Think You're Cut Out For Sourcing Chemicals from China? Read on …

The production of commercial chemicals in China began in the late 1920s and there were only four notable producers in the country (Yang 1938, Vol.I, p. 113). The market for chemicals from China was further accelerated after the outbreak of the Sino-Japanese war in the interior of China. During that time, impressive gains were made in the production of chemical products, including soda ash, caustic soda, bleaching powder, sulphuric acid and hydrochloric acid needed for the war effort (Bureau of Information, 1947, p. 369).

In the mid-1990s, China established fine chemicals production bases and large-scale petrochemical parks in various areas, including Shanghai, Nanjing and Tianjin, and others in the coastal regions. Some of the world's top chemical companies are located in these parks. China's chemical industry now plays an essential role as a global supplier with some of the largest chemical companies.

If you are interested in or new to sourcing chemicals from China, you most likely have questions about the process. Since 2007, I have exported mining chemicals from China. In the following paragraphs, I draw from my experience to answer some of the most frequently asked questions about importing chemicals from China.

Quality of Industrial Facilities and Finished Products

The Chinese chemical industry is characterized by enormous variation in the quality of industrial facilities and their finished products. The differences range from remnants of the early industrialization to state-of-the-art facilities imported from abroad. As a result, the quality of final products also varies widely.

The old and dilapidated plants built in the pre-privatization era are making way for new and modern facilities. These are located mostly in purpose-built chemical industrial zones and adopt stringent production and quality control practices. Originally, the main goal of these parks was to restructure and improve Chinese chemical standards.

Reducing chemical impurities, as specified by western clients, remains elusive for many plants. Consistently achieving desired purification levels also presents a challenge for many Chinese chemical suppliers. These issues make it difficult for foreign buyers to find top quality and reliable chemical suppliers in China.

Chemical Sourcing: China Office or Not?

As we have already established, sourcing chemicals from China has its own unique challenges. The best way to address these challenges is to have a procurement office in China. This, of course, requires a level of financial commitment which only pays for itself if you are buying millions of dollars’ worth of chemicals each month.

If you prefer the DIY route, there are some things you should do. Be aware that they can be time consuming and expensive.

Factory visits

Geographically, China is a big country and it takes a lot of time to travel from one factory to another. Since 2007, I have traveled around China by train and car, in search of the “unicorn” factory. Be prepared for a similar journey.

Before buying any chemicals, at the very least you need to visit the potential suppliers and carry out a Factory Audit. This requires specialist knowledge about process flow, inventory management, quality assurance procedures, state licensing and other bureaucratic requirements, and bulk haulage and shipping methods. If you aren't already armed with this information, you may want to hire a consultant to accompany you. 

First Impressions: if you met your supplier at a trade show, pay extra attention. The manufacturer that creates the greatest initial impression is probably not the most reliable. Don't get sold on nice displays or good manners. Quality is what you are after.

Keep in mind the importance of nurturing the relationship with the supplier by constantly carrying out follow-up visits and pre-inspections.

 BUYER KNOWLEDGE: WHY CHINA CHEMICAL SOURCING SUCKS

Sourcing chemicals requires specialist knowledge and a complex understanding of price analysis, demand awareness, and timing. As a buyer, you need to understand the full dynamics of the Chinese chemical industry, including:
• Key raw materials and their demand cycles.
• Market prices and availability.
• The effects of annual shutdowns around the Chinese New Year and Spring Festivals.
• Impact of MNC players that buy up production in advance.

A global view of the demand for certain chemical products will also affect the decision on when and from which factory to buy those chemicals.

 COST COMPARISON: ARE YOU MAKING THE MOST OUT OF CHINA SOURCING?

From our experience, executives at some western companies are still concerned about purchasing Chinese chemicals. Many quickly they change their minds once discovering that buying from non-Chinese suppliers costs at least 50% more. Ironically, major chemical suppliers import their products from China for rebranding and resale to the same executives who are concerned with buying from China. Along the way, they inflate prices and take home sizable profits.

