Trade row cited for rapid deal between BASF and Guangdong

Germany’s BASF managed to wrap up a preliminary deal to build China’s first wholly foreign-owned chemicals complex quite quickly, aided in part by trade tension between Beijing and Washington, sources with knowledge of the matter said.

The proposed complex, worth $10bn in investment to 2030, will be located in Guangdong, China’s most populous province, which had been worried about the impact of a US decision to heavily penalise telecoms company ZTE, which is also based there.

Fears that a US-China trade war would hurt investment prospects for the businessfriendly province made local government officials that much more receptive to overtures by BASF, a global giant with state-of-the-art technology, according to separate people briefed on the matter.

BASF’s announcement, part of $23bn worth of bilateral deals unveiled as German Chancellor Angela Merkel met Chinese Premier Li Keqiang in Berlin this week, is conspicuous for its timing, trade and chemical industry experts said.

In reaching out to Europe, China is showing it is open for business as the trade row with Washington deepens.

BASF’s coup, while still a rare example of a foreign player prising open the Chinese government’s tight control over its energy and chemical industries, also follows measures by Beijing to lift some caps on foreign ownership in the automotive and banking sectors.

“Now that we have this trade war that was kicked off last week, Beijing is telling Washington that it is still doing business and that there are capable companies around the world to do business with,” said John Driscoll, director of consultancy JTD Energy in Singapore.

The outcomes of Li’s visit — during which the widow of Chinese political dissident and Nobel laureate Liu Xiaobo left de facto house arrest in China to live in Germany — signalled a measured warming in what has been a bilateral relationship fraught with spying allegations and commercial mistrust.

China this week has also approved a huge new wholly owned Shanghai factory for US electric-car maker Tesla, and a $2.3bn joint venture organic light-emitting diode plant to be built by South Korean company LG Display.

BASF’s search for a potential site for its second major project in the world’s largest chemical market had been in the works for a while, an industry insider with knowledge of the deal said.

The German firm decided to go it alone rather than working with a state-owned partner as it had done previously and chose Guangdong as recently as three months ago, the person said, adding BASF had spied a “window of opportunity”, banking on the province’s desire for cuttingedge technology.

The person also said local governments had become more aware that they cannot own everything and foreign investment could help them build what they wanted.

BASF’s overtures coincided with a crisis for ZTE, slapped with a ban barring US suppliers from selling it components after the firm broke an agreement to discipline executives who conspired to evade US sanctions on Iran and North Korea. ZTE has had to curtail operations and is working to lift the ban.

“The ZTE case helped,” the person said without elaborating.

BASF’s media relations department said the company chose Guangdong for its first major investment in south China to tap the region’s fast economic growth and declined to comment on whether ZTE’s travails helped speed up the decision.

Amid China’s increased openness to foreign investment, BASF’s knowledge of doing business in China meant it could “seize the right opportunity at the right time”, a Beijing-based energy industry executive said.

Under the deal, BASF will explore building an integrated chemicals complex with petrochemicals plants and a steam cracker producing 1-million tonnes a year of ethylene.

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It is a chance to greatly expand in a Chinese chemicals market worth an estimated $1.5-trillion a year, feeding plastics, coatings and adhesives to the southern province’s fast-growing consumer electronics and automotive sectors.

By contrast, rival petrochemical giants have yet to strike wholly owned similar-sized deals in China — which accounts for around 40% of the world’s chemical production. So far, they’ve stuck with joint ventures even though China eased restrictions on foreign ownership in the sector in 2011.

Royal Dutch Shell started an expanded joint venture petrochemical plant in Huizhou in May with China National Offshore Oil Corporation. Exxon Mobil late last year signed a joint study memorandum of understanding with the government of Huizhou for a similar facility — although that deal allows for the possibility of full ownership.

BASF plans to do a pre-feasibility study of its site by the end of the year, followed by a thorough analysis by end-2019 with construction estimated to start in 2023. The company aims to complete the first plants by 2026.

CHINA THIS WEEK ALSO APPROVED A HUGE NEW SHANGHAI FACTORY FOR ELECTRIC-CAR MAKER TESLA