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Demand in China to lift Formosa Plastics profits

Formosa Plastics Corp (台塑), the world's third-largest maker of polyvinyl chloride, is poised to benefit from "robust" petrochemical demand in China, KGI Securities Co (中信證券) said.

Formosa Plastics, a unit of Taiwan's Formosa Plastics Group, may rise almost 40 percent to NT$119 (US$3.67) a share by the end of next year, KGI said. Formosa Plastics Group, which has a "complete supply chain in petrochemicals," will benefit from reduced earnings volatility and the high chemicals prices forecast for 2008, KGI analysts Angela Hsiang (向子慧) and Fang Wen-yen said in a report on Wednesday.

China, the fastest-growing major economy, can't build plants rapidly enough to keep up with demand and must import more than half of the chemicals it needs. Formosa Plastics Group has units that range from oil refining, naphtha processing through to commodity chemicals production.

"We maintain our view that the petrochemical cycle upturn will last through 2008," Hsiang and Fang said. "Taiwan will be one of the major beneficiaries" of strong Chinese demand for chemicals used in construction and manufacturing including ethylene, PVC, and polystyrene, they said.

Formosa Petrochemical Corp (台塑石化), a Formosa Plastics unit, in May started output at a new 1.2 million tonne a year cracker, which turns naphtha into ethylene, the basic building block of plastics and synthetic fibers. The plant boosted Taiwan's ethylene capacity 42 percent to 4.04 million tonnes.

The refining and petrochemical group, which includes Formosa Plastics and Nanya Plastics Corp (南亞塑膠), has 4 percent of the global ethylene market this year and supplies 9 percent of the world's ethylene glycol, a key ingredient in polyester fiber and water bottles.

China's petrochemical demand will grow faster than the global average, KGI said.

China may consume 12 percent of the world's ethylene by 2010, from 8 percent in 2005. The world's most populous nation may account for 53 percent of global demand for polyester in the next three years, from 43 percent two years ago, the KGI analysts said, citing projections by Taiwan's Industrial Economics and Knowledge Center.

"China's petrochemical demand will remain above global economic growth rate," said Samuel Liew, associate consultant at industry consultant Chemical Market Associates Inc in Singapore. "We expect chemical prices to stay strong in the first half of 2008, before weakening in the second half as new capacities in the Middle East start output."

The ``vertically integrated'' structure guards the refining and petrochemical group against earnings volatility, KGI said.

Having a fully diversified supply chain gives Formosa Plastics advantages over rivals including South Korea's Samsung Total Petrochemicals Co, Indonesia's Chandra Asri PT, and Petrochemical Corp of Singapore, said Chemical Market's Liew.

"Integration with a refinery shields Formosa from exposure to volatile feedstock prices," Liew said by telephone.

Chemical makers like Chandra Asri and PCS are vulnerable to volatile feedstock price movements because they produce chemicals from imported naphtha.

Naphtha prices have surged 56 percent this year and closed at US$880 a tonne yesterday, outpacing the 51 percent gain in crude futures, according to Bloomberg data.
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