An Uncertain Future for Taiwan’s Petrochemicals

Despite local opposition from environmentalists, the industry continues to thrive based on low oil prices and expansion abroad.

Cancellation of the Kuokuang petrochemical complex project in 2011 was a watershed in Taiwan’s industrial and environmental history. Touted as the largest investment in petrochemicals in decades – the estimated cost was over NT$600 billion (around US$20 billion) – the facility would have included an upstream 300,000-barrel-a-day refinery and naphtha cracker capable of producing 1.2-million metric tons of feedstock for as many as 25 midstream and downstream petrochemical plants.

Ministry of Economic Affairs (MOEA) estimates at the time said the project would create hundreds of thousands of new jobs, attract hundreds of billions of New Taiwan dollars in additional future investments, and generate NT$460 billion (around US$15.3 billion) in annual revenues. Yet the project was the subject of intense protests by environmental groups, and the Environmental Impact Assessment (EIA) for the project became mired in controversy and delay. Ultimately, the administration of then-president Ma Ying-jeou succumbed to public pressure and rejected it.

Since then, Taiwan has not significantly added to its petrochemical manufacturing capacity, which continues primarily to produce commodity chemicals, mainly plastics resins such as polyvinyl chloride (PVC) and polypropylene (PP). With the closure of the state-owned CPC Taiwan Corporation’s Fifth Naphtha cracker in Kaohsiung in 2016 – likewise due to environmental concerns and public protests at the time of its construction in 1991 leading to promises that the complex would be closed after 25 years of operation – Taiwan’s supply of raw materials for its petrochemicals industry has tightened.

In 2015, according to the 2016 annual report of the Petrochemical Industry Association of Taiwan (PIAT), Taiwan’s six operational naphtha crackers produced a peak of 4.228 million metric tons (mt) of ethylene, the basic feedstock for the petrochemical industry. The shuttering of the Fifth Naphtha Cracker has reduced this capacity by 500,000 metric tons annually (mta), and a more recent report by global business analytics firm Business Monitor International (BMI) noted that Taiwan’s petrochemical industry witnessed a 1.1% contraction in the first nine months of 2016. The report added that “Taiwan is likely to become a net importer of ethylene over the medium term.”

Taiwan’s midstream petrochemical makers rely on supplies of cheap ethylene and propylene, both produced by cracking naphtha, a derivative of crude oil. Constrained supplies of feedstock choke off growth in midstream markets, deterring investment.

“It would be almost impossible to build another large-scale naphtha cracker in Taiwan because of the environmental awareness in Taiwan,” notes Liu Chih-chung, chief of the petrochemicals and derivatives department at the Industrial Economics & Knowledge Center (IEK), part of the Industrial Technology Research Institute (ITRI). As a result, downstream companies increasingly need to rely on imports to meet their demand for ethylene and propylene.

“It is not expected that the petrochemical industry in Taiwan will have a sustainable growth due to the strong environmental protection influences, resulting in the difficulties building new plants,” adds Leo Loh, special assistant to LCY Chemical Corp.’s CEO, Lee Bo-wei, and acting secretary general for the Taiwan Chemical Industry Association. “It will be lucky if Taiwan can maintain its current level of petrochemical capacity.”

Once touted as among the foundations of the nation’s economy, Taiwan’s petrochemicals industry is criticized by environmentalists and community activists for issues related to hazardous waste, high energy consumption, and high emissions, and it continues to be the focus of intense and sometime violent protests. Many question why Taiwan should be in the petrochemical industry at all, as the island has virtually no domestic oil production and is totally reliant on imported crude oil as the industry’s raw material.

Nevertheless, Taiwan is one of the world’s largest producers of petrochemicals, with a fully developed value chain that extends from the upstream of naphtha cracking to the downstream of finished plastics and textile products. With total 2016 revenues of around NT$1.8 trillion (about US$60 billion) according to ITRI, petrochemicals account for some 30% of the total value of Taiwan’s manufacturing sector.

Further, while total revenues in the industry recently have been down slightly, net profits and profit margins have been rising, particularly in the upstream sector. Oversupply in global crude oil markets is keeping prices in the range of US$55 per barrel (bbl). As crude oil comprises some 70-80% of the costs of upstream petrochemicals manufacturers, operating costs have plunged since oil’s June 2014 high of US$112/bbl. Product prices have also fallen, but less than raw material costs. Consequently, gross revenues have declined but profit margins are up and upstream suppliers have seen profits surge in recent months.

Two leading players

Two firms dominate the upstream of distilling naphtha from crude oil: state-run CPC and the Formosa Plastics Group (FPG) through its publicly traded subsidiary, Formosa Petrochemical Co. (FPCC). Naphtha is processed in naphtha crackers, which break naphtha’s long chains of hydrogen into substances with smaller hydrogen chains, particularly ethylene. Ethylene is the most widely produced petrochemical in the world and the basic material for polyethylene, which is used to produce a wide range of plastics, solvents, cosmetics, and many other products.

