Petrochemical Industry in Taiwan after the Financial Crisis

15 Jul 2010 - Taiwan - FREE REPORTS

The petrochemical industry in Taiwan gradually begins to recover as the overall economy breaks away from negative growth

There is a close relationship among the annual growth rate of the petrochemical industry, the overall economic growth, and the GDP in nations with mature petrochemical industry. In 2009, the economic growth rate in Taiwan is -1.87%, lower than the global average of -0.60%; its GDP in the same year is $US 37,940 million, a drop of 5.76% than the previous year. It is expected, however, that the overall economic growth rate in Taiwan will shift from negative to positive in 2010, reached 4.72%; its GDP will also grow 7.74%, to $US 40,880 million.

	2008	2009	2010
Economic Growth Rate (%)	0.73	-1.87	4.72
GDP(million US$)	402,616	379,408	408,779
GNP (million US$)	412,592	392,220	420,713
Personal Income (Million US$)	352,171	334,182	358,312
Exchange Rate(US$)	31.54	33.06	32.08
Personal Saving Rate (%)	28.65	28.14	29.35
Consumer Price Annual Rate of Change (%)	3.5	-0.9	1.29
Whole Sale price Annual Rate of Change(%)	5.2	-8.7	6.48
Industrial Production Annual Rate of Change (%)	-1.56	-7.97	8.12
Manufacturing Production Annual Rate of Change(%)	-1.6	-8.0	8.1
Private Consumption Annual Rate of Change(%)	1.6	-0.09	2.77
Export Amount Annual Rate of Change(%)	3.63	-20.32	-
Import Amount Annual Rate of Change(%)	9.67	-27.48	-
Purchase Order for Exports Annual Rate of Change(%)	1.71	-8.33	-
Foreign Reserves (Hundred Million US$)	7.92	19.37	-
Unemployment Rate(%)	4.1	5.9	5.7

Notes: Statistical average from January to March 2009
Statistical average from January to February 2009
Source: Directorate-General of Budget, Accounting, and Statistics, Executive Yuan, R.O.C.;
Department of Statistics, Ministry of Economic Affairs, R.O.C.; ITRI IEK (June 2010)

The Production Value of the Petrochemical Industry in Taiwan dropped 19% in 2009

The petrochemical industry in Taiwan was hit hard by the financial crisis in the fourth quarter of 2008, its production value and exports & imports values dropped 30%. The petrochemical industry continued to be affected in 2009, and its annual production value was $NT 1.32 trillion, a drop of 19% from the previous year. In the petrochemical industries, the synthetic rubbers had the highest rate of decline, a whopping 25%, followed by synthetic resins and plastics, declining 17% and 20% respectively.

As the financial crisis began to show signs of relief in the first quarter of 2009, companies that closed down production for maintenance in 2008 began to resume production, and their utility ratio of manufacturing capacity began to go up gradually. The growth in the second quarter is even more striking. By the fourth quarter, under the implements of the Consumer Voucher policy and other economic packages, domestic consumer market for petrochemical products began to stabilize and gradually recover. In addition, the successful campaign of China�fs Electrical appliances to the countryside and the speedy recovery and growth of its domestic market had stimulated exports of synthetic resins, plastics, and synthetic rubber products from Taiwan. As a result, the utility ratio of manufacturing capacity of the petrochemical companies had gone back to the level before the financial crisis.

Chart 1: Production Value of the petrochemical industry in Taiwan: 1999-2010

The Production Volume of ethylene for 2009 was a record high in Taiwan, with annual growth of 6.3%

The total production volume of ethylene in Taiwan reached 3,852,000 tons in 2009, a 6.3% increase from the previous year. It was a record high for the production and manufacturing of ethylene in Taiwan, with overall utility ratio of manufacturing capacity reached 95.9%; the production volume of other key petrochemical products (propylene, butadiene, xylene) also reached record high. It indicated that the petrochemical industry in Taiwan still maintained a high utility ratio of manufacturing capacity despite the impacts from the global financial storm.

Table 2: Demand and Supply for Basic Petrochemical Raw Materials

Product		2008	2009	2010	2011	2012
Ethylene	Production Capacity	4,015	4,015	4,015	4,015	4,015
	Production Volume	3,623	3,852	3,614	3,573	3,654
	Demand	3,951	4,004	4,085	4,125	4,105
Propylene	Production Capacity	3,093	3,093	3,093	3,093	3,093
	Production Volume	2,662	2,881	2,784	2,722	2,753
	Demand	2,380	2,616	2,668	2,695	2,681
Butadiene	Production Capacity	620	620	620	620	620
	Production Volume	513	527	558	546	552
	Demand	561	589	601	589	595
Benzene	Production Capacity	1,752	1,752	1,752	1,752	1,752
	Production Volume	1,550	1,558	1,577	1,542	1,559
	Demand	1,978	2,230	2,275	2,121	2,383
Toulene	Production Capacity	115	115	115	115	115
	Production Volume	16	39	58	46	52
	Demand	270	165	255	242	252
Xylene	Production Capacity	2,898	2,898	2,898	2,898	2,898
	Production Volume	2,464	2,454	2,608	2,550	2,579
	Demand	2,778	3,148	3,210	3,307	3,439

