More fear than substance?

05 May 2003 00:00  [Source: ACN]

...maybe, but as John Richardson discovers with help from the ACN and ICIS-LOR teams, even if the danger has been overstated, the impact on the chemical industry has been real enough through falling prices and business disruption with the fear that the long-term fallout could be even more serious

When I flew back from the US to Singapore a few weeks ago, it felt as if I was on board a time machine heading back to Europe in 1348 when the Black Death had taken hold, such was some of the nonsensical garbage being written about Sars (severe acute respiratory syndrome) in the press.

One article on Singapore was, for instance, headlined 'Plague Island Under Quarantine'. What has also fuelled the global panic is the Internet, which enables everything from unfounded scare stories to dangerous or completely useless home remedies to reach an audience of millions via e-mail and websites.

The point is that, compared with the Black Death, which killed one in three Europeans between 1348 and 1351 and numerous, much more recent and natural killers, you stand a very, very small chance of catching Sars and dying from it. This may offer no comfort to those who are suffering either bereavement as a result of Sars or who have contracted the disease, but a sense of proportion helps.

The trouble is that, with perception being roughly nine-tenths of reality, the Asian chemical industry is already being badly hurt by the disease, and the longer the crisis drags on, the more severe will the damage inevitably be.

It is not only fear that's dampening chemical demand, affecting trade flows and the progress of projects. The other major factor is the very sensible reaction, or overreaction, of the good public health bodies, such as the World Health Organization, and companies to the crisis.

It's better to overreact now through stringent health-protection measures and by banning all business travel in order to prevent the disease becoming much more widespread, seems to be attitude. We wouldn't be in this mess now if China had taken this approach last November.

To quantify the impact on our industry, we'll deal with markets, projects and some overall business and economic consequences of Sars. This article is the result of a collaboration between ACN and our colleagues at ICIS-LOR (ICIS-LOR is a global chemical pricing and information service).

'One olefins trader remarked last week that "where there used to be a war premium [meaning Iraq] there is now a Sars discount" ', said Vanessa Taylor, managing editor of ICIS-LOR.

'Although many believe that Sars may be a convenient excuse to stay away from the market, given inventory buildup ahead of the war, or a further means to exert downward price pressure on suppliers, there is concern over evaporating end-use demand in plastics, styrenics and fibre markets.'

The impact on pricing of all these factors is already very tangible. For instance, the market had expected propylene to remain around US$500/tonne cfr NEA during Q2, said an industry source. Last week, however, propylene was US$450/tonne cfr NEA.

ICIS-LOR reporter Clive Ong believed that the psychological impact of Sars on the PS, ABS, expandable PS and SAN markets was even greater than that of the war. 'The whole supply chain has slowed down as players take a very cautious stance,' he said.

The caution, according to Salmon Lee of ACN, is due to the concern that the declines in consumer spending will have an impact on petrochemicals.

He added that to date in the markets he covers - aromatics and styrenics, PTA and MEG - demand has not fallen as a direct result of Sars eating into consumer spending. However, it seems only a question of time before all the forecasts of declining GDP (gross domestic product) on the back of the collapse in consumer spending eat into demand growth.

'Buyers are not buying for fear that they will not be able to sell their finished products,' he added. 'Sellers want to sell, but because there is so little buying, they have cut operating rates and lowered prices.'

The effect on PX was a fall to US$490- 500/tonne cfr Asia last week, from US$980- 1000/tonne cfr Asia in March.

MEG and PTA had each fallen by US$150-200/tonne as ACN went to press, again compared with March.

In China, polyester prices had tumbled to Rmb8800/tonne from Rmb10500/tonne in March.

Sars has also cast its shadow on methanol, causing price ideas to fall, reversing the upward spiral of the last four months, said ACN's Prema Viswanathan. Buying ideas fell to US$245-260/tonne cfr SEA, down from the previous week's business concluded at US$290/tonne cfr SEA.

It is in China, the mother of all chemical markets and also Sars, that the pain is being felt the most.

And here's a worry: in 1997-98, it was a still-booming China that helped partially offset the impact of the Asian financial crisis.

'If China goes down, then God help us,' said a source at one Asian cracker operator. On Monday of last week, the Asian Develop-ment Bank forecast 7.3% GDP growth for China for 2003 compared with earlier predictions of 8%. However, a Beijing think tank and Goldman Sachs predicted growth of only 6%, which would be the slowest since 1990.

And another worry is the vulnerability of the US economy to Asia.

