Market intelligence: Asia downstream chemicals hit by macro concerns, rising petchem costs

08 March 2013 09:30  [Source: ICB]

Crude-led gains in petrochemical prices are making life difficult for the industry as they translate into higher production costs for downstream businesses that cannot be passed on readily to end-users because of poor demand.

Derivatives price movements tend to lag behind changes in feedstock costs, so high and volatile naphtha, butadiene (BD) and benzene prices are forcing consuming companies to run downstream plants at reduced rates to stem losses.

China manufacturing Rex Features

Rex Features

Concerns emerge about China's manufacturing sector

Neither producers nor buyers welcome rising prices now as there is little or no growth in underlying demand. The risks associated with unabated price spikes upstream include curtailment of production, with a heightened possibility of a price crash at the slightest trigger.

Concerns about prevailing weakness in China's manufacturing sector sent prices tumbling for ethylene glycols, naphtha and toluene, among others, in the week ended 1 March.

CHINA PMI WEAKENS

China, which is the world's second largest economy and a major importer of petrochemicals in Asia, had a 50.1 reading in its official Purchasing Managers' Index (PMI) for February, indicating only lacklustre industrial activity compared with previous months.

Recent data from the global economic majors do not inspire much confidence for the industry in terms of demand. 2013 looks like another tough year for petrochemicals growth.

"There is no reason to say that [things] would be better this year If the economy is still sluggish, we don't think the market situation would be improved much," says Jack Shieh, executive manager at the Petrochemical Industry Association of Taiwan (PIAT).

Demand recovery is what Shieh describes as a "big question" for the industry.

The US and the eurozone - huge markets for Asia products - are still struggling with their respective compounded fiscal and economic ills.

Exports are the ties that bind Asia to the troubles of the West, and with no clear recovery in sight, the region's petrochemical industry will have to tread cautiously in difficult times.

Petrochemicals demand correlates directly to economic growth. And while growth is likely to be assured, it is likely only to be weak as global end-use consumption remains soft.

Global economic growth is forecast at 3.5% in 2013, slightly higher than the 3.2% projection for 2012, according to the International Monetary Fund (IMF).

Overall trade volumes in 2013 are expected to improve, growing at a faster rate of 3.8% - a full percentage point higher than in 2012, but much lower than the 5.9% growth recorded in 2011, the IMF said.

"My view is: basically, we don't see any better signs to show economic recovery, either domestic or overseas," says PIAT's Shieh.

US CONCERNS

The US economy grew by 0.1% in the last three months of 2012, based on the revised reading from the country's Department of Commerce, which had earlier noted a 0.1% contraction for the world's biggest economy.

But there are concerns that hefty spending cuts which took effect on 1 March could push the US economy back into recession. The US Congress had failed to avert the fiscal measure that could shave the national budget by $85bn.

The IMF had warned the US to avoid excessive fiscal consolidation in the short term. The US economy is still in a fragile state and measures should be geared towards promoting growth, it said.

In projecting US GDP growth of 2.0% for 2013, the IMF assumed that "the spending sequester will be replaced by back-loaded measures and the pace of fiscal withdrawal (at the general government level) in 2013 will remain at 1.25% of GDP".

The debt-saddled eurozone, on the other hand, is looking at a second year of recession, with the European Commission projecting a 0.3% contraction in the region, which consists of 17 countries.

These developments offer no comfort to Asia, which relies heavily on exports for growth.

It is this weakness in external demand that hit the highly industrialised economies of Japan, South Korea and Singapore.

ASIA IMPACT

And it is impossible for China, which is widely considered as the factory of the world, not to be affected.

Asia's largest economy grew at a 7.8% rate in 2012 - its second consecutive year of decelerating growth, having posted a 9.2% expansion in 2011 and growth of 10.4% in 2010. This year, the IMF projects 8.2% GDP growth for the country.

Against this not-so-good backdrop on global consumption, petrochemical producers that are due to start up capacities in the near term may have to rethink their schedules.

There is no point saturating the market with too much supply when demand has yet to come back, as this move would only weaken prices.

Industry players are basically facing "more of the same problems" as they did last year, primarily the "struggle with weak demand", says Sriharsha Pappu, a Saudi Arabia-based investment analyst at HSBC.

"Managing supply and higher costs, and trying to get a sense of what demand looks like is going to be the key challenge for 2013," he says.

LPG CRACKING OPTION

To address the problem of rising naphtha costs, South Korean cracker operators plan to crack cheaper liquefied petroleum gas (LPG), for example. The producers likely to make this move are LG Chem, Lotte Chemical and Yeochun NCC.

But the option is not open to everybody. "Korean crackers have flexibility to use a range of feedstock, but not [those] in Taiwan, given the structure of the units and the downstream that needs certain feedstocks. It's harder to do [for others]," Pappu says.

Even in Korea, only a small portion of their production can be replaced by LPG, since there is a trade-off - the use of this alternative feedstock yields lower volumes of aromatics.

Most petrochemical companies in the region either incurred losses or generated lower earnings last year against the global economic slowdown.

But while market conditions may not get better, nobody expects things to get worse. Maybe that is enough of a consolation, for now.


By: Pearl Bantillo
+65 6780 4359



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