Given environmental pressures and limited scale, the sector sees just two options: move into specialty chemicals or invest overseas.
Despite environmental and other challenges, Taiwan’s chemical sector continues to thrive. In 2018, the industry was forecast to grow by 4.88% – the highest growth rate of any industry in Taiwan – to reach NT$4.68 trillion (US$148.6 billion) in production value. In terms of export sales of chemicals, Taiwan ranks 14th globally, according to the World’s Top Exports website.
The sector boasts a complete supply chain, covering the upstream, midstream and downstream segments, and has a growing presence in key growth markets like Indonesia, India, and the U.S.
Taiwan’s Formosa Plastics Group (FPG) is the world’s sixth-largest chemicals producer, with more than 110,000 employees and sales last year of US$77.5 billion. Formosa and the state-owned CPC Corp. dominate the local petrochemical sector, focusing on the production of raw materials like olefins and aromatics. Most of Formosa’s and CPC’s feedstock, or raw material, comes from their own refineries and naphtha crackers.
Given economic uncertainties stemming from the U.S.-China trade war, it is not surprising that growth in the petrochemicals sector is expected to slow to 1.1% this year. Economists say that Taiwan’s GDP will likely increase by about 2.1% in 2019, down from 2.6% the year before.
While chemical manufacturers can take cyclical economic hiccups in stride, more troubling are the basic constraints on growth that confront the Taiwanese industry. On the one hand, Taiwan’s chemical industry lacks the scale of regional competitors like China, South Korea, Japan, and even Singapore. At the same time, the high environmental sensitivity of the Taiwanese population makes the construction of new plants exceedingly difficult.
Given that scenario, companies can grow only by adopting one of two scenarios. The first is to shift into niche, high-value-added segments, which at least in theory are both less polluting and more profitable than traditional petrochemical production. The second is to explore projects overseas, usually in developing countries with less environmental activism than Taiwan.
“The future doesn’t look bright for the petrochemical industry in Taiwan,” says Sean Hsu, vice president of Jackson International, a subsidiary of the leading petrochemical technology importer, the Tai Fung Group. Citing environmental concerns and reduced competitiveness, he says: “There isn’t going to be new development of commodity chemicals here.” He suggests that chemical companies, to the extent possible, “apply their knowledge” overseas – in China, Southeast Asia, and the United States – develop high-margin specialty products or adapt their products to make them greener.
Industry veterans say that Taiwan’s petrochemicals industry was once among Asia’s most competitive. In 1968, when CPC launched Kaohsiung’s first naphtha cracker with an ethylene capacity of 54,000 metric tons per year, China and South Korea (today the world’s No. 1 and No. 6 chemical producers respectively) were both decades away from being able to export chemicals to global markets. By 1984, Taiwan’s total annual ethylene capacity was 953,000 metric tons, 12th in the world and second in Asia behind Japan.
In 1991, Formosa Plastics established a US$19.1 billion petrochemical complex in Mailiao, a township in northwestern Yunlin County. The complex is colossal, including 61 plants and its own port. It handles both raw materials and finished products, supplying the domestic market and serving as a major petrochemicals export hub.
“It’s as competitive as any petrochemical complex in the world,” says Mike Wong, president of Kraton Formosa Polymers Corp. (FFPC), whose production facilities are in Mailiao, and a co-chair of AmCham Taipei’s Chemical Manufacturers Committee.
The Mailiao complex is unique in Taiwan. “You need enormous scale to be competitive in this industry,” Wong observes. “Mailiao is the only site I know of in Taiwan with that type of scale.”
Kaohsiung, the industry’s traditional base, is home to many old petrochemical facilities in in need of modernization, he says. “Taiwan’s competitors are world-class now,” he notes. “It’s hard to compete with them if your plants were built in the 1960s and 1970s.”
