UpdateAsia petchems more risk-aware after 1997

02 July 2007 11:12  [Source: ICIS news]

(Adds fresh quotes in paragraphs in 2-7)

By Abdul Hadhi

SINGAPORE (ICIS news)--The Asian financial crisis which started exactly 10 years ago forced the regional petrochemical industry to consolidate but by weeding out inefficiency, allowed the sector to strengthen and possibly prevent a repeat,  analysts and industry officials said on Monday.

“Regional petrochemicals were relatively less affected compared to other sectors but overinvestment is generally seen as the trigger for the crisis. The lesson learnt is the link between the management of cash and hedging,” Nizam Idris, director of currency strategy at UBS, said.

“In Malaysia, much of the external liabilities were not properly hedged. Companies now are a lot more aware of risk,” he added.

Companies have also become more cautious about expanding aggressively.

Several of them in the region over-expanded due to heavy inflow of short-term funds and excessive leverage, Vasu Menon, Vice President at Finatiq, OCBC Bank’s online unit, said.

“When Asian currencies came under attack, a lot of these companies that had borrowed in foreign currencies went under. They’ve learnt their lesson and avoid taking excessive debt and exercise a lot more financial discipline when expanding,” he added.

However, the transformation is far from complete.

“Companies are generally stronger after the crisis but we are still not at international standards,” Bertrand Jausseme, Samsung Total’s senior vice president for purchasing and base chemicals export, said.

“We should see either improvement or more foreign involvement by way of mergers or joint ventures,” the South Korea-based Jausseme added.

The crisis began on 2 July 1997, with the Thai baht dropping 15% against the US dollar. Others including Indonesia’s rupiah, Malaysia’s ringgit, Philippines’ peso and South Korea’s won followed as the weeks and months rolled as speculative international funds began short selling these currencies in a big way.

Companies – big and small – that had borrowed in dollars to fund their operations while their earnings were in local currencies found themselves squeezed as their profits in rupiah or baht plunged while their skyrocketing dollar-denominated loans became impossible to pay.

 “A number of companies faced problems, especially those funded by debt. Most have recovered – by way of mergers or takeovers,” Mazlan Razak, a senior official for consultancy Dewitt & Co in its Malaysia office said.

Industry rationalisation and an even bigger role for the major players was the most significant impact of the Asian financial crisis, Mazlan said.

“Singapore’s Temasek became a player in Indonesia. In Thailand, most of the weaker companies were taken over by PTT, and in South Korea, companies such as Lotte and LG got bigger,” he added.

Indonesia’s Polysindo, then southeast Asia’s biggest polyester maker, was affected as its parent, the Texmaco group, fell into massive debt, prompting the government to bail it out.

In Thailand, Thai Petrochemical Industry (TPI) became the country’s largest debt-defaulter and only exited a court rehabilitation process in April last year. The rehabilitation cut TPI’s, now called IRPC, debt to $950m from $2.7bn.

TPI unit, Thai Olefins (TOC) which makes ethylene and propylene, suffered, reporting losses due to high prices for feedstock naphtha as a result of the lower baht.

TOC’s difficulties were also due the lack of a cheap ethane feedstock agreement that rival National Petrochemical Co (NPC) had with state-owned energy giant PTT, Kitichan Sirisukarcha, an analyst with Kim Eng Securities said.

Aromatics Thailand (ATC), meanwhile, was hit by a plunge in product-to-feed margins as prices fell, Bangkok-based Kitichan added.

The drama was played out in several countries.

While unwilling to rule out a repeat of 1997, “most players have learnt from the crisis and anything similar in the future is unlikely to be as catastrophic,” Mazlan said.

Kitichan, speaking for the sector in Thailand, said petrochemical demand in the country will be strong in the next 4-5 years.

“New capacity is likely to be delayed due to the building boom in the country, which has pushed up construction costs for these projects by 20%-30% over the past year,” he said.

Due to the higher costs, projects slated to come onstream in 2008 may not be ready until 2009-10, he added.

ICIS Copyright © Reed Business Information 2009

Author: Abdul Hadhi
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