S'pore promotes chemicals industry as growth engine

S'pore promotes chemicals industry as growth engine

By Raj Rajendran

SINGAPORE (Reuters): Singapore is firing up a second engine, the chemical industry, to propel its economy out of the regional chaos and into the next millennium.

But analysts say the strategy is not without its pitfalls, and point to new mega projects coming up in Thailand and Malaysia that promise to offer stern competition in a climate of shrinking regional demand.

Unfazed, the Singapore government is pumping investments of Singapore $7 billion (US$4.1 billion) into infrastructure to prime the chemical sector to shoulder a heavier burden in the country's future.

"The chemical sector is something that we have to build up, there is no choice, so that we have a more balanced economy. Up to now electronics has a very large chunk," Phillip Yeo, chairman of the Economic Development Board, told reporters recently after opening yet another chemical plant.

"We are trying to build the chemical sector as the second engine...and we are determined to make it. We can build chemicals to be a third of manufacturing's share of output," Yeo added.

Output from the chemical sector, which includes petroleum, petrochemicals, speciality chemicals and pharmaceuticals, grew about 12 percent in 1997 to S$27 billion from the year before, contributing around 20 percent to total manufacturing output.

Well aware of the strong competition for every dollar of foreign direct investment, the government has earmarked Jurong Island for the chemical industry where the S$7 billion investment is being used develop a large piece of land.

"Starting from oil products, the linkages flow downstream to petrochemicals and eventually to intermediates, specialty chemicals and advanced materials. Our intent is to build both depth and breadth in the industry integration," Yeo told a recent industry gathering.

Jurong Island, an amalgamation of seven small islands through land reclamation, will eventually be 2,800 hectares (6,720 acres) -- triple its original size when completed at the turn of the century.

The government is not stinting on its investment in the island project despite an overall belt tightening in response to the prevailing economic hardship.

Battered by the winds of the year-old Asian economic crisis, Singapore has just announced its first budget deficit in more than a decade. Exports have fallen sharply, foreign direct investment is forecast to contract in 1988/99 and job losses are on the rise.

Officials see negligible growth -- in the region of 0.5 to 1.5 percent -- this year, and warn it will probably stay sluggish for another five years. And Prime Minister Goh Chok Tong has even raised the prospect of a recession next year.

But Jurong Island appears to be yielding results. It is home to around 20 companies with combined fixed investments of S12.5 billion with another 10 projects involving S$5.6 billion in various stages of completion.

The island boasts two world-scale refineries, one owned by Exxon Corp and the other a consortium that includes British Petroleum and Caltex Petroleum, a joint venture between Chevron Corp and Texaco Inc and Singapore Petroleum Co.

The basic petrochemical feedstock is provided by a Royal Dutch Shell Group and Sumitomo Chemical- led Japanese consortium, producing annually nearly one million tons ethylene -- the basic raw material used to make plastics.

Despite these big name projects, and the failure of six similar projects in Thailand and Indonesia, industry overcapacity is still forecast with more challenges expected from other ventures in neighboring countries that are untouched by the regional malaise.

Perennial rival Malaysia has lined up German giants BASF AG and U.S. major Union Carbide Corp to bring on stream in the next millennia product lines similar to that mooted in Singapore, analysts said.

Thailand, already a regional power house in basic petrochemicals, will at the end of this year bring on stream a fourth world-scale ethylene plant that will raise the country's reliance on the international markets for buyers.

"Too much capacity has already come onstream. It will bottom out in 2000, 2001," said one Singapore-based, U.S. oil and petrochemical consultant.

The consultant said that if the regional economy recovers within that time, then the industry can look forward to higher operating rates, from the current low 70-80 percent, and improved profits.

Even in the oil refining industry, Singapore is not looking too comfortable despite strong integration with the downstream petrochemical industry.

"Singapore refining margins will be down in the short term. It really doesn't come back to 1997 levels till...several years after the turn of the century," said Bob Anderson, senior principal at consultant Purvin & Gertz Inc.

Although no new oil investments are planned, the industry faces the start up of a new refinery in Malaysia later this year.

Analysts said in the long term, Singapore will ride out the bumps and the planned billion dollar petrochemical investments by Exxon and Mobil will come to fruition.

"I am confident both projects would go ahead. The EDB want to make it (Singapore) a major petrochemical center," said Danley Wolfe, manager of consultants Chem System East Asia.