FocusAsia petchems face worst slump since 2002

18 September 2008 07:25  [Source: ICIS news]

By Bohan Loh

SINGAPORE (ICIS news)--Asia's petrochemical industry could face its worst downturn since the 1997-2002 financial crisis in the coming months as the sub-prime crisis, the global slowdown and new capacities from the Middle East combine to create a mega-fallout, analysts and economists said on Thursday.

"We were riding on the astronomical growth of China and India in the early 2000s through to 2007 but from now on, we're looking at a possible three-four years downturn,"  said Pongpan Apinyakul, a Thailand-based market analyst from regional stock broking house Kim Eng Securities.

A prolonged period of thin trade amid bearish market sentiment was aggravated by the bankruptcy of US banking giant, Lehman Brothers and the Federal Reserve's $85bn (€59.5bn) bailout of insurer, American International Group (AIG).

Market confidence was weakened further as news of Edinburgh-based mortgage lender HBOS negotiating to be acquired by British financial giant Lloyds TSB Group raised questions over the financial health of Morgan Stanley and Goldman Sachs.

New capacities expected to come onstream in the Middle East was another factor that could work negatively for Asian petrochemicals companies.

"New capacities in the Middle East are expected between the end of this year through to 2012. A downturn on excess supply was predicted in the context of economic conditions before the true depth of the sub-prime mortgage was known," said another analyst with a Thai securities firm.

"I think the excess supply prediction might be an under-statement considering current circumstances," he added.

Chairman of UK consultant International eChem, Paul Hodges has said in his Feedstocks for Profit study: "The level of capacity expansion underway [in the Middle East] means that it cannot all be absorbed, even under a global boom scenario."

Middle East ethylene capacity would expand from 14m tonnes/year in 2006 to 32m tonnes/year in 2013, and propylene from 3m tonnes/year to 11m tonnes/year with a significant portion of the output being based on "advantaged feedstock," particularly ethane, Hodges estimated in his paper.

"Today there is a compounding effect from deteriorating wealth position, labour market and the overall pullback on consumption as a whole," said Vishnu Varathan, an economist with Forecast Singapore.

"We are definitely going for sharp deceleration, whether this will escalate to recession on a global basis, it depends on how policy makers in Asia will prop up the market," he added.

CIMB regional economist Song Seng Wun expected further "bad news" to emerge in the wake of the US sub-prime mortgage crisis as confidence in the mass markets continued to wane.

"Where the US and European economies continue to be weak, it’s bad news for Asia's petrochemical players," said Arden Dai, analyst with Frost and Sullivan Shanghai.

Meanwhile, regional indexes recovered early losses by the end of the trading session.

Singapore's Straits Times Index was trading down 0.08 points to 2,419.21 at 17.30 hours local time (09.30 GMT) while Japan's Nikkei 225 lost 2.22%, or 260.49 points, to 11,489.30.

The Shanghai Stock Exchange 180 was down 1.72% to 4248.51, while Hong Kong's Hang Seng Index plunged 0.03%, or 4.73 points, to 17,632.46.

($1 = €0.70)

Pearl Bantillo contributed to this article

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