Despite the numerous threats to the world economy, petrochemical manufacturers in Thailand and elsewhere still expect a bonanza in the year ahead.

The jury is out on whether the global price cycle has peaked, but local producers need to take advantage of the good times and build more competitive, integrated operations to ensure sustainable longterm success by BUSRIN TREERAPONGPICHIT

Product prices in the highly cyclical petrochemical industry have remained at impressively high levels for longer than many had expected, boosting margins and helping operators build up war chests for future growth.

The industry did see a sharp drop in prices in the second quarter of this year, resulting in lower margins on a quarteronquarter basis.

Most companies admit that their secondquarter performance will be less impressive than in the first quarter, but they still expect revenue growth on a yearonyear basis. They also believe the secondquarter slowdown has been a blip and that the second half of the year will be healthy.

"The current lower prices are a result of a slowdown in China's manufacturing sector in the first quarter," says Permsak Shevawatananon, the president of The Aromatics (Thailand) Plc (ATC).

"I'm confident that it is not a sign of a downhill trend, since supply is still tight and demand is still growing."

Executives attribute the current slowdown partly to the effects of a dispute between China and major Western markets over textiles. With lowpriced Chinese products flooding US and European markets since the abolition of global textile quotas in January, Beijing faces increasing pressure to revalue its currency, which Washington maintains is about 40% too cheap.

In an attempt to mollify critics, China imposed tariffs on some textile exports, leading producers to reassess their plans and cut back on orders for polyester, according to Cholanat Yanaranop, the executive vicepresident of Cementhai Chemicals Co, the petrochemical flagship of the Siam Cement Group.

However, Mr Cholanat said China would inevitably have to source many products to sustain its economy growth as petrochemicals were a key raw material for dailyuse products.

"The orders from China will return to normal levels, driven by harvestseason demand," he said.

Thai Olefins Plc, the upstream petrochemical arm of PTT Plc, agreed that the recent decline would be shortlived as supplies remained extremely tight, despite the ongoing construction of new petrochemical complexes in China.

China's olefins consumption now represents between 18% and 19% of global demand, with 60% of the olefins products used in China imported.

According to an analyst with National Securities, ethylene prices dropped sharply by 30% to US$817 per tonne from $1,160 from March to June, with olefins prices down 11%.

A 510% depreciation in the yuan could affect demand from China's textile industry.

However, a TOC report says the current softness in the ethylene market is only a pause on the way to the peak, while the spread margin on ethylene, at $490 per tonne, remains healthy.

Kongkrapan Intarajang, the corporate strategy manager for TOC, said ethylene demand would grow strongly at 4.7% per year until 2009, despite additional supply from the Middle East and Asia.

Another analyst believes that the impact of the new ethylene capacity from the Middle East and China, coming onstream in mid2005, would bring a quick end to the current peak in the cycle.

In the second half of this year, the major threat executives see is a possible slump in Chinese consumption if Beijing bows to US pressure to revalue the yuan.

ATC, whose main customers are Chinese manufacturers, forecasts that a 510% depreciation in the yuan could cut the country's export growth this year to 10% from an impressive 34% in 2004. GDP growth would decline by 1.6 points to 8%, still a healthy number by any standard.

Cholanat Local operators need to improve riskmanagement skills

"Although PX (paraxylene) is the focus in the China market, we can export to the US, Far East Asia other countries that need PX for their textile industry as well," Mr Permsak said.

He said the company's current spread margin between condensate and PX was still favourable at around $450 a tonne, up from $440 in 2004.

Although high crude prices helped drive recordhigh earnings in 2003 and 2004 for the petrochemical industry, they represent a doubleedged sword.

"While surging crude prices help to increase our sales revenue, the con
struction costs for new plants are skyrocketing as well," Mr Permsak said.

ATC has been forced to revise the investment cost for its second aromatics plant, originally budgeted at $650 million, to reflect higher building materials costs, in particular construction steel, as well as the increasing transport costs linked to more expensive fuel.

