Asian Chemical Connections

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

The Indian government has announced 17 November as the date for a public hearing to discuss the provisional anti dumping duties that it had imposed in June on imports of polypropylene (PP) from Saudi Arabia, Singapore and Oman.

The hearing will give a chance to all affected parties to present their case. Such hearings are usually a formality and do affect the end result which is a confirmation of the provisional duties.

But I have been told that it may be different this time as the Saudis, led by Sabic, are likely to put up a spirited defense. The Saudis have been busy pulling lots of government strings for the duties to be revoked.

Sabic and Advanced Polypropylene were hit the hardest - duties on their PP exports range from $440-$820/tonne. I was told that one of the reasons for the high level of duties was 'the lack of cooperation in sharing data' when the Indian government had sent its questionnaire earlier in the year. However, this attitude appears to have changed.

There's a lot at stake here and this is why the 17 November hearing is crucial. India is already in surplus and looks likely to be in this position for the next couple of years. So there's every reason for Indian PP producers, Reliance Industries and Haldia Petrochemicals, to check competition. On the other hand, many Indian processors are unhappy as the duties would force them to rely on local supply.

For the Saudis, and also other Middle Eastern producers, India is not such a big market for PP. But the ADD threat is a worrying global trend that they want to ensure does not take off.

Besides India, China is investigating methanol and 1,4-butanediol (BDO) imports from Saudi Arabia. And the European Union (EU) is investigating on polyethylene terephthalate (PET) imports from United Arab Emirates (UAE) and Iran.

The growing protectionist measures have provoked a long chain of protests with the most recent one being in October by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA Secretary General Dr. Abdulwahab Al-Sadoun has said that the association will strengthen coordination with Gulf Cooperation Council (GCC) Governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by anti-dumping regulations and other trade restrictions
"The GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules," he said.
The investigations may not sound fair to GCC producers but they face an uphill task in convincing the Indian and Chinese governments to ease protection to local producers. A lot will depend on what the GCC governments can offer or withhold.

Source of picture: www.prisonplanet.com

Misleading perceptions can be very dangerous - especially when they apply to the crude-oil futures markets.

"The price has more than doubled this year partly because of the belief that the recovery in Chinese oil-import demand is all about booming local consumption" said a source on the sidelines of this week's APPEC oil and gas conference in Singapore.

But China is adding around 25m tonne/year of refinery capacity in 2009, which, of course, requires a lot more oil to operate.

Liberalisation of fuel-price controls has raised refinery profitability, resulting in recent operating rates of more than 80%.

This high throughput hasn't been matched by an equivalent increase in gasoline consumption, despite the humongous increase in vehicle sales.

"People seem to be buying lots of new cars, driving them home to impress the neighbours but not driving them much after that," said Jason Feer, vice-president and general manager, Asia Pacific, of the Argus Media Group in a speech at the conference

Fuel-price liberalisation has pushed the cost of gasoline close to US levels, he added afterwards.

This miss-match between supply and demand could be a factor behind China becoming a bigger exporter of gasoline and diesel.

China exported 505,505 tonnes of gasoline in September - 153% higher than a year earlier, according to China Customs.

Diesel exports have also risen, reaching close to 400,000 tonnes in August and 293,759 tonnes in September.

This led to talk of overseas refinery margins being put under pressure for the long-term by China's exports.

But another source said: "This is just one of those conspiracy theories about China. Any company will export when it makes more economic sense.

"China's refiners are listed, remember, and so operate like listed companies. Exports are not a long-term strategic objective."

Another factor behind the rise in fuel exports was unwinding of big inventories built ahead of last year's Beijing Olympics, he said.

What's clear is that the rise in oil imports this year - expected to be around 5% - isn't just a sign of an immediate surge in domestic consumption.

And as we've already covered on this blog, China's overall growth story is not as straightforward as crude and equity markets appear to believe - another nail in the bull's coffin.

A further misleading view was that we were already in a V-shaped recovery, believed a number of delegates.

"I expect the recovery to be W-shaped," said Gati Al-Jebouri ,Chief Executive Officer of Lukoil, in a speech to the conference.

