INSIGHT: Polyolefins producers scrabble for answers

19 June 2013 16:53  [Source: ICIS news]

By John Richardson

PERTH (ICIS--First, the China story turned negative and now, thanks to an acceleration of capital flight, greater doubts are being expressed about the prospects for Indian petrochemicals demand growth.

“From 20 May up until last week, around $10bn poured out of the country, partly thanks to Ben Bernanke's comments [about reining-back on quantitative easing]," said a Mumbai-based chemicals trader.

But he believed that the speeding-up of capital flight was also driven by "India's people and policies being at a crossroads. Nobody knows what direction we should take.

"The overseas investment community had already been scared-off by mindless policy decisions on taxation."

Last week, the value of the rupee fell to an all-time low against the US dollar.

"The Reserve Bank of India (RBI) has been under pressure from the entire business community to lower interest rates and was expected to respond positively in June or July," the trader continued.

"But now, because of the risk of a further outflow of dollars and the impact that this would have on inflation and the current account deficit, the RBI will find it a lot harder to lower interest rates.

"This is likely to mean no respite for Indian corporations that are paying a Benchmark Prime Lending Rate of 15%, even in a downturn.''

Southeast Asia represents another great hope. But it, too, faces challenges and now Indonesia, the biggest economy in the SEA region is grappling with riots over plans to hike fuel prices and a falling rupiah.

All of these economic difficulties are raising concerns among some petrochemical industry executives over what they fear could be yet another wave of overcapacity in polyolefins.

“Now that China has weakened, everybody has switched their attention to countries such as Indonesia, Vietnam, Myanmar and the Philippines in order to try and justify their investments, but, essentially, I think nothing has changed in these countries,” said an industry source.

“They are much smaller markets than China, will remain so for the foreseeable future, and they face major long-term structural, economic, social and political challenges.”

And yet new-capacity momentum keeps building, he added.

For example, Mitsui Chemicals, Idemitsu Kosan, Kuwait Petroleum International and Petro Vietnam have made a final decision to pursue a $9bn project in Vietnam’s Thanh Hoa province.

The project is expected to have a refining capacity of 200,000 bbl/day and a polypropylene (PP) capacity of 370,000 tonnes/year.

JG Summit Petrochemical is due to start-up the Philippines’ first cracker, possibly in September of this year.

The cracker is expected to produce 320,000 tonnes/year of ethylene and 190,000 tonnes/year of propylene.

The company is also scheduled to expand its 210,000 tonnes/year polyethylene (PE) plant at the same site.

And much more importantly, China will add some 12m tonnes/year of new polyolefins production from methanol to olefins (MTO) technology by 2020, according to Stewart Hardy, a consultant with Nexant.

This includes 5m-6m tonnes/year of high-density (HDPE), both via MTO and steam cracking, by 2020.

Nine new high density polyethylene (HDPE) plants were also due to start-up in China in 2012-2013, said Hardy.

Another concern is that as commodity grade polyolefins markets become harder going for higher-cost producers, thanks to the rise of shale gas, those producers are increasingly shifting up the value chain.

“Everyone starts out as a commodity seller first and then, if they don’t have a competitive feedstock position, or have some other motive to add value, they move to metallocenes, polyolefin-based elastomers or some other kind of speciality,” added the industry source.

“But the problem is that the global markets for these specialities are relatively small.”

Another dilemma appears to be that while what is defined as a “worldscale” cracker becomes ever-bigger, thanks to better engineering, engineers at the other end of the value chain – those involved in plastics processing – are constantly improving the ability to down gauge.

Innovation in downgauging is being drive by environmental and cost factors.

Bottles and packaging are becoming ever-thinner, thanks to the rise in metallocene-grade production. For instance, bottles can be made with around 20 grams of polymer compared with 35 grams earlier.

The shift from rigid to flexible packaging is also reducing plastics consumption. Demand for stand-up pouches is booming and replacing, for example, rigid milk cartoons.

There is also the ‘Smart Bottle’ innovation.

Here, you blow a film into a bottle, rather than blow liquid resin into a mould, and this leads to lower energy and polymer consumption.

On average 15-20% less polymer is used in Smart Bottles compared with standard blow-moulding, we were told.

Smart Bottles are being used in North America, but a bigger potential could be in Asia, where cost is so much more important.

Smaller processing machinery can also be used to manufacture Smart Bottles. This is another advantage in Asia, where most converters are small and medium-sized enterprises and so have limited financing capabilities.

The fragile and uncertain nature of the global economy, and thus the need to further reduce costs, might lead to more innovation in reducing plastics consumption.

Building such variables into demand-growth forecasts seems to be a huge challenge for polyolefin producers.

At the same time, some sources said that companies were under pressure from investors not to stand still on capacity additions. This led to over-simplified and over-optimistic outlooks for growth, they feared.

And within some companies, it was difficult to challenge conventional wisdom because of the risk that asking too many awkward questions might damage career progression, they added.

“Nobody wants to rock the boat because if you do rock the boat, you have to come up with an alternative and that’s very difficult because it is so complicated,” said one of these sources.

“You also don’t want to end up as the only executive without a project to pursue.”

With additional reporting by Pearl Bantillo, Peh Soo Hwee, and Jo Pitches

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: John Richardson
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