Argus - 26 June 2019
Analysis: EU-Vietnam FTA opens up petchem trade options
A landmark free-trade agreement (FTA) between Vietnam and the EU will open up options for new petrochemical trade flows, but may not lead to a quick shift away from Hanoi’s main export markets in China and southeast Asia.
The EU and Vietnam will sign the FTA on 30 June, progressively eliminating nearly all customs duties on goods traded between the two sides. The deal was first negotiated in late 2015 but EU members only gave their approval this week. The FTA is expected to be formally ratified later this year.
One potential beneficiary may be Vietnam’s new Nghi Son Refinery and Petrochemicals (NSRP) complex, which produces 700,000 t/yr of paraxylene (PX), 200,000 t/yr of benzene and 400,000 t/yr of polypropylene (PP).
Vietnam-origin benzene and PX are currently sold to China, where NSRP has Form E preferential status under the FTA between China and the the Association of Southeast Asian Nations (Asean), which allows it to sell at zero duty.
NSRP, which came on line last year, trades PP regionally within southeast Asia, benefitting from the existing Asean FTA.
South Korean textiles and chemicals maker Hyosung could also benefit from the new FTA. The company’s new petrochemical complex in Vietnam’s Ba Ria-Vung Tau province will include two PP plants with a combined 800,000 t/yr capacity, a propane dehydrogenation (PDH) unit and LPG storage facilities. The first PP unit is scheduled to come on stream at the end of this year, followed by the second unit in 2020.
Exports of PET bottle chips from Vietnam to Europe are unlikely to get an immediate lift from the FTA, as Vietnamese manufacturers currently do not pay duties under the EU’s Generalised System of Preferences (GSP). The GSP, a unilateral initiative rather than a bilateral deal like a FTA, removes import duties from products coming into the European market from vulnerable developing countries.
Any move by Vietnam-based producers to switch their sales from China and Asean to Europe to take advantage of the new FTA will depend on profitability and margins. European customers will also need to consider longer voyage times from Vietnam, which are typically around 3-4 weeks, depending on final port and destination.
Before gaining access to the EU, all Vietnam-origin producers will need to ensure their co-monomers and feedstock olefins comply with the bloc’s Reach regulation, which is designed to manage environmental risks posed by chemicals.
Crowded markets
But the new FTA gives Vietnam options to sell to Europe in the medium term, in the face of rising competition. Vietnamese polymer exports may find it tougher to find buyers in China and Asean because of overcapacity, prompting them to look westwards.
Malaysia’s state-owned Petronas is expected to start up 900,000 t/yr of PP capacity at its Rapid operations in Pengerang later this year, challenging Vietnam’s market share in Asean. China is also becoming increasingly self-sufficient in polymers thanks to new methanol-to-olefins (MTO) and coal-to-olefins (CTO) start-ups in 2019 and 2020.
The EU could be a major outlet in the coming year for two Vietnamese PET manufacturers looking to expand their export reach. Taiwan Far Eastern started its 400,000 t/yr PET bottle chip plant in Vietnam last year, while Fujian Billion will start up its 200,000 t/yr plant in the third quarter of this year. Vietnamese PET manufacturers would also look to displace some South Korean origin product going into the EU. South Korea has had a FTA with the EU since 2015, but Vietnam enjoys a relative proximity advantage to Europe.
In the long run, the EU-Vietnam FTA will spur new foreign direct investment (FDI) opportunities for the southeast Asian country. Vietnam’s downstream capacity is already scheduled to expand in 2023, when Long Son Petrochemicals will add to polymer capacity.
Vietnam is already the EU’s second largest trading partner in southeast Asia after Singapore, with trade worth €49.3bn/yr for goods and over €3bn/yr for services. The EU’s main exports to Vietnam include electrical equipment, vehicles and pharmaceutical products. Vietnam’s biggest exports to the EU are footwear, textiles, coffee and rice.
Trade tensions
The EU is working to secure deals with Asia-Pacific countries as it looks diversify its export destinations amid rising protectionism, including US tariffs on its steel and aluminium products that were imposed last year.
Vietnam is indirectly benefitting from US trade restrictions, as the US-China trade war sees more China-bound cargoes from the US re-exported to its ports at lower prices.
Hanoi is also expected to ratify another key FTA, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), sometime this year. The CPTPP, formerly known as the Trans-Pacific Partnership (TPP), has 11 members including Australia, Canada, Japan, Mexico, New Zealand and Singapore, but not the US, which pulled out of the TPP after the election of President Donald Trump.
Brunei, Chile, Malaysia and Peru are also expected to ratify the CPTPP in the coming months.
The EU-Vietnam FTA will be the bloc’s second trade deal with an Asean member state this year, after the EU-Singapore FTA was agreed in February, paving the way for formal ratification.
The EU and Japan also launched the world’s largest free-trade zone through a FTA earlier this year.