Energy & Resources, Talking Point

Chemical reaction

A megamerger in China sees the new firm dwarf  Dow, DuPont and BASF


Sinochem has just absorbed rival state-owned enterprise ChemChina in a massive M&A deal

Before media firms began compiling China rich lists and billionaire rankings, the wealthiest Chinese man was probably Wang Yung-ching from Taiwan.

Wang founded Formosa Plastics in 1954. Long before plastics earned its reputation as one of the worst polluters of our oceans, his PVC resin producer made up much of the industrial backbone of Taiwan. Wang emerged as a godfather to a later generation of businessmen. Acknowledging him as a mentor, Foxconn’s Terry Gou kowtowed three times to Wang’s photo at his funeral in 2008.

In the 1990s Wang was also one of the initial industrialist tycoons from the island to invest in mainland China. Tsinghua University even published a biography about him in 2007, looking at how he pioneered many of the innovations in the petrochemical industry. Li Rongrong, the director of Sasac, a powerful regulator that oversees the performance of China’s biggest state-owned enterprises (SOEs), made it an essential read for senior cadres at oil and chemical firms under Sasac’s oversight, such as Sinopec. Li also organised cross-Strait seminars to help SOE bosses learn from Formosa Plastics history as a truly competitive global enterprise.

Under Sasac’s tutelage, the Chinese government has just created the world’s biggest petrochemicals firm by asset size.

Another hugely-respected figure from the industry has been tasked with leading it: Ning Gaoning. What does that denote for the petrochemicals sector, especially as China charts a course towards a carbon-neutral future?

Step forward China’s new petrochemical giant

The merger between Sasac’s two petrochemicals heavyweights Sinochem and ChemChina was officially completed earlier this month. The new entity is called Sinochem Holdings. The combination of the refining and chemicals giants creates a new company – with more than 220,000 staff – that’s “the world’s biggest petrochemical conglomerate”, state broadcaster CCTV said last week. Its revenues would have topped Rmb1 trillion ($155.37 billion) last year, with total assets of more than Rmb1.4 trillion.

Sinochem Holdings now has 16 listed firms under its control. If it went public itself (and assuming a price-to-asset ratio of 0.7 times, i.e. similar to global petrochemical giants such as DuPont and Dow) the Chinese firm would boast a market capitalisation of Rmb980 billion. That is roughly the combined value of DuPont and Dow, plus Germany’s BASF.

What is the rationale behind the merger?

With R&D centres and production bases in 150 countries, the new firm will operate across a wide array of sectors. The basics of the deal bring together Sinochem – an integrated operator in oil and chemicals, with a further focus on seeds, agrochemicals and fertilisers – with ChemChina, which operates in sectors covering new materials and specialty chemicals, agrochemicals, oil processing and refined products like tyres and rubber products, as well as chemical equipment.

Following the merger, state news agency Xinhua has reported that Sinochem Holdings will go through further restructuring in its bid to become a “world-class comprehensive chemical enterprise”.

Of the two constituent companies, ChemChina was more heavily in debt, after paying $43 billion for Swiss agrochemicals business Syngenta in 2017. In a bid to alleviate some of the financial pressure, ChemChina and Sinochem consolidated their agrochemical assets into a holding unit that included Syngenta earlier this year. Syngenta executives have also said they want to take the company public next year to reduce the debt load further.

Sinochem has the stronger cash reserves, although analysts expect a push for cost savings across the new entity. “There is a significant amount of synergy to be realised including R&D, distribution and production of their overlapping business segments such as agrochemical, new materials and oil and gas,” says Laura Zhai, senior director for Asia-Pacific corporates at Fitch Ratings.

There should be other benefits: Syngenta has less exposure to the Chinese market, for instance, which could be remedied through the combined entity’s distribution channels. In addition, Sinochem is expected to share its domestic oil products with ChemChina’s refineries, while more of ChemChina’s output could be sold to the international market through Sinochem’s prized export quotas, analysts told S&P Global.

Remember Ning Gaoning, ‘China’s Morgan’?

Sinochem Holdings will be chaired by Ning Gaoning, a man who has been dubbed in the past as ‘China’s Morgan’ (a reference to John Pierpoint Morgan).

It might seem an inappropriate comparison for a career bureaucrat from the Chinese Communist Party but Ning (who is better known overseas by his English first name Frank) got the nickname after organising at least 150 M&A transactions among major SOEs, including deals for China Resources, COFCO and the original Sinochem (see WiC311 for our earlier profile of the business leader).

