There is a danger that overinvestment in petrochemical expansions in Asia will lead to overcapacity, margin erosion and the next big down cycle by 2015, a senior executive with German chemical major BASF said on Friday.
Large amounts of capacity additions, coupled with more moderate economic growth in China and the Asia-Pacific region, will create the perfect conditions for a major down cycle in chemicals, said Torsten Penkuhn, the head of BASF’s petrochemicals business in Asia.
The current favourable conditions for the chemical industry globally are making companies undertake major expansion decisions without considering the possibility that those decisions will contribute to a down cycle, he said.
“We are more and more concerned at BASF about an increasing risk of overbuilding once again. We currently see a risk that people are becoming too ambitious, enthusiastic and optimistic. And that could lead us to where we have already been in this industry.”
He added: “The cycles are not self-created by magic; it’s the industry which creates them. Overcapacity will be bad news for all of us, as it will lead to margin erosion and then it will come down to who has what cost position. When you’re in that position, that’s when the fun stops.”
He said BASF would be comfortable because its verbund philosophy – the interlinking of production plants – gives it a competitive edge, adding: “We are very optimistic and positive about Asia, and this word of warning does not imply a negative outlook for BASF in Asia.
“But industry has a responsibility to look at cycles as man-made: we create them, they are not thunderstorms. I feel optimistic that people are able to learn from the past.”
Penkuhn said a variety of announcements on petrochemical investments have been made in Asia, which are all due to come on stream around the same time. If these all become a reality, there is the possibility of overcapacity, with the danger period being in 2015.
He said the Chinese government’s attempts to control inflation by tightening monetary policy are necessary but will have a negative impact on manufacturing growth. “They cannot have inflation above 5% and they need to cool their economy,” he said.
But this policy is leading to a lot of speculative manufacturing, as companies rush to produce goods before obtaining credit become more difficult.
“We feel that underlying GDP growth in China is around 9%, with chemical industry growth perhaps into double digits. But if you look at first-quarter results, you see 15-20% sales growth. So there is an underlying speculative element which comes from an anticipation of shorter availability of credit. There has been some pre-production by people worried about their credit lines being withdrawn.”
Penkuhn said he believes that over the next decade the chemical industry in China will have moderate growth of around 7%. Across the Asia-Pacific region, industry growth should reach 5%. These growth rates are converging as economies mature and the service sector becomes more important.
He dismissed talk of a “supercycle” for chemicals.
“At the risk of being blunt, I don’t believe in the ‘supercycle’ story at all. It discounts environmental and demographic risks, also political risks such as the North Africa situation. The ‘supercycle’ story assumes that none of these risks translates into reality and I don’t believe that.”
Penkuhn warned that long-term demographic trends in China do not favour continued exponential growth.
“They only have 20-25 years to go until they have a real aging problem like the Germans do. All their political stability is based on growth and young people wanting to make a living. When they become old, what’s next?”