Fears for S Korea’s petchems as economy stalls

21 October 2008 08:40  [Source: ICIS news]

By Pearl Bantillo

 

SINGAPORE (ICIS news)--Major petrochemicals producer South Korea needs to pump in more money to spur domestic growth as the battered won combined with falling exports threatens to hobble Asia’s third largest economy, economists said on Tuesday.

 

The currency’s 30% fall since January would weigh heavily on cracker production as feedstock naphtha, which was priced in US dollars, would cost relatively more compared with domestic won-denominated chemical sales, cracker operators said.

 

Despite a weaker currency Korean exports are not expected to rally when major trading partners such as the US and China are saddled by economic troubles of their own.

 

The country’s naphtha exports in September slumped 28% as Japan took in 25% less of the product from a year ago, while shipments to China declined 32%.

 

“Growth is going to slow in Korean exports. The third quarter was up 25% year on year but they cannot sustain something like that if the world economy is going the direction we see it to be,” said David Cohen, chief economist at Action Economics.

 

The won’s decline in value against the US dollar had compounded Korea’s woes as small and medium enterprises (SMEs), which hedged against a likely appreciation of the won in 2007, are now reeling from massive losses, said Daniel Soh, an economist at consultancy firm Forecast.

 

“Some SMEs were suffering from hedging losses as much as their total revenue,” he added.

 

At current rates, $1 bought won (W) 1,320.

 

“The main problem with Korea is the domestic slump - businesses are curtailing spending and hiring, the construction sector borrowed heavily during the property boom and now demand is falling off because of negative sentiment,” he said.

 

South Korea has seen gross domestic product (GDP) growth decelerate to 4.8% in the second quarter, from 5.8% in the first quarter.

 

“The third quarter will still be fairly resilient but in the fourth quarter, we may see a minor collapse. Recession may be on the cards in 2009,” he said.

 

The second half of 2008 may only see growth averaging between 2.5-2.8%, with growth falling to just about 2% in the fourth quarter, Soh added.

 

On Sunday, the government announced a $130bn financial rescue package - including a $100bn guarantee on banks’ offshore debts and $30bn to be made available to banks - joining in the global efforts to stabilise the financial markets.

 

“The financial package, the most it can do is to ease the liquidity issue in South Korea, to eliminate the financial risk,” said Soh, adding that pre-emptive measures such as pump priming the economy might turn the tide.

 

The bulk of the country’s exports consisted of capital goods such as machinery and equipment, which thrived during times of economic prosperity but would be dismal during difficult periods, economists said.

 

“The trend so far is quite positive for Korean exports. It remains supportive for their economy but clearly they are still nervous for potential drag on their exports,” said Cohen.

 

South Korea’s petrochemical exports were a mixed bag in September, with significant falls in volumes of naphtha, offset by a substantial increase in purified terephthalic acid and olefins shipments compared with a year earlier, data from the Korea International Trade Association (KITA) showed.

 

Propylene exports, meanwhile, jumped 31% due to production cuts in acrylonitrile, polypropylene and other propylene derivatives.  

 

To discuss issues facing the chemicals industry visit ICIS connect

 

Leon Toh, Steve Tan, Helen Yan and Hong Chou Hui contributed to this story

By: Pearl Bantillo
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