One of the economic threats he highlighted was fiscal tightening.

Australia has twice raised interest rates over the past few weeks, Norway recently raised rates and India has tightened reserve requirements for the country's banks because of inflation concerns.

A string of comments from US Fed hawks indicate a possible change in direction.

If fiscal tightening isn't timed properly, it might come too soon for a fragile recovery.

Higher interest rates could narrow the contango that's helped make storing crude, gasoline and diesel etc a low-risk option.

Very high storage levels don't fit with current crude prices.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $79.71 a barrel this morning, down 69 cents in the Globex electronic session.

December Brent crude on London's ICE Futures exchange fell 70 cents to $78.19 a barrel.

I found it hard to find any delegate who found much logic in today's price of oil.

"It could easily more or less half to $40 a barrel in the New Year. That's where it should logically be," said one delegate.

Admittedly, though, one tends to seek out those who support your biases - and I could be described as a tad pessimistic about this recovery.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

It pays to have a domestic focus and Reliance Industries has shown this again in its results for the first half of fiscal 2009-10.

Its petrochemicals division delivered Rs43bn in earnings before interest and taxes (EBIT), a 23.8% growth over the same period last year. The company attributed this to higher margins on improved domestic realisation. The concentration on India helped the company maintain nearly 100% utilisation and hold inventory at low levels.

The Indian market often gets lost in the larger Asian/global picture which is very much dominated by China. But this market has been seeing steady demand growth since last year and it is one of the few markets to have expanded despite the economic crisis.

Reliance estimated PP demand growth at 28% in the last six months; PE at 15%; PVC at 36% and polyester at 15%. Packaging, infrastructure and auto sectors were the key drivers.

The company anticipated a stable margin environment in 2010 as India is expected to keep growing. It also emphasised that it would continue its 'predominantly domestic market orientation in order to sustain high operating rates' - a plan that will no doubt be helped, in the case of PP, by hefty anti dumping duties imposed on imports from Saudi Arabia, Singapore and Oman. A second investigation on PP imports from South Korea, Taiwan and the US is due to be launched soon and there have also been reports of producers asking for an investigation into PE imports.

Expanding the domestic focus will not be easy. India is oversupplied in PP and likely to remain so for another couple of years despite the high demand growth numbers. PE would also be oversupplied once Indian Oil Corp starts its new cracker complex.

IOC expects to achieve mechanical completion of the cracker by the end of this month and start commissioning activity in December. The derivative plants (PE, PP and MEG) are likely to start at end-March or early April.

This is the schedule on paper. But given the many project delays around the world, don't be too surprised if this one also slips.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

Japanese chemical majors have raised their sales and profit forecasts for the second half of the fiscal year ending 31 March 2010, but the revisions are marginal and companies are still holding a conservative outlook.

Earnings in the first half of this fiscal year have been better than expected but the stock market is not impressed. It appears investors are being guided by the cloudy outlook for H2.

A Tokyo-based analyst highlighted three major risks that Japanese companies foresee:

• Inventory adjustments in China for petrochemicals and globally in the auto and LCD sectors
• A rise in naphtha prices led by higher crude oil prices
• Rising availability of product from new petrochemical capacities in the Middle East.

Mitsui Chemicals has forecast sales of Yen1,210bn as compared to Yen1,487.6bn in 2008-09. Operating loss is expected to narrow to Yen15bn from Yen 45.5bn last year.

Sumitomo Chemical expects to post petrochemical sales of Yen500bn in 2009-10, down 9.6% from the previous year. Total sales are projected at Yen1,620bn, down 9.4%.

At an analyst meeting yesterday Sumitomo Chemical disclosed that operating rates at its joint-venture PetroRabigh complex in Saudi Arabia are still quite low, especially for polyethylene (PE). Although the situation is improving the company expects full operations only at the end of this year.

PetroRabigh has posted losses yet again. Third quarter losses had widened to Riyals844.7m from Riyals155.9m in the same period last year.

