NPRA '05: Has the paradigm shifted on the industry cycle?

03 April 2005 20:50  [Source: ICIS news]

SAN ANTONIO, Texas (CNI)--Getting on towards two years of record-breaking profits for many petrochemical producers has raised the inevitable question among delegates at this year’s National Petrochemical & Refiners Association (NPRA) International Petrochemical Conference (IPC) of exactly when it’s going to end.

 

The other burning question on the minds of everyone here is what the end will be like? Will it be a disastrous slump with pricing and therefore earnings returning to their nadir of 2001-02 or will the next decline be much less severe?

 

Everybody appears to agree that barring a major economic downturn, caused, say, by a collapse of the Chinese economy or a geopolitical event on the scale of the 9/11 attack on the US, 2005-06 should be very good. The division of opinion is over whether the downturn will arrive in 2007, 2008 or perhaps even later.

 

The other big divide is on the supply side. Much is being made of all the Middle East capacity additions. However, even if it is assumed that all the projects happen, the region’s share of world ethylene capacity is still only expected to rise from 8% to 15% over the next decade, according to some optimists.

 

And even if all of the projects in Iran do go ahead, further delays in start-ups are inevitable. Reasons include the lack of experience of local contractors, a shortage of skilled manpower caused by the sheer volume of projects in Iran, and the slow pace of completing utilities. This has created optimism that much of the new capacity scheduled to be onstream in Iran during the next two to three years will be pushed further back.

 

True, projects in China are constantly being announced; PetroChina, for example, recently announced two cracker projects in one week. But some of these projects will inevitably not be realised, the optimists added. Companies in China tend to make announcements first and ask questions later, such as where is the feedstock going to be sourced? Banking reforms in China should mean that feedstock and other issues are examined much more closely, making finance harder to obtain.

 

Also, China’s monstrous demand growth needs to be taken into account. Even with the start-up of more than 2m tonne/year of ethylene capacity and hundreds of thousands of tonne of derivative capacity in China this year from the joint-venture cracker projects, the country is expected to remain in deficit on many petrochemicals for years to come.

 

In addition, a senior petrochemicals executive said, on the sidelines of the IPC, that many of the already operating petrochemical plants across the globe and across many products could not be debottlenecked any further. "They have reached technical limits on debottleneckings and there is still plenty of caution around over rushing into greenfield investments," he added. He believed, therefore, that the next pricing trough will be a lot shallower than last time around, a view shared by consultants CMAI.

 

His view is a complete turnaround from only a few years ago when people were predicting that there had been another fundamental shift in the industry – to lots of mini troughs and peaks. The worry then was that great economic uncertainty, combined with the speculative and opaque nature of the increasingly dominant China market, meant that, just perhaps, the industry would have to make do with these mini troughs and peaks with no sustained upswing.

 

Because of unforeseen geopolitical events, or because the industry again gets its calculations wrong on supply and demand, will we see evidence of another paradigm shift at next year’s IPC? 

 

*Sponsored by the National Petrochemical & Refiners Association (NPRA), the IPC begins Sunday and continues through Tuesday.

 

(The CNI newsroom at NPRA's IPC is in Salon C, Riverwalk Hotel; Tel. + 1 210 299 6585.)

By: John Richardson
+65 6780 4359

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