Despite the higher costs, Mr Permsak is confident that the expansion remains viable as demand should escalate and the feedstock for the new production has already been secured.

With the good times continuing, Thailand's petrochemical manufacturers have been investing in significant capacity expansion, though they also realise that consolidation as well as diversification will be necessary for longterm performance.

Although Thailand has advantages among rival countries in Asia due to the concentration of facilities on the Eastern Seaboard, lower production costs and adequate feedstock supplies, the country still needs to improve competitiveness by expanding downstream to secure revenue at times when upstream prices are weak, says Suphon Tubtimcharoon, senior executive vicepresident of National Petrochemical Plc, another affiliate of PTT.

Given the intensive capital investment required, collaboration among players in a bid to create greater benefits would eventually take place in the near future.

Mr Cholanat said local operators needed to further develop their riskmanagement skills, while also creating more integrated production complexes, expanding export market bases, securing feedstock supplies and improving production efficiency and cost controls.

One such beneficial arrangement in the pipeline is the integration between PTT's petrochemical arms, TOC and NPC, which will be finalised this year.

Also closely watched will be Thai Petrochemical Industry Plc, which is already well integrated but has been unable to reach its full potential because the longstanding dispute over its debt restructuring has put the brakes on new investment.

TOC LOOKS DOWNSTREAM FOR STABILITY

Thai Olefins Plc, one of PTT's petrochemical units, is making a strategic move to integrate downstream activities into its business, with the goal of generating more stable and predictable earnings over the long term.

Kittichan Sirisukaracha, an analyst with Kim Eng Securities, has made TOC his top pick in the petrochemical sector because of the strong earnings potential resulting from its new and planned strategic investments.

TOC was listed on the Stock Exchange of Thailand two years ago and has since gone from strength to strength. The achievement is notable given that the company had been one of the hardest hit in its sector after the 1997 economic crisis.

In fact, the company had been steadily losing money ever since it began commercial operations during the trough of a global petrochemical industry cycle.

However, under a skilful management team, TOC is now taking advantage of an unusually prolonged cyclical peak to position itself as a longterm outperformer.

The company's chief of finance and strategy, Puntip Oungpahuk, says TOC emphasises sustainable returns based on two key strategies production cost reductions and investment diversification to downstream activities.

The company has increased its olefins production capacity to tap high prices and tight demand, TOC's production capacity for olefins _ ethylene and propylene _ is currently 875,000 tonnes per year, up from 575,000 tonnes a year earlier.

Earlier this year, TOC began investing in downstream companies, including a joint venture with Cognis Thai Co to set up Thai Ethoxylate Co, which produces fatty alcohol ethoxylates (FAE) as raw materials for medical and personalcare products.

The new venture plans to produce 20,000 tonnes per year of choline chloride and 50,000 tonnes of ethanolamines. Both projects are expected to be operational by early 2007.

Meanwhile, TOC expects to realise earnings from its investment in SETlisted Vinythai, a vinyl chloride monomer (VCM) producer, which uses ethylene feedstock from TOC.

Capital Nomura Securities Co (CNS) foresees healthy profits this year for TOC and Vinythai as well as other listed players Aromatics (Thailand) Plc (ATC) and National Petrochemical Plc.

The higher profits are expected to be generated from higher product prices, lifting combined gross margins to 27% from 21% a year earlier.

Among these companies, a CNS analyst said TOC and ATC would record the highest profit growth.

TOC's total revenue this year is expected to rise by 10 billion baht from 23.8 billion last year. The average olefins price this year is likely to be maintained at around US$900 a tonne, similar to last year, despite a recent drop in ethylene prices.

The increased revenue this year would come mainly from capacity expansion, said CNS, which remains "bullish" on the sector in expectations that oil prices will continue to go up until next year.

Also boosting prospects is consolidation by PTT, the parent firm of TOC and NPC, to maximise the benefits for both, in terms of economies of scale, while also making the operations more attractive to investors.

