022, the global demand is still unpredictable. The fragile balance of the global economy could also be broken.
Moreover, the increasing raw material prices is squeezing the profit margin of key manufacturers.
To face the future of unstable demand, manufacturers are lowering their future expectation on investment for expansion. For agribusiness, the food commodity price is the only foundation of ag-input consumption and farmer’s expectation. The question is how long will the fragile balance last? When FED and central banks start raising interest rates, we wanted to know if the food commodity will stay at the high-priced level? No one can answer it.
To face the three pressures in 2022, China proposed the following solutions to the nation. The solutions will be to continue to strengthen the economic foundation, enhance capability for scientific and technological innovation, adhere to multilateralism, take the initiative to adopt high-standard international economic and trade rules, and promote deep-level reform and high-quality development through high-standards opening up.
In 2022, there is a high probability for China to follow a prudent and flexible monetary policy.
It would be mainly for maintaining adequate liquidity. In order to support the development of the real economy and promote the steady reduction of comprehensive financing costs, the People’s Bank of China (PBOC) decided to lower the required reserve ratio for financial institutions by 0.5% points on Dec. 15, 2021. It was a clear signal to support the basic liquidity for the economic growth.
According to the Central Economic Work Conference, government will guide financial institutions to increase support for the real economy, especially small and micro businesses, scientific and technological innovation, and green development in 2022. For China’s agrochemical industry, the future policy and relevant regulations would be leaning on green manufacturing and advanced technology of synthesis. The high energy consumption manufacturing and high-toxic portfolios will be strictly controlled or phased out in coming years.
On the other hand, the execution of carbon emission peak and carbon neutrality was also mentioned in the conference. One proactive signal was released to the industry. The carbon emission peak and carbon neutrality target cannot be achieved in one day. Comparing to double control impact in September 2021, there would be more flexibility on double control policy in 2022 to minimize the disruption on producers’ ordinary production. Supply shock would be also diminishing in 2022 as well.
Moreover, the conference also mentioned that the energy consumption control plus energy intensity control (the double control) will be transferred to the total carbon emission control plus intensity control (Carbon Double Control) step by step. Such transformation could empower the upgrading of China’s future industry.
We cannot only focus on the energy consumption since it is only one parameter of carbon emission.
The development of innovation and technology of low-carbon emission and low-energy consumption in the whole industry shall be the most important for the achievement of future carbon neutrality target. On the other hand, newly added renewable energy and raw material energy, which is for production (not for fuel or power), are not included in the total energy consumption control. This new policy trend will bring significant benefits to the stable chemical industry development in 2022.
In 2022, all regions and departments of China will take the responsibility for maintaining macroeconomic stability as priority. The future policies made will also be conducive to stable economic growth. It will be the fuel to the engine of future growth for the smooth cycling of national economy. The future innovation shall be mainly progressed by enterprises.
The leading companies in different industries shall be the key role of the future R&D ecosystem. For the basic commodity and material supply, China will focus on resources saving. The recycling of materials, low carbon emission, and low environment impact will be mainly promoted in 2022. Not only for materials, but food security will be also important development of China’s agriculture productivity. From seed to folk, the whole food value chain will be secured. Regarding the China agrochemical industry, there will be more topics to be discussed between leading agrochemical manufacturers.
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