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Taiwan's Petrochemical Industry Mired in Downturn in Q2

Nov 18, 2013 | By Steve Chuang

Dampened by weakening oil prices amid sluggish market demand, Taiwan's petrochemical industry remained on a downturn in the second quarter of this year, when its overall output value reached NT$462 billion for a 4.5% decline compared to the first quarter, according to the latest report by Industrial Economics & Knowledge Center (IEK), a local market research institute under the government-funded Industrial Technology Research Institute.

IEK says that sagging international oil prices, down to US$102.9 per barrel in the second quarter from US$112.6 seen a quarter ago, led to cheaper petroleum products as the main reason behind the downturn. Under the scenario, the price of butadiene, for instance, sharply shrank by 26.4% quarter-on-quarter (QoQ) to US$1,322 per tonne to US$1,794.

Separately, the petrochemical material sector posted output value of NT$301.3 billion in the second quarter, up 1.5% year-on-year (YoY) but down 6.9% QoQ.

In addition to price drops, the sector's quarterly decline was also attributable to supply shrinkage, mainly due to production suspension following an explosion at the Kaohsiung oil refinery owned by CPC Corporation, Taiwan, a state-owned petroleum, natural gas, and gasoline company; a shutdown of the purified terephthalic acid (PTA) production line by CAPCO Corp., a Taiwan-based petrochemical material maker, at its factory in Kaohsiung, southern Taiwan; and periodical factory maintenance at the ethylene glycol (EG) plant by Nan Ya Plastics Corp., a flagship company of Formosa Plastics Group, Taiwan's largest conglomerate of plastics and petrochemicals.

Meanwhile, local synthetic resin and plastics manufacturers attained output of NT$150.2 billion, growing 3.8% YoY and edging up 0.8% QoQ, to which IEK attributes mainly persistently sluggish market demand.

The synthetic rubber sector turned out NT$10.5 billion of products, down 21.3% YoY and 4.5% QoQ, to which IEK attributes partly declining shipment amid excess supply of synthetic resin in China, and partly continuously weakening prices of butadiene, which led to market inertia as downstream manufacturers generally looked forward to a deeper price drop.

IEK points out some important issues occurred during the second quarter will probably affect development of Taiwan's petrochemical industry in the near future.

Firstly, IEK mentions, Taiwan's major petrochemical suppliers, including Formosa Plastics Corp., Formosa Chemical & Fibre Corp., Nan Ya Plastics, USI Corp., Chang Chun Petrochemical Co., Ltd., China Petrochemical Development Corp. and China Man-made Fiber Corp., together visited the economic affairs minister on May 31 to report the industry's status quo and petition the government to negotiate adding Taiwan-made petrochemicals to China's duty-exempt list in the follow-up Economic Cooperation Framework Agreement (ECFA) talks.

In fact, most of Taiwan's major plastics, polyethylene (PE), polyvinvl chloride (PVC), polystyrene (PS), acrylonitrile butadiene styrene (ABS) and polypropylene (PP), man-made fiber materials, such as EG, PTA, caprolactam (CPL) and acrylonitrile (AN), and synthetic rubber have yet been given duty-free treatment in the Chinese market, despite the ECFA having been in effect for a few years, reports IEK, which furthers that China absorbs over 70% of Taiwan's exported petrochemicals yearly, underlining the importance of duty exemption to Taiwanese suppliers.

Taiwan's petrochemical products going to China are subject to 6.5% duty on average, compared to those from ASEAN countries that are tariff-exempt. This unfair situation negatively affects Taiwanese suppliers in the long run, as IEK indicates that Taiwan's overall PE exports from 2009 through 2012, for instance, had dropped 31.4%, compared to a 42.7% increase in those from ASEAN countries

Therefore, IEK opines that the government should step up negotiating with the Chinese authority to help Taiwanese suppliers better compete in the market, which is critical when China is already in talks with Korea and Japan over the signing of free-trade agreements.

Feedstock Transition
Using light crude oil as feedstock in production of petrochemicals may be losing competitive advantage, as more and more makers in the world are using more economical alternatives, such as coal and shale gas, in production to cut costs. As the theme and subject of 2013 Asia Petrochemical Industry Conference held May 9-10 at Taipei International Convention Center, this technology is accelerating, especially when shale gas is increasingly explored in the U.S. while the coal chemical industry is fast developing in China mostly due to governmental support, IEK reports.

IEK points out that mass production of shale gas in the U.S. has sustained the brisk growth of the international market for natural gas over the past few years, and led to price drops. As a result, ethylene using ethane as feedstock can be produced at 50% lower cost than that made from light crude oil. Formosa Plastics Group's plant in Texas has completely replaced its conventional feedstock with ethane this year to ride the wave.

The technology is being pushed by the rise of the coal chemical industry in China, says IEK, which notes the considerable coal reserves nationwide, with China planning to activate 10 methanol-to-olefin (MTO) plants during 2013-2016. The center adds that in addition to extremely low cost, coal can also be used to produce not just olefin- but also benzene-based products, thus increasingly applied as feedstock in chemical production, to revolutionize the global petrochemical industry in the near future.

IEK advises Taiwanese suppliers to assess the benefits of their new investments more rationally to meet this transition in the future.

Butadiene Price Hits 4-year Low
Affected by oversupply in China amid sluggish global demand, the international price of butadiene hit its four-year nadir of US$1,149 per tonne in June after four consecutive months of drop, a growing concern among Taiwanese petrochemical suppliers.

IEK notes that China ramped up its butadiene output by 310,000 tonnes to 3.034 million tonnes in 2012, when only 2.345 million tonnes were demanded domestically. Despite supply far exceeding demand, the country is still expanding output by 570,000 tonnes this year, which will surely exacerbate oversupply in the short term.

What's worse is that in the past months the international butadiene price has plummeted drastically, from nearly US$4,000 per tonne seen in 2012 to only US$1,149 in June, to have seriously impacted sales and profits of both suppliers and downstream manufacturers in Taiwan.

Dimming Prospects in Q3
With global market demand remaining slack, IEK forecasts that Taiwan's petrochemical industry will likely report a very flat growth of only 0.8% in output of NT$465.5 billion in the third quarter, but emphasizes that the industry's prospects in the second half will be brighter than in the first half. For the whole year, the center projects the industry's overall output to reach NT$1.88 trillion for a 3.6% YoY increase.

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