The environment and safety
The reason Taiwan isn’t building new petrochemical facilities is that any industry expansion would face strong public opposition on environmental and safety grounds. A number of recent cases have raised public concerns. In 2015, residents of Yunlin County’s Taisi Township, located eight kilometers away from the Mailiao complex, sued FPG for NT$70 million in damages. Taisi’s residents alleged that the company’s naphtha crackers caused serious health hazards, including cancer. The case remains ongoing.
From mid-2010 to mid-2015, there were 645 reported environmental violations at Mailiao by FPG, resulting in the collection of NT$300 million in fines, the Taipei Times has reported.
Research by Chan Chang-chuan, dean of the College of Public Health at National Taiwan University (NTU), found that residents living within 10 kilometers of the complex (which began operations in 1998) had a cancer incidence rate more than four times higher from 2008 to 2010 than from 1999 to 2001.
A separate NTU study published in 2017 also linked cancer risk in Taisi to the Mailiao cracker complex. Residents of the village were found to have a high concentration of heavy metals in their urine, a possible risk factor for lung and liver cancer.
The effect of emissions from FPG’s Mailiao plants on the surrounding community and even farther afield remains a contentious issue. In April, Citizen of the Earth, a Taiwanese environmental advocacy group, said the Mailiao complex is responsible for the stubbornly high levels of PM2.5 particles in Yunlin County. Pollution from the complex adversely affects the air of Chiayi City and Tainan as well, Citizen of the Earth has alleged.
A report published in April by the Environmental Protection Administration (EPA) found that the counties of Yunlin, Chiayi, and Tainan had Taiwan’s highest PM2.5 concentrations last year, at 25, 24.5, and 23 micrograms per cubic meter respectively. According to the U.S. EPA, daily PM2.5 exposure of 12 micrograms per cubic meter or more is considered unsafe.
FPG’s plants are not the primary cause of high PM2.5 levels in southern Taiwan, according to remarks by a company spokesperson. The spokesperson said that a recent EPA report showed that less than 6% of PM2.5 concentrations in Yunlin, Chiayi, and Tainan were caused by FPG’s naphtha crackers, according to The Taipei Times.
Given the prevalence of combustible substances at petrochemical facilities, maintaining high safety standards is paramount. Unfortunately, Taiwan’s chemical industry has had its share of tragic accidents. The most lethal was a series of gas explosions in Kaohsiung that killed 32 people and injured 321 others in 2014. Investigators concluded that a propane gas leak from a corroded underground pipeline – which had not been inspected for two decades – caused the explosion.
The force of the blasts were so extreme that they sent fireballs down streets and threw vehicles in the air, some of them slamming into nearby apartment buildings.
In 2018, the Kaohsiung District Court sentenced city officials and employees of two companies responsible for the pipeline’s operations to prison sentences of four years or more for their role in the tragic incident. Prosecutors charged both LCY Chemical Corp., which owned the pipeline, and the China General Terminal & Distribution Corp., which was responsible for supplying it with gas, with failing to adequately maintain the facility. Several city officials were also found to be negligent in view of the lack of inspection.
With that in mind, the Kaohsiung District Court ordered LYC and China General to pay NT$240 million in compensation to the victims. While prosecutors did find the Kaohsiung City Government 40% responsible for the incident, the government has not yet been required to pay any damages.
In April this year, a gas explosion triggered by a leak of liquefied petroleum gas rocked FPG’s naphtha cracker complex in Mailiao. Fortunately, no casualties occurred, although one of the plants in the facility caught fire.
“The bang was as loud as an earthquake, destroying windows and walls, and then enveloping everything in smoke,” Yunlin County councillor Lin Wen-ping wrote in a media commentary. Lin described the blast as “the biggest and most frightening of the more than 30 safety incidents at the plant over the past 20 years.”
In response to the incident, the Yunlin County Government ordered FPG to replace dated equipment in the complex. The Yunlin government said it would fine FPG NT$5 million for contravening the Air Pollution Control Act, presumably because of emissions from the conflagration.
Moving up and out
To be sure, serious accidents in Taiwan’s chemicals industry are relatively rare, and the industry has worked hard to improve safety and environmental conditions, observers say.
