Introduction to Southeast Asia's Chemicals Industry
Overcoming regional fragmentation
There is no doubt that the Asia Pacific (APAC) region, with its huge population and rapid economic development, is the most important market for the global chemicals industry. But even after taking India and China’s multi-billion populations out of the mix, one is left with a slice of great significance: The Southeast Asia (SEA) region, home to 600 million people spread across 11 countries, and with an aggregate economy growing faster than most others over the last 10 years. However, this grand SEA population, the fourth largest trade bloc in the world after China, India, and Europe, is also one of the most diverse – the idiosyncrasies of language, culture, religion, geography, politics, and economy leaving the region fragmented and struggling to present itself as one. Broken up into individual countries, the region diminishes its global significance, as well as its collective force to attract investment.
Besides Indonesia’s sizeable 273 million population, the other 10 SEA countries form a contrasting palette of differences; some of the world’s richest countries, like Singapore, and some of the poorest, like Myanmar, belong to the same group; one of the smallest states in the world (Brunei, with less than 500,000 people) is put in the same box with one of the biggest (Indonesia has the world’s fourth largest population). This diversity is matched by a deep level of market fragmentation, characterized by varying consumer preferences and spending behaviors.
At the country level, local economies are highly fragmented and dominated by SMEs. For example, the Malaysian chemical industry constitutes of over 900 SMEs and 100 multinationals (MNCs), according to the Chemical Industries Council of Malaysia, the main association representing the industry. In Indonesia, there are about 300 crop protection producers, according to Salim Agro, a formulator and active ingredient producer of crop protection chemicals. Momentive, an American silicone producer, serves about 4,000 customers in SEA. Despite efforts from the Association of Southeast Asian Nations (ASEAN), and the recently ratified Regional Comprehensive Economic Partnership (RCEP), trade in the region is not harmonized, with a web of bilateral and multilateral regulations overlapping each other.
MNCs are well aware of the opportunities of scale that the region presents. Most have set up bases in Singapore, which has grown into the designated ASEAN, and sometimes APAC, headquarters, competing with Shanghai and Hong Kong. Singapore has also taken the lion’s share of investment in manufacturing for the region, despite its own negligible domestic market of just 5.5 million people. Singapore excells in terms of ease of doing business, and nurtures a highly skilled workforce, pro-business policies, and unparalleled regional connectivity. However, Singapore also has its disadvantages, especially in terms of land availability and high production costs. While its hegemony as a preferred base for high-value production remains broadly uncontested, Singapore’s competitiveness for low-cost production has been far outstripped by other countries in the region.
Malaysia, Thailand, Indonesia, Vietnam, and The Philippines are all competing for foreign direct investment (FDI) in the chemicals sector. While Indonesia flaunts its large domestic market and the second-fastest growing middle classes in the world after China, Vietnam emphasizes its export-oriented economy, boosted recently by the EU-Vietnam FTA, which has already made the country into one of the favorite recipients of FDI in recent years. Malaysia has long been the cost-friendly alternative to neighboring Singapore, with good infrastructure, rich natural resources, and a well-developed ecosystem of skills and services. Before making a final investment decision for a new facility, companies look at all of these credentials. In deciding the best location for its second specialty silicones plant in the region, Momentive considered Vietnam and Indonesia, before zeroing in on Thailand: "Thailand has both a sizeable local market and excellent export capabilities," said Pawan Sherpuri, responsible for Momentive in Southeast Asia, Australia, and New Zealand (SEAANZ) region.
Investments in the region are determined by such compare-and-contrast, pros-and-cons exercises, based on which American, European, Japanese, and Korean MNCs chose their preferred SEA location. For instance, Malaysia is home to the largest investment outside of Tokyo headquarters for Kaneka Corporation, as well as for Seoul-based Lotte Corporation. German polycarbonate producer, Covestro, runs the APAC business from Bangkok. Giant oil and gas corporation ExxonMobil also has its largest Business Support Center in Bangkok. Dutch paints and coatings leader AkzoNobel has four manufacturing sites in Vietnam.
Position for cooperation, not competition
However, no matter where they produce from, MNCs' end goal is always to serve the region rather than any individual country, something that SEA nations seem to lose sight of in their competition with each other. We argue in this article that the region would become more competitive to international investors if it learned to act more as one – for instance, by developing upstream-to-downstream regional value chains and by focusing on complementary differentiating points, rather than competing ones. A Malaysia-versus-Thailand-versus-Indonesia-versus-Vietnam-and even versus Singapore approach only makes sense to the extent it highlights unique differentiators best matched to investors’ interests. For example, an investor interested in the semiconductors business might find Penang’s (a Malaysian state) buzzing electronics industry to be a winning investment choice, while an investor whose main goal is to produce inexpensively will find a good fit in Vietnam. Either of these investors will benefit from importing raw materials from the region and exporting their products to the region. For this, they need a well-integrated and self-serving market.
A Malaysia-plus-Thailand-plus-Indonesia-plus-Vietnam-plus-Singapore approach has a multiplier effect on the unique advantages of each country, while it offsets the disadvantages of either individual country. Investments in any ASEAN nation can benefit the entire region if these are guided to an equal extent by considerations of differentiation and integration: Each country differentiates itself in view of what other countries in the region have to offer, without clashing with or trying to outdo its neighbor. This would lead to the development of a complete and self-sustaining regional ecosystem.
