Singapore's chemical ambitions face Chinese threat

City-state must grow in niche areas to parry threat from China, Middle East
Singapore's chemical ambitions face Chinese threat
Globally, the specialty chemicals market is worth $395bn
By Reuters
Mon 08 Nov 2010 04:12 PM

Singapore's
aim to rule Asia's expanding specialty chemicals market will be challenged with
China set to boost capacity and reduce imports, leaving the island with limited
export options.

Unable
to vie head-on with China and the Middle East on commoditised petrochemicals,
Singapore is moving up the value chain to snare a sizable portion of the $395bn
global specialty chemicals market.

Specialty
chemicals - high-value raw materials used to produce a host of consumer
products from high-performance tyres to state-of-the-art LCD televisions - is a
growing market for petrochemical makers striving for higher profit margins and
to differentiate themselves from competitors.

The
island nation needs to carve a niche for itself in that segment to stay ahead
of China.

"Singapore
has no choice but to keep moving into more advanced chemicals with higher margins,"
said Chris McNally, a partner with management consultants Booz & Company in
China. "It has to run faster just to stand still."

Singapore's
10-year masterplan, dubbed Jurong Island Version 2.0, aims to further boost its
energy and chemicals industry, valued at S$57bn ($44.2bn), which contributed 28
percent of the economy's manufacturing output last year.

The
city-state has had a headstart over China on specialty chemicals, but lags the
Asian giant as a consumer manufacturing hub, and lacks its critical mass.

This
makes it dependent on export markets, and unless it finds new outlets outside
Asia, it may struggle as China becomes increasingly self-reliant.

"While
developed countries still corner nearly 59 percent of the specialty chemicals
market, the growth in the US and Europe is just two to three percent compared
to Asia at 10-15 percent," said Krithika Tyagarajan, research director for
chemicals, material, food practise, Asia Pacific at Frost & Sullivan.

She
added growth will be driven by India, Southeast Asian countries and especially
China, where the economy has been expanding at double digits driven by the
manufacturing sector.

"A
key question in the industry is how fast China will move to satisfying its own
demand in fine and specialty chemicals," said McNally of Booz &
Company in China.

It
took China 12 to 15 years to do that for basic chemicals, such as ethylene and
low-end polymers, but will probably take a little longer for specialties, he
said.

China's
development of its specialty chemicals capabilities means Singapore has a window
of perhaps 15 years before it gets partially shut out of its top export market,
analysts said.

The
Singapore government says chemical companies in the city-state serve not just
China but other growth markets like India and North Asia.

They
remain confident that Singapore's developed supporting infrastructure will
continue to attract companies to set up bases here to serve the Asian market.

"Hence,
notwithstanding future supply expansion plans in China, we are confident that
Singapore will continue to play an important role in serving growing needs in
China," said Liang Ting Wee, director of energy and chemicals at
Singapore's Economic Development Board (EDB).

Singapore's
intellectual property protection, its support for research and development and
corporate tax incentives remain attractive to new investors.

But
analysts argue that Singapore needs to look further ahead and farther afield
into new niche areas of specialties to counter the Chinese threat.

Many
multinational firms are already building or expanding their plants in China to
be nearer their customer base. German firm BASF has near $2.8bn allotted for
Asia investment from 2009-2013, its most important being the expansion of its
joint venture plant with Sinopec in Nanjing, China.

The
$1.4bn facility produces specialty chemicals for the Chinese construction,
electronics, pharmaceutical and automotive markets.

"The
biggest part [of the expansion] will come on-stream at the end of 2011,"
said Albert Heuser, BASF's president for market and development for Asia
Pacific.

BASF,
which owns 124 production sites in Asia including Singapore, has a new Shanghai
site for its automotive spring aids coming up by first half of 2011. Production
at a new dispersions plant in Huizhou is set for first-quarter 2012.

Companies
with links to the two national firms - PetroChina and Sinopec - can easily tap
into China's growing commoditised feedstock capacity.

China's
ethylene production is estimated at 15-16 million tonnes per year (tpy) versus
Singapore's three million tpy, which is growing to four million tpy in 2011 with
the startup of ExxonMobil's new cracker.

"Within
a decade, it is possible to see China's share of the global specialty chemical
industry pie growing to about one third from about 10-20 percent now,"
said Tyagarajan.

The
growth will be driven by domestic demand, although many of the specialty
chemicals will go into high-end consumer products which would be exported.

Strategic
collaborations and alliances is the way forward, said Tyagarajan. "Rather
than seeing the Middle East as a threat, Singapore has to work together so that
both the regions can leverage their advantages," she said.

"Some
of the areas for co-operation could also be in investing in R&D on oilfield
chemical, performance chemicals and water treatment solutions," Tyagarajan
added.

For all the latest business news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.

Subscribe to our Newsletter

Subscribe to Arabian Business' newsletter to receive the latest breaking news and business stories in Dubai,the UAE and the GCC straight to your inbox.