Vietnam petrochemicals report 2016

BMI Industry ViewBMI View: Vietnam is set for a surge in refining and petrochemicals capacities in the next five years as investors seek to establish new operations in the Southeast Asia

2016 www.bmiresearch.com

VIETNAM

PETROCHEMICALS REPORT

INCLUDES 5-YEAR FORECASTS TO 2019

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: November 2015

© 2015 Business Monitor International Ltd

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of the publisher

DISCLAIMER

INCLUDES 5-YEAR FORECASTS TO 2019

Part of BMI’s Industry Report & Forecasts Series

Published by: BMI Research

Copy deadline: November 2015

© 2015 Business Monitor International Ltd

All rights reserved

All information contained in this publication is

copyrighted in the name of Business Monitor International Ltd, and as such no part of this

publication may be reproduced, repackaged,redistributed, resold in whole or in any part, or used

in any form or by any means graphic, electronic ormechanical, including photocopying, recording,taping, or by information storage or retrieval, or byany other means, without the express written consent

of the publisher

DISCLAIMER

BMI Industry View 7

SWOT 8

Political 9

Economic 10

Operational Risk 12

Industry Forecast 14

Table: Vietnam Planned Petrochemicals Projects 14

Table: Vietnam - Petrochemicals Capacities, 2012-2020, '000tpa 18

Macroeconomic Forecasts 19

Economic Analysis 19

Table: Economic Activity (Vietnam 2010-2019) 22

Industry Risk Reward Ratings 23

Asia Petrochemicals Risk/Reward Index 23

Table: Asia Petrochemicals Risk/Reward Index Ranking 26

Vietnam Industry Risk/Reward Index 27

Market Overview 28

Industry Trends And Developments 30

Company Profile 33

PetroVietnam 33

Vinachem 36

Regional Overview 38

Asia Overview 38

Chinese Crackers Spark Concern as Crisis Blazes 39

A Rocky Surge in 2016 41

Global Industry Overview 44

Feedstock Differentials: Respite for Europe 44

2016 Feedstock Outlook 46

Could US Gas Run out? 47

Market Outlook: Chinese Downturn 48

Long-term Outlook 48

Europe - Brent On Board For A Bumpy Ride 52

Demographic Forecast 53

Table: Population Headline Indicators (Vietnam 1990-2025) 54

Table: Key Population Ratios (Vietnam 1990-2025) 54

Table: Urban/Rural Population & Life Expectancy (Vietnam 1990-2025) 55

Table: Population By Age Group (Vietnam 1990-2025) 55

Table: Population By Age Group % (Vietnam 1990-2025) 56

Glossary 58

Table: Glossary Of Petrochemicals Terms 58

Methodology 59

Industry Forecast Methodology 59

Risk/Reward Index Methodology 61

Table: Petrochemicals Risk/Reward Index Indicators 62

Table: Weighting Of Indicators 63

BMI Industry View

BMI View: Vietnam is set for a surge in refining and petrochemicals capacities in the next five years as

investors seek to establish new operations in the Southeast Asian country Strong growth in end markets and Vietnam's position as a global manufacturing hub are driving production, although there are enduring risks associated with land acquisition and regulatory approval as well as regional market over-supply.

Currently, limited capacity leads to a reliance on imports for domestic conversion and end-product

manufacturing With refinery developments in the pipeline, Vietnam will be able to increase capacities,particularly for polypropylene and ethylene in the medium term However, slow land clearance and

financing problems delay these projects, postponing capacity increases by a number of years

The main risks will come from both domestic and external influences Domestically, the slow rate of landclearance for projects is delaying progress This is adding years and raising costs to completion, leading toprojects being scaled back Externally, the industry is faced with the onslaught of cheap US-based

production flooding the Asian market, while it will be dependent on refineries for feedstock, which is likely

to be more expensive than shale-derived ethane However, the Vietnamese industrial base is likely to favourthe orientation of petrochemicals development with its emphasis on polypropylene and aromatics

■ In the January-November period of 2015, chemicals production was up 5.7% y-o-y and rubber and plasticoutput grew 12.7% on the back of 9.7% industrial growth However, the small base of local chemicalsand petrochemicals production ensured that rising consumption led to a surge in imports