For some mining chemicals, companies in Africa & South America tend to pay the highest prices per ton for their chemicals. First and second-tier mines are ahead of the pack and tend to source their consumables (including chemicals) and equipment directly from China. Other mines and industrial clients rely heavily on tenders and VMI (vendor managed inventory) procurement, which adds a layer of middle man costs to their profit and loss statement. Take the sodium cyanide market for example. Prices in Tanzania and Mexico are as high as $7,000/ton while the FOB price is as low as $2,000/ton. 

 Quality vs. Price: You Get What You Pay For

Chinese factories produce chemicals across the whole range of the quality spectrum. Lower quality products naturally cost less to produce, and the high-end products are usually more expensive.

Foreign buyers sometimes negotiate too hard and insist on paying below the value of the product they expect. This leads to suppliers cutting back on the quality of the product they dispatch. It’s just asking for trouble. Knowing current market values and raw materials costs can help you negotiate within reason, without putting the quality of your chemical products at risk. 

Fraud in The China Chemical Industry 

“Fly-By-Night” Vendors: These are often “Briefcase Businessmen” who prey on gullible foreign customers and quote anywhere from 50% to 100% lower than the existing demand and supply prices.

They have impressive websites with photographs of “their factory”, testimonials, copies of their “national awards for quality”, and contact details for their “English speaking sales team”. Many uninitiated buyers have fallen under their spell, only to end up with either a substandard product or nothing at all. When victims try to get justice for the crime just committed against them, the vendor is nowhere to be found. His address and recommendations are false, and you have been looking at photographs of someone else’s factory.

During the time of peak gold production, from 2008 onwards, the demand for sodium cyanide was higher than the international capacity to produce. Naturally, prices shot up. As a result, prices reached as high as $4,000 per ton. Dodgy traders in China caught wind of this and offered very low prices. Most customers who fell prey to such traders were new buyers trying to maximize their profits. They were ignorant of the perils of purchasing from the East. In the case of a Zimbabwean operation: “When the first container of 'cyanide' landed in Harare, it contained rocks!”

Low purity chemicals: When the prices quoted are about 15-35% below the market price, watch out for this scam. These suppliers usually procure chemicals from reputable manufacturers and then dilute them with other, lower-cost chemicals. This results in bulking-up of the quantity of chemical they are selling to you, allowing the dealer to scale back the unit cost of the product.

You are quoted a lower price and the sad reality is that analysis of the actual product will not match the technical data sheet specifications. These chemicals will not be fit for your particular application. This is probably the most common scam. I have even lost count on how many buyers have fallen victim to this type of fraud, and it is often their fault.

In the previous example, we illustrate a common scam in xanthates. You can read more about it here. 

SUPPLIER DUE DILIGENCE: REVIEW OF ALL SUPPLY-SIDE ROLE-PLAYERS

Factory visits: Our team is made up of independent technical specialists and supply chain specialists. These professionals understand the technical and procurement aspects of common mining and industrial chemicals. If there is a chemical that is unusual or has special transport or logistical requirements, then the chemist or metallurgist from the client side can accompany us on visits to the supplier to obtain the required information.

Our supplier inspection process includes:
• Presentations by the supplier.
• Review supplier licenses, ISO registration, and other statutory requirements.
• Visit the factory to view the raw material supply system and storage, manufacturing process, quality controls, health and safety, and completed product storage and dispatch facilities.

WILLING VICTIMS: ARE YOU HEAD OVER HEELS?

I have been on factory visits with clients to what undoubtedly seemed like the worst factory ever, but the factory owner treated us so well and flattered us with lunch and gifts. The level of flattery was so exaggerated that he managed to make our client feel obliged to place an order. This was despite the fact that advised against the purchase and explained that the quality of product and service would not be acceptable.

Another buyer fell into this trap, and his shipment was delayed for 2 months. He was at risk of losing his contract, so had to buy the product from a local supplier who had warehouse stock at a price 50% higher than his contract price. Needless to say, when his cargo finally arrived, the quality was unacceptable.

The Evaluation Template: The ultimate checklist?