Source: ITRE IEK (June 2010)

Mega Investment projects in Taiwan continue to go through Environmental Impact Assessment

The Third Naphtha Cracker Renovation and Expansion Project from CPC Corporation, Taiwan, the KPTC project from Kuokuang Petrochemical Technology Co., and the Fifth Phase of No. 6 Naphtha Cracking Project from Formosa Plastics Group are the three major investment projects in the petrochemical industry in Taiwan. In view of possible supply shortage of petrochemical products due to the planned 2015 dismantlement of the Hou-Jin Fifth Naphtha Cracker Plant, CPC is planning to replace the production capacity supplied by the Fifth Naphtha Cracker Plant with the new production capacity generated by Kuokuang�fs KPTC project in the future. As for the Third Naphtha Cracker Renovation and Expansion Project, CPC is planning to upgrade the capacity of existing plants on current location in order to reduce pollution and enhance production capacity. The Fifth Phase of No. 6 Naphtha Cracking Project from Formosa Plastics Group aims to accomplish No. 6 �fs original goals, namely to connect the upstream and downstream petrochemical industries, and to continue to expand related petrochemical production capacity.

Table 3: Investment Projects in the Petrochemical Industry in Taiwan and their Latest Developments

Company	Investment project	Invesment Amount (Thousand million NT$)	Latest Development
CPC Corporation	Kuokuang Petrochemical Technology Co.	5001	1. In June of 2009, EPA approved Kuokuang s project in the Tacheng Township of Changhua Country and proceeded to the second stage environmental impact assessment 2. The second-stage environmental impact assessment was impeded by the issue of the Indo-Pacifica. Humpack Dolphins. EPA hosted a meeting with experts in June of 2010 and recommended to creat of eco-corridor about 5m to 10m deep and 800m wide specifically for the passage of Indo-Pacific Humpback Dolphins even though the overall construction costs will increase by NT$20 billion to NT$ 30 billion. Our shareholders will not agree to such increase of cost, said Kuokuang Chairman Chen Ba-lang 3. In June of 2010, shareholders from the Board of Directors of Kuokuang Petrochemical Co. stressed that if hte investment project was unable to inaugurate by the end of the year due to stalled enviromental assessment, the shareholders would withdraw from the investment project
CPC Corporation	The Third Naphtha Cracker Renovation and Expansion Project	420	1. CPC began to invide bids for the Third Naphtha Cracker Renovation and Expansion Project in Feb of 2009 2. The project finally passed enviromental assessment in May of 2009 3. The Third Naphtha Cracker Renovation and Expansion Project office began construction in Aug 2009
Formosa Platics Group	The Fifth Phase of No. 6 Naphtha Cracking Project	2805	1. Ministry of Economic Affairs set up the Fifth Phase of No. 6 Naphtha Cracking Project Taskforce in Nov 2009 2. EPA and the Enviornmental Assessment Commission decided to conduct a second stage environmental impact assessment on NC-6 in March of 2010 3. Originally the environmental assessment was scheduled to be completed by June of 2010. Because the 2nd phase enviromental assessment is still on-going construction has been postponed to the end of 2010

Source: ITRI IEK (June 2010)

In June of 2008, Kuokuang Petrochemical Technology Co. applied to the Executive Yuan and its proposal was approved as one of the mega projects for Taiwan. By June of 2009, EPA had reached the consensus that the project needed go through the more stringent second-stage environmental impact assessment which was then impeded by the issue of the Indo-Pacific Humpback Dolphins. EPA hosted a meeting with experts in June of 2010, and recommended to create an eco-corridor about 5m to 10m deep and 800m wide specifically for the passage of Indo-Pacific Humpback Dolphins even though the overall construction costs will increase by NT$20 billion to NT$ 30 billion. Our shareholders will not agree to such increase of costs, said Kuokuang chairman Chen Bao-lang. At the same time, the shareholders from the Board of Directors of Kuokuang Petrochemical Co., stressed that if the investment project WAS unable to inaugurate by the end of the year due to stalled environment assessment, the shareholders wOULD consider to withdraw from the investment project.

CPC�fs Third Naphtha Cracker Renovation and Expansion Project finally passed environmental assessment in May of 2009. It officially proceeded with construction in August, 2009.

As for the Fifth Phase of No. 6 Naphtha Cracking Project, Formosa Plastics Group sent its proposal to Industrial Development Bureau of the Ministry of Economic Affairs for approval in January, 2008. By March of 2010, EPA and the Environmental Assessment Commission decided that the Fifth Phase of NC-6 needed to go through a second-stage environmental impact assessment in. As a result, the construction schedule has been postponed for another six months.

