Malaysia RAPID delays may push PCG on alternative growth path

By Nurluqman Suratman

SINGAPORE (ICIS)–Malaysia’s PETRONAS Chemicals Group (PCG) may have to rethink its medium-term growth plan as the $20bn petrochemical and refinery project of its parent firm has remained on a feasibility-study stage nearly three years since it was proposed, analysts said on Wednesday.

State-owned energy firm PETRONAS, which is PCG’s parent firm, is expected to make a final investment decision on its Refinery and Petrochemical Integrated Development (RAPID) project in Johor in end-March, with growing apprehension in the industry that the whole project may not push through.

“If RAPID doesn’t come through, then they [PCG] will have to re-examine their growth plans, including potential acquisitions,” said Sriharsha Pappu, director of chemicals research at HSBC.

RAPID is an integrated greenfield refinery-cum petrochemical plant of PETRONAS that was first announced in May 2011. The development is expected to turn Southern Johor into a major petroleum and petrochemical centre in Asia. The project has the potential to double PCG’s current capacity of 11.5m tonnes/year within the decade.

But PETRONAS CEO Shamsul Azhar Abbas was quoted in various media reports in August 2013 as saying that RAPID runs the risk of being scrapped if the project’s potential economic returns are deemed unsatisfactory amid rising costs.

Early last year, PETRONAS and German chemical giant BASF have mutually agreed to terminate their agreement on building a specialty chemicals project, which is part of RAPID. Taiwan’s Kuokuang Petrochemical Technology Co – a subsidiary of CPC Corp – also decided to withdraw a plan to build a major petrochemical project in Malaysia that was supposed to located in the same area as RAPID, citing poor economics.

Amid the uncertainty surrounding the RAPID project, PCG can pursue expansion on its own given the company’s huge cash buffer, analysts said.

“They [PCG] are cash rich and growth constrained,” Pappu of HSBC told ICIS.

The company has a cash balance of Malaysian ringgit (M$) 10.3bn ($3.14bn), the highest of any petrochemical group globally, and it has the facility to borrow substantial capital, said Malaysia-based Maybank IB Research.

“Should the PETRONAS RAPID project not proceed for whatever reason, [PCG] will then look at alternative investments, which include the acquisition and buy-out of other petrochemical companies,” it added.

When first announced, the RAPID project was to include a 300,000 bbl/day refinery, as well as a naphtha cracker that will produce about 3m tonnes/year of ethylene, propylene, C4 and C5 olefins and a petrochemicals and polymer complex that will produce differentiated and highly-specialised chemicals.

In July 2013, PETRONAS said that RAPID’s start-up will be delayed by a year from the original schedule of 2017.

“We view the project as unlikely to be fully commercially operational before 2019-20 at the earliest,” said HSBC’s Pappu.

Meanwhile, PCG’s Sabah Ammonia and Urea (SAMUR) project, initially scheduled for completion by the end of next year, has been delayed after a fire had broken out on a ship that was delivering  critical equipment to the project site in February, according to Malaysia-based HwangDBS Research.

The SAMUR project is an integrated greenfield plant with a nameplate urea capacity of 1.2m tonnes/year.

“[PCG] has already assembled a task force to investigate and assess the damage as well as contingency plans towards the project’s August 2015 operational timeline,” said Maybank IB Research.

A delay to the project’s start-up is likely as the fire affected the equipment’s integrity and requires time to facilitate repairs and testing, it added.

“Unless new developments  surface, we believe this project will be delayed, with commercial production only starting in fiscal year 2016,” according to Malaysia-based RHB Research Institute.

Meanwhile, at Pahang in east peninsular Malaysia, PCG’s $500m joint venture aromatics project with German producer BASF is expected to push through, analysts said.

The final investment decision on the aromatics unit in Gebeng, Pahang, should be announced by the end of the second quarter of this year, according to Maybank IB Research.

If PCG decides to go ahead with the project, construction will take about two years to complete and the plant is expected to start commercial shipments by 2016, it said.

The plant will produce chemicals for the fragrance industry, and super absorbents used in human sanitary applications.

For 2014-15, PCG is expected to post earnings growth on the back of higher olefin margins due to stronger demand growth despite the scheduled maintenance at its olefins and aromatics plants, and the gas supply shortage at its fertiliser plant in the first quarter of this year, according to Suwat Sinsadok, an analyst at Malaysia-based CIMB Investment Bank.

“The olefin industry has been on the upcycle, leading to margin expansion across the product chain, thanks to higher demand and tighter supply, Sinsadok said.

“The margins for its [PCG’s] downstream olefin products, polyethylene (PE) and polypropylene (PP), were the key drivers for the strong earnings. This offset the weak naphtha-based aromatics earnings which are now clearly entering a downcycle,” he said.

In 2013, PCG’s net profit fell by 9% to Malaysian ringgit (M$) 3.5bn ($1.1bn), with group revenue down by 8% at M$15.2bn, in line with lower production volumes amid heavy maintenance schedule at its facilities.

($1 = M$3.28)

Read John Richardson and Malini Hariharan’s blog – Asian Chemical Connections