Now that George W Bush has finished with Saddam, he has the rather tricky domestic problems of rising unemployment and a fiscal stimulus package that, if it passes through Congress in its truncated form, might not be enough to kick-start the economy.

At least, though, there were signs last week of a recovery in consumer confidence with the Conference Board reaching a preliminary 81 points in April against 61.4 in March.

However, that could be just down to everyone feeling good about beating a sanction-depleted, ill-equipped army of de-motivated, underfed conscripts.

In 1998-2001, it was the boom in the US that largely underpinned Asia. With the US in a precarious economic condition, it could be the other way round now. HSBC estimates that, for every 1% drop in Asia ex-Japan GDP growth, the US will see a 0.2% fall in its export growth.

But to get back to markets, the effect of Sars on trade volumes was hard to quantify, said industry players.

One trading firm, however, said that its volumes to China had fallen by 30% since the onset of the outbreak.

And a few Taiwanese producers estimated that their sales had fallen by 20-30% over the previous month with business to southern China/Hong Kong down by 50%.

But they stressed that Sars was not the only reason for the declines, adding that too-high inventory building during the surge in crude prices before the Iraq war and disappointing Chinese demand after the Chinese New Year were others.

Pick your product and the story is almost the same, with Sars playing some kind of role in the declines in pricing.

But in PE and PP, ICIS-LOR editor Steve Tan said that the recent fall in demand for resins has been due more to the Iraq war and seasonal factors.

'In the longer term, however, some converters are bracing themselves for a reduction in orders for their product,' he added.

Tan identified the PE/PP sector as the first casualty of Sars with toy and gift manufacturers suffering in Guangdong province. The cancellation of a trade fair in Hong Kong was partly to blame, leading to a shortfall in overseas orders.

But in this utterly crazy world, another reason for the decline could be the totally unfounded belief that the Sars virus is capable of being transported via cargoes. There are anecdotal reports of US orders for plastic toys being cancelled because of the fear.

Plus, earlier this month, the Mexican Textile Association was reported to be lobbying the Mexican government to ban Chinese imports of garments. Rather convenient, perhaps, given that Mexico is facing increasing competition from the Chinese garment industry due to China's World Trade Organization admission.

It's not only the US that has apparently gone crazy. Port workers in Kaohsiung, Taiwan, have taken to wearing masks when handling cargoes from China and even those being dispatched to China.

And South Korean port workers' unions are reported to be demanding protective measures against Chinese cargoes.

The crews on China-bound ships might have more reason to be worried. They are demanding higher insurance cover that could work its way through to higher freight rates.

To return to chemical markets, it might be in bad taste to suggest a benefit from Sars, but some industry sources are not letting taste hold them back: while plastics used for wrapping consumer goods might be suffering, they point out that sales of plastic used in the production of medical gloves could be on the rise.

They add that increased sales of telecommunications equipment due to reductions in business travel could be on the rise, delivering a boost to polycarbonate alloy sales.

And there are the benefits that could be delivered to the sales of chemicals used in disinfectants and detergents such as propylene oxide, benzyl chlorophenol and sodium hypochloride.

But this is surely not only in bad taste with the worldwide death toll at 335 as ACN went to press; it is also clutching at straws.

What of petrochemical projects in China? Clara Tan and Kamachi Ruthramurthi from ACN gleaned the following information.

Shell Chemicals says that, to date, there has been no impact on the schedule for completion of its 800 000 tonne/year joint-venture cracker project with CNOOC at Nanhai, Huizhou, Guangdong, China, which is due onstream in 2005. There are currently 1000 employees working on the project with 700 at the construction site. Shell stresses that it has a contingency plan in place to ensure business continuity.

This is typical of reports across the industry, with those behind projects in China insisting that it is too early to say whether the timing, or perhaps even the realisation, of investments will be affected.

Even if it is too early to say whether projects will be affected on a significant scale, investors must be worried on several levels.

One major western investor in China predicted that there would beno disruptions to its projects, provided the crisis peters out in the next two months. If it drags on until end-2003, however, it predicted that its second phase of investments would definitely be affected since only so much can be achieved through tele- and video-conferencing.

'Trips to China are needed for negotiations with joint-venture partners and for securing feedstock,' the investor said.

Also, will the downward revisions in GDP growth result in a shift in the current predictions for when petrochemical pricing will peak?

It is conventional wisdom that you bring a project onstream at as close to peaks in pricing as possible.

So far, the consultants argue that it is too early to say that Sars will definitely push back their forecasts for pricing peaks. For instance, CMAI is currently sticking with 2004 for vinyls and styrenics with the good times set to start rolling for paraxylene in 2004-05, provided you are integrated.