“You have a responsibility to the community where you’re located,” says KFPC’s Wong. “You need to set high standards – it’s a competitive advantage for companies who are good corporate citizens.”
Charles Liang, chief representative of the Eastman Chemical’s Taiwan branch and the other co-chair of AmCham’s Chemical Manufacturers Committee, urges Taiwanese chemicals firms to accelerate their move up the global value chain. Taiwan should focus on producing specialty chemicals that are more profitable and less harmful to the environment than traditional commodities, he says.
Rather than making up the majority of the material in an end product, specialty chemicals are typically added in small amounts at the end of the production process to ensure a product performs its function properly. For instance, the high-performance synthetic rubber additive HSBC (hydrogenated styrene block copolymer) adds flexibility to key parts of a wide array of everyday consumer products.
As an example, KFPC’s Wong points out the cushioned silicone seals on the interior of a pair of swim goggles. Without the HSBC additive, the seals would be extremely brittle, digging in to the skin around the eyes, he explains.
Taiwanese manufacturers have developed formidable capabilities in rubber and plastic materials, giving them “an irreplaceable position globally,” says Jerry Ou, chairman of CPC. He urges the Taiwanese government to encourage further investment in high-value added chemicals, particularly in the areas of waste elimination and recycling. It would then be possible to achieve greater balance between economic growth and environmental preservation, he says.
Taiwan also has a strong foothold in niche chemicals used in the technology sector, such as those used in masking the circuit boards of semiconductors. The process, called photolithography, protects the area of the wafer where plating is not being done so that paint does not contaminate the baseboard.
“In reality, Taiwan is too small to accommodate many large-scale traditional chemical facilities,” Liang says. “In the past, we were much more focused on GDP growth and didn’t always carefully weigh the environmental impact of our decisions.”
Liang points out that when Kaohsiung began developing its petrochemical sector in the mid-20th century, the facilities were not located near residential areas. But as the city’s population grew, homes have sprung up closer to the plants.
Taiwan could learn from the experience of Singapore, which has based its thriving chemical industry on the uninhabited island of Jurong, Liang says. “If it’s possible to isolate the manufacturing facilities are located away from inhabited areas, then you can manage environmental and safety concerns much more effectively.”
Formed in 2009, Jurong is an amalgamation of seven reclaimed offshore isles. More than 100 chemicals firms, including heavyweights ExxonMobil, Shell, BASF, Mitsui Chemicals, and Sumitomo Chemicals, reportedly have invested more than US$47 billion there.
Companies on Jurong are focused on some of the same types of specialty chemicals as Taiwan, including those used in autos to increase fuel efficiency and in farming to improve agricultural output.
The ever-proactive Singapore government has been the driving force behind Jurong’s development. In the decade since the island was established as a chemicals hub, Singapore has widened its lead over Taiwan as a chemical exporter. “Singapore has a national strategy for chemicals,” says KFPC’s Wong. “They’re successful because the government offers a one-stop shop to businesses. Once companies agree to invest, everything is taken care of for them.”
Given the challenges of expanding capacity in Taiwan, analysts say that many Taiwanese chemicals firms will accelerate global expansion. China, once the market of choice, has become less desirable as growth has slowed. “The lack of transparency in China [making cost assessment difficult] could be justified during boom times, but China has become less attractive now that it’s facing serious overcapacity,” Liang says.
Other major emerging markets offer fresh opportunities, but their business environments can be problematic too. In February, CPC announced it had suspended a joint investment plan in an India petrochemical facility after assessing that the returns would be fairly low by global standards.
CPC does still plan to build a US$6.5 billion naphtha cracker in Indonesia following its signing of an agreement with Indonesian oil and gas giant Pertamina last October.
For its part, Jackson International is sanguine about prospects in the U.S., where the shale gas boom has revitalized the domestic energy sector. “The shale gas revolution has created a lot of previously unforeseen opportunities,” says Hsu. “The direction there is quite positive for the upstream side of the petrochemical industry.”