Japanese companies are continuing their efforts to widen their footprint in China. Mitsui Chemicals and Sinopec have agreed to proceed with a joint venture for production of phenol and ethylene, propylene diene terpolymer (EPT). At a recent analyst meet, Mitsui's ceo disclosed that the project would be a 50:50 joint venture. Asked if the jv would be expanded to include ethylene and propylene production, the ceo said there was no immediate plan but there was some potential.

Mitsui's ceo is also reported to have said that the company was interested in acquisitions in agro-chemicals or speciality chemicals. Among the Japanese majors, Mitsui is most exposed to commodity chemicals and is under greater pressure to diversify if product portfolio.

By John Richardson

Manufacturers yesterday reported rising output and improved employment prospects in the US, Europe and Asia.

China's Purchasing Managers' Index (PMI), involving a survey of more than 700 manufacturers, increased for the eighth straight month in a row - and is now back to where it was in May 2008. This is exactly the same length of time that China's chemical imports have been booming.

In the US, too, the Institute of Supply Management (ISM) survey for October showed that the employment index had expanded for the first time in a year.

But dig a little deeper and the same old doubts and muddle re-emerge.

New orders rose at a slower pace in October than in September, added the ISM. This could be an indication that the process of re-stocking is coming to an end, points out the Short View in the Financial Times.

The rate of bank lending to private companies has turned negative in the Euro Zone for the first time since the data was first gathered, according to this post on The Economist's Buttonwood blog.

Nobody in the chemicals industry is getting excited about the prospects for 2010, least of Jurgen Hambrecht of BASf on the release of the German giant's Q3 results..

He warned of the need for more concerted efforts by governments and industries, as there was no easy way out of the crisis.

One easy way might be China. But as we keep going on and on about, what are all the chemicals being shipped to China going into?

As long as this uncertainty lingers, so will the fear that it will come to a sorry and sudden end.

If you're selling in China and merely looking towards your year-end bonus, this endless head-scratching might not matter if China can hold its ground until end-December.

But anyone with a slightly longer-term perspective needs to be a little more worried.

A Famous Ditherer

Source of picture: sarafinewordpress.com

Chasing higher oil prices and/or a response to the now long-running recovery in Chinese demand that's become sustainable?

Not wanting to sound too much like the start of a famous Shakespeare soliloquy, these are the questions that should be wracking everyone's brains as they try to figure out price rises, which continued last week.

Ethylene rose again and low-density polyethylene (LDPE) was up by $50 a tonne to $1,235-1,300 tonne CFR China, according to ICIS pricing.

The polyolefin was at $1,130-1,180/tonne CFR China four week. Click here for a graph showing the price history for all the PE grades since January last year - Olefin-PEprices.ppt.

But interestingly, while the sentiment in the China market was described as bullish due to stronger crude and second and third tier traders and distributors were stocking up, actual end-user demand was characterised by market players contacted by ICIS as weak.

This suggests stocking up ahead of the assumption that oil prices will go higher, even though the outlook for the next few weeks is mixed given recent negative reports over the US economy. 

It then comes down to the sustainability of the eight-month long rebound in demand from China. Head-scratching continues as to where all this stuff is going, more of which later this week.

Asian cracker operators, according to my colleague Peh Soo Hwee, ICIS pricing's ethylene editor in Asia, seem to believe its worth running hard for the time being at least.

"Some of the cracker operators, notably in Japan, had reduced production to below 90% in September-October, partly due to turnarounds at derivative plants," she said in a recent note to one of our customers.

"Most of them now expect to increase rates to close to 100% next month (November)."

"So far, with the exception of a few crackers in the region running at lower rates - Chandra Asri in Indonesia at 75% and South Korea's YNCC at 90% - the bulk of producers aim to keep ethylene production at 90-100% in November."

Supporting these decisions were improvements in margins last week. Ethylene margins rose for the second week in a row as a result of the pace of C2 price increases outpacing those for naphtha, according to the ICIS weekly Asian Ethylene Margin Report.

But still, October ended up as the worst month for ethylene margins since June.

PE margins also rose on a better spread between C2s and the polymer and improved co-product credits, according to our Asian PE Marging Report - also weekly. 

Again, though, overall margins were down in October over the previous month. Stand-alone players did better than integrated operators.

