East Asian petrochemical industry recovery sure but slow

May 10, 1999
With over half of the global population, East Asia is expected to continue to be an important region for the growth of the petrochemical industry. The region (primarily China) will be the key importer of most petrochemicals, and it is expected to play an important role in setting product prices in the international marketplace. East Asia is defined as the Asian countries from Pakistan east to Japan and from China in the north to Indonesia in the south.
Stephen N. Rothman
Chem Systems Inc.
Tarrytown, N.Y.
With over half of the global population, East Asia is expected to continue to be an important region for the growth of the petrochemical industry.

The region (primarily China) will be the key importer of most petrochemicals, and it is expected to play an important role in setting product prices in the international marketplace.

East Asia is defined as the Asian countries from Pakistan east to Japan and from China in the north to Indonesia in the south.

From 1998 to 2005, the share of global GDP (gross domestic product) by the countries in East Asia is expected to increase from 25 to 27%. This growth is mostly accounted for by the economies in China and in the ASEAN (Association of Southeast Asian Nations) region.

During the 1998-2005 period, China and the ASEAN countries are each expected to gain one percentage point in global share of GDP. China's share is expected to increase from 3% to 4%, and the ASEAN countries' share is expected to increase from 2 to 3%. This is in spite of the recent economic crisis in East Asia.

As shown in Fig. 1a [46,838 bytes], the crisis began in mid-1997 and is not expected to effectively recover until about 2002. The ASEAN region, where the crisis began, has been most seriously affected, as shown in Fig. 1b. In ASEAN, average economic growth went negative in 1998, and the region is expected to lose about 2 years of previously anticipated growth by 2002-the forecasted date of recovery.

Despite these recent problems, East Asia deserves attention as the focus for future markets for petrochemical products and production capacity. Long-term economic growth for China and the ASEAN countries is expected to be 4-7%, compared to less than 3% in most developed countries.

International industry

Most industry observers understand the truly international nature of the petrochemical industry. This nature can be clearly demonstrated by examining the patterns of profitability around the world.

Fig. 2 [56,835 bytes] shows chemical industry profitability indices for the U.S., Western Europe, Japan, and South Korea, based on analysis performed in Chem Systems' Petroleum and Petrochemical Economics program. These data clearly show the cyclical and parallel performance of the chemical industries in these different locations.

The figure also shows the deterioration in the relative performance of the chemical industry in South Korea, which was primarily a result of excessive capacity additions and substantial exports at low product netbacks.

Ethylene and its derivatives

The remarkable growth in the importance of East Asia in the production of petrochemicals can be illustrated by examining the change in capacity of ethylene production over the recent past.

Fig. 3a [135,641 bytes] shows that East Asia's share of global ethylene capacity increased from 19 to 26% from 1990 to 1998. The majority of this increase was a result of new facilities built in China and the ASEAN countries.

From 1998 to 2005, ethylene demand in China and ASEAN is expected to substantially increase from over 3 million metric tons to over 7 million tons each (Fig. 4a [102,507 bytes]).

Examination of polyethylene (all grades of low density, linear low density, and high density combined) also shows the increasing importance of East Asia in this international industry.

Polyethylene capacity in East Asia increased dramatically from 1990 to 1998 (Fig. 3b). In terms of global capacity share, East Asia increased from 19 to 27% over this 8-year period. The majority of the increase came from China and ASEAN.

Forecasts of increases in polyethylene demand in East Asia between 1998 and 2005 are impressive (Fig. 4b). Polyethylene demand in China is expected to grow from 4.7 million tons to 8.5 million tons, and in ASEAN from 1.6 to 3.2 million tons over this period.

East Asia's position in polypropylene shows the same characteristics as that for ethylene and polyethylene, but even more so. East Asia's share of global polypropylene capacity increased from 29 to 38% from 1990 to 1998 (Fig. 3c). This growth in global share was a result of increases in China and ASEAN capacity.

