Asian construction chemicals face uncertain market outlook

Glimmer or gloom?

04 March 2009 14:37  [Source: ICB]

Demand for construction chemicals across Asia has been hit hard by the downturn. As for when, or even if, a recovery takes place, that depends on your outlook

A Doomsday scenario for Asian property markets is an average 50% decline in prices over the next six months as banks reduce their exposure in an effort to limit the potential impact of bad debts.

Indian prices of real estate have doubled since 2005, and could decline to their pre-2005 level, warn some commentators.

But, in a region where healthy government budgets seem to be king, those with the rosiest fiscal balances have the greatest potential to mitigate the damage. China has already announced a Yuan (CNY) 4bn (US$585m) stimulus package, with CNY3.5bn of this money being spent on public housing in western China.

So, when it comes to construction chemicals, it depends on whether you are a pessimist or an optimist.

"I think it's pretty hard to be an optimistic right now," says a Shanghai-based polyvinyl chloride (PVC) trader. Just as with every other commodity chemical, PVC prices have fallen through the floor.

Last July, they reached a high of US$1,310/tonne CFR main port China. The ICIS pricing assessment for the week ending 13 February , 2009, was $630-650/tonne CFR main port China. The PVC, phenol and styrenics chains have seen modest price rallies of late on end-user restocking.

But the demand outlook remains clouded because of all the economic uncertainties - even if there are signs that the Chinese economy might not be as weak as some had feared.

The pessimists are inevitably those at the coal-face of the business - like the Shanghai trader - who are confronting a radically new short-term growth environment.

"The Chinese PVC market is approaching self-sufficiency and there is a threat of oversupply," says Katrina Chen, senior analyst at the China-based commodity markets information service, CBI, in a report on the sector.

By 2008, there were 98 plants in China with a total capacity of almost 14.45m tonne/year. This represented 32% of global capacity. But some projects are being shelved, so supply growth up until 2012 will only be 4.4% year, Chen adds.

This is the result of both the crisis and of the eroded economics of acetylene or carbide-based producers.

These producers, which are mainly located in the northern, mid- and western regions of China, had enjoyed access to cheap and abundant electricity, coal and calcium carbide prices - their raw materials.

Now, though, ethylene-based production is comparatively more competitive following the collapse of oil, and therefore naphtha and C2 prices, she says. But this seems to be all background noise, a reshuffling of competitive positions likely to be accompanied by further industry consolidation. It doesn't change the tremendous long-term prospects.

"PVC pipes often account for 70-80% of the market in developed countries. In China, it is only 50%," says Chen.

She is predicting 10% demand growth in pipe demand up until 2012, with consumption in profiles forecast to rise 9%/year up until the same year. Lack of market penetration is expected to boost growth in both these sectors, along with the stimulus package and China's ever-growing urbanization.

"The Chinese government is [also] likely to put into force some compulsory regulations that would facilitate the development of the domestic PVC profile and steel-reinforced plastic door/window industries," she adds.

And, even though China is heading for on-paper self-sufficiency, imports are forecast to continue in significant volumes because of quality concerns. Imports will rise to 1.4m tonnes this year and will still be at a healthy 1m tonnes in 2012, says CBI.

A STRONG OVERALL MARKET

Demand for construction chemical products used in on-site applications in China is expected to total CNY40bn by 2012, representing 10.1%/year growth from 2007, says the Freedonia Group.

The Cleveland, US-based industry research firm makes its estimate in a study - Construction Chemicals in China. "Growth will be driven by an increase in both new construction, and improvement and repair projects," says Freedonia, which identifies rising urbanization as a key growth driver.

"A focus on improving the general quality of construction will also boost gains by increasing the volume of chemicals used in construction applications, as well as spurring demand for higher-priced, value-added types," adds the company.

"Caulks and adhesives will remain the largest construction chemical product category in 2012, accounting for about 40% of total industry sales."

Cement and asphalt additives will be the next biggest sector, thanks to the boost from greater use in paved surfaces and high-rise buildings, says Freedonia.

"Polymer flooring will also see strong gains, driven by increasing penetration of these products in high-end residential and commercial parking applications. Demand for sprayed polyurethane foam will be boosted by its increasing usage in insulation applications."

But it, too, warns of the impact of falling real-estate prices. "[This] will result in a deceleration of construction expenditure gains and associated chemical-product sales," says the research firm.

Increasing competition in this attractive market will also prevent suppliers from fully passing on higher production costs, it warns.

WHAT ABOUT THE REST OF ASIA?

In short, the prospects do not appear anywhere near as good. India might still have great potential, but its government is in a much weaker fiscal state than China - and so relief from the current crisis might be limited. Japan recently announced its worst economic contraction for decades, and Singapore and South Korea have seen property bubbles burst.

"The other problem is too much overall chemicals and polymers capacity chasing too little demand. China is, for example, moving towards self-sufficiency in phenol," says an aromatics consultant. Go downstream and you see the same story as China's government pursues the strategic goal of greater self-sufficiency in many products.

In epoxy resins, which are used in adhesive and paving applications, China added new plants in 2008 - just as the global market tanked. Imports fell by 14.2% to 242,280 tonnes last year compared with 2007, according to China Customs.

Upstream, bisphenol-A (BPA) imports slipped by 8.8% to 419,929 - also on increased local production and the weaker market. Phenol imports declined to 366,000 tonne, a 19.8% reduction. Phenol and BPA prices have risen recently as part of the overall petrochemical pricing improvement.

But epoxy resin producers have only achieved modest price gains to compensate for higher feedstock cost, whereas polycarbonate (PC) has continued to fall following the end of the Chinese New Year holidays. The further price declines have included general-purpose extrusion grades, used in construction.

"Most of the reason for all the price rises has been higher naphtha costs on cuts in refinery runs - and on even deeper cuts in petrochemical operating rates," says a plastics converter. "This mini bubble will only stay inflated if we see a real improvement in consumer demand. I cannot see this happening in sectors such as electronics, automobiles and construction, where consumer spending is discretionary."

The blunt fact remains that for the construction chemicals industry, lost demand will stay lost. Capacity was often added on assumptions of sustained strong growth in the West, and/or Asia remaining decoupled from a developed-markets downturn.

The global nature of this crisis, and its depths, mean that some companies in some sectors are going to struggle to survive.

However, somewhere over the horizon - the big question is, how far over the horizon? - remains the tantalizing prospect of huge further growth in countries such as China.

"What's most exercising my mind at the moment is to make sure I am still around to take advantage," adds the plastics converter.

By: John Richardson
+65 6780 4359

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