The rocky road to riches

24 February 1997 00:00  [Source: ACN]

Aromatics (Thailand) Co is riding high on a wave of optimism now that it has started commercial production. But is it strong enough to conquer the problems analysts say it will soon encounter? Parry Ray Dhillon reports on how the company intends to meet the challenges ahead

AROMATICS (Thailand) Co (ATC) commissioned the country's first aromatics facility last November and embarked on initial test runs. These were completed at the end of January, with commercial production starting at the beginning of February.

On the surface, it may seem that ATC can look forward to years of profit and plain sailing. But analysts forecast gloomy times ahead, citing overcapacity, falling prices and increased competition as key difficulties. Given the prospect of stormy weather ahead, how will ATC overcome these hurdles and steer a steady course to the road of success?

'Until now, we have been lucky and have not encountered any serious problems. Progress of the project has been relatively smooth,' says ATC's vice-president of planning and commercial, Atikom Terbsiri. Total project costs were put at US$670m and the project is currently US$20m under budget, he says. 'We are also ahead of schedule by about 1-2 weeks and have used 23m construction manhours without accident or loss of construction time - a new world record.'

Commercial production underway is set to produce capacities of 200 000 tonne/year of benzene, 320 000 tonne/year of paraxylene (PX), 52 000 tonne/year of toluene, 29 000 tonne/year of orthoxylene (OX) and 15 000 tonne/year of mixed xylenes. Of these, ATC is selling 80% of its benzene production to Siam Cement and Dow Chemical for their styrene project and has earmarked a proportion for export.

Some 80% of its PX capacity is being sold to Tuntex, with the rest of the products manufactured for the domestic market. Until now, Thailand sourced its petrochemicals from Singapore, South Korea and Indonesia.

But ATC should not be complacent. With the Thai government bringing forward liberalisation of the Thai aromatics industry to 1 January 1999, about three years earlier than expected, ATC will lose its price and import tariff protection and is well aware of the challenges ahead.

Initial competition is from imports, but ATC cites transportation cost savings as a valuable contributor to competitive products. A greater problem is that of new investment. Terbsiri states, 'It is inevitable that competition will come. So far we have been protected by the government, but we only have two more years to enjoy this privilege.'

There are several projects under study in the country and surrounding region. Last August, Tuntex won approval from the Thai Board of Investment for its aromatics project in Mab Ta Phut, Rayong. The US$1.5bn project will produce 800 000 tonne/year of PX, 160 000 tonne/year of OX, 210 000 tonne/year of benzene and 30 000 tonne/year of toluene. Startup is set for late 1999.

The project will use condensate and naphtha as feedstock and UOP technology, with output targeting both Thai and export markets. The group is to also build its second purified terephthalic acid (PTA) facility in Thailand. The 900 000 tonne/year facility, also in Mab Ta Phut, Rayong, is scheduled to come onstream in mid-1998 or the beginning of 1999.

Towards the end of last year, Chevron confirmed discussions with the Petroleum Authority of Thailand (PTT) and Caltex for a proposed joint-venture aromatics complex in Thailand. Chevron's general project manager, Stan Weber, told ACN that the Thai site is the company's primary focus for aromatics investment (ACN 5 Aug 1996, p21). The consensus, however, is, that this project will not be up and running before the turn of the century. There is also talk of an Exxon project which is yet to be confirmed.

Perhaps the greatest threat in the near future to ATC is the Thai Oil and Mitsubishi Oil investment in a PX and mixed-xylene facility. Construction has started and production could begin in 1999. This project is likely to be more competitive in terms of investment costs than ATC's plant, says Corrina Lim, HSBC James Capel Asia's head of research.

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So how will ATC fend off competitors on home ground? There will be two main approaches, says Terbsiri. 'We have to keep focused on being a low-cost producer. Using condensate, we have a strong feedstock advantage. As it has an aromatic-rich composition, in theory we can use less but maintain our production levels. We can also save on logistical costs.'

Most feedstocks are sourced through PTT. Some 70- 80% of the company's requirement is fulfilled by sourcing condensate, a by-product of natural gas production, from the Gulf of Thailand. About 1.25m tonne/year of condensate will be used. Approximately 450 000 tonne/year of naphtha is being imported from Malaysia to supplement the condensate. The rest of the feedstock requirement is topped up using about 220 000 tonne/year of pyrolysis gasoline provided by Thai Olefins Co.

