"A lot of the requests we receive from our clients are around doubling down on costs, becoming more efficient in conversion, produce higher grade polymers, and commercial excellence."

Thomas Luedi

SENIOR PARTNER, HEAD OF ASIA CHEMICALS AND COMMERCIAL EXCELLENCE PRACTICES, BAIN & COMPANY

June 07, 2024

Could you briefly explain Bain & Company’s footprint and set-up in Southeast Asia, within the Energy and National Resources (ENR) practice?

Bain & Company has offices in Bangkok, Kuala Lumpur, Singapore, Jakarta, and two years ago we opened two new locations, in Manila and Ho Chi Minh.  Energy and Natural Resources is one of the top three global practices, encompassing oil and gas, chemicals, mining, utilities, and agriculture, across which we see a much deeper level of cross-integration as opposed to 10 years ago when these verticals were more silo-ed. Bain & Company has done well integrating these cross-sector perspectives at both country and regional levels. I personally lead the chemicals division in Asia, as part of a team of 100 consultants dedicated to this industry.

How is the Southeast Asian petrochemical market doing in 2024?

The Southeast Asian petrochemical market faces multiple import pressures. China is continuing to invest in the capacity to become self-sufficient across several key chemicals, like polycarbonates (which it managed a while back) or polypropylene (more recently). The transition from importer to potential exporter of the world’s largest petrochemical market is a tectonic shift for the industry. Additionally, discussions in the Middle East about more crude oil to chemicals production, as opposed to fuels, in the context of the energy transition and uptake of electric vehicles, are also mounting.

Due to its geographical positioning, Southeast Asia is exposed to imports not only from China, where surpluses of intermediates have built up on account of a slower Chinese economy, but also from the Middle East and the US Gulf Coast. Tariffs between the US and China turned both countries towards Southeast Asia, so the region has become a sort of “catch-all” market for petrochemicals. That poses challenges for domestic producers, who are losing significant market share to lower importers. 

What can Southeast Asian players do to overcome current challenges and boost their competitiveness? 

In the current market, most Southeast Asian petrochemical companies have returned back to the basics, focusing on margin optimization and capacity utilization. A lot of the requests we receive from our clients are around doubling down on costs, becoming more efficient in conversion, produce higher grade polymers, and commercial excellence to try to capture the maximum of the domestic market (where they have better control of the product and can enjoy higher profitability since export costs are removed). When we do diagnostics for our clients there is always some opportunity for further harmonization, digitalization, etc. to drive efficiency across functions and squeeze further value. 

How do you see the economics stacking up in terms of circular plastics (whether bio-based or recycled)?

Circularity has gained more steam over the course of last year. The industry is trying to figure out the economics of plastic waste and what is the real demand for it, especially since some brands have made announcements to postpone their circularity targets. That has caused some uncertainty over how big the market really is, the willingness to pay for the premium, access to materials, and even the role of traditional petrochemical companies versus independent recyclers. 

The economics remain quite challenging. It will be down to investment subsidies and incentives to essentially build more capacity and optimize the process – the higher scale of production will eventually drive costs down. We will likely continue seeing strong demand for virgin plastics in this region until recycling and bio-based plastics catch up. 

How has the commodities downcycle impacted transaction-making and investments in the chemical space?

If we go back a few years, both PTT GC and PCG forayed into specialty chemicals, with PTT GC buying Allnex in 2021 and PCG buying Perstorp a year later; Indorama also completed a series of transactions, prioritizing inorganic growth as part of their growth engine. Globally, ADNOC made a bid for Covestro, and Aramco continued to take minority stakes in various Chinese producers. It will be interesting to see if this underlying activity of investments will continue among Southeast Asian players. Another transaction/partnership driver could be between naphtha suppliers and standalone crackers that need access to low-cost feedstock. 

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