The Recovery That Never Was
How the industry is reacting to softening demand in a turbulent market
2022 saw several changes to the geopolitical and macro-environment landscape which are likely to continue to create challenging conditions for the Singaporean chemicals sector in 2023. High energy costs and inflation levels, the ongoing conflict in Ukraine, and increasing interest rates have created a perfect storm for chemical companies worldwide, particularly those that are exposed to industries such as electronics and construction. “Continued economic growth in ASEAN is expected, but the global slowdown will continue to pose challenges to many industries, including the chemical industry,” explained Takayuki Inagaki, managing director and CEO at Mitsui Chemicals Asia Pacific.
Moreover, across the entire chemical industry, from distributors to toll manufacturers and shippers, the theme of 2023 has been the same; the big post-pandemic economic rebound everyone was expecting from China has not yet arrived. These circumstances have had far-reaching consequences for the industry globally, as HELM Asia’s managing director Kew Hui Chin explained: “The chemical industry is cyclical, and we are currently in a trough. We are faced with a triple whammy of oversupply, slower-than-expected growth in demand, and high energy costs.”
dsm-firmenich’s APAC region president Jun Saplad, described the current situation as a VUCA (volatile, uncertain, complex, and ambiguous) environment. Although the APAC region has perhaps not experienced rising energy costs as sharply as some European countries, inflationary pressures have driven up costs nonetheless in other areas. However, Singapore’s Monetary Authority announced that core and headline inflation rates have started to drop, and many expect this trend to continue throughout 2023. Johnson Lai, vice president at Chemical Specialties Limited (CSL), said: “Energy costs are high, but they at least seem to be plateauing now, and the shock of the initial increase has somewhat normalized. What continues to impact the industry is the rising cost of raw materials, construction costs, and labor.”
The volatility in oil prices and geo-political uncertainty appear to be impacting the petrochemical sector in particular. No doubt, the EDB’s efforts to grow the local specialty chemicals sector, which tends to offer higher margins and value-added applications, will prove fruitful in times like these. China China has been plagued by strict lockdowns due to the pandemic until restrictions started being lifted in late 2022. Many expected a surge in activity and demand from the Chinese market to follow, however China’s highly anticipated re-opening has been underwhelming, compounded by a slump in the Chinese real estate market and sanctions from the West. China has an outsized impact on the chemical industry, accounting for around 45% of global demand for chemicals and petrochemicals. According to the Observatory of Economic Complexity (OEC), 16.7% of Singapore’s chemical exports, amounting to US$7.9 billion, were destined for China in 2021, thus making China the largest importer of Singaporean chemical products.
“While the energy impacts were felt more in Europe, our businesses outside of Europe, specifically in America and Asia, were less impacted by these energy price surges.”
Vinod Agnihotri, Managing Director, LANXESS
“A lot of the specialty chemicals used in the semiconductor industry are not produced here in Singapore, and the semiconductor industry here relies heavily on imports from other countries in Asia... I believe the Singaporean government is now making efforts to promote local manufacturing of these highly specialized chemicals.”
Kris Leong, Vice President, Singapore Country President, Entegris
Following years of significant investment in production capacity, this year China is expected to add a record-breaking chemical and fertilizer capacity of nearly 140 million t/y (dwarfing the previous record of 90 million t/y in 2014). The Independent Commodity Intelligence Services (ICIS) reports that between 2000 and 2022, global capacity exceeding demand in the six building block petrochemicals averaged 76 million t/y. ICIS forecast this figure to surge to 218 million t/y in 2023 from 191 million tons last year. “The increasing balance of China's new capacities coming online could impact Southeast Asian markets most as volumes find their way there first. Despite a demand rebound, the supply overhang will likely continue to impact midstream players in Southeast Asia significantly,” said Thomas Luedi, senior partner, head of Asia chemicals, Bain & Company.
Thus, the problem of weak consumer demand has been exacerbated by a massive oversupply of certain products, due in part to a massive ramp-up in Chinese petrochemical capacity over the years.
The weaker-than-anticipated demand in China is also felt by service providers like shipping companies. “There has been a decrease in chemical charterers, especially on the commodity side. These changes are mainly due to the global economy and China's significant role in driving demand for chemicals,” said Sudheer Vijapurapu, managing director, New Asia Shipbrokers.
COVID’s legacy
In H2 of 2023, COVID has almost entirely subsided, and most have adjusted to life in a post-pandemic world. Life has returned to normal in most countries. However, the chaos wrought upon supply chains during the pandemic is still having lasting effects. The pandemic stressed supply chains to breaking point, exacerbated by other extraordinary events, like the 2021 Suez Canal obstruction.
Many companies realized that they were unprepared for such black-swan events, and are re-vamping their supply chain strategies, with an emphasis on having contingencies in place and ensuring supplies are always at hand. Supply chain bottlenecks led many players to build excess inventory. “In addition to the macroeconomic situation, demand is also softening as there was significant overstocking during the pandemic as supply chains were extremely tight, and many companies have built up buffer stock that they now have to deplete,” said Ruben Mannien, executive vice president APAC at allnex, an industrial coating resins producer in Singapore.
The subsequent de-stocking effect created a lot of uncertainty and global production volumes of chemicals fell 5.3% in Q1 2023 on a year-on-year basis. Nevertheless, most predict this situation will not last long. “If we look at APAC itself, in general, the region is holding up, but there is still limited growth. With built-up stock starting to deplete, we expect to start seeing a rebound in the second half of 2023,” continued Mannien.
“Global politics play a key role in regional supply and demand trends. Currently, Chinese companies are dumping excess stocks in the ASEAN region due to abysmally low local demand, impacting regional manufacturing. Volatile prices have added complexity to market dynamics.”
Raj Kaushik, Director, FRP Services (Asia)
Despite the turbulent economic situation, some new doors are opened as others are closed. Roger Marchioni, olefins & polyolefins director – Asia at Braskem, explained that sustainability continues to become increasingly important to consumers worldwide: “The demand for sustainable products, such as biopolymers, has shown a strong resilience. People are more aware that climate change must be tackled globally, and that is why everywhere in the world sustainable solutions have been more resilient against softening demands.” Conclusion
According to data from Enterprise Singapore, petrochemical and primary chemical exports from Singapore experienced a 34% and 61.8% drop respectively in June 2023 on a year-on-year basis. Singapore nevertheless maintained its status as the world’s 9th largest exporter of chemicals in 2022, and its prowess in chemical manufacturing will maintain its future growth.
With Europe feeling the sting of high energy prices and ongoing war, it may present an opportunity for companies to shift some of their operations to Southeast Asia, where some of these problems are not being felt as sharply.
Article header image courtesy of LANXESS