INSIGHT: Healthy Asia petchems defy logic, baffle experts

24 July 2009 15:17  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--“Where have all the petrochemicals gone?” is a question that everyone keeps asking, and oil gas consultancy Purvin & Gertz is no exception.

Naphtha demand looks like being very strong in H2, driven by petrochemical demand in China which we can’t fully understand,” said one of the firm's Singapore-based consultants, N Ravivenkatesh.

“Our naphtha balances for the third quarter have changed significantly due to higher operating rates of crackers and lower operating rates at refineries,” Ravivenkatesh writes in his July Asian Petrochemical Feedstock Outlook report.

Here is the rub: how can petrochemical markets be so healthy when consumption of crude and crude products keeps on slipping?

OPEC in its latest report, for instance, forecasts that global oil demand is not expected to return to 2008 levels until 2012.

Global petroleum demand will be 1.8m barrels of oil per day lower than its June forecast for 2009, Purvin & Gertz added.

But until recently, the price of crude was in the region of $70/bbl and is still hovering around $60/bbl, despite evidence of further demand erosion.

Maybe driving everything is a consensus - still in place despite some recent bad macroeconomic news - that the worst of the crisis is over.

Delays to the start-up of Middle East petrochemical plants are often cited as another reason for the petrochemicals recovery.

But although these delays couldn’t have occurred at a better time if you’re an existing producer, a strong argument is that they should have merely made a very weak market only slightly weaker. The demand for finished goods made from petrochemicals has to be down on a global basis over the first half of 2008.

Deep global operating rate cuts at refinery and petrochemical plants also helped in the fourth quarter of 2008 and the first quarter of this year.

A heavy Asian petrochemicals turnaround season, which peaked around June, is used as another explanation for the rebound.

“But this just doesn’t stack up when you look at the numbers,” added Ravivenkatesh.

In Asia and the Middle East naphtha demand was down by about 2.9m tonnes on a cumulative basis from January to June 2009 as compared to 2.8m tonnes for the same period in 2008, according to the consultancy.

Soaring Chinese demand on huge government spending and an explosion in bank lending seem to be other factors.

But the consultant joined a fairly sizeable and senior chorus when he said: “No matter how much domestic demand might grow in 2009, exports of finished goods are still far too big a share of China’s economy for this local growth to have made up all the difference.

“You start to worry about the level of inventories of chemicals and finished products.”

While prices might have gone up, the first half of the year saw an erosion of spreads on an historic basis across the whole chain from naphtha to polyethylene (PE) and polypropylene (PP).

Polyolefin spreads were better than those for ethylene and propylene when the first half is looked at in isolation. The feedstock producers spent most of the six months playing catch-up with rapidly rising energy costs.

Rising oil and naphtha costs, by the way, are yet another reason given for the price rally.

While ethylene and propylene producers battled to recover costs, the polyolefin players were happy to accept price rises because of their confidence that the recovery is here to stay. There were also reports of stocking up ahead of further crude increases.

A recent surge in Asian operating rates is partly behind the revised Purvin & Gertz outlook for naphtha.

Petrochemical production is expected to dip in the third quarter and early in the fourth.

But the start-up of new aromatics reformers in Kuwait and Oman and a new gasoline reformer at Vizag in India will more than compensate for any dip in naphtha demand, the consultancy adds.

Even the new Reliance Industries gas field in India - which could displace as much as 150-200,000 tonnes/month of domestic naphtha consumption in the power and fertilizer sector by August/September – isn’t expected to change the outlook.

East of Suez naphtha supply will be short for the rest of this year, Purvin & Gertz added.

What’s remarkable is that as recently as April, a 20-30% increase in Asian naphtha supply in the second half looked as if it would drive the cost of the feedstock down.

The head scratching over the real strength of petrochemicals continues when you look at the other reason why the consultancy has revised its forecast.

“Refining margins for both simple and complex refining were extremely weak in June and early July,” adds Ravivenkatesh in the Petrochemical Feedstock report.

Variable margins were negative in the Singapore market using Dubai crude as a measure, he continued. This has forced “dramatic operating rate cuts (and therefore less naphtha supply) in Japan, South Korea and Singapore during the third quarter.”

Weak demand for gasoline during the US summer driving season and oversupplied Asian fuels markets has been behind the negative margins and the cut in operating rates.

Chinese refineries have in contrast ramped up rates on the recent domestic fuel-product price rises. This is likely to mean strong gasoline exports by China in July.

“US total gasoline stocks briefly fell to a five-year low range from a five-year high because of refinery outages,” said Ravivenkatesh.

“But within two months they were back up again after refiners had upped production, only to be hit by weak consumption.”

If people continue to drive less, how can petrochemicals remain in such a relatively healthy state?

If China is the key factor then how long can it continue to absorb enough volume to sustain the current health of the market?

Now that petrochemical operating rates have been raised in Asia could this be enough to swing the supply and demand balance in the wrong direction?

The other debate is on the petrochemical supply side. Further start-up delays in the Middle East and also in China seem likely, staggering the impact of the huge new volumes.

The best scenario is that further delays happen when economic confidence is still high.

But it’s probably best to plan for the reverse.

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By: John Richardson
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