Polypropylene demand in East Asia is expected to substantially increase from 1998 to 2005. Chem Systems expects demand in China to grow from 3.2 million tons to 5.6 million tons and in ASEAN to grow from 1.1 million tons to 2.4 million tons (Fig. 4c).

Global trade

The position of East Asia global trade in petrochemicals is extremely important. This can be illustrated by examination of the trade in polyethylene and polypropylene ( Fig. 5 [75,224 bytes]).

In 1990, China and ASEAN were minor net importers of polyolefins, and Japan and South Korea were minor net exporters. By 1998, China became the largest global importer of both polyethylene and polypropylene, and its actions are recognized as having dramatically affected the price of these polymers in the East Asian and global markets. When China stopped buying, at various times, prices in East Asia and around the world plummeted.

The position of the ASEAN region changed by 1998 as the result of significant capacity increases. The region, formerly a net importer, became a net exporter. This affected product netbacks (export prices vs. protected domestic prices) and project economics.

South Korea became a substantial exporter (1.2 million tons in 1998). With the need for cash flow to fund debt for this new capacity, South Korea became the generally acknowledged low-price setter for the export market. Japan maintained a minor export position in 1998.

In the future, Chem Systems expects the continued growth of these recent trends. China's imports will expand substantially, as demand increases faster than its ability to add new capacity. With China importing almost 6.5 million tons of polyethylene plus polypropylene in 2005, China will continue to be the most important factor in the polyolefins international market place. That is, China will be the price-determining buyer.

South Korea will continue as a major exporter of polyolefins. And, the country's cash needs are expected to continue to establish prices at the bottom of the cycle. ASEAN producers are expected to become a major factor in the export market, and their behavior with respect to pricing and their requirements concerning debt obligations, etc., could have an important effect on regional and international prices and economics.

Issues in China

There are, of course, some concerns and uncertainties associated with the outlook for several countries which are important in the East Asian petrochemical industry. With China's prominent position in the regional and international industry, it is appropriate to look first at the issues of concern with China.

China's economy is still growing, but at a somewhat lower pace than in the early to mid-1990s when the growth rate was about 9%. Most forecasters expect China's intermediate and long-term economic growth to be 7-8%, which is a significant multiple of the growth level in the developed countries.

To sustain this growth, the government is shifting resources and funding towards infrastructure. Fewer resources will be directed towards petrochemicals. The government cites two reasons for this policy: the current low profitability level of the petrochemical industry and poor results with recent domestic projects.

While the current low point in the petrochemical cycle is well-known (one could argue that this is the correct time to plan projects in anticipation of the next upturn), the problems with recent Chinese projects were mainly due to their small scale and other fundamental competitive deficiencies.

This change in economic policy illustrates some of the difficulties in planning and implementing projects in China by international companies.

Over half of the new capacity planned in the petrochemical industry in China by 2005, is based on joint ventures with international companies. These companies are encountering the usual difficulties and delays in implementing large projects in developing economies as well as some problems which are unique to China.

Two categories of issues appear to be the most important:

  • Changes in government policies which affect new projects (such as the previously mentioned shift towards infrastructure from petrochemicals and other industrial facilities)
  • Difficulties in reaching agreement on internationally conventional commercial terms which are needed for projects to be funded.
These terms include arms-length, market-based prices for raw materials and products; long term contracts for raw materials and products; lump-sum, fixed-priced contracts for the engineering, procurement and construction of facilities; and an independent, international quality feasibility study which analyzes the ability of the project to generate the necessary cash flow to repay the loans.

These elements are central to virtually all process-industry project financing. They are particularly important to the financing community for projects in China, considering the banks' recent problems with projects in other East Asian countries and the uncertainties of financing large projects in China.

While these elements are considered to be standard conditions to the international process industry and financial community, they are new concepts to Chinese government-run companies.

