INSIGHT: Those left holding on to assets could suffer

29 October 2013 17:42  [Source: ICIS news]

By John Richardson

PERTH (ICIS)--If and when the Fed decides to taper-back on quantitative easing and China starts rebalancing its economy, it could be those left holding on to assets – whether they be equities, “long” crude-oil futures or high-end condos in Jakarta – that could suffer, warn some sceptics.

“Rock-bottom interest rates in the US, Europe, and Japan, combined with the Federal Reserve’s multi-trillion dollar quantitative easing programmes encouraged $4 trillion of speculative ‘hot money’ to flow into emerging market investments over the past four years,” wrote the US-based economist, Jesse Colombo, in a 15 October article in Forbes magazine.

“A global carry trade arose in which investors borrowed at low interest rates from the US and Japan, invested the funds in high-yielding emerging market assets, and pocketed the interest rate differential or “spread,” he continued.

“Soaring demand for emerging market assets led to a bond bubble and ultra-low borrowing costs, which resulted in government-driven infrastructure booms, alarmingly fast credit growth, and property bubbles in numerous developing nations.”

And he added that many emerging-market economies have also benefited from high commodity prices, thanks to China’s aggressive credit-fuelled infrastructure spending boom that began in late 2008.

Even if the music keeps playing for a good while longer – i.e. the Fed and China keep credit conditions ultra-loose – it can be argued that high youth unemployment in Europe and ever-lower returns from infrastructure investment in China will persist. The benefits delivered to overall economic growth of sustained stimulus might, as a result, not be as great as some people think.

How will all of this translate into petrochemicals demand growth?

Some industry executives express the above fears, whilst others insist that this view of the world is way too pessimistic. They think that the worst of the economic crisis is behind us and that, now, we are into a sustained recovery.

Who is proved right will, of course, have a major impact on how easily new capacities will be absorbed by markets.

Attention is now heavily focused on the capacities due on-stream more immediately - in 2014-2016.

Many, perhaps all, of the projects listed below could well prove to be winners because of their major cost, technology and other advantages. Of more relevance, therefore, might be how others fare if overall economic growth is weaker than some people anticipate.

Borouge 3 is due to start-up in Abu Dhabi in 2014. The project includes construction of a third ethane cracker, two additional Borstar PE plants, two additional Borstar PP plants and a low density polyethylene (LDPE) unit. It will raise Borouge’s olefins and polyolefins capacity to around 4.5m tonnes/year from the current 2m tonnes/year.

The giant Sadara project in Saudi Arabia – a joint venture between Saudi Aramco/Dow Chemical – also seems to be very much on track.

Sadara will have an 18-month start-up window from mid-2015 with ethylene and polyethylene (PE) being commissioned first followed ethylene oxide (EO) and propylene oxide (PO and finally polyols and isocyanates. The complex is expected to be fully on-stream by late 2016.

Further new capacities listed in the ICIS Plants & Projects database include:

The start-up by Gail (India) Ltd of 450,000 tonnes/year of LDPE at Uttar Pradesh in India in Q1 next year.

The ONGC Petro-additions Ltd (Opal) 340,000 tonnes/year high-density PE (HDPE) facility, which is scheduled for commissioning in H2 2014.

Reliance Industries’ 400,000 tonnes/year LDPE project in Gujarat, India, which is due to come on-stream at end-2015.

One assumption is that quite a few petrochemicals complexes in Europe, and perhaps even in Northeast Asia - which fall down on feedstock cost, scale and other site-specific economic advantages - might close down. This would help make room for the new capacities.

But is it possible that one of the arguments used for keeping the Grangemouth plant in Scotland open might also be applied to other sites in Europe? Politicians contended last week that the INEOS refinery-petrochemicals complex played a big role in the overall Scottish economy.

In a weaker-than-expected growth environment, such arguments might carry greater weight.

And since the late 1990s, some industry observers have been predicting closures of cracker complexes in Japan, South Korea and Taiwan.

In reality, though, few shutdowns have actually taken place because of the view taken by domestic governments that they, again, added a wider value to the economy. For example, the South Korean government helped draw-up a rescue package for the petrochemicals in 1998 – during the Asian Financial Crisis.

“A further argument more solid argument, I think, is that the basic petrochemicals produced by these complexes provide vital feedstock for differentiated downstream speciality products - even if they are expensive on a cost-per-tonne basis,” said a Singapore-based petrochemicals industry executive.

The debate is sure to continue over the next few months and years as the above capacities come online.

And once it has been played out, attention will then likely switch more firmly to the US cracker projects set for start-up post-2017 – which are also in a very strong position because of their feedstock-cost advantages.

By: John Richardson
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