Singapore’s aim to rule Asia’s expanding specialty chemicals market will be challenged with China set to boost capacity and reduce imports, leaving the island with limited export options.
Unable to vie head-on with China and the Middle East on commoditised petrochemicals, Singapore is moving up the value chain to snare a sizable portion of the $395 billion global specialty chemicals market.
Specialty chemicals—high-value raw materials used to produce a host of consumer products from high-performance tires to state-of-the-art LCD televisions—is a growing market for petrochemical makers striving for higher profit margins and to differentiate themselves from competitors.
The island nation needs to carve a niche for itself in that segment to stay ahead of China.
“Singapore has no choice but to keep moving into more advanced chemicals with higher margins,” said Chris McNally, a partner with management consultants Booz & Company in China. “It has to run faster just to stand still.”
Singapore’s 10-year masterplan, dubbed Jurong Island Version 2.0, aims to further boost its energy and chemicals industry, valued at S$57 billion ($44.2 billion), which contributed 28 percent of the economy’s manufacturing output last year.
The city-state has had a headstart over China on specialty chemicals, but lags the Asian giant as a consumer manufacturing hub, and lacks its critical mass.
This makes it dependent on export markets, and unless it finds new outlets outside Asia, it may struggle as China becomes increasingly self-reliant.
“While developed countries still corner nearly 59 percent of the specialty chemicals market, the growth in the U.S. and Europe is just 2-3 percent compared to Asia at 10-15 percent,” said Krithika Tyagarajan, research director for chemicals, material, food practise, Asia Pacific at Frost & Sullivan.
She added growth will be driven by India, Southeast Asian countries and especially China, where the economy has been expanding at double digits driven by the manufacturing sector.
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“A key question in the industry is how fast China will move to satisfying its own demand in fine and specialty chemicals,” said McNally of Booz & Company in China.
It took China 12 to 15 years to do that for basic chemicals, such as ethylene and low-end polymers, but will probably take a little longer for specialties, he said.
China’s development of its specialty chemicals capabilities means Singapore has a window of perhaps 15 years before it gets partially shut out of its top export market, analysts said.
The Singapore government says chemical companies in the city-state serve not just China but other growth markets like India and North Asia.
They remain confident that Singapore’s developed supporting infrastructure will continue to attract companies to set up bases here to serve the Asian market.
“Hence, notwithstanding future supply expansion plans in China, we are confident that Singapore will continue to play an important role in serving growing needs in China,” said Liang Ting Wee, director of energy and chemicals at Singapore’s Economic Development Board (EDB).
Singapore’s intellectual property protection, its support for research and development and corporate tax incentives remain attractive to new investors.
But analysts argue that Singapore needs to look further ahead and farther afield into new niche areas of specialties to counter the Chinese threat.
Many multinational firms are already building or expanding their plants in China to be nearer their customer base. German firm BASF has near $2.8 billion allotted for Asia investment from 2009-2013, its most important being the expansion of its joint venture plant with Sinopec in Nanjing, China.
The $1.4 billion BASF-YPC facility produces specialty chemicals for the Chinese construction, electronics, pharmaceutical and automotive markets.
“The biggest part (of the expansion) will come on-stream at the end of 2011,” said Albert Heuser, BAS