Petronas Chemicals Group Endures Rough Market in Third-Quarter 2012, Sees Shaky Demand Growth Ahead

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Researched by Industrial Info Resources (Sugar Land, Texas)--Petronas Chemicals Group Berhad (PCG) (Kuala Lumpur, Malaysia), one of the largest integrated chemicals producers in Southeast Asia and the largest in Malaysia, dealt with turbulent market conditions in the third quarter of 2012. Higher feedstock prices and lower product prices combined to reduce operating profits, while limited feedstock and increased plant maintenance negatively affected production. Profit for the quarter was reported to be about $243.13 million, a 38.32% decrease from third-quarter 2011.

Total revenue for the quarter stood at $1.29 billion, a 15.16% decrease from the same period last year. Among the most damaging factors for PCG were global economic worries and slowing growth in China, which negatively affected demand in the Olefins & Derivatives segment. Maintenance activities also slowed progress, including the precautionary shutdown of jetty facilities in Labuan, Malaysia, after a fire-related incident on one of the vessels.

Despite these setbacks, the Olefins & Derivatives segment led a companywide improvement in operational performance. Sustained agricultural demand also kept the fertilizer market in a relatively strong position.

Industrial Info is tracking more than $39.8 billion in active projects involving PCG in Malaysia and Indonesia, including the $1 billion construction of a grassroot liquefied natural gas (LNG) regasification terminal in Sungai Udang, Melaka, Malaysia. The terminal is expected to have a storage capacity of 260,000 cubic meters, and the project involves installing equipment to regasify 3.8 million metric tons per year of LNG, including an island jetty; a 3-kilometer subsea-to-onshore pipeline; and two floating storage units with capacities of 130,000 cubic meters each.

"In terms of market conditions, quarter three saw poorer conditions and softening demand," said Dr. Abd Hapiz Abdullah, the president and chief executive officer of PCG, in a conference call. "Global manufacturing activity declined due to low export orders. The pessimism on global economic conditions continues. Our market spreads remain low--despite higher naphtha prices in Asia, quarterly prices fell due to weak demand."

Both of the company's major segments reported sharp declines in revenues and earnings before interest, income taxes, depreciation and amortization (EBITDA):

• The Olefins & Derivatives segment reported $955.71 million in revenues, a 16.1% decrease from third-quarter 2011, and $294.87 million in EBITDA, a 31.19% decrease.
• The Fertilizers & Methanol segment reported $349.92 million in revenues, an 11.95% decrease from the same period last year, and $118.28 million in EBITDA, a 40.43% decrease.

Abdullah says that he sees a mixed outlook for both segments in the final quarter of 2012. An executive from the Olefins & Derivatives segment said in the conference call that ethylene operating rates are expected to be reduced as the year winds down, while polymers demand will remain "lackluster" and chemical derivatives will continue to see a low level of purchases until the global economy sees more solid improvement.

An executive from the Fertilizers & Methanol segment said that urea prices will continue to decline for the remainder of the year as supply increases, particularly from China, and will likely stay low in 2013 as additional capacity in Algeria and Abu Dhabi comes online. However, demand in the U.S. and Thailand is expected to pick up in early 2013. Methanol demand is not expected to see any great improvements next year, but the outlook for ammonia is mostly positive due to low supplies in the Middle East, although high prices could lead to a decline in demand.

Late last month, PCG announced that it soon would discontinue its vinyl business, stating in a press release that the business "has not been able to capture the full value and synergies of [PCG's] integrated business model, whereby the product of one plant is used as feedstock in another, thus maximizing margins along the value chain." The company also cited the steep annual costs related to the vinyl chloride monomer facilities, as well as the potential to divert ethylene used in the business toward the production of more profitable products. The vinyl business consists of two plants in Malaysia and a third in Vietnam.

"The plants in Malaysia will continue to operate until the end of year, after which it will be decommissioned," Abdullah said in the conference call. "We will also initiate a divestment process for the sale of our stake in the plant in Vietnam."

For more information, visit Industrial Info's Global Chemical Processing Project Database.

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