'But relying on feedstock advantage alone is not enough,' says Terbsiri.

ATC also plans to expand capacity by debottlenecking and has started studying the possibilities with UOP, its licensor. 'In the next two months, UOP will look in detail at expanding capacity.'

It is hoped this part of the project will be realised by the end of 1998 with new capacities coming onstream in 1999, giving the company a stronger foothold in both the domestic and surrounding markets. ATC aims to achieve a 15-20% increase in all products produced and reduce its production costs.

ATC's gameplan does not stop here, ear-marking integration as another key to survival and growth. The lack of sufficient intermediate production is a major issue, Terbsiri says, especially as demand for products further downstream, such as polyethylene terephthalate (PET) and PS, is great. He says: 'This is why ATC sees the need to establish intermediate production in Thailand.

'Otherwise the chain will be broken and end-users will continue sourcing imports, which will hinder our business.'

ATC is evaluating downstream opportunities. These include a styrene project, under construction, with a local Thai user. Capacity is put at 200 000 tonne/year, with startup set for the first quarter of 1999.

Terbsiri also confirms ATC is currently exploring the markets for investment in cumene and phenol.

The company has instructed consultants ChemSystems to undertake a PTA feasibility study in Thailand. ATC is talking to potential partners, all of whom are understood to be local users, in keeping with the company's strategy.

ATC intends to target key sectors such as textiles, the polyester chain and car manufacture, especially engineering plastics. Having created a firm base in its domestic market, the company will then concentrate on exporting to Southeast Asia and Northeast Asia, which is forecast to be among the greatest aromatics importers in coming years.

'We do always need to be mindful of competition from the US - but we are confident we can compete in terms of cost. At the moment, the market favours ATC, with demand set at a much higher level than current production capabilities,' says Terbsiri. 'There has been no aromatics production before us and downstream producers could only look towards imports. Now we are presenting a competitive alternative.'

But is this really the case? PX accounts for about a third of ATC's revenue. The Northeast Asian market has been tight over the last three years, with new PTA production outstripping PX capacity. This has led to PX prices reaching levels over US$1000/tonne at the end of 1995.

However, it seems PX capacity is catching up with demand, suggesting surplus product with bleak prospects for 1998.

Global PX capacity is predicted to rise from 11.4 tonne in 1995 to about 17.9m tonne by 1998 and if all announced projects are commissioned, the figure could rise another 2m tonne. A large proportion of new capacity will come from South Korea, China, India and Indonesia. In contrast, demand from new PTA capacity is rising by only about 3.89m tonne, implying an overcapacity of about 2.6-4.6m tonne.

HSBC's Lim says: 'Even if PTA and dimethyl terephthalate (DMT) plants run at full utilisation in 1998, average global utilisation at PX plants will need to drop to 77% to avoid overstocking. Consequently, some projects could well run into cashflow problems, some will fail and others will be scrapped. This would be a plus point for prices.'

Within Thailand, demand for PX is set to explode with the planned expansion of PTA capacity by Tuntex - 900 000 tonne/year to come onstream in 2000 - and Siam Cement and Mitsui Petrochemical Industry - 350 000 tonne/year to come onstream in 1999. By 2000, Thailand could have more than 1m tonne/year of PTA, implying a demand of about 670 000 tonne of PX, double ATC's current production. However, this does not automatically mean a good portent for PX demand in Thailand, says Lim, unable to justify such a huge demand for PTA.

Substantial capacity for benzene will also be added in Asia over the next few years and globally, demand and supply is forecast to be roughly balanced into 2000. Within Thailand, demand for benzene will reach almost 1m tonne by 2000 on the back of the new styrene plants coming onstream, predicts Lim.

She says: 'ATC's forecast of US$30m net profit for this year is far too optimistic. The company will have to downgrade net profit forecasts to reflect falls in PX and benzene prices.' The forecast was based on a PX price of US$670/tonne and a benzene price of US$471/tonne, whereas the current PX price is about US$450/tonne. The current price of benzene is about US$390/tonne.

Lim adds: 'I rate the management of ATC and have no problems with the company, but the business is highly cyclical. ATC cannot determine its fortunes as it is a price-taker rather than a price-setter. There is never a good time to put up a petrochemical plant - the lead time is too long.'

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