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The petrochemical industry is experiencing an upturn but the overall picture for the industrial sector indicates a patchy recovery with exporters leading the way

 

INDUSTRY

Slow road to recovery

SOONRUTH BUNYAMANEE

The low rate of domestic consumption is the major barrier to an across-the-board recovery of industrial production.

Although most exporters have benefited from the weak baht and an upturn in demand, industries that serve the local market have not fared as well.

According to the Bank of Thailand, the Manufacturing Production Index (MPI) for the first nine months of 2000 increased by 4.1% year-on-year. However, the increase compares unfavourably with 10.8% growth in the same period of 1999. A sharp drop in liquor production was one key factor retarding growth in manufacturing between January and September 2000.

The decline stemmed from a large stockpile of liquor carried over from the previous year. The stockpile - enough to last three years - was created by the Sura Maharas Group to counter increased competition that had been expected when the industry was opened to competition last January, but with major existing players gaining control of plant put up for sale, competition exists in theory only.

Production lifted

The industrial sectors that have lifted production sharply are electronics and electrical products, steel and related products, automobiles (see separate article) and jewellery, although all of them rely substantially on imported raw materials.

Industries still in trouble are petroleum products, food and beverage, construction materials, and garments and textiles.

Factories operated at an average of 55.7% of their capacity in the first nine months of 2000, compared with 58.9% in the same period of 1999. But if the liquor industry is excluded, the average capacity increased to 59.5% from 54.3%.

Between January and September 2000, factories making petroleum products operated at 84% of their capacity, electronics and electrical products 63% and tobacco 57%. These were the highest levels recorded.

Shadow of debt

Huge debts and non-performing loans (NPLs) remain the country's important problem, preventing a recovery of the industrial sector.

According to the Bank of Thailand, the country's outstanding NPLs totalled 1.1 trillion baht as of Sept 30. Of the total, 273 billion baht or 24.5% was owed by industrial producers, followed by the property sector with 188 billion baht or 16.9%. By the end of September, 19,693 industrial operators had restructured loans totalling 524 billion baht through the central bank's Corporate Debt Restructuring Advisory Committee (CDRAC).

However, at least 4,000 operators owing a total of 175 billion baht were awaiting restructuring under the CDRAC.

While the pace of restructuring may appear satisfactory, the rate of new problem loans and recurring NPLs is high.

New and re-entry NPLs in the industrial sector averaged 10 billion baht a month during the first nine months, as high as the amount of successfully restructured debt.

Help came in September, when NPLs were trimmed by 124 billion baht as a result of asset transfers from Krung Thai Bank to its asset management company.

Hard times for steel

SCB Research Institute forecast that steel output in 2000 would rise 28.7% from the previous year to 9.35 million tonnes.

Of the total, 2.12 million tonnes or 22.7% would be semi-finished steel products and 7.23 million tonnes or 77.3% finished products, of which about 2.86 million tonnes were bars and 4.37 million tonnes were sheets.

Total domestic demand for steel was forecast at 15 million tonnes, up 10.5% from 1999, partly met from imports.

The steel industry operated at 41% of its production capacity in 2000, compared with 57.4% in 1996, the year before the recession started.

The decline was partly because capacity had been increased, particularly for cold-rolled steel, since 1997, while sales of traditional steel products such as bars and sheets are depressed by the slump in the construction industry.

The industry was affected during 2000 by an increase in the prices of raw material, energy and oil, as well as fierce competition in both the domestic and export markets. An oversupply of steel bars was worsened by the failure of plans to merge some of the 33 producers.

On the positive side, progress was made in debt restructuring, notably the cases of Sahaviriya Steel Industry and NTS Steel Group.

Property slump

The slump in the property sector continues to dampen demand for building materials and a full recovery is at least five years away, according to the Siam Cement Group, the largest supplier.

The industry appeared to pick up slightly in the middle of 1999, driven by the Miyazawa stimulus package, but returned to the doldrums in the second quarter of 2000.

The 50% fall in demand during recession has left the industry with considerable overcapacity for production. In the first nine months of 2000 the production index of the construction materials industry contracted by 4.2% year-on-year, compared with 14.4% growth in the same period of 1999.

Cement sales were expected to contract by 6% in 2000, while sales of ready-mixed concrete were forecast to grow by 1-2%.

Sales of roof tiles were down 50%, particularly for mid-income houses. Tile makers have increased exports to the United States, Hong Kong and South Asia in an attempt to offset the slump.

Cyclical upturn

The world petrochemical market is recording a cyclical upturn with a solid lift in performance forecast for the next seven years. Prices are projected to peak in 2002.

However, not all petrochemical producers will benefit. An industrial expert said that commodity-based petrochemicals, mainly olefins and aromatics, had experienced their price peaks in the first quarter of 2000. As well, there was a huge surplus of those products in the region, particularly ethylene, mainly due to an influx of olefins products from Exxon's new plant that began production in Singapore early in 2000. The plant can produce one million tonnes of ethylene products per year. The prices of commodity-based petrochemical products fell by 20% during the year.

However, there is room for growth in manufacturing of specialised products in demand by the automobile and electronics industries.

Petrochemical projects costing 80 billion baht were submitted for Board of Investment promotional privileges this year.

Of the total, 24.7 billion baht was for four new plants making specialised products - an ethylene glycol joint venture between India's Indorama Group and Thai Olefins Co; vinyl acetate monomer production by US-based Millennium Petrochemicals; phenol acetone production by Germany-based Phenol Chemical Co; and a plant making polyethylene terephthalate resin, proposed Mitsui Chemical Inc of Japan.

Of the remaining projects totalling 55.3 billion baht, most were investments by existing local operators to expand capacity to catch up the growth cycle of the world's petrochemical industry.

In 2000, most local petrochemical and plastic makers signed debt restructuring deals. The only outstanding case is that of Thai Petrochemical Industries, the country's biggest corporate debtor, owing US$3.2 billion. The firm is considering appealing a recent court decision approving its rehabilitation plan

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