About as reliable as roulette

22 September 2003 00:00  [Source: ACN]

The year to date has again proved just how tough making consistently good money out of petrochemicals has become. Malini Hariharan and John Richardson discover that it's been good, bad or ugly in 2003 with hope springing eternal for next year

Hope beats eternal in the human breast - nowhere is this perhaps more true than in the petrochemical industry. After a disastrous 2002 - for many products -Asian producers' hopes were pinned on a slow but steady recovery in 2003.

The year is not yet over but what is clear is that the last nine months have not been easy. It is sad but true -the months so far have been much below expectations in many markets. But it is also true that there have been exceptions with products like monoethylene glycol and styrene doing very well. And there have also been patches of sunshine with strong performances in some quarters.

However, the negative influences of first the Iraq War and then Sars (severe acute respiratory syndrome) were hard to overcome.

The months preceding the war saw a strong run up in feedstock costs which were to a certain extent compensated for by increases in product prices. But the fall in product prices was equally swift after the war. And then came Sars which impacted business activity in China, Taiwan and parts of Southeast Asia.

In retrospect, some in the industry say that fears about the impact of Sars were more than was warranted. They believe that the pre-buying that took place before the war had a heavier impact on business. This they say, was responsible for heavy destocking in the second quarter.

But others insist that demand for several products plummeted as manufacturing activity across various industries was curtailed because of Sars. Either way Q2 was disastrous for most products. But demand quickly rebounded in June and July at a pace that far exceeded expectations. But this has in many cases not been sufficient to erase the losses suffered in Q2.

To start with, in the olefins chain the year-to-date has been patchy in terms of volumes as a result of the Iraq War and then Sars. 'People were expecting a much better year. But it has not even been much better than 2002. The war raised feedstock prices while Sars impacted demand,' says Mazlan Razak of Dewitt & Co.

He points out that the average Asian cracker operating rate so far this year has been around 90% which is a fairly good number. But margins have not been uniformly good across Asia with some players in negative territory. As always, integrated players benefited, as they had the flexibility of playing in either the olefins or polyolefins markets to maximise returns.

And those that were integrated to butadiene had even more reason to cheer as tight supply has kept Asian butadiene prices at high levels this year.

The spread between feedstock and product prices has been narrower in the case of PP than PE. The average spread between PE and C2s has been floating around the US$150/tonne mark through this year, which is acceptable under the circumstances, says Razak.

Polymer demand

In terms of demand, the worst affected have been ldPE and lldPE where the latest Chinese government statistics indicate that for the seven months to end-July, shipments into the country slipped by 40% to 855 000 tonne over the same period.

Most of this fall occurred in April and May when Sars was at its height. In June over May, the imports of the polymers rebounded by 46%. However, what is worrying for the producers is that in July exports slipped back again, by 4.8% to 117000 tonne over June's 123 000 tonne.

HdPE has fared considerably better. For the seven months until end-July, total shipments were up 11% to 1.34m tonne from 1.2m tonne last year. And in June over July, imports rose to 197 000 tonne from 188 000 tonne.

The strength of hdPE, which is heavily dependent on the re-export of finished goods, supports the argument that the impact of Sars on the Chinese economy was very short-lived and will have a minimal effect on growth for the year as a whole.

But the very weak performance of the other two polymers suggests otherwise, and cannot be just attributed to their greater cyclicality resulting from the agricultural film seasons in China.

In the case of PP, imports until July were around 5% higher than the first seven months of last year which is good but not as good as hdPE.

PP imports by China had fallen in the March-May period thanks to Sars as well as destocking. Mazlan points out that imports during the first two months of 2003 were 20-25% higher than the same period last year which was partly behind the contraction seen during the subsequent three months.

But there was a recovery in June, with shipments to China rising to 209 000 tonne from 165 000 tonne in May. Imports from January-July totalled 1.454m tonne.

PP shipments for the full year are likely to be only 5% more than last year at most, well below earlier projections of a 10% rise, says Mazlan.

This is not the kind of year that the olefins and polyolefins industries wanted. Growth has been patchy and often very disappointing since 1997 with the legacy of overcapacity still lingering.

Other economies are also struggling, with demand growth in Taiwan and in parts of Southeast Asia likely to fall short of expectations because of Sars. In South Korea, the Korea Petrochemical Industry Association recently announced sharp downward revisions in its domestic demand growth forecasts for the synthetic resins, blaming Sars and the country's own economic problems.

But there must be something to smile about, surely? Well, yes, there's the stronger hdPE numbers, the fact that both the Iraq War and Sars could have been an awful lot worse than they actually were and the large container loads of money that some people have made over the last few months.

Who's been making the money?

