Asian Chemical Connections

Still too crowded...

Source of picture:www.tripadvisor.com

By John Richardson

Dear Readers - Welcome Back.

Having spent the last two weeks lying on Western Australian beaches, drinking beer and reading books on European history - while also building sand castles etc with my three-year-old son - I have given little thought to chemicals.

But here's to another year and another dollar - or quite possibly a lot less dollars if the forecasts of excess petrochemicals supply prove to be correct.

On the big-picture macroeconomic front these area few of the things we should also be worrying about:

*Global demand being too tied to government economic stimulus packages (Western governments will have to at some point ease back on stimulus to cut back on deficits in order to avoid credit downgrades leading to higher borrowing costs, or perhaps even defaults on debt; China has dollops more cash to spend on boosting the economy, but needs to worry about inflation)

*Consumer debt levels and unemployment in the developed world will remain high and so a big recovery in consumer spending seems very unlikely

*Restocking has come to an end across many industries including chemicals

The question is whether we will see a sustained V-shaped global recovery or a long period where global demand for everything, including chemicals, will remain much-below 2007 levels for many years to come.

My betting is firmly on the latter scenario.

Cash won't be as tight as early 2009, but some of the hype of H2 last year needs to be put into the context of all that restocking - plus the fact that numerous project delays have postponed the inevitable impact of a flood of new capacity. Even though more delays are likely, the amount of new volumes suggests a tough second half of 2010

The emerging markets story remains exciting, but demand growth in China, India and Indonesia (Indonesia being probably a much under-rated source of demand last year) won't be enough to return us to 2007.

Commodity chemicals companies that have made big-enough shifts to developing markets and/or to where the cheap feedstock is located should be OK - as long as tight inventory management, and therefore cash preservation, continues.

By Malini Hariharan

The financially troubled Kumho Asiana group, with assets stretching from petrochemicals to airlines, has finally been able to work out a plan that should satisfy its creditors.

The Korea Herald reports that the group plans to raise $1.13bn by selling assets as part of a restructuring programme. Kumho Tire and Kumho Industrial have been placed under a debt workout programme. Kumho Tire will be selling its stake in its Hong Kong unit.

Korea Kumho Petrochemical, the holding company of the group, will raise $233m by selling treasury shares. Kumho Petrochemical, which manufactures synethetic rubber, polymers, speciality chemicals and electronic chemicals, may also have to sell a power plant.

Asiana Airlines will have to sell stakes in a software company and in Kumho Investment Bank, the financial unit of the group.

The Korean Development Bank, the main creditor, has allowed Kumho Petrochemical Co. and Asiana Airlines more time for debt repayment in return for their pledges to restructure themselves.

But creditor banks have warned that the two units could be put under debt workout if their voluntary restructuring program fails to meet expectations. And the group also risks losing managerial rights if it fails to normalise operations over the next five years.

Kumho Asiana's restructuring can begin if approved by three fourths of its creditors.

A Seoul-based analyst says he has read a news report that Kumho Asiana may also sell its stake in Kumho P&B, the phenol, bishpenol-A, MIBK and epoxy resin producer. The company is a 78:22 joint venture between the Kumho Asiana and Japan's Nippon Steel Chemicals. The stake is likely to be offered first to the Japanese partner.

Financial problems at Kumho Asiana, South Korea's eighth-largest conglomerate, started after a heavily leverage purchase of Daewoo Engineering & Construction in 2006 and Korea Express in 2008.

By Malini Hariharan and John Richardson

Expect the unexpected and you probably stand a good chance of making money in the polymer market.

Defying expectations of a slowdown in demand ahead of the Chinese new year in February markets have started 2010 with a bang - material is short and prices are steadily moving up.

Prices have risen by $50-170/tonne from early December. LdPE is now being talked about at $1450/tonne cfr China, lldPE at close to $1400/tonne cfr China while hdPE at $1350-1450/tonne. PP has hit $1300/tonne in China and one trader thinks that it will cross $1350/tonne by the end of the week.

"I bought a load of material in December and so I am delighted. Everyone else was being bearish, but I thought with the economy doing so well, why not [buy]," says a second trader

The first trader describes the markets as "being on fire" supported by the strength in crude oil prices ($81/bbl today) and tight availability because of plant problems in the Middle East and Asia.

Supplies from new plants (Sharq, Yansab, Fujian Petrochemical and Dushanzi Petrochemical) are still not arriving as expected, says a third trader. And if you add turnarounds and operating problems to the equation buyers face a very tight market.

