17 May 1993 00:00 [Source: ICB]
Australian petrochemicals producers are bent under the weight of losing their traditional protective tariffs at a time when their own domestic investment environment is becoming increasingly uncompetitive. The government, they argue, could do more to ease the transition, particularly with micro-economic reforms.
By Angela Smith
THE AUSTRALIAN petrochemical and polymers industry appears to be facing a potential crisis unless action is taken in the near future to carry out significant restructuring. Previously heavily protected by considerable tariff barriers, it is finding it increasingly difficult to cope as the Australian government opens up the market, with exports from the burgeoning Asian market posing a particular threat. As elsewhere in the world, finding a profitable polymers business is currently almost impossible in Australia.
But the sector, although relatively small, is important for the Australian economy. In recognition of this, the federal Department of Industry Technology & Commerce (Ditac) has provided a platform for top executives from the major players involved to discuss how best to reshape the industry to preserve its future.
The sector consists of the Australian operations of multinationals - ICI Australia, Shell Chemicals (Australia), Hoechst Australia, Kemcor Australia (the Exxon/Mobil joint venture), BF Goodrich Chemical and Dow Chemical - and one domestic company, Chemplex, now 50% owned by Huntsman.
But with a domestic market of just 18m, even these few players may prove to be too many. Whether any will bow out completely or all will survive with compromises on all sides hinges on the discussions now taking place.
The companies are faced with a number of issues specific to Australia, which, when combined with worldwide overcapacity and low product prices, present a complex set of problems. First, companies' plants tend to be around one-third of world scale, automatically making production less competitive. Although the domestic market would support a worldscale petrochemical operation, there are currently two or more small plants supplying each commodity, points out Ditac's recent report on the industry.
And although a few companies have sought out and exploited export opportunities, the growing strength of the Asian players tends to limit these. The Asian regional market also plays a significant role in determining the prices of petrochemical products in Australia.
Also, although domestic feedstocks are secure, the oil and gas reserves are not concentrated and lack any transportation or pipeline network, says Ditac.
As an investment environment too, Australia appears significantly less attractive than some other countries, due to its high construction costs (perhaps 10-20% above western Europe and 20-30% above Singapore), relatively low worker productivity, lack of incentives such as tax holidays, few investment subsidies, and high transportation and regulatory costs.
Government charges are also significant: the petrochemical and polymers industry's contribution to payroll tax in 1991 was over Aus$15bn ($10.8bn), in a year in which the profit for the whole of the chemicals industry was only Aus$32bn. The Petroleum Resource Rent Tax on resources from the Bass Strait, environmental charges and other state and Commonwealth taxes combine to make a significant burden.
The industry is urging the government to take action and implement micro-economic reforms so that costs are reduced in parallel to the continuing reduction in import tariffs.
Companies are agreed that the formerly protective regime - which included import tariffs as high as 60% on hdPE and 45% on ldPE - was not helpful for the industry in the long term. But, in parallel to tariff cuts, the government at all levels must deliver the cost reductions from micro-economic reforms in areas such as sea and land transport, and power and waterfront industries, as well as in taxation reforms, says ACIC ceo Frank Phillips.
The ACIC says its support for continuing tariff reductions is also contingent on: the phase-out of the developing country tariff preference scheme and the strengthening of anti-dumping arrangements in Australia; clear and decisive steps being taken to remove other forms of international protection against Australian exports; and recognition of overseas tariff development applicable to chemicals.
Tariff protection in Australia started to be broken down in 1973 with a 25% across-the-board tariff cut. Levels have since come down to 15%, and 10% for products from developing countries. The list of developing countries originally included Taiwan, Hong Kong, Singapore and Korea, but these countries had assisted tariff levels frozen at July 1992. Ironically, product from Saudi Arabia still benefits from the 5% tariff discount.
A target was originally set for 5% tariffs by 1 July 1996, with zero tariffs for developing countries, and the total abolition of tariffs by an unspecified date. Companies are now split on whether tariffs should be frozen at current levels or whether continuing reductions should be made. In any case the government has conceded that the pace of tariff reduction may be slowed.
Some executives criticise the fact that exports from Australia are likely themselves to be subject to tariffs from countries such as Thailand, Malaysia and Indonesia, which tend to slap tariffs on previously zero-rated goods so as to protect infant domestic industry.
The level of import penetration into the domestic market varies according to product, but in general has increased since the 1980s to around 20%. Imports have also had a significant impact on price setting in Australia, explains Warwick Bisley, md of the Exxon/Mobil joint venture Kemcor and president of the ACIC. Industry has traditionally paid a premium over import parity, for the benefits of security of supply, after-sale service, and so on, but this premium has plummeted over the last few years as downstream customers have become increasingly unwilling to pay extra for domestic product.
From their peak in 1988, PE prices, for example, have fallen by some Aus$700-750/tonne, although they are still slightly above US or European prices, added Bisley, who sees no chance of a return to 1988 levels until perhaps 1995.
