01 July 1997 00:00 [Source: APC]
Australia's chemical industry is repositioning itself on the world stage, with a shift in emphasis and investment towards Asia. Angela Macdonald-Smith reports.
Australia's chemical industry is experiencing another period of intense change as companies reposition themselves in what is increasingly part of the Asian market-place; consolidate polymers production to cope with the country's tariff policy; and seek out niche areas for investment.
1996 was not a good year for the industry and this year does not look much better, due to the cyclicality of the industry in general and low tariffs, says Michael MacKellar, chief executive officer of the Plastics and Chemicals Industry Association (PACIA).
MacKellar points in particular to the dramatic increase in imports of chemicals and plastics - including finished products - into Australia over the past few years. From 1991 to 1996, imports increased an average 11.4% a year, from Aus$6.72bn (US$4.77bn) in 1991 to Aus$11.51bn last year.
In 1996, the US accounted for Aus$2.7bn of total imports, followed by the UK with Aus$1.11bn. Other, less traditional, trading partners are building up a more significant presence. China, while starting from a low base, saw exports to Australia increase 222% from 1991-1996, while the share of total imports from the top three countries - the US, UK and Japan - is slowly diminishing.
While sales for the domestic industry have been increasing constantly - now totalling more than Aus$28bn - profitability has been variable. 'Profitability was very low in the recession times,' says MacKellar. 'It recovered a bit in 1995, but 1996 again saw a deterioration.'
MacKellar attributes this trend partly to me industry's innate cyclicality, but also to the tariff regime. Under Australia's tariff policy, import tariffs were reduced to just 5% on average in mid-1996 from 20% or 25% higher 15 years before. Last year the 3% tariff concession system was replaced by a 3% tax.
Significant industry restructuring has been one result, particularly at the bulk end of the market. Disregarding, for the moment, the proposed divestment of ICI's majority stake in its Australian affiliate - which will have a profound impact on the shape of the domestic industry - recent years have seen several major consolidation moves.
1997 has seen the sale of Hoechst Australia's polyolefins business to the Exxon/Mobil venture Kemcor and the merger of Australia's only two PVC producers - ICI Australia's PVC business and Auseon (formerly Geon Australia) - to create Australian Vinyls Corp.
The previous year saw a venture, Polystyrene Australia, set up between the country's only two styrenics producers, Dow Chemical's Australian affiliate and Huntsman.
Further restructuring is on the cards. While the world waits to see what strategy ICI Australia will adopt once its UK-based patent divests its 62.4% stake, the fact remains that both the existing petrochemical complexes in Australia - Botany, New South Wales, and Altona, Victoria - remain sub-world scale and compete against each other as well as against imported product.
This leads Ron van Santen's chemical consultancy ACTED to point out that the restructuring in the upstream industry may not be over yet as the outlook for several products at Botany and Altona is still unclear.
While the Botany operation was considered less competitive than its counterpart in Victoria, ICI Australia's recent Aus$300m investment in a 1400km ethane pipeline from South Australia and the conversion of the Botany cracker to use ethane feedstocks is regarded as having narrowed the gap in competitiveness.
Van Santen says the chemical industry's significance in the overall Australian economy has halved since the mid-1970s, with turnover now just a little over 1% of the country's GDP. But it is the country's second-largest manufacturing sector - after food and beverages - and the ratio to GDP is broadly comparable with the chemical sector in other industrialised countries. He believes the decline may now have bottomed out.
Certainly, several new investments have been recently made or planned, particularly in specialised product areas that make the most of the country's unique natural resources.
But the industry is concerned that the government is not doing more to promote investment at a time when several billion dollars worth of chemical projects are up for grabs. A recent report carried out on behalf of PACIA found that Australia risks missing out on some Aus$6bn worth of new investment if the government does not address the several impediments. If located in Australia, that investment would increase GDP by Aus$1.5bn a year, with imports falling by Aus$1.2bn/year and exports increasing by Aus$2.2bn/year.
Investment impediments include: a lack of specific investment incentives in comparison with Australia's Asian neighbours; taxation differentials on investment compared with Asia; the lack of an effective anti-dumping system; and the need for internationally competitive coastal shipping.
