06 July 2007 15:03 [Source: ICIS news]
By John Richardson
Some financial analysts have argued that the bad old days will not return because of much better financial management and far more discipline in adding capacity.
The analysts are right on the first score, as Asian companies no longer borrow predominantly in US dollars. Local bond and stock markets have developed, providing alternative sources of financing. Hedging tools are much more widely used.
It also seems highly unlikely that there will be a crisis of a similar nature because governments across the region have huge US dollar reserves, thanks to booming exports, and much better-run banking systems.
But the change in the structure of export trade is a pointer to one major cause of concern.
Back in 1997,
The threats to the Chinese economy include rising social unrest as a result of illegal land grabs and rising levels of pollution, the capital investment binge that has driven most industries into oversupply and inflation resulting from soaring labour, land and other costs.
It is also nonsense to talk about discipline in building capacity, a statement common to both the analysts and CEOs anxious to talk up markets.
A lack of appetite for investment, a hangover from the crisis, is the reason why the cracker projects being mooted in
However, much-needed further restructuring in
And while companies might have learnt better financial management skills thanks to the lessons of 1997, they are still vulnerable to repeating the same mistake in a different guise.
Many of the projects were non-integrated. “The assumption was that if a paraxylene [PX] feedstock tank was built, that would be enough to guarantee viability,” said a delegate at last week’s Third Asian Aromatics Conference in
“Few project proponents bothered to assess whether enough PX would actually be available.”
PX has, as a result, been tight for several years and is likely to remain so until 2009, leading to lots of aromatics projects.
The problem is the booming demand for gasoline combined with delays in building refineries, the result of the tight contractor market.
Gas-oil supply could also be tight due to rapidly rising diesel demand, meaning that aromatics output from reformers and crackers could be restricted.
In other words, as the same delegate rather caustically put it: “The problem has shifted up the chain. PX plants are being built along with feedstock tanks, where the assumption again is that the tanks will automatically be filled.”
Finally, the 10,000lb gorilla question is what the impact of crude prices will be on petrochemical margins when the flood of new capacity arrives in 2009-2010.
Some forecasters assume that crude will decline in a steady, comfortable line from the current $70/bbl range to $55/bbl by 2009-2010. This would mean the squeeze would not be that bad when polymer and other prices once again retreat well below $1,000/tonne CFR (cost and freight) China.
What about geopolitics and the voracious demand for crude and from
Crude could easily remain around $70/bbl, or could go even higher, as petrochemical prices tumble.
Most of the new capacity coming on stream in the
We might therefore soon be talking about an Asian naphtha cracker crisis, linked to a global oil-price inflation crisis.
This could be far more severe than the events of 10 years ago, leading, maybe, to more complacent reflections in 2019-2020 when the world is being run on alternative energy or on abundant new oil supplies on the moon. History repeats itself, repeatedly.
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