Asian chems take stock

24 September 2001 00:00  [Source: ACN]

In the aftermath of the terrorist attacks in the US, Asian pet rochemicals attempt to assess the impact on the industry

It might seem inappropriate to debate the effects on the petrochemical industry of the terrorist attacks on the US as the death toll keeps on rising and America and most of the rest of the world grieves.

But life has to go on, hence as Asian Chemical News went to press, the industry was attempting to assess exactly what will be the consequences for financial performances, operating rates, product prices, margins and new projects of 'America's New War'.

Companies across Asia last week said it was still too early to conclude whether sales and earnings targets for this financial year will remain intact or will have to be revised.

Some were also too busy evacuating staff from Pakistan, or placing staff on standby to be flown home from Iran to comment on the long-term implications.

For instance, Mitsubishi Corp, Marubeni, Mitsui & Co, Itochu Corp and Nissho Iwai had bought air tickets for their staff in Iran in readiness for possible evacuations.

Others were frantically attempting to catch up on work due to flight delays, while some companies had imposed travel restrictions on employees. An employee of Formosa Plastics Corp in the US took five days to return to the States from Europe.

Security at some petrochemical complexes was being tightened amid fears of possible terrorist attacks on infrastructure facilities.

What seems already clear, though, is that each company will have to at some point, draw up best, medium and worst-case scenarios for their financial returns.

And what is absolutely clear, according to Asahi Kasei, is that the industry can kiss goodbye to any hope of a recovery in demand in Q4 this year.

The very earliest Asahi expects the rebound to now occur is mid-2002.

A Hong Kong-based chemicals analyst was even more pessimistic last week. He warned that his prediction of a recovery in early 2002 may have to be pushed back to late 2002 or even early 2003, depending on how events develop.

A US petrochemical industry source told ACN that the country expected events to develop into a protracted war, possibly lasting years. Again, this might seem inappropriate, in fact in downright bad taste, but he predicted that such a war would boost demand for electronic chemicals for military command and control equipment, for synthetic fibres for uniforms and for aviation fuel for fighter jets. Whether this will be enough to compensate for the inevitable slump in consumer spending was his big, unanswered question.

The other unanswered questions of when the US will strike and what will be the impact of that first strike, were dominating petrochemical markets as ACN went to press.

Aromatics spot markets were virtually dead. Producers had raised selling ideas US$10-30/tonne since 11 September, but buyers and traders were staying almost entirely out of markets as they waited for clear direction.

Northeast Asian aromatics producers said they have not drawn up any contingency plans as a result of the US attacks because they did not expect that Asian markets would be impacted.

Aromatics end-users, however, said they were concerned that spot shipments due to arrive at end-October from the US could be delayed because of heightened security at US ports and the resulting congestion in the Panama Canal.

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In contrast, at least one Japanese cracker player - Tosoh Corp and possibly as many as two others - were making contingencies through building naphtha inventories in case there is a reduction in supply from the Arabian Gulf as a result of military action.

In the case of Tosoh, though, it was only able to raise inventory by 5-10% because of limited tank space.

'People are afraid of the future. Refineries in Thailand, Malaysia and South Korea are supposed to stop exports of petroleum products so they can build up inventories,' said a Tosoh source.

'More than 80% of our naphtha comes from the Middle East. If there is a war in this region, then we will be badly impacted.'

As for naphtha pricing, buyers and traders were last week confronting extreme volatility due to all the uncertainty. Prices fell in 18 September trading from a Mean of Platts Japan of US$252/tonne cfr Japan to US$245/tonne cfr Japan as fears of a global recession resulted in a slide in crude prices.

However, Tosoh was factoring into its financial projections an average H2 2001 naphtha price of US$220-230/tonne cfr Japan before the crisis. Now it says the projection may have to be revised.

There are more scenarios to where naphtha pricing could go for the rest of this year, than there have been recent falls and spikes in its price.

Asian naphtha has been oversupplied recently, in part due to the weak demand and the inflow of an estimated 1m tonne of European naphtha since July, said a trader.

To some extent, West-East volumes are expected to fall as many European crackers are switching from liquefied petroleum gas feedstock to naphtha, he added.

However, he believes naphtha will still remain in oversupply in Europe.

And he pointed to the current very weak demand, likely to weaken even further, as another reason to be bearish on naphtha pricing.

He also argued that because this is not likely to be a conventional war - sustained military action - supply from the Middle East could be interrupted, resume as normal and then be interrupted again on many occasions. Pricing volatility could, therefore, continue for a long time, he predicted.

As for oil prices, Purvin and Gertz was last week predicting near-term price increases due to speculative influences and public reaction to the attacks.

However, the consultancy believed 'the fundamentals do not support long-term price impacts'.

The fundamentals for cracker operators were weak even before 11 September.