China also faces the need to shut down small, inefficient petrochemical plants. The social problems associated with unemployment, however, makes this a very difficult undertaking.

The possible devaluation of the Renminbi is another a concern. At this time, however, it does not appear to be a productive or probable step.

With the likelihood that many of the planned petrochemical projects will be delayed, the import level of products into China will increase. This could benefit the global industry. A delay of petrochemical projects would cause an increase in industry operating rates and shorten the time until the next upturn in the profitability cycle. It would, however, not be good news for the process-industry contracting business, which is suffering from a lack of new projects.

Issues in other countries

The situation in South Korea is presently difficult. The following issues characterize the South Korean situation:
  • High debt loads (from 350 to 1,000% for different companies) and government emphasis on restructuring and the reduction in debt/equity positions (target of 200% debt level).
  • Consolidation of the Chaebols. The five largest Chaebols are reported to have had sales equivalent to about two-thirds of the national GDP in 1997. A change in this system introduces a new element of uncertainty to the national economic structure.
  • Consolidation of the petrochemical industry, with the focus on major production sites. The collaboration between Daelim Industrial and Honam Petrochemical at Yeochon is an example of previously unheard of cooperation between neighboring operations.
  • Investments or acquisitions by foreign companies. For example, BASF AG acquired the remainder of its styrenics joint venture with the Hyosung Group, and Mitsui is considering acquiring a share of the merged operations of Hyundai Petrochemical and Samsung General Chemical at Daesan.
  • Overcapacity and dependence on exports.
The Japanese petrochemical industry is facing several important problems, also. They include:
  • A high cost of production at many old, small plants
  • A weak economy
  • High export orientation in a period of declining traditional markets.
The Taiwanese petrochemical industry is in the process of dealing with several key issues.

The industry has been stagnant, except for the new project and future plans by Formosa Plastics Corp.

Actions by environmental groups are limiting new projects, and will possibly force plants to be built overseas.

The ASEAN countries are also facing a variety of issues.

Singapore continues to develop as an internationally competitive export platform. It depends, however, on strong export markets for its products.

Although Indonesia offers promising domestic market opportunities, these opportunities will have to wait until after the resolution of its current political and economic difficulties.

In Malaysia, several new projects, based on favorable feedstock positions, are continuing to be developed. These projects are largely export oriented, however, and like Singapore, they need strong export markets to succeed.

In the Philippines, coordination and cooperation between downstream petrochemical ventures is necessary to develop the first upstream olefins project. Olefins projects are being planned or promoted in Bataan by groups led by PNOC Petrochemical Development Co. and Bataan Polyethylene Co. as well as in Batangas by JG Summit Petrochemical Corp. Olefins demand in the Philippines, however, can only presently support one world-scale project.

Thailand is in the process of economic recovery. It is restructuring some petrochemical project debt and absorbing new capacity. The resolution of the effects of the economic crisis on existing projects is expected to result in the continued growth of the most developed petrochemical industry in ASEAN.

Thailand is not independent of its neighbors, however. The shift to a net exporter, from import substitution, means an increasing dependence on the strength of export markets for the country.

The Author

Stephen N. Rothman is a vice-president of Chem Systems Inc., Tarrytown, N.Y., and a director of Chem Systems East Asia, headquartered in Bangkok. He is also responsible for Chem Systems' consulting activities in China. Chem Systems is a wholly owned subsidiary of IBM. Rothman has over 30 years of experience in the petrochemical and energy industries. He has been responsible for successful studies and implementation of petrochemical projects in Thailand, Malaysia, Singapore, the Philippines, and many other countries around the world. He has served as commercial or technical advisor on negotiations for joint ventures, raw material and product contracts, project financing, and mergers/acquisitions for governments and private companies. Rothman holds a BChE from Rensselaer Polytechnic Institute, Troy, N.Y

Copyright 1999 Oil & Gas Journal. All Rights Reserved.