INSIGHT: Petchem regionalisation may challenge world-scale plant model

27 December 2013 14:00  [Source: ICIS news]

PERTH (ICIS)--The global petrochemicals industry has long depended on a business model which involves building big, world-scale plants in regions where there is feedstock advantage, with the knowledge that product surplus to domestic demand can be easily exported.

But there is a body of thinking - as the US prepares to once again follow this model – that markets might become more regional as governments in Asia increasingly protect local petrochemicals investments.

“I think as China moves more towards self sufficiency in polyolefins, we could see it increasingly resorting to antidumping and safeguard measures, through the World Trade Organisation, to protect its local producers. Easy access to its markets is not something that we can 100% be sure of,” said a business development executive with a global polyolefins producer.

There is a view within southeast Asia (SEA) that regional priorities might not always entirely fit with the drive to greater global free trade.

Particular anxiety is building over the potential for a flood of low-cost US polyolefins imports when the big wave of US ethane-based crackers comes onstream after 2017, and how this might affect planned new cracker and refinery-cracker investments in Indonesia, Malaysia and Vietnam.

“The Middle East, also, shouldn’t be overlooked as a result of all the focus on the US,” the business executive added.

“Despite the shortage of new allocations of ethane gas feedstock, there are still two big projects due on-stream fairly soon – Borouge 3 and Sadara Chemical.”

And the view amongst some petrochemical players in SEA can be summarised as follows:

1. Creating and protecting jobs should be a priority for governments over saving money for plastic processors through importing low cost shale gas-based petrochemicals from the US.

2. The petrochemicals industry doesn’t create that many direct jobs, except in the construction phase, but it does provide local and thus secure supplies of raw materials for finished goods manufacturers. These manufacturers have created many millions of jobs in countries such as China. Local processing industries might not always be able to secure supplies from the US and the Middle East, as volumes will sometimes be diverted elsewhere based on margins.

3. Incomes from these jobs have also lifted many millions of people out of poverty. The more you earn the more you can obviously spend, creating a virtuous circle of rising petrochemicals demand.

4. Why should any country in the process of developing its refinery and petrochemicals industries want to give up on the opportunity for this kind of growth?

5. It can also be about the sound economic logic of adding value to local hydrocarbon reserves, which, of course, is exactly what the US is doing.  Take Vietnam as an example. At the moment, it is exporting crude whilst importing crude, diesel, gasoline and plastics.

How this will play out nobody knows yet. It seems possible that anti-protectionist politicians, backed by plastics converters who want greater access to competitively priced material, might win the day.

But stronger regional trading blocs might develop within which free trade might flourish, but around which higher trade barriers might be erected.

Countries in SEA, such as Thailand, are building closer trading links with China in the knowledge that cooperation and partnership is the way forward. To compete with China would be impossible, given the massive scale of its state-of-the-art industries and low tariffs that have resulted from the ASEAN-China Free Trade Area.

Borders within ASEAN will become even more open in 2015, when the ASEAN Economic Community is launched.

“Trucks are due to thunder from Wednesday over a vast new crossing on the Mekong River connected to highways either side that opens up north Thailand as a way station for goods headed between China and the 10-strong ASEAN group of nations mainly to the south and east,” said the Financial Times in a 10 December article.

“It is part of Bangkok’s broader regional ambition to become the dominant link for trade between China and ASEAN, where exports and imports surged more than six fold to $400bn last year, from $55bn in 2002, according to the Chinese data provider Wind Information.

“It is also meant to dovetail with the easing of regional trade barriers, as ASEAN heads for the creation of a planned economic community of more than 500m people by 2015.”

The problem for most of Asia’s existing and planned naphtha crackers is that without the security of higher trade barriers, they might well struggle to compete in the new environment, said a sales and marketing executive with a second global polyolefins producer.

“On my estimation, because of the size of the US ethane advantage, oil prices would have to fall to $40-60/bbl to make naphtha cracking in SEA and northeast Asia successful again, based on basic commodity polyolefin and monethylene glycol production etc,” he said.

“Some producers will have to follow the lead of the Japanese and merge, close down plants and move to greater speciality production if they want to prosper in the absence of a lot more protectionism,” he added.

A major change in the competitive environment in Asia, thanks to the US ethane advantage, is clearly on the way.

This article just scratches the surface on how the environment might change. In later articles, we will look at other scenarios. 

Author: John Richardosn

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