The Jiangsu Yancheng Explosion: Implications for Industrial Safety and Chemical Supply ChainsEverstream Team
- A major petrochemical plant explosion at Jiangsu Tianjiayi Chemical Company on March 21 has set off a wave of nationwide industrial safety inspection campaigns that have triggered significant production halts, plant closures and industrial zone shutdowns across China, particularly for companies operating in the chemicals sector.
- The March 21 blast marks the deadliest industrial safety accident in China since the 2015 Tianjin port warehouse explosion that killed 173 people and resulted in USD 1.1 billion (EUR 974,801,174) of damages.
- More industrial zone shutdowns and plant closures in Jiangsu and other chemical-producing provinces are likely to occur over the coming weeks and months as government regulators place a greater emphasis on industrial safety and environmental compliance.
- Companies may also face relocation pressures due to industrial safety or environmental concerns that could threaten to disrupt chemical supply chains by increasing production and manufacturing costs.
- The Jiangsu explosion could trigger a global supply shortage in the dye, pesticides, and textile industries and has already impacted prices of raw materials for chemical companies in China and worldwide. The shutdown of the Chenjiagang Industrial Park in Xiangshui has already cut into global ink supply chains for pigments, pigment feedstocks, biocides, and photo initiators required for the manufacturing of UV inks.
- Procurement and supply chain managers sourcing chemicals from suppliers in China should reassess their supply strategies, and diversify risks where necessary.
A major petrochemical blast occurred on March 21 at around 3:00 AM local time at a pesticide chemical plant operated by Tianjiayi Chemical Company located in the Chenjiagang Industrial Park in Xiangshui County, Yancheng, Jiangsu. The blast killed 78 people and injured more than 600, while triggering a 2.2-magnitude earthquake. One day after the explosion, Jiangsu environmental authorities found that nearby water sources were contaminated with chloroform, dichloromethane and toluene; media sources confirmed that the concentration of sulfur dioxide was reportedly reported to be 57 times higher and nitrogen oxide was 348 times higher than the acceptable standard.
Tianjiayi Chemical Company, which produces more than 30 organic chemical compounds (such as methyl phenoxide and hydroxybenzoic acid) as well as fertilizer and pesticides, has held a poor industrial safety track record, having been fined in 2015 and 2017 for violating solid and water waste management standards. A State Administration of Work Safety report published in February 2018 cited that the plant violated 13 safety measures, which include a lack of qualified personnel, chemical tank leakages, and lack of clear safety protocols.
In response to the devastating blast, Jiangsu provincial authorities issued a draft plan on April 1 indicating that it would be launching a month-long nationwide inspection campaign into hazardous chemicals, mines, transportation, and fire safety. As one of the leading chemical-producing provinces – and a major source of pesticides, dyes, and petrochemicals – Jiangsu is pledging to slash the number of chemical production enterprises from 5,433 in 2017 to fewer than 1,000 by 2022 in a bid to overhaul the local chemical manufacturing sector in the wake of the industrial accident.
On April 4, the Yancheng government ordered the shutdown of the Xiangshui Industrial Park which hosts more than 367 chemical companies. Companies that have ceased production due to the Xiangshui industrial zone shutdown include Henryda Chemical, a unit under Jiangsu Wuzhong Industrial, which produces organic pigments and dyes; Red Avenue New Materials; Jiangsu Yaban Dye Stuff; and other local firms. Jiangsu Lianhe Chemical Technology and Lianhe Chemical Technology Yancheng, which had a combined net profit of CNY 120 million (USD 17.86 million; EUR 15.82 million), also suspended manufacturing temporarily. Despite the announcement, two of the park’s largest companies – Jiangsu United Chemicals Technology Co., Ltd. and Yancheng United Chemicals Technology Co., Ltd. – remain open and have yet to receive instructions to relocate as of this writing.