However, there is still not much confidence that the bull run can be continue after operations at new plants stabilize. Concerns about the health of the global economic continue to cloud the picture. There is nervousness in some quarters that very high prices will only lead to a steep fall in the future. "Remember 2008? Everyone is scared of a repeat," says one producer.

But leave room for the unexpected to create surprises at least in the short term. For instance, severe winter conditions across most of the northern hemisphere are affecting petrochemical production.

Pic source: Xinhuanet

Our colleagues at ICIS news have reported that naphtha is short in Asia as a result of reduced shipments from Europe. This has forced lower operating rates at some aromatics units and Formosa's three crackers in Taiwan.

There have also been unconfirmed reports of a reduction in operating rates at some crackers in Europe.

In China, heavy snow in the northern provinces has closed expressways and affected movement of products, reports ICIS news. Chemical producers were also facing power shortages and they do no expect the situation to ease before March.

And China's cold spell could also affect start up of new plants. The second trader says Tianjin Petrochemical's new cracker complex is likely to start only after the Chinese new year, a delay from the earlier target of end-2009.

We have also heard that start up of new methanol-to-propylene (MTP) projects in the north, such as the Datang Power project, could be delayed to the second quarter.

"This season is not good to start up; companies would not like to take the risk," says a Beijing-based industry source.

More delays would tighten supplies further. And if demand holds up the bull run may not end very soon.

Stop complaining - it's actually colder inside!

Source of picture: www.gulfnews.com

By John Richardson

As northern China shivers from the coldest temperatures in decades, one Western ex-pat based in the country vented his spleen on cultural impediments which cause huge energy wastage - and prevent everyone from keeping a little bit warmer.

"My colleagues keep their coats on while at their desks so they can open windows to circulate fresh air.

"Our cleaners and security guards do exactly the same - they open windows in corridors no matter how many times you tell them not to.

"For a long time there's been a lot of talk about 'American Exceptionalism', the concept of how we view our way of life as distinct and unique and one that shouldn't be messed with or criticised.

"I think this increasingly applies to China and the attitude towards energy conservation is one small example."

Also at the heart of the problem is very low electricity costs compared with the developed world, the ex-pat continues.

And buildings are 6-10 times less well-insulated than those in America, he adds, creating a huge demand-growth opportunity for the polymers used in the insulation - including polystyrene (PS), polyurethane (PU) and phenolic resins.

But, sadly, the nature of building construction in China seems to be holding back progress: Typical apartments are mass-manufactured as concrete and solid-walled boxes with therefore no cavities in which insulation material can be inserted, he says.

The other extreme is in summer where, if you have the misfortune to be wearing a suit and tie working in an office in China, it can be akin to a visit to the sauna - again because of insufficient use of insulating materials and poor ventilation.

So if you visit northern China while this cold spell continues make sure you pack a thick coat, scarves and gloves etc - to wear in as well as outside the office.

By Malini Hariharan

The Wednesday post on this blog highlighted some of the unexpected turns that the Asian polyolefins market has been taking.

There have been more developments over the last two days that are likely to influence markets in the short term.

• ICIS news reports that Sabic will significantly cut its January and February polyethylene (PE) allocations to China and Southeast Asia due to some production problems. The company's buyers have confirmed this. One Chinese buyer said that his allocation has been cut by as much as 60-70%. PE prices had not reacted to this news today and were still weighed down by Thursday's sharp fall in lldPE futures on the Dalian Commodity Exchange, said traders.
• Ineos was forced to shut its 320,000 tonnes/year lldPE plant in the UK due to problems caused by cold weather. This could further tighten the European market.
• An explosion in a naphtha storage tank at Lanzhou Petrochemical killed five people. The company, a subsidiary of PetroChina, has shut down a 240,000 tonnes/year cracker and associated PE and PP plants at the site as a precautionary measure. Its other 460,000 tonnes/year cracker, in the same area but at another site, has not been affected.

Pic Source: Xinhuanet

• And petrochemical production at Texas in the US could be affected by unusually cold weather. Temperatures in the region have hit a 14-year low and are expected to remain at current level for the next three days. Companies have started taking precautionary measures but some traders fear the weather could trigger outages.

By Malini Hariharan

LyondellBasell's aggressive moves to convince creditors to approve its own reorganisation plan have drawn a reaction from Reliance Industries.

A source familiar with developments confirms that Reliance has raised its valuation of LyondellBasell to $13.5bn, up from $12bn and a letter has been sent to LyondellBasell.

