Asian Chemical Connections

I am at logistics conference at the moment where the major theme is a chronically tight global container shipping market because of booming exports from China. Ports are congested, waiting times are increasing, freight rates have in some cases doubled in the last two months(for example, the Middle East-Asia route) and there is no immediate sign of new container freight capacity easing the crisis.
And across the globe there is an imbalance between rapidly growing economies such as China and exports back out of some receiving countries in the same container vessels.
This result is lots of re-positioning or backhaul i.e containers moving out of the receiving countries empty. Countries such as Russia, for example, have small manufacturing industries and therefore need to import far more than they are able to export.
So if you are a polymer producer, there are savings to be made by scouring the globe for supplies of these empty containers.
What you do is you move your polymers to the country where the empty containers are sitting and fill those containers to move back to China, India etc. The shippers are delighted because they earn guaranteed extra revenue and the exporters in China are are dead chuffed because they don't have to haggle with the shippers over re-positioning fees (compensation for moving the containers empty back to China).
Now I cannot name the company I was speaking to fear of losing a good contact, but a polyolefins producer said to me over lunch over how he could be moving his product from his plant in central Asia to St Peterburg in Russia, via rail.
And then from St Petersburg, the polyolefins might move by sea all the way to China!
This is being repeated across the industry because supply chain effiiciency is so important for overall competitiveness.
The point of my headline is this - what will happen if the regulators start clamping down on this in a bid to tackle a producer's overall emissions, from the efficiency of his plant to final delivery to the customer?
Producers may not necessarily have to stop the use of convoluted shippings. If the economics still add up, they might buy carbon credits or find other ways of offsetting their responsibility for these extra emissions.
The producer I was speaking to believes it is possible that legislation to this effect will be introduced over the next two years.

Methanol producers have been enjoying the best of times, but to paraphrase good old Charles Dickens, they may not necessarily be heading for the worst of times.

There is a staggering amount of capacity due on stream by 2012. By that year, global capacity will stand at 66m tonne/year according to
Mark Berggren of consultancy, MMSA. . This compares with his estimate of global demand of only 50m tonne during that year. 10.58m tonne/year of this capacity will be in the Middle East - representing 25% of the current global total - with China accounting for an even bigger slice of the pie. For more a detailed analysis of methanol see the latest ICIS insight Asia Middle East report Download file

But as Mark and the whole of the methanol world concedes, it is hard to estimate what consumption will be from a whole raft of new end-uses. These include direct blending of methanol into gasoline, dimethyl ether and fuel cells for both cars and computers.

But still, if demand growth is insufficient, you have to pity the smaller, higher cost producers .

In the case of the Chinese coal-based producers, they will be towards the bottom of the cost curve because of low feedstock costs and will increasingly be able to compete with the Middle East.

To carry on with the Dickens quote, from A Tale of Two Cities, he talked of the French Revolution as being "the age of foolishness" and "the age of wisdom".

Perhaps the wonderful world of methanol will also represent such divergent fortunes, with the poor foolish US and European producers facing Madame Guillotine.
I

Alan Greenspan refused to categorise conditions in the US housing market as a bubble when he was chairman of the Fed.
But now he's retired and while plugging his memoirs, he admitted in a TV interview the other day that lots of froth in different parts of the US made up what was, in reality, one giant bubble - similar to the one that went pop in 2001 with the collapse of the dot com shares.
Take a look at this article from The Economist which suggests that there are six countries - Belgium, Britain, Denmark, Greece and Spain - where a housing market crash is even more likely than in the US. In these countries, the article suggests, average house price inflation is 47% above what is justified by fundamentals.
And then look at Asia. In Singapore, property prices have doubled - even tripled in some cases - over the last two years. Speculation reached fever pitch until an increase in government taxes and the global credit crunch brought sanity to the market a few weeks ago. Now there is talk is of another property price collapse similar to the 1997 meltdown.
Then there are the property booms in India and China.
You can argue, as the Asian Development Bank does, that Asian fundamentals are so strong that the continent can ride out a US credit-crunch driven recession.
But what goes up has to eventually, surely, come down and bubbles have historically always gone pop.
And so from this calculate how many polymers and chemicals go into the construction industry - from PVC to formaldehyde - and think of a worst-case scenario for your business. This could be the froth being taken out of the market - meaning property prices falling back to where they should be based on the fundamentals. But as is often the case when sentiment turns bearish, prices could collapse below their real value. Fantastic news for bargain hunters with nerves of steel, but not much use if you're operating a PVC plant.
The global property bubble could pop as early as next year, if the Fed 50 basis point cut and any future measures fail to bring the credit crisis under control.

Standing in the queue for Starbucks (not McDonalds - no way, and my son's going nowhere near that place) it's so easy to opt for the half bucket-sized Grande option because, after all, we are all rich these days and anyway it costs hardly anything to "Upsize". Walk around Starbucks and you'll notice numerous Grande Lates have been left only half-drunk.
And why not buy yet another car, an even bigger one, or an even bigger house (maybe one that's been repossessed in the US?).
Also, thanks to the ferocious cost-cutting efforts of the likes of Walmart - made possible by the developing world's hugely competitive textile industry - clothing has become incredibly cheap.
Move upstream from your wrack after wrack of cheap shirts and the feedstocks - crude oil, heavy naphtha. mixed xylenes (MX) and paraxylene (PX) - are becoming tighter and tighter.
Oil is at record highs, new refinery building has been delayed by soaring construction costs and MX is becoming an increasingly attractive blend into gasoline.
The picture for plastics might be slightly different because of all the gas-based capacity being brought on stream over the next few year.
But the polymer still has to be shipped and/or trucked, meaning yet more pressure on crude-oil pricing.
"Governments should try to limit the amount of synthetic fibres and plastics being consumed through taxation because there simply aren't enough raw materials around," said a delegate at the ICIS/International eChem Asian Aromatics Conference which took place in Singapore this summer.
This would be political suicide, of course, and so what seems more likely is that only inflationary pressures can produce the desired moderation in consumption.
But what if inflation gets out of control - perhaps more likely after the recent interest rate cuts in response to the credit crisis?
Back to bell bottoms, Ziggy Stardust And The Spiders From Mars, Ted Heath and the three-day week and football tackles that were really tackles - meaning, greivous bodily harm. God bless you, good Old Norm'.

......how long will it last is the inevitable question. Demand growth has been so strong so far this year with very little new production coming onstream that while crude oil and the price of monomers have set a floor for pricing, they no longer appear to be the main drivers behind fluctuations and increases; in other words, supply is so tight that it is the demand pull rather than the cost push that's the dominant factor behind pricing this year. The attached slides from Chow Bee Lin, Senior Editor at ICIS pricing, illustrate this point - Download file
But Chinese inflation is rising. This has led to negative real interest rates on savings, leading to money being poured into ever-more frothy (remember, lots of froth makes one giant bubble) local equity and real estate markets.
Inflation everywhere could be back with avengeance - made worse by the US interest rate cut that has led to more hot money flowing out of the US into China, India and other developing countries.
Plus there are the long term implications of the global credit crisis beyond. A lot of the polymers being shipped to China and elsewhere are for re-export to the US and Europe as finished goods.
And, of course, the second half of next year marks the beginning up the big new capacity upsurge.
But the doommongers, including myself, have been calling time on the industry upcycle for three years now.
Maybe the super-cycle, as it is now lovingly called, will continue if demand growth in Asia continues to accelerate.