■ A surge in capacity is expected in the medium term, with the completion of new refinery-based

complexes operated by Nghi Son Refinery & Petrochemical and Vung Ro Petroleum, adding 700,000

tonnes per annum (tpa) of paraxylene and 1.27mn tpa of polypropylene capacities to the industry

■ The PTT-Aramco joint venture complex is expected to start up in 2021, adding 1.4mn tpa of ethylene

and 800,000tpa of polyethylene capacities to the Vietnamese industry

• With little current domestic petrochemicals activity, Vietnam scores poorly in BMI's Asia

Petrochemicals Risk/Rewards Index However, its position has improved marginally since last year, withits score rising by 0.1 points to 42.9 points Vietnam's position has been enhanced by a modest

improvement in long-term country risk, although it is still weighed down by poor institutional, financialand external risks It lies in last place in the regional ranking, 4.0 points behind the Philippines and willremain there until new capacity comes onstream and the business environment improves

Vietnam Petrochemicals Industry SWOT Analysis

Strengths ■ Self-sufficiency in oil production gives a feedstock advantage, which helps in the

development of the petrochemicals industry

■ Well placed to cater for the Chinese demand for petrochemicals

■ Has attracted some foreign investment for polyvinyl chloride (PVC) production

Weaknesses ■ Petrochemicals product portfolio is more or less limited to PVC

■ Scarce refining capacity

■ High input costs for petrochemicals production

■ Limited interest from foreign petrochemicals majors in investing, while partners havedropped out of past projects

■ Project delays due to slow land clearance

Opportunities ■ Plans to establish refinery and development of plastics and intermediate

petrochemicals production

■ Feasibility studies underway for ethylene cracker

■ Rising gas production could provide feedstock for petrochemicals production

Threats ■ Plans are not expected to lead to any initial olefins production, with the country

continuing to rely on imported monomer feedstock for some time

■ The EU predicts Vietnam will not become a true market economy until 2018, and eventhis forecast is somewhat ambitious

SWOT Analysis

Strengths ■ The Communist Party of Vietnam remains committed to market-oriented reforms and

we do not expect major shifts in policy direction over the coming years The one-partysystem is generally conducive to short-term political stability

■ Relations with the US have witnessed a marked improvement, and Washington seesHanoi as a potential geopolitical ally in South East Asia

Weaknesses ■ Corruption among government officials poses a major threat to the legitimacy of the

ruling Communist Party

■ There is increasing (albeit still limited) public dissatisfaction with the leadership's tightcontrol over political dissent

Opportunities ■ The government recognises the threat corruption poses to its legitimacy, and has

acted to clamp down on graft among party officials

■ Vietnam has allowed legislators to become more vocal in criticising governmentpolicies This is opening up opportunities for more checks and balances within theone-party system

Threats ■ Although strong domestic control will ensure little change to Vietnam's political scene

in the next few years, over the longer term, the one-party-state will probably beunsustainable

■ Relations with China have deteriorated over recent years due to Beijing's moreassertive stance over disputed islands in the South China Sea

SWOT Analysis

Strengths ■ Vietnam has been one of the fastest-growing economies in Asia in recent years, with

GDP growth averaging 6.5% annually between 2000 and 2014

■ The economic boom has lifted many Vietnamese out of poverty, with the officialpoverty rate in the country falling from 58% in 1993 to 17.2% in 2012

■ Vietnam has been strengthening its trade and aid ties in a bid to increase exports anddiversify its export sector

Weaknesses ■ Vietnam still suffers from fiscal deficits, leaving the economy vulnerable to global

economic uncertainties The fiscal deficit is dominated by substantial spending onsocial subsidies that could be difficult to withdraw

■ The heavily-managed and weak currency reduces incentives to improve quality ofexports, and also keeps import costs high

Opportunities ■ WTO membership and the ASEAN economic integration in 2015 should give Vietnam

greater access to both foreign markets and capital, while making Vietnameseenterprises stronger through increased foreign competition

■ The government has continued to move forward with market reforms, includingprivatisation of state-owned enterprises, addressing the high level of bad loans in thebanking sector as well as liberalising the banking sector

■ Urbanisation will continue to be a long-term growth driver The UN forecasts theurban population rising from 32% of the population in 2013 to more than 50% by theearly 2040s

Threats ■ Although inflation has subsided in 2014, complacency by the State Bank of Vietnam

on this front could result in a decline in investment

■ The potential for an escalation of political tensions with China over sovereign claims

to parts of the South China Sea could have a negative impact on the economy

SWOT Analysis - Continued

■ Market reforms could progress at a much slower pace as the government remainscautious about ceding ownership to foreign investors