Construction underway in 2011 of the CPC’s new Third Naphtha Cracker, which replaced the original one the following year. Photo: CNA

CPC has two operating naphtha crackers, both located in the Linyuan district of Kaohsiung: the new Third Naphtha Cracker, which replaced the old one in 2012 and has an output of 720,000 mta, and the Fourth Naphtha Cracker, with 350,000 mta. These two plants supply most of Taiwan’s midstream petrochemical producers, who in turn serve downstream plastics and textiles industries. FPG’s Sixth Naphtha Cracker, located at its massive Mailiao petrochemical complex in Yunlin County, has 2.93 million mta capacity, but primarily supplies FPG’s own mid- and downstream plants.

“Profits are very high,” says FPCC Chairman Chen Bao-lang, noting that FPCC contributes around a third of the revenue for the entire FPG conglomerate.

Local financial firm Sinopac Securities Investment Service noted in a report on FPG that combined sales last year for all FPG-owned companies in Taiwan (including textiles, plastics, technology, and others) totaled NT$1.32 trillion (US$43.55 billion), an 8.9% decline in annual comparisons, while at the same time combined net profits rose 46% to NT$207.7 billion (US$6.85 billion). “Although oil prices on average were lower in 2016 than in 2015, product spreads were higher. Therefore, the company enjoyed robust earnings growth despite the drop in sales,” Sinopac noted. The report added that “we see a positive petrochemical industry outlook in 2017 on the view that rising oil prices will underpin product prices at high levels.”

CPC’s 2015’s financials, detailed in the company’s 2016 annual report, similarly show revenues declining but margins rising. The company had total sales of NT$843.6 billion (US$27.8 billion)) in 2015, mostly from gasoline and other fuels, with another NT$92.9 billion (US$3 billion) from petrochemicals. The total revenue was down significantly from 2014’s NT$1.19 trillion (US$36.9 billion).

Although the company continued to operate at a loss, the deficit diminished from NT$33.75 million (US$1.1 million) in 2014 to only NT$1.4 million (US$46,526) in 2015, a significant recovery, and 2016’s numbers are expected to be even better.

Further, as substantial proportions of the main petrochemicals produced in Taiwan – especially ethylene and propylene – are used domestically to make intermediate materials, the export value of Taiwan’s petrochemicals is not an accurate measure of the value of the industry. These feedstocks support an entire value chain of midstream chemical producers, which in turn supply Taiwan’s plastics, rubber, and textile industries. In total, from upstream to downstream, the petrochemical-related value stream exported a hefty US$47 billion worth of product in 2016, amounting to 16.7% of Taiwan’s total exports.

Then-President Lee Teng-hui tours the Formosa Plastics Group’s Mailiao petrochemical complex in 1999, accompanied by FPG chairman and founder Wang Yung-ching. Photo: CNA

While that number is a far cry from the electronics industry’s 47.5% of total exports, the chemical industry is also a vital partner to the electronics sector and many other Taiwan industries, supplying specialty chemicals that are essential for the manufacture of everything from semiconductors to paints and automobiles.

Historical origins

Taiwan’s chemical industry can trace its origins as far back as Qing-era dye-making, textiles, and brewing, while Japan’s construction of an oil refinery in Kaohsiung during World War II to supply the Japanese Imperial Navy set the foundations for a petroleum industry. The country launched itself into the plastics and synthetic fiber industries in 1957 when Formosa Plastics Corp. first began manufacturing PVC with the benefit of a loan from the U.S. Economic Aid program and China Man-Made Fiber started production of rayon.

During Taiwan’s early development, a number of small-family owned companies bought plastics manufacturing equipment such as extruders, and with the use of imported plastics materials began manufacturing finished plastic goods. In an example of reverse integration, the government then decided to get into the upstream manufacture of the raw materials for the industry with the construction of the First Naphtha Cracker in 1968, followed by the Second Naphtha Cracker in 1975. Three more followed over the next decade – two by state-owned CPC and one by FPG. By 1984, Taiwan was the world’s 12th largest manufacturer of ethylene and the top maker of PVC and acrylonitrile butadiene styrene (ABS), used in synthetic rubbers.

As Taiwan’s industries expanded, domestic demand for fuel, lubricants, plastics, and chemical fibers increased, and the petrochemical supply chain grew accordingly. The industry saw major expansion with the development of FPG’s US$19.1 billion Mailiao petrochemical complex, developed in four phases beginning in the 1990s and into the 2000s. Covering more than 2,000 hectares and complete with a port, oil refinery, naphtha cracker, and 61 mid- and downstream plants, Mailiao is Taiwan’s largest petrochemical complex.

A group from neighboring Changhua County protesting at the FPG complex in Mailiao that emissions from the facility were polluting their air. Photo: CNA

Taiwan is now home to more than 200 petrochemical companies, most of them highly specialized in a small range of products. Kaohsiung Monomer Co., on its posting in PIAT’s 2016 annual report, lists 105,000 mta of a single product, methyl methacrylate (MMA), used for specialty plastics. China-American Petrochemical Co. (CAPCO), a joint venture of BP and CPC, has capacity of 700,000 mta of purified terephthalic acid (PTA), a raw material for high-performance multi-purpose plastics. Many other companies listed in PIAT’s annual report make more than a single product, but still primarily produce just one or two key items.

