Even Middle East budgets are being cut

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Yes, I know this blog has gone very quiet – but as the world has imploded, a few more pressing issues have come to the fore.

On a business trip last week the extent of the crisis became apparent when a Middle East producer told me that travel and entertainment budgets are being ferociously cut for 2009 (many companies are busy at the moment preparing their budgets for next year with deadlines for submission due n November).

Everyone asks “how bad is it going to get?” with the hope that someone will offer at least some degree of optimism that will – just for a few fleeting seconds perhaps – relieve the anxiety.

But despite yesterday’s stock market bounce, the real economy seems likely to get much worse before it gets better, even if most of the bad news from the financial sector is out of the way.

The trouble is I keep hearing that much more bad news might yet emerge – for example, the enormous size of credit-default swap commitments.

The Middle East producers face:

*Much lower oil prices than just about anyone had forecast, meaning lower margins between their fixed feedstock prices costs current global petrochemical prices, which are set by the oil-based players

*Plants coming on stream in 2008-11 with far higher capital costs than during the last building spree. This is due to soaring raw material, equipment and labour costs and much more complicated project configurations due to diversification downstream away from basic ethylene derivatives

*The decimation of demand. Polyethylene and polypropylene demand could be zero or even negative in China this year. I talked to one industry source who also expects the same for polyester As recently as July, he was forecasting growth of 12% with the market expanding by 17.2% last year

How long will it be before the Middle East producers begin to cut capital expenditure programmes and how will this influence the fate of projects yet to reach the financing stage?

Of course, everything is relative and although the Middle East players may be earning far more thann they anticipated, they have huge cash reserves.

Wouldn’t these reserves be better employed buying existing capacity rather than adding new plants?

There will surely be no shortage of suitors, especially those with high leverage who expanded through acquisitions at the wrong time.

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