Jean-François Tremblay
C&EN Hong Kong

Last month, the Korea Economic Weekly advised its readers that it would interrupt publication for an undetermined period. Financial difficulties afflicting the South Korean business sector had spread to the country's only English-language business weekly. It was another indication that the economic outlook in Asia is becoming as precarious as it was in late 1997, at the beginning of the Asian financial crisis.

Asia quickly rebounded from the crisis of 1997. But now, incomplete economic reforms, high oil prices, and the likely slowdown in the U.S. economy pose a significant risk to the ongoing Asian recovery. Prices remain stable, industrial output is still strong, and employment is mostly rising, but confidence is eroding. Asian stock markets are declining, and consumers in Japan--Asia's largest economy--are still not spending.

The persistent economic health of the U.S. and Europe for the past three years buoyed the region's economies. Europeans and Americans bought Asian goods and invested in the region.

Economic prospects in Asia are still reasonably positive for next year. The Organization for Economic Cooperation & Development (OECD) predicts that gross domestic product (GDP) growth in Asia will remain quite healthy in the coming year, following strong growth this year. However, as is usually the case with forecasts, the OECD forecast makes a number of assumptions. When one changes these assumptions, the picture is not as bright.

OECD predicts that the U.S. economy will grow by 3.5% next year. Slower growth in the U.S., or even a recession as some leading economists envisage, would broadly affect Asian economies. China, for example, exports more than $40 billion worth of goods to the U.S. annually, or more than 4% of its GDP. Both Taiwan and South Korea are large exporters of electronic goods. Should the U.S. sharply reduce its imports, the change would be felt across broad swaths of Asian economic sectors. The global chemical industry, which is a supplier of raw materials to the manufacturers that are exporting to the U.S. and Europe, will be quickly affected by a slowdown in Asian exports.

Currently, Asia is particularly vulnerable to a slowdown in the world economy. The high oil prices of the past few months have already weighed down the region's growth prospects. With the exception of Indonesia and Malaysia, which are oil producers, Asian countries' oil imports represent a larger proportion of their GDP than is the case in North America and Europe.

In a recent commentary, Andrew Spiers, a London-based consultant at the international market research firm Chem Systems , said that high oil prices could halt Asia's economic recovery. Already, he noted, petrochemical companies are cutting production in Asia. Japan's JSR Corp, which is a major producer of synthetic rubber, revised its earnings forecast downward because of high naphtha prices. Mitsubishi Chemical made a similar announcement, and other Japanese chemical companies have expressed concern about high raw material prices.

Other than oil prices, Asia is on weak footing for several other reasons. Banks are still a problem in Japan. Although the economy is set to grow nearly 2% this year, the cost of cleaning up its banking system, which is saddled with bad debts, is equivalent to 12 to 15% of the country's GDP, according to the Washington, D.C.-based Institute for International Economics.

The fragility of the Japanese banks' financial position has slowed down economic recovery for nearly a decade. Public funds, likely involving a tax increase, would help to accelerate the financial sector cleanup. But the uncertainty concerning the leadership of the country is preventing the adoption of radical measures. Moreover, the government has little ability to direct taxpayers' money into the banking system because it is grappling with a large budget deficit. In 1999, according to French bank BNP Paribas , Japanese government bonds represented 90% of total government borrowings by the 18 leading world economies.

An economic downturn would make more difficult the generally slow restructuring process many of Japan's chemical companies have embarked on. One such company, Tokyo-headquartered Showa Denko , for example, has embarked on the three-year "Cheetah project," which aims to "renovate operations to pave the way for future growth." The plan envisages scaling down Showa Denko's business activities "while maintaining investments in high growth potential areas," the firm says. Showa Denko's net profit margin, however, has hovered between zero and 2% for the past five years. A deterioration in the economy could make orderly implementation of the restructuring plan more problematic.

Despite its robust growth, China's economy is also fragile. In a November report on the restructuring of China's state-owned enterprises, OECD states: "Economic developments over the past several years suggest that China's reform process has reached a critical juncture. Economic growth has declined steadily since 1992. The slowdown has highlighted worsening structural problems, including growing losses by state-owned enterprises and extensive nonperforming loans in the commercial banking system, that are comparable in some respects to those experienced by several Asian countries that underwent crises in 1997."

The success of urgent reforms now under way depends, OECD says, on the persistence of a "virtuous circle" made up of three main factors: Chinese companies must remain profitable in the short term; there must be "improvements in enterprise operational efficiency over a longer period"; and the Chinese economy must continue to perform well. If these elements are not in place, OECD says, the virtuous circle could easily be replaced by a vicious circle. A deteriorating world economy could do just that. Both China's economic performance and the profitability of its enterprises are linked to some extent to the stability of the world economy and to continued demand for Chinese goods.

Strains are also evident in South Korea, Asia's third largest economy after Japan and China. The Seoul stock market has lost nearly 50% of its value in dollar terms since the beginning of the year. Added to uncertainty about the global economy, South Korea has failed to implement many of the reforms it was apparently going to embark on in late 1997. Its politicians have failed to pass a $35 billion bill to recapitalize the country's banks. Business groups, known as chaebols, are still heavily indebted. For example, Hyundai Engineering & Construction is nearing insolvency. The business environment having turned unattractive has caused foreign firms that had shown interest in investing in South Korea to now turn back. A plan by Ford Motor Co., for instance, to invest in Daewoo Motor fell apart in October. The lack of foreign investor interest is adding to the country's woes.

