Thursday, February 24, 2005

Timing Is Everything
Today's Financial Times includes a story (subscription may be required) on plans by PTT, the state oil company in Thailand, to merge several of its refining interests and do an IPO with them. This represents a remarkable turnaround in the Asian refining business, which only a few years ago was in truly dismal shape, suffering from a glut of product and depressed margins.

The story of the two refineries in question, the Star Petroleum Refining Co. facility at Map Ta Phut (64% owned by Caltex) and the neighboring ex-Shell refinery at Rayong suggests a word of caution, though. These plants were financed and built with high expectations, in the early 1990s environment of robust Asian economic growth and double-digit increases in Thai fuel demand.

When they started operations, however, Thailand was at the center of the slumping market of the Asian Economic Crisis. These two world-class facilities (I'm a little biased, having been involved with SPRC via my role looking after Texaco's interest in Caltex at the time) struggled financially for years. Though well-built to the highest standards--SPRC, at least, came in on time and on budget--these projects destroyed hundreds of millions of dollars of shareholder equity, because actual market conditions when they started up were drastically worse than anyone had expected.

Now the market has rebounded, with China's growth fueling a new boom throughout the region. The proposed merger of the two refineries must be driven entirely by the appetite for a refinery IPO, since all synergies have already been captured through a joint operating agreement put in place in the late 90s.

The history of these two refineries reminds us that economic expectations don't always pan out. However unlikely it may seem today, it's possible to imagine credible scenarios in which this could happen again, whether through another currency crisis or a "hard landing" for China's economy, which would send shock waves throughout the region. Asia's growth wave could last for twenty years, or it might fizzle next month. Caveat emptor.

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