Another analyst said the competitive advantage of a merged petrochemical entity would be ensured if PTT operates in all layers _ upstream, intermediate and downstream. Previously, PTT's petrochemical business focused on upstream operations consisting of natural gas separation. Natural gas is the main raw material for olefins plants, which both NPC and TOC operate.


TPI POISED FOR A BREAKOUT

"A company of Thais, for the dignity of Thais," proclaims the banner on the TPI headquarters on Chan Road.

Often overlooked in all the commotion over its protracted debt restructuring is the fact that Thai Petrochemical Industry Plc is a formidable, fully integrated business that should provide good returns for years to come.

And while a resolution of the debt case now appears close at hand, no one doubts that its tenacious founder, Prachai Leophairatana, still has more cards to play as he strives to maintain control of the company.

TPI is best known as the country's largest corporate debtor, in hock for US$3.7 billion after the 1997 crisis. The company's origins were modest enough _ Mr Prachai believed the family rice business could save money by switching to plastic sacks from jute. He set out to make the plastic and the chemicals that go into it, and the business grew to include cement, service stations and other ventures.

When the crash came, TPI was among the biggest casualties. Mr Prachai has waged a battle ever since to maintain managerial control over TPI, mixing litigation, moratoriums on debt repayment and labour strikes to thwart creditors.

TPI entered business rehabilitation since 2000, and the first round of legal skirmishes went to Mr Prachai, who succeeded in securing the dismissal of Effective Planners, the creditorappointed company put in charge of the debt workout.

However, the government struck back by manoeuvring the Finance Ministry into the planner's role. Mr Prachai felt he had no option but to mount more legal challenges.
Under the latest plan devised by the ministryappointed planning team, TPI will be held by stateowned investors, including PTT Plc, the Government Pension Fund, Government Savings Bank and Vayupak Fund, with a combined 58.5% stake, raising 59 billion baht for TPI's creditors, among them Bangkok Bank. Another $250 million is expected to be raised from the sale of TPI's holdings in its cement subsidiary TPI Polene.

Finance Minister Somkid Jatusripitak has said he wants to see TPI formally exit rehabilitation by Aug 1, two months after the share purchase agreement was signed.
Both PTT and the ministry say that they are committed to meeting all of the key milestones and consummating the deal in a timely and efficient manner, in spite of the strong opposition of Mr Prachai.

Siri Jirapongphan, a member of the current planning team, said TPI was named as the most competitive petrochemical complex in Southeast Asia, with efficiency on par with other gigantic chemical groups in Asia.

This is due to its full integration from upstream to downstream, resulting in stable cash flow and earnings, while most other local firms must weather the ups and downs of crude oil and petrochemical price cycles.

However, because TPI's debt _ $2.7 billion at present _ remains unresolved, few improvements have been made to its production units for the past seven years and the result has been lower yields.

Most industry analysts agree that if TPI exits rehabilitation, it will be a hot stock, given its extremely solid fundamentals and impressive performance.
The benefits for PTT could also be considerable.

PTT president Prasert Bunsumpun said PTT and TPI could develop full integration, helping them to cut costs in various activities such as crude oil procurement, feedstock management and marketing management.

However, Mr Prachai has not thrown in the towel yet. In his latest gambit, he has recruited Citic Resources Group, a unit of the huge Chinese state investment group Citic, to propose taking a majority stake of 70% in TPI, freezing out PTT and its partners.

The court has given the TPI founder a lifeline, saying all he needs to do is show that he has the money to repay all the company's creditors.

Dr Somkid insists the transaction involving PTT is a done deal and that whatever
happens with Citic is irrelevant.

Mr Prachai and Citic, meanwhile, have two more months to complete due diligence on the company and come up with a definitive proposal. Otherwise, he could be locked out of the TPI executive suite for good.