Operational Risk

SWOT Analysis

Strengths ■ Vietnam has a high number of university graduates with skilled degrees and a high

literacy rate for its income level

• In addition to a number of regional and international flight options, Vietnam has anextensive inland waterway system

• Growing levels of foreign investment encourage further trade and spin-off industries

• Vietnam's rate of violent crime is generally low, and foreigners are unlikely to betargeted

Weaknesses ■ High number of incidences of industrial action

• Underdeveloped rail capacity overburdens the road network

• An underdeveloped banking sector decreases the options for keeping money in thestate

• Vietnam's military forces are only a quarter the size of China's, meaning that Beijingwould probably prevail in any naval battle over maritime disputes in the South ChinaSea

Opportunities ■ Explosive growth in demand for tertiary education will increase the number of highly

skilled graduates in the medium term

• Vietnam is easily accessible from the main shipping routes, and growth in the number

of port facilities will provide adequate capacity

• Increased foreign participation in the banking sector will increase the availability offunds for loans

Threats ■ Dysfunctional labour-management relations increase the risk of disruption and strike

action

SWOT Analysis - Continued

• Vietnam's reliance on imported oil poses risks in the form of energy and fuelshortages

• Corruption and inefficiency in the legal system

• Anti-Chinese violence, as seen in May 2014, could be a harbinger of wider politicaland social unrest

Industry Forecast

Vietnam is a rapidly growing market for chemicals and derivatives A lack of plastics and rubber capacitymean that domestic conversion and end-product manufacturing are reliant on imports, which have grownfast in recent years In the January-November period of 2015, chemicals production was up 5.7% y-o-y andrubber and plastic output grew 12.7% on the back of 9.7% industrial growth The small base of localchemicals and petrochemicals production ensured that rising consumption led to a surge in imports

The Vietnamese petrochemicals industry is set to move the country towards greater self-sufficiency in basicchemicals and points the way towards future product diversification In recent years, capacities have risenbut growth has been constrained by a lack of olefins production that can enable the country to capitalise onits own domestic hydrocarbons resources and satisfy domestic demand Refinery expansion will lead to self-sufficiency in refined products, ensuring significant potential in downstream production Current plansmean that until 2017 at the earliest, most downstream production will be reliant on propylene, butadiene andaromatics streams produced by refineries, although naphtha streams could supply feedstock to domesticcracker capacity

Table: Vietnam Planned Petrochemicals Projects

Product Capacity ('000 tonnes per annum) Producer completion Scheduled

more than triple, from 140,000b/d in 2015 to reach 500,720b/d by 2019 According to industry sources,construction of the Nghi Son refinery was more than 60.0% complete by Q415, and is on course to becomeoperational by mid-2017.

At present, nearly all of the country's refining capacity is provided by PetroVietnam's Dung Quat refinery,

with total nameplate capacity of 140,000b/d The country also has a smaller refinery, the Ba Ria-Vung Taurefinery with a capacity of 2,612b/d

Rising concerns about diminishing local crude feedstock and lack of sufficient investment incentives for

high-cost projects are dampening the outlook for these projects In November 2015, Qatar Petroleum, one

of the joint-venture partners in the Long-Son plant project, announced its intention to withdraw from theproject

As a result of the completion of the Nghi Son Refinery & Petrochemical and Vung Ro Petroleum from

2017, there will be a surge of polypropylene and aromatics capacities, Including 700,000 tonnes per annum

(tpa) of paraxylene and 1.27mn tpa of polypropylene capacity to the industry After that, a PTT-led project

should start up in 2021 with a 400,000b/d refinery and downstream capacities of 2.9mn tpa of olefins and2mn tpa of aromatic products with most of the petrochemical products exported

The main risks will come from both domestic and external influences Domestically, the slow rate of landclearance for projects is delaying progress This is adding years and raising costs to completion, leading toprojects being scaled back Externally, the industry is faced with the onslaught of cheap US-based

production flooding the Asian market, while it will be dependent on refineries for feedstock, which is likely

to be more expensive than shale-derived ethane However, the Vietnamese industrial base is likely to favourthe orientation of petrochemicals development with its emphasis on polypropylene and aromatics