Taiwan is also under a cloud. Its stock market is now down to levels last seen four years ago. Much of the poor performance is due to political instability. For instance, Taiwan's premier, Tang Fei, resigned in October following the government's announcement that it would stop construction of a nuclear power plant. But there are other issues. The 50% drop since 1995 in property values, which are used as collateral for bank loans, is threatening to cause a financial crisis on the island. Meanwhile, Taiwan's economy is dependent on exports of electronic products and semiconductors. World demand for personal computers and mobile phones has slackened in recent months.

As economic prospects deteriorate, the Asian chemical industry is showing early signs of a slowdown. Growth in output of chemicals in South Korea has not been as strong as in previous years. After last year's rebound, Japanese production of chemicals is showing a mixed picture. Declines in production nearly equaled increases in the Japanese chemicals that C&EN follows on a regular basis.

The chemical industry of Singapore, which is geared toward exports to the Asian region and is therefore a bellwether, is running out of steam. Output of chemicals and oil products in the first 10 months of this year was 2.3% lower than in the same period last year. It was, however, not a completely negative picture. The Singaporan drug industry was down almost 9%, but production of specialty chemicals was up 23% in the first 10 months of the year, according to the Singapore Economic Development Board .

The coming year could be quite hard on the petrochemical industry. C&EN's predictions of this year's total petrochemical output in South Korea and Japan are most likely overoptimistic, as they do not take into account reported production cutbacks at ethylene production centers in those two countries that have occurred since November. The cutbacks were the result of lack of demand.

The slowdown in the growth of regional demand would prevent producers from fully passing on to buyers the increase in the cost of raw materials such as naphtha. An economic slowdown in China, the region's main importer, would be particularly devastating. China imports about a quarter of the polyolefins that are traded worldwide.

Further adding to the industry's woes is an expected increase in the supply of petrochemicals. In Singapore, ExxonMobil is in the start-up phase of its new petrochemical complex built around an ethylene cracker with an annual capacity of 800,000 metric tons. Saudi Yanbu Petrochemical, a joint venture between Sabic and ExxonMobil, is also starting a petrochemical complex in Saudi Arabia, and it features a cracker of the same size as the one at the Singapore facility. And after much delay, Taiwan's Formosa Plastics is also coming on-line with its second cracker at Mailiao, a facility with an annual production capacity of 900,000 metric tons.

As the overall outlook deteriorates, there are a few bright spots in the prospects for the region's chemical industry. A new page was turned in the restructuring of Japan's chemical industry with the announced merger last month of Mitsui Chemicals and Sumitomo Chemical , which will form what now would rank as the world's fifth largest chemical firm. The move will add pressure on other Japanese producers to take more dramatic steps to improve their business prospects.

Despite the prevalent gloom afflicting the electronics industry, signs of dynamism continue to be evident in this sector in Japan as companies continue to launch products, such as the Sony PlayStation 2, that are appealing to customers worldwide. In its latest half-year results announcement on Nov. 17, Sumitomo Chemical partly credited strong sales of functional films used in the manufacturing of liquid-crystal displays (LCDs) for a 55% increase in consolidated net income compared with the previous year. Sharp Corp., which is the world's leading producer of LCDs, reported a marked increase in sales of electronic components in the first half of this fiscal year. Sumitomo predicts that its profits will be higher than last year in the fiscal year ending March 30, 2001. Sales of electronic materials constitute a small but growing share of Sumitomo's sales.

In China, China Petroleum & Chemical Corp. (Sinopec) and Petrochina were both able to raise billions of dollars by launching their much-delayed international public stock offering ahead of the downturn in regional stock markets. The cash injection will help move along the daunting challenge of restructuring China's largest oil and petrochemical conglomerates. Outside the petrochemical industry, demand for cheaper medicines in North America and Europe augurs well for China's increasingly proficient producers of pharmaceutical ingredients.

Taiwan is improving its regional competitive prospects as facilities at Formosa Plastics' integrated complex at Mailiao continue to come on-line. Built at a cost exceeding $10 billion, the giant production base comprises world-scale basic chemical and power plants, an oil refinery, and a harbor.

India is also enhancing its competitive positioning. The exports of its pharmaceutical ingredients are growing rapidly. Companies such as Ranbaxy, Dr. Reddy, and Aurobindo keep on increasing sales, profits, quality of output, and market recognition. To some extent because it is protected by India's import tariffs, petrochemical producer Reliance Industries continues to be highly profitable as its operations keep growing.

But these few bright spots are not enough to affect the general picture, which is one of fragility in Asia's economic environment. In recent years, the region's stock markets have proven themselves remarkably good predictors of upcoming changes in the regional environment. For instance, the markets rebounded in late 1998 a few months before Asian economies turned around. Over the past few months, the markets have not plunged but have followed a downward trend overall. The coming year could be an eventful one in the region.

a C&EN estimates. b Agricultural and nonagricultural use. c Millions of cubic meters. d Data for 1997 and following years include petroleum- and nonpetroleum-derived product. Source: Japan Ministry of International Trade & Industry

Taiwan's production increase in basic chemicals leads all sectors

a C&EN estimates. Source: Taiwan Ministry of Economic Affairs

a C&EN estimates. Source: Korea National Statistical Office

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