INSIGHT: Capacity flood to overwhelm naphtha

30 May 2007 16:28  [Source: ICIS news]

by John Richardson


SINGAPORE (ICIS news)--If oil and gas exploration is the dog and refining is the tail, the petrochemical industry is a mere flea on the dog’s fur.


This twist on an old saying might seem a rather strange way to view an industry that’s been delivering marvellous returns over the past three-four years.


But as the downturn looms ever closer, attention is turning to how petrochemical producers can insulate themselves against the deluge of new capacity.


“A major problem is that the industry doesn’t adequately understand refineries,” says a source from a European oil-to-petrochemicals major with responsibility for naphtha purchasing.


“A lot of effort and expense has been devoted to adding value downstream through, for example, differentiated polymers and mapping what’s happening in markets all the way downstream to finished goods. I think that these efforts would have been better focused on improved refinery integration and on understanding the pressures on refiners.”


His views were echoed by a second senior industry source who pointed out that as polymer technology was so easy to license, there was little point in spending a fortune on research and development.


“And when the flood of new polymers arrives on the market, your ‘value added’ will soon disappear to the lowest cost supplier,” he added.


“What you will also see is inter-polymer substitution to the cheaper alternatives – for example, high density polyethylene (HDPE) for polypropylene (PP).”


The challenge for anyone operating a naphtha cracker over the next few years is to find enough feedstock.


Poor refinery margins led to a lack of refinery investment. However, margins are now above re-investment levels due to booming gasoline and other refinery-product demand, resulting in a plethora of new projects.


A lot of refining capacity is under construction, particularly in China and India. Contractors are working flat out and the cost of raw materials such as steel has greatly increased.


This means new refineries are likely to be behind schedule because of the full workload of the contractors and the increased time needed to raise finance, said Paul Hodges of UK-based consultancy, International eChem at the Fourth ICIS World Olefins Conference, which took place in Antwerp earlier this month.


Hodges added that some announced refinery projects might even be cancelled because of construction costs that had soared by as much as 70% over the last few years.


International eChem and oil and gas consultancy Wood Mackenzie therefore believe that there could be a global naphtha deficit of 24m tonnes by 2010.


China will be a big driver of this deficit because of the numerous naphtha-based crackers under construction, Hodges added.


It seems unlikely, though, that the central government will allow crackers to be brought on stream unless at least 75% of feedstock is sourced from a local refinery, other sources say.


This was the rule for new crackers introduced in March 2006 - at the beginning of the current five-year plan - because of concerns that the new C2 plants wouldn’t be competitive.


However, Hodges said that the power of competing influences in China could not be ruled out. If a local authority wants a cracker built on schedule for job creation reasons, the plant might just start up on time even if it needs to import a large percentage of feedstock.


Naphtha has been tight for the last 18 months due to shortages in capacity and soaring refinery margins. Hodges said that the strongest demand growth has been for light and middle distillate products in Asia, especially naphtha.


He predicted that naphtha would be tight for the next two years with the possibility of the market rebalancing by 2010.


The danger is that if the naphtha market doesn’t balance by 2010, further tightness in naphtha could coincide with the next petrochemical downturn.


So go and talk to your local refiner and persuade him to make more naphtha and/or switch to cracking liquefied petroleum gas (LPG) if you have the flexibility, advised the first industry source.


Otherwise, the result could be a nasty case of defleaing as producers are forced to consolidate.


By: John Richardson
+65 6780 4359

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