Plan cutbacks and/or sell November stocks early and you miss the potential of better returns. Some polyolefin producers sold October volumes earlier than they should have done because they expected prices to fall.

The flipside of the risk is being left holding overpriced inventory as oil prices fall and more new polyolefin capacities hit the market.

Nothing new in having to make these decisions, of course; the difference is the absence of any consistent and reliable patterns from all the data to support planning.

Source of picture: Businesweek

More evidence is emerging of the big rebound in Chinese exports resulting from government subsidies, including a Yuan now pegged to the dollar, soft and plentiful bank loans and export-tax rebates.

More than 9,000 quality control inspections of goods set for overseas shipment took place in Q3 this year - a 32% increase over the same quarter last year, said AsiaInspection, which carries out monitors these inspections.

Book and stationery inspections were up by 24%, toys 32%, shoes and fashion accessories 58% and textile apparel 63%, according to this news report on the latest AsiaInspection findings.

A further boost to China's textiles industry was the EU's removal of restrictions requiring companies to source a percentage of their textile business from within the EU in January 2009, the report added
.
But Q3 2008 saw the collapse of Lehman Bros and the virtual grinding to a halt of the global economy, so comparisons with the third quarter of this year were always likely to appear good.

Export trade has bounced back from its low point. It is widely recognised, though, that it could be a very long time before shipments to Western markets return to 2007 levels.

Still, the October Canton Trade Fair reported a 20% increase in electronics, hardware, tools, transport vehicle and building material exports orders from overseas buyers as against the April Canton Fair.

Together, these products account for around 60% of China's total exports.

And the damage done to China by the crisis is far less than elsewhere.

For example, the country's semiconductor market is expected to fall 6.5% by value to $68bn in 2009, down from $72.9bn last year, according to this report, quoting iSuppli.

This compares with a forecast 16.5% fall in the global chip industry.

Consumer electronics exports by volume are, however, expected to be down by 10% to 30% in all categories except LCD-TVs and Set-Top Boxes, where growth is expected.

What on earth does this all add up to then?

Here's what I think:

*China's exports have rebounded from their low points more quickly than other countries due to all the government support.

*Because of its ability to aggressively discount, China is gaining bigger market shares from other countries in certain export sectors - most notably textiles and garments.

*China is likely to be able to grow market share even further as it can cut costs by even more, notwithstanding a big increase in trade protectionism

But, as we have already said, demand in the West is unlikely to return to 2007 levels for a very long time and so China is only gaining bigger slices of a much smaller overall pie.

The country's export trade has also been boosted by cheaper raw materials as result of import tax cuts and lower pricing.

The dramatic increase in chemical import volumes is partly due to both the above factors - and, of course, stronger domestic demand.

Take methyl methacrylate (MMA) and polymethly methacrylate (PMMA) as examples. Pricing remains way down on its July 2008 peak, as this graph MMAPPMAPricing200809.ppt from ICIS pricing shows.

MMA imports have risen by 293% in January-September over the same month last year, according to China customs. In September, overseas shipments increased by 87% to 16,309 tonnes.

PMMA imports were up by 67% in January-September with September cargoes totalling 20,829 tonnes - a 22% increase.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

It helps to have a commodity bull on your side and that's just what the Dalian Commodity Exchange (DCE) has succeeded in doing. Jim Rogers, the noted investment guru, will be a senior advisor to the exchange.

Jim Rogers is, as always, positive on the future of China and also commodities (see TV interview below).

It is not yet clear what Rogers will be doing in this new role but his appointment will help DCE realise its ambition of becoming a leading commodity exchange in the world. The Futures Industry Association (FIA) says that the DCE is the largest futures exchange in China and is ranked ninth in the world. It has the world's biggest trading market for plastics (lldpe and PVC) and the second-largest for agricultural products.

This blog has been regularly highlighting the growing volumes of lldPE and PVC transactions on the DCE. Lldpe contracts totalling 75.719m tonnes have been traded on the exchange so far this year, up 185.67% from last year. PVC contracts, which were was introduced in May, totalled 21.829m tonnes.