Upward Trend In Petrochemicals And Chemicals Output

Production Indices (100 = 2010)

Source: General Statistics Office of Vietnam

On the downside, the business environment has not been conducive to investment in petrochemicals.Vietnamese production will have to compete with imports from Singapore, Thailand and Malaysia, whichare currently major suppliers of plastic resins to Vietnam To be able to compete with these establishedplayers, petrochemical plants in Vietnam will have to be cost-competitive at least in domestic markets; andthis will require tax and non-tax incentives Infrastructure is weak with a lack of port and road infrastructuredevelopment causing supply bottlenecks Moreover, the investment process in Vietnam is complicated,requiring approval from many ministries, which can delay projects leading to lower project economies anddisincentive to invest If these issues are dealt with, Vietnam could become a serious player in South EastAsia's petrochemicals market

Economic Trends In Vietnam

Factors Influencing Petrochemicals Consumption

Vietnam - Real GDP growth, % y-o-y (LHS) Vietnam - Industrial production, % y-o-y, ave (LHS) Vietnam - Vehicle production, units, % y-o-y (RHS) Vietnam - Construction Industry Value, Real Growth, % y-o-y (LHS)

2013 2014 2015f 2016f 2017f 2018f 2019f 2020f 4

6 8 10

0 5 10 15 20

f = BMI forecast Source: National sources/BMI

There is a strong basis for petrochemicals consumption growth going forward The industrial sector, whichaccounts for approximately 33% of the economy grew strongly in 2015 At 21% of GDP, manufacturingaccounts for the lion's share, accelerated by a robust 10% in 2015, driven by textiles and the automotiveindustry, which are significant domestic consumers of petrochemicals products Moreover, the

manufacturing sector will continue to see strong growth, particularly as it moves up the value chain intohigher value sectors

Construction is a booming sector in Vietnam, providing strong support for growth in polymer pipes Wemaintain a positive outlook for Vietnam's construction sector and expect real growth of 5.9% in 2015 and toaverage 6.1% per annum between 2015-2019 The outlook for Vietnam's residential and non-residentialbuilding segments is improving Easing developments regarding foreign ownership of property will help tospur demand and construction activity

Vietnam's autos industry is still in its infancy as producers typically import completely knocked-down kits,which are assembled and sold domestically The domestic parts sector is small at present, although the

government is making it a priority As such, the scope for growth in petrochemicals use by the automotivesupply sector is limited

However, Vietnam has seen a flurry of announcements from foreign automakers declaring their intentions

to begin, or ramp-up, manufacturing activities in the country We believe automakers are looking to

establish operations in the country to capitalise on large sales growth opportunities about to be unlocked bythe introduction of free trade between ASEAN members in 2018 However, we stress that that these

automakers will still face significant operational challenges in realising sales growth across the region overthe long run Recent inflows of investment will provide support to Vietnamese vehicle production up to theend of our forecast period in 2019 and we forecast output to grow an average of 13.2% annually over theperiod

Table: Vietnam - Petrochemicals Capacities, 2012-2020, '000tpa

2012 2013e 2014f 2015f 2016f 2017f 2018f 2019f 2020f

e/f = BMI estimate/forecast Source: BMI

Macroeconomic Forecasts

Economic Analysis

BMI View: The Vietnamese economy will remain a regional outperformer over the coming years on the

back of strong foreign direct investment (FDI) inflows and export resilience As such, we forecast Vietnam's real GDP growth to accelerate to 6.6% in 2016, from an estimated 6.4% in 2015.

Our long-held bullish outlook for the Vietnamese economy has continued to play out well According to thelatest data from the General Statistics Office, Vietnam's real GDP growth for the first three quarters of 2015came in at an impressive 6.5% y-o-y, beating the Bloomberg consensus estimate of 6.4% Continued exportresilience despite cooling regional demand, sustained foreign capital inflows to the country, and a recentstrong pick-up in domestic credit growth are some of the key drivers that will keep the economy on a stronggrowth path We therefore expect Vietnam to remain a regional outperformer Accordingly, we are

maintaining our forecast for the country's real GDP to grow by 6.4% in 2015, before accelerating to 6.6% in2016