Evaluation of a new or existing product varies according to the nature of the product and the profile of the product supplier. Some of the main components of our comprehensive evaluation process include:

• Profile and history of the factory or supplier.
• Range of products and target markets.
• Manufacturing and supply processes.
• Quality test reports and safety standards.
• ISO 9001-2000 certification.
• Continuity and storage of raw material supply.
• Appraisal of the manufacturing equipment.
• Technical assessment of the manufacturing process.
• Quality management procedures.
• Qualifications of quality control inspectors: in-house training and certification and formal training.

We have people on the ground, which allows us to visit manufacturers regularly and at short notice. This allows us to quickly identify and manage any potential problems.

Rarely do Chinese suppliers stock up on raw materials (Yes, there's a business case for this ). It's a matter of when and how you manage the risk of an interruption in the supply chain when this happens. How does one manage an incident like this if your whole strategy is based on Skype chats?  

THE SMOG- XI JINPING UNLEASHES AN IRON HAND

Factories in China are faced with increasing anti-pollution standards that they need to satisfy. According to Bloomberg.com, China aimed to cut sulphur dioxide emissions by 3%, nitrogen oxide by 5%, and ammonia by 2% in 2015. Controlling these emissions invariably results in an increase in the cost of production for factories.

Chinese chemical prices are rising as authorities clamp down on companies that have poor environmental, health, and safety practices. “We are going to punish, with an iron hand, any violators who destroy ecology or environment, with no exceptions,” the official Xinhua News Agency reported. In mid-2014, as result of new pollution measures, several small-scale sodium hydrosulphide (NaHS flakes) producers were shut down for non-compliance. This led to a spike in NaHS prices.

Enforcement of ever-increasing restrictions of wastewater discharge and air-quality does not happen without corruption. As a result, production costs may increase without any real environmental benefit.

Regrettably, the minimum pollution standards are different throughout the country. The coastal provinces often have stricter minimum compliance standards compared to the interior of China. One noteworthy consequence of the new environmental legislation over the last few years is the shift of some manufacturing facilities to the interior provinces, leaving behind processes such as formulations and packaging in the coastal plants.

Environmental activism in China is growing. A few plants have shut down as a result. For a example, a $1.5 billion paraxylene (PX) factory plant was shut down in Dalian in 2011. 

 FISCAL PRESSURES

Chinese producers face other cost pressures, including the strength of the Chinese currency (RMB). Moreover, Chinese manufacturers no longer get tax rebates on their exports. This will likely drive up prices going forward.

 COMMERCIAL SKILLS & NEW SUPPLIER STRATEGY

Many manufacturers have immature commercial skills,  and lack an understanding of customer drivers and benchmark standards for products meant for export versus products for use in China. Don’t expect to get credit terms on your first order - it may take years of business to cultivate that kind of relationship with Chinese suppliers. This also depends on your country of origin and if the supplier deems you worthy to be covered by Sinosure.

Don’t focus all your attention on the commercial side – a lot of western buyers have stringent payment rules. To illustrate, some buyers will pick and choose a manufacturer and focus on payment terms. We ought to be spending more time emphasizing their technical capabilities and whether they are able to supply the goods we want.

90% of our orders in China have been on TT basis and we have never lost any money. Our order volumes are in the millions. It all starts with supplier selection. While fraud does exist, not every Chinese supplier is out to cheat you.

Key Takeaways & Recommendations

When you conduct careful research and back it up with production facility visits, it is possible to buy direct from Chinese factories successfully. There is, however, still a negative perception associated with buying from China. Many people continue to fall prey to dishonest suppliers, often as a result of insufficient knowledge. The result? Sub-standard quality, missing orders, and money lost.

 A full chemical analysis and random pre-shipment inspection at the port of loading can play an integral role in ensuring quality chemicals are supplied. Complement this strategy with a good quality control program to ensure consistency in your supply chain.

It is important to be very clear and upfront about your quality standards, ethics, and safety expectations. Most of the suppliers, if not all, will respond positively. They see it as an enabler to future export growth. Finally, beware of the impact of a big night out on báijiǔ and zhōnghuá cigarettes before you go into negotiations the next morning!

Share your opinions and experiences with chemical suppliers in China in the comments, and please share this article if you found it useful.