But the Wall Street Journal reports that the LyondellBasell's board has rejected Reliance's latest offer as they deem it to be too low. LyondellBasell's own reorganisation plan has valued the enterprise at $15.5bn.

"Reliance has a valuation in mind and there is no point in quoting this on day one. The strategy is to start low and see what happens," says the source.

Reliance is also looking at participating in a $2.8bn equity issue that LyondellBasell has outlined as part of its reorganisation plan.

Does this then mean that Reliance would be willing to join hands with Access Industries and/or settle for a minority stake?

The source would only say that it is a fluid situation. " Reliance will be playing it by the ear," he says.

LyondellBasell has said that it has received substantial creditor support for its plan to reorganise the company and come out of US bankruptcy protection.

But the source stresses that unsecured creditors are not happy as they are getting virtually nothing.

By John Richardson

THE BIG gap in credit growth between China and the developed world has been thrown into further relief by recently released data - raising inflationary concerns in the world's most important economy, while emphasising how rich-world countries remain on government life-support systems.

Broad money supply growth was a huge 30% in China in the ten months to November 2009, according to The Economist.

This compares with a fall in money in supply in the Euro area over the past year with US money supply only increasing by 1.2% in the six months to November last year.

In Australia, lending to the business sector declined by 8.2% in November 2009 year-on-year, said the Reserve Bank of Australia (RBS).

A strong indication of the importance of government life-support is that thanks to low interest rates and Canberra's tax credits for first-time buyers, credit to the real-estate sector grew by 8.2% in November over the same month in 2008, the RBS added.

This supports the anecdotal stories I keep picking up of credit remaining very tight in the developed world, particularly for small -to medium-sized chemicals companies, end-users and traders. While banking systems might have been rescued from financial collapse, the surviving banks are too busy rebuilding capital to take the risk of increasing lending to businesses - and perhaps also because they fear another bust could be around the corner.

It also seems likely that even where banks are more relaxed about credit, rich-world companies in certain sectors - certainly including chemicals - are maintaining very tight cash-management policies because of this same fear of another bust.

"In this financial environment no-one is holding more than 2-3 weeks inventory cover," said an Australian plastics processor.

"Who could finance it and take the risk in (such) a volatile market?"

Some converters have, according to one Singapore-based polyolefins trader, been constantly caught out by new supply that hasn't arrived due to all the project delays -and now most recently production problems in Saudi Arabia.

This forced them to restock when low inventory levels became quickly depleted during several supply-side shocks in 2009 and into the first weeks of this year. This has made an awful lot of money for the traders.

The converters - and also many of their suppliers who also continue to exercise careful cash-management - appear to be aware of the risk of a sudden collapse in crude and other commodity prices.

The danger of a mini-repeat of H2 2008 lingers. Everyone down all the chemicals chains could again be left with big inventory losses if the bull-runs in crude, commodity and equity markets suddenly come to an end at a time when stocks are high.

But as Paul Hodges, chemicals consultant with International eChem has pointed out, rising crude and chemicals prices automatically increase potential losses - no matter how strict your inventory management.

Watch out for much more on all these themes (and a great deal more) throughout this week.

Sky-high living costs?

Source of picture: www.shanghaiist.com

By John Richardson

CHINA'S imports surged by 55.9 per cent last December, raising concerns among chemicals traders and producers that this points to increasing inflationary pressure and a possible interest-rate hike later this year.

The country's current official borrowing rate stands at 5.31%.

"The government has indicated in several official statements that it's concerned about inflation. If borrowing costs go up we would very likely see a dip in activity in sectors such as real estate that hugely buoyed chemicals and polymers demand in 2009," said a Singapore-based source with a leading global polyolefin producer.

"Pro-active" fiscal policies and "moderately loose" monetary policies would, however, be maintained in the near-term said China's president Hu Jintao at the weekend.

Real-estate construction is nevertheless up by more than 50% from a year ago, according to the same article from the Sydney Morning Herald which we quoted in our blog post earlier today.

Property prices have surged over the last 12 months, raising apparent government concerns over an asset bubble and affordability for average earners.

The same article, quoting the Beijing-based Institute of Population and Labour Market Economics at the Chinese Academy of Social Sciences, said that the labour markets were now once again tight after the big migrant-worker layoffs in 2008 and early 2009.

So is inflation really that much of a threat?

