Philippines Petrochemicals Report Q2 2008

Poor margins in the Philippines' petrochemical sector will be tackled through planned expansion, which will improve integration and self-sufficiency, according to BMI's latest Philippines Petrochemical Report.

In 2007, the Philippines had installed polyethylene (PE) nameplate capacity of 475,000 tonnes per annum (tpa), polypropylene (PP) nameplate capacity of 240,000tpa and polyvinyl chloride (PVC) nameplate capacity of 100,000tpa, but not ethylene capacity. Despite capacity utilisation of over 80% throughout 2007, there are significant weaknesses in the chemicals segment. Throughout most of the year, JG Summit's 180,000tpa PP plant at Batangas was operating at 60% capacity due to high propylene feedstock costs and low PP prices. According to the Monthly Integrated Survey of Selected Industries (MISSI) for 2007, the volume of production index (VoPI) for the chemicals industry fell 4.5% and the VoPI for plastic products was down 2.7% y-o-y. JG Summit Petrochemical's revival of its proposed 350,000tpa naphtha cracker for completion in 2009 is intended to address the country's feedstock shortage, which is contributing to poor petrochemical margins.

The key issue in the petrochemicals sector in 2008 is the sale of Petron. In March 2008, UK-based global asset management company Ashmore offered to purchase Saudi Aramco's 40% stake in Petron for US$550mn, a deal that the Saudi company agreed. Aramco is reportedly keen to quit Petron because of government interference, in particular the policy of price reductions and lagged price increases. However, the government appeared to prevaricate on whether to permit the sale to Ashmore or to buy back the stake through the state-owned PNOC, which has a 40% stake in the petrochemicals company. A renationalisation of Saudi Aramco's stake would run contrary to the government's long-standing trend towards economic liberalisation. It would also lead to a loss of Aramco's technical expertise.

Ashmore's interest in Petron has been stimulated by the latter's strategic transformation programme, which intends to diversify petrochemicals production. In March 2008, Petron Corp began production of propylene at the 180,000 barrels a day (b/d) Bataan Refinery. The unit has a capacity to produce 140,000tpa of propylene annually. Petron is in the process of evaluating the second phase of its refinery master plan, which should entail an additional investment of US$1.5bn. This would include a second Petro Fluidized Catalytic Cracker (PetroFCC) unit, which should come on stream by 2014, among other projects that would increase Petron's conversion capacity and petrochemical feedstock production. The project should start implementation by 2009. Petron's PetroFCC is also expected to boost operating efficiencies at its 180,000-barrels-a-day Bataan refinery. The upgrade project is estimated at US$300mn.

BMI has revised its method of risk scoring in the petrochemicals sector, introducing dynamic scores that reflect on future growth as well as current capacities and the size of the internal market, along with investment risk assessments of the political, economic and regulatory environments. In the Asia Petrochemicals Business Environment Rankings matrix, the Philippines comes last of five countries, with 42.6 points, well below the regional average of 59.4 points and 6.4 points behind Indonesia. The Philippines petrochemicals sector suffers from lack of locally available feedstock and a relatively small and inefficient local polymers manufacturing base which is incapable of supplying the plastics industry.

Nevertheless, the Philippines has a supportive business environment in which the petrochemicals industry can grow.