Plastics burn rubber
Plastics makers edged higher over the last 10 trading sessions on higher product prices and anticipation of strong demand from China in the coming year.
Formosa Plastics, Asia's largest PVC maker, climbed 10.9 percent from NT$59.50 to close Friday at NT$66; sister company Formosa Chemical and Fiber rose 10.1 percent from NT$38.40 to close at NT$42.30; and Nan Ya Plastic jumped 15.8 percent higher from NT$63 to finish at NT$73.
Some industry analysts say plastics shares have room to climb even higher, as the cyclical industry is in the early stages of an upturn that began last year.
"We expect the next peak in 2001," said Jackie Chen, an equities analyst who covers the petrochemicals industry for National Securities Corp. "And we expect share prices [of plastic makers] will reflect that before then."
Chen said the plastics industry peaks about every five to seven years. While products such as PVC fetched roughly US$400 per ton in 1998 -- a level at which few companies can realize a profit -- prices began to rebound in 1999 and today PVC commands about US$700 per ton.
One positive factor for Taiwan manufacturers is growing demand from China. The world's most populous market imported 719,000 tons of PVC in the first half of 1999, a 30.2 percent increase compared to the same period a year earlier. Demand is expected to grow again this year, according to National Securities, as new home construction in China means greater need for PVC pipes.
Another positive factor is less competition from South Korea and Japan. Industry analysts say plastics makers in both countries have reduced production capacity.
Because Formosa Plastics is Asia's largest PVC maker, the company is expected to be the biggest winner in the plastics industry's upturn. In addition, Formosa's Sixth Naphtha Cracker project will boost the company's production capacity this year. Chen forecasts Formosa Plastics -- which was the second most popular company among foreign stock buyers on Friday -- could reach NT$80 per share this year, or 21.2 percent higher than the company's closing price of NT$66 on Friday.
She also sees Formosa Chemical and Fiber as undervalued and projects the firm's shares could eventually trade as high as NT$60 per share -- or 41.8 percent higher than Friday's close.
But there are some potential pitfalls, primarily China's protectionist policies. China may attempt to restrict imports through high tariffs or other trade barriers.
On the other hand, China may be forced to allow PVC and other plastics products in, as demand in that country is greater than what can be produced domestically.
"They will have to import," said one industry analyst, who was unable to be identified for this report because his company's policy forbidding it. The analyst said Formosa Plastics may reach NT$78 per share.
Another beneficiary of the anticipated upturn in the plastics industry, the analyst said, is Nan Ya Plastic, which he sees reaching NT$88 per share.
But in addition to being a plastics play, Nan Ya is also an electronics play. According to National Securities, Nan Ya's printed circuit board business is picking up and will run at full capacity this month and next. Also, the company's DRAM manufacturing unit, like most Taiwanese DRAM makers, is benefitting from healthy chip prices.
RSS