New clouds on the horizon

14 May 2001 00:00  [Source: ACN]

Asian petrochemical players face a very tough remainder of 2001, even if the US economic recovery is V-shaped, reports John Richardson

It is not just raining for certain Asian petrochemical producers, it is pouring. They face sharp slowdowns not only in their domestic markets, but also in Chinese export volumes which so far this year are either disappointing or, where they have improved, are failing to provide the price support so desperately needed.

At a macro economic level, there is intense debate over whether the US recovery will be V-shaped rather than U-shaped.

First quarter US gross domestic product (GDP) growth was 2%, above expectations.

One view is that aggressive monetary easing - the US Federal Reserve is expected to lower interest rates further, by 50 basis points, on 15 May - will result in Q4 GDP growth of 4%.

An argument is that the downturn is purely cyclical - the result of Federal Reserve tightening and energy price shocks - and has not been triggered, and will therefore not be prolonged, by an investment overhang.

However, other analysts point to rising unemployment, falling consumer confidence and over investment during the boom as reasons why the recovery will be U-shaped.

And even if the US economy is on course for a quick rebound, the impact of the hoped-for V-shaped recovery is unlikely to work through to many economies until next year.

Petrochemical markets other than China confront their own economic problems that could prevent any significant improvements in their demand in H2.

If you add to the problems of petrochemical producers persistently high crude oil prices and the capacity additions in the Middle East and Asia, they have little choice but to grin and bear a great deal more pain.

China was always going to be important for the success or otherwise of 2001.

As the US slowdown started to bite, China became even more important for salvaging the year for the Asian petrochemical industry (ACN 26 Mar, p10).

'Sadly, so far in 2001, the Chinese market has provided us with very little price support,' says one Japanese exporter.

He adds that Chinese demand failed to pick up for most products after the traditional lull which occurs immediately ahead of and during the Chinese New Year.

And he argues that where demand has shown a major improvement, pricing has been disappointing.

Take PVC, for instance. In Q1 of this year, official figures place imports in January and February at 426 194 tonne against only 170 243 tonne for the same period last year. Domestic production rose during January and February to 382 100 tonne, an increase of 27%.

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However, during those two months, China's exporters of processed products reported a decline in orders due to the US slowdown.

As a result, total PVC inventory in early March soared past 100 000 tonne in southern China.

Domestic prices dropped steadily to reach Rm5500-5700/tonne in early May and Asian exporters' prices followed suit. Prices for May shipments were last week at US$490-540/tonne tonne cif China, a US$90-140/tonne fall from February prices.

Chinese PVC demand is expected to grow by at least 9% this year.

The government's emphasis on developing the economically backward western region is expected to lead to a strong improvement in demand for PVC this year. Under its 2001 budget, China intends to issue Rmb150bn (US$18.2bn) of construction bonds and special bonds, the revenues from which will be invested in the west.

And if China's re-export sector bounces back, which seems almost certain, Chinese demand growth over the next five years could be more than 12%/year.

But even this long-term picture is not entirely sunshine. The rain cloud is China's rising self sufficiency. DeWitt forecasts that self sufficiency will grow from 75% in 2001 to 85% in 2005.

Nevertheless, the consultancy's long-term forecast for imports is that they will be in the region of 2-2.5m tonne/year. In 2000, China's PVC imports totalled 1.4m tonne.

The markets in China for all other polymers, with the exception of ABS, for which imports fell in Q1, followed the same pattern in January and February as that of PVC. But PE and PP domestic production in the first two months of this year fell very slightly compared with January-February 2000.

As is the case with PVC, lldPE is forecast to enjoy good growth over the whole year. Industry sources expect demand to be 2m tonne, which would represent a 17.6% increase over 2000. Local production of lldPE in 2001 is expected to be 1m tonne against 900 000 tonne in 2000.

As for ldPE, the forecast for domestic production this year is 750 000 tonne, an increase of 50 000 tonne over last year.

China's demand for ldPE is still strong, but with the introduction of new processing machinery, lldPE is gradually replacing it in many applications.

As with many of the polymers, it has been so far so good this year for China's demand for purified terephthalic acid (PTA). In January and February, imports were 390 145 tonne. Imports in March were estimated at a record 300 000 tonne.

This follows a very strong 2000 when imports grew over 1999 by close to 40% to 2.5m tonne. Total Chinese demand for PTA was 4m tonne against 2.8m tonne in 1999.

These strong increases are largely due to the estimated 1-2m tonne/year of polyester condensation capacity which was commissioned last year. A further 1.5m tonne/year is forecast to be brought onstream in 2001.

The boom in the Chinese polyester market has fuelled PTA demand and helped absorb some of the Asian surplus.

However, intense competition among sellers and China's customary smart buying practices ensured that prices last year and in Q1 2001 were well below producers' expectations.

