INSIGHT: The world of petrochemicals isn’t half changing

22 February 2010 15:21  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--“I remember in the old days, the European benzene price used to be set when US industry magazines, listing prices in the States, would arrive by post,” said an industry observer several years ago.

Now benzene – and other aromatics – pricing can change several times a day.

“I was working 18 hours a day and still couldn’t keep up,” said a former Singapore-based aromatics trader who has taken a temporary career break.

And it used to be that China was an enormous and seemingly never-ending sink for exports of petrochemicals from the rest of the world.

But then came the Chinese government’s decision to become self-sufficient in many products.

This led to an on-paper surplus in local polyvinyl chloride (PVC) production several years ago.

Now benzene looks to be heading the same way following the start-up of new reformers in southern and northern China in June last year.

“China is no longer a straightforward import market. Instead, you are seeing sharp swings between exports and imports, based on the economics of local producers,” said an industry observer.

In September and October last year, for example, exports were 40,000-55,000 tonnes for each of these months, he added.

“This swung to exports of only 7,000-8,000 tonnes in November and the same quantity in December," the observer said.

Ahead of this steep decline in exports, local yuan prices increased by a sufficient amount above US dollar values to open arbitrage - leading to a ramp-up in reformer and cracker-based production elsewhere in Asia.

But now with CNY and dollar prices at parity, China could soon swing back to big export volumes.

Overseas polyolefin producers are in far better shape as China, no matter how hard it runs its plants, cannot come close to meeting its own requirements.

“This is changing as local capacity increases. We are already hearing about more Chinese material being sold in Vietnam and the Philippines as China further tests out export markets,” said a polyolefin trader.

“We’ve also heard of a new representative office being opened in Vietnam specifically to handle Chinese exports.”

China’s polyethylene (PE) capacity is due to increase by 1.99m tonnes/year in 2010 to 11.1m tonnes/year, while its ability to produce polypropylene (PP) is to set to rise by 2.74m tonnes/year to 12.7m tonnes/year, according to Shanghai-based commodity information service CBI.

No matter where you look - up or down any production chain - the story seems to be the same: of China using its vast financial muscle to build industrial capacity.

In refining, it’s not only benzene that has been affected but also gasoline, with China becoming a big exporter of the fuel, squeezing the profitability of refiners elsewhere.

China’s demand growth for gasoline might be sufficient in the long-run to soak up increased local production – but this is very much a moot point.

What you can be certain of is that the increase in local refining capacity won’t always be perfectly synchronised with growth in domestic consumption. More supply shocks for refiners elsewhere seem certain.

Industrial capacity, downstream of refining and petrochemicals, is a lot less capital-intensive and therefore easier to overbuild.

Nameplate biaxially oriented polypropylene (BOPP) film capacity totalled 3.2m tonnes/year in 2009 versus domestic demand of only 2.2m tonnes/year, for example, said Stephen Moore of Singapore-based management consultancy Intercedent in an ICIS news article last week.

“These brand-new lines tend to be run very hard – at or close to 100% - for reasons of economics, resulting in last year’s actual surplus being significant,” he added.

A further concern is that China’s huge economic stimulus - including $1,400bn of new bank lending in 2009 - has led to more of this type over-investment in a wide range of industrial capacity.

“There’s no point in moaning about it, and no point in getting all paranoid and developing some big conspiracy theory about China being out to get you. This is just the way it is... you have to accept it and get on with life,” said a Singapore-based shipbroker.

Getting on with life for the higher-cost overseas polymer and petrochemical producers might have to involve a greater focus on offering higher value-added products – and on being solution providers.

It will be interesting to see which producers can live up to this challenge.

Read John Richardson and Malini Hariharan’s Asian Chemical Connections blog
To discuss issues facing the chemical industry go to ICIS connect

By: John Richardson
+65 6780 4359

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