Large-scale projects and big names in the chemical industry used to command the terms of capital market access by the virtue of their ability to service debts, but the whole market landscape has changed as the industry faces a bumpy future, said two corporate and infrastructure credit analysts at ratings agency Standard and Poor s (S&P).
The market is not receptive at this time to fund very large projects. [This is] common to most industries, said S&P s senior analyst Andrew Wong.
For instance, Singapore-based Jurong Aromatics Corp has admitted to facing challenges in raising funds although it said it remains on track to start constructing its $2bn aromatics plant in Jurong Island.
Regardless of the names, I would find it surprising if they get long-term financing for the industry, said Wong.
Compared to previous downcycles in the industry [when] some big names were still be able to get financing, at this time, both the financial tension and dynamics don t favour much even this kind of exemption lending, said Manuel Guerena, another senior analyst at S&P.
If there are exemptions, we ll be talking about very small numbers and really isolated cases, Guerena said.
Even regular financing for working capital purposes would be difficult to come by as finance companies were much too worried the global financial turbulence would continue to erode their balance sheets, analysts said.
Under current circumstances, petrochemical companies would have to scale back their projects and only proceed with major expansion plans if engineering and mechanics make sense, Guerena said.
For companies accessing the banks as a necessity, assuming they can get credit, the cost would be a lot higher and the lending covenant a lot tighter, which would restrict the companies financial flexibility, said S&P s Wong.
Multilateral institution International Finance Corp. is prepared to take up some slack in funding industry projects as most lending windows have virtually shut. IFC, which is the private sector lending arm of the World Bank, can provide money insofar as the projects are not government-led as per its mandate.
In times like these when capital has become scarce, we have a very strong role. We have a counter-cyclical role in terms of when other commercial banks are not lending. IFC think it is part of its role to be present in those markets, said Marcene Broadwater, US-based chemicals sector manager at IFC.
Not wishing to undercut the private sector, Broadwater said IFC would loan on market conditions but with more flexibility in terms of maturity, grace period allowed for payments and could even consider buying equity into a company.
IFC would usually be open to finance 25-50% of project cost.
As of end-June 2008, IFC has a total exposure of $76.75mn in petrochemical projects in East Asia and Middle East region, including Chengdu Chemical and Darong in China and Tuntex in Thailand. Syrian-based Daaboul got a $13.20m funding for a project while $50m went to vinyls maker Engro Asahi for a project in Pakistan.
Additional capacities coming on stream in China and the Middle East at a time of economic weakness may also pose problems.
There is now demand side risk given everything that has happened. If capacity growth outpaces demand growth in the next two to three years, certainly the potential of a severe (industry) downturn is there, said S&P s Wong.
Petrochemical product prices have fallen to multi-year lows in recent months, forcing companies to think twice about making further investments, analysts said.
We can expect some trouble with plants coming up now because there is no firm demand, said a petrochemical consultant who declined to be named.
The current petrochemical producers would also consider shutting down the plant due to squeezed margins and even losses, said Xu Chao, a Shanghai-based analyst at Dalu Futures.