The fallout from the March 21 blast has not been limited to companies located in the Xiangshui Industrial Zone. Jiangsu authorities carried out an impromptu inspection on April 9 at Nantong Economic and Technology Zone that resulted in companies having their operations suspended. A notable example was Zanyu Technology subsidiary Cata Technology, which produces chemicals used as a sizing agent in textiles, after it was forced to suspend production at the Yangkou Chemical Park in Nantong, Jiangsu when it was found to have failed industrial safety standards. The suspension lasted more than 10 days and added to growing uncertainty over when it will resume operations. In contrast to Yancheng, three chemical parks have been ordered to close their doors in the city of Nantong since the March 21 blast, leaving manufacturers with a lack of clarity and a lack of compensation, and leading to industrial protests in some instances.
On May 6, Jiangsu environmental authorities issued a new notice stating that the provincial government would enact a new plan immediately to speed up relocation of smaller chemical companies away from densely populated urban areas. Chemical companies that remain open will need to improve safety standards or be forced to close their operations by 2020. Chemical plants located within a kilometer of the Yangtze River will also have to relocate or close by the same date. However, follow-up reports indicate that Jiangsu authorities may be toning down their relocation demands due to strong opposition from the province’s influential chemical industry that have highlighted the potential impact on the region’s employment levels and economic development. Jiangsu is a leading chemical-producing province that is home to around 4,280 chemical companies and 50 chemical parks.
Industrial Safety Challenges
The Yancheng explosion comes on the heels of a long succession of major work safety incidents in China over recent years that can be attributed to poor industrial safety practices and lax enforcement. A number of high-profile incidents – including the 2015 Tianjin port disaster – have set off vigorous nationwide inspection campaigns aimed at rooting out violators and punishing companies or officials for ignoring supervisory duties. Further punitive measures have often led to forced relocation of chemical factories to other industrial parks, production halts, plant closures, or even industrial zone shutdowns.
Notable precedents include a gas leak on November 30, 2018 at a plant owned by Hebei Shenghua Chemical Industry Company in Zhangjiakou, Hebei that caused a chain explosion which led to 24 casualties and 21 people being injured, after leaked chloroethylene came into contact with a fire source. The National Administration for Work Safety Emergency Response later launched an inspection of all large-scale chemical plants in the wake of the explosion. Regulatory authorities later attributed the incident to the company’s lack of safety measures and poor management as contributors to the blast.
Another incident occurred on July 12, 2018 when an explosion at a Yibin Hengda Technology chemical plant in southwestern Sichuan took place in a deflagration accident that led to 19 people being killed and 12 sustaining injuries. The company, which makes chemicals for the food and pharmaceutical industries, has three production lines, making 300 tonnes per year of benzoic acid, which is used in food preservatives, and 2,000 tonnes per year of 5-nitroisophthalic acid, for medicines and dyes.
These accidents since the Tianjin disaster in August 2015 have helped underscore the industrial safety challenges facing Chinese manufacturers and have laid the groundwork for some of the strictest environmental and industrial safety regulatory standards in the world. Although the sensitive response to chemical safety issues among national and regional governments is understandable, it has also caused regulatory ambiguity and unexpected disruptions to global supply chains sourcing from China.
The March 21 blast in Jiangsu is the latest industrial incident to instigate a sudden increase in regulatory crackdowns on hazardous chemical production across the country. Chinese authorities at all levels of government have sought to tighten enforcement through various industrial safety inspection campaigns, capacity cuts and temporary shutdowns, and plant closures and industrial zone shutdowns within their respective jurisdictions. The table below lists the regulatory actions adopted by Chinese authorities since the March 21 explosion.
