Taiwan’s petrochem industry to grow over next five years, to be pressured by increased competition from China

The Taiwanese petrochemicals industry is set to witness significant growth in capacity over the next five years, but will come under pressure from increased competition in the Chinese market as regional output growths and naphtha prices increase, according to a report by BMI. In 2009, Taiwan had olefins production capacity of 7.8 mln tpa, of which 4.05 mln tpa was ethylene, 3.13 mln tpa was propylene and 625,000 tpa was butadiene. These feed polyethylene capacities of 500,000 tpa of HDPE, 335,000 tpa of LDPE and 385,000 tpa of LLDPE, as well as 1.31 mln tpa of PP. In other polymer segments, Taiwan has capacities of 780,000 tpa of PET, 950,000 tpa of PS and 1.89 mln tpa of PVC. The country also has a large aromatics and intermediates production base with 1.37 mln tpa of benzene, 945,000 tpa of cumene, 350,000 tpa of ethylbenzene and 2.45 mln tpa of xylenes. The focus for Taiwanese petrochemicals expansion over the medium-term will be CPC's Lin Yuan complex, due onstream in 2013 and Kuokuang Petrochemical Technology's Chang-hua complex, due onstream in 2015. With the Chang-hua complex not featuring in our five-year forecast, it is envisaged that by 2014, ethylene capacity will rise 13% over 2009 levels to 4.57 mln tpa, propylene capacity by 15% to 3.59 mln tpa and butadiene capacity by 21% to 755,000 tpa. However, the lack of PE, PP, PVC and PS expansion further downstream is evidence of the lack of confidence in Taiwan's ability to compete in what will be an increasingly competitive environment. Instead, downstream capacities are focused on ethylene oxide (up 25% to 1.40 mln tpa) and ethylene glycol (up 16% to 2.85 mln tpa) which should help provide feedstock to Shinkong Synthetic Fibres' planned 400,000 tpa polyethylene terephthalate plant in Taoyuan, due onstream in 2010, as well as plugging China's EG deficit. Taiwanese production is being affected by a combination of moderating economic growth in China, higher crude oil prices and a rapid rise in global petrochemicals capacities. However, this could be offset by improved trade relations between Taiwan and China through the Economic Cooperation Framework Agreement (ECFA). Proponents claim it will give it an advantage over Korean and Japanese rivals with tariff-free entry to the Chinese market. Currently, Japan and Korea account for about 38% of China's petrochemical market. Taiwan's annual petrochemicals exports to China typically total 10 mln tons, on which an average of 6.5% import duties apply. The move could also integrate the island's petrochemical industry with the mainland. An increased economic integration would boost petrochemicals turnover in Taiwan, or at the very least help Taiwanese producers compete against Middle Eastern and Asian rivals. Another important factor in the future of the Taiwanese petrochemical industry is the pattern of demand in the Chinese market. With the Chinese petrochemicals industry set to witness major expansion amid slower rates of demand growth, the report cautions that China will witness surpluses in some segments that could undermine prices and hit margins at Taiwanese facilities. We estimate that in 2009 alone, China witnessed a 2.15 mln tpa increase in PE capacity and a 2.25 mln tpa increase in PP. With the report anticipating domestic demand growth of 2%, polymer market self-sufficiency should approach 75% PE and exceed 100% PP in 2010. This could drive down international polymer prices yet further, putting more pressure on Chinese petrochemicals producers' profit margins despite the easing of naphtha feedstock prices. Taiwan's reliance on naphtha streams, derived from refining imported crude, give it little margin to compete with ethane-based producers in the Middle East unless oil prices drop significantly and at a faster rate than the drop in petrochemical prices. Taiwan has a small domestic market, relatively high labour costs compared to its neighbours, a strong environmentalist lobby and a large volume of FDI flowing into Mainland China. Yet, it retains a competitive advantage in logistics due to its close proximity to China's most industrially advanced provinces. Taiwan is in fifth place in the Petrochemical Business Environment Ranking for Asia, with 71.9 points. Taiwan's petrochemical industry is large, although not as large as that of mainland China. The island's strength is the structure of the economy, with its advanced infrastructure, and the relatively low long-term risks facing the country. However, the key issue is competitiveness, with the industry dependent on crude imports and oriented towards export markets at a time of increasing global uncertainty.