But who's been making the money? If financial results for the first half of this year are anything to go by, it is certainly not some of the region's key cracker-to-polymer players, particularly in South Korea and in Japan.

In South Korea, for instance, LG Petrochemical, the cracker and hdPE player, saw its net profit fall by 41% in Q2 2003 over the second quarter of last year on an industry-wide destocking.

Although the Iraq War was shorter in duration and lesser in impact than many had feared, the industry wide destocking will leave a big black mark on 2003.

The destocking, caused by the fall in oil prices when it became clear that the war in Iraq would not seriously disrupt supply was accelerated by Sars. It is one of the major causes of the slump in China polymer imports.

The ones making the money are, as usual, some of the traders and the distributors - as this year has been no different from any other: producers have been left playing a constant guessing game over the fundamental strength of China's polymer demand.

Some of the contradictory rumours we pick up about the market are as old as Moses. For instance, we were recently told by different traders that polymer operating rates were either high or low, that demand would rise or fall ahead of China's national holidays in October and that polymer supply was either long or short.

But what makes it so much harder to work out what is really going on is that getting reliable statistics out of China is very difficult. Because of the absence of good numbers reading the market often comes down to perception, to a feel for what's happening. And, of course, the Chinese buyers know they are sitting pretty because their market is so important to overseas suppliers.

Last, but far from least, the other major characteristic of the year-to-date has been very tight olefins supply for the last few months.

It all started to go pear-shaped for the non-integrated polymer producers when Japan's Ministry of Economy, Trade and Industry (Meti) forced the closure of Mitsui Chemicals' 455000 tonne/year Osaka cracker on 18 August because of a safety inspections scandal. There then followed other production problems, such as the shutdown by SK Corp of its 580000 tonne/year cracker between 28 August and 3 September with Sumitomo Chemical beginning a turnaround at its 415000 tonne/year Chiba cracker on 2 September. The restart has been delayed to 19 October from 14 October with no reason given.

Japanese traders, in what often amounted to swap deals and were therefore not indicative of what the end-users were willing to pay for ethylene, dashed into the market to secure material at US$500-505/tonne fob Korea. In contrast, the end-users stuck to buying ideas of US$500-520/tonne cfr NEA/SEA as a stand-off began. The stand-off was driven by the tight olefins supply and, yes you've probably guessed it, uncertainty over the direction of polymer markets.

Something would have to give and it finally did in the week ending 12 September. Offers slipped to US$540-550/tonne cfr NEA from US$530/tonne fob NEA and above the week earlier. In propylene, prices slipped by US$40/tonne from US$570-575/tonne cfr the week earlier.

Improved supply

The declines were due to improved supply and a weakening in polymer markets. Supply has improved as a result of Mitsui restarting production on 12 September following clearance by Meti, the end of the SK turnaround and Chandra Asri raising its operating rate. The Indonesian cracker player had been running at 80% since 16 August. It was back at 100% last week.

Polymer markets weakened because it turned out to be true after all that the Chinese buyers were in a comfortable position. At the end of August, producers had hoped that the buyers would remain out of the market for only a few days courtesy of the offloading of material by distributors and traders.

As this feature went to press, HdPE film-grade business for September delivery had, for instance, slipped to 600-630/tonne cfr China US$20/tonne, down from a week earlier with PP raffia grade declining by US$10/tonne to US$670-710/tonne cfr China. The hope now is for a rebound in pricing when the China's national holidays end on 3 October. They begin on 1 October.

But supply problems could crop up again. Meti says that more companies have failed to submit accurate safety reports.

Following the Mitsui scandal, Meti gave 47 chemical and refining companies until 8 September to submit their safety reports. It transpired in mid-September that less than five of these reports were not up to scratch. Meti had declined to name the companies concerned as this feature went to press.

If they were cracker operators, it is possible that more crackers will have to shut down for 1-2 months while Meti carries out its own inspections. And even if there are no cracker operators among the fewer-than-five companies, the political climate in Japan is currently one of heightened concern over the safety of the industry in general. The possibility of further disruption of production before the end of the year, therefore, cannot be ruled out.

Mazlan expects the start of the next petrochemical upcycle in 2004 with the peak in 2005, although he points that there are others in the industry who believe that start could be much later - maybe 2005 or even 2006. But he stresses that a deciding factor will be how new plants operate once they are commissioned. It is possible that supply growth could still outpace demand, in which case the industry is back to square one.

Before the events of this year, forecasts for the next peak in pricing had been as early as H2 2003.

Styrene and derivatives

Insert caption here

Moving to aromatics, benzene producers are also seeing a year that has been way below expectations. Many are hurting and losing money. Prices boomed for a while early in the year and then crashed. Margins have not been very healthy with producers often in a tight squeeze.

