"It is expected to reduce the combined water consumption and thus the operating level of its various plants by approximately 40 percent from the end of June onwards," the company said.

Prime Minister Thaksin Shinawtra said industrial plants on the eastern seaboard did not need to cut output because there was enough water for the next two months.

"Operators are misunderstanding," Thaksin told reporters. "They can operate fully and should not worry about water shortages. We have enough water for the next two months even if no rain falls".

Thaksin said the situation was not critical and the government had launched artificial rain making efforts, which should increase water supplies in the area.

Eastern Water Resources Development and Management, Thailand's largest industrial water supplier, said it had enough water to supply clients until September after the success of recent cloud seeding efforts.

"Water supplies should last until September without rainfall providing we cut water supply to our clients by 10 percent from June 27," Chief Executive Wanchai Lawatanatrakul told Reuters.

Wanchai said he expected industrial users to reduce water consumption gradually and the reduction rate should not as high as 40 percent.

Concerns about the impact of the water crisis have prompted several brokers to downgrade the petrochemical sector.

MORE CUTS MAY FOLLOW

Others are likely to follow SCC, the first company to announce a production cut since firms at Mab Ta Phut agreed this week to use less water to ensure supplies last until end-July, when the onset of the rainy season should ease the problem.

SCC's major petrochemical business is Rayong Olefins, Thailand's largest olefins maker, which has annual capacity of 800,000 tonnes of ethylene and 400,000 tonnes of propylene.

Thai Olefins (TOC) and National Petrochemical (NPC) -- which operate three ethylene plants with capacity of 1.145 million tonnes per year (tpy) -- were expected to deepen cuts to 40 percent from next week, trade sources said.

"We have already cut our upstream and downstream output by 10 percent this week and the operating rate will be lowered by another 30 percent next week," a NPC source said. "We will have to cut our output further if the water supply is reduced again."

A TOC source said the 40 percent reduction in water usage meant only a 30 percent reduction in naphtha use.

But an NPC official in Bangkok said the company had not yet cut output, but would do so at the end of July if there was insufficient water.

PTT PCL, a major shareholder in both companies, said it was studying the impact of the drought and had not yet decided whether its petrochemical business would cut production.

"The most important thing is to find new sources of water for the production lines," PTT senior executive Prajya Prinyawat told Reuters.

A source at Thai Petrochemical Industry said its petrochemical plant and refinery in Rayong province were operating at full capacity because the company had its own reservoir, which gives it more flexibility to manage water use.

SHARES TAKE HIT

The production cut announcement sent SCC shares to a 7-day low on Wednesday as analysts said lower output could hit profits.

At 0810 GMT, SCC shares were down 0.85 percent at 232 baht, while the overall Thai stock market was up 0.28 percent.

"Even though we think the situation will be short term, we may cut our SCC target price to reflect the impact of the water shortages," said Kim Eng Securities analyst Surachai Pramualcharoenkit.

Rayong produces olefins like ethylene and propylene which can be made from either naphtha or natural gas and are used to make plastics, mostly for the packaging and auto industries.

About 60 plants operate at Mab Ta Phut, including Aromatics (Thailand), Thai Plastics and Chemicals and Vinythai PCL

Refineries there include PTT's Rayong Refinery Co. and Star Petroleum Refining Co.. Power firms include Electricity Generating Co. and Glow Energy.