|March 24||Chinese State Council||Issued an “urgent notice launching risk assessments for all chemical industrial parks across the country” to deploy a thorough examination on potential hazards of dangerous chemicals; all chemical industry parks would be required to undergo safety risk assessments.|
|March 25||Shanghai Emergency Management Bureau||Launched an inspection of more than 300 chemical enterprises and found more than 800 safety hazard violations. It also resulted in the production suspension or partially stopped production for six companies including Shanghai Tongli Electric Materials Company, Xingke Packaging (Shanghai) Company, and Shanghai Trial Chemical Company.|
|March 27||Chinese Ministry of Emergency Management||Launched a month-long, nationwide inspection program into hazardous chemicals, mines, and fire and transportation safety. Chinese safety departments have been instructed to investigate unqualified companies and crack down on the illegal or excess storage of dangerous chemical materials.|
|March 29||Shandong Provincial Government Security Committee||Issued an urgent notice on rectifying potential safety risks of hazardous chemical enterprises that resulted in 762 inspection teams that were sent to inspect 4,050 enterprises. 7,796 of 22,504 issues and potential risks were rectified immediately, 113 enterprises were subject to punishment, and 121 enterprises were requested to suspend production for rectification.|
|April 3||Chinese Ministry of Emergency Management||Introduced safety and inspection measures to tighten industrial safety and environmental compliance effective May 1, 2019.|
|April 4||Guangdong Emergency Management Bureau||Provincial authorities ordered the shutdown of three chemical enterprises at Qining Chemical Company Ltd., Jiangmen Guangyue Electrochemical Company, and Tianlong Fine Chemical Company Ltd. for violating laws and regulations after emergency management investigations.|
|April 8||Chinese State Administration of Market Regulation||Launched a nationwide inspection program into the safety of industrial products such as food packaging and hazardous chemicals. The program will last until October 2019 and increase scrutiny of manufacturers and operators of high risk products, as well as look into the potential use of explosion-proof electrics and structures. A failure to comply will result in the withdrawal of operational licenses.|
|April 9||Shandong Safety Production Committee||Issued measure starting a three-month safety inspection campaign on production in key industries involving hazardous chemicals, coal mines, and metallurgical industries. The inspection programme will punish those who violate regulations, close down enterprises that do not have sufficient safety production conditions, and address major security risks.|
|April 29||Chinese Ministry of Ecology and Environment||Issued a notice indicating that all contaminated water from the Yancheng explosion will be cleaned up by the end of May 2019. Government officials confirmed that “about 199,000 cubic meters of polluted water at the explosion site by April 26” has been dealt with, while “there was 99,000 cubic meters more of polluted water” that needed to be treated.|
|May 6||Jiangsu Provincial Party Committee||Issued issued a new notice stating that the provincial government would enact a new plan immediately to speed up relocation of smaller chemical companies away from densely populated urban areas. Chemical companies that remain open will need to improve safety standards or be forced to close their operations by 2020. Chemical plants located within a kilometer of the Yangtze River will also have to relocate or close by the same date. Reports surfaced on May 9 suggesting that provincial authorities may be toning down their regulatory response in the face of strong chemical industry opposition.|
Supply Chain Impact
The swift regulatory response has raised serious questions about how procurement managers sourcing from chemical companies operating in China will need to respond. More industrial parks and plant closures in Jiangsu and other chemical-producing provinces are likely to be shut down in the coming weeks and months, which may further impact chemical supply chains. Some notable impacts have already been observed.
Shortage of raw materials & key ingredients
The March 21 blast has already had a significant economic impact on chemical supply chains – both within China and abroad. Ongoing industrial safety-related measures have created difficulties for chemical plants to resume production, while production halts or suspensions have resulted in a shortage of supplies for raw materials and have created delays in recovering previous production levels.
The Xiangshui Industrial Park shutdown has led to major raw material shortages and has cut into global ink supply chains such as pigments and pigment feedstocks, biocides, and photo initiators required for the manufacturing of UV inks. Another major example of how the explosion has posed serious challenges is Swiss pharmaceutical giant Lonza Group’s supply chain, which has seen significant material shortages at the company’s specialty ingredients division. Lonza confirmed that all of its ingredient businesses were facing raw material shortages and supply chain disruptions, and that the company was taking additional cost containment measures to overcome headwinds.
According to the EU Chamber of Commerce in China and Greenment Environment, suppliers have seen a sharp increase in prices for polymeric methylene diphenyl diisocyanate (MDI), thermoplastic polyurethane (TPU), M-phenylenediamine (MPD), and liquid chlorine. Fluctuations have also been reported in the price of resins and adhesives. For pesticides, oxyflourfen technical, mesotrione technical, resorcinol, quizalofop-p-ethyl technical and nicosulfuron technical have been directly impacted by the March 21 blast due to supply shortages and rising prices.
