Island Complex

Taiwan's petrochemical industry is experiencing a renaissance. Despite negative public sentiment, petrochemical producers are vastly expanding, and more plans are awaiting implementation.

These days, most of the work is done by the Formosa Plastics Group at its Mailiao complex, in western Taiwan. But fearful of being eclipsed by Formosa, the state-owned Chinese Petroleum Corp. (CPC) is planning a large refinery and petrochemical complex on land near Formosa. This new set of facilities, requiring an investment of at least $12 billion, would begin production in 2012.

Formosa's Mailiao complex is huge. "The scope of our complex now far exceeds what we had envisaged in 1994, when construction started," says Wu Shin-Jer, vice president of management at Mailiao. Wu explains that Formosa's investment to date at Mailiao exceeds $20 billion.

The complex's fourth expansion, now almost complete, features a third naphtha-based ethylene cracker with an annual capacity of 1.2 million metric tons and an aromatics unit of similar size. In addition, Wu says, 22 downstream plants are being upgraded. Altogether, the company will spend $4.5 billion on the project.

Measuring 5 by 2.5 miles, the Mailiao complex is built on land reclaimed from the sea. Formosa originally wanted to build it in the 1980s near Ilan or Taoyuan, which are counties in northern Taiwan. But the plan, when made public, was fiercely opposed by local residents and environmental activists.

Formosa briefly threatened to move the project to mainland China before being welcomed in its present location in Yunlin County. In addition to chemical and petrochemical plants, the complex features an oil refinery, several power plants, and a harbor. Formosa is now considering the construction of a major hospital to serve Yunlin residents.

The scale of the Mailiao facility is so large that it has turned Taiwan, which used to be a net importer of polyolefins and polyvinyl chloride, into a net exporter. The output of the fourth expansion will be aimed, not surprisingly, at the Chinese market.

This raises the question of why Formosa isn't building in mainland China instead, as several of its international competitors are doing. One answer is that Taiwan's government forbids companies from investing in upstream petrochemical production in China. But this is not much of an obstacle for the Formosa group, because it could easily utilize its sizable U.S. subsidiaries as its investment vehicle in China.

Garrie Li, director of Asia olefins studies at Chemical Market Associates Inc. (CMAI), says Taiwan is not a bad location from which to serve China. The island is geographically close to the mainland, and its people are ethnically Chinese and speak Mandarin. Moreover, building highly integrated facilities such as the one in Mailiao nearly makes up for the advantage that competitors derive from setting up facilities next to customers on the Chinese mainland.

But, Li says, "Taiwan is a consolation; it's not the best alternative." He explains that plants located in mainland China benefit from lower shipping costs. Moreover, if Formosa operated more facilities in China, its local sales force would be larger and have better market insight. At present, all sales made outside of Taiwan are handled by salespeople based in the Taiwanese capital, Taipei. "If you're not on the ground, you cannot hear what's going on," he says.

Formosa's Wu counters that the competitiveness of the Mailiao complex provides a decisive edge. "All the plants have huge capacities, and our harbor is the deepest in Taiwan," he says. He further claims that Formosa's facilities cost less to build than those of its competitors, thanks to its reliance on Formosa Heavy Industries, a sister company, for construction.

Formosa, he says, licensed the basic design for most of the facilities at Mailiao from foreign companies, but Formosa Heavy performed the detailed work. Furthermore, about 60% of the vessels, pipes, and other equipment were made in Taiwan. "We did most of the work, and it was faster, cheaper, and more straightforward," he says. Wu adds that he cannot understand why any company would import a major piece of equipment such as the new aromatic unit's 1,400-metric-ton distillation tower.

Formosa's success in building and operating its Mailiao complex is part of the reason that CPC also seeks to build a refinery and chemical complex in nearby Yunlin County. But according to a CPC executive involved with the project, a more important reason is that the company fears for its survival in Taiwan.

The executive, who requested anonymity because he is not an authorized spokesperson, explains that CPC has the largest network of gas stations in Taiwan, and Formosa is a distant second. But CPC's position is threatened because Kaohsiung, Taiwan's second-largest city, has ordered CPC to shutter a major refinery there by 2015. This would wipe out one-third of CPC's capacity.

Separate from the Yunlin project, CPC is also planning to shut down a 230,000-metric-ton-per-year ethylene cracker in Linyuan, near the city of Kaohsiung, and to replace it with a new 1 million-metric-ton cracker. This project, worth $1.3 billion, would come on-line in 2011. Some observers have doubts about this project because Kaohsiung County, where Linyuan is located, is fiercely opposed to the petrochemical industry.

Indeed, one of the main challenges in building a refinery or petrochemical plant in Taiwan is the intense public opposition such projects face. Taiwan is about the size of the state of Maine and consists mostly of mountains. Most of the population of 23 million people live on the plains, on the western side of the island. These plains are densely populated and covered with cities, farms, and industrial parks. Taiwan's petrochemical industry, which only recently embraced Responsible Care, is not a welcome neighbor.

The petrochemical industry and downstream manufacturers together account for about 20% of Taiwan's gross domestic product, the CPC executive says. "Yet the public believes that there would be no economic impact if plants close down, that users could just rely on imports," he says.

The CPC executive acknowledges that it will be difficult to build a new petrochemical complex even in Yunlin County, despite the fact that Formosa has been the source of much local economic benefit. He notes that the land on which CPC intends to build is currently owned by fish farmers.

Nonetheless, he adds, CPC is proceeding optimistically with the project, which will feature a 1.2 million-metric-ton ethylene cracker and 23 downstream plants. In January, CPC launched Kuo Kuang Petrochemical, a consortium in which CPC is the main shareholder, to manage the venture. The remaining members are other Taiwanese chemical companies searching for land for new plants.

The CPC complex will go ahead after the government reviews Kuo Kuang's environmental impact study, a process that will take two years at most, the CPC executive predicts. He acknowledges that about five years ago another CPC-led consortium abandoned plans to build a major petrochemical complex near the southern city of Pintung after the government's environmental impact review bogged down under mounting public opposition.

According to CMAI's Li, another challenge the CPC complex will face is competition from China and the Middle East. Several new petrochemical complexes are scheduled to begin operating after 2008 in Saudi Arabia, Iran, and elsewhere in the Middle East. Meanwhile, China is going ahead without fanfare with the construction of several new complexes throughout the country. "One can be optimistic about the growth of demand, but it will pale compared to the amount of new capacity coming up," he says.

Under these conditions, Li warns, it may make little economic sense for CPC to go ahead with a new complex, especially if it competes with plants that are better located. Also, Formosa's Wu says the best time to build a petrochemical complex is when the industry is experiencing a downturn, as was the case when the first phase of construction began at Mailiao. At such times, he says, construction materials are cheaper and contractors are easier to deal with.

In the end, if CPC's managers fear for the company's survival, they may have little choice but to go ahead with the Yunlin project, once it wins government approval.

Do-It-Yourself Formosa Plastics claims it builds most of its plants by itself. Shown here is a styrene monomer plant at its Mailiao complex.