The flip side of the coin of the surge in PTA demand is that all the new condensation capacity in China is hurting other Asian polyester players.

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Much of the new Chinese capacity, which is either already onstream or due to be commissioned, is of commodity-grade production.

Exporters are already finding it difficult to compete in China for these markets.

The strategy of Taiwanese polyester players has for several years now been 'if you can't beat them join them'. Many Taiwanese textile and garment producers have relocated to China to take advantage of the cheaper labour.

The alternative to shifting to China is either to focus on the smaller Southeast Asian market, or to search for markets in other parts of the world.

As for the PTA shipments to China, some of the increases are, in net terms, not increases at all. The low operating rates of polyester players in Taiwan and South Korea have forced domestic PTA suppliers to seek compensation through more sales to China, hence the intense competition in China's PTA market.

On the plus side for China are not only the forecasts for strong demand growth for many petrochemical products; there are also the recent economic indicators which point to an economy that is being much less affected by the US slowdown than commentators had feared.

In Q1 of this year, GDP growth was 8.1% over the forecasted 7.5%. And export growth in Q1 did not decelerate by as much as the economists had expected. They had predicted export growth of 7-10%, but it was 15% against 30% in Q1 2000.

Also in Q1 2001, retail sales rose 10.5% and fixed-asset investments 12.4%. The latter was largely due to the rise in foreign direct investment ahead of China's admission to the World Trade Organisation.

But are all these figures to be believed?

In March of this year, ACN reported the scepticism of certain economists who believed that in 1998, 1999 and 2000, the political pressure on China's provincial statisticians was such that they grossly exaggerated GDP numbers.

They pointed to what defied all economic logic, that in 1996-99, China's GDP was officially reported to have grown 25.6%, even though energy consumption fell 12.2%.

However, energy consumption in 2000 was reported to have risen 10%, which economists say indicates that last year's official GDP growth of 8% is accurate. They insist that China's power bureau is not subject to political pressure to exaggerate its consumption reports.

On the negative side again, though, no matter how resilient China's economy proves to be to the global slowdown this year and no matter how much this translates into stronger petrochemical exports, it seems unlikely that it will be enough to rescue 2001.

The fall in petrochemical demand elsewhere in Asia is simply too pronounced and China's buyers know this. The buyers, who always seem to second guess the pricing cycles to their advantage, are currently able to employ this ability from a very strong position.

Take South Korea, for example. South Korean petrochemical demand slumped 6.6% during the first two months of this year.

The total volume of synthetic resins, fibre intermediates and synthetic rubber sold in South Korea in January-February was 1.5m tonne against 1.6m tonne for January- February 2000, says the Korea Petrochemical Industry Association (KPIA).

Exports rose in parallel with the decline in local requirements. Overseas shipments in January- February for the same three product groups were 1.2m tonne over 1.1m tonne in the first two months of last year.

For March 2001, the KPIA adds that 491 000 tonne of synthetic resins, fibre intermediates and synthetic rubber were ex-ported, compared with 468 000 tonne in March 2000.

The increased exports came despite a 10% average decline in petrochemical pricing in Q1 of this year against Q1 2000.

The decline in pricing has led the KPIA and the government to revise down its estimate of the total value of South Korean petrochemical exports in 2001 to US$9.4m from US$9.7m.

But the KPIA points to the possible rebound of the US economy as a reason for optimism. It is convinced the recovery of the world's biggest economy will, by the second half, feed through to the domestic economy and, therefore, petrochemical demand.

Economists are not sure.

The most optimistic of the economists contacted by ACN says that because of the US's stronger-than-expected growth in Q1, he has added 0.1-0.2% to his forecast for South Korea's 2001 GDP growth.

This modest addition is because he believes that over-investment in the US during the economic boom will take longer than this year to be worked out of its economy. Therefore, he predicts that exports of electronics to the US from South Korea, key to the health of the South Korean economy, will not show any significant improvement until H1 2002.

His GDP growth forecast for 2001 is now 5% against most of the investment banking houses which are predicting 3.7-3.8%. The government expects 4.3%. Last year, South Korea's GDP grew by 8.8%.

South Korea has made huge progress towards restructuring its financial sector and the corporate sector is also in much better shape with major improvements in corporate governance.

But this hasn't stopped slumps in the South Korean stock markets. In 2000 alone, for instance, investors lost US$78bn because prices on the Seoul stock exchange halved.

Even taking into account the March-May rebound of the South Korean indices, the effect on consumer confidence and therefore spending of the 2000 and the January- February 2001 equity losses are bound to be huge. The problem for South Korea is that its structural reforms have included the opening up of its stock market and its economy. Add to this its increased dependence on electronic exports and the effect is that when the US catches a cold, South Korea suffers a severe bout of pneumonia.