Looking at recent government development plans, the chemical sector is prioritized in each of the economies mentioned. Indonesia has recently made public its intention to become the largest petrochemical producer in ASEAN, with investments of US$31 billion dollars by 2030. The government’s focus is to become completely self-sufficient and no longer import petrochemicals after the superhub at the North Kalimantan complex is complete. Currently, Indonesia imports chemical products valued at US$22.9 billion and exports US$11.2 billion worth of chemicals, according to the Observatory of Economic Complexity (OEC). Private investments are also focusing on closing the upstream gap in imports. South Korean company Lotte Chemical Titan, one of the largest olefin and polyolefin producers in the region, is investing US$3.95 billion in a new integrated ethylene project (the LINE project), which will consist of 1 million tonnes per year (t/y) naphtha cracker, and added capacity in both ethylene and propylene. The company has three existing standalone polyethylene (PE) plants in the same area as the LINE project, so the new upstream capacity will feed into the downstream production of PE.
Indonesia has a refining capacity of 1,1 million barrels per day (b/d), the third largest in the region after Singapore and Thailand, according to BP Statistical Review of World Energy 2022. Malaysia, on the other hand, with a refining capacity of 955,000 b/d, has been mostly concerned with the development of its downstream sector, according to Akbar Thayoob, president at the Malaysian Petrochemicals Association (MPA) and head of strategic planning and venture at Petronas, the state-owned integrated petrochemical company.
The Malaysian chemical sector began developing in the 1980s with basic petrochemicals like ammonia, ethylene, propylene, aromatics, and polymers, and it has swiftly pushed into higher-value products, culminating with the RAPID integrated project in the southern state of Johor, right at the border with Singapore. Including a petrochemical refinery, an isononanol plant, a steam cracker, three sulfur recovery units, a liquid sulfur storage unit, and a sulfur solidification unit, RAPID is part of Petronas’ largest downstream greenfield investment, called the Pengerang Integrated Complex (PIC) and worth US$27 billion. The inauguration of the project, overdue since 2021, has been stalled by a fire that took place in 2020.
Investments in value chain integration, both backward and forward, are not always aligned with the principles of competitiveness. For example, 2-ethyl hexanol (2-EH) Indonesian producer PT Petro Oxo Nusantara (PT PON) sources propylene, a gas used as raw material for 2-EH, mostly from its main shareholder, the state-owned oil and gas company Pertamina; but outside of its contract with its mother company, it also imports this raw material from suppliers like Petronas or PTT Chemicals, the state-owned petrochemical companies of Malaysia and Thailand, respectively. Meanwhile, for natural gas, the other essential feedstock of 2-EH, PT PON buys it at a discounted price from Pertamina. At the current rate, the 2-EH producer cannot sustain growth: "We risk being rendered uncompetitive in five or 10 years; for instance, we have been losing US$3 million/year on our IBA line since 2016. To become sustainable as a business, we must first source cheaper propylene for 2-EH, and then transform our portfolio so that 2-EH only represents 30-40% of our production, while the rest constitutes downstream chemicals," said Jaya Martapa, the CEO.
“We feel very confident in the future of Southeast Asia and we are excited about the opportunities it provides for further investment from global entities. Multinationals may ship to numerous countries within a region, but their physical assets are limited to a few countries. This is where Ouray’s expertise becomes key.”
Aaron Montgomery, CEO, Ouray
Guided by free market principles, the top domestic players in the region are investing in their counterparts in neighboring countries. In 2021, Indonesia’s Chandra Asri bought the shares of Thai Oil for US$1.1 billion, one of the largest rights ever issued on the Indonesian Stock Exchange, to support the development of its CAP 2 petrochemical complex, the second world-scale integrated petrochemical complex by PT Chandra Asri Perkasa, Chandra Asri's subsidiary. Malaysia and Indonesia may be competing as the top two palm oil producers, but the palm oil industry is also quite integrated between the two countries, with Malaysian companies investing in Indonesia and vice-versa. For example, Malaysian Group Kuala Lumpur Kepong (KLK) will be completing a new integrated refinery and kernel crushing plant, the PT Perindustrian Sawit Synergi in East Kalimantan, Indonesia.
Supply chain gaps are creating opportunities not only for chemical producers but also for distributors. Helm, one of the top five largest chemical distributors in the world, registered its office in Thailand in 2020, at the height of the pandemic. It entered Thailand by supplying IPA and styrene monomers to Thai manufacturers, and by sourcing biobased epichlorohydrin, caustic soda, and acetone from Thai suppliers for exports to Europe. Supakrit (Tos) Aungwarapitikorn, the managing director at Helm Thailand, told GBR that his strategy is to grow in specialty intermediates and performance chemicals, rather than commodities: "We chose to go to Thailand, because it has a strong manufacturing hub which demands specialty intermediates and performance chemicals. Beyond setting our footprint in the country, Helm Thailand does not want to play in the commodity game, but the higher-price game, within the five priority industry segments we defined (automotive, electronics, construction, care chemicals, and bio-based chemicals)."
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