And the exchange could see more action in the coming months. China Daily reports growing interest from major foreign traders to participate in Chinese exchanges. They will have to work their way around government regulations but leading banks such as Goldman Sachs, JP Morgan and Barclays Bank have compelling reasons to invest in China. The paper says that the Shanghai exchange's copper futures now rivals that of the LME while DCE's soyabean volumes already exceed that of CBOT.

As this updated table from my colleagues at CBI in China illustrates, cracker-complex delays in China have the potential to further stagger the arrival of new volumes into the market.

Chinanewcapacitytable.doc

This follows the widespread problems in starting up new capacity in the Middle East.

The 800,000 tonne/year Fujian Petrochemical/ExxonMobil/Saudi Aramco cracker is on-stream, but there have been operating issues with downstream PE.

The 1m tonne/year Sinopec/SABIC Tianjin cracker will undergo trial runs from 28 December and so commercial production won't be until H1 2010.

But the Dunshanzi complex, centred on a 1m tonne/year, was commissioned on schedule in September. The operating rate is reported to be 85% with product being sold across China.

2.56m tonne/year of capacity is due to start-up this year compared with the original 3.56m tonnne/year.

In Thailand, the new  400,000 tonne/year PTT linear-low density polyethylene (LLDPE) plant is due to start next week, but the 1m tonne/year cracker won't be on-stream until the end of the year/Q1 2010.

A new 300,000 tonne/year low-density polyethylene (LDPE) project is not due to be commissioned until Q3 next year, according to ICIS Plants and Projects.  

The start-up is being fed by ethylene from existing crackers, but it's not clear whether this will be sufficient to quickly achieve optimal rates

Further out, there appears to be some more good news for existing producers from China.

The 800,000 tonne/year Fushun cracker, originally scheduled for 2011, has been delayed to 2102. An associated refinery has already started up, but only preliminary work has taken place on the petrochemicals complex.

Wuhan - a Sinopec and SK Energy joint venture - has been pushed back from 2011 to 2012-13, as has the PetroChina-owned Daqing project.

There are also unconfirmed reports of operating problems at several Middle East complexes brought on-stream this year.

"I think an on-going problem in the Gulf Co-operation Council (GCC) region is going to be the shortage of natural-gas supply," said an industry source.

"Every summer, until this problem is resolved, you are going to see a big pull of gas into the power sector at the expense of petrochemicals."

He suggested that there might also be issues with stabilising production at several new gas-phased polyethylene (PE)  plants due to their scale.

Existing crackers in Iran are expected to continue to experience deep rate cuts in winter as gas is diverted for domestic and power-generation consumption. Iran has plenty of natural-gas reserves, but political difficulties have slowed down investment in extraction.

More of the cheap stuff?

Source of picture: www.thelocal.de

Some of the China import data for September is now available - showing record-high imports of monoethylene glycol (MEG), ethylene vinyl acetate (EVA), polyacetal, polycarbonate (PC).

"I have given up trying to figure this out. There is not sufficient accurate information anywhere to read a trend. Reality is that they continue to buy to put SOMEWHERE," said a senior polyolefin industry source last week.

"Physical and future markets are continuing to show strength, but export and domestic consumption data continues to be weak."

Now he is beginning to think, like this blog, that a lot of these extraordinary volumes have to do with China making gains in specific finished-goods export markets. A lot more data-crunching is needed to stand this up.

A note of caution and context - a lot of these September imports might have been booked in July/August before the recent price declines.

There could have also been some stock building ahead of the long October holidays (when we get the October figures any dips will also need to take into account the holidays).

If China is making big gains in finished-goods export markets thanks to all of its competitive advantages, you can read the latest US Conference Board confidence index results either way.

The failure of US consumers to respond to better equity and housing markets could indicate a deeper shift in the way Americans spend, said Ian Shepherdson, chief economist at High Frequency Economics - in this FT article on the last Conference index.

More thrift might give the Chinese the ability to cost-cut their way into bigger slices of export markets.

Such a weak level of confidence, though, points to a poor Christmas sales season. This would leave a lot of goods left stacked on US shop shelves, pointing to a big New Year dip in commodity chemical exports to China.

But again - this would have to be put in the context of the Chinese New Year in February!