This article is based on a GCiS multi-client market research report: China Biodegradable Plastics Market Research Report.
China’s Green Revolution
Source: China Engineering Plastics Website.
According to GCiS China Strategic Research, 135,000 tons of bio-plastics were sold in the China market in 2016. Largely driven by regulatory mandates in environmental protection, the bio-plastics market is expected to continue growing over the next 5 years. Following the State Council’s ‘Order to Limit Plastics’ in 2007, Jilin and Jiangsu have gone further to implement a ‘No Plastics Order’ in 2015 and 2017 respectively. The latter order bans the production and sale of disposable plastic bags or tableware made using non-biodegradable materials. Local Jilin officials are also made accountable as their annual performance review will incorporate performance indicators related to the implementation of the order.
While the Chinese government has been pushing to limit the use of plastics bags in China over the past several years, it’s still hard to escape these in our everyday life. Whether at a convenience store, a supermarket or a Mom and Pop store, nearly anything one buys will come in a plastic bag. In cities such as Shanghai, these bags now cost a small amount extra, but still remain popular. In 2015, plastics still accounted for about 15% of the total solid waste in China. On the face of it, the Chinese are using, and disposing of, just as many plastic bags as ever.
Killing Two Birds With One Stone
One reason why plastics are still prevalent is because such orders are not mandatory at the local level. Apart from Jilin, Jiangsu and Hainan province, most other provinces have yet to introduce such stringent regulations. Even for those who do, environmental concerns might not be their biggest, or only, concern.
Take Jilin province for example, its ban on non-biodegradable plastics may just be a way to kill two birds with one stone. Prompted by a massive corn glut in recent years, the Jilin government was faced with an oversupply of aged corn that is unpalatable for consumption. By converting the unused corn into xylitol and corn starch, they can be diverted to the local bio-plastics sector for the production of biodegradable plastics. Not only do they get to solve the corn glut problem, the local government appears to be pushing for policies that are aligned with the central government’s climate mandates. It is a win-win situation for everyone, except perhaps the downstream users who now have to pay more for biodegradable disposables.
The Chinese Domestic Market for Bio-Plastics
According to GCiS, China’s bio-plastics industry is valued at close to RMB 2.5 Bn of domestic sales revenues in 2016, up 13% from 2015. Since 2013, government funding has been flowing into the sector, to help support key domestic enterprises and develop industry bases in different parts of the country. This is part of a broader industrial policy at developing bio-plastics, amongst many others, into one of the country’s strategic new materials.
China’s bio-plastics industry is dominated by 3 main types of products, partially degradable plastarch material (PSM), polybutyrate (PBAT) and polylactide (PLA) – each with roughly equal market shares by revenue, as shown in figure 1. In 2016, partially degradable PSM takes up the largest share of market revenue as well as total sales volume. This is then followed closely by PBAT and PLA, at 25% and 23% of market share by revenue respectively. Together, these three segments accounted for close to three quarters of the total revenues made by China’s biodegradable plastics manufacturers in 2016.
Figure 1: China Bio-degradable Plastics Market Revenues by Product Type (2016)
Polybutylene succinate (PBS) is the slowest growing segment with a below market growth rate of 7.8% in 2016. Its lower growth rate is mainly because of the persistently high price of PBS end products, which is impeding its market development, especially when other bio-plastics are already relatively cheaper. In addition, the overall cost of producing PBS is high and subjected to fluctuations in oil prices. Much of China’s PBS is still synthesized from petrochemical precursors. In the foreseeable future, PBS is likely to continue as a small and niche product segment in China while popular biodegradable plastics like PSM PBAT and PLA become more dominant product types.
Competition in this Market
The Chinese biodegradable plastic market is relatively concentrated with the top 10 market leaders accounting for 45% of the total revenues. The rest of the market comprises of around 200 suppliers, mostly with annual revenue of less than RMB 10 Mn. With lesser financial resources and a lack of scale economy, these smaller companies focus more on selected regions or niche sectors. Companies in this market generally specialize in one or two products rather than cover all bio-plastics segments in this market. GCiS data also shows that most of the bio-plastic suppliers derive over 80% of their revenues from just one product segment.
Overall, only 13% of companies in this sector are foreign while the rest are predominantly Chinese. Despite so, foreign companies captured around 25% of the total market share by revenues, mainly because of their better quality products and premium pricing strategy. None of the foreign bio-plastics suppliers currently active in China are in the PHA segment. In 2016, the PHA segment experienced relatively faster growth rates and is highly concentrated with 3 dominant suppliers - all are Chinese companies. Foreign companies are relatively more active in the PLA and PBS segments where their competitive advantages lie. PLA and PBS require product modifications to make up for their performance deficiencies and these modification expertise are more common amongst the foreign players.
Chinese Bio-plastics ‘Going Out’ and Back
Beyond China, much of the global capacity for biodegradable plastics bags, and bio-plastics in general, lies in China and with Chinese firms. In the initial stages of China’s bio-plastics sector development, most of this capacity is exported to Western countries that have greater demand for these products. This was when the environmental awareness and efforts were relatively stronger elsewhere in the world than in China.
