Uptrend to be main issue at aromatics conference

28 June 2007 01:34  [Source: ICIS news]

By Clive Ong

SINGAPORE (ICIS news)--With the Asian petrochemical uptrend entering its fourth year, concerns about how much longer it can be sustained is expected to take centrestage at the 3rd Asian Aromatics and Derivatives Conference starting on Thursday.

Lively discussion is expected among industry players at the conference where speakers from major firms including Shell Eastern Petroleum, Korea’s Samsung Total Petrochemicals, Japan’s Nihon Oxirane Co, and India’s Reliance Industries will touch on these concerns.

Petrochemical products have reached heights not seen in a decade, underpinned by robust crude and naphtha values.

Nymex crude futures have largely traded above $60/bbl for most part of this year and are now heading toward $70/bbl, prompting speculation that aromatics prices could remain at high levels for the remainder of 2007.

In Asia, China remains the key propellant of growth in the region. Its economy registered another strong 11.1% growth in gross domestic product (GDP) in the first quarter. Estimates point to this growth being sustained into 2008.

Although China consumes large amount of petrochemicals, concerns are surfacing among Asian producers as the country builds up its own capacity.

New capacities in the Middle East coming onstream in 2008-2009 using cheaper feedstock could also spell a downturn in aromatics due to a potential oversupply. Whether China can continue to absorb the additional supplies is a question on the minds of many.

Another key issue that is likely to be discussed is the challenge of passing on high aromatics costs to end-users.

Producers of resins, synthetic rubbers, coatings and paints have seen shrinking margins as prices of end-products such as toys, consumer electronics, computer items, and shoes have not kept pace with petrochemicals.

Environment issues in China have also affected the country’s relations with neighbouring countries such as Japan and international environmental groups.

The government continues to play a delicate balancing act between having adequate chemical production to keep its economy vibrant, and keeping pollution in check.

The recent government clampdown on numerous polluting chemical plants in the Taihu Lake region is perhaps a sign that the Chinese authorities are serious about curbing pollution to its lake, air and lands.

With China having such a pivotal role in Asia’s growth, any potential hazards to that growth will be heavily scrutinized.

Several measures by the Chinese government to cool its economy appear to have limited impact so far. The latest initiative is the reduction of export rebates for more than 2,000 products effective 1 July in a bid to curb the growth in its massive trade surplus.

Besides China, the housing sub-prime woes in the US have also raised concerns that any slowdown or recession in the world’s largest economy could undermine China’s growth and ultimately the buoyant aromatics market in Asia.

Given the increasing risks in global markets, hedging against price fluctuations in petrochemicals has gained some head-way in recent years. The most evident developments are in the aromatics sector although the sophistication of the techniques still lags behind the tools used in financial markets.

Nonetheless, the emergence of instruments such as forward trades, fixed-floating price swaps, time and location swaps allow players to manage their risks better although liquidity continues to be thin.

Brokers have also become an important component in the spot aromatics market. They play a key role in improving liquidity, transparency and introducing instruments for hedging risks. Since 2000, more than five brokerages had set up shop in Asia with almost all brokering one or more aromatics products.

By: Clive Ong
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