02 May 2005 00:01 [Source: ACN]
THE language might be different, but the end result could well turn out to be exactly the same: petrochemical oversupply leading to a price slump just as severe as that which we saw in the wake of the Asian financial crisis.
This is why I am left scratching my head with bemusement over the extensive plans for capacity build-up in South Korea, which, as features editor Malini Hariharan points out, amount to the equivalent of a new worldscale cracker or thereabouts.
You can dress expansion up in modern, trendy corporate speak, such as ‘improving efficiency’ and ‘rationalisation’ rather than the old ‘maintaining market share’ and ‘strategic project’ as much as you like. But in the end, it might all amount to just another corporate suicide note, albeit using different words.
As one consultant says: ‘The disordered nature of capitalism is such that companies across every industrial sector pile into building projects at the peak of cycles because they don’t know what else to do with their money.’ The alternative under the communist system is state bureaucrats directing what to build, and when and where, which has to date proved somewhat less efficient.
But surely, can’t the good capitalists in South Korea find another use for their money? One suggestion is to give it back to their shareholders in dividends as a reward for the patience and loyalty that they displayed during the last downturn.
True, Honam Petrochemical and LG Petrochemical did increase their dividends last year over 2003, but maybe they could have done more. LG Chem lowered its dividend because of an extensive capital expenditure programme.
The companies argue that in order to stay competitive they have to increase scale. If not, then their unit costs of production could leave them as laggards in an environment where what constitutes worldscale is changing frequently, perhaps too frequently for the industry’s own good, because of improvements in technology.
On an individual company level, yes, I have a great deal of sympathy for this argument.
But collectively, as we keep saying, this is the equivalent of one new worldscale cracker in a country with no feedstock advantage and a mature market with low growth prospects that is already over-dependent on China for its survival. Just imagine what would happen to South Korean petrochemicals if Chinese GDP (gross domestic product) fell below 7%. And – and this is a big AND – all this cracker, aromatics, and derivative capacity detailed in the table on pages 11 and 12 is due onstream in 2007-08, just as Middle East capacity is due to be commissioned.
Maybe the answer is taking a little of the disorder out of capitalism. I am not talking about state planning, of course, but a sensible approach to granting approvals by the South Korean government might not go amiss.
No, what I am talking about is more consolidation in South Korea. If there were fewer companies around to jump on the capacity-addition bandwagon, we wouldn’t be seeing such a plethora of projects.
There has been a fair amount of merger and acquisition activity, but as one South Korean player concedes, there is still the need to lower the current 10 companies to three of four.
Let’s hope by the time history is in danger of repeating itself again – at the height of the next upcycle – such consolidation will have taken place. Also, let’s hope I am wrong in thinking that the next round of restructuring will be the result of another oversupply crisis in South Korea.
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