The producers were last week hoping that the prospect of a world recession would strengthen their hand in negotiations with Saudi Aramco for premiums on A-180 supplies in H1 2002, due to take place in October and November.

Their request even before the current crisis was for premiums of less than US$10/tonne over Mean of Platts Arabian Gulf (MoPA). Premiums for H2 2001 are MoPA plus US$25/tonne.

But of course, if naphtha supply is affected by military action, then Saudi Aramco could well hold the stronger hand.

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Asia's petrochemical industry may not only see its margins reduced to nonsense by a rise in feedstock costs and global recession; it may also see sales volumes hurt by much more competitive US exports.

Nova Chemicals in 1999 told ACN it had a US$200/tonne cash-cost advantage in selling PE to China over any Asian producer.

When natural gas rose steadily through Q4 last year to reach a record high of US$10/m Btu in January this year, the competitive advantage of North American ethane-based suppliers over Asian naphtha-based petrochemical producers was wiped out.

However, if the US does go into recession, then energy demand may be weak this winter through until summer 2002. It was strong energy demand that drove up gas prices last year.

Talking of volumes, the current crisis has probably put paid to the slightly improved trading environment that Japanese petrochemical companies had noticed in the US over the last couple of months.

Sumitomo Chemical and Mitsui Chemicals said they had seen evidence of restocking of electronic chemicals. Now, however, they expect de-stocking. Mitsui is 4% dependent on the US for its export turnover.

At least last week, though, Japan was attempting to stave off the effects on their economies of the very likely global recession.

The Bank of Japan boosted liquidity by lowering the official discount rate by 0.1% from 0.25% and by lifting its balance of current accounts above its previous ceiling of Yen6000bn (US$48bn).

Whether other Asian economies will have the inclination or the resources to follow suit remains to be seen.

Whatever they do to cushion the impact of a recession, China will remain crucial for salvaging at least something from this year for Asian petrochemical players.

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Its GDP (gross domestic product) grew by an estimated 7.9% in H1 and in January-July there were very substantial increases in the volume of petrochemical imports (see p18).

But despite China's huge domestic market, it would be far from immune from a recession in the US and therefore the rest of the world: 30% of its exports are to the States.

Many of the questions concerning the impact of the attacks on the US might have been unanswered last week, but what had been answered was the response of stock market investors.

As indices across Asia fell, so did petrochemical share prices.

For instance, in Thailand, by the close of trading on Monday, Thai Petrochemical Industry and National Fertiliser Co saw the value of their shares fall by 8.7% and 20% respectively.

This represented an intensification of a bear run that began 45 days earlier. In the 45 days to 17 September, Vinythai's shares had, for example, declined by 48%.

The strong and the weak (Vinythai falls into the relatively strong category because of its European shareholder, Solvay) were all victims of the region-wide sell-off as investors cottoned on to the concern of a chronic margin squeeze.

As for the weak, the further progress of debt restructuring has to be a concern.

The progress of restructuring the debts of the likes of Chandra Asri, TriPolyta and Polysindo has already been torturously slow. Now it could well be that the future cash flow projections upon which current restructuring packages are based would have to be revised in the light of recession.

As for consolidation, who is going to take the risk of buying a petrochemical asset in a market where even the bottom might not be in sight?

Efforts by Hyundai Petrochemical to sell its petrochemical assets and by Daelim Industrial to merge its polymer assets with those of SK Corp and PolyMirae could as examples again, be hampered by the ramifications of the terrorist attacks.

And there is yet another factor to evaluate - that of not only reduced crude oil supply on oil prices, but also on the functioning of South Korea and Japan, which are entirely dependent on imported crude.

As mentioned earlier, the South Korean government last week ordered refineries to build crude inventories.

President Kim Dae Jung's administration may be forced if supply is interrupted to limit refinery operating rates and restrict the number of cars on the roads.

For South Korea and Japan, reduced crude supply could further dampen their economies.

And what of adding new capacities?

Much of the current focus of western majors has been in Iran, which probably has the world's most competitively priced ethane.

One western major interested in extending its presence in Iran said: 'At present, it is business as usual in Iran as it is not the affected region. We are continuing discussions in the country.

'If there is a war, however, we will have to re-evaluate.'

A second western player in Iran pointed to the encouraging noises emerging from Iran immediately after the US attacks, and the country's determination to fully re-enter the international community as reasons for optimism.

However, Kuwait's Petrochemical Industries Co admitted that it may suffer a delay in finding a US partner for its olefins and aromatics project (see p28).

And in the longer term, adding new capacity anywhere could become even less of a priority if the worst happens. Obtaining approval and financing could become next to impossible.

But perhaps all of this is out of perspective.

Perhaps what really matters at a time like this, at any time, is that there was at least some good news to emerge from the World Trade Center tragedy - employees of Sinochem and Sinopec, who were working in the towers, escaped with their lives.

We all need some good news at present.

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