By Lim Shie-Lynn

Petrochemical manufacturers around the world have been raising the red flag in recent weeks as a full-fledged global economic downturn sees players filing for bankruptcy protection and their production plants grinding to a halt on falling demand.

US-listed LyondellBasell filed for Chapter 11 bankruptcy protection last Monday while Germany-based BASF SE, the largest chemical company in the world, temporarily shut down some 80 plants worldwide in November last year to curb overproduction

The German firm estimated that around 20,000 of its employees around the world would be affected by the production cuts. Meanwhile, a New York judge gave LyondellBasell approval last Thursday to borrow more than US$2 billion to restructure debt after the chemical company filed for bankruptcy protection.

Closer to home, BASF Petronas Chemicals — a joint-venture company between BASF and state oil firm Petroliam Nasional Bhd — has also been affected, with six plants in Kuantan being closed down temporarily.

Titan Chemicals Corp Bhd, which is Southeast Asia's largest producer of petrochemicals, made a huge inventory writedown of some RM125 million in the third quarter of its fiscal year 2008. As a result of the large provision, coupled with a 11% contraction in its sales volume, its gross margin has shrunk to 2.2% in 3Q2008, although its average product pricing has improved 10% quarter-on-quarter, the company said in its latest financial report.

With chemical giants LyondellBasell and BASF hit by waning sales, will the outlook be just as bearish for the Malaysian player which exports more than half its production to the region? "With manufacturing facilities in China and other parts of the world shutting down, there is hardly any demand for plastics and polymers…quite a bleak picture for Titan Chemicals," says an analyst with a foreign research firm.

Although the price of naphtha, the main feedstock used by petrochemical players, has fallen significantly after rising to a peak of US$135 per tonne, weaker demand is "a bigger worry for Titan Chemicals and other petrochemicals players", the analyst says.

Demand for naphtha was lacklustre towards the end of last year due to falling demand from global petrochemicals users.

"To add to the slew of negative news surrounding petrochemical players, the decision byautomakers to shut down their plants will have a huge impact," says an analyst with a local research firm, citing carmaker Toyota's 11-day factory shutdown in Japan.

"Carmakers make up the biggest buyers of petrochemical products, so you can imagine these are worrying times for Titan Chemicals and the other players," the analyst adds. Titan Chemicals officials declined to comment when contacted.

For its fiscal year 2007, Titan Chemicals generated revenue of RM6.1 billion. In its 3Q2008 financial results, the company reported a revenue of RM2.04 billion, a 31.5% increase from a year earlier. Net profit however fell 88% to RM9.7 million from RM82.1 million. Its operating profit dropped 60% to RM49.6 million from RM124.2 million previously. Cash on hand amounted to RM86 million.

According to Titan Chemicals' website, the company currently has an annual capacity of 2.6 million tonnes of olefins, polyoefins and other associated products. It is also the largest integrated olefin-polyolefin producer in Malaysia and one of the largest polyolefin producers in Southeast Asia.

Polyoefins are used in a range of consumer and industrial applications, including packaging film, trash bags, automotive parts, plastic bottles and caps and compounds for wire and cable insulation. Titan Chemicals, which began operations with a single polypropylene production facility in 1991, has a petrochemical complex comprising two steam crackers at Pasir Gudang and polyethylene facilities at a second site in Malaysia and in Indonesia.

It is the market leader in the country, offering a range of polyethylene and polypropylene products and commanding a 38% share of polyolefins sales volume in 2007, according to its website. In its Indonesian venture, its subsidiary has a 30% share of the combined linear low density polyethylene and high density polyethylene markets.

"Considering the weakening demand, Titan Chemicals' current capacity is already in excess. We are likely to see that most of Titan's plants running at between 80% and 85% capacity in 2010. If the rate comes down further, then Titan Chemicals could face margin pressure," says an analyst. The ideal utilisation rate for petrochemical plants is between 95% and 100%

The petrochemical firm began to show signs of distress when Standard & Poor's Rating Services placed its "BB" corporate credit rating on CreditWatch last year because of the challenging outlook for the sector.

The ratings agency adds that Titan Chemicals will be vulnerable to industry risks, with its profitability and cash flows sensitive to naphtha price movements and challenges on the demand side. S&P says Titan Chemicals' planned capacity growth has outpaced demand growth over 2009 and 2010. "This places downward pressure on Titan's liquidity and financial flexibility," the agency says.It adds that the first six months in 2009 will continue to be a difficult period for Titan, before a "projected recovery in operating rates and product prices in 2010".