Anti-dumping tax have been imposed by Mainland China on some of Taiwan�fs Petrochemical Products

Since Mainland China begins to adopt protection measures for its domestic market for petrochemical products, it has greatly impacted the petrochemical industries in Taiwan which rely on mainland China as its major export market. Taiwan-made products that are imposed by Mainland China with anti-dumping tax:

Product	Period-of-ime	Tax-Rate	Companies - Targeted
PVC	2010-2015	6.5% and more	Formosa Plastics Group Hw a Hsia Glass, Ocean Plastics
CPL	2010-2015	7%	China Petrochemical Develpment Corp
BDO	2010-2015	4.6%, 9.1% and 4.8% are respectively imposed on Dairen Chemical Corp, Taiwan Cement and Nan-Ya Plastics Corp as punishment	Dairen Chemical Corp Nan-Ya Plastics Corp. Taiwan Cement
Nylon (particle) 6-cut	2010-2015	4%~4.3%	Formosa Chemicals & Fiber Corp Li-Peng Enterprise Zig-Sheng Industrial Co and upstream petrochemical companies

Source: ITRI IEK (October 2009)

The intention of China�fs move to impose anti-dumping tax on Taiwan is to protect its domestic industry and market. Since the petrochemical industry in Taiwan heavily rely on the mainland China market, the anti-dumping tax has no doubt increased the risk for companies exporting to China.

The impacts of ECFA on the Petrochemical Industry in Taiwan

To the petrochemical industry in Taiwan, the signing of ECFA will benefit the upstream raw material suppliers since nearly half of the Taiwan-made petrochemical raw material is exported to mainland China and Hong Kong. If the petrochemical raw material suppliers in Taiwan can be exempt from the 6.5�� customs duty for imported petrochemical raw material currently charged by mainland China, it will undoubtedly help them to expand to the mainland China market.

In addition, the prices of the downstream plastic and rubber products in mainland China are lower than those in Taiwan. After mutual exempts from customs duties, it is possible that the downstream petrochemical products from the mainland will be dumped to Taiwan in large quantities. As a result, the downstream petrochemical manufacturers in Taiwan will face fierce competition, and some of the less competitive downstream products will likely be replaced by China-made products. Some of the downstream petrochemical manufacturers in Taiwan will be forced to relocate to mainland China, which will lead to less production and closures of downstream petrochemical manufacturers in Taiwan.

Currently the production value of the upstream sector is higher than that of the downstream manufacturers, (The production value for the upstream raw material in 2008 amounted to $NT1.6 trillion whereas the production value for the downstream products amounted to $NT 247.9 billion) and, after the signing of ECFA, all the upstream petrochemical raw material can be included in the early harvest list, and it will provide a five-year protection for Taiwan-made petrochemical products. It is expected that, during this period of time, market share from manufacturers in Taiwan will go up in mainland, and their profit margins will be increased due to the exempt of customs duty.

Government agencies begin to promote an Upgrade Plan for the Petrochemical Industry in Taiwan

There are a wide variety of challenges facing the petrochemical industry in Taiwan: for the upstream sector, it�fs the difficulty in expanding; for the downstream industries, their facilities are growing outdated and both the anti-dumping measures from mainland China and regional trade agreement have limited their export growth. In view of this, the governing agency for the petrochemical industry, the Industrial Development Bureau of the Ministry of Economic Affairs, has actively seek to enhance the quality of the petrochemical products as well as promote technological development. In 2007, it began to implement the Development Plan for the Petrochemical Products, which included providing technical support for high value-added petrochemical products as well as planning and encouraging the development of the petrochemical industry. By 2010, it has expanded the original plan and commissioned the Material & Chemical Research Laboratories of ITRI, Industrial Economics & Knowledge Center (IEK), and Taiwan Research Institute to implement the Upgrade and Value-Added Plan for the Petrochemical Industry for the purpose of providing a blueprint for the development of petrochemical products and technology as well as assisting the petrochemical industry in the Kaohsiung area to upgrade, enhance its value and to transform. Its goal is to actively assist the industries to use their resources efficiently, to improve and diversify their manufacturing process, to enhance the value of their products, to develop new products, and to transform. Government agencies also plan to provide a series of counseling, guidance, and industrial analysis to help the relocation of the #5 CPC cracker plant to go smoothly in order to increase its industrial competitiveness.

Conclusions

The tremendous impacts from the global financial storm on the petrochemical industry in Taiwan began to subdue by the year 2009. Benefited from the strong economic recovery in mainland China, the petrochemical industry as a whole began to recover gradually. The utility ratio of manufacturing capacity for the petrochemical industry began to go up, gradually back to the previous levels in the third and the fourth quarter.

As a whole, the production value for the petrochemical industry in Taiwan dropped 19% in 2009. The production volume for the petrochemical products for the same year, however, appeared to go up. This was because the petrochemical industries moved their maintenance schedule ahead and adjusted their production volume in order to survive the first quarter of 2009 when the impacts from the financial storm were the most severe. As a result, the annual production volume was not affected. The main cause for the decline of the production value for the entire petrochemical industry in 2009 was due to the tumbled oil prices which in turn drove down the prices of petrochemical products. Therefore, it is clear that, under the impacts from the financial storm, the production value of the petrochemical industry in Taiwan shrunk because it was affected by falling oil prices. In the future, the petrochemical industry in Taiwan is expected to prosper when the global economy recovers.