Receivers for JAC mull over revival plan via third-party usage

Singapore

SECOND chances are found in a new year. And that is what 2016 could potentially hold for the troubled Jurong Aromatics Corporation (JAC) after the twists and turns of the past year - if current plans on the table come to fruition.

Three months after the operator of the US$2.4 billion aromatics plant on Jurong Island went into receivership, about four to five proposals are said to have been made to the company's receivers Borrelli Walsh.

The Business Times understands that one of them involves a tolling arrangement with the end goal of restructuring, while the others are tolling models, where third-party users pay a fee for processing, that last for a limited period of time.

The restructuring proposal, made by Jurong Energy Investment (JEI), includes a a fresh injection of US$300 million in equity and US$250-300 million in working capital. JEI is owned by Arovin and Sheffold Investments, which together hold 20 per cent of JAC, as well as US trading firm Astra Oil, a new shareholder.

A decision was expected to have been made last week, but this has now been postponed, according to a source close to the talks. It is not clear if one can be reached by the end of the year, as the decision makers - bankers from lenders including BNP Paribas and Standard Chartered - head out of the country for their Christmas and New Year vacation breaks. Borrelli Walsh declined to comment, while JAC could not be reached by press time.

The plant can start up within three months of a decision being made, BT understands.

JAC's US$2.4 billion plant on Jurong Island has been idle this year while discussions on what to do with it went back and forth.

The plant started operations in August 2014, just as the market for both its feedstock and products turned unfavourable.

JAC buys condensates - a by-product of natural gas production - and processes it into petroleum products such as fuel oil and petrol as well as aromatics such as paraxylene, better known as PX, which goes into making polyester. It can produce 2.5 million tonnes of transportation fuels and 1.5 million tonnes of aromatics each year, with the latter being the main profit driver.

When conceived in 2005, the plant had seemed like a compelling business case: weak supply and strong demand for PX means many PX producers were recording strong margins.

By the time it started up - three years later than the original planned date of 2011 due to difficulty obtaining funding during the financial crisis - the market had turned sour. Two other similar facilities in South Korea were also firing up at the same time, buying up condensates and also pushing the PX market into oversupply, just as China's appetite for polyester waned. China is the largest producer and consumer of PX.

JAC therefore stopped operations in December last year "to recalibrate" its production process. This, said industry observers, involved tweaking the plant to use naphtha as a feedstock as its price had fallen.

But it also ran out of working capital.

The need for fresh capital prompted BP, SK Energy and Glencore - which combined are owed about US$500 million - to suggest converting some debt into equity, Reuters reported, quoting unnamed sources. This would have diluted current shareholders and result in the trio holding a 75 per cent stake themselves.

JEI, however, roped in commodity trader Trafigura and proposed to have the latter pay a fee to use the plant.

The wrangling among the various shareholders continued till JAC went into receivership in late September.

According to latest available records, JAC had US$1.53 billion in liabilities as at end-2013. Suppliers BP, Glencore and SK Energy have secured claims against the company, while BNP Paribas led a $1.73 billion loan facility in 2011 that has yet to be repaid.

Under the most optimistic scenario of a decision being made before the year ends, JAC would be able to start running again in March-April next year.

If so, it could find a market that is more friendly than when it had first fired up, industry observers say.

"That was a particularly bad time, and the conditions have changed after that," said Anu Agarwal, vice-president of chemicals at market data provider Argus Media.

Condensate prices, which correlate with crude oil prices, have come down, while PX supply has dropped after an explosion at Dragon Aromatics in China caused the 1.6 million tonne-a-year facility to shut down.

If there is a chance for JAC to start, now would be as good a chance as it comes, she said.

This is because more new supply of PX will come on stream by late 2016 and 2017. "So it does need a little bit of time to start up and stabilise. It does get a little bit more competitive again later on."

Concurring, Ashish Pujari, senior director of aromatics and fibres at IHS Chemical said that PX capacity addition has slowed down.

In the meantime, margins for petrol, one of JAC's products, have also grown.

This, coupled with the low crude oil price, means that "if JAC were to start up it should be able to operate and place volumes without disturbing the margins to a major extent," he said.

And the firm should be profitable as long as crude oil remains less than US$60 a barrel, and demand for petrol grows in response to low prices, he added.

There are, however, others who take a more pessimistic view of the paraxylene market.

Said Darryl Xu, research analyst at Wood Mackenzie: "The capacity hasn't crescendoed yet . . . There are still projects that haven't come on stream."

He believes it will take about three to five years for the excess supply to be worked off.

Regardless of the market conditions, what is certain is that JAC will be more exposed to the boom and bust cycles of the chemicals market than most of its competitors which are integrated with refineries.

Aromatic production increasingly takes place in units integrated with refineries that provide for more flexibility to produce products which are more profitable at a given time, said the market analysts.

The two Korean plants that started up at the same time as JAC, for instance, have fared better due to their integration as part of a larger complex.

The gruelling market conditions also mean that the current fractured ownership of JAC will need to be restructured.

"The ownership structure needs to be consolidated, then it has a chance," said Ms Agarwal, echoing the views of many others.

And even after that, to re-start the plant will not be an easy task.

"Once a company has such a big setback it takes a while to get out," she added. "But I think if you have a shot at it I suppose now is as good a chance as you'd get in the near future."

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