ChemChina’s former Party boss Ren Jianxin was an another dealmaking tour de force, before his retirement in 2018. He is said to have concluded more than a century of takeovers for ChemChina since 1984, including highly-prized overseas acquisitions, such as the swoop for the Italian tyre maker Pirelli (see WiC275).

There was also ChemChina’s $43 billion acquisition of Syngenta (a major player in GMO crops), which is still the largest overseas deal for a Chinese firm (see WiC313).

Ning took over as Sinochem’s chairman in 2016. At the time Sasac had started the consolidation process among state enterprises with overlapping businesses. The result was a steady flow of new ‘national champions’ across sectors such as railway construction, power generation and shipping (see WiC279). A merger between the country’s duopoly in petrochemicals was a foregone conclusion, once Ning was appointed to co-chair ChemChina in 2018.

Other global giants have been consolidating to create even bigger chemical companies too. German chemicals conglomerate Bayer took over US agrichemical major Monsanto just three years ago, paying $64 billion. Dow and DuPont tried a merger of the two biggest American players in 2016 before splitting again in a further restructuring a couple of years later.

What’s Sinochem Holding’s key mission?

“Bundling many sampans [a small Chinese boat] together doesn’t make an aircraft carrier,” Ning told Sina Finance. “As a petrochemicals firm we should be integrating different assets in the industrial chain and creating synergies. That’s why we have grouped all these assets together [into Sinochem Holdings].”

Using the refining of crude oil as an example, Ning further explained that the Sinochem of the future would integrate different businesses from oil trading to the sophisticated processing of industrial chemicals.

There are broader policy goals to support as well. Food security is always towards the top of the Chinese government’s agenda and Sinochem will be part of the plan for delivering it (some of the rationale for the Syngenta deal was that it would help improve arable yields in China too).

“Without fertilisers and pesticides more than a third of the Chinese people would be starving; without feed additives there would be barely enough meat, eggs and milk for two-thirds of the Chinese people,” Xinhua opined in 2017. This dramatic calculation was widely recirculated by bloggers on news that the Sinochem-ChemChina deal had been approved by regulators last month.

However, in a manner similar to the semiconductor sector, domestic petrochemical firms have often relied on imports of higher-spec materials and equipment from international suppliers. Potentially increasing that vulnerability is the risk of export bans or other sanctions from hostile governments. For instance, the original Sinochem and ChemChina have both been added to a US government list of organisations that it considers to be “Communist Chinese military companies” (see page 7). Although the limits of the embargo are still being defined by the Biden administration, the designation could forbid American investors from putting capital into Sinochem subsidiaries. Other sanctions might follow in future, especially in controls of exports of more sophisticated materials or technologies. But in the longer-run, a new champion of the Chinese petrochemical sector should be able to stave off some of these threats by reinvesting its higher-margin returns in domestic production, and achieving its own advances in scale and technology.

Petrochemicals is heading for a period of change in general?

Sinochem Holdings has been created at a time when the petrochemicals sector has been attracting some of the largest amounts of foreign investment in China, including BASF’s plans to invest $10 billion in a huge new project in Guangdong. The German firm is incorporating its ‘Verbund’ model in bringing together a wider range of production processes on a single site.

Both ExxonMobil and Shell signed deals last year to invest more than $10 billion in petrochemical projects in Guangdong as well, while Saudi Aramco signed an MoU with the Zhejiang provincial government in 2019 that should see the world’s largest oil producer invest heavily in downstream refinery businesses in that coastal province.

In part that is recognition that these industry giants need to be present in their largest market, although some of these moves might look counterintuitive, given that many major economies have announced commitments to go carbon-neutral (by 2060 in China’s case). Others have set deadlines for removing gasoline-powered cars from the roads (by 2035 in China).

But the likely demise of parts of the refining sector hasn’t diminished enthusiasm for other areas of the industry, China Petrochemical News says. For instance, many of the new facilities in China will be applying COTC (crude oil to chemicals) technologies that convert petroleum into essential production materials such as ethylene.

This underlines the strategic importance of Sinochem Holdings: it is perhaps the key SOE in preparing China’s transition from being the world’s biggest oil importer into a zero-emission economy. Ning has said an important objective of Sinochem will be the offering of agricultural materials and services so as to upgrade China’s agricultural sector, and contribute to achieving the country’s carbon neutrality goals. Besides that, Ning pointed to another climate goal: helping to turn more crude into raw industrial materials in more emission friendly ways.

His success in these endeavours will resonate far beyond China’s shores. Sinochem Holdings’ foreign assets account for 60% of the total. Ning said the company will spend more than Rmb23 billion annually on R&D in order to stay competitive, and added that he expects China’s petrochemical market to account for half of the world total in five years time.

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