Global chemical firms urged to source responsibly after lethal China blast - study

* Report says multinationals sourced from plant in March blast

* Merck confirmed as indirect buyer, other giants named

* 78 killed in Tianjiayi explosion; at least 26 detained in probe

By David Stanway

SHANGHAI, May 21 (Reuters) - A prominent Chinese environmental group has called on chemicals multinationals to stop "cutting corners" by outsourcing business to Chinese suppliers that violate safety regulations after an investigation into a deadly explosion at a factory in March.

In a new study, the Institute of Public and Environmental Affairs (IPE) said it had identified global chemical producers among indirect buyers of products made at the Jiangsu Tianjiayi chemical plant, at Yancheng on China's eastern coast. The IPE is a non-governmental organisation which has a close relationship with China's environment ministry.

The factory was shut for good after the March 21 blast. China's cabinet has set up a special team to investigate the incident and at least 26 people have already been detained.

IPE's investigation named German conglomerate Merck among indirect buyers of Tianjiayi products, while Swiss chemicals firm Lonza previously confirmed Tianjiayi was one of its major suppliers.

Asked to comment on the IPE report, Merck called Tianjiayi a "tier two supplier" and said it was still assessing the situation.

China's massive chemical sector plays a vital role in the supply of basic products widely used across the world, many of which are hazardous. Tianjiayi was a major manufacturer of products like 1,3-dinitrobenzene, used to make explosives, and M-phenylenediamine, a key polymer component.

But IPE said international firms had created a "powerful engine for continued irresponsible operations around the country" and they must ensure they buy only from factories that meet safety standards.

Officials told Reuters that oversight failures were partly caused by the inability of regulators to keep up with the chemical sector's rapid growth, with demand soaring at home and overseas.

'LOOPHOLE'

Ma Jun, IPE's director, said China's economic slowdown had encouraged local authorities to allow non-compliant firms like Tianjiayi to resume operations, but improving enforcement wasn't the only issue. Data and information exist to allow multinational firms to make informed decisions about suppliers rather than focusing only on costs.

"We all recognise the real problem is not about someone being immoral, and more a dynamic that basically rewards those who cut corners," Ma told Reuters.

"Those who have gained the most from globalised outsourcing practices are basically taking advantage of a loophole instead of joining efforts to solve the problem," he added.

The Ministry of Ecology and Environment did not respond immediately to a faxed request for comment on the IPE report.

Also named in the IPE report as buyers of Tianjiayi goods were U.S. chemical conglomerate DuPont, Switzerland's Clariant and Germany's BASF.

The report said BASF and Clariant sourced Tianjiayi chemicals via China's Hifi Chemical Co., which has confirmed it was one of Tianjiayi's major customers. A Hifi sales official told Reuters that BASF and Clariant were among its clients.

Clariant said it was still investigating but Tianjiayi was not a "direct supplier". BASF said, "After an initial internal audit, we did not find Tianjiayi Chemical as the supplier to BASF in China."

DuPont didn't immediately respond to a Reuters request for comment, but IPE wrote in its report that it had been told by DuPont that the firm had "no business relationship" with Tianjiayi.

After the March accident, the Chenjiagang industrial park where Tianjiayi was located was found to be rife with violations and shut down. Jiangsu is now planning a wider crackdown to eliminate hundreds of small-scale chemical producers.

"Among the 400 chemical factories in this chemical industrial park and two others in adjacent regions, more than 300 had records of violations in our database," said Ma. IPE tracks corporate environmental violations nationwide in a database followed closely by the environment ministry.

"If the brands continue only wanting to buy from the cheapest, then they become part of the problem," he added.

(Reporting by David Stanway Additional reporting by Shanghai newsroom Editing by Kenneth Maxwell)