INSIGHT: Overconfidence in 2011 is a clear risk

28 December 2010 15:00  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS)--Overconfidence is perhaps the biggest risk for 2011 as a result of sales volumes that have this year exceeded even the most wildly optimistic forecasts.

The danger is that we have yet to see the worst of this current petrochemicals cycle. Companies and chemicals analysts might have got a little ahead of themselves by predicting that a “Supercycle” will begin from as early as the second half of the coming year.

A strong argument can be made that by 2013-2014 lack of investment in sufficient new capacity could lead to record-high margins. This assumes that the world economy doesn’t suffer a double-dip recession.

But cautious commentators are warning that a delayed supply-shock is still on the cards in the New Year, thanks to further start-ups and more stable operations at recently commissioned plants in the Middle East and Asia.

“At the end of 2009 the industry was, in hindsight, too pessimistic and this fed through into sales targets for 2010,” said a UK-based industry observer.

“I get the feeling that forecasts for 2011 have gone too far the other way and that we are about to go through a period of absorption as operating rates at new plants increase.

“This is where human nature comes into the game. Product managers faced with targets that are too high could end up chasing market share through maximising output. This would make oversupply even worse.”

Chemicals analysts at South Korea-based Woori Investments wrote in a November report that 2011 would see a decline in global utilisation rates.

“We believe that [global ethylene] supply will rise by 10m tonnes over the next year, topping our global demand-growth estimate of 5m tonnes over the same period," said the report.

This was based on commercial production starting at new facilities with a total capacity of 6.2m tonnes/year and higher operating rates at plants already on-stream.

Extra capacity absorption that still needs to take place includes Borouge’s 800,000 tonne/year polypropylene (PP) and 180,000 tonne/year linear-low density (LLDPE) plants that started up in the third quarter.

“We are not seeing much material from these plants right now and so we are expecting the real impact to occur next year,” said a Singapore-based polyolefins trader in early December.

The same can be said for Saudi Kayan Petrochemical’s polyolefin capacities, which includes 400,000 tonne/year of high-density polyethylene (HDPE). 

Although the SABIC subsidiary’s Saudi-located complex has been on-stream since August, the big volumes seen in the market so far have only been of ethylene.

Plants in Thailand, delayed by a complicated environmental muddle, have recently been allowed to start-up. These include Siam Cement/Dow Chemical’s 350,000 tonne/year LLDPE and PTT Chemical’s 300,000 tonne/year HDPE facilities.

Recently commissioned complexes in China are expected to run a little more smoothly next year.

A further danger hanging over the market is an increase in OPEC crude-production quotas.

The oil cartel left its quotas unchanged after it met in Ecuador earlier this month, but if the cost of crude keeps on increasing the pressure for greater output will rise.

Saudi Arabia’s current quota, around 8.5m bbl/day, has resulted in a reduction in associated gas supply to many of the country’s crackers. Oil production needs to be at 10m bbl/day for the crackers to run at full rates, estimate several industry observers.

Ethylene exports from the Al-Jubail industrial city on Saudi Arabia’s east coast have fallen to virtually zero in 2010 from several hundred thousand tonnes in 2009 because of the cut in associated gas.

Higher oil quotas could result in exports returning to 300,000 tonnes or more over a 12-month-period.

Either that or SABIC might successfully push for much-higher downstream operating rates now that the company, in theory, has more control over its subsidiaries thanks to a new corporate structure introduced earlier this year.

From a “value addition” point of view, exporting ethylene can be viewed as making less sense than shipping-out poyolefins or mono-ethylene glycol (MEG).

One would have thought that major technical issues at complexes such as PetroRabigh in Saudi Arabia will have to eventually be resolved. The Saudi Aramco/Sumitomo Chemical joint venture has suffered around five major polyolefin outages during 2010.

Further support to the market has been provided by what have reportedly been delays at the container port in Al-Jubail.

If customs-processing issues said to be behind the delays are resolved, this could mean a smoother flow of volumes into Asian and European markets.

A consensus is building that refinery margins have bottomed-out, meaning that some refiners might push production harder in 2011. This would help solve the butene-1 co-monomer shortage that has restricted LLDPE production.

The growth side of the story can also be viewed as little more negatively.

New plants in China have raised the country’s polyolefins self-sufficiency and the country’s GDP (gross domestic product) growth is forecast to fall to around 8% in 2011 from approximately 10% this year.

Lower growth in China is expected to be the result of efforts by the government to control inflation.

Inflation is a threat to growth in many major Asian chemicals-consumption markets including India, Indonesia and Thailand.

“The battle against inflation in Vietnam has been lost by the government,” added the polyolefins trader we quoted earlier in this article.

“Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation.”

The value of the dong (the local currency) has fallen by one-fifth over the US dollar since mid-2008 and last week, Moody’s Investment Service downgraded Vietnam’s sovereign debt.  

All of the above might have sounded a little like the kind of comments that Ebenezer Scrooge would have made if he had been involved in the chemicals industry.

He is instead the lead character in the Charles Dickens’ novel, A Christmas Carol.

But being told to cheer up and show a little more generosity of spirit at this festive time of year is hardly the basis of sound planning.

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog
Read Paul Hodges’ Chemicals & the Economy blog
To discuss issues facing the chemical industry go to ICIS connect


By: John Richardson
+65 6780 4359



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