Asian petrochemical facing tough 2001

Asian petrochemical facing tough 2001

SINGAPORE (Reuters): Asia's petrochemical industry is heading towards a severe downturn likely to be deepened by this year's run up in crude oil prices, analysts say.

The highly cyclical sector has just passed a peak that followed recovery from a bottom hit 30 months ago during the region's sharp recession.

Petrochemical producers are bracing for a period of weakness as slack demand squeezes razor-thin product price margins.

The start up of a rash of new naphtha capacity, especially in the Middle East, may provide a ray of hope, as analysts say supply of feedstock-naphtha is likely to outweigh demand for the next 12 to 18 months.

The overhang would reduce production costs, but most see this as little help to producers.

"There is little good news for ethylene producers. Next year is going to be a nasty, nasty year," said chemical analyst Nicholas Smith at Jardine Fleming in Tokyo.

Petrochemicals are used in many sectors such as construction, manufacturing, automobile and packaging, often the first hit in any economic slowdown.

This year's oil rally to 10-year peaks has fueled fears of a setback in the Asian economic recovery picture, although there is little to indicate that has happened so far.

According to Nomura International, even a meager rise of one percent in oil prices would cause most Asian countries, apart from Indonesia and Malaysia, to suffer a contraction in gross domestic product (GDP).

Terence Robinson, managing director of Chase Manhattan Bank's global chemicals group in Asia, said the impact of high oil prices would flow through to petrochemicals.

"Look at the petrochemical business here in Asia, which is growing at up to twice the rate of GDP...If you slow GDP, it will hurt," Robinson said.

Soaring naphtha prices, which have followed crude's steep rally, have only fractionally been passed down the chain to endusers, leading to a sharp squeeze on margins.

Last week, ethylene was talked at around $650-680 per ton, compared with high-density polyethylene at $720-750 per ton, leaving a margin of just $70 per ton against a break-even spread of $150.

Analysts say there appears to be a silver lining for the industry, despite the impending start up of two large crackers in Singapore and Taiwan.

"Anytime you have two large crackers come on, you worry about the market being flooded with product," a trader said.

Worries may be premature as one analyst said ExxonMobil's 800,000 ton per year (tpy) steam cracker in Singapore has the advantage of being able to use naphtha or heavy residual liquids as feedstock.

In Taiwan, the recent start up of Formosa Petrochemicals' 900,000 tpy No 2 cracker, the single largest cracking unit in Asia, was expected to be countered by a closure of the company's 450,000 tpy No 1 unit in November.

Analysts said the start up of several new naphtha production plants including a 140,000 bpd condensate splitter in Abu Dhabi and another 120,000 bpd splitter in Dubai would add to the pool of naphtha supply.