US And EU Markets Provide A Buffer For Exports Amid Regional Headwinds

The strong economic showing is due in part to a resilient export performance Despite facing a challengingregional environment, Vietnamese exports managed to expand at a respectable clip of 9.6% y-o-y for thefirst nine months of 2015, which marked only a slight moderation from previous year's double-digit growthperformance This owes to Vietnam's high exposure to the US and EU markets, which has provided acushion against dwindling regional demand Both the US and EU markets account for around 40% ofVietnamese exports

Vietnam Remains Attractive To Foreign Firms

Vietnam has also remained an attractive investment destination for foreign firms, and its ability to continueluring capital inflows will contribute greatly to its ongoing economic development Based on the latestofficial data, estimated realised foreign direct investment (FDI) inflows came in at USD8.5bn for the firsteight months of 2015, representing a 7.6% y-o-y increase over the same period in 2014 In particular, weexpect the bulk of foreign capital to continue flowing into the manufacturing sector, given the relatively lowwage rates and generous tax incentives that Vietnam has to offer, which will greatly reduce the cost ofproduction for foreign manufacturers Moreover, the relatively low political risk in the country is alsogenerally conducive for businesses, although we note that corruption remains an issue, as with most

emerging countries in the region With foreign firms like South Korean giant Samsung making rapid

inroads to the country in recent years, we expect many more to follow suit There is thus the potential for astrong investment pipeline in Vietnam

Entry Of Foreign Firms To Sustain Output Growth

Vietnam - Industrial Production, % chg y-o-y

Source: Bloomberg, BMI

Sustained Output Growth On The Cards

High frequency economic indicators are also pointing to sustained production growth over the comingquarters Industrial production expanded by 10.1% y-o-y in September, reflecting the underlying

fundamental strength of the manufacturing sector Meanwhile, the purchasing managers' index (PMI) came

in at 51.3 in August, marking 24 consecutive months of expansion A PMI reading of more than 50

indicates an expansion in manufacturing output

Easing Of Foreign Property Ownership Rule Will Bring In More Investment Inflows

In addition, the real estate market is also set to perform well on the back of the government's relaxation ofthe foreign property ownership rule in July 1, 2015 Several real estate developers such as Singapore-based

CapitaLand and Mapletree are already expanding their operations into the Vietnamese market in a bid to

tap on rising property investment and development opportunities

Credit Uptick Reflects Robust Domestic Demand Conditions

Vietnam - Credit Growth, % chg y-o-y

Source: BMI,SBV

Strong Credit Uptick Reflects Robust Private Domestic Demand

Further informing our positive outlook for the Vietnamese economy is the recent strong pick-up in domesticcredit Credit growth accelerated to 18.7% y-o-y in June, from 18.3% in the previous month, reflectingstrong underlying private consumption and investment demand Meanwhile, the retail sales growth figurefor the first nine months of 2015 came in at a healthy clip of 9.8% y-o-y

Table: Economic Activity (Vietnam 2010-2019)

2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Nominal GDP, USDbn 112.9 134.6 155.5 170.4 185.8 190.3 199.9 224.0 252.2 283.5

GDP per capita, USD 1,267 1,496 1,712 1,859 2,007 2,038 2,121 2,358 2,635 2,940

Industrial production, % y-o-y, ave 14.1 10.9 7.0 5.9 7.6 8.4 8.6 8.6 8.5 8.5

e/f = BMI estimate/forecast Source: National Sources/BMI

Industry Risk Reward Ratings

Asia Petrochemicals Risk/Reward Index

BMI View: The average Risk/Reward Index score for the Asian petrochemicals sector has fallen by a

modest 0.1 point this quarter, although we see a potential pick-up in growth of regional giants such as China, India and Indonesia Overall, Asia's petrochemicals sector offers investors the opportunities to realise considerable returns, reinforcing the region's status as the world's largest petrochemicals market.

The average Risk/Reward Index (RRI) score for Petrochemicals in Asia was 65 out of 100 this quarter, withsigns of growth in regional giants picking up as reform momentum gains traction However, there is still asubstantial disparity throughout Asia This translates into a significant divergence in rewards and risksamong the Asia Pacific infrastructure markets, and a sizeable 37-point differential exists between the top-and bottom-ranked countries (South Korea with 80.1 and Vietnam 42.9) in our regional petrochemicalsindex table This wide dispersion presents investors with a range of rewards depending on their appetite forrisk

The key findings from this quarter's update can be summarised as follows:

■ Exposure to the Chinese market slowdown has undermined the scores of Singapore and South Korea,which will face a downturn in exports However, South Korea remains at the top of the table

■ Lower naphtha feedstock costs have helped revive growth prospects in Japan and Taiwan, lifting theirscores

■ Australia's small petrochemicals sector is witnessing negative risk due to the declining availability ofcompetitively priced feedstock

Declining Chinese Risk Scores Undermine Regional Trend

Risk/Reward Scores By Country

Note: Scores out of 100, with 100 the best Source: BMI

Much growth in China's petrochemicals sector has been underpinned by coal-to-olefins production in recentquarters This surge in capacity has driven down prices and threatened over-capacity in some segments at atime of slow consumption growth Structural imbalances within the Chinese economy - such as a weakfinancial system, an overvalued property market, expensive infrastructure build-up, and huge industrialovercapacity - are posing considerable negative risks However, following declines in recent quarters, wehave not revised China's score further as the situation has not worsened, but stabilised

India also faces threats to its rewards Even though the historic win by the pro-business Bharatiya JanataParty during the 2014 Lok Sabha elections improves the likelihood of policy formation and execution, aswell as greater coordination between ministries, other factors dampening petrochemicals activity areunlikely to be resolved anytime soon These factors include the high cost of domestic capital, high cost ofoverseas inputs due to a relatively weak Indian rupee and the numerous business environment issues thatcontinue to delay infrastructure development (eg, environmental clearances, land acquisition, convolutedbureaucracy)

In the long term, the most significant score changes are likely to be in the relatively virgin territories ofIndonesia, Malaysia and Vietnam, which until recently had been neglected but where capacity expansion isnow focused These markets are emerging market manufacturing hubs in South East Asia that could benefitfrom an indigenous basic chemicals industry

In Indonesia, political risk remains elevated with the president not assured of a parliamentary

majority Potential to block legislation could prevent reform of the business environment Meanwhile,Thailand's score will benefit from ongoing efforts by the military government to boost the Thai economy,which should continue to gain traction over the coming quarters However, we note that there are numerousheadwinds that will impede the pace of recovery, posing downside risks to our growth forecast

Taiwan and Thailand Boosted, But China's Impact Haunts Other Markets

Change In Risk Scores, Q116/Q415

Source: BMI

Different levels of liberalisation and competition in the regional petrochemicals markets play a prominentrole in shaping our risk scores, with Malaysia holding the strongest market risk score China and India haveput forward highly ambitious capacity expansion programmes, aiming to meet fast-growing demand

However, our industry risks indicator illustrates how the two giants still leave much to be desired in terms

of market liberalisation, with 40.0 points for China and 57.0 for India

Table: Asia Petrochemicals Risk/Reward Index Ranking

Country Petchem market structure Country Rewards Market risks Country risk Risks Petchem rating Rank

Vietnam Industry Risk/Reward Index

With little current domestic petrochemicals activity, Vietnam scores poorly in BMI's Asia Petrochemicals

Risk/Rewards Index However, its position has improved marginally since last year, with its score rising by0.1 points to 42.9 points Vietnam's position has been enhanced by a modest improvement in long-termcountry ris, although it is still weighed down by poor institutional, financial and external risks It lies in lastplace in the regional ranking, 4.0 points behind the Philippines and will remain there until new capacitycomes onstream and the business environment improves

The development of a competitive petrochemicals sector is likely to spur further growth in the petroleumsector as well as generate additional revenue for the country The present capacities at petrochemicalsfacilities are very low; the government is inviting private investment to develop the petroleum and

petrochemicals sector In a bid to attract investment and boost the economy, the government is also setting

up industrial complexes and improving infrastructure However, Vietnam is starting from a low base and itwill take until the end of the forecast period for it to become a world-scale petrochemicals producer

The government is supportive of trade and is taking measures to increase trade Financial infrastructure isunderdeveloped and investment is needed to turn it into a world-class support system for trade and industry.Bureaucracy, corruption and red tape are rampant, leading to delays to existing projects and hindrances atnew projects

The Communist Party of Vietnam is expected to maintain a strong grip on the country Vietnam has, to acertain extent, been able to overcome poverty; and its poverty levels are lower than those of China, Indiaand the Philippines The authorities have regulated monetary and fiscal policies to stem high inflation But amajor area of concern is the impending current account deficit that may arise due to rising import demand,fuelled by increased affluence among customers In order to solve this problem, the state has been trying todevelop more competitive, export-driven industries The export of crude oil and electronics to countriessuch as Japan and the US has also added to the pace of economic expansion However, this growth may becurtailed if growth in Vietnam's biggest export market, the US, remains sluggish

