FocusRobust S Korea petchems exports hinge on strong China demand

25 January 2010 07:21  [Source: ICIS news]

By Pearl Bantillo and Nurluqman Suratman

SINGAPORE (ICIS news)--South Korea will continue to rely on China’s consumption to beef up its petrochemical production, but the strong demand witnessed in 2009 may not be repeated this year, analysts said on Monday.

The country exported a record 98,760 tonnes of polymethyl methacrylate (PMMA) last year, up a staggering 70% a year ago, based on data from the Korea International Trade Association (KITA), driven by strong demand for flat-screen televisions (TVs).

A substantial portion of these exports went to China, where TV manufacturers like Samsung and LG Electronics have operations, traders said.

“Volume to China will decrease as the demand last year was so high. It was exceptional demand growth and I don’t think it is sustainable in 2010,” said Thomas Yi, a Seoul-based analyst at brokerage house Samsung Securities.

China is the biggest consumer of petrochemicals in Asia.

South Korean petrochemical companies had been lucky last year, when competitors from Taiwan had some problems at plants and could not cater to the China market, he said.

“Thanks to Formosa’s troubles with plants in 2009 Taiwan lost its chance to benefit in the first half of 2009. But in 2010, this will not be repeated,” Yi said.

KITA statistics showed that South Korea shipped out 14% more polyethylene (PE) totalling 1.34m tonnes in 2009, while its polyvinyl chloride (PVC) exports jumped nearly 30% to 666,401 tonnes.

The country had also remained the biggest Asian exporter of base oils, with nearly 2.83m tonnes of the lubricant shipped in 2009, up 9% from 2008, based on the same data.

Weakness of the Korean currency, the won, provided South Korea an edge over rival Japan in capturing a good share of the Chinese market, analysts said.

But new petrochemical capacities coming on stream in China, in other southeast Asian countries such as Thailand and Singapore, this year would dilute the chances of South Korea in cornering again a significant share of the much sought-after China market, analysts said. More capacities are also due in the Middle East.

China’s demand for petrochemical imports may remain strong through to the first half of 2010 but may fizzle out in the second half as it boosts domestic production, in line with its long-term strategy of being self-sufficient for its chemical needs, analysts said.

“This will mean that the Asian petchem industry will face a supply surplus situation,” Yi said.

China has become the anchor of economic growth since the global financial and economic maelstrom occurred in late 2008. It did not disappoint, having recorded an 8.7% average GDP growth last year.

But now, efforts to cool down a possible overheating of the Asian mammoth economy may have some negative repercussions on its neighbouring countries, particularly those that look to it for export support.

China has started to move away from an ultra-loose monetary policy at the start of the year to curb ballooning credit.

“The changes in monetary policy is bad news for Asian petchem companies as there will be less liquidity in China which should limit speculative demand for petrochemicals,” Yi of Samsung Securities said.

Petrochemical prices in Asia have started to soften last week upon news of the monetary tightening in China but industry players were holding on to expectations of better demand from end-users that should buoy prices this year.

“Demand (in China) remains exceptionally strong, especially in the automobile industry and house remodelling. These two industries still need a lot of chemicals,” said Hong Kong based Gordon Kwan of  South Korean brokerage house Mirae Securities.

China has about a quarter share in the overall exports of South Korea over the past four quarters, with the situation unlikely to change this year given continued economic weakness in the US and Europe, said Vishnu Viswarathan, Singapore-based economist at research firm Forecast.

“There were some surprises in the fourth quarter (of 2010) as far as exports and manufacturing are concerned. A lot can be attributed to China’s uptake of South Korean exports,” said Viswarathan.

“Clearly, China exports accounting for a lion’s share of what goes out of South Korea, overtaking the US for quite a while now,” he said.

The South Korean economy continues to be driven by exports of goods, which account for roughly 40% of the country’s GDP.

Viswarathan said he projects the country’s exports to grow at “mid-teens to 20% levels” year on year, largely due to a low base in 2009.

“We don’t really see an excessive and enduring kind of growth. It is really just reflecting the double-digit declines in 2009,” he said.

With additional reporting by Vincent Xiang and Anu Agarwal

To discuss issues facing the chemical industry go to ICIS connect
Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections

By: Nurluqman Suratman

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