Clouds over Asia

Past performance is no indication of future performance. This warning tagged at the end of promotional literature for investment funds might as well have been the general theme of this year's Asia Petrochemical Industry Conference (APIC) in Yokohama, Japan, last month. Having just reported bumper profits in their latest fiscal years, petrochemical companies in Asia are far from convinced that more good days lie ahead.

An annual event, APIC is the largest petrochemical industry gathering in Asia. Until a few years ago, only executives from firms in Japan, South Korea, and Taiwan could attend. The conference is now open to anyone and, indeed, attracts attendees from all over the world. This year, it drew nearly 1,000 people, including the chief executive officers of some of the largest chemical companies in Asia.

A few days before the conference, Japanese producers of plastics and olefins posted excellent results--record profits in several cases. The past two years have been positive for petrochemical firms in Asia as strong demand from China boosted profits, despite the rise in the price of feedstocks such as oil and natural gas.

But the petrochemical industry is cyclical. Demand from China has slackened this year, and many in the industry are wondering whether this is a blip or a change in trend. According to Vince Sinclair, who covers styrenics from the Singapore office of the consulting firm Chemical Market Associates Inc., the styrenics market started softening early in the year, and other petrochemicals followed suit in the spring. He says weak Chinese demand is the result of excessive inventories in China of finished products such as home appliances and the central government's continued efforts to cool down the economy.

Kamal P. Nanavaty, president of the cracker and polymer sector at Reliance Industries, sees the long-term outlook as bright. In a keynote speech, Nanavaty said that more than 85% of the global increase in ethylene capacity between now and 2009--nearly 22 million metric tons--will be built in the Middle East and Asia. Asian demand is booming, he said, owing to the powerful combination of economic liberalization in China and India and the youth of the workforce in those two countries.

But another keynote speaker, Dow Chemical President and CEO Andrew N. Liveris, warned attendees not to get carried away by the strength of the demand experienced in 2003 and 2004. "The size of the petrochemical industry is growing by $40 billion annually; that is the equivalent of one new Dow Chemical every year," he said. "But as an industry, we build too many plants based on overoptimistic scenarios."

Taiwanese producers are boldly betting on a rosy future for the petrochemical industry. Jack J. H. Shieh, executive manager of the Petrochemical Industry Association of Taiwan, shared with C&EN his belief that the downturn of the past few months is only a blip. He noted that several major petrochemical projects are under way in Taiwan.

At its Mailiao complex, Formosa Plastics expects to complete an expansion in 2007 featuring a large ethylene cracker and aromatics unit. The group is also building several units in China. Meanwhile, Taiwan state-owned Chinese Petroleum Corp. is planning to expand existing crackers and build another petrochemical complex.

In South Korea, only small-scale projects are under way. At the conference, Lee Young-il, chairman of the Korea Petrochemical Industry Association, summed up the mixed feelings of optimism and pessimism experienced by the industry. "The outlook is getting as vague as never before," he said.