BASF goes for Asia growth but warns on overcapacity

21 May 2011 10:52  [Source: ICB]

Company to invest €2.3bn in Asia, but says a downcycle awaits if industry over-expands

German chemical giant BASF has ­ambitious growth targets for Asia. Its Asia Pacific Strategy 2020 targets a growth of two percentage points above market growth of 5-6%, to double sales by 2020.

But the group is worried that overexpansion across the industry in Asian petrochemicals will lead to overcapacity, margin erosion and the next big ­downcycle by 2015.

Large amounts of capacity addition, coupled with more moderate economic growth in China and Asia-Pacific, will create the perfect conditions for a major chemicals downcycle, according to Torsten Penkuhn, the head of BASF's petrochemicals business in Asia.

The current favorable conditions for the chemical industry globally are making companies take major expansion decisions without considering the possibility that they will contribute to a downcycle, he says.

"We are more and more concerned at BASF about an increasing risk of overbuilding, once again. We currently see a risk that people are becoming too ambitious, enthusiastic and optimistic - that could lead us to where we have already been in this industry.

"The cycles are not self-created by magic, it's the industry which creates them. Overcapacity will be bad news for all of us as it will lead to margin erosion, and then it will come down to who has what cost position. When you're in that position, that's when the fun stops."

He says BASF will be comfortable because its "Verbund" - integrated production - philosophy gives it a competitive edge, adding: "We are very optimistic and positive about Asia, and this word of warning does not imply a negative outlook for BASF in Asia. But industry has a responsibility to look at cycles as man-made - we create them, they are not thunderstorms. I feel optimistic that people are able to learn from the past."

Penkuhn says a variety of announcements on petrochemical investments have been made in Asia, which are all due to come on stream around the same time. If these all become a reality there is a danger of overcapacity, with the danger period being 2015.

He believes the Chinese government's attempts to control inflation by tightening monetary controls are necessary, but will have a negative impact on manufacturing growth. "They cannot have inflation above 5% and need to cool their economy," he says. But this policy is leading to a lot of speculative manufacturing, as companies rush to produce goods before obtaining credit becomes more difficult.

"We feel that underlying GDP growth in China is around 9%, with chemical industry growth perhaps into double digits. But if you look at first-quarter results you see 15-20% sales growth. So there is an underlying speculative element which comes from an anticipation of shorter availability of credit. There has been some pre-production by people worried about their credit lines being withdrawn."

How much real demand - rather than speculative - exists in the second quarter of 2011 is an important question. Penkuhn says: "It seems to be stable, but on a slightly lower level than in the first quarter.

"I don't see a sharp decline in front of us. If there is a slowdown due to tightening credit then some dealers will do some arbitrage with other regions. I don't see a structural breakdown, definitely not."

Penkuhn warns that long-term demographic trends in China do not favor continued exponential growth: "They only have 20-25 years to go until they have a real aging problem like the Germans do. All their political stability is based on growth and young people making a living. When they become old, what's next?"

Penkuhn believes that over the next decade, chemical industry growth in China will moderate to about 7%. Across the Asia-Pacific industry, growth should reach 5%. These growth rates are closer to GDP, as economies mature and the service sector grows.

He dismisses talk of a supercycle for chemicals: "At the risk of being blunt, I don't believe in the supercycle story at all. It discounts environmental and demographic risks, as well as political risks such as the North Africa situation. The supercycle story assumes that none of these risks translates into reality, and I don't believe that."

Penkuhn believes India has very favorable ­demographics, and could become the next big growth area for Asian chemicals if it can solve infrastructure and ­regulatory problems.

Even if it does overcome these barriers, growth will still not be as dynamic as in China because the country is more decentralized.

"It is not possible to plan large-scale production if it takes a truck going to a customer one week to travel 1,000km (621 miles). We might see 8-9% chemical industry growth in India, but this is very moderate in absolute terms because of the low starting point."

BASF is planning investments of €2.3bn ($3.2bn) between 2011 and 2015. For the petrochemical business, two major investment projects in Asia will fuel growth. In China, it is planning expansion of its existing joint-venture plant with Chinese oil and petrochemical giant Sinopec, by extending its acrylics value chain.

It is also working on a potential iso-nonanol investment in southern Malaysia as part of a bigger integrated site, extending its partnership with Malaysian state oil company PETRONAS.

BASF is also mulling an expansion of its Malaysian joint BASF-PETONAS site by investing in a superabsorbent polymers (SAPs) plant. BASF in Asia has three large value chains in petrochemicals. The first is the production of olefins by steam cracking. Next, these olefins are used to produce oxo-alcohols. The final thread is acrylic acid production, some of which is used internally for derivatives including SAPs.

There are fully integrated sites following the BASF integrated production "Verbund" philosophy in Nanjing, China, in a 50:50 joint venture with Sinopec: BASF-YPC. At Nanjing, cracker capacity has just been boosted from 600,000 to 740,000 tonnes/year of ethylene (C2).

Penkuhn is excited about the construction of a worldscale plant - the first in Asia - for the environmentally-friendly alcohol 2-propylheptanol (2-PH), a key plasticizer feedstock. "There is more environmental concern about dioctyl phthalate as a plasticizer. You can create a much better plasticizer with a better toxic profile if you use a longer chain alcohol. With our 2-PH plant in Nanjing, we are providing a very innovative new alcohol for Asia." Production is scheduled to begin by the end of the year.

The third expansion phase for the company's Nanjing facility is now underway, with a potential investment of $1bn if it all goes ahead. Feasibility studies are being conducted, with final decisions scheduled for the end of 2011. BASF is studying a second worldscale acrylic acid facility, of 160,000 tonnes/year capacity, with joint-venture partner Sinopec.

Penkuhn says BASF wants to build a 2-PH plant and a non-ionic surfactant plant. Also under evaluation is a propylene oxide (PO) plant using the innovative hydrogen peroxide propylene oxide technology.

BASF's other Asian "Verbund" site is at Kuantan, in Malaysia, in a 60:40 joint venture with PETRONAS, known as BASF PETRONAS Chemicals. Based on propylene dehydrogenation, the unit is operated by BASF's upstream partner PETRONAS. The joint venture procures propylene (C3) from PETRONAS and produces oxo-alcohols, acrylic acid, acrylic acid monomers and butanediol (BDO), with a total investment of about Malaysian Ringgit (M$) 3.4bn.

"We are investigating forward integration into SAP and this plan is at feasibility stage," says Penkuhn, adding: "In south Malaysia we have a project under evaluation with PETRONAS for about $1bn, which includes another competitive alcohol for plasticizers - iso-nonanol, as well as C4-based specialty chemical products. It's currently being produced by Exxon in Singapore and others in Asia. We expect to complete the feasibility study this year."

By: Will Beacham
+44 20 8652 3214

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