ROSY OUTLOOK FOR SIAM CITY CEMENT

Siam City Cement Plc (SCCC), the country's second largest cement producer, is expected to sustain its high profit this year.

The company in general stands out in the construction material sector, due the policy of its parent company, Holcim of Switzerland, to focus on enhancing the efficiency of its core cement and aggregates business.

As energy costs steadily rose, the average selling price for cement remained stable and SCCC recorded good results. For the first quarter of 2005, it posted an 11% rise in sales yearonyear, compared to the 9% average for the local industry as a whole.
The company's senior vicepresident, Chantana Sukumanont, expects SCCC will record a favourable gross margin and continue to increase production.

This is partly due to the company's strategy to use alternative fuel and raw materials in its production process, enabling the company to save 6% on energy costs compared to 2003.

"We are not being optimistic; we foresaw the threat to the industry," Ms Chantana said.

She said the uncertainties had been emerging since last year. Apart from using alternative fuel, the company is also improving its logistics system by using new transport and fleet management programmes within the supply chain operation.

For the first quarter of this year, the company continued to post impressive sales growth of 8.5% to 6.1 billion baht, up from 5.67 billion baht in the same period last year.

She expects that higher oil prices will weigh on consumers' purchasing power in the second half of the year and in turn lead to slower growth in demand for cement to around 8% or 13.5 million tonnes, compared with 12% growth or 14.5 million tonnes in the first half of the year. For the whole year, cement consumption is expected to increase by 10%.

To maintain its market share in the highly competitive domestic market, SCCC plans to aggressively focus on the readymix concrete market.

The company is now in a strong financial position, with high cash flow and is nearly debtfree.

Ms Chantana said that with the outlook for the industry uncertain, the company would take a cautious approach and not rush to boost output.

SCCC has announced a small investment plan to enhance production efficiency and
productivity in order to add a million tonnes to its annual output which now stands at 12.3 million tonnes when its plants are operating at full capacity.

The decision to boost capacity was based on increased demand in the export market.
"The additional output is aimed to boost economies of scale and not to pressure the industry," she said.

Ms Chantana forecasts the company's domestic cement sales will rise by 1115% this year, mainly driven by government spending on infrastructure and growth in housing demand.

"Actually, the industry should grow by 15%, but the negative impact from higher oil prices may slow down cement consumption,"she said.

Thailand's total cement production capacity is expected to reach 54.4 million tonnes this year, far outstripping local demand which is expected to be 2829 million tonnes.

STRONG PRODUCT MIX HELPS MILLENNIUM STEEL

Most construction steel producers have been saddled with overcapacity and huge debts since the 1997 crisis despite the strong pickup in demand for steel in the past few years.

However, that has not been the case with Millennium Steel Plc (MS), which was formed in July 2002 through the merger of NTS Steel Plc, founded by the tycoon Sawasdi Horrungruang, and two unlisted units of the Siam Cement Plc _ Siam Iron and Steel Ltd and Siam Construction Steel Ltd.

The merger created synergy in various areas, including increased production capacity, reduced excess operation costs and stronger working efficiency by sharing expertise.
More spending on government infrastructure, the boom in residential housing construction and the recovery of the commercial sector have helped strengthen MS's financial position.

The company expects sales to reach 20 billion baht this year, a 25% increase from the impressive 16 billion baht grossed last year, according to president Santi Charnkolrawee.

MS has a combined rolling capacity of 1.7 million tonnes of integrated steel, including long product steel such as rebar, wire rods and small section steel, mainly used in construction and infrastructure applications.

"Our product mix is the key to success," Mr Santi said, while explaining that the company planned to increase its output of the highgrade products, which would provide higher sales margins. The proportion of highgrade products is targeted to be 50% of the company's total output in 2009. It now stands at 14%.

"Because we have a variety of production lines as a benefit from the merger, we can pick only the highly efficient production lines and eliminate the ones that may be nonprofitmaking in the long run," he noted.

