PETROCHEMICALS

Notoriously cyclical by nature, petrochemicals is one sector where the current boom is expected to last well into the future, driven by demand for all manner of products from Asia's surging economies, led by China

by BUSRIN TREERAPONGPICHIT


Although the nation's first petrochemical plant was built through co-operation between the government and the private sector, past governments have offered insufficient support to petrochemical producers, a situation which insiders say has hurt the industry's competitiveness.

To sustain the leading position of the Thai petrochemical industry, the government needs to put more effort into forging new links in the petrochemicals sector's product chain in order to improve competitiveness in terms of new technological developments and economies of scale.

CEMENTHAI CHEMICALS Co (CCC), the Siam Cement industrial conglomerate's petrochemicals arm, has expressed concern that recent fluctuations in oil prices could shake up sentiment for the entire industry.
"If oil prices jump to US$60 per barrel by early next year as the oil companies are saying, I don't even want to think about what our product prices will be," said Apiporn Pasawat, president of CCC.

Despite the industry's healthy growth in 2004, he worried that sky-high product prices could affect consumer purchasing power, resulting in reduced consumer consumption demand.

Because plastics are a necessity for daily life, if raw material costs increase, plastics producers will simply pass their higher costs on to the end user to sustain their own margins, resulting in the end users shouldering the entire load.

Because an oil price surge could push petrochemicals prices to unexpected levels, the company is still anxious that such a development could backfire, in one of those rare cases of too much of a good thing.

Global crude oil supply and demand has a direct impact on naphtha prices, the main feedstock of petrochemicals. Currently, naphtha goes for around US$450 per tonne, in line with the crude price which is hovering at around $45-50 per barrel, up from $25-30 in 2003.

As a result, petrochemicals including polypropylene have hit $1,100 a tonne, while high density polypropylene is around $1,200 a tonne; record-setting prices for both.

"Petrochemicals prices [in 2004] were unbelievable. We have recorded the highest profit gain since I entered the business," said Mr Apiporn.

But amid the sound of champagne corks popping, the currency exchange rate poses another hidden potential threat, he said. Should the greenback lose its strength against the Chinese renminbi, it could cause the US to reduce imports from China.

As a result, China's petrochemicals consumption and economy would likely sink into a slump, with a knock-on effect on the Thai petrochemicals industry since China is one of its main export markets.

Fortunately, the CCC president said, the world petrochemicals market will remain strong over the next two years as global supply remains tight. "If domestic sales drop, we could export with a similar margin gain."
Another worrying factor is the shortage of naphtha on the global market due to higher prices for gasoline.

CCC has set a strategy of being well prepared for future uncertainties by limiting its inventory to less than one month and adjusting its production to constantly meet optimum levels.

The company is negotiating with construction companies to build an ethylene cracking plant in Saudi Arabia, with a deal expected to be wrapped up by 2006. Once its new cracker starts commercial production by 2008, CCC expects its naphtha supply worries to be over.

No threat of political risk

THE PETROCHEMICALS ARM of the country's largest petroleum conglomerate, PTT Plc, expects to see the industry sustain healthy growth over the next couple of years, despite weakened consumer and business confidence.

The newly appointed president of The Aromatics Thailand (ATC), Permsak Chevawattananont, said the current cyclical uptrend was likely to last up to 2006, longer than ever seen before.

Uncertainty in the Thai economy would not affect the company's performance, because the company could simply switch to exporting its petrochemicals production abroad if domestic demand falls due to a local economic slowdown.

Therefore, even if the Democrat party forms the next government after Feb 6, such a change should not result in significant turbulence for the industry.

Dr Viroj Mavijak, president of National Petrochemical Plc, agreed that local demand was likely to grow in line with the global momentum for economic growth.

With the world economy predicted to grow 5% in 2005, its highest gain in 30 years, Asia recorded overall growth of nearly 10% in 2004.

Dr Viroj predicted that consumption demand for petrochemical products in Asia would grow some 7%.
However, risk factors include soaring oil prices that are expected to average over US$40 per barrel, resulting in increasing raw material and production costs. Higher future interest rates may affect investments in new projects and reduce consumer purchasing power, another potentially negative factor.

The NPC president expressed concern that additional supply from the Middle East and some Asian countries could intensify global competition.

Along with competitive costs, Thailand's geographic location offers an advantage over its rivals, making it easier for local producers to access top export markets.

In spite of these advantages, local players still need to work on their cost management skills and create better market information networks.

He said NPC had attempted to increase its competitiveness by investing in projects which maximise knock-on benefits to its existing operations.

Dr Viroj added that the government should take a leading role in establishing one-stop service for the industry, which would encourage Thai companies to put more effort into research and development.

ATC was more optimistic about the future, Mr Permsak said, since rising oil prices had boosted the company's earnings.

Ever since oil prices began to skyrocket in the fourth quarter of 2003, the company has been concerned about a potential squeezing effect on spreads. But instead, the higher prices have turned out to be a windfall for the company.

While rising oil prices had increased the costs of raw materials, they had widened margin since product prices had risen well ahead of the higher costs for materials.

"Increasing oil prices will likely bring more big profits for ATC," he said.
Amid such bright prospects, Mr Permsak said that petrochemical market players needed to keep abreast of world economic trends as they adjusted their plans to cope with the fast pace of world events.

Most players have learned this lesson well, which after the last economic crisis saw them struck with the double blow of a weakened baht and huge debt burdens.

Although the aromatics product cycle is expected to be longer this time around, with global feedstock supplies extremely tight, the company is approaching the question of further investments with caution.

He added that government support would be needed for the industry's next growth phase, which would see the creation of marketing networks throughout Asia, and was hoped to turn former competitors into partners.

He expressed hoped that the government would support the industry by creating petrochemical clusters, with collective sourcing to ensure adequate feedstocks.

His last suggestion was that government needed to control its own expenditures better, and avoid overspending which could damage the economy if left unchecked.