THE RISKS TO the economy of trade-dependent Singapore have been well flagged. Europe’s deepening debt crisis and the increasingly despondent US economy have been keeping investors and government officials here on their toes for months. But there’s one new domestic development that could further fuel anxieties about the country’s near-term economic prospects.
A potential plunge in output at Royal Dutch Shell’s Singapore refinery after it was engulfed by fire on Wednesday (Sep 28) is threatening to crimp the city-state’s industrial production. The blaze at the Pulau Bukom facility -- Shell’s largest refinery worldwide -- was finally extinguished on Thursday, but the oil giant says traces of fuel vapour remain, although it claims they’re non-toxic.
The area affected is about 150 metres by 50 metres in size. Shell has already closed several refinery units in the vicinity of the fire and says it’s prepared to shut down the entire refinery operation for safety reasons. Pulau Bukom is located more than five kilometres away from Singapore’s shores.
The company has yet to disclose its losses so far, but a complete shutdown could be costly, not only for Shell but the industry as a whole. The refinery can process 500,000 barrels of oil a day. While a Shell executive has said the incident won’t affect the supply of gasoline or gasoil in Singapore, the impact on export markets is less clear as most of the refinery’s output is meant to be sold in the region. Singapore is Asia’s largest oil trading and storage centre.
“The extent of the damage is still unclear, but what is certain is there will be unplanned downtime with supply disruptions to chemical-related producers,” say CIMB economists Song Seng Wun and Ching Quan Jian in a note to clients. They say they turned bearish on Singapore’s manufacturing sector even before this incident, warning that the industry’s performance in 4Q2011 and beyond could be wobbly as their channel checks suggest weak technology output going into 1Q2012.
The chemical sector accounted for 10.7% of Singapore’s manufacturing output and 2.8% of GDP in 2010. For the first eight months of this year, oil made up 27% of Singapore’s total exports, while petrochemical products accounted for 7.5%.
“The temporary loss of refinery capacity and petrochemical output thus does not bode well for Singapore’s manufacturing and exports in late September and possibly for most of October,” according to Song and Ching. For now, they are retaining their Singapore GDP growth estimate of 4.5% for 2011, but add that the forecast could be downgraded pending the extent of the damage arising from the Shell incident and troubles in Europe and the US. Singapore’s official GDP forecast for this year is growth of between 5% and 6%.
For investors wondering how best to put their money to work under the current market conditions, there’s no straightforward answer as even analysts themselves are divided on what action to take. “We still maintain a cautious-bearish stance on the Straits Times Index and the S&P 500,” says Phillip Securities strategist Joshua Tan. “Singapore is already on track to post a second quarter of negative quarter-on-quarter growth. We are barely scrapping it in for 3Q2011.”
CLSA analysts Ashwin Sanketh and Lu Chuanyao, on the other hand, advocate what they call a “dividend cocktail portfolio”. This comprises six large-cap, liquid stocks with “strong” underlying fundamentals – United Overseas Bank, ST Engineering, Singapore Press Holdings, Starhub, Singapore Telecommunications and Ascendas REIT.
“We believe that in volatile times, where the macroeconomic environment remains uncertain and there is a lack of conviction on any one strategy, leave alone individual stocks. We continue to espouse a dividend-biased approach,” they say.
Sakthi Siva and Chik Kin Nang of Credit Suisse suggest simply going for stocks with price-to-book valuations close to their lows in 2008 and 2009. These include Olam International, Sembcorp Industries, CapitaLand, SingTel, ComfortDelgro and SMRT.
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