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BUSRIN TREERAPONGPICHIT
High crude prices could prove healthy. They promote conservation of limited resources and innovations in alternative energy. But oil prices that soar at a breakneck pace and only in one direction hardly do anyone any good. Even the petrochemical industry, once a big beneficiary of the upward trend in recent years, has now been counted among the casualties of the spiral that characterised the first half of 2008. This is because the cost of the industry's raw material, naphtha, has risen too much too fast. In the first half of 2008, its prices crossed the US$1,000-per-tonne threshold from around $600 a year earlier.
Meanwhile, the prices of its intermediate and final products were growing as well but at slower paces, leaving petrochemical producers struggling with narrower profit margins.
Suphon Tubtimcharoon, IRPC's chief planning and administration officer, said the spread margins of some petrochemical products had been trimmed by nearly 50% year-on-year.
For example, the price of commodity-grade ethylene rose to $1,200 and $1,300 a tonne from around $1,000 a year earlier.
''Some ethylene plants that use naphtha as feedstock in China, South Korea and Japan were forced to shut down because their sales were too low to cover the rising costs,'' he said.
Others that remain in operation need to cut production to only 60% to 70% of total capacities, with the sole purpose of generating cash, not profits.
As the prices of intermediate petrochemical products, such as low-density polyethylene (LDPE) and high-density polyethylene (HDPE) move in the same direction, they rose to $1,400 to $1,500 per tonne on average. The increases of only a few hundred dollars a tonne were hardly enough to compensate the rises in feedstock prices.
During the first quarter, most petrochemical products reported lower margin growth, especially those based on naphtha. The Siam Cement Group (SCG), Thailand's largest industrial conglomerate whose chemical business made up 45% of its total revenue, was not spared from volatile petrochemical spreads, according to Phatra Securities research.
''We believe that every $10-a-tonne change in spread from naphtha to HDPE would affect SCG's earnings by 600 million baht, or 3%, in 2008 and 2009,'' said Phatra analysts.
However, in the second quarter, the situation improved, as the prices of intermediate products started to rise faster, relieving some of the pressure on those producers' margins from the first quarter.
The trend in the second half of this year, however, remains uncertain. Some producers may see their prices improve while others will continue to struggle, said Mr Suphon.
He said this was due to the fact that the prices of commodity-grade products could not be raised to keep up with the higher costs, while investment to upgrade machinery or technology was too costly.
''I would say that some companies whose plants still use outdated technology, have low efficiencies and produce low-grade products will need to allow the bigger ones to acquire them,'' he said.
Indeed, some large petrochemical companies are planning to do just that. The PTT group, the majority state-owned oil-and-gas giant, is considering acquiring the good assets of petrochemical producers, not only locally but also abroad through its extensive investment plans.
After all, integrated producers with products that fill all market segments from upstream to downstream, as well as specialty petrochemical products, will have advantages over their peers.
One of the few such producers is IRPC, a PTT affiliate that has not only petrochemical plants but also an oil refinery. Mr Suphon elaborated that its complex was producing a whole range of feedstocks, including expensive specialty-grade products such as ABS. This combination of products has helped IRPC maintain marginal growth in tough times.
SCG is also moving in the same direction. Through close ties with its US-based long-term partner Dow Chemicals and Japanese-based Mitsubishi, the company has invested in a number of specialty-grade projects.
A concern over the next six months will be new rivals. Petrochemicals makers in the Middle East will gradually start their operations, adding to the world supply, starting in September this year, when the global petrochemical industry is projected to softly slide into a cyclical downturn once again.
Mr Suphon added that the key survival strategy for Thai manufacturers was not only to turn to specialty products but also to seek new markets to reduce their dependence on the main China market, where demand would soften after the 2008 Olympic Games.
Other emerging markets, including India, Latin America and East Europe, would be the key engines driving the demand for petrochemical products in the world market, both commodity goods and value-added chemicals products.
He added that even in the old market that was China, the company foresaw large room to grow since development in the world's emerging superpower had to date been concentrated only in some provinces along the Pacific Rim.
''The Chinese government has already set a plan to develop its suburban economy, which comprises a large number of undeveloped provinces and that means huge demand,'' he said.
The Thai petrochemical industry, therefore, would keep growing, albeit at a modest pace, and the key was to move smartly, he concluded.
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