Expectations of inflation matter a lot as these drive consumer behaviour, leading to pre-buying of everything from oil and chemicals to food.

Prices of garlic and dried chili peppers have already been driven up in China by speculators anticipating price rises, said Alaistair Chan, Sydney-based associate economist for Moody's Economy.com, in this Los Angeles Times blog piece.

The price of food is vital for social stability in China. The wider threat of rising food prices across Asia - because of poor harvests and increasing energy costs - is a subject we will revisit in more detail in later posts on this blog.

The same LA Times blog posting - and again the article in the Herald - point out that The People's Bank of China began selling its three-month bills at a slightly higher interest rate last Thursday for the first time since August.

This was aimed at mopping up excess liquidity brought on by the $1.35 trillion in new loans issued between January and November last year - and could indicate less new loan-growth in 2010 as part of efforts to tackle inflation, the blog added.

"There is good reason to view the rise (in the sale price for the three-month bills) as a precursor to further tightening," said Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland in the same posting.

Consumer price index inflation (CPI) reversed from a 2.0% drop year-on-year to a 0.5% increase during the first three quarters of last year, he added.

But Morgan Stanley argues in this article in Finance Asia that while the CPI and the production price index are likely to rise early in 2010, China's year's average inflation rate will only be 2.5%.

Inflationary pressure will not be as great as some market participants expect because the growth in money supply - which we referred to earlier today as proxy for credit and spending growth - is to some extent misleading, the bank added.

Strong M2 growth failed to take into account the change in M2 caused by the shift in asset allocation by households between cash and stocks, said Morgan Stanley.

As equities or so unstable, therefore, a rise in share prices won't necessarily mean a big jump in consumer spending.

The other reason given by Morgan Stanley for inflation remaining under control as current conditions stand - meaning a low risk of an interest rate hike later this year - is what it forecasts will be a weak export market in 2010.

In the same set of official government data that indicated the steep rise in December 2009 imports, a 17.7% rise in exports was reported for the same month.

This was the first time in 14 months that China's exports had increased, according to this piece from the Financial Times.

If a strong export recovery is sustained during the next few months, this might raise pressure on the Chinese government to return to its policy of gradual Yuan appreciation, said Andy Rothman, CLSA's chief China economist, in the same article. CLSA is a Hong Kong-headquartered investment and brokerage firm

He believes a sustained recovery would give China's government the political cover to raise the value of the Yuan against the dollar by 3% in 2010.

A real recovery in exports would be a return to the volumes China enjoyed in 2007 and the first half of 2008.

(A return to dollar values wouldn't be necessary as China's exporters have received boosts from tax rebates and the fall the value of the Yuan against currencies other than the dollar because its been re-pegged to the greenback)

I am with Morgan Stanley on this as I cannot see how China's exports can recover to pre-crisis levels in 2010 because of deep-seated problems with Western economies.

So the odds seem to be long on a rate rise.

But if loan growth is reduced this year, this will still have a negative effect on chemicals demand.

What's hard to gauge is the impact on chemicals of a widespread belief that Yuan appreciation will not take place this year - the result of exports failing to rebound sufficiently. 

(The more that exports recover the greater the pressure from the West on China to raise the value of the Yuan. Higher interest rates - the result of the inflation we've been talking about - might also be accompanied by a stronger local currency) 

As we've written about before, the prospect of a 2010 appreciation led to lots of strange speculative trading in chemicals in 2009.

This added to the optimistic mood, but didn't always necessarily represent real (whatever "real" means!) demand growth.

Yuan appreciation will have to resume at some point.

So those in for the long term would continue to maximise their local currency revenues, while those with a shorter horizon would cut back on their exposure.

By Malini Hariharan

Eight years after agreeing to the Asean-China FTA (ACFTA) and a few days after its implementation the Indonesian government has succumbed to industry pressure to ask the Asean Council to renegotiate tariff reductions on 228 categories of goods across eight industrial sectors. In return, it has offered to accelerate implementation of tariff cuts on 153 tariff categories.

The 228 tariff categories include steel, iron, textiles, electronics, basic inorganic chemicals, petrochemicals, furniture, footwear, machinery, cosmetics and herbal medicines.

The government has been facing intense pressure from local companies who fear that competitive imports from China will force closure of their businesses.

Last month, a senior official at the Indonesian Employers Association (Apindo), warned that as many as 7.5 million workers (about a quarter of the country's 30m strong formal sector workforce) could lose jobs. He predicted that layoffs would begin gradually in about eight months' time.