Market Overview

Vietnam has a poorly developed petrochemicals industry despite significant oil and gas reserves and arespectable sized refining sector relative to the country's market size The country has massive growth

potential, but it will take at least three years for the industry to catch up Binh Son Refinery (BSR) is the

sole polyproyplene (PP) producer in Vietnam with a 150,000 tonnes per annum (tpa) plant located in DungQuat industrial park in Quang Ngai province The company is a subsidiary of state-owned oil firm

PetroVietnam However, it fulfils just 20% of the market, although the country has potentially huge

domestic sources of feedstock

Once completely reliant on oil product petrochemicals imports, Vietnam is embarking on a large-scaledevelopment of its refining industry, which should practically eliminate net imports and provide feedstockfor the nascent downstream petrochemicals industry While not all of the proposed refining projects will goahead, once the government grants its final approval, the centralised nature of decision-making in Vietnammeans subsequent stages tend to proceed at a rapid pace Vietnamese refining is of particular interest tocompanies from Asia's more developed economies such as Japan, South Korea and Taiwan Faced withstagnating fuel demand and a supply glut in their own countries, these companies view Vietnam as a strongpotential market for fuel products

As demand for refined products continues to grow, Vietnam has been facing a rising import burden

However, its refining capacity is set for an increase The partners of Nghi Son refinery, to be located inThanh Hoa province, finally committed to the project in January 2013; in October 2013, they announcedthat construction of the refinery had begun Costing USD9bn, Nghi Son will more than double the country'srefining capacity when the 200,000 barrel per day (b/d) facility comes online in 2017 as planned

Although PetroVietnam has put an expansion of Dung Quat's capacity to rest, following an order from thegovernment, other projects will contribute to grow A long-proposed refinery at Phu Yen has also beengiven the green light to proceed by Vietnam's Prime Minister Initially slated for a capacity of 4mn tpa (or80,360b/d), the Vung Ro refinery is now planned to process twice the amount at 160,720b/d Construction

of the plant began in 2013 and the project is scheduled for completion in 2018

Another refinery project that has been proposed is PTT's Nhoi Hoi refinery in Binh Ding province It is a

mega-refinery project designed to process 400,000b/d of crude oil The Thai petrochemicals firm is stillconducting a feasibility study and if this goes well, the facility could see construction begin in 2016 andcome online by 2021

These recent developments have led us to revise our forecasts Accounting for the additional capacity thatNghi Son and Vung Ro will add to the Vietnamese market, we now project its refining capacity to increase

to 345,000b/d by 2017 By 2019, we expect this to reach 500,700b/d when both refineries hit their fullcapacity Investment decisions on the Nhoi Hoi, Long Son and Khanh Hoa projects present significantupside risks to our forecasts; Nhoi Hoi and Long Son could together boost Vietnam's refining capacity by860,000b/d We have not factored these in, as the Long Son and Khanh Hoa proposals in particular couldcontinue to struggle to find finance to support their development

Meanwhile, the large scale of PTT's Nhoi Hoi refinery - which could make Vietnam into a net fuels

exporter if it does indeed materialise - makes it a risky investment in Vietnam's tightly regulated domesticfuels market, and in a regional market where fuel exports are likely to face fierce competition Hence, wewill await clearer indications towards final investment decision on Nhoi Hoi before we will consider it inour forecasts However, we note that the prospects for Nhoi Hoi could pick up following an expression of

interest in the project by Russian petrochemical firm SamaraNefteOrgSintez (Sanors) in November 2013.

