FOCUS: S Korea competes with Mideast for China

17 October 2006 05:41  [Source: ICIS news]

By Nurul Darni

SINGAPORE (ICIS news)--Plans by South Korea’s petrochemical producers to tap into Chinese demand by expanding ethylene capacities face a challenge from Middle East competitors, analysts said on Tuesday.

"The growth is necessary to prepare South Korean producers for fierce competition from the Middle East. There is a need to raise efficiencies of their units either based on debottlenecking or revamping," Jae Jung Kim, an analyst at Korea Investment & Securities, said.

"In short, it is a battle for business," he added.

South Korea - the world’s third largest ethylene producing nation - plans to boost capacity by 8% to 6.375 million tonnes/year by 2007, analysts said, noting that companies such as Yeochun Naphtha Cracking Centre (YNCC), LG Chemical and Samsung Total Petrochemicals have planned to increase ethylene capacity next year.

China, the world’s fastest growing economy, needs to fulfil its increasing appetite for petrochemicals derivatives in the next few years and relying on domestic ethylene production alone may not be sufficient, industry sources said.

Producers from South Korea have to scramble for a piece of the pie from China, or risk losing it.

LG Chemical plans to expand its ethylene capacity next year by 54% to 740,000 tonnes/year. Samsung Total Petrochemicals will increase its capacity by 200,000 tonnes/year to 850,000 tonnes/year next year, while YNCC will raise capacity at its No 1 cracker to 810,000-850,000 tonnes/year from current 510,000 tonnes/year.

In April this year, LG Petrochemical expanded its ethlylene capacity from 760,000 tonnes/year to 860,000 tonnes/year.

"It is important for us to maintain, if not increase, our market share in the region. China will be our main target outlet," a source at Seoul-based LG Chemical said.

Competition from the Middle East will be stiff, however.

Middle East producers have the propensity to dish out relatively cheap supplies since they can crack low-cost feedstocks produced domestically such as ethane, propane and butane.

That may put South Korean ethylene supplies at a big disadvantage in terms of cost-competitiveness and could deter prospective buyers in China who are typically price-sensitive, industry sources said.

"South Korea may not be able to compete as well against the Middle East as the cost-gap may be too wide," said Daeyong Park, an analyst at Hyundai Securities. He said that the cost-gap between Middle East ethylene supplies versus South Korea could be "as wide as $500/tonne", with the price in favour of Middle East origin.

Middle East producers are targeting to increase ethylene capacities from next year onwards, with some 7.8 million tonnes/year of ethylene seen by 2008 and 9.1 million tonnes/year by 2010, analysts said.

"Middle East producers could enjoy better economies of scale. That advantage alone could leave them with very good margins," said Hyundai Securities’ Park.

Asian ethylene price peaked earlier this year at $1,500 tonne, CFR Northeast Asia, and the price has eased below that level to $1,200/tonne this month, and some analysts projected that the sector is entering its cyclical downturn.

Concerns aside, most South Korean producers acknowledged that while they can’t avoid such competition, they are still hopeful that they could find ready buyers and sell ethylene briskly.

"I’m hopeful that there is room for everyone, including us, to place our barrels. This region can’t be too short on demand," a source at Samsung Total Petrochemicals said.

By: Nurul Darni
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