Petrochemical sector running on full steam as low oil prices boost margins

Singapore

THE black mark of Jurong Aromatic Corporation aside, the petrochemical sector in Singapore would be turning in a gleaming report card for this year, aided by lower crude oil prices which eroded the competitive advantage of gas-powered chemical plants in the Middle East and the US.

And 2016 would likely be another good year for the sector - the country's biggest manufacturing cluster - before the next wave of new petrochemical plants in the US flood the market, said chemical analysts.

"2015 has actually been a fabulous, fabulous year, if you look at the margins," said Anu Agarwal, vice-president of chemicals at market data provider Argus Media.

The petrochemical crackers here turn oil-based naphtha from refineries into ethylene and other chemicals which become the basic building blocks for petrochemicals that are eventually processed into products such as plastics. (See INFOGRAPHIC: Value Chain)

Crackers in the Middle East and US, on the other hand, use gas - prices for which have fallen in the US as a result of the shale revolution - as feedstock.

As crude prices slumped, and together with it naphtha prices, the competitive advantage of these competing gas crackers have been eroded, analysts say. Crude oil prices have fallen by almost two thirds since 2014 to trade near 11-year lows at about US$36 a barrel, and many analysts expect it to remain low till at least mid-next year.

Crackers using naphtha, such as those on Jurong Island, probably enjoyed their highest profits in 10-15 years, said Tony Potter, head of Asia Pacific chemical research at consultancy IHS Chemical. This is especially so for ethylene, the main product from crackers; the other products, namely propylene and butadiene, have not been as profitable due to other factors in the specific product markets.

He pointed out, however, that the crackers which use naphtha still have higher costs than gas crackers.

Comments by the analysts were borne out in Singapore's industrial production figures, in which chemicals have been the only bright spot in an otherwise dismal year: it is the only sector to have grown for the past three quarters as the country recorded nine consecutive months of contracting industrial output.

This is largely due to new production capacity in the specialty chemicals segment, according to the Economic Survey of Singapore released quarterly by the Ministry of Trade and Industry (MTI).

Specialty chemical firms Solvay and Croda this year opened expanded and new facilities respectively. These reaffirm Singapore's attractiveness as a location for manufacturing, said Damian Chan, executive director of energy and chemicals at the Economic Development Board (EDB).

The specialty chemical sector is one that Singapore has identified as the next growth area for its large petrochemical sector and is actively courting.

The chemicals sector also saw increased investments this year, with S$3.17 billion committed in the first nine months of this year, compared with S$2.64 billion for the full 2014 year, MTI's figures show.

Growth momentum across the chemicals value chain in Singapore remained strong this year, in spite of the global economic slowdown, Mr Chan told BT. Besides the completion of the new specialty chemical plants, this year also saw Germany's Evonik opening its expanded oil additives plant and Sumitomo starting a urban farming research and development project.

Globally, the US$130 billion merger of Dow Chemicals and DuPont, seen as the largest deal to date in the industry, surprised many for its sheer size. Analysts, however, expect it to have minimal impact on Singapore.

DuPont has three manufacturing sites in the island-state, and is setting up a new innovation and business headquarters for South-east Asia at Biopolis next year. Dow Chemicals has only a holding office here.

DuPont Asean group managing director Hsing Ho said that DuPont remains committed to serving the market needs in Singapore and Asean.

"There are no immediate plans to alter our presence in Singapore," he said in response to BT queries."

Looking ahead, EDB's Mr Chan expects data analytics to play a key role in improving the competitiveness of the petrochemical sector in Singapore.

US multinational engineering firm Emerson and Japan's Yokogawa Engineering Asia are both looking to use Big Data technology to help petrochemical facilities improve their efficiences.

This is especially as Singapore's energy costs continue to be among the highest in the region, though they have improved in the past year due to oversupply in the electricity market.

Come next year, the opening of Vopak's liquefied petroleum gas (LPG) terminal would also provide additional feedstock options for the petrochemical crackers here. Naphtha and LPG are interchangeable as feedstock to a certain extent, and prices for LPG dipped during the summer season.

The year ahead will also see an increase in ethylene supply from the US as more crackers there start up.

This might lead to a weakening of profit margins, but the full force of it will probably be felt the most in 2018, said Vince Sinclair, head of chemicals at energy consultancy Wood Mackenzie. "This is just the beginning of the tsunami."

Concurring, Ms Agarwal of Argus Media said: "Everybody in Asia who's large should probably feel the impact of those volumes and the low cost base."

At the same time, however, those who have invested in the US gas crackers are the same ones with naphtha crackers in Asia, she noted. "In some sense, maybe there's some cushion because ExxonMobil US killing ExxonMobil Singapore doesn't make sense."

As Singapore moves into a mature stage of growth, the sector will have to calibrate accordingly to ensure high quality, sustainable growth that accompanies an advanced economy's needs, said Mr Chan.

"What's important for the sector is that we continue to redefine ourselves, and consistently provide something special for companies to continue investing and growing here."

For more of BT's year-in-review stories, visit bt.sg/review_15