As Both Technology and Production Capacity Achieve Breakthrough, The Downstream Boom Is Good for Domestic Manufacturers

Meta-cresol is an important chemical intermediate, mainly used in pesticide and pharmaceutical industries. M-cresol, also known as m-cresol, belongs to the fine chemical industry, which is an important raw material for pesticides, medicines, antioxidants, spices, and synthetic vitamins. The overall domestic level is still far behind that of foreign countries. As the industry barrier of m-cresol is high, the market is basically monopolized by international manufacturers and domestic imports are relatively high. There is dumping of imported m-cresol produced in the United States, the European Union, and Japan, and the domestic m-cresol industry has suffered substantial damage. The Chinese government has adopted anti-dumping policies to maintain the normal competitive environment of the domestic m-cresol industry, which will accelerate the import substitution of domestic enterprises. With the expansion of the downstream market of m-cresol, and domestic enterprises are expected to reverse the situation.

The production capacity of m-cresol is relatively concentrated, with manufacturers mainly located in the United States, Germany, China, and Japan. Lanxess AG and Sasol each account for 36% and 27% of the total production capacity, occupying an absolutely dominant position; China's production capacity is contributed by three companies. Among them, Haihua Technology is the domestic leader, while Japan only has Mitsui Chemicals production, accounting for 12% of production capacity.

Although China introduced m-cresol production technology from the United States in the 1980s, it eventually failed and switched to acetone, making it rely on imported m-cresol to meet domestic industrial demand. It was not until 2017 that the domestic Anhui Haihua broke through the cresol separation technology to realize the mass production of m-cresol and begin to gradually get rid of the import dependence of m-cresol.

Long-Term Dumping of Europe, America, And Japan Harms the Interests of Domestic Enterprises

In the past, due to the failure to break through the separation technology of m-cresol in China, the domestic sales price has been dominated by foreign countries, and the import price determines the domestic price trend. Before 2015, the price remained at 40,000 to 50,000 yuan per ton. In 2017, with the release of the new domestic production capacity of Haihua, it can basically meet the domestic market demand, but foreign countries have adopted price reduction measures to seize market share, in which the price has dropped to a minimum of 16,000-19,000 yuan per ton. From 2016 to 2018, the average import ratio of cresol was as high as 45.96%, which restrained domestic industrial production. Besides, enterprises fell into a vicious circle of losses and failure to release production capacity.

Anti-Dumping Is Expected to Accelerate Localization

In response to the price cut sales of m-cresol abroad, the Ministry of Commerce of China decided in July 2019 to initiate an anti-dumping investigation on imported m-cresol originating in the United States, the European Union, and Japan. According to the published anti-dumping materials for m-cresol, the dumping margin of m-cresol of the United States, the European Union, and Japan is 50~110%. On November 3, 2020, the Ministry of Commerce issued a preliminary announcement that it determined that there was dumping of imported m-cresol originating in the United States, the European Union, and Japan, and that the domestic m-cresol industry was materially damaged, both of which were causal relationship; 131.7%, 49.5%, 54.8% of margins for the US, EU and Japanese companies.

With the implementation of anti-dumping investigations, domestic production capacity will be released. In recent years, the rapid development of downstream products of m-cresol in China has led to the rapid growth of m-cresol demand. However, the current domestic production capacity cannot meet domestic demand, in which China still needs to import 4800-7200 tons of m-cresol each year. With the breakthrough of m-cresol technology, manufacturers with technological advantages and scale advantages will stand out. From the perspective of production capacity, Anhui Haihua has a cresol production capacity of 20,000 tons, which is the leading domestic m-cresol market, with production capacity accounting for more than 50% of the total domestic production capacity.

The Downstream Market Prospects Are Generally Positive, And Domestic Companies Have A Lot of Room to Play

The demand for m-cresol is improving year by year, and the industry is expected to usher in a high boom. In 2019, the global consumption of m-cresol was approximately 45,000 tons. M-cresol is an important fine chemical product widely used in medicine, pesticides, perfumes, and dyes.

Menthol has great potential, leading to an increase in demand for m-cresol. Menthol is the largest in oral care products, accounting for more than 1/3 of the total. At present, most of L-menthol is imported, and the annual import exceeds 10,000 tons. Due to the rapid growth of downstream demand, some chemical companies began to actively deploy synthetic menthol production capacity.

The prosperity of the pesticide industry has improved, which is good for the m-cresol industry. M-cresol is mainly used in pesticide production. Affected by the environmental protection inspection, the domestic pesticide market has accelerated in recent years, and low-end backward production capacity has gradually withdrawn. Resources are further inclined to leading companies. Besides, environmental inspections have brought about a significant increase in the prosperity of the pesticide industry. Profit-driven leading companies have expanded their production. As the approval threshold for pesticide projects has increased significantly, the release of new production capacity takes longer than before, which is a long-term upward growth channel for m-cresol.

We believe that the expansion of menthol and pyrethroids will become one of the main sources of increased demand for m-cresol. The vitamin E industry is expected to see a boom in the future, which will drive the demand for m-cresol. With the implementation of the domestic anti-dumping policy, the import substitution of domestic production capacity has begun, leaving more room for domestic enterprises to play.

With the breakthrough of m-cresol technology and the expansion of production capacity, the self-sufficiency of m-cresol China is expected to be further improved. With increasing barriers to entry of m-cresol and stricter environmental protection, the supply of raw materials will be tightened. We believe that the pattern of the domestic m-cresol industry is expected to reverse, the market will enter a business cycle, and the industry will develop more orderly in the future.