In addition, the domestic industry needs improved access to the markets of its Asian neighbours by the removal of tariff and non-tariff barriers - something it has been wanting for some time.
Senior executives from ICI Australia and Kemcor Australia agreed with the study's findings. ICI Australia executive director and general manager of plastics Bob Hunt also called for a long-term industry policy vision in Australia to help with investment planning. Kemcor managing director Robert Fairley emphasises that it is not government protection the industry was looking for, but a partnership with government.
Fairley adds that Kemcor and the Australian industry as a whole could be a much more potent player in the global chemical and plastics arena, especially given the country's natural resources and educated population.
'But we are not even in the same game as our overseas competitors,' he laments. 'A supportive industry policy for the chemical and plastics sector would allow Australia to compete with the huge investment push in Asia.'
The bulk of the potential new investment - some Aus$4bn - relates to possible projects in the Pilbara region of Western Australia (WA), using ethane and methane from the North West Shelf, while the remaining Aus$2bn relates to projects in the east of the country, says MacKellar.
The WA projects have been mooted for some time, but are now regarded as more of a probability than a possibility. The logic appears sound, given the level of petroleum development in the region and the need for large volumes of caustic soda production for alumina production. Australia is the world's largest alumina producer, but imports almost all its 1bn tonne/year caustic soda feedstock.
The petrochemical proposals being promoted by the WA Department of Resources Development (DRD) are based on ethane feedstocks from 'wet' gas from the Shell-led project on the North West Shelf and using the plentiful nearby salt availability for an integrated chlor-alkali chain. The complex would include a world-scale ethane-fed cracker, ethylene oxide (EO) and ethylene glycol (EG), ethylene dichloride (EDC), vinyl chloride monomer (VCM), possibly down to polyvinyl chloride (PVC).
According to David Ryan at the DRD, likely capacities are around 300 000 tonne/year EDC, 700 000 tonne/year VCM and over 1m tonne/year for caustic soda. On PVC, the DRD is 'keeping the options open', he says, while an EO/EG facility would be based on around 200 000 tonne/year EG. Some potential developers are also looking at related ammonia/urea and methanol projects, which are also being promoted by the DRD, to some extent independently from the ethylene/chlor-alkali projects.
The DRD is examining the critical success factors for the project. It aims to invite expressions of interest from industrial investors in the second half of 1997, with a view to receiving submissions by the year-end. Preliminary design work and the approvals process could start in 1998, with detailed designs scheduled for late 1998 and firm project commitments by the end of 1999. The first phase of the project could come onstream in 2003 or 2004.
The whole viability of the project depends on securing competitive prices for the ethane feedstocks, of which around 500 000-550 000 tonne/year will be required. While it will be up to the industrial investors to negotiate this with the partners in the North West Shelf project, there is potential for the gas to be supplied at below Aus$2/GJ, adds Ryan.
Many companies have been mentioned in press reports in connection with the potential Pilbara project, including ICI Australia, Shell Chemical (Australia) and Dow Chemical, as well as Asian producers. In May the WA deputy premier Hendy Cowan was reported to be sounding out the interest of European consortia during a visit to Europe, which included talks with German company Krupp Uhde.
Ryan is reluctant to mention particular names, but ICI Australia and Dow Chemical have publicly confirmed their interest. While ICI Australia would only consider taking a minority stake in any project, Dow is carrying out a study for a possible Aus$1.5bn investment there, in partnership with a consortium.
Ryan does confirm that Krupp Uhde is interested, not just in project engineering, but in a coordination role for a development group.
The site location is a choice between two leading contenders: Hearson industrial zone on the Burrup peninsula or Maitland industrial estate south of Dampier. In either case, the government could be prepared to fund some infrastructure development, particularly if the project involved both petrochemicals and downstream products, says Ryan.
Other selective investments are continuing, with an increasing amount orientated towards exports. In sodium cyanide, three new projects or expansions have been announced or are being considered: ICI Australis is evaluating the construction of a 30 000 tonne/year sodium cyanide liquor plant in Kalgoorlie, WA, while DuPont and Ticor are joining together to expand Ticor's facility in Queensland by 15 000 tonne/year with an eye not just to the domestic market, but also to New Zealand, New Guinea, Fiji and the Philippines.