He said Millennium Steel's sales volume was forecast to rise to 1.15 million tonnes this year, from 900,000 tonnes last year in, line with its capacity utilisation target.

He forecast that local demand for steel would grow 8% per year over the next five years on the back of major infrastructure expenditure, leading to impressive results for the steel firms in the upturn economy and noted that many construction steel producers remained in debt rehabilitation and lacked funds to buy raw materials.

To sustain its strong results, MS is investing 675 million baht to improve its production process.

In general, Mr Santi is confident in the future of the industry and forecasts a substantial increase in local demand over the next five years. World supply is also likely to be tight over the next three years, as China still needs commoditygrade products for its megaprojects, he said.

However, some factors such as oil prices do pose threats to growth. Mr Santi explained that the government's recent policy to float the diesel prices could lift the industry's transport costs, as well as energy costs.

From another perspective, research from SCB Securities pointed out that slower growth in the real estate sector, particularly in high income residential projects, has slightly affected overall demand for construction steel products with the growth level expected to slip to 89% this year from 10% in 2004.

The research indicated that if local interest rates head higher, the property sector could slow down even more.

It also voiced concern over steel price volatility, saying it could cut into profit margins of steel firms, and the possibility of delays in implementing government megaprojects.

 

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STRONG PRODUCT MIX HELPS MILLENNIUM STEEL

Most construction steel producers have been saddled with overcapacity and huge debts since the 1997 crisis despite the strong pickup in demand for steel in the past few years.
However, that has not been the case with Millennium Steel Plc (MS), which was formed in July 2002 through the merger of NTS Steel Plc, founded by the tycoon Sawasdi Horrungruang, and two unlisted units of the Siam Cement Plc _ Siam Iron and Steel Ltd and Siam Construction Steel Ltd.
The merger created synergy in various areas, including increased production capacity, reduced excess operation costs and stronger working efficiency by sharing expertise.
More spending on government infrastructure, the boom in residential housing construction and the recovery of the commercial sector have helped strengthen MS's financial position.
The company expects sales to reach 20 billion baht this year, a 25% increase from the impressive 16 billion baht grossed last year, according to president Santi Charnkolrawee.
MS has a combined rolling capacity of 1.7 million tonnes of integrated steel, including long product steel such as rebar, wire rods and small section steel, mainly used in construction and infrastructure applications.
"Our product mix is the key to success," Mr Santi said, while explaining that the company planned to increase its output of the highgrade products, which would provide higher sales margins. The proportion of highgrade products is targeted to be 50% of the company's total output in 2009. It now stands at 14%.
"Because we have a variety of production lines as a benefit from the merger, we can pick only the highly efficient production lines and eliminate the ones that may be nonprofitmaking in the long run," he noted.
He said Millennium Steel's sales volume was forecast to rise to 1.15 million tonnes this year, from 900,000 tonnes last year in, line with its capacity utilisation target.
He forecast that local demand for steel would grow 8% per year over the next five years on the back of major infrastructure expenditure, leading to impressive results for the steel firms in the upturn economy and noted that many construction steel producers remained in debt rehabilitation and lacked funds to buy raw materials.
To sustain its strong results, MS is investing 675 million baht to improve its production process.
In general, Mr Santi is confident in the future of the industry and forecasts a substantial increase in local demand over the next five years. World supply is also likely to be tight over the next three years, as China still needs commoditygrade products for its megaprojects, he said.
However, some factors such as oil prices do pose threats to growth. Mr Santi explained that the government's recent policy to float the diesel prices could lift the industry's transport costs, as well as energy costs.
From another perspective, research from SCB Securities pointed out that slower growth in the real estate sector, particularly in high income residential projects, has slightly affected overall demand for construction steel products with the growth level expected to slip to 89% this year from 10% in 2004.
The research indicated that if local interest rates head higher, the property sector could slow down even more.
It also voiced concern over steel price volatility, saying it could cut into profit margins of steel firms, and the possibility of delays in implementing government megaprojects.