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Petrochemical sector faces drop in demand, rather than supply

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While supply chain delays and disruptions have hit manufacturers in industries like electronics, Singapore's petrochemical sector is more likely to suffer from a drop in demand.

Singapore

WHILE supply chain delays and disruptions have hit manufacturers in industries like electronics, Singapore's petrochemical sector is more likely to suffer from a drop in demand.

That's because the Chinese market made up just 3 per cent of Singapore's petrochemical imports in 2018, which limits the impact of supply chain disruption, according to the Economic Development Board (EDB).

But China is also the top petrochemical market: It took about 40 per cent of Singapore's exports in 2018.

"It is too early to predict the effect of Covid-19 on demand in China for petrochemicals, as we do not know how protracted the outbreak will be," Khalil A Bakar, the EDB's chemicals and materials director, told The Business Times. "But any impact will likely come from the demand side."

Indeed, the road ahead for demand is rocky, with Covid-19 likely to compound a slowdown in China's economy. Synthetic polymers like plastics are made from petrochemicals that are derived from petroleum.

Vanessa Ronsisvalle, a former oil broker who covers Asian petrochemicals at S&P Global Platts, noted that the shuttered factories in China will drive down demand for the chemicals used to make end-products such as synthetic textiles, plastic goods and cars.

"Polymer demand will certainly deviate from expectations due to the coronavirus," she said, citing Platts Analytics estimates for polyethylene demand in China to drop by between 350,000 and 1 million tonnes compared with the base case for 2020.

The spread of the infectious Covid-19 has not come at an easy time for the sector, which contributed just under one-tenth of Singapore's S$336.2 billion in factory output last year.

Petrochemical output shrank by 18.8 per cent from 2018 to 2019, followed by a 10.8 per cent slide in January, the most recent month on record.

But on the bright side, Singapore players have less to worry about on the supply front.

The ecosystem on Jurong Island, which EDB assistant managing director Damian Chan billed in 2018 as a "highly integrated energy and chemicals complex", lets companies source for feedstock, then sell their products, all in one place.

"It is unlikely Singapore will face shortages of raw materials from China," said Ms Ronsisvalle.

"Petrochemical supply is likely to be ample across South-east Asia as China imports less - so higher inventory levels are expected in Singapore."

That's why a spokesman for industrial gas and engineering company Linde told BT that "we continue to supply to our Singapore customers without disruption and see minimal impact in the immediate term".

Peter Lee, senior oil and gas analyst at Fitch Solutions, also said the outbreak's impact could be more modest if there is stronger consumption of plastics and consumer goods.

"Even though demand for most fuels are taking a hit - such as gasoline, diesel and, most of all, jet fuel - consumption of feedstocks for the petrochemicals industry... is still rather resilient," he said, citing consumer product demand in China.

While consumer demand softened on the viral outbreak, "there are early signs that recovery is already here, as retail stores slowly reopen", added Fitch consumer and retail analyst Lin Taohai, naming Apple and Starbucks.

Commodities lawyer Dan Marjanovic, a partner at Simmons & Simmons, also said that once the virus outbreak is over, "global demand is likely to see further upward price pressure" on demand from industrialising countries.

At the end of the day, "we are confident that Singapore is in a strong position to recover once the Covid-19 situation stabilises", said the EDB's Mr Khalil, on the back of growth potential in Asean and other Asian markets.

He added: "We will also continue to diversify the portfolio of industries in Singapore and the markets that they sell to, so as to strengthen our resilience as an economy."