Falling value and output raise questions about S'pore chemicals hub

Chemicals' value added has fallen from its peak of S$7.36 billion in 2004 to S$3.98 billion in 2013


THERE has been a flurry of openings, ground-breakings and investment announcements on Jurong Island this year, but the latest available numbers tell a less bullish story of Singapore's chemicals cluster.

Chemicals value added fell to its lowest level since 1999 last year - with the exception of 2008's global financial crisis-induced plunge - and has been on a downward trend since 2010. Output too, has fallen since 2011. INFOGRAPHIC: Adding less value?

Though in part due to rising oil prices and the global economy's slow recovery from its 2008 meltdown, chemicals' decline here also raise broader questions of whether Singapore's chemicals hub can stay ahead of global competitors, and whether a strategy like that of Jurong Island - massive public investments to anchor an industry here - is still relevant to the Singapore economy today.

Last year, the chemicals sector contributed to just 1.3 per cent of the economy's nominal value added, compared to electronics' 5.6 per cent contribution. In absolute terms, chemicals' value added has fallen from its peak of S$7.36 billion in 2004 to S$3.98 billion in 2013.

Chemicals output rose as investments flowed in and plants revved up, from S$53.3 billion in 2004 to S$99.4 billion in 2011 but fell to S$97.1 billion in 2013.

The Singapore Economic Development Board (EDB) explained the downwards drift in value added as a function of slower demand - which has hit the manufacturing sector as a whole - and the chemicals sector's sensitivity to oil price movements.

"As Singapore is a price taker for both energy and feedstock, which are primarily oil-linked, this has resulted in squeezed margins of the refining and petrochemicals, translating to lower value-added," EDB director of Energy & Chemicals, Eugene Leong, told BT.

Other observers added that rising oil prices coincided with a ramp-up in global chemicals production. The shale revolution in the US also produced cheaper natural gas which gives American producers a significant cost advantage. This triple whammy has squeezed margins and value-added from the chemicals sector here, they said. Competition is closing in with rising investments in petrochemicals in the region, rising supply from the Middle East and China's shift up the value chain.

To give some perspective: refining capacity - which produces the feedstock for chemicals - in the Middle East rose 6.9 per cent in 2013 from 2012 while China expanded capacity by 5.6 per cent, according to the BP Statistical Review of World Energy 2014. Singapore produces 1.4 million barrels daily, or 1.5 per cent of the world's total refining capacity. This is dwarfed by China's capacity for 12.6 million barrels daily, or 13.3 per cent of total global refining capacity. Singapore is ranked 17th in refining capacity in the world.

While the long-term competitiveness of Singapore's petrochemicals industry was addressed in a Monetary Authority of Singapore research paper as far back in 1999, the latest developments and figures do ask questions of the sector, particularly given the huge and deliberate public investment and planning over the past few decades to anchor petrochemicals activities here.

"I would like to see how much linkages these new investments have with the rest of the Singapore economy. How do these new plants provide demand for the rest of the Singapore economy? What is the division in value added between profits and wages and what share of these profits are remitted abroad by the foreign investor? What sort of tax incentives and subsidised land were offered to the foreign investors to locate here?" said Manu Bhaskaran, founding director of economic research and consultancy firm Centennial Asia Advisors.

These are questions that need to be answered, to gauge the efficacy of Singapore's Jurong Island push, he said.

To Mizuho Bank economist Vishnu Varathan, the Jurong Island strategy could be seen as one of "picking winners". "Singapore picks not just one basket, but rather carefully selects a variety of baskets to concentrate the eggs in. So there is some diversification, or hedge."

For an acutely resource-constrained economy like Singapore's, this model of a concerted push to develop certain industries makes sense. "(This) often expedites and enhances the creation of an eco-system of requisite logistics, supply-chain and human capital," he added.

Will that be sufficient to keep Singapore ahead of emerging petrochemicals hubs in the region? "While there is greater competition, in South-east Asia even, it is not easy to have upstream and downstream presence. Once invested, the sunk costs for companies are very high, so you need a whole host of conditions - land, political stability, infrastructure. I don't see why Jurong Island won't continue to be a key site in processing petrochemical output for regional demand. There are no obvious alternatives for now," said National University of Singapore economic geography professor Henry Yeung.

The government's view is that Jurong Island has catalysed other activities in Singapore. There are more than 400 companies trading in petroleum and petroleum products in Singapore, for instance, a development supported in large part by the storage capacity available. Oil majors and downstream industry leaders have also chosen to locate regional or international headquarters in Singapore, generating activity in marketing and sales, research and development, logistics and other business services.

EDB remains positive about Singapore's chemicals cluster and hopeful that more investments into the specialty chemicals segment - which is also subject to oil price volatility but to a lesser extent - will raise the sector's overall value-added contribution to the economy, Mr Leong said.

Specialty chemicals' contribution to chemicals output may have held steady at a consistent 10 per cent since 2004, much smaller than petroleum and petrochemicals output, but it is now adding more value. In 2013, as poor refining margins hit the petroleum sector, specialty chemicals hauled in 60 per cent of chemicals value added, up from 20 per cent in 2004. As a proportion of its own output, however, specialty chemicals value-added dipped from 32 per cent in 2004 to 25 per cent in 2013.

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