BASF strikes massive green power purchase agreement for China chemical plant

BASF’s move has amplified German anxieties about de-industrialisation

Germany's BASF this month signed China’s largest ever power purchase agreement (PPA) for green energy. Under the deal, China’s State Power Investment Corporation will supply 1 TWh of renewable energy annually to BASF’s new facility in the Guangdong province for 25 years. The €10 billion (US$10.6 billion) plant – set to be completed by 2030 – will be BASF’s third largest production facility and the first chemicals plant in China to be completely owned by a foreign company. China is BASF’s second largest market. It is currently adding two facilities to its Shanghai Innovation Campus, its largest R&D facility in Asia.

BASF’s expansion in China has exacerbated fears that Germany stands to lose its industrial base to countries with more affordable/green energy. Largely due to its loss of Russian gas following the war in Ukraine, energy prices for German industry have risen around 40 percent from 2021 to 2023. China is facing large challenges in its own renewables and green power market trading rollout. The market for green energy trading in China still remains nascent, with traded volumes at just a few percent of the total amount of green power traded in the country.

More fundamentally, China is facing perhaps a more extreme version of the challenge confronting other advanced economies – how to actually connect renewables to the grid. China lacks a unified national electricity market and faces high levels of renewables curtailment, exacerbated by the significant distances between renewable projects and demand centres. This in turn is complicated by relatively uncoordinated energy transmission and limited interprovincial trading, meaning that while China has installed more green power capacity than any other economy, its actual consumption of renewable energy is still relatively low. Paradoxically, Germany sourced 47 percent of its power consumption from renewables in 2022, compared to China’s 26 percent (including nuclear). Still, if China can overcome these issues of transmission and market fragmentation, it has a clear opportunity to steal a further march on Western manufacturing.

Hungary bets big on transition to EVs

Chinese investment has been an important part of Hungary’s EV strategy

Hungarian Prime Minister Orbán is attempting to transform the country into an EV and battery manufacturing hub by offering major tax incentives and reforming regulation. It has offered China’s CATL – the world’s largest lithium-ion battery producer – upwards of US$915 million to construct a US$7.8 billion battery plant with Mercedes-Benz in the country’s east. The 100 GWh facility has been touted as the largest ever single foreign investment in Hungary. China’s EVE Energy and Sunwoda are also investing US$1.1 billion and US$275 million, respectively, in battery plants. Separately, BMW has earmarked over US$2 billion for a battery assembly plant in the country’s east, while Samsung is investing over US$3 billion in two battery plants in the north. BloombergNEF forecasts that Hungary will become the fourth-largest manufacturer of EV batteries in the next few years.

Chinese companies are evidently playing a key role in Hungary’s – as well the wider EU’s - EV ambitions. The EU aims to domestically produce enough batteries for at least 6 million EVs to become self-sufficient by 2025. This would, however, require a significant reduction in imports from China which – due to its dominance of EV supply chains – produces over 70 percent of the world’s EV batteries. Attracting investment from Chinese companies in EU-based manufacturing provides a middle ground which both promotes domestic manufacturing in the EU whilst avoiding totally excluding China – likely an unfeasible prospect at this time. The EU’s more muscular approach to trade – signalled by its announcement of a probe into introducing higher tariffs on Chinese EVs – may further induce Chinese companies to localise production in Europe.

Australia’s exports to Asia revert to pre-2020 status quo

The gravitational pull of the Chinese market seems to have transcended political rhetoric around trade diversification and critical minerals alliances

Australia’s exports to China have risen substantially this year, undoing much of the trade diversification that occurred after Beijing placed tariffs on a suite of Australian exports. Australia’s exports to China rose 22.4 percent from the first half of 2022 to the same period this year, reaching a record A$102.5 billion (US$65.9 billion). The growth in exports to China follows Beijing’s recent move to remove punitive trade barriers on products including timber, barley and coal. Remaining trade tariffs on the rock lobster and wine industries may be lifted when Prime Minister Albanese visits China later this year.

