Drumming up business

14 June 2004 00:01  [Source: ACN]

Thailand has put behind it the financial catastrophe of 1997 and is now the best economic performer in Southeast Asia. Further big expansions in the petrochemicals sector are in the pipeline. However, the government has come in for criticism for its handling of some domestic issues. Malini Hariharan reports

MAJOR Thai petrochemical companies posted a hefty growth in profits last year, a trend that has continued in the first quarter of 2004. The economy is doing well and there is, of course, the upturn in the petrochemicals cycle, which has so far not been dampened by high feedstock costs.

And analysts agree that most of the companies are better placed to enjoy the good times as they finally cleared or restructured the heavy debt burden they were saddled with after the economic catastrophe of 1997.

On the economic front, Thailand was the best performer in Southeast Asia last year as its GDP (gross domestic product) grew by 6.7%. The forecast for 2004 is a healthy number despite a recent downgrade.

The government said last month that it expects the economy to expand by 7.1%, down from its earlier estimate of 7.9%, on fears of an adverse impact from high crude-oil prices, the bird flu, separatist violence in the southern provinces which has so far left 200 dead, a possible cooling down of the Chinese economy, and a hike in US interest rates.

The forecast by economists is slightly more pessimistic – 6.9%-7.0%. Most of them concur that growth in the second half is likely to be slower as the economy will start feeling the impact of high raw-material prices.

Recently, the National Economic and Social Development Board admitted that growth could dip to 6% if oil prices stayed on the higher side (over US$35/bbl) due to instability in the Middle East and rising demand. Thailand is, of course, not the only Asian country that will reel under the impact of high crude prices. Still, the effect is likely to be more than on some of the other countries as Thailand’s oil imports account for a little over 4% of its GDP.

Consumer and business confidence was hit in the first quarter by the outbreak of the bird flu virus and violence in the Muslim-dominated southern provinces. The government had said in early May that the virus attack was under control, but a fresh outbreak at end-May suggests that the optimism was misplaced. The government came in for plenty of criticism for covering up the matter for a long time. But eventually a crisis team was formed which took the step of slaughtering some 37m chickens to contain the virus.

The government’s response to the second crisis – the sectarian violence in the south – also attracted similar criticism: that the government played down the significance of the attacks in refusing to acknowledge that an Islamic separatist movement was still active. Prime minister Thaksin Shinawatra’s almost predictable reaction, shallow reassurances at first and then a deflection of blame to other members of the government, did not win him much public support. Both the events have cast a doubt on the government’s authority and popularity.

But Thaksin is still capable of winning back popular support ahead of the next elections that have to be held not later than January next year, say some analysts. Recent measures to boost his public standing include a bid for Liverpool, one of the top English football clubs, which was initially to be financed by a lottery with a top prize of Baht1.0bn (US$24.5m). Plans for the lottery were scrapped after public criticism that it encouraged gambling and was against Buddhist principles, but the bid for Liverpool holds as it is viewed as a confidence- and consumption-boosting exercise.

The stock market too has not been in great shape. After ranking as the third-best performer last year, the Stock Exchange of Thailand index has been down over 20% since January, earning the dubious distinction of being among the worst-performing markets this year.

Despite these worries, confidence has been expressed about the overall health of the economy. In its annual report issued in April, Moody’s Investor Service remarked on the significant improvement in the government’s external liquidity and policy performance since the financial crisis of 1997.

The factors that provide considerable leeway for the authorities to manage external shocks, says the Moody’s report, include buoyant export performance, a high level of international reserves, and a more flexible and successful macroeconomic policy framework. A substantial reduction in external debt, including prepayment of outstanding IMF (International Monetary Fund) loans, is an additional factor.

The Thai government is continuing its policies of strongly supporting key industries such as automobiles, electro­nics, agro industry, fashion and high-value services. According to the Thai Automotive Industries Association, total vehicle production in 2003 was up 28% from the previous year at 750 512 units. The figure for the first quarter was 222 677 units. Investment in automotive manufacturing and related industries is expected to be more than Baht10bn. The Ministry of Industry is said to have worked out a plan linking the auto parts industry with other related industries, leading to the formation of industrial clusters.

Moving on to petrochemicals, this sector may not figure on the government’s priority list, but it will benefit from the supportive policies extended to the other industries. John King of Nexant Chemsystems says that Thailand is experiencing growth similar to that in other Asian countries, thanks to a strong domestic market and healthy exports.