But at the risk of being boring, the longer the crisis goes on, the more likely it is that dates such as these will be pushed back.

Another concern must be whether finan-cing can still be secured in the current climate, maybe not only because of the expected reductions in rates of economic growth.

'Can anyone trust the Chinese government to be straight about anything, including infrastructure provision and secure feedstock supply, after the lies that have been told over Sars?' one western banker said to ACN.

This seems really wide of the mark (plus an unfair exaggeration) given that everyone who does business with China surely knows by now that being economical with the truth is an ingrained feature of the country's chronically over-bureaucratic and multi-layered government. It is something you have to accept and to get around, as is the case with continued intellectual property abuse, in order to take advantage of the world's fastest-growing chemical market.

But on a wider level, a greater awareness of China's habit of concealing uncomfortable facts could do damage to foreign direct investment that has in part been driven by the belief that the country is really opening up.

The other problem with the lies that have been told is whether anyone will believe China when it announces that it has brought the crisis under control.

As we went to press, the news, thank goodness, was much better: Vietnam and Toronto both appeared to have brought their outbreaks under control with the WHO indicating that, worldwide, the number of cases might have peaked.

In Guangdong, too, the root of the disease, it was reported that the number of cases had peaked, but would you trust the numbers enough to travel to Guangdong?

In all of this we are probably in danger of losing the most important point - the human impact of the crisis.

A very good contact and friend of ours faces the anxiety of knowing that his wife is at risk: she is a doctor and has been sent for a month to one of the 'frontline' hospitals in Beijing to treat Sars patients. When she returns, she will need to spend ten days in quarantine.

But still, the risk does seem to have been overblown, maybe for the right reasons to prevent a pandemic.

Asia, and the rest of the World, really does need a break. First it was the Asian financial crisis, then the US downturn, then 11September, then Afghanistan, then Iraq and now Sars.

It is hoped that, once Sars is out of the way (or becomes something we learn to live with and manage, as we did with malaria, Aids and also influenza, which is, in fact, more dangerous) a strong and sustained recovery in the chemical industry will finally arrive.

Chemical companies' response to Sars crisis

Chemical companies across Asia have reacted to the Sars crisis by not only cancelling business trips in place of which many more hours are being spent on the phone or working by e-mail.

In addition, employees are being allowed to work from home and others split into groups to minimise the risk of infection spreading.

BASF-YPC, the joint-venture company established to construct and operate a cracker complex in Nanjing, China, is carrying out regular cleaning and disinfection at the project's construction site.

Also, staff have been organised into shifts to again reduce the risk of any outbreak spreading, with some offices introducing flexible working hours to enable employees to avoid crowded public transport.

Some companies, for instance, Shell Chemicals, have sent families of expatriate staff back home.

With the crisis showing signs of easing last week, the hope was that working patterns might soon return to normal.

Country	Cumulative Sars cases*	No of Sars- related death	Tourism receipts/ GDP%+	General govt balance GDP% 2003	S&P real GDP growth assumption (pre-Sars) 2003	Impact from Sars 2003
Australia	5	-	1.9	0.4	3.0	-
Singapore	151	12	6.2	4.7	2.7	0.4-2.0%
New Zealand	-	-	4.3	(0.9)	2.5	0.1-0.2%
Taiwan	23	-	1.4	(4.0)	3.0	0.2-0.5%
Japan	4	-	0.1-	(10.1)	0.1	-
Hong Kong	1151	41	5.1	(6.9)	2.5	0.6-1.5%
South Korea	-	-	1.3	(0.7)	3.8	0.1-0.5%
Malaysia	51	1	10	(5.4)	4.0	0.5-0.1%
China	1336	60	1.5	(4.4)	6.7	0.1-0.5%
Thailand	8	2	5.2	(3.4)	4.1	0.1-1.0%
Philippines	1	-	2.4	(4.5)	4.5	0.5-1.0%
Vietnam	62	5	0.3	(4.9)	5.5	0.1-0.5%
Pakistan	-	-	0.2	(3.4)	4.6	-
Indonesia	3	-	3.7	(1.4)	3.5	0.0-0.4%
* as of 14 April, as reported by World Health Organization, including suspected and probable cases
+ 2001 figures except for New Zealand (2000), Cook Islands (2000), Papua New Guinea (2000), and Vietnam (1998), from World Tourism Organisational
SOURCE: STANDARD & POOR'S

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