Asia petrochemical players yearn for stable oil prices

SINGAPORE (ICIS)–Petrochemical industry players in Asia are hoping for a more stable oil market, after nearly two years of wild swings, to enable planning for future growth.

Oil prices have recovered a portion of lost value this year but remained at depressed levels. Prices had tumbled since mid-2014 on heightened concerns over a supply glut and weakening consumption amid a slowdown in the global economy.

At midday, US crude for July delivery was trading 13 cents lower from the previous day at $47.95/bbl, while Brent crude was down 17 cents at $48.18/bbl.

Prices are on their fifth consecutive sessions of decline, undermined by a firmer US dollar on expectations that the US Federal Reserve will hike interest rates in June.

However, production outages in Canada and Nigeria, as well as expectations of a fall in US crude inventories, were providing some support to the market.

Most industry players want to see semblance of stability in the oil market so they could to plan ahead.

“It is very difficult to forecast oil prices,” LG Chem vice chairman and president Jin-Soo Park told ICIS at the sidelines of the Asia Petrochemical Industry Conference (APIC) last week.

If oil can stay below $60/bbl levels, it will pose “no problem” for petrochemical companies “profit-wise, but we have to grow”, he said.

“Revenue will decrease – we have to take some counter measures to grow,” said Park, who is the chairman of the Korea Petrochemical Industry Association.

With the continuing economic slowdown in China, Korean petrochemical companies are diversifying into other markets, as well as their business portfolio, he said.

For the Japanese petrochemical firms, there is a deliberate shift from producing basic to functional chemicals and also to look at investment opportunities in the specialty chemicals space instead of commodity chemicals, outside of Japan, said Tsutomo Tannowa, acting chairman of the Japan Petrochemical Industry Association (JPCA) and president and CEO of Mitsui Chemicals.

In this light, Mitsui Chemicals is considering pursuing an elastomers project in the US, he said.

A more immediate concern, however, is the volatility in oil prices.

Tannowa said that heavy fluctuations make operations difficult for petrochemical companies in Japan, citing that utilities costs escalate in line with any uptrend in crude prices.

“Around $50/bbl is reasonable,” Tannowa said, adding that it is easy to control petrochemical operations when prices are at those levels.

The volatility in oil prices is still unseated as the biggest challenge facing the petrochemical industry, a source close to a Middle East producer said.

A continuous slide in oil prices spell bad news for trades and revenues of chemical companies as they translate to lower product prices, the source said.

In the first quarter of the year, most chemical firms in Asia generated lower revenues caused by tumbling product prices, which were tracking the weakness in crude prices. But net profit were significantly higher because of strong margins.

Crude’s slump has dragged down the prices of naphtha, the main feedstock for petrochemical production in the region, widening the price spread with downstream products, benefitting the producers.

“The business and profits of most petrochemical producers in Asia has … improved last year as the price of many of petrochemicals did not fall as much as oil. But it is too early to be optimistic about the future business condition of [the] petrochemical industry,” Petrochemical Industry Association of Taiwan (PIAT) chairman Bao-Lang Chen had said in a speech delivered at APIC.

Malaysian Petrochemicals Association (MPA) vice chairman PK Choong warned of a “more challenging” environment for the petrochemical industry this year, when average product prices are expected to weaken further.

But the industry must look beyond the heavy fluctuations in oil and focus on beefing up competitiveness, according to executives at energy majors Shell and ExxonMobil in a panel discussion during APIC.

“Let’s move away from trying to predict on what crude is going to do and focus on things that are in our control,” Kurt Aerts, vice president for specialty elastomers and butyls at ExxonMobil, had said.

Top Image: The Midway Sunset oilfield in Taft, Bakersfield, California, USA.
(Photographer: Global Warming Images /REX/Shutterstock)

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

Focus article by Pearl Bantillo