Simultaneously, Australia’s exports to the rest of Asia have fallen. As a result of China’s trade embargoes, the share of Australian exports to China dropped from 43 percent in May 2020 to 28 percent in the middle of 2022. Many products affected by the tariffs were instead sent to Japan, South Korea and India. Japan increased its share of Australia’s exports from 11 percent in mid-2020 to 21 percent in September 2022. As a result of the lifting of China’s embargoes, Japan’s share of Australian exports is now back down to 16 percent.

The dissonance between the trade reality and Australia’s declared policy is perhaps most apparent when it comes to lithium. China now imports over 95 percent of Australian lithium, despite the Australian government vowing to join efforts to diversify global critical mineral supply chains and this year blocking the efforts of Chinese companies to purchase lithium mines.

South Korea’s Hyundai and Samsung target India as No.2 global manufacturing base

However, New Delhi still far from reaching headline targets of the Make in India initiative

South Korean companies are expanding their production bases in India and targeting its domestic market. Hyundai now counts India as its largest production base outside South Korea. It will increase production capacity in the country from 1.2 million vehicles in 2022 to 1.4 million after the company finalises upgrades to its recently acquired Talegon plant in 2025. India will be both a production base for India’s large domestic market and an export hub. The company sells around 800,000 vehicles to the Indian market and is poised to export 600,000 from India to countries in the Middle East and Africa.

In addition, Samsung has moved all of its smartphone production to India and Vietnam. The company operates the world’s largest phone manufacturing plant in India’s north. These investments come amid a manufacturing push by Prime Minister Modi under his government’s Make in India campaign which has seen Taiwan’s Foxconn promise to make 25 percent of iPhones in India by 2025.

These provide the Make in India initiative with a high-profile win. New Delhi aims to raise the contribution of the manufacturing sector to 25 percent of GDP. However, progress in reaching this broader target has stalled, with manufacturing currently just 18 percent of GDP. Indian manufacturing is currently facing several structural challenges including lack of highly skilled labour, underdeveloped logistics and infrastructure, high financing costs, regulatory uncertainty and limited integration into global value chains. Resolving these challenges will arguably be more conductive to meeting targets than attracting big-ticket investments.

Southeast Asia’s gas transition ambitions face headwinds

High LNG prices and depleting local production present clear challenges

Southeast Asian countries are targeting gas as a core plank of their energy transition strategy. Vietnam, for example, aims to quadruple gas consumption over the next seven years under its latest National Power Development Plan. The Philippines is targeting a twelvefold increase to gas consumption by 2040. Indonesia is also aiming to increase the contribution of gas to its energy mix from 18 percent to 22 percent by 2025.

These ambitions have clashed with the reality of higher prices in global gas markets. European countries substituting Russian pipeline gas have driven Asian spot market prices from around US$10 per MMBtu early last year to between US$15 and US$20 MMBtu. This has prompted Southeast Asian countries to turn to further expanding their domestic gas industries. However, the available supply from domestic gas sources is depleting fast. For example, the Philippines’ only known gas field, Malampaya, is projected to run out of gas in 2027.

Despite these challenges, many Southeast Asian countries have put targets in place to boost domestic production. Indonesia, for instance, is aiming to double the output of its shrinking gas industry to approximately 12.4 billion cubic feet per day by 2030. Thailand’s state owned PTT Exploration and Production is looking to double the output of Erawan – the country’s largest gas field. Financial constraints and politics may get in the way. China’s sweeping territorial claims in the South China Sea have routinely complicated Malaysian, Vietnamese and even Indonesian (in waters lying outside the so-called “nine-dash line”) exploration. Thailand and Malaysia have overlapping claims in the Gulf of Thailand, as do Thailand and Cambodia. Both areas are believed to be rich in gas. Hesitation to adopt more ambitious renewable energy policies may prolong reliance on coal.