But the sun has been shining quite brightly for styrene. It has been another good year for producers and should remain so for the next two to three years thanks to China.

Styrene shipments to China this year are expected to hit 2.5-2.6m tonne, up from 1.8m tonne in 2002 and way above some producers' expectations of a 10% growth in 2003. Imports in H1 2003 were 1.3m tonne.

Vince Sinclair of CMAI points out that increased demand from China has taken place despite Sars, a weak global economic environment and high styrene prices. Import demand was largely driven by a rapid expansion in expandable PS (EPS) capacity which is projected to touch 2m tonne/year, up from 1.6m tonne/year in 2002.

Although the year has been good, styrene producers have seen swings in margins. For instance, April was a poor month as benzene consumed during this period had been purchased at a higher price. But producers were able to break even in May, with conditions steadily improving thereafter. Cash margins (based on spot and contract prices) have averaged at US$85/tonne for the year so far, says Sinclair. If the months with negative margins are eliminated the average margin would be closer to US$100/tonne. The average cash margin in 2002 was US$115/tonne.

So will 2003 turn out to be better than 2002? It would be quite reasonable to expect lower styrene prices (mid-US$600s/tonne) in Q4 based on a drop in crude oil and benzene costs, points out Sinclair. But then it is too early to assume the year will turn out to be worse.

One styrene producer says if Q4 goes well, producers can look forward to a year as good as 2002. For 2004, the consensus is that China will import more styrene. But the pace of growth is expected to be slower. Sinclair expects styrene imports of 2.9-3m tonne next year based on a slower rate of EPS capacity expansion.

The 2003 picture for styrene derivatives is quite good except for EPS. Capacity for this product in China is booming but plants are coming onstream ahead of demand, which CMAI expects will rise by 20% to 1.05-1.1m tonne in 2003. Tough competition has meant that the domestic market so far this year have been awful.

The ABS performance has been better than expected with demand rebounding quickly after Sars with most producers back above breakeven point. But one producer says it suffered big losses in April and May, from which it is unlikely to recover this year especially as the ABS peak demand season will draw to a close at end-September.

And in PS, the year is likely to be better than a lousy 2002 when profits were not evenly shared along the chain. Cash margins for PS producers were for the first time zero to negative last year. But margins should average US$20-30/tonne on export prices to China this year, estimates Sinclair. Margins on domestic prices are likely to be higher.

As for 2004, margins should be at a similar level as this year. But it should be a better year for ABS on the assumption that feedstock costs, especially butadiene, will be lower. But styrene could on an average be more expensive. 'It could be a year of two halves. The first half of 2004 is likely to see styrene prices in the mid US$600s/ tonne. Prices could then gradually move up,' says Sinclair.

But a condition for a prosperous ABS market is that producers should moderate production to match demand - no doubt a difficult task.

PX and PTA

In the paraxylene (PX) and purified terephthalic acid (PTA) chain, this year could have been worse given the feeling of overcapacity in PTA at the start of 2003, says David Hewitt of PCI Xylenes and Polyesters.

The spread between naphtha and PX has been hovering in the US$160-460/tonne range for most of the year which covers cash costs but is still not at reinvestment level. PX producers had expected much higher prices in 2003 as on paper Asia was expected to be short of 720000 tonne/year of PX after the start up of new PTA units.

The Asian contract price (ACP) was US$615/tonne cfr Asia in Q1, which collapsed to US$525/tonne cfr Asia in Q2 only to creep back to US$570/tonne cfr Asia in Q3. With spot prices averaging US$540-545/tonne cfr Asia as this feature went to press, the general expectation was that buyers were unlikely to tolerate any increase in the October contract price, which had been nominated at US$580-670/tonne cfr Asia, says an industry source.

PTA producers enjoyed a good February and March but Q2 was a disaster as sales to China plummeted. In 2003, the spread between PX and PTA has averaged US$195/tonne on export prices to China. This covers cash costs but is not terribly exciting, adds Hewitt. The spread was lower than 2002, when it was on an average US$20/tonne higher.

Despite this, 2003 has in some ways been better than expected, points out Hewitt. Volumes from the new PTA plants that were commissioned earlier this year were absorbed without any major disruption to markets. And Chinese PTA demand growth is expected to be healthy - rising 16% to 8.1m tonne. This would be lower than the 22-23% growth experienced in 2002, but still stellar given that world growth this year will be about 8% with Chinese demand growing by 1.14m tonne out of a global total of 1.9m tonne.