Producers' insistence on setting product prices around import parity has come in for criticism from their customers. BTR Nylex group supply manager Ken Chesswas, for example, believes it is unrealistic that Australian producers refuse to sell product at less than the full US/western Europe/Southeast Asian domestic price plus full freight costs, particularly as they are prepared to sell product overseas at less than the Australian price.
Plastics processors supplying the automotive industry are facing enormous cost pressures, with their customers demanding price reductions of 3%/year on the product price for the life of a model or else threatening to take their custom elsewhere, said Chesswas. The real threat lies in the possibility of automotive manufacturers importing components duty free instead, with a subsequent major impact on the domestic processing industry and the potential loss of a significant part of the market for polymer producers.
And if processors try to order cheaper product from foreign companies, the local polymer producers immediately call for anti-dumping action, says Chesswas, whereas no action is possible against the import of cheap finished products. Such a short-sighted attitude can only harm polymer producers' own customers, he claims.
Certainly the number of anti-dumping complaints made by Australian polymer producers has rocketed in the last few years as foreign companies try to offload their surplus capacity. Partly due to the impact of increased imports, many polymer prices are now some 40% lower than their peak in 1989.
ICI Australia, which has been the most vociferous of complainants, estimates that it lost some Aus$35m in trading profits last year through the effects of dumped product. This included Aus$28m alone in its polymers business, which plunged to a loss of Aus$35m last year.
The company lodged seven dumping cases last year, of which it won six, and looks likely to take up four new cases this year, including an action on PP imports from South Korea, according to md Warren Haynes. Imports of PP into Australia increased from 9200 tonne in 1989 to 13 300 tonne in 1991 in a market totalling 124 000 tonne. The case is supported by Hoechst.
Convinced of the rationale of taking up anti-dumping cases, Haynes points to the slight improvement seen in vinyl resins prices since the company won some protection against dumped imports in May last year - some 17 months after actions were lodged against around 20 companies.
But ICI has openly criticised the slowness and bureaucracy of Australia's anti-dumping procedure, which involves consecutive investigations by the customs department, and, if warranted, then by the Antidumping Authority. Although administrative time has now been reduced from 275 days to 145 days, ICI Australia insists a further reduction to 90 days is necessary, which could be achieved by parallel investigations by the authorities.
Kemcor has supported some of ICI Australia's dumping actions, including one on ldPE. 'We have no argument with imports but do not believe dumping is something we should have to contend with,' comments commercial director Bob North.
But it has not initiated cases itself, appearing rather unconvinced of their ultimate positive effect. For example, although the authorities upheld the case on ldPE, no penalties were imposed, comments North. On the other hand, Hoechst launched an action against hdPE imports from around ten countries, which Kemcor did not support, having concluded Hoechst did not have a case. Although securities were eventually imposed, no effect on prices was felt.
Certainly, Australian producers have found it difficult to prove their case, encountering problems in determining the exact domestic price in the home country - often Asian - and in proving harm to their own businesses, given the depressed market situation prevailing.
Threats of increased tariffs on Australian exports has strengthened some companies' resolve to take up cases. Chemplex, for example, will certainly be looking more aggressively at dumped product, partly because of threatened 20-40% tariffs on Australian polymer imports (currently zero-rated) once domestic capacity goes onstream in some Asian markets, said md George Thomas.
So far, Chemplex has initiated just one case - in expandable polystyrene beads - which was upheld in October 1992 against imports from Korea and Singapore, although no action was taken against product coming in from Saudi Arabia, France, the UK and Taiwan.
Chemplex is also currently assembling an anti-dumping case against PS imports from Taiwan's Chi Mei Industrial and several Korean exports. Imports account for just 5-10% of the Australian PS market, but have the potential to increase significantly once producers gain a foothold, comments business development manager John Fowler.
In contrast to its counterparts and despite suffering losses itself in polymers, Shell Chemical (Australia) Pty stands out against anti-dumping action. 'We don't like government interference in markets,' says SCAP general manager Alan Reid. He emphasises the company's need for open markets overseas for its own exports, upon which its Australian business is more dependent than most.
While ICI and Hoechst prepare a case against PP imports, for example, Shell, which is the market leader in Australia with a 45% share and which also benefits from direct access to refiner byproducts, is focusing on increasing its already significant exports of PP into Asia. Currently exporting some 35% of its 140 000 tonne/year PP capacity, exports will grow to over 50%, said Reid, who envisages SCAP's exports to Southeast Asia doubling from Aus$90m to Aus$180m.
Reid believes antidumping actions are unjustified given that the whole industry' is already selling at less than full cost.
SCAP brought onstream a new PP plant at Clyde in 1991, originally intending product for the domestic market, which has not, however, shown the expected growth. It now intends to invest a further Aus$50m to expand capacity to 130 000 tonne/year by the end of 1994, and to add to storage and material handling facilities, says Reid (ECN 17 May p18).
