BMI View: This quarter we have only made modest changes to our Asia Petrochemicals Risk/Reward R atings (RRRs). The ongoing slowdown in global economic ac tivity remains a key dampener on potential returns from the Asian petrochemicals sector, but this has not stopped t he region's overall risk score increasing as the markets in a minority of countries have shown signs of improvement. However, with no new petrochemicals projects announced over the past quarter, capacity forecasts remain steady and as such rewards scores have not changed .
The key findings from Asia's Petrochemicals RRRs can be summarised as follows:
There remains a substantial disparity in petrochemicals output and demand throughout Asia, translating into a significant divergence in rewards and risks among the Asia Pacific petrochemicals markets. A differential of over 40 points exists between the top and bottom countries in BMI's Asia RRRs table. This offers investors a range of rewards depending on their appetite for risk.
Softening economic activity is allowing Asian countries to loosen their monetary policies and create a more positive credit climate for household consumption, which should boost demand for plastic applications in the consumer goods and packaging segments, thereby bolstering developed markets where economies are highly influenced by consumer spending.
This will have a positive knock-on effect on dynamic, large-scale producers in the region, such as South Korea, Thailand and China.
Taiwan's performance continues to deteriorate because of capacity closures due to exposure to the mainland Chinese market.
In terms of rewards, Vietnam and Malaysia continue to notch up better scores as a result of planned capacity expansion.
Having seen its score leap last quarter, South Korea's score did not change this quarter, with the country remaining at the top of the ratings table - 0.9 points ahead of China.
The main losers are India and the Philippines; the former for continued uncertainties related to progress and the viability of capacity expansion and the latter due to lacklustre market performance.
The chief downside risk to most countries in this region continues to come from corruption, poor institutions, barriers to competition and the lack of infrastructure in less developed markets.
The regional economic slowdown could, however, provide new impetus for regulatory reform, which would be beneficial for most of the region's petrochemicals industries in the long term.
|Asia Risk/Reward Ratings Changes|
|Modest Improvement In Average Scores|
In spite of their stagnant scores China, India and Thailand will continue to dominate our emerging Asia rewards ratings over the medium-term, regardless of expansion in capacities elsewhere. In stark contrast, Taiwan has fallen back, principally due to its exposure to the mainland Chinese market, although in terms of its regional peers it still remains fairly robust and competitive. A slowdown in economic growth could lead to a future decline in scores for emerging market goliaths China and India.
In addition to slowing growth in the Chinese petrochemicals industry and the stuttering rise of the Indian industry, capacity expansion is focused on the relatively virgin territories of Indonesia, Malaysia and Vietnam, which until recently had been neglected. These markets are emerging market manufacturing hubs in Southeast Asia that could benefit from an indigenous basic chemicals industry. Progress has lifted the risk ratings for these countries to 62.9, 80.7 and 53.6, respectively. Meanwhile, developed markets are registering static growth in basic chemicals capacities, with the emphasis on adding value and improving efficiency in the face of strong competition from China and the Middle East. The one exception is Taiwan, which will witness a decline in available capacity over the medium-term.
Despite growth, we stress that relatively poor business environments and low levels of liberalisation remain the region's Achille's heel, thereby hampering the potential of various countries. Similarly, corruption, poor institutions and a relatively high level of external risk combine to dampen country risk scores in a number of cases, most notably for India, Indonesia, Vietnam, Philippines and China. As such, a substantial divergence in risks and rewards between and within petrochemicals markets in the region remains a prominent feature of our Asia RRRs.
|Change In Risk Scores, Q213/Q113|
|Winners Trump Losers This Quarter|
Similarly, different levels of liberalisation and competition in the regional petrochemicals markets play a prominent role in shaping our risk scores, with Singapore holding the strongest market risk score - at least 35 points ahead of China and India. China and India have put forward highly ambitious capacity expansion programmes, aiming to meet fast-growing demand. Yet, our industry risks indicator illustrates how the two giants still leave much to be desired in terms of market liberalisation, giving them scores of under 60 points. In India, an opaque business environment also represents a downside risk, with difficulties over coal generation in China illustrating the overexposure of the country to this means of electricity generation and the precarious position of the country's main power generators. The dominance of state-owned Sinopec militates against a level and open business environment in China, while constant confusion and political agitation over land rights has delayed the construction of new plants in India.
|Country||Petchem market||Country structure||Rewards||Market risks||Country risk||Risks||Petchem rating||Rank|
|Scores out of 100, with 100 highest. Source: BMI|