There is not much the Bank of Korea (BoK) can do this year to stimulate the economy. Last month, the consumer price index rose 5% compared with 2.3% for the whole of 2000. Thus, the BoK has little room for interest rate cuts.

On the slight plus side, inflationary pressure should ease in the second half because of a strengthening of the won and a government decision to reduce the prices of some public utilities.

Economists expect the won to strengthen to Won1270:US$1 by end-2001 from Won1300:US$1, its value as ACN went to press.

So far this year, the BoK has allowed the won to depreciate in order to maintain export competitiveness with Japan. The yen has declined this year because of increased economic uncertainty concerning Japan which, in turn, has driven down the won because of the interdependence of the two economies.

Now that optimism has risen and uncertainty declined following the appointment of Junichiro Koizumi as prime minister (see p12), economists expect that demand for US dollars in Japan will decline and the yen strengthen. This should result in a won appreciation.

Perhaps the most worrying statistic for an export-dependent economy such as South Korea's is the forecasted decline in overall export growth.

The economist predicting 5% GDP growth expects export growth this year to be 8.9% in volume terms against 21.6% last year.

One of the most worrying statistics for Taiwan is that its unemployment rate hit a 15-year high of 3.73% in March. This led to a march on the legislative Yuan by protesters demanding that the government pour money into job creation.

What is hurting Taiwan is its dependence on exports to the US. In 1999, 23% of its exports went to the States against 20.5% from South Korea.

And as Taiwan's high technology industry grapples with the impact of the US deceleration, traditional industries such as construction and real estate confront a mountain of bad domestic debt. The ability of the government to inspire investor confidence through dealing with this problem is virtually nil because it lacks a majority in the Yuan.

All these problems have worked through to petrochemical demand.

Overall Taiwanese petrochemical demand is likely to remain flat this year over 2000, says the Petrochemical Industry Association of Taiwan (Piat).

Flat demand would be a major blow, given all the capacity additions by the Formosa Group.

However, the association adds that Taiwanese polymer demand will grow by 3-5% this year. At present, this growth appears likely to come from PP and PVC.

Piat adds that to date this year, PP has been faring better than PE. PE producers have suffered from the double whammy of poor demand and rising raw material costs.

The association says that in 2001, polyolefin operating rates in Taiwan have been hovering between 80% and 85% and are unlikely to improve in the short term.

As for Taiwan's synthetic fibre industry, the Piat forecast is, predictably, that it will continue to struggle against oversupply and poor downstream demand. As mentioned earlier, increasing numbers of the industry's customers are relocating to China where labour costs are much lower.

Piat expects synthetic fibre exporters will face even tougher competition from South Korea, Thailand and Indonesia.

Synthetic rubber demand will also suffer in 2001 because of the further relocation of the customer base to China, adds the association. Many tyre producers are moving to the mainland, again because of cheaper labour. Synthetic rubber growth is therefore forecast to be flat.

In Japan, too, petrochemical demand has declined (see p33). Monoethylene glycol demand, for instance, fell 18% in Q1 2001 over Q1 last year.

Some of the economic problems confronting Southeast Asia are certainly no less severe and, in some cases, even more severe than those in Northeast Asia.

Indonesia is a prime example of a country where economic conditions this year have gone from bad to worse.

The decline of the rupiah is bound to have already hurt petrochemical demand. The Indonesian currency had strengthened to Rp10 924: US$1 as ACN went to press from Rp11 675:US$1 in late April.

This improvement is largely due to the fact that political uncertainty has lessened with the passing of the second censure motion against President Abdurrahman Wahid and the absence of major civil unrest before, after and during the parliamentary debate on the motion.

But everything is relative. Political uncertainty remains high in Indonesia and will remain so for the foreseeable future.

If the president is impeached and forced to step down - which seems very likely - his probable replacement remains largely an enigma despite her year-and-a-half term as vice-president. Megawati Sukarnoputri's ability to handle Indonesia's mountain of economic problems is very much in doubt, as is her ability to keep a cap on simmering religious and ethnic unrest.

And last week's trading value of the rupiah is a long way short of the 2000 average of Rp9000:US$1. And Rp9000:US$1 is a long way short of the Rp6500:US$1 which companies say is required before business conditions can be close to the way they were before the crisis.

Business conditions have worsened for the Indonesian petrochemical industry in 2001 because of both the weakening of the rupiah and the return to sharp fluctuations in its value from one day's trading to the next.

A consequence of depreciation is higher inflation, which is depressing consumer demand and therefore the operating rates of converters and fabricators. The government expects inflation will this year be 9-9.5% compared with its earlier forecast of 7.2%.

Also affecting operating rates are the sharp changes in the value of the rupiah.