Australian Gold Reagents is also boosting output at its Kwinana liquor unit to 70 000 tonne/year. Given that In the end of 1999. Australian capacity will be up to 180 000 tonne/year compared with domestic demand of 100 000 tonne/year, some product appears destined for export.
Plans for salt investments are also steaming ahead. Akzo Nobel intends to build a solar salt plant in Onslow, WV. in cooperation with as yet unnamed local and Asian partners, marketing output to chlor-alkali producers in the Asia-Pacific. Onslow Salt is also proposing a new salt field there.
Ammonium nitrate is getting some attention, with new projects planned by ICI Australia and BHP, while Westfarmers CSBP recently hiked capacity.
In titanium dioxide pigments, expansions are being considered, but plans have been influenced by poor market conditions. Millennium Inorganic Chemicals has 'rephased' its planned expansion at Kemerton, WV, from 79 000 tonne/year to 190 000 tonne/year and is not likely to consider this again for another year or two, says Ian Hampton, employee relations manager.
The additional capacity, once it finally goes ahead, will be almost entirely for export. Three-quarters of existing capacity is already exported, almost all of it to Southeast Asia.
Another TiO2 producer, Tiwest, a joint venture between Kerr McGee and Ticor, hiked the capacity of its Kwinana unit to 80 000 tonne/year last year, but refused to be drawn on a supposed further expansion of 180 000 tonne/year. Several projects are planned by Westralian Sands and Tiwest for the TiO2 raw material synthetic rutile.
French major Rhône-Poulenc is reviving its interest in rare earths in Australia and is considering a project to process up to 12 000 tonne/year monazite, to produce 15 000 tonne/year solid rare earth nitrates, according to the WA DRD.
Local companies Coogee Chemicals and PQ Australia are studying a joint venture to set up zeolites production at Kwinana.
ACTED says Western Mining Corp has plans for ammonium phosphate production, for WA and Queensland.
Still partly with export intentions in mind and back in the east of Australia, Belgium-based producer UCB is to invest Aus$38m in a new bioriented polypropylene film unit. Located near Melbourne, the plant will supply material for use in the production of Australian bank notes and for export elsewhere in the Asia-Pacific.
While other projects - such as BHP Petroleum's proposed 850 000 tonne/year methanol facility at Pilbara - will not go ahead due to new projects in the targeted export markets, the new investments are expected to be sufficient to bring WA almost to balance in chemicals trade, notes ACTED.
ICI Australia remains in a state of flux, not only due to the surprise decision by the UK-based parent to divest its majority stake, but also because of the untimely death in June of managing director and chief executive Warren Haynes, who had been at the forefront of the company for many years.
The possibility of an industrial investor taking a stake cannot be ruled out, although ICI Australia - which will soon take on a new name to match its new identity - is counting on its future as an independent company. Corporate affairs manager Mike Feehan indicates there will be no significant change of strategy and the company will continue to reinforce its traditional activities as well as seek out new opportunities.
'We have always maintained we would be looking to increase our presence in Asia, but the vast majority. of our business is in Australia and New Zealand and will continue to be so in the foreseeable future,' he says.
Individual investments demonstrate the company's Asian ambitions, such as the recent announcement of a new explosives manufacturing investment in Weihai, northern Shandong province, China.
Exports are also growing for the pharmaceutical sector, supported by the governments Factor (f) scheme, which enables manufacturers undertaking approved development programmes to receive higher prices from the government for drugs on the pharmaceutical benefits schemes.
The scheme, which was extended again in April, has gone some way to promoting the development of a home-grown drug development sector in Australia.
The Australian pharmaceutical sector is poised to see a new name on the scene, although the business will not be a new one. UK-based Zeneca is negotiating to buy the ICI Australia drugs business, under the terms of an agreement reached at the time of the ICI demerger which comes into action once ICI sells its majority stake in the Australian company.
The trend towards export orientated projects demonstrates the new commitment the Australian industry feels to the Asia-Pacific market-place. Even links with parent companies from the traditional European markets are being severed or weakened - as in the case of ICI and Laporte.
'We are getting closer and closer to Asia, especially through exports, and we are moving to establish strong links with Asian chemical industry associations,' says PACIA's MacKellar.
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