Sanors Chief Executive Igor Soglayev stated that the firm would need 'clear commitments of the involvedgovernments' before it would go ahead with investment

Industry Trends And Developments

Over the past decade, petrochemicals-consuming industries have exhibited strong growth, particularly in thepackaging sector which utilises high levels of polymer film Blow-moulded products, used in consumerdurables and engineering, have also witnessed burgeoning growth, particularly in the automotive sector,although the industry remains relatively small and the level of local content is low There exists plenty ofscope for market expansion, given the low rate of per capita consumption and the country's positioning as amajor export hub in South East Asia

The Vietnamese petrochemicals industry is set to experience a surge in capacity from 2017 Planned newplants will turn Vietnam from being a net importer of petrochemicals to a self-sufficient producer of basicchemicals with a long-term capacity for further downstream development

The Vietnamese petrochemicals industry is set to experience a surge of capacity with the completion of new

refinery-based complexes operated by Nghi Son Refinery & Petrochemical and Vung Ro Petroleum,

adding 700,000tpa of paraxylene and 1.27mn tpa of polypropylene capacities to the industry These willturn Vietnam from being a net importer of petrochemicals to a self-sufficient producer of basic chemicals,one that has a long-term capacity for further downstream development

Aside from financing and land acquisition issues that have delayed refinery and petrochemicals projects inrecent years, there is a danger of massive regional oversupply if all plants are built - including Thai-ownedPTT's mega-complex, which will transform Vietnam into a regional petrochemicals exporter This would

have an impact on petrochemicals profitability, which is already in decline BMI cautions that plans may be

scaled back if the projects lead to more output than the market can realistically absorb

PTT has studied the possibilities of investing in central Vietnam for over two years In 2015, the value ofthe project was reduced from a previous estimate of USD28.7bn after the Vietnamese government issued alicence for a new refinery in northern Vietnam The planned capacity of PTT's oil refinery has been cut by40% from an initial 660,000b/d

The project, which requires investment of about USD18.8bn, now includes a 400,000b/d refinery andolefins and aromatic petrochemical plants with construction of the refinery scheduled to be completed by

2021 The petrochemical complex will have an annual production capacity of 2.9mn tpa of olefins and 2mntpa of aromatic products with most of the petrochemical products exported PTT will hold about 40% of theproject, while the rest will be owned by strategic partners

Industry analysts have previously cast doubt on its viability, due to troubles surrounding the Nghi Son andLong Son projects, which have been delayed by years due to financing and land acquisition issues Potential

partners of PTTGC may need to be wooed by tax incentives if they are to join the project PetroVietnam

has refused to participate The project will also face stiff competition in both the domestic and exportmarkets

In 2013, Thailand's SCG approved a medium-term investment plan worth THB250bn, which includes along-delayed USD4.5bn petrochemicals complex in Vietnam The project includes a 1.4mntpa cracker anddownstream facilities, including a 400,000tpa HDPE unit, a 450,000tpa PP plant and a 400,000tpa LLDPEplant SCG holds a 28% stake in the project while its subsidiary Thai Plastics and Chemicals (TPC) holdsanother 18% Construction is due to be completed in 2018 SCG has agreed a joint venture with partners,

including Qatar Petroleum (QP), PetroVietnam and Vinachem, for the project in Long Son, which was

first announced in Q409 and signed in Q112

Under a long-term feedstock agreement, QP will supply propane and naphtha feedstock while PetroVietnamwill supply ethane Although the feedstock slate had not been indicated at the time of writing, the variety offeedstocks used should improve cracker flexibility, thereby keeping down costs, and enables the complex todiversify and add value to the production chain in the long term As such, the complex is likely to be highlycompetitive, enabling Vietnam's manufacturing base to source locally produced petrochemical products aswell as providing opportunities for the sector to capture growth in ASEAN demand

Meanwhile, Japan's Idemitsu Kosan is committed to build the Nghi Son Refinery, located in Vietnam's northern Thanh Hoa Province The USD9bn project is being developed by Nghi Son Refinery &

Petrochemical, a joint venture between Idemitsu, Mitsui Chemicals, Kuwait Petroleum International

and PetroVietnam Construction of the refinery began in July 2013 and it is scheduled to start full operation

in July 2017 The refinery, with a planned processing capacity of around 200,000b/d, will be an advancedfacility capable of efficiently manufacturing gasoline, light oil and other oil-based products as well as basicchemicals such as benzene The complex will have 150,000tpa propylene capacity to supply a 370,000tpa

PP facility

Construction started on the USD3.2bn Vung Ro oil refinery and petrochemical project in Dong Hoa district

in Phu Yen province in September 2014 The Vung Ro complex is designed to produce fuel products such

as liquefied petroleum gas (LPG), gasoline RON 92/95, jet fuel, diesel and fuel oil, together with

petrochemical products such as benzene, toluene, mixed xylene and polypropylene (PP) The new project