Taiwan’s petrochemical industry at a cross roads

Despite a lack of oil resources, Taiwan has had a thriving petrochemical industry for a half century now. In ethylene production, Taiwan is currently the ninth largest producer of the chemicals in the world, and also takes a leading position in the production of thermoplastic and glass fiber.

According to Global Views monthly, the output of Taiwan’s petrochemicals soared to over NT$1 trillion (US$33 billion) in 2004, becoming the third industry to top NT$1 trillion after the semiconductor and the flat panel display industries. I Including textiles, the output value of chemical materials, petroleum and coal products and petrochemicals exceeds NT$4 trillion (US$132 billion), and accounts for 30 percent of Taiwan’s total manufacturing production.

Adding value to keep firms in Taiwan

This April, after five years of heated debates, the construction of the Kuokuang Petrochemical Project slated for Changhua County (central Taiwan) was abandoned. As the largest industrial investment project of recent years, investors still hope the project can go ahead elsewhere, but on a reduced scale. The backlash resulted in increasing talk of Taiwan’s petrochemical manufacturers quitting the island.

Business leaders in the petrochemical industry have said that it is hard to survive in Taiwan, although a scholar was quoted as saying, “Moving abroad is the laziest policy decision. It reflects the mentality of petrochemical businessmen and their reluctance to transform and upgrade,” reported Global Views.

Global Views reported that the ratio of the Taiwanese petrochemical industry’s R&D budget was only 0.32 percent of its total revenues in 2009, well below the lowest figure of 3 percent for large multinational companies. Plus, the average value-added amount in Taiwan was only 14.6 percent, far less than Japan’s 22 percent and Germany’s 33 percent. The government hopes the petrochemical industry will increase its R&D to 2 percent by 2020, and raise its value-added percentage to 20.

In the last six months, the government has promoted a “high value-added” policy to cope with the situation, asking petrochemical businesses to stay in Taiwan by upgrading the quality of their products.

Export-oriented industry hinders upgrade

In the last couple of decades, the business model of the Taiwanese petrochemical industry was to buy crude oil, then export large amounts of petrochemical raw materials post refining so as to earn large foreign exchange reserves. Taiwan’s production capacity of seven major petrochemical products (five general-use plastics and two chemical fiber raw materials) reached 12.35 million metric tons in 2009, among which 63.2 percent were exported overseas and over 70 percent of the exports headed to China.

At present, developing countries are still clamoring for raw petrochemical materials, so Taiwanese companies can continue to rely on the old business model to survive for the time being. However, a dependence on developing countries decreases the urgency to upgrade.

Established firm stands out from the crowd

Global Views noted that high-value added products are the way for Taiwan’s petrochemical industry to go. They should keep the old business model, but reduce their over dependence on importing crude oil and export the raw materials after refining, something that is mainly controlled by foreign companies.

Oriental Union Chemical Corporation (OUCC) is a successful case in point. As a member of the Far Eastern Group, OUCC has been focusing on ethylene oxide (EO) since it was established in 1975. The firm dedicates 1-2 percent of its total budget to R&D every year, and researchers account for over 10 percent of the company’s employees. Currently OUCC is the world’s largest producer of ethylene carbonate (EC), the largest maker of ethanolamine (EA) in Asia, and has recently developed environmentally friendly “green ethylene glycol” (EG) from rice stems.

Alex Kuo, president of OUCC, said Taiwan is congenitally scarce in crude oil and technology patents. Most petrochemical firms run in the mid- to down stream of the business supply chain. That’s why Taiwan’s petrochemical industry is easily affected by the global economic situation. The best way to get rid of this dilemma is to move as far away as possible from the up stream crude oil.

In the last two years, the rising environmental protection sentiment in Taiwan has cut off the possibility of domestic expansion in the petrochemical industry and has forced the government to take action to encourage such firms to move towards the high value-added direction. In the short term, petrochemical manufacturers have the option of moving abroad or maintaining the status quo. None can predict how long this business model will continue to work and only the industry can choose its direction, said Global Views.

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