Large-scale manufacturing of a narrow range of product allows companies to wring cost savings throughout the manufacturing process, with engineering efficiencies as always a major Taiwan advantage. Highly automated, the petrochemical industry is not a major source of employment compared to electronics, for example, though workers are highly trained and well-compensated. PIAT notes that petrochemical workers on average have spent nearly 20 years in the industry, and that the industry is the first choice for graduates of Taiwan universities’ high-quality chemistry programs.

PIAT Secretary-general Christina L.C. Ho notes that quite often the factory equipment has already been depreciated, further lowering costs.

IEK’s Liu cites Taiwan’s proximity to China as a key advantage. When cross-Strait trade began in the 1990s, China’s petrochemical industry was underdeveloped, “so Taiwanese manufacturers had the opportunity to penetrate China’s market and seize market share,” he says.

Liu observes that production stability and the high yield rate are two more advantages enjoyed by Taiwan’s petrochemical industry. “Because Taiwan’s petrochemical industry has many years of experience, our yield rate and stability are better than many other places, so our companies have stable profits,” he says.

The highly efficient production of commodity high-tech products is something Taiwan does well, but the model entails significant risk. Low product differentiation allows customers to easily seek out new cheaper sources, and with Taiwan’s industries generally losing their technological differential in the face of the increasing sophistication of Chinese industry, China’s massive scale can easily drown them.

The main competition for Taiwan’s petrochemical industry currently are new entrants from China, says Liu. “In the past their product quality wasn’t as good as Taiwan’s and their stability and yields lower, but in recent years they have improved,” he notes. “They have the advantage of big scale and are quickly expanding.”

This risk is clearly seen in the decline of Taiwan’s PTA manufacturing. In 2010, PTA was the Taiwan industry’s biggest product; 5.16 million mt were produced, more than the total production of ethylene, with China as the biggest market. Yet by 2015, PTA output had dropped to only 2.59 million mt. As PTA is an intermediate product with little differentiation and is relatively easy to manufacture, Chinese firms were able to ramp up, aided by state backing and ready access to deep-pocketed banks and investors. Chinese PTA production capacity ballooned and Taiwan couldn’t compete. CAPCO alone has closed three entire PTA production lines, according to IEK.

Investment overseas

With expansion in the industry largely out of the question, Taiwanese petrochemical players are looking for investment opportunities abroad in places with reliable feedstock supplies, such as the United States. But development opportunities for U.S. shale gas ethane crackers favor U.S. companies, and of the seven ethane crackers in planning or under construction in the United States, all but one are being developed by American firms, including Dow Chemical, Exxon-Mobil Chemical, and Chevron Phillips Chemical. The lone exception is Formosa Plastics Corp. (FPC), the founding company around which the sprawling FPG conglomerate was built.

FPC has operated petrochemical plants in the United States since 1978, with the main operation in Point Comfort, Texas and other plants in Delaware and Louisiana. “We have been in the United States for so long that we are treated as a local company,” says Chen of FPCC.

FPC is seeking permission from state and national leaders to develop a US$9.7 billion facility in Louisiana, based on the United States’ supply of shale gas and with ready access to pipelines and ports. Also, industry insiders say environmental regulation is considered more straightforward and less politicized in the United States than in Taiwan, adding to the attraction.

While environmental regulations and public opposition hold back expansion of the industry domestically, Taiwan’s lack of Free Trade Agreements (FTAs), especially with China, is also putting the industry at a disadvantage. Taiwanese petrochemicals generally face at least a 5.4% import duty when entering China, whereas rival South Korea signed an FTA with China in 2015 that will gradually lower tariffs on Korean petrochemicals coming into China. ASEAN signed its own FTA with China in 2010, and its petrochemicals industry is growing.

To balance feedstock supply and market access, Taiwanese firms have invested in various projects in ASEAN member countries, especially Thailand, Malaysia, and increasingly Vietnam, due in part to feedstock availability and duty-free access to the vast China market for plastics and textile resins. More often, they have invested in Chinese factories to gain access to China’s own supplies of feedstocks and avoid import duties.

FPG, for one, has long been in the China market, with plants in Ningbo and more recently a US$13 billion complex, including refinery and naphtha cracker, in Gulei in Fujian Province. Oriental Union Chemical Corp., a subsidiary of Taiwan’s Far Eastern Group, launched a manufacturing base in Yangzhou, China in 2008, while LCY Chemical Corp., headquartered in Taipei, has two plants in China, along with five in Taiwan, one in the United States, and one in Qatar.

This trend of outward investment looks set to continue, as all industry sources concurred that major new investments in Taiwan’s petrochemical sector are highly unlikely. To continue to promote the industry, government and business are pushing investments in R&D for higher-value “green” specialty chemicals aimed at the electronics, optics, and renewable energy industries.