Specialty Chemicals
Producers chase another rebound
Whereas basic chemical producers are more sensitive to supply cycles, manufacturers of specialty ingredients and performance materials are closer to economic cycles and the forces of demand, driven by end users.
To escape the commodities cyclicity, many Southeast Asian active players have invested in higher-value products. For example, Petronas allocated US$12 billion to increase its specialty chemicals share from 2% in 2019 to 25% by 2037. When it was carved out of Bayer, Covestro represented a mostly commodity-based Performance Materials portfolio, with MDI, TDI and PC. However, it has since invested repeatedly in higher-value products to become more resilient. Its most recent investments at the Map Ta Phut site in Thailand reveal this strategy, with the first Naphthalene-Diisocyanate (NDI) plant outside of Europe and its most advanced specialty films facility in the continent. “Globally, more of Covestro’s investments have been in the solutions and specialties business, as at our Map Ta Phut site. In this way, we want to have a more robust portfolio to mitigate the cyclicity of commodity prices on the spot markets and derive higher value from application-focused products,” said Timo Slawinski, managing director at Covestro Thailand.
Generally, the global specialty market, led by APAC in terms of revenue share, is healthy, and expected to average a growth rate above 5% between 2022-2032, as the use of advanced chemicals in construction, automotives, electronics, packaging, pharmaceuticals, personal care, and agriculture continues to rise. Many global specialty chemical manufacturers posted record profits in 2022, but their full-year results conceal a difference between the first (H1) and the second half (H2) of the year: profits skyrocketed on the back of demand build-ups and very high prices in the first two quarters of the year, before correcting sharply in H2.
This year, the industry hopes that 2023 will be a mirror of 2022, with a weak H1 and a buoyant H2, largely driven by the rebound in China: “If the first half of 2022 still carried the lagging effects of the pandemic, manifesting through a high demand for medical suppliers, for instance, the second half of the year was marked by a more sluggish economy, with the sharp rises in energy prices and growing interest rates putting a break on growth in most countries,” said Hiroyuki Nishimoto, managing director at Kaneka Malaysia, a large chemical company headquartered in Japan.
Like other companies with a diversified portfolio, Kaneka was able to grow in some segments, like health care, and balance it with lower profits in its material solutions unit, which serves mostly in a depressed construction market. But those companies with a leaner portfolio had to look for other opportunities for diversification. For example, Asta Chemicals, a Malaysian formaldehyde and adhesive resins producer with exports to 23 countries, is seeing an anemic wood industry as its main customer. “With the weak housing market in the US and in Europe, many of our customers are running at 50% capacity, and I personally do not expect significant improvement in the next six months,” said Jerry Looi, the company’s CEO.
Looi diversified the company’s business model by acquiring a logistics company and providing toll manufacturing services for specialty products like animal feeds. Traditionally more active in the basic chemicals, most native SEA producers have taken steps towards the downstream, investing more in intermediates, derivatives, as well as more complex formulations, where the margins are higher. After closing its butanediol (BDO) and derivatives line in 2020, BASF Petronas Chemicals (BPC), the 60:40 JV company announced last year a plant expansion for 2-Ehtylhexanoic Acid (2-EHAcid), a chemical intermediate used in the production of synthetic lubricants and oil additives, among other uses. The second line of production will double the annual capacity of the producer. “The decision to close the BDO plant is a result of significant overcapacities in the region due to recent investments into new coal-based BDO production sites. We plan all our future investments – and divestments – through a sustainability lens. Looking ahead, we are optimistic the economy will gradually recover in the second half of 2023, once China reopens its borders and consumer spending returns,” Marko Murtonen, the managing director of BASF Petronas Chemicals told GBR.
“In this part of the world, owners want to build faster, higher, and stronger, while staying within budget. Every country in Southeast Asia is now looking at new codes for fire protection, and Tremco CPG is sitting at those tables, educating the market and regulators on safety and certification.”
Jackson Kho, Area Director – Southeast Asia, Tremco Construction Products Group (CPG) APAC
China’s reopening ushers in a wave of delayed demand
Described by The Economist newspaper as “the biggest economic event of 2023,” China’s reopening at the beginning of this year is expected to send a super-wave of demand for goods and services, which will power growth in the chemicals sector. After three years of lockdowns and draconian zero-covid policies that have cost individual liberties for the greater good of containing the virus, China’s 1.4 billion inhabitants can move again – and are moving. On the 27th of December, bookings on Trip.com rose by 250% compared to the previous day, wrote the newspaper. The government expects 2 billion trips this year.
At the end of the first quarter, the much-anticipated reopening of the US$19 trillion economy did not disappoint, with GDP growth reaching 4% according to the most recent survey by Reuters. The same source estimates this figure to jump to 5.4% for the full year. A stronger Chinese economy sends ripple effects across the world. But not all are good. Analysts at Goldman Sachs projected that Chinese demand could push the Brent crude prices to US$100 a barrel, beefing up inflation. More competition for LNG imports could lead to shortages in Europe, warned the International Energy Agency (IEA).
However, for SEA, the rebound in the Chinese economy is mostly good news. Thanks to the region’s geographical and trade proximity, SEA is bound to profit from the influx of tourists and uncorked demand. 11 million Chinese traveled to Thailand for tourism before the pandemic, which is 27% of the country’s total tourist pool. "China has just started experiencing the economic rebound that the rest of the world saw in 2022 because it was still under lockdown last year. Now that the Chinese economy is opening, we can expect a second wave of economic growth radiating from China into Southeast Asia and setting everything on the move. Southeast Asia will particularly benefit from the influx of Chinese tourists. Another spillover effect from China’s opening will also come from increased trade between Southeast Asia and China," said Pawan Sherpuri, general manager for the SEEANZ region at Momentive, a silicone producer.
“Many of our customers in the wood sector are running at 50% capacity, and I personally do not expect significant improvement in the next six months. For this reason, I am very keen to attract new contract manufacturing clients to produce specialty chemicals. We are currently producing pathogen controls chemicals for animal feed for a client, but our facilities are flexible and can accommodate different chemicals.”
Jerry Looi, CEO, Asta Chemicals (AstaChem)
China’s indubitable role in the chemical markets cannot be understated. China represents about half of both the petrochemical and specialty markets globally, and is a major trading partner for countries in the region and beyond. China is the main export destination for all chemical exporters in the region – Singapore, Malaysia, Indonesia, Thailand, and Vietnam – and by a considerable margin. As Vino Kumar, the CEO of Kuantan Port, one of the biggest ports in Malaysia, said: “When China sneezes, we catch a cold:”
With close to 50% of its business linked to Chinese trade, the lockdown in the world’s largest economy severely impacted the port’s operations.
Article header image courtesy of Evonik