• 
• 

Published on November 26, 2007

Thailand's petrochemical industry is bracing itself for a cyclical market trough in 2010 and 2011, due to oversupply from the local industry's third phase of development and new projects in the Middle East and China.

The third phase of development of Thailand's petrochemical industry, which is divided into two cycles ending in 2018, will need a total investment of more than Bt200 billion.

The first cycle began in 2004 and will be complete in 2011, while the second will begin in 2011 and 2012 and will finish in 2018. The third phase is aimed at boosting the production capacity of plants and integrating their production in a bid to produce more value-added petrochemical goods.

According to the Petroleum Institute of Thailand, the country's capacity to produce polyethylene will rise from 1.9 million tonnes this year to 3.06 million tonnes in 2011. In the same period, its capacity to produce polypropylene will rise from 1.25 million tonnes to 1.95 million tonnes.

Putting these figures into perspective, the institute estimates that domestic demand for polyethylene in 2011 will be around 1.6 million tones, while for polypropylene it will be about 1.3 million tonnes.

The industry usually takes five to seven years to complete a market cycle, based on several related factors including oil prices, the global economy and supply and demand.

For example, when oil prices surged three years ago, the price of petrochemical products also rose because of huge demand from China and its rapidly growing economy.

However, this picture will change because the world's leading economies, the US and China, are likely to cool down next year, following negative factors such as the sub-prime mortgage fiasco, a weakening US dollar and inflation.

Supachai Watananggura, chairman of the Federation of Thai Industries (FTI) Petrochemical Industry Club, says a turndown in the industry will become apparent in the second half of next year or the beginning of 2009.

"Although demand in the market will slow down, supply will stay tight next year due to many project delays in the Middle East, as a result of labour shortages," he explains.

Total supplies, both domestic and international, will rise in 2010, affecting the industry's margins. While the margin for manufacturing ethylene was recorded at a peak of US$450 (Bt15,246) per tonne in 2005 and 2006, it is expected to drop sharply to $150 per tonne in 2009 and 2010.

Ethylene, the most produced organic compound in the world, is an odourless, colourless gas that occurs naturally.

To consider the good side of the industry's cyclical turndown, the softer price of upstream products, including petrochemical raw materials such as ethylene and polyethylene, will help reduce the costs of downstream polymer products that are used to manufacture goods such as plastic bags and film wrap.

Meanwhile, the chairman of the FTI's Plastic Industry Club, Somsak Borrisuttanakul, says the rising price of oil is a significant factor that will maintain the high price of upstream products, despite their oversupply.

Moreover, when the petrochemicals industry enters a down cycle, most upstream operators shut down their plants for maintenance or de-bottlenecking, which tightens supplies of raw material and increases production costs for plastics manufacturers, he explains.

At the same time, these downstream producers cannot raise their product prices because of tough competition and a lower demand for plastic as a result of environmental concerns.

He suggests that companies producing plastics from petrochemical feedstocks should shift to making more bioplastics, despite production costs being 5 per cent to 7 per cent higher than those for conventional plastic.

Somsak says many such companies in Japan have shut down their plants due mainly to very low margins and their slow adjustment to changes in global demand.

"There is a chance that this situation will occur in Thailand soon unless we improve our production and manage our costs efficiently," he says.

At present, half of Thailand's total production of plastic goes to the domestic market and the rest is exported.

In the first nine months of this year, the country recorded exports of plastic resins and plastic goods valued at $5.377 billion, up 13.94 per cent on the figure for the corresponding period last year.

However, the baht's appreciation has led many Thai companies that convert petrochemicals to plastics to establish manufacturing plants in Vietnam. Their aim is to boost their competitiveness in global markets and gain benefits from cheap labour and export tariff reductions to the US and EU countries.

Besides, the Vietnamese currency, the dong, has remained weak over the past five years, while the baht has strengthened by more than 20 per cent in the past year.

To build up the Thai plastics industry, the Office of Industrial Economics, the Petroleum Institute of Thailand and the FTI are cooperating in an effort to convert local producers from original equipment manufacturers to original design manufacturers. At the same time, they aim to boost the quality of products to meet international standards and regulations such as Restrictions on Hazardous Substances and the Registration, Evaluation and Authorisation of Chemicals.

Bayer Thai executive Chaveng Chao says local manufacturers must pay attention to these regulations or they will be unable to adjust their production processes and end up losing their markets in Europe.

The regulations are not only enforced in Europe but also in other countries, including the US. China is also preparing to launch similar restrictive measures.

Another significant factor affecting the competitiveness of Thailand's petrochemical and plastic industries will be free-trade agreements.

Dow Chemical Thailand's marketing executive Sumate Rongkawilit says that if the government is able to clinch free-trade deals with countries such as India, the petrochemical and plastic industries will grow considerably.

The Japan-Thailand Economic Partnership Agreement, on the other hand, has had very little impact on petrochemical and plastics industries because tariffs for Thai exports to Japan were already low.

However, the agreement might attract Japanese plastic manufacturers to move their production plants to Thailand to enjoy tariff reductions when sending their products back to Japan.

Sumate says Thai petrochemical firms and plastic makers enjoy obvious benefits from the Thailand-Australia Free Trade Agreement because Australia is a net importer of petrochemical products and rival manufacturers from other countries must still pay a 5-per-cent tariff.

He believes the outlook for Thai petrochemical and plastic industries in the coming downcycle is not too dull for manufacturers, exporters and consumers.

Supachai, chairman of the FTI's Petrochemical Industry Club, agrees. "Although we are walking into an industry downcycle amid several negative factors, we believe we are strong enough to get through these hard times," he says.

Chalida Ekvitthayavechnukul

Somluck Srimalee

The Nation