Looking ahead, PTA markets are expected to start tightening from some time next year as there are no new capacities due onstream except in Iran. Also the Iran project is linked to polyester, which will limit exports. The next projects are due only in 2006 which would mean two years without any new capacity, says Hewitt.

As for PX, there is only one project due next year, in Iran, and after that a second possibly in 2005. But big companies continue to be reluctant to put in more money into a product that has not given good returns since 1994-95.

In contrast, there has been keen interest in PTA projects especially in China, Thailand and India. China's net polycondensation capacity is projected to grow by 2m tonne/year for the next two years.

Although many local companies have drawn up projects, it remains to be seen how many will be built.

Hewitt says he would be surprised to see more than six new plants start up by 2006-07 out of the 22-23 projects that have been announced.

Money is likely to the major constraining factor as well as perhaps access to PXgiven the dearth of new projects.

Acrylonitrile and caprolactam

Caprolactam producers are also not rejoicing as high raw material prices in H1 affected returns. 'We can at best hope for a little profit this year after a loss in 2002,' says one producer.

For acrylonitrile producers, the second half is turning out to be better than H1 but the year will probably end up below expectations.

One producer estimates that after enjoying a profit of around US$200/tonne in Q4 2002, returns slipped to US$150/tonne in Q1 2003. He believes that most producers only broke even in Q2 when raw material prices rose by almost US$100/tonne while acrylonitrile prices dropped by the same amount. In July and August, some non-integrated producers suffered losses in the range US$50-100/tonne.

Global acrylonitrile demand growth this year is expected to be flat or at best grow by 1-2%, down from the 3-4% growth experienced last year. Demand in 2002 was an estimated 4.94m tonne. But producers are looking forward to 2004 when demand growth is projected to be 2%. 'This would mean about 100000 tonne of additional demand in a year of almost no production increases. The net effect would be a much tighter market.

A better 2004?

Optimism is running high that 2004 will be a better year for acrylonitrile and many other products. But towards the end of far too many years since 1997 - when life first became so much more difficult - the expectation has been that come January, everything would turn around.

Often the expectation was based on little more than the theory that things couldn't get any worse.

Let's keep our fingers crossed that this time the optimism, founded at least on some pretty encouraging supply and demand balances, will be justified.

However, as is always the case in this industry, all the forecasts could prove to be wrong with profitability about as reliable as returns from a spin of the roulette wheel.

Production of major petrochamicals in China*

Product	Quantity	% change+
Ethylene	3442.3	15.3
Propylene	3329.6	15.2
Butadiene	482	21.14
Benzene	1370.6	13.2
Paraxylene	953.2	12.0
Styrene	534.9	7.8
Methanol	1703.5	36.8
PE	2308.9	17.0
PP	2376.0	13.1
PVC	2274.9	17.2
Monoethylene glycol	569.8	10.75
Caprolactam	112.2	30.16
PET	2303.3	17.56
* January-July 2003 ('000 tonne)	+ against January-July 2002
Source: Sinodata Consulting

Imports and exports by China, January-July 2003 ('000 tonne)

Product	Import	% change*	Export	% change*
Naphtha	165.1	107.5	652.6	27.6
Ethylene	22.5	(58.9)	12.4	30.5
Propylene	100.3	(46.3)	-	-
Butadiene	40.2	(44.0)	9.6	227.8
VCM	477.7	4.4	-	-
Ethylene dichloride	225.4	30.8	-	-
Toluene	548.5	19.8	0.9	(39.0)
Paraxylene	527.4	326.4	86.0	144.3
Orthoxylene	125.5	18.0	0.1	119.8
Styrene	1479.4	53.2	3.5	182.4
Phenol	149.8	5.6	0.2	(10.1)
Methanol	790.5	(29.0)	41.4	-
LdPE / lldPE	858.4	(40.3)	5.1	25.1
HdPE	1340.0	11	3.8	83.4
PP	1454.0	5.5	7.4	0.03
PVC	1248.4	(9.3)	15.3	25.9
ABS	959.4	3.9	13.1	4.0
PS	776.4	(7.0)	9.8	5.9
Expandable PS	95.3	1	18.0	53.0
Purified terephthalic acid	2697.7	20.8	-	-
Monoethylene glycol	1288.5	7.7	16.0	(6.6)
Acrylonitrile	215.78	16.2	-	-
Caprolactam	219.6	8.1	-	-
PET	162.2	5.6	15.0	34.5
Polycarbonate	286.4	30.1	49.7	24.0
Polybutadine rubber	47.0	12.8	18.0	(11.6)
Styrene butadiene rubber	214.0	(10.9)	13.0	(23.6)
* against January-July 2002
Source: Sinodata Consulting

< previous article(ICIS Podcast: Chemical News Central 2 November 2009)

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly