Singapore's huge petrochemical industry has started to feel the pinch of a cyclical downturn in the past few months. And it's expected to drag on for four years, hitting the multi-billion-dollar crackers that Shell and ExxonMobil will start up here in 2010 and 2011.
To survive the Gulf competition, local producers have to look to opportunities. One way is to integrate refineries and look for synergies.
'After a four-year boom, margins have started falling in the past three months,' an industry source said.
There has been a 'triple whammy', arising first from the glut of capacity added by new petrochemical plants, especially in the Middle East, he told BT. 'Second, we've started seeing a slowdown in demand from markets like China, linked to a slowdown in demand for finished products in the US.
'And third, high crude prices - which spiked above US$135 recently - have hit feedstock costs for Singapore crackers, which has led to margin erosions.'
Last week, Stan Park, deputy managing director of Petrochemical Corporation of Singapore (PCS), told BT that margins at its Jurong Island crackers have been squeezed by the rapid rise in oil prices, which account for more than 90 per cent of operating costs. Naphtha, a product of oil refining, has shot up 20 per cent this year alone.
The warnings from Singapore players come as the Asian Petrochemical Industry Conference (Apic), which started here yesterday, heard that the boom of the past four years is over.
'We've already seen a decline in profits this year as new capacity starts up,' said Steve Zinger, Asian managing director of consultancy Chemical Market Associates.
'In the next 12 months alone, there will be Middle East ethylene capacity additions of 9 million tonnes per annum, which is larger than global demand growth of 5-6 million tonnes per annum (tpa).'
On top of this, new Asian capacity will start up around 2009/2010. In 2009, China will invest in about 9 million tonnes of new capacity, including three coal-fired petrochemical plants, while Vietnam and Indonesia are also considering investments.
With capacity supply exceeding demand, 'we expect the downturn to last for four more years, with a recovery in 2013-2015', Mr Zinger said.
An avalanche of new Gulf capacity, especially in Saudi Arabia and Iran, will overwhelm petrochemical supply at a time when economic growth is slowing worldwide.
The upcoming 9 million tpa in the Gulf this year dwarfs Singapore's current capacity of 2.3 million tpa, comprising PCS's 1.4 million tpa and ExxonMobil's 900,000 tpa.
It is also more than double the 4.1 million tpa total here when Shell's new US$3 billion, 800,000 tpa cracker and Exxon's US$5 billion-plus, 1 million tpa cracker, start up.
But the industry downturn will not affect construction of these two projects. 'Our investment decisions are not timed for market cycles,' said an official. 'If you put steel into the ground, it's for the long term.'
The downturn will, however, put a dampener on the Economic Development Board's (EDB) hopes for two more petrochemical crackers here.
Furthermore, high oil prices will not only hurt naphtha-fuelled crackers like those in Singapore, but give a competitive advantage to natural gas-fuelled crackers like those in the Middle East and the US.
As Mr Zinger pointed out, this means the Middle East can produce ethylene at US$200 a tonne, which is US$600 a tonne cheaper than in Europe and North-east Asia and US$400 a tonne cheaper than in South-east Asia.
To survive the Gulf competition, local producers have to look to opportunities, he suggests. One way is to integrate refineries and look for synergies, which Shell and ExxonMobil have done here to boost operational efficiencies and cut costs.
In the meantime, a shake-out of less cost-efficient producers is expected.
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