According to a study by GCiS China Strategic Research, the production capacity of biodegradable plastics has grown to at least 600,000 tons by the end of 2016 and much of this is concentrated in the eastern coastal regions like Guangdong and Jiangsu province. An estimated production capacity of biodegradable plastics by province is indicated in the following map. From the table below, we can see that provinces like Guangdong and Jiangsu produce the most, with Guangdong firms producing over 136,000 tons alone. Some of this is for the domestic market, but much is for export.
Figure 2: China Bio-degradable Plastics Production Volume by Province (2016)
Source: GCiS, Biodegradable Plastics Limited Publication Study 2017
At least 75 Mn tons of traditional non-biodegradable plastics manufacturing capacity still remain in China by 2016. With biodegradable plastics production capacity at less than 1% of traditional plastics, bio-plastics still has a long way to go – at least from a pessimistic viewpoint. From the brighter side, bio-plastics seem to have immense market potential.
Can Consumption Keep Up?
If we look purely from a growth rate angle, Chinese consumption of biodegradable plastics in 2016 grew at a rate of 13.2%, depending on product segment. While this is much higher than China’s GDP growth rate of 5-6%, the picture is not as rosy as it seems. Compared to other industries like service robots, which is growing at around 40%, the growth rate will need to be higher for this to qualify as a real China growth market. Also, even though production capacity is estimated at 600,000 tons, the actual output is much lesser, at around 300,000 tons. And from the demand side, Chinese biodegradable plastics consumption is only about one third of its production output. In other words, the industry is growing but at lower than expected rates.
The largest downstream usage of biodegradable plastics in China is disposable plastic bags, followed closely by packaging and then tableware. Together the top three applications accounted for 81% of the market revenues. The application in medical supply and agriculture & forestry each takes up 7% of the total revenues. In recent years, demand from downstream industries is driven mainly by government regulations like the Plastic Limit Order and No Plastics Order. But the downstream adoption of biodegradable plastics has been slow and reluctant.
Figure 3: China Bio-Plastics Revenues by Application (2016 est.)
Source: GCiS, Biodegradable Plastics Limited Publication Study 2017
At the moment, downstream adoption of biodegradable plastics is mainly taken up by larger downstream users like Walmart or Ikea. With an average price of at least 2 to 3 times higher than traditional plastics, it would be difficult to convince the neighborhood grocer to willingly use biodegradable options. Many smaller downstream users in Jilin either continue using traditional plastics and risk being fined a sum of between RMB 1,000 to RMB 30,000, while others may resort to using fake biodegradable plastics bags.
Fake biodegradable alternatives or traditional plastics are still easily available from neighboring provinces like Liaoning, or even further South from Hebei and Anhui where regulatory standards are not as strict. Even if Jilin can maintain a strict No Plastic Ban order within the province, it would be difficult to stem the flow of non-biodegradable plastics from beyond its province.
Ready to Take the Next Step?
Overall, GCiS estimates that the Chinese biodegradable plastics market can expect a 15% compound annual growth rate over the next 5 years, primarily driven by the growth in PSM-Fully Degradable and PBAT, with applications continue to be in disposable plastic bags, packaging and tableware. This market will increase significantly, as a result of recovering downstream demand over the near term as the country recovers from the downturn, supported also by the structural shift towards a consumption driven economy. But it still has a long way to go before it can truly displace the conventional non-biodegradable plastics.
While the cost of traditional and biodegradable plastic bags is not great by Western standards, retailers and consumers in China are particularly sensitive to even smaller increases. Barring more government intervention, the uptake of bio-plastics (plastic bags, other) on the end-user side will continue to be gradual.
At the supply end, the ongoing regulatory mandate to promote bio-plastics will benefit domestic more than foreign suppliers. For one, domestic biodegradable plastics are sold at around half the price of foreign ones. Also, domestic suppliers have far better access to local distribution and sales networks than foreign suppliers do. This means that local bio-plastics suppliers are in a better position to take advantage of the market growth opportunities. The GCiS study also finds that market revenues of foreign bio-degradable plastic suppliers are growing at below market average rates or at a mere 6.5% - much slower than their domestic counterparts.
While it is clear that the Chinese government is embarking on a green revolution across all sectors and industries, it is difficult to determine whether the policy will be lasting enough for this industry to achieve its environmental mandates. Unlike areas like the phasing out of HCFC where there are clear phase out targets, there are no such performance targets when it comes to the biodegradable plastics sector. In fact, apart from the guidance document issued by the State Council in 2008, the No Plastics order implemented by Jilin and Jiangsu is an administrative order rather than a statutory order. If China continues to experience lower economic growth rates in the longer run, the policy makers might have to be more selective in terms of which industries or sectors to support. And when that happens, will the bio-plastics sector continue to receive as much support or will it quietly recede and fall off the radar just like many of China’s industrial policy experiments?