Plant closures and industrial zone shutdowns
In the aftermath of the Yancheng explosion, industrial safety inspections, production cuts, plant closures, and industrial zone shutdowns can be linked to an ‘one-size-fits-all-approach’ regardless of a supplier’s track record with industrial safety measures or environmental compliance. In some instances, foreign companies with petrochemical joint venture plants have been requested by authorities to reduce production or even shut down due to major policy events, environmental initiatives such as the Blue Sky Program, air quality control, or region-wide environmental controls.
While the need to address industrial safety concerns is understandable, excessive shutdown measures are having a direct impact on chemical supply chains. Industrial shutdowns not only pose challenges to a chemical plant’s daily operations, but may actually in some cases pose greater potential safety risks. For instance, some plants use carbon monoxide as upstream feedstock which means that a significant production reduction or plant shutdowns could ironically result in increased carbon emissions.
Companies are likely to experience even more pressure to relocate their chemical factories, warehouses, and facilities to specified industrial parks, which has been actively encouraged by the central government ever since the 2015 Tianjin disaster. Although the State Council’s August 2017 Circular No. 77 on the Relocation of Hazardous Chemicals Production Enterprises from Urban Populated Areasoffers national-level guidelines on what relocation entails, such outlines have not been replicated at the provincial and municipal levels.
From a supply chain perspective, relocation demands have led to higher production and manufacturing costs for companies sourcing from suppliers that are forced to either relocate, shut down plants, or suspend production for an extended period of time. Cost pressures on suppliers can be attributed to poor relocation options due to the lack of availability or overcrowding in different industrial zones (as a result of multiple suppliers being forced to relocate at the same time) and poor compensation packages from the government to help suppliers facilitate their move to another location. Relocation can have a direct impact on chemical pricing in the immediate term as some products may be in shorter supply while the relocation takes place. In cases where there are prolonged production halts while suppliers wait to hear whether they will be forced to relocate, companies may not be provided with enough time to determine if they will need to identify alternative suppliers and thereby could be faced with unforeseen stockouts.
Supply chain professionals should remain alert as the recent regulatory crackdown intensifies on chemical companies operating in China. The sudden shift in demand to comply with industrial safety and environmental policy directives has meant that companies will be under more pressure to understand how their supply chain and distribution channels in China will need to adapt. Those with suppliers in China can build more resilient supply chains by considering the following measures.
- Create supplier visibility: Understanding where suppliers are located within China, as well as the region or province that they may have manufacturing locations in, is key to preparing for business contingency plans that may need to be operationalized in the event of a regulatory crackdown. Customers are advised to create visibility of critical supplier locations and product flows through mapping tools in order to assess potential impact in the event of a similar industrial accident and subsequent policy measures.
- Monitor supplier issues and early indicators of non-compliance: The use of supplier monitoring tools can help ensure that companies are able to identify and are aware of suppliers that may be facing safety production issues. Real-time monitoring of issues affecting suppliers can help formulate a resilient sourcing approach in China.
- Develop a robust supplier risk mitigation strategy: Customers are advised to diversify suppliers and consider alternative sourcing strategies for critical supplies in order to mitigate the impact of plant closures and industrial zone shutdowns. In addition, customers that are sourcing products from China are advised to factor in the risk of industrial accidents to ensure sufficient compliance and avoid reputational damages.
- Follow regulatory developments: The Yancheng explosion underlines the importance of ensuring that supply chain professionals are aware of ongoing regulatory changes and how it can directly impact their supply chain and distribution networks. While Chinese regulators continue to grapple with the need to balance economic performance and environmental protection, companies would be best advised to stay abreast of changing regulatory environments to minimize the manufacturing and production costs associated with relocation, production halts, plant closures and/or industrial zone shutdowns. A failure to comply with regulatory directives could also result in greater reputational risks.
- Emphasize industrial safety and environmental protection: Given the sensitive nature of regulatory crackdowns and industrial incidents from the chemicals sector, foreign companies should seek to align themselves with the broader policy objectives of Chinese regulatory authorities and place a strong emphasis on industrial safety and environmental protection in their daily operations, especially with regards to key suppliers. This not only fosters greater trust with regulatory authorities, but provides foreign companies and suppliers with a clearer picture of the regulatory priorities from industrial safety and environmental inspectors.