ASIA TO PACE WORLD PETROCHEMICAL GROWTH

Developing nations of Asia will account for the most dramatic growth in petrochemical demand and capacity additions in the 1990s.

That's apparent in a study by the World Bank that focuses on six newly industrializing nations: China, India, South Korea, Thailand, Indonesia, Malaysia.

Burgeoning economies and ambitious expansion plans in most of those six-plus Hong Kong, Singapore, and Taiwan-underlie analysts' projections of the Pacific Rim as having the strongest growth in petrochemical supply and demand in the years to come.

Even at that, there is an emerging concern about potential surplus capacity in the Pacific Rim supply. In Indonesia, where work is about to start on a major ethylene project, the wisdom of the government's plans for further ethylene capacity has been questioned.

Meantime, Japan's petrochemical industry will focus on a more global orientation in the 1990s as it deals with a slowing rate of growth in domestic demand and increasing regional competition.

Elsewhere in the Eastern Hemisphere outside western Europe, the Middle East will continue to show strong gains in petrochemical capacity, paced by an ambitious program in Saudi Arabia. One analyst seeks to refute the common assumption that the big crude exporters in the Middle East have a built-in edge in petrochemical production when oil prices rise.

Less certain is the direction the U.S.S.R., China, and eastern Europe will take in the wake of political upheaval and economic woes as Communist regimes continue to crumble.

The depressed economies of Africa will keep the volume of petrochemical demand there fairly low. There are a few significant projects planned in Africa, chiefly among members of the Organization of Petroleum Exporting Countries-most notably in Nigeria.

WORLD BANK STUDY

Asia, which now accounts for production of 17% of all plastics, 15% of all synthetic rubbers, and 34% of all petrochemical fibers, is expected to expand its market share still further, the World Bank study said.

The study by Walter Vergara and Dominique Babelon offered these thumbnail analyses of the six targeted countries' markets and competitive positions in petrochemicals:

South Korea has an advanced market, high per capita consumption, high growth rates, an ambitious expansion program, and is a large exporter of finished products but lacks domestic feedstock. It has competitive production of downstream chemicals in its domestic market and is expected to be self-sufficient in the short term.
India is the lowest per capita consumer of the group and a large importer of intermediates and resins with moderate to high demand growth rates and large expansions under consideration. It is about to start use of gas but has limited feedstock available because it has no surplus of gas. India is likely to be a naphtha importer in the long term. Its gas based production of olefins and production of aromatics is competitive domestically. Overall, India is a high cost producer and thus will continue to be a net importer.
China offers the biggest market of the group but has low per capita consumption. It is the largest importer of resins in the group. China has shown high growth rates in the past, but prospects for further growth are clouded by trade and currency restrictions. It faces a growing domestic shortage of refining feedstocks. China just finished an expansion program and is considering adding much more capacity. Its naphtha based production is competitive only in the domestic market. China is a high cost producer and major net importer.
Thailand is a new producer with a small but fast growing market with moderate per capita consumption. It has limited feedstock available with relatively expensive gas fractions. Thailand's gas based production is competitive in its own market, and the country is a potential competitive exporter of downstream products to Asia.
Indonesia is not yet a producer of basic petrochemicals. Its domestic market is of moderate size, with low to moderate per capita consumption. It is expected to be a long term exporter of naphtha and gas fractions. Domestically, Indonesian petrochemicals are potentially competitive with U.S. imports, but its export competitiveness depends on improvements in capital costs and integration.
Malaysia produces no basic petrochemicals other than methanol. It has a modest domestic market and moderate per capita consumption. It is a large feedstock supplier and net long term exporter of gas and naphtha. It has good potential position as an exporter to Asia for olefins and aromatic derivatives but will face crowded export markets.

CONTINUED ASIAN GROWTH

The World Bank study authors expect the six domestic markets to continue to expand, soon converting Asia into a market comparable with more developed regions.

Ethylene demand for the six has jumped to 1 1/2 times that for Japan, compared with only a small equivalent fraction just 10 years ago. By 1995, ethylene demand in the six countries will climb at a rate of more than 10%/year to 10 million metric tons/year, the study estimated.

The study also projects similar growth rates for plastics, fibers, and rubbers for the six.

In addition, there is a trend among the six developing nations toward greater liberalization of government policies regarding development of a domestic petrochemical industry, the World Bank study said.

That is evident in the relative market strengths and government interventionist policies among the countries, the study found. A high degree of nominal and effective trade protection, such as in India, has kept a rein on industrial efficiency. Countries where much of the petrochemical production is targeted for export, such as South Korea and Malaysia, have been more careful to keep protectionist policies to a minimum, the study said.

Another reason for optimism in developing Asia's petrochemical industry is that differentiation among the markets there offers opportunities for complementary ventures, the study found.

"From the most sophisticated, highly integrated markets like Korea to those with clear advantages as suppliers of polyolefins (Malaysia), the region is a showcase of the stages of market development in petrochemicals," the authors wrote.

Finally, abundant gas resources in some of the region's nations and supply of other feedstocks provide Asian producers with the chance to become long term, low cost producers of basic petrochemicals and competitive manufacturers of downstream products, the study concluded.

It noted that to take advantage of low feedstock costs and build upon their competitive stances, the six countries must act now to improve economics of petrochemical manufacture: South Korea and Thailand must diversify feedstock bases and continue vertical integration, China needs to restructure in fibers, India must restructure in fibers and rubbers, improve efficiency among contractors and engineering companies, and cut tariffs, and Malaysia and Indonesia must undertake long term planning and obtain access to export markets.

