Issue Date: January 9, 2006
When C&EN published World Chemical Outlook a year ago, Asian economies were enjoying their best economic performance in about a decade. One year later, consumers and businesses in the region are adapting to the good times. This confidence is neither universal nor solid, but optimism rules nonetheless.
Walk though the Central business district in Hong Kong, and the signs are evident. Louis Vuitton, Gucci, and other chains of luxury goods are investing small fortunes in renovating and expanding their shops. Opulent new hotels are opening. Older buildings are being rebuilt and turned into ostentatious new landmarks.
Despite charging higher prices and facing competition from budget airlines, Cathay Pacific, Singapore Airlines, and other regional transporters are filling their seats. These carriers are ordering billions of dollars' worth of new airplanes.
In Asia's largest economies, growth is exceeding forecasts. The Asian Development Bank (ADB) expected that gross domestic product growth this year would reach 8% in China and 6.5% in India. Its new estimate is that China grew 9.2% in 2005 and India, 6.9%. In Japan, a less dynamic economy that is by far Asia's largest, the economy grew 2.4% instead of the 2.1% forecast by the Organization for Economic Cooperation & Development (OECD). These three countries are tens of billions of dollars wealthier than expected a year ago.
Singapore is the bellwether of the Asian chemical industry. Plants based in Singapore supply Asia and the rest of the world with petrochemicals, industrial chemicals, pharmaceutical ingredients, and semiconductors. The city-state's market is global, as its population of 4 million is far too small to absorb the output of its industry.
On the whole, according to a survey by the Singapore Economic Development Board, more manufacturing companies expect business conditions to improve in early 2006 rather than deteriorate. A majority of companies in Singapore's "chemical cluster," which also includes oil refiners, foresee that business conditions in the first quarter of 2006 will be as good as they were throughout 2005.
In particular, companies expect stronger demand for a range of products including food chemicals and additives, epoxy and phenolic molding compounds, and ultrapure electronic materials. Most chemical companies in Singapore are multinationals from developed countries. Japan in particular is a major investor.
Indeed, chemical companies in Japan enjoyed 2005. They are in the best shape they have been since the early 1990s. Profiting directly from the boom in aviation in Asia, Toray and Mitsubishi Rayon are rapidly expanding their global carbon-fiber capacity to meet the rising needs of Airbus and Boeing. Meanwhile, fibers and plastics producer Teijin is benefiting from growing global concern about security. Demand for its Twaron-brand para-aramid fiber, used to manufacture lightweight bulletproof personal shields, is surging.
It looks like the once-embattled Japanese chemical industry is on a new page. In what was probably one of the last measures to correct the excesses of the late 1980s, Dainippon Ink & Chemicals a few months ago sold for $1.00 its U.S. subsidiary Reichhold, which it had bought for $540 million in 1987. Mitsubishi Chemical expects to earn $650 million this year and has already posted a $400 million gain in its first half. Only four years ago, the company declared a record net loss of more than $400 million.
A few Japanese companies, including Sumitomo Chemical and Shin-Etsu, are making profit forecasts that will break new records if achieved. And yet the industry in Japan is not entirely optimistic about the near future. Mitsubishi Chemical expects that margins in its petrochemicals business will decline owing to high and volatile raw material prices. Petrochemicals account for nearly half of its sales. The firm says it will increase its net profit largely by reducing the special losses it declared in recent years.
Shin-Etsu, the world's leading producer of polyvinyl chloride resins and silicon wafers, sees an uncertain outlook for raw material prices and for the U.S. and Chinese economies. These are key factors for the business performance of the company. It expects to meet its profit target partly by better control of its manufacturing costs and partly by boosting sales of 12-inch silicon wafers.
Many Japanese chemical companies are supplying materials to the fast-changing and fast-growing electronics industry. For the past two years or so, consumers have been snapping up flat-screen televisions to replace their existing bulky models. Meanwhile, mobile phone manufacturers have been adding new functions to their devices such as the ability to watch movie clips.
Chemical firms have met with uneven success in their attempts to profit from these trends. This is largely because manufacturers of flat-screen TVs and mobile phones are striving to supply consumers with products that are both less expensive and more advanced. Another factor is that the electronics industry is notorious for its fast boom-and-bust cycles.
JSR, already one of the most profitable of the major Japanese chemical companies, expects to increase its net profit 12.5% in the fiscal year that will end on March 31. The firm is confident that its materials will remain in favor with manufacturers of electronic components because it offers cutting-edge products developed through its ambitious R&D programs. In recent months, however, a more important factor in the company's sustained profitability has been strong sales of synthetic rubber, its more traditional product line.
