Near-term petchem supply fears overblown - HSBC

03 December 2008 04:00  [Source: ICIS news]

DUBAI (ICIS news)--Concerns over a near-term supply glut and a global slowdown in demand for petrochemicals have been overblown with fear in the markets driven by negative headlines, said Hassan Ahmed, managing director of HSBC’s chemical research arm, on Wednesday.

Stress testing of demand and supply fundamentals still suggest a “normal”  or mid-cycle margin year in 2009, Ahmed told delegates at the 3rd Gulf Petrochemicals and Chemicals Association (GPCA) forum.

Profitability over the next 12 months should also be at or near mid-cycle levels even if we factor in a global recession, he added.

Ahmed’s stress testing mode,l which incorporates a contraction of 1.4% in US demand growth levels and a 6% growth in Chinese demand, suggests a global capacity utilisation rates of 87.2% and 85% in 2009 and 2010 respectively.

Global chemical players have raised fears of a severe overcapacity situation next year as mutiple Middle East facilities are due to come on stream in the second quarter of 2009 coupled with a light maintenance schedule for the year.

Ahmed based ongoing projects in the Middle East and China on the assumption of a 70:30 debt to equity financing model.

Estimating the net debt to capital ratios of various European, US and Middle Eastern chemical companies, he said their balance sheets remain in relatively good shape and had been largely shielded from the direct impacts of the credit crunch.

However, a cyclical deep trough in the medium term was inevitable as a result of the large Middle East cost advantage and all planned capacities coming on stream creating a major oversupply situation, Ahmed said, but added: “Contrary to popular belief the trough may be shortlived, aided by ethane shortages in Saudi Arabia and a moratorium on gas allocation in Qatar,” he said.

Shutdowns of marginal producers in the US and western Europe would also aid the recovery of the industry, he added.

He concluded that the long-term profitability of the sector did not “paint a pretty picture” as estimated operating margins of the industry of a whole declined from more than 13% in the 1960s to roughly 6% in 2000.

“Consolidation, innovation, integration and relocation will be the key determinants to success,” Ahmed said.

The three-day 3rd GPCA forum ends on 4 December.

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By: Bohan Loh
+65 6780 4359

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