But Indonesia had sufficient time to prepare the domestic industry for the rigours of Chinese competition. And if this was impossible the government could have approached the Asean Council much earlier.

"What were you waiting for?" questions the Jakarta Globe in this report and blames the government and industry for failing to anticipate consequences.

Anwar Suprijadi, former chief of the country's customs and excise office is reported to have said that he had warned colleagues in the Trade Ministry as well as those on the House of Representatives budgetary commission two or three years back about the problems the country would face once the Asean-China trade pact was implemented. "I warned that this [pact] should be reviewed," he said.

Pic Source: Jakarta Globe

Edmund Sim, Singapore-based trade lawyer with Appleton Luff, points out in this excellent analysis that other Asean members may be tempted to follow Indonesia.

"That Indonesia and the Philippines, with active business lobbies and media, reacted so strongly was somewhat predictable. Nevertheless, that business interests in those countries and elsewhere in ASEAN waited until the last minute, months and years after the negotiation, ratification and implementation of the FTAs, reflects fundamental deficiencies within the region's operating system. Clearly ASEAN governments and institutions such as the ASEAN Secretariat did not adequately prepare the business sector for trade liberalization. The corporate sector should have been more involved in the process from the earliest stages," he writes.

It is still early to say if Indonesia will be successful. The Jakarta Globe states that the Asean FTA council has 180 days to make a decision. Meanwhile, the trade deal will be implemented as planned.

A clause in the deal states that the council can reject Indonesia's request if other Asean countries oppose it. However, if the council sees Indonesia's offer as reasonable, it will represent the country in new negotiations with China.

But the Indonesian government has indicated that it will maximise the use of safeguard duties. A senior government official said recently safeguard measures would be used as soon as 30% of the domestic market for any product was controlled by China.

By John Richardson

CHINA'S decision yesterday to increase the amount banks must set aside as reserves and two interbank interest rate rises in the space of a week are designed to tighten monetary conditions as worries grow over overheating and inflation.

Lending reached Yuan 600bn ($88bn) in the first week of this year, not far short of the full-month average last year.

The New Year fresh-loans surge was noted by a Singapore-based source with a North American polyolefin producer earlier this week, when he commented that recent price rises were partly the result of "an even greater ability by traders to speculate".

We pointed out last year that easy credit appeared to be enabling China's many thousands of traders and distributors to buy, hold and sell stock - distorting the true demand picture.

This could have been a significant factor behind the big increases in polyolefin imports, despite an overall demand picture that should have been weaker when you took into account the decline in re-exports.

The credit surge has made it easier to trade not only in chemicals and polymers but also in other commodities, real estate and equities during a period when maximising Yuan revenue has been the focus - ahead of a possible revaluation of the currency at some point this year.

"There's a lot of talk about hot money flowing in from overseas, but most of this is locally-held money being shifted from dollars into Yuan," said a Shanghai-based US expat.

"Because bank deposit rates are negative in real terms and financial markets are undeveloped, the only ways to make money are in real estate, equities and commodities."

And amazingly, we also discovered that the same trader can switch between chemicals, polymers, real estate and equities with such carefree abandon that the underlying motive for a purchase can be obscured.

Sometimes buying a chemicals cargo is all about getting the 90 days' credit to gamble and make money somewhere else, for example, in the stock market. If the resulting profits are big enough a trader can be quite happy to dump a chemicals cargo at a loss.

The easy credit might well have also encouraged overproduction of finished goods with reports that textile mills were told to keep operating via soft loans in order to keep people in jobs.

True, growth in retail sales seemed spectacular. But a Singapore-based oil and gas consultant told me this today: "What's going on? I still don't get. Despite the record-high auto sales in China last year gasoline and diesel demand only increased slightly and so are a lot of new vehicles that have been recorded as sales actually sitting in showrooms somewhere?"

This would be consistent with the analysis of one of the China sceptics, Michael Pettis - and also the China Economic Quarterly which tends to take a more positive view.

Both told this blog last September that retail sales were a bad proxy for real consumption growth because China's retail sales figures include government purchases and shipments to shopkeepers.

If the steps taken by the government to reduce credit are successful, chemicals demand will therefore go down as speculation abates and surplus industrial production is reduced.

But these measures might not be enough to take the air out of frighteningly big asset bubbles.

"The average real-estate price in Beijing is Yuan 20,000/sq metre. That is a 30% increase in one year," said a Beijing-based chemicals consultant.