At Sumitomo Chemical, operating income in the electronic materials business shrank 33% in the first half of the fiscal year ending March 31 owing to lower sales prices. Early last year, the prices of flat-screen TVs fell as large new factories came on-line in South Korea, Taiwan, and Japan.
In South Korea, LG Chem's electronic materials business recorded an operational loss in the first nine months of the fiscal year that ended on Dec. 31, 2005. The company manufactures lithium-ion batteries and polarizers for liquid-crystal displays. LG.Philips, a manufacturer of liquid-crystal displays and one of LG Chem's main electronic materials customers, recorded an operational loss in the first quarter of the fiscal year, but performance has since rebounded.
Japanese producers of industrial chemicals owe their strong financial results over the past two years not only to the recovery of the Japanese economy but also to robust demand from China. The health of the Chinese economy is a question that matters greatly to Japanese producers, as well as to chemical companies that supply China from other parts of the world.
For the surging Chinese economy, more of the same is likely in 2006. ADB and OECD expect China to grow about 9% in 2006. Much of the growth will be sustained by increasing consumption. ADB notes that China created 6 million jobs in the first half of 2005, representing two-thirds of the country's target for the whole year. The agencies, however, warn that the Chinese economy could be negatively affected by sudden shocks, such as a financial crisis in its weakly funded banking sector.
BASF, one of the biggest foreign operators in the Chinese chemical industry, is optimistic about its business in Asia in the near term. The company's largest site in Asia is a petrochemical complex in Nanjing that it operates with Sinopec (China Petroleum & Chemical Corp.). In its latest financial statements, BASF noted that the Nanjing site, which began production this summer, is "exceeding its ambitious goals."
Sinopec, the main petrochemical producer in China, believes that the cyclical petrochemical industry is at the top of the cycle. Optimistic about future conditions, the conglomerate spent billions of dollars in various projects last year and shows no sign of slowing down.
Last Spring, Sinopec bought the shares the public owned in its Hong Kong-listed subsidiary Beijing Yanhua. In November, it decided to do the same with Zhenhai Refining & Chemical, another subsidiary listed in Hong Kong. Meanwhile, Sinopec is proceeding with plans to build various types of chemical plants throughout China, either alone or with foreign multinationals.
India, an economy about one-third the size of China, is firing on all cylinders. ADB notes that the government has launched an ambitious program to improve infrastructure that is likely to raise demand for a whole range of construction materials. In addition, consumption is surging as the middle class gets wealthier. Growth in spending is further stimulated as local banks adopt more lenient credit policies that facilitate home and car purchases.
Reliance Industries, India's largest company and a major oil refiner and petrochemical producer, is optimistic about 2006. It expects that the supply-and-demand balance in the Asian petrochemical market will remain tight until 2007 at least. The company's business will be aided by delays in the construction of petrochemical complexes by competitors in the Middle East. Meanwhile, the company is targeting the burgeoning Indian market for specialty grades of plastics, which it is best able to supply.
Pharmaceuticals is one of the fastest growing industries in India. Growth is driven by rising sales to Western countries that increasingly source pharmaceutical ingredients and research services from India to reduce costs. India features world-class pharmaceutical plants and an abundance of highly skilled scientists and engineers.
Drug companies in India, however, are adopting several distinct business models, and not all of them may be successful in the marketplace. Some firms decide to have all their facilities in India, and others not. Some companies focus on the generics market, while others try to become innovative drug companies with a proprietary stable of patented pharmaceuticals.
Ranbaxy Laboratories and Dr. Reddy's, among the largest drug companies in India, are striving to launch their own pharmaceuticals and raise themselves to the level of the major drug companies like Roche and Novartis. They are walking a difficult, but potentially rewarding, path.
Net profit at Ranbaxy dropped 67% in the first nine months of 2005 as the company spent more and more on developing its international distribution network and its R&D capabilities. Ranbaxy remains optimistic about its global generics business, however, as large buyers of pharmaceuticals attempt to reduce their costs.
In its recent outlook report, ADB warned that India's economic performance would deteriorate if oil prices resume their ascent, because the country is highly dependent on imports. In fact, reading through the various forecasts for 2006 issued by companies and international organizations, one is struck by how strong and frequent the warnings are that rosy forecasts may not pan out. These warnings appear much more commonly than in previous years.
Economists and forecasters are disturbed by growing global imbalances, such as how the U.S. as a whole is a huge borrower of money while the rest of the world saves. They also fret about how energy prices are subject to wild swings. OECD has devoted a special section in its 2006 economic outlook to the potential danger posed by rising property prices in developed countries.
Uncertainty is on the rise. But consumers and corporate decisionmakers typically don't base their decisions on events that are not scheduled to happen, even though they may well occur. And judging from the current trend, 2006 will be another excellent year for the Asian chemical industry.
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