Reid is confident of being able to find markets for the product in countries such as China, Indonesia, India and Pakistan, particularly as Asia is as yet a relatively small use of copolymer. So far, SCAP has around 40% of the Shell group's 4% market share in the Far East, excluding Japan.
Shell's older, smaller PP plant at Geelong is still very efficient, adds Reid, although it will ultimately require redevelopment 'or its future will be under a cloud'.
But Reid would support some rationalisation in the local PP sector, pointing to Hoechst's relatively small 18% share of the market.
ICI Australia, too, brought on new capacity, with a 90 000 tonne/year lldPE plant at Botany, NSW, intended to absorb surplus ethylene capacity at the cracker. But although the majority of product is currently going for export, the plant, being utilised at around 85%, is actually intended to reduce current levels of lldPE imports.
According to the Ditac report, some 47 000 tonne of lldPE imports came into Australia in 1991, dominating the 55 000 tonne/year demand. The only other local producer, Kemcor, operates a lldPE/hdPE swing plant at Altona, of 75 000 tonne/year.
But apart from these expansions, the industry has on the whole been in a retrenchment phase, which intensified in 1992 as companies attempted to diminish the effects of the general erosion of profit margins.
ICI Australia alone announced the closure of ten chemical plants, while Shell closed its 20 000 tonne/year detergent alkylate plant at Geelong in December and Dow closed its 24 000 tonne/year ethylbenzene/styrene monomer unit at Altona at the end of March.
A major step towards effective rationalisation of the industry would have been achieved had negotiations come to fruition between Exxon, Mobil and Hoechst on the reshuffling of their petrochemical assets at Altona. Under the original plan, Hoechst was to have taken over Mobil's 50% share in the joint olefin, polyolefin and rubber companies it operated with Exxon, enabling these to be merged with its own hdPE and PP operations there.
Although conceptually no-one disagreed with the idea, Hoechst eventually decided that, mainly for economic reasons, 'that particular format was not viable and did not benefit Hoechst', commented Hoechst Australia md Dr Jen-Uwe Mohr.
Exxon and Mobil went on to merge their three joint companies, Altona Petrochemical Co, Commercial Polymers and Australian Synthetic Rubber, to form Kemcor Australia, creating a 'one-stop polyolefins shop with strong international connections', said Kemcor's Bisley. Mobil, he added, has renewed its commitment to these downstream operations and wants to maximise their value, whether eventually for sale or to keep.
Hoechst, meanwhile, continues to take 60-70 000 tonne/year of ethylene from neighbouring Kemcor, against whom it also competes in hdPE. But Mohr stresses that Hoechst is still open to other possible restructuring, insisting only that there is 'give and take' on all sides and that the terms are not dictated by just one company.
While acknowledging that Hoechst's position in PP needs to be seen in the overall context of the industry, Mohr emphasises Hoechst Australia's 'definite intention' of strengthening its already strong position in hdPE. In 1989 the company invested over $45m at the hdPE plant, partly to allow further investment or expansion at a future date, when appropriate, he added. Some additional investment would enable its Altona facility to be switched to produce solely hdPE or PP.
Meanwhile, all the producers continue their efforts to reduce costs and improve competitiveness, particularly as they compare themselves increasingly with their Asian competitors. Significant progress in industrial relations and labour reform in Australia has resulted in several companies moving towards enterprise agreements rather than federal-wide sectoral agreements, with the support of the unions. ICI's single site agreement at Botany in 1991 is regarded as a model for industrial relations in the industry, says Ditac.
But the effect on employment has been marked. Kemcor's workforce, for example, has already been cut from 1020 at the beginning of 1992 to 930, with a further reduction to 840 intended by the year-end, almost all through retirements and voluntary redundancies. Dramatic changes have been introduced to workplace structure, with, for instance, increased numbers on shift work, and cutting out overtime.
In all, Kemcor is aiming at a 30% reduction in unit costs by next year over 1990, of which around one-third will be due to the weaker Australian dollar, and the rest to improved efficiencies. More 'surgery' may be required into 1994 and 1995, by which time 'we should have our cost structure where we want to be and will then just be looking at a 2%/year reduction from then on', explained Bisley.
ICI, meanwhile, is aiming for a real reduction of 3%/year in its cost base, involving no wholesale redundancies but with a continuous reduction in staff, probably around 100 jobs this year, said Haynes. Its 21 plant closures since the beginning of 1990 have resulted in over 800 job losses alone. But Haynes calculates that some Aus$20m will be gained from action taken last year in discontinuing activities and cost cutting.
Chemplex already undertook significant cost cutting efforts in 1988, November 1990 and September/October 1991, with staff numbers now totalling 724, reduced from a total of 911 in mid-1990. 'We are continuing to look at all cost elements in the business in order to be a low-cost producer,' commented Thomas.
But all realise that cutting costs will not be enough. Watch out for announcements of some major restructuring in the coming months.
For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.
Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.
Sample issue >>
My Account/Renew >>
Register for online access >>
|ICIS Top 100 Chemical Companies|
|Download the listing here >>|
Asian Chemical Connections