INSIGHT: NPRA '07 - The myth of cracker delays

26 March 2007 23:08  [Source: ICIS news]

SAN ANTONIO, Texas (ICIS news)--A massive 3.5m tonnes of ethylene capacity will come on-stream in Saudi Arabia next year. Significant volumes will follow in 2009 and beyond from low-cost producers in the Kingdom and elsewhere in the Middle East.

These facts alone should make petrochemical industry watchers sit up.

Construction delays are not widespread across the Middle East some commentators suggest. Significant volumes of ethylene and ethylene derivatives will be available later this decade and find a ready home in markets in the west.

Olefins and derivatives producers in Europe and the US can expect some difficult times ahead if capacities come on-stream as planned.

This is not a doom and gloom scenario. “[Cracker] delays in the Middle East, with the exception of Iran, are largely a myth,” Tony Potter, director of olefins Europe, Middle East and Africa for consultants CMAI says.

Ethylene capacity additions this year may be limited to three units but the wave of new output building up is unprecedented.

Two crackers in Iran, the Araya Sasol complex (Olefins number 9) and the Jam cracker, (Olefins number 10) are expected at last to start up in the second half of this year as is Formosa Petrochemicals’ 1.2m tonne/year unit but the output from these units will really be just a drop in the ocean.

In 2008 four of Saudi Arabia’s planned new crackers will come on-stream. Saudi Arabia will add 10m tonnes of ethylene capacity by the end of 2012, CMAI says.

The question is then whether it is too easy currently to be overly positive on the sector outlook. Certainly, construction costs have risen dramatically. Capital equipment and construction skills are difficult to come by.

There is much talk of construction delays postponing the inevitable sector downturn or even militating against its effects. Yet Potter particularly points out that new capacity from Iran will not be responsible for that downturn.

The Saudi plants will probably be brought up to full output quickly. The question then is whether capacities from plants ready for start-up later in the decade in Kuwait, Qatar and Abu Dhabi hit the market as expected.

Additional derivates volumes out of the Middle East will find ready markets in Europe and North America. China’s capacity to produce key polymers and other chemicals is growing fast and the need for imports shrinking.

North American petrochemical players believe that ethylene demand will be flat for the next five years with any derivatives demand growth easily met by low-cost imports. The North American ethylene derivates trade balance is expected to dip negative from 2009.

In Europe the situation is likely to be similar but its domestic producer more exposed to imports.

The impact on profitability is inevitable. As competitive pressure builds so will the pressure on commodity prices. Some players will find refuge in more specialised polymer areas – like pipes, wire and cable – but others will be exposed.

A testing time for petrochemicals awaits the real threat being the capacity cycle hitting the sector once again with a vengeance.

By: Nigel Davis
+44 20 8652 3214

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