INSIGHT: Future planned capacity expansions in doubt

28 December 2011 15:50  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--Conventional thinking would suggest that when you have a strong feedstock advantage, you should go ahead and build more petrochemical capacity on the assumption that growth will eventually be sufficient to absorb volumes.

Hence, several more green-field crackers would be announced in the US based on low-cost ethane, butane and propane via shale gas, said a European-based industry observer on the sidelines of this month’s Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai.

To date, four new crackers have been announced – by Chevron Phillips Chemical, Dow Chemical, Sasol and Shell Chemicals.

“The start-up dates of new cracker projects might be pushed-back a bit, but I believe that all of them will happen,” he added.

A second industry observer disagreed. He predicted that only one or two grassroots facilities would go ahead, along with a few expansions of existing facilities, because of “great economic uncertainty”.

During on-the-record speeches and interviews, the GPCA delegates saw beyond this “great economic uncertainty” towards a period when the world would return to normal.

But in private, delegates seemed considerably more nervous and edgy about the future than during last year’s conference.

Most of the discussion was about the eurozone debt crisis and its implications for the global economy, including China’s ability to absorb petrochemical imports.

“China’s 2009-2010 stimulus programme cannot be repeated because this would cause more bad-debt problems,” said a senior executive with a North American polyolefins producer.

“Without another huge round of government stimulus, Chinese growth would be badly affected by a fall in exports to its biggest export destination - Europe.”

As much as 45% of polyethylene (PE) sold to China is re-exported as finished goods, said a chemicals analyst.

Other macro-economic concerns include the possibility of a global trade war resulting from a collapse of the eurozone. This could make markets less global and therefore more regional.

In addition, China is aggressively moving towards greater self-sufficiency in petrochemicals. This is a government strategy and is not driven entirely by economics. New domestic plants might therefore still be constructed even if, on paper, they do not make much economic sense.

It is also important to note that these are global markets and so if China cannot absorb export surpluses, producers in every region, assuming there are no major trade barriers due to a trade war, could seek to find new homes for their product. Even though South America is on the doorstep of the US resulting in logistics advantages, it might become a 'battle ground" for these displaced volumes.

Another concern is that the US economy confronts major long-term challenges. Healthy domestic markets are important for all the proposed expansions, even if export competitiveness is assured as a result of low-cost feedstock.

A return to normal economic conditions would create a tremendous opportunity for those with the feedstock advantage, said another senior executive, who works for a major Asian polyolefins player – again on the sidelines of the GPCA.

“There are very few new plants due on-stream over the next few years,” added the executive, who believes that the world’s economy will soon be back on track.

“Announced ethylene capacity is insufficient to meet global demand growth, which will be around four million tonnes a year. I definitely believe that a Supercycle for petrochemicals will happen.”

His views are in contrast to those of chemical analysts at global bank HSBC in a report released last month.

“The ‘Supercycle’ thesis for commodity chemicals – highly popular among investors in 2010, but less so in 2011 as reality has sunk in – has, in our opinion, always been centred on assumptions about demand growth rather than supply,” wrote the authors of the report.

“The current investor perception of the sector appears to be that, despite some near-term uncertainties linked to the macroeconomic environment, limited new capacity growth means that a ‘Supercycle’ environment is inevitable once macro fears subside.

“However, in order to reach the level of operating rates required for a margin ‘Supercycle’, the rate of demand growth must significantly outstrip the pace of supply additions.

“While the near-term outlook for supply growth remains favourable - we forecast a CAGR (compound average growth rate) of 2.9% over the 2011-15 period - demand growth would need to exceed supply by 150-200 basis points each year for the existing oversupply to be absorbed and a meaningful tightening of operating rates to occur.

“This already challenging task is complicated by a macro outlook that suggests demand contraction in the developed world in 2012 and a prolonged period of slower growth thereafter.”

HSBC predicted that developed world plastics demand was a full 15% below the 2007 level in 2011 - and would not fully recover until after 2015.

If HSBC is right, the timing, and perhaps even the entire future, of planned capacity expansions in the US and elsewhere might be in doubt. 

Conventional thinking might, as a result, be turned on its head.

See John Richardson’s Asian Chemical Connections Blog

By: John Richardson
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