The converters and fabricators either buy polymers in US dollars or purchase their raw materials in rupiah, based on the US dollar price.

The danger is that they might buy raw materials at one conversion rate only to find the rate has drastically appreciated when they come to sell the finished goods. In such an event, they would not recover enough rupiah to meet their feedstock outlay.

Yet another dampener on petrochemical demand is interest rates which the government now expects to average 15% in 2001 compared with its earlier prediction of 11.5%.

Bank lending is not only more expensive, but has also become harder to come by. The greater economic uncertainty is making lenders more reluctant to open letters of credit.

Petrochemical demand forecasts have yet to be revised down as a result of Indonesia's renewed crisis.

However, even without any downward revisions, the estimates made early this year illustrate how far Indonesia has to go before demand catches up with supply. PE demand, for instance, is this year forecast to be only 450 000 tonne against installed capacity of 750 000 tonne.

Elsewhere in Southeast Asia, the economies heavily dependent on electronics exports - Singapore, Malaysia, the Philip-pines and to a lesser extent, Thailand - have been battered by the US slowdown.

Adding to the Philippines problems could be the long-term economic fallout of efforts by Estrada's supporters to unseat President Gloria Macapagal Arroyo.

As this feature went to press, it appeared that order had been restored and Arroyo was likely to survive. But how she survives may become the issue. Will the state of rebellion she declared in late April be viewed as an overreaction and, as a result, point to her lack of ability to handle other crises? Will any perception that she has been heavy-handed and unfair in her treatment of the opposition lead to a danger that instability could return?

If the answer to both these questions is yes, then GDP growth, already forecast to be in the region of 2% this year against last year's 4%, may be even lower because of declines in business and consumer spending. Lower-than-expected government revenues will make it even harder for Arroyo to control the country's swollen public-sector deficit.

Politics will also play a major part in determining the strength of Thailand's economy for the rest of this year. The signs concerning the health of its economy are mixed. In January, the country ran its first trade deficit for 11 months, but in February and March, trade balances were again positive.

The government is now forecasting that the country will see 'reasonable' export growth this year. It depends what you mean by reasonable. Last year, exports grew by 15.4% on GDP growth of 4.3%.

The difficulty is that GDP growth is this year forecast to be 2.8-4%. If the lower end of these estimates is realised, then you are looking at export growth of only 5-7%.

At the moment, the jury is out on Thaksin Shinawatra.

Thaksin has come up with a whole raft of economic stimulus packages including giving low-cost loans to Thai villagers and writing off the debts of farmers.

His survival in Thailand's turbulent political system will depend on his ability to deliver on his promises. The trouble is that because of a public sector deficit which is 57% of GDP, he can only prudently spend his way up to a deficit of 60% of GDP.

If the US recovery turns out to be U rather than V-shaped, he may fail to deliver on his promises, or risk driving the deficit dangerously high. That is if an investigation into allegations against Thaksin of electoral financing irregularities do not result in his removal from office.

It might be pouring with rain for many of Asia's petrochemical exporters, but at least there is the prospect of much better weather when the US economy does recover. But even if the fears of a global recession prove unfounded, it seems inevitable that the rest of this year will be very hard going.

China petrochemical production ('000 tonne)



Jan-Feb 2001 % change over Jan-Dec 2000
Jan-Feb 2000
Ethylene 798.9 1.78 4700
Propylene 696.2 1.29 4260
Butadiene 106.1 9.92 590
PE 414.5 (6.26) 2360
PP 277.8 (0.48) 2370
PVC 382.1 27.74 2390
Benzene 312.7 3.82 1840
Paraxylene 234.6 15.65 1260
Styrene 115.3 (15.15 760
Methanol 349.6 29.55 1980
Monoethylene glycol 152.0 (2.22) 900
Caprolactam 20.9 7.67 120
Polyester staple 895.0 24.05 2210
Acrylic fibre 69.9 (8.36) 471
Phthalic anhydride 85.5 47.15 410
Source: China Chemical Reporter

China's petrochemical imports 2000-01 ('000 tonne)



Jan 2001 Feb 2001 Jan-Feb Jan-Dec
2001 2000*
LdPE / lldPE 162.5 188.6 351.1 1753
HdPE 108.8 133.5 242.2 1214
PP / PP co polymer 150.0 169.2 319.2 1640
PS 96.3 115.1 211.4 2140
ABS 87.9 111.5 199.4 1470
PVC 203.9 222.3 426.2 1445
Purified terephthalic acid 157.2 232.9 390.1 2505
Acrylonitrile 10.8 11.2 22.0 153
Phthalic anhydride 11.5 20.3 31.8 217
Di octyl phthalate 16.9 32.5 49.4 306
Polymethyl methacrylate 5.6 6.8 12.5 77
Source: Statistical Department of Customs, China *estimates



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