INSIGHT: Continued market growth drives Asia confidence

12 May 2010 15:21  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--Persistent Middle East production problems, operating rate cuts in the West and resilient growth in China have led to growing confidence that the polyolefins downturn, when it eventually arrives, will not be as bad as had been feared.

The continued strength of the industry could be one of the key topics of discussion during this year’s Asia Petrochemical Industry Conference (APIC), which takes place in Mumbai on 13-14 May.

The delays in new Middle East start-ups have been legion and are the result of a shortage of sufficiently-experienced start-up engineers and faulty plant equipment, say many industry sources.

New Saudi crackers have only been allocated sufficient gas feedstock to run at around 90% of nameplate capacities, these same sources add.

Saudi Arabia is sticking to its OPEC oil-production quota. This has, therefore, also resulted in insufficient associated gas to run existing crackers at maximum rates,” claims one industry observer.

Shell Chemicals earlier told ICIS that it had cut 22% of its US ethylene capacity over the past two or more years.

Plant closures in the West have created unexpected tightness in some polymers and some applications.

“Permanent shutdowns in Europe have included tiny, old low-density polyethylene (LDPE) units, 10,000 tonne/year and even as low as 7,000 tonne/year, because the operating costs were so high,” said a Singapore-based executive with a global PE producer.

“This, along with the switch to ethylene vinyl acetate (EVA) production by some LDPE producers, has meant that the polymer has actually become very tight - much tighter than we expected.

“Autoclave reactors, because of their high cost, are also not being built anywhere - and autoclave is ideal for extrusion coating applications, which are seeing some excellent margins.”

Linear-low density PE (LLDPE) production is being constrained by a lack of butene-1 co-monomer supply as a result of crackers in the US switching to lighter feed due to the big advantage of ethane gas prices over naphtha. Hexene and octene co-monomers are also said to be tight.

This is leading to low operating rates at both new and established plants, with swing plants choosing to produce high-density PE (HDPE) because of the lack of co-monomer, said a southeast Asia-based olefins and polyolefins consultant.

The market is still being supported by low US and European operating rates.

And, of course there is China: despite a 43% reduction in bank lending in the first quarter compared with the same period last year, March LDPE and linear-low density PE ((LLDPE) imports reached record levels.

There is a debate over whether these strong data point to continued economic overheating or to a sustainable increase in domestic consumption.

“I take the positive view and expect PE demand-growth to be between 13-19% this year,” added the Southeast Asian-based olefins and polyolefins consultant.

“This will be a lot lower than the 36-37% we saw in 2009 as extensive re-stocking took place during that time, but growth in the high teens would still be excellent.”

And a senior European-based executive with a second global polyolefins major said:  “We see margin depression on new supply, but my feeling is that this trough will not be as deep as previous ones because of Asian demand and project delays.

“There has been too much writing and excitement about overcapacity, but it will not be as extreme as some people say. I don’t think it will be as bad as 2002-03.”

Further out, beyond the current cycle, confidence over Asian petrochemicals growth is even greater.

This correspondent has found it hard to find anyone willing to express a negative view.

“In India, it took 14 years to reach the first 8m tonne/year of consumption - but the next 8m tonne will be added in 5-6 years and subsequent 8m tonnes every 3-4 years,” said a senior source from the Indian industry, who was expressing a typical train of thought.

“The country’s total polymer market should total 30m tonne/year by 2020. This will still be a long way behind China, where polymer demand is right now around 50m tonne/year, but it is amazing progress.

India is finally taking off because long-standing problems with poor infrastructure are at last being dealt with.”

Is this all too good to be true?

Around 29m tonnes/year of ethylene capacity is due on stream in the 2008-2012 period, estimates the ICIS pricing Worldwide Ethylene Plant Report.

In March 2010, however, only around 45% of this had come on stream which suggests that there’s still the potential for a big supply shock.

And the collapse in global stock markets late last week as a result of the Greek debt crisis reminded everyone that economic recovery remains fragile.

But one commodity that is definitely not in short supply right now in Asia is confidence. 

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By: John Richardson
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