"But if you look at salaries, a fresh graduate gets Rmb2000-3000/month. This is causing a social problem. 

"Shenzhen (in southern China) has seen a 90% increase house prices."

And the Shanghai- based US expat added: "It doesn't feel right - it still feels like a bubble economy.

"I have an apartment on the outer ring road of Beijing which is 130 square metres and is right on the flight path from the airport and yet it's more expensive than downtown loft apartments in many US cities.

"With property so expensive here average salaries are still only a quarter of US levels in major wealthy cities such as Shanghai, and even less elsewhere as you move further inland.

"A lot is made of the fact that the average price of an auto is only $17,000 here compared with $30,000 in the US, but direct comparisons are not valued because very cheap local cars - some of which might come with brakes as optional extras - drag the average price down. Foreign-branded autos in China cost 50% more than in the US.

"Gasoline prices are now only $3.71 a gallon as against $2.54 a gallon because of fuel-price liberalisation and there are other signs of inflation. This place is getting expensive."

The danger is that if further measures are taken to deflate the economy, the end-result could be the same as in December 2007 - a housing slump with an overall severe economic decline.

Such is the delicate state of the world's recovery with the rest of Asia increasingly dependent on trade with China ("the second decoupling"), that decisions taken in Beijing over the next few months are going to be of huge importance.

Or, perhaps, the momentum generated by policy steps already taken means that bubbles will keep on inflating and inflating - making the disaster, when it comes, of even greater magnitude 

As famous investor James Chanos, who is shorting China, is quoted as saying: "This could be "Dubai 1,000 times over".

By John Richardson

SINGAPORE (ICIS news)--Multiple production issues are likely to keep Asian methanol markets tight until at least May after which new supply might give struggling buyers more leverage, said Mark Berggren, managing director of Singapore-based consultancy, Methanol Market Services Asia (MMSA).

"There are many operating issues keeping supply tight in Asia at the moment including those in Iran, Malaysia, Indonesia and China," said Berggren late on Wednesday.

"Many of the outages in China are related to coal and natural gas feedstock and logistics constraints and problems in running coal gasifiers. This is the result of the exceptionally cold weather."

Supply could ease after May with the start-up of new plants in Brunei, then Oman and Egypt, and the return of production in Malaysia , he added.

"Sometime in the second half, assuming that there are no further unexpected operational issues, buyers' options will increase and this will limit the margins of the Chinese coal-based producers."

Global methanol production will rise by approximately 2.7m tonnes in 2010 from 2009, estimates MMSA. Production by 2014 is forecast to reach almost 54.0m tonnes.

Good news on the demand side of the equation is, as usual, from China.

The country would consume 18.1m tonnes in 2010 and would become the biggest consumer of any region in the MMSA global supply and demand balance, said Berggren.

The biggest driver of this robust growth in China is energy applications, resulting in a reversal of the usual dynamics of affordability.

"Under normal circumstances end-uses requiring the most amounts of methanol to make each unit of product would typically be able to pay the least," he said.

"But those using methanol for gasoline blending and for producing dimethyl ether (DME) in China - which have become two of the biggest single overall uses for the product - can afford to pay much more than the formaldehyde, acetic acid methyl methacrylate producers."

The outlook for the West is nowhere near as rosy as a result of weak consumer spending in the US and the malaise affecting European economies, according to Berggren.

A further problem is that demand in the West is limited to traditional end-uses such as acetic and formaldehyde where the upside is less than in energy.

The big question remains whether the rally in crude, which began in H1 last year, will be maintained.

"We don't expect any major changes in energy prices this year on the assumption that the flight of money to commodities, supported by the fiscal policy of Western governments, doesn't dry-up," added Berggren.

He predicted that firm crude could squeeze China's methanol producers as their feedstock suppliers, the coal producers, are in a stronger position in 2010.

The coal industry will be better able to raise prices in line with firm or higher oil, he said.

The annual MMSA Methanol and Derivative Analysis is published in March 2010. It offers a globally integrated analysis of methanol, formaldehyde, acetic acid, MMA, methylamines, methyl tert-butyl ether (MTBE) - and all other major methanol end uses, with additional attention to the developing energy applications.

The figures may not be as impressive as China but India too has been churning out some good growth numbers.

The Index of Industrial Production was up 11.7% in November, the fastest pace of growth in more than two yeas. While growth was broad-based the consumer durables sector was a major contribution as production expanded by 37.3%.

Pic Source: Livemint

The auto sector too has recovered with this report estimating a 17% growth