Asian Chemical Connections

China annnounced on Wednesday that it had shifted its monetary policy stance to "tight" from "prudent" in response to food-price driven inflation, soaring real-estate prices, the surge in local stock markets and continued strong growth in industrial investment.

How this policy shift will be implemented remains unclear, but media reports suggest that total bank-lending growth could be limited to 13% next year from 15% in 2007.

The concern is that this will affect working capital as well as funding for new projects.

The ICIS pricing team is already picking up anecdotal evidence of petrochemical producers and buyers struggling to afford and source working capital in China during this year. This is the result of several interest rate hikes and increased reserve requirements imposed on the banks by China's central bank.

Next year could therefore be even tougher for cash flow. But the greater danger is that if the government doesn't succeed in taking some of the heat out of China's economy, and that some of the froth might end up making one giant bubble - to quote Alan Greenspan.

Loss of working capital is a small price to pay for avoiding the popping of a bubble which would have huge consequences for the global economy.

See below for an extended analysis of why everything is about to go wrong.

Looking forward to picking up some bargain chemical shares over the next two years and some cheap US and UK property!

As the Asian head of M&A and acqusitions for a major bank told me this morning: "Wnen everyone tells me I must buy as the market will definitely keep going up I sell.

"When they tell me to sell, I buy."

Counter-cyclical advice that served the Huntsmans well for a long time, until they became over-leveraged.

Talking about over-leveraging, only interest rate cuts right down to zero will prevent the great unravelling of the paper-bottomed credit-fuelled boom.

There are strong rumours circulating that the hopelessly fragmented Indonesian petrochemical industry might undergo some more restructuring.

This would follow Titan Petrochemical's purchase of troubled polyethylene producer PT Peni, now renamed PT Titan, for a bargain price.

Common ownership between sole cracker operator Chandra Asri and its numerous downstream companies would go a long way to resolving the country's flawed petrochemical economics.

Meanwhile, talk of adding olefins capacity in Indonesia has gone very quiet. This time last year, there were cracker projects reported to be under evaluation.

Yes, if it persists despite the best efforts of the government to cool down the economy.

The point is that this is not just crude oil and food prices, but the pace of underlying inflation is picking.

As the Financial Times reports, inflation is now at an 11-year-high

Call me a bitter old cynic, but some of the talk in this ICIS news article about a government lending crackdown might be from a few traders taking positions.

But still, it does seem as if the government is taking some measures to restrict loan growth.

Earlier, it appeared unclear as to whether the restrictions would effect trade finance. Now it seems that quotas will set per quarter next year for total loan growth, whether it's trade credit or capital expenditure.

What Andrew Liveris didn't address when interviewed over the Dow/PIC deal is what the $19bn olefins and polymers deal could mean for Asia, the Middle East and commodities.

All the talk was of specialities with speculation sure to be rife over the next few months over how the US major will use its now substantial war chest to boost its presence in performance products.

But when it comes to commodites, Kuwait is not blessed with abundant supplies of natural gas.

Although the Equate joint venture (the jv between Dow and PIC) has sufficient gas to build and supply a second complex, which is due on stream next year, talk of a third cracker in Kuwait has gone quiet. There were reports late last year of a significant new gas find in the north of the country, but apparently the new field is not ethane-rich.

And so if Dow/PIC can't further expand in Kuwait, where might they build?

Perhaps in Egypt where discussions have been taking place with the Egyptian government for an ethane cracker.

And PIC, through its parent company Kuwait Petroleum Co, has access to crude oul supplies. This could get Dow/PIC into China, where future foreign participation in future integrated refinery and petrochemical projects might only be possible if the foreign partner brings oil supply into the deal. This is a commodity of which China is in desperate shortage.

Dow has also been pursuing a coal-to-chemicals project in China. Will its interest in coal-to-chemicals persist now that it is better able to build oil-based petrochemicals in the world's most-important market?

Finally, though, it's worth noting that there has been a lot of talk, and hints from those in the know, about further pipeline links across the Middle East.

On of the places with lots of gas in the region (excluding Iran, which has too many other issues to worry about than pursuing regional co-operation) is Qatar. Linking Kuwait into future spurs of the Dolphin pipeline might not be beyond the realms of possiblity - thereby, making Kuwait a place for further expansion.

Or what about moving gas from Iraq, if that country ever becomes politically stable enough? Or maybe even Dow/PIC could co-operate on eventually even building a cracker together in Iraq?

Talk of building petrochemicals in Iraq re-emerged a few months ago.

Worth ringing Mr Liveris and asking him these questions. I will ask my colleagues to help out.

At least the US is on board, but the pact to reduce emissions by 25-40 per cent by 2020 might well not be sufficient to prevent the 1.5 centigrade rise in global temperatures that will be disastrous for the planet.

In another excellent article from George Monbiot of The Guardian, he argues that we need to "decarbonise our society" in order to achieve reductions of 95.9 percent in the UK and 98.3 per cent in the US by 2050.

Impossible? Maybe, but as the effects of climate change become more evident, pressure on the chemicals industry will mount. A great deal more investment in new technologies to reduce emissions will surely be necessary - to put more substance behind some of the right noises industry leaders are making.

India is already being held back in mass manufacturing by restrictive labour practices and poor infrastructure - meaning the answer to the above question is already a resounding no in some sectors.

The rise of the rupee is also a concern, as this article from The Economist highlights .

The problem for India is because it has spent the last 15 years gradually opening its capital account and liberalising its financial market, it cannot do what the Chinese do so effectively - intervene to keep its currency competitive.

Export markets are going to get a great deal tougher next year as the US, and probably Europe, enter recession.

And so how will Indian manufacturers cope in these tougher markets versus their Chinese competitors, given the handicaps of the rupee that could remain high and weak infrastructure etc? The answer is likely to be not particularly well.

Reduced export sales will weaken the stellar petrochemical consumption growth we've seen over the past few years.

It will be interesting to see the effect that this will also have on polypropylene. Reliance Industries is due to commission its 900,000 tonne/year plant in Gujarat in mid-2008.

Yet more gloom - the world's second-biggest economy appears to be slowing down as the effects of the sub-prime crisis spread.

What will this mean for Japan's chemical industry, which in the first half of the current financial year suffered badly from the highly cylical electronic chemicals sector?

All will, of course, hinge on the extent of the slowdown in the US economy.

What's clear is that nobody will envy Shinetsu's position next year, when it's due to bring on stream new PVC capacity in Louisiana.