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THE ambition of Jurong Aromatics Corporation (JAC) to be the "most admired aromatics company in the Asia- Pacific" looks, for the near term at least, a distant goal.
Just five months after firing up its US$2.4 billion petrochemicals facility on Jurong Island, the company has hit a rough patch and finds itself in need of a strategy change. Since mid-December 2014, plant operations have stalled.
"JAC is taking advantage of the current unfavourable market for petrochemicals to recalibrate our production process to improve efficiency," a JAC spokesman said in response to BT's queries.
JAC's main business driver is the production of paraxylene (800,000 tonnes per annum), an aromatics used to fabricate polyester.
Inclusive of a condensate splitter and an aromatics complex, JAC's facility also produces other aromatics such as benzene (438,000 tonnes) and orthoxylene (200,000 tonnes), as well as petroleum products such as fuel oil and jet fuel.
JAC started operating at a bad time, industry watchers say.
"The economics have been squeezed since the second half of 2014," Anu Agarwal, vice-president of chemicals at market data provider Argus Media, told The Business Times. "Feedstock and end-product wise, both have been moving in directions that you don't want."
But the situation was rosier in August 2011, when the project's groundbreaking took place. Then, condensate was underpriced to crude and demand for paraxylene was fast growing. It was a compelling business case.
Unfortunately, JAC wasn't the only one hoping to ride the paraxylene wave.
When JAC's 100,000 barrel per day condensate facility was launched, two massive splitters had also just sprung up in South Korea. Within a year, splitter capacity shot up by over 10 per cent.
The significant addition to splitting capacity over the years pushed paraxylene into oversupply, just as China's appetite for polyester waned, taking paraxylene prices and margins lower. China is today the largest producer and consumer of paraxylene.
JAC's margins were further compressed by plunging crude prices. Since its peak in June 2014, Brent, the international benchmark for crude, has tumbled more than 50 per cent. Aromatics, which closely tracks crude prices, too, slumped.
"Margins for paraxylene and benzene weakened significantly in the second half of 2014," said Darryl Xu, a chemicals research analyst at Wood Mackenzie.
Based on data from price assessment provider Platts, the value of paraxylene has plunged 35.56 per cent from August-December 2014. Over the same period, benzene fell 44.42 per cent while orthoxylene fell 36.56 per cent.
With the weak crude market, margins for JAC's petroleum products also came under pressure.
For JAC, the situation was compounded by rising condensate feedstock costs. With surging demand in Asia for feedstock, condensate - once considered a by-product of natural gas production and traditionally sold at a discount to crude oil - was trading at a premium to crude by mid-July 2014.
There will be little respite in the near term. The US Energy Information Administration expects global oil inventories to continue to build up throughout this year, keeping downward pressure on oil prices.
Capacity supply will continue to increase. By 2016, an additional 370,000 barrels per day of splitter capacity in the Middle East and Asia are expected to start up.
During this period, Qatar, JAC's main condensate supplier, will also be firing up its own splitters, potentially tightening condensate exports to Asia.
In 2016-2017, more paraxylene supply will be entering the market, aggravating the current over-supplied market, said Mr Xu. He forecasts benzene to also remain in oversupply for the next two to three years.
"At this point in time, you would wish you were an integrated player like ExxonMobil, with more room to offset market changes," he said. "In current market conditions, it will be tough for JAC to recover its cost of investment."
JAC cannot halt operations indefinitely. For one, the project had been financed mainly via debt, including a subordinated debt facility provided by oil major BP. That debt has to be paid off.
Leaving aside sunk cost, it would be better for JAC to run at a lower operating rate than shutting down completely, as long as it covers the cash cost of production, Mr Xu said.
"The other newly started up condensate splitters (Samsung Total and SK Global Chemical) are still running, albeit at lower operating rates. Most aromatics producers will cut their more expensive tiers of production and continue to run," he said.
Other splitters in Asia are in the same predicament, some more so than others. Since May 2014, the Trans Pacific Petrochemical Indotama has shut its condensate splitter and aromatics plant in Indonesia. In October 2014, Japan's JX Nippon Oil & Energy Corporation followed suit, shutting a small condensate splitter.
Ms Agarwal understands that JAC is looking to focus on aromatics production upon restart, by directly procuring naphtha as feedstock, instead of condensate.
Perhaps the redeeming factor here is that JAC's plant has been designed to allow flexibility in using alternative feedstock.
"JAC is doing something sensible. Naphtha-based production makes more sense, given the sharper falls in naphtha values in the past two months when compared to condensate," Ms Agarwal said.
Notwithstanding the weakness in the chemicals market, production margins for aromatics are still acceptable, she added.
JAC is held by a diversified group of stakeholders who are also its feedstock providers and product offtakers. The consortium is led by South Korean conglomerate SK Group (30 per cent) and Chinese polyester maker Jiangsu Sanfangxiang Group (25 per cent).
Other shareholders include entrepreneur Vijay Goradia, the founder and owner of Houston-based chemicals firm Vinmar Group (10.5 per cent), Swiss trader Glencore (10 per cent), Indonesia's Sridjaja family (9.5 per cent), Thai KK Industry (5.1 per cent), Singapore's Economic Development Board (5 per cent) and India's Essar Group (4.9 per cent).
EDB's director of energy and chemicals, Eugene Leong, told BT: "Feedstock prices tend to be volatile. Singapore's aim is to diversify our feedstock base to include naphtha, liquefied petroleum gas (LPG) and condensates in order to increase feedstock options for petrochemicals players . . . such feedstock diversification adds robustness to Singapore's energy and chemicals industry."
The firm is also the pioneer customer of the S$950 million Jurong Rock Caverns, which was launched on Jurong Island in September 2014. JAC uses two of JRC's caverns to store condensates.
JAC's current halt comes after a much-anticipated but also delayed launch. In May 2009, JAC delayed plant startup after struggling to obtain funding due to a credit crunch following the financial crisis.
Last year, JAC only started plant operations four months after receiving its first condensate shipment.
"Paraxylene economics weren't making sense," said Mr Xu. "Since startup I understand that JAC has been operating at 70-75 per cent capacity."
And even as JAC plans for a restart, lingering doubts about its feasibility persist.
"Do they have the logistics capability to import the naphtha?" Mr Xu asked.
INFOGRAPHIC: BTExplains - Recalibration