The study also warned industry in the region to deal with potential overbuilt capacity through better communication, planning, and discipline.

JAPAN'S CHANGING FOCUS

A survey by the Japan Chemicals Industry Association showed that its members expect to become more internationally oriented in the 1990s.

According to the survey, 69% of JCIA's 182 members thought their main business was in the last stages of maturity. Although companies still expect to expand, they say they must revitalize their main business and develop new businesses and production.

K. Kagami, director general of JCIA, said the Japanese chemical industry hinges on domestic demand. The major issue for the future will be progress toward an international approach such as direct production overseas or direct selling overseas, he said.

The big Japanese trading houses are already involved in major investment projects overseas but are becoming concerned that overcapacity could emerge in the now buoyant Pacific Rim market.

Showa Shell Sekiyu KK, Mitsubishi Corp., and C. Itoh & Co., who are investing in a 370,000 metric ton/year ethylene plant in Indonesia to start up in 1993, were disturbed by proposals from the Jakarta government for a second ethylene plant with similar capacity.

Industry observers in the region believe there is a danger of saturating the market with a plant starting up soon after the Shell-Mitsubishi-C. Itoh project.

The Indonesian government claims that both plants are viable, given long term demand projections in the U.S. and Pacific Rim markets.

The World Bank study found that if Japan's petrochemical industry proceeds with plans to add a substantial amount of cracking capacity, the country may be able to trim future imports of petrochemicals.

Since 1987, Japan has been a net importer of petrochemicals through the combination of mothballing of domestic capacity, increasing competition from other Asian producers, and creation of Japanese owned subsidiaries in lower production cost countries with output earmarked for Japan, the study said.

Because Japanese petrochemicals rely 98% on naphtha as a feedstock, the industry there is likely to be squeezed by an expected tightening of naphtha supplies in Asia.

ROLE OF OIL PRICES

Probe Economics Inc., Mount Kisco, N.Y., disputes the conventional wisdom that high oil prices give Saudi Arabia and other OPEC petrochemical producers a market advantage because they have access to inexpensive liquid petroleum gas as a byproduct of oil production.

OPEC oil sales decline when oil prices rise, Probe Pres. Fred Peterson noted.

"The result," he says, "is that OPEC producers can sell all the chemicals they can make, but they have to cut production because they can't get enough feedstock."

If oil prices fall, however, many analysts assume the resulting switch to heavier feedstocks will flood the market with excess benzene and propylene.

"Instead, when oil dips below a certain price, refiners produce more heating oil, which has a price advantage over natural gas in industrial heating," Peterson said.

"Refining heating oil yields more straight run gasoline, which yields less benzene and propylene during processing."

SABIC PLANS

Meanwhile, Saudi Basic Industries Corp. (Sabic), the main force in Middle East petrochemicals, continues to expand and grow more profitable.

Sabic is moving ahead with a $1 billion, 500,000 metric ton/year expansion of the Petrokemya ethylene plant at Jubail, pushing total capacity of the unit to 1.15 million metric tons/year.

The extra ethylene produced will serve to expand Sabic's ethylene glycol and polyethylene output. The expansion also will add 300,000 metric tons/year of propylene, 100,000 metric tons/year of butadiene, and 70,000 metric tons/year of benzene. Most of the propylene will serve as feedstock for polypropylene. The plant will operate on a variety of feedstocks.

Sabic last month signed a $200 million construction contract with Mitsui Engineering & Shipbuilding Co. covering engineering, detailed design, construction, and purchasing services for the Petrokemya expansion project. The contract spans 33 months. The project is to be complete in 1992 and start up in 1993.

Petrokemya, which went on stream in 1985, produces 650,000 metric tons/year of ethylene, 100,000 metric tons/year of polystyrene, and 50,000 metric tons/year of butene-1.

Sabic, in partnership with a Japanese group led by Mitsubishi Gas Chemical, also is doubling its methanol capacity at the Ar-Razi plant in Jubail.

By the end of 1991 production should be 1.2 million metric tons/year.

Last year, Sabic had revenues of $3.634 billion and profits of $898.66 million.

CENTRALLY PLANNED ECONOMIES

A question mark hangs over the newly emerging markets of the centrally planned economies-an increasingly obsolete term.

Although the U.S.S.R., China, and the eastern bloc nations have huge potential for growth, their strapped economies and lack of consumer infrastructure leave industry wondering if that potential will be tapped soon.

Raymond Ory, Wright Killen, Houston, sees the new markets in the U.S.S.R., China, and eastern bloc nations as much more difficult to gauge than other markets.

"Although those economies will be growing, they will be harder to penetrate because their social structures are not tuned in to synthetics," he said.

Bill Urquhart, Bonner & Moore, Houston, sees rapidly growing internal demand for consumer goods in eastern Europe that could have a significant effect on world markets by the mid-1990s.

The Soviets' ambitious program to revive and greatly expand the U.S.S.R.'s petrochemical industry base probably won't absorb much of that demand growth in the near term.

"The Russians are unlikely to build anything on time," Urquhart said.

A bigger uncertainty is the direction China will take, contends Bonner & Moore's Earl Simpson. Since 1988, China's suddenly lagging demand has kept much of the Far East export market in recession after a boom in 1987.

Now, Simpson sees mixed signals from China: Demand is up from last year but not likely to take off again as it did in 1987.