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Viewpoint: SE Asian petrochemical investments surge

29 Dec 2017 03:53 GMT
Viewpoint: SE Asian petrochemical investments surge

Singapore, 29 December (Argus) — Petrochemical producers in southeast Asian are planning to invest around $60bn in new capacity from 2017-23, after three years of record margins prompted a surge in spending.

The plans, which include new refinery developments, will mark the entry of Vietnam to the regional market and big expansions in Indonesia, southeast Asia's biggest economy. Indonesian firms have announced a slate of new projects, including the country's first greenfield olefins plants since private-sector Chandra Asri started its cracker at Cilegon in 1995.

The project announcements come as producers in southeast Asia lag rivals further north. Investments in China in particular have sent northeast Asian ethylene and propylene capacity higher by about 23pc and 20pc respectively in 2014-17, compared to growth of only around 7pc and 15pc in southeast Asia during the same period.

Greenfield projects planned

The Indonesian expansions are led by Chandra Asri, the country's sole naphtha cracker operator, which has laid out plans to invest $5bn in a new cracker with nameplate capacity of at least 1mn t/yr, as well as MTBE and butene-1 plants, for start-up after 2020. It will also build a new 400,000 t/yr polyethylene (PE) plant that will come on line in 2019.

Malaysia-based Lotte Titan is also planning to build a new cracker in Indonesia, to be based at Merak in west Java. The project will produce at least 1mn t/yr of ethylene and cost $3-4bn. The cracker, which will support the firm's existing 450,000 t/yr PE plant in Indonesia, is expected to start operations after 2020.

In Vietnam, construction of the $5.4bn Long Son cracker is expected to resume in 2018 after a delay of about four years because of issues surrounding financing and site clearance. Thai industrial group Siam Cement agreed in March to buy a 25pc stake in the project from Qatar's state-owned QP for $36mn, giving it a controlling 71pc ownership interest.

The new investments also reflect a desire to diversify petrochemical feedstocks, with Indonesia considering its first coal-based polypropylene (PP) unit. A consortium of state-owned coal mining firm Bukit Asam, fertilizer producer Pupuk Indonesia and energy firm Pertamina, as well as Chandra Asri, will study the feasibility of building the coal gasification facility at Tanjung Enim in south Sumatra. The unit, which will be attached to a 450,000 t/yr PP plant, could start operations in November 2022.

Funding constraints ease

Financing has in the past posed challenges for companies in the region, as low petrochemical margins put plans on hold. But this changed in 2014, when crude prices slumped. That helped send cracker margins sharply higher, from $35/t in 2013 to $188/t in 2014, $364/t in 2015 and $641/t in 2016. Margins rallied further in 2017, to $714/t — about 20 times higher than just four years earlier — sending profits at petrochemical companies to record highs.

Access to financing has also become easier thanks to relatively low interest rates. Malaysia has cut its reference rate to 3pc from 3.25pc in early 2015, while Indonesia has reduced its benchmark interest rate to 4.25pc from 7.5pc in 2014.

But even so, plans for new petrochemical projects have met with some scepticism. Lotte Titan raised about $877mn through an initial public offering (IPO) on the Malaysian stock exchange in July, but only after scaling back its offer price to 6.5 ringgit/share ($1.60/share) from 8 ringgit/share and cutting the size of the offering by around 22pc.

Some investors continue to see the consumer sector as providing more attractive profit margins than petrochemical projects, which are perceived as riskier given their exposure to market forces. And the risks of overcapacity are certainly real. The US is expected to add another 12.6mn t/yr of PE capacity from 2017-21, supported by rising availability of feedstock ethane thanks for the country's shale boom.

Aramco seeks new markets

State-owned Saudi Aramco has emerged as a major investor in southeast Asian petrochemical projects. The company is raising its exposure to downstream sectors ahead of its IPO, which is expected to take place in the second half of 2018 and will open up new sources of financing.

Aramco in February paid around $7bn for a 50pc stake in state-owned Malaysian firm Petronas'

Refinery and Petrochemical Integrated Development (Rapid) project at Pengerang in Johor, southern Malaysia. Aramco subsequently bought a 50pc stake in the project's polymer operations for $900mn. The goal is to get marketing rights for Rapid's PE and PP.

In Indonesia, Aramco is investing in a $6bn expansion and upgrade of the 348,000 b/d Cilacap refinery it jointly owns with state-owned Pertamina. The project will increase Cilacap's propylene output by 2023.

Other state-owned energy firms are also eyeing investments in southeast Asia, both to diversify and to secure long-term contracts for their crude supplies. Russia's Rosneft plans to invest about $13.8bn to build a new 300,000 b/d refinery at Tuban in Indonesia. The project will include a petrochemical complex that is envisioned to produce 650,000 t/yr of PP, 500,000 t/yr of styrene, and 1.3mn t/yr of paraxylene, with completion scheduled for 2022.