INSIGHT: Strong growth opportunities for southeast Asia polyolefins

29 May 2013 13:38  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Polyolefins demand grew by 15-20% in Indonesia and Vietnam during 2012, with the rest of southeast Asia (SEA) enjoying a very strong year, a source with a global producer said.

The opportunities for further growth seem huge, not just in SEA but in other emerging economies in Asia, as this chart from India’s Chemicals and Petrochemicals Manufacturers’ Association illustrates. It measures 2011 per capita polymer consumption against per capita GDP.

Polymer consumptionPer capita polymers consumption has a long way to go before it catches up with the west and developed Asian economies, such as Taiwan and South Korea.

Growth in SEA consumer spending – and with it polymer consumption from a comparatively low base – has partly been driven by the wealth effect of booming property markets.

In Indonesia, for example, property prices have increased by as much as 300% over the past five years in US dollar terms, added the source with the global polyolefins producer.

And in a few districts of Bangkok, the value of condos has reportedly doubled in just three years.

Some SEA plastic converters which diversified into land speculation are said to have made a fortune by subdividing their land and selling it on to property speculators.

But what goes up, usually comes down. Comparisons are being drawn with the credit-fuelled economic boom that preceded the 1997-1998 Asian Financial Crisis.

“The difference this time around is that most of the debt being piled up is in local currencies,” said a Bangkok-based financial analyst.

“In 1997-1998, the problem was that the majority of borrowings were offshore, in US dollars, and so when confidence evaporated, local currencies collapsed and individuals and companies were left insolvent,” he added.

International Monetary Fund (IMF) economist Giovanni Dell’Arricia has studied 40 years of credit booms, and in a June 2012 paper wrote that they “often end up in costly balance sheet dislocations and, more often than is acceptable, in devastating financial crises whose cost can exceed the benefits associated with the boom.”

Earlier credit booms resulted in major crises one-third of the time, with sub-par growth occurring on another one-third of occasions, he added in the same paper.

The good news for SEA, however, is that the remaining one-third of historic credit binges ended up creating what Dell’Arricia described as a “permanent financial deepening” that supported long-term stronger growth.

But – and this is the beginning of the biggest 'but' of all – some of the recent spending by SEA governments on infrastructure is viewed as a means of compensating for the slowdown in export trade. Infrastructure spending is another factor behind the region’s economic success story, economists say.

For example, in Malaysia the ministry of finance is issuing $10bn (€8bn) of bonds to fund a 100km subway system in Kuala Lumpur, in an effort to make up for weaker exports resulting from a weak global economy, reported the 27 May edition of the Asian Wall Street Journal.

“Although many residents and economists think a bigger [subway] system will benefit the city’s economy, critics worry that taxpayers might eventually be saddled with the debt. A monorail built in the 1990s required a public bailout in 2001,” the newspaper added.

Doubts also exist over whether Malaysia, Thailand and Singapore – the three heavily export-trade dependent economies in SEA – can prosper in the long term if the external economic environment remains weak, no matter how much money is spent on local infrastructure.

“The big concern, of course, remains China and its economic rebalancing,” said a source at a Malaysia-based speciality chemicals distributor. “Malaysia has gained an awful lot from China’s GDP growing at 10% or more per year.

"Now that China looks set to grow at much less than 10% per year as it restructures its economy, I have major doubts over Malaysia’s economic future.”

The chart below right, from the Malaysia Petrochemicals Association (MPA), shows that the country’s polyolefins industry is heavily dependent on exports.

Polyolefins productionIn 2008-2012 Malaysia was a net exporter of polyolefins, with major destinations including China, other SEA countries and the Indian sub-continent, said the MPA.

Indirectly, Malaysia’s chemicals and polymers industries also feed into the country’s heavy reliance for growth on overall exports. The US Central Intelligence Agency’s (CIA) World Factbook valued Malaysia’s exports at $239.8bn in 2012, compared with total GDP of $307.2bn.

Similarly, in Thailand the fortunes of its petrochemicals industry are directly and indirectly dependent on exports.

The table below, from the Petroleum Institute of Thailand, shows how polypropylene (PP) exports have soared since 2009.

PP chart

And Thailand is also heavily reliant on exports to China.

One Thai producer has been forced to reduce its percentage of polyethylene (PE) exports to China from 30-40% in 2012 to just 10% so far this year, said a source with the producer.

“We have managed to fully compensate for the slowdown in China by raising our exports to other SEA countries and to Latin America,” he said.

But with US capacity set to substantially increase over the next few years, several industry sources believe that the Latin American market will no longer be viable for Asian exporters.

Globally, competition is set to intensify as new US plants come on-stream.

Thailand, as with Malaysia, is also heavily reliant on overall exports to drive its economy. Out of a total Thai GDP of $366bn in 2012, exports accounted for $226bn, according to the CIA World Factbook.

In an ever-more complex and interdependent world, it seems as if SEA is particularly vulnerable to what happens elsewhere.

($1 = €0.78)

By: John Richardson
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