Almost all major petrochemicals are forecast to repeat last year’s performance (see table). One of the few products that saw consumption slip last year was PVC, and that was due to a drop in the government’s budget for rural irrigation. But this is unlikely to be repeated this year. Demand for fibre intermediates such as purified terephthalic acid (PTA) and monoethylene glycol (MEG) is expected to climb because of the commissioning of new polyethylene terephthalate facilities.

The only concern is that the industry is still in some need of financial restructuring and consolidation, points out King. While the present is a good time to sort things out, it is easier for these issues to take a back seat when the going is good.

The right noises, though, are being heard. The long drawn-out saga of Thai Petrochemical Industry’s debt restructuring may finally be nearing an end, if creditors approve the latest debt-restructuring plan and former chief executive officer Prachai Leophairatana concedes to a graceful exit (see page 17). This would pave the way for a possible strategic investor, provided the price is right.

Meanwhile, there also has been speculation of a mega-merger of PTT Pcl’s affiliates National Petrochemical Co (NPC), Thai Olefins Co (TOC) and Aromatics Thailand Co (ATC), a proposal that was first mooted after the financial crisis but later abandoned. But PTT has confirmed that it is in talks to acquire Bangkok Polyethylene (BPE), a 250 000 tonne/year high-density polyethylene (hdPE) producer based in Mab Ta Phut that is currently controlled by Bangkok Bank (40%) and Mitsui & Co (35%). Due diligence has yet to be completed and there have been reports that the offer of around US$130m has yet to be accepted. It is also not yet clear whether PTT would purchase the entire stake or if it would involve TOC, which supplies ethylene to BPE.

With petrochemical fortunes looking up, PTT and Siam Cement are in the mood for investing more money in the business. Siam Cement is mulling a cracker investment (see page 15) besides investing in an expansion of its joint venture PTA facility.

And late last year, PTT’s board approved a Baht146.08bn five-year spending plan for the 2004-2008 period, of which around Baht118bn will be on its gas business. Petrochemical investments will be made mainly by PTT’s affiliates NPC, TOC and ATC in which PTT will have stakes.

But PTT’s investments in the gas business will ensure that feedstock is available to projects planned by its affiliates. For instance, construction of a third gas pipeline and a fifth gas-separation unit as well as improvements to the second and third gas-separation plants would provide enough feedstock for a propane dehydrogenation and polypropylene project. Among the other key projects are a cracker by NPC (see page 16), cracker debottlenecking and an MEG project by TOC and a phenol project involving PTT and its three affiliates.

Questions have been raised on the wisdom of multiple cracker investments in the country – is there enough feedstock and is the market big enough to accommodate the extra volumes? But the companies are in good shape financially, with cash flow expected to keep rising at least until the petrochemical cycle reaches its peak sometime next year. The pressure now is to invest in order to guarantee future growth in sales and profits.

NPC

	2002	2003	2004E	2005E
Sales (Baht m)	12 718	15 514	18 225	19 714
Profit before tax (Baht m)	1 572	2 835	4 784	5 613
Net profit (Baht m)	1 307	2 302	3 613	4 276
Net debt/equity (%)	8.1	7.6	2.9	(8.1)
Net profit margin (%)	10.3	14.8	19.8	21.7
SOURCE: CLSA

SIAM CEMENT

	2002	2003	2004E	2005E
Sales (Baht m)	128 201	148 865	163 074	164 705
Profit before tax (Baht m)	14 442	22 139	32 705	37 628
Net profit (Baht m)	11 214	17 806	25 141	29 117
Net debt/equity (%)	143.0	99.1	81.6	64.8
Net profit margin (%)	8.7	12.0	15.4	17.7
SOURCE: CLSA

THAI PETROCHEMICAL INDUSTRY

	2001	2002	2003	2004E
Sales (Baht m)	75 583	81 274	96 794	104 538
Net profit (Baht m)	8 628	(4 231)	2 546	2 715
Earnings per share (Baht)	1.42	(0.54)	0.32	0.14
Price earnings ratio (times)	2.30	(7.24)	37.31	78.57
SOURCE: UOB KAYHIAN

THAILAND – CONSUMPTION OF MAJOR PETROCHEMICALS (’000 TONNE)

Product	2002	2003	2004*
PE**	979	1073	1180
PP	688	801	887
PVC	417	415	454
PTA	772	924	977
MEG	340	366	397
Acrylonitrile	93	97	105
Benzene	303	361	374
Toluene	253	297	512
Paraxylene	669	841	897
* forecast ** includes ethylene vinyl acetate
Source: Petrochemical Industry Club, Federation of Thailand Industry

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