Closer look: Chinese glass industry feels the squeeze of global economic downturn

AGC, Saint-Gobain, China Southern Glass, Fuyao stop float lines

As Chinese exporters cope with plunging sales and want to devalue the yuan, the country's glass industry faces its share of challenges.

“There are roughly 160 float lines in China, of which about two dozen produce Western quality glass,” says Russell J. Ebeid, president, Glass Group, Guardian Industries Corp., Auburn Hills, Mich. “Fifty-one lines are shut down at the moment [as of Feb. 12], and there will be more.” Most of the decommissioned lines are uneconomical and produce poor quality glass, he says, but “slowdown has accelerated. Even newly built plants have been mothballed. Bigger plants have cut prices for lack of profitability.”

“The market is worse now everywhere in the world, including China, but China definitely is not [in the worst shape],” says William Seiberlich, communications, Saint-Gobain Corp., Valley Forge, Pa. “Many glass companies in China, but not all, have made some adjustment of output either by making an anticipated cold repair or by making a hot stop for a few months during the ‘low season’ around Chinese New Year [Jan. 25-first week of February]. [This] is the case of Saint-Gobain with one line under hot stop.”

Total Chinese float capacity could have decreased by about 25 percent by the end of 2008, Seiberlich says. “According to our latest update, by the end of 2007 there were 172 floats in China, and in 2008, 11 new floats started,” he says. “But by the end of 2008 there were almost 40 floats [that had] completely stopped, started cold repair much earlier than normal float life, or started hot stop like AGC and ours. Besides these 40 lines, the pulls of remaining lines have been reduced as well.”

Asahi has two plants in China and has put two lines on hot hold, says Daniel G. Plotnick, national sales manager, Pilkington Building Products, Shanghai. “China Southern Glass has at least two lines down; Guangdong SYP Glass has two lines closed due to relocation, not for market pressure; and Fuyao has two lines down,” he says. “NSG hasn’t closed any lines. Xinyi has tons and tons of excess inventories, but I don’t know what’s happening with their plants.”

Xinyi has not closed any plants or lines, says Daniel Lau, managing director, XYG Glass, Richmond, B.C., a division of Xinyi Glass Holdings Ltd., Shenzhen, China. “Only those efficiently run and well-managed float glass manufacturers will be able to cope with the tough market situation and be poised in a stronger and more favorable position to capture market upturns and gain market shares quickly,” he says. “Based on the current plant closings, it is possible that Chinese output for float glass may be reduced by 30 percent in 2009 if the global economic downturn continues.”

The plant closings will be good for the Chinese glass industry and may bring a better sense of equilibrium, Plotnick says. “Now, there’s stag deflation: stagnating market with increased supply and no demand,” he says. “So, prices are going down even though raw material prices have come down.”

Floats in China don’t have fiscal discipline, Plotnick says. “They keep chasing prices, pushing them lower and lower to sell the increased capacity, which is a shame. Now would be a good time to retain price level to compensate for the previous high prices of raw materials--soda ash and heavy fuel oil--but no one is doing it. Demand is down, 30 percent lower than early 2008, and there’s no place to store glass.”

Decline in exports and currency manipulation
A few years ago, China’s economy was growing at a rate of 11 percent to 12 percent per year. Now it’s growing at a 6.8 percent annual pace, Ebeid says. “They were building plants like crazy and making more than the economy needed. The glass industry is hurting and seeing the squeeze due to the economic slowdown. Compared to last year, their exports have dropped significantly.”

The Chinese government has given a 5 percent export incentive in addition to what the exporters were getting, Ebeid says. “It was 17 percent three to four years ago, 11 percent a little more than a year ago, 6 percent a year ago and now it's back up to 11 percent on specific higher valued products,” he says.

Chinese currency has depreciated, Plotnick says. “The government manipulates the currency to manage the flow. It [went] from Rmb 6.3 to Rmb 6.8 to the dollar in the end of November 2008." The government in Beijing is now discussing a change to Rmb 7, he says. “The export rebate that used to be in effect for years was reduced back in July ’07, but might be back," he adds. "There’s a standard 17 percent VAT taxation. The government rebate was 12 percent of value-added tax in mid-2007. Now the rebate is 5 percent. They might roll it back to the 12 percent level.”

If the rebate happens, the American glass industry could potentially see more cheap glass coming in as the effective price of glass will be reduced by 7 percent, Plotnick says. “But with the demand being down, I don’t see it having a huge impact yet.”

Domestic producers are lowering their prices, so Chinese glass won’t be cheap to export for the foreseeable future, Ebeid says. “In Europe, the fuel surcharge has been drastically reduced and has affected their domestic pricing,” he says.” That will make it more difficult for the Chinese to penetrate. And that will mean more Chinese plants will shut down.”

The plant closings don’t mean much for the American glass industry, Ebeid says. “Less and less Chinese glass is coming to the U.S., with the exception of automotive replacement glass,” he says. “Most of the exports from China will go to poorer countries, such as Bangladesh, Kenya, North Africa and South America. India has an $80 penalty against Chinese dumping. Other countries may follow.”

What’s ahead?
Consolidation will happen in China, as it should, Ebeid says. “There are too many manufacturers now and it’s a disorganized market,” he says. “At some point, they’ll understand return on capital as against ‘biggest is the best.’” Of the 160 plants, there are 60 owners, he says. "That will come down to 10 owners in the next five years. When you have 60 players, you don’t have an organized market. Someone will emerge as the leader.”

China’s economy will start looking like the Western economy depending on how long the government wants to prop it up, Ebeid says. “The poor quality players are taking over other poor quality players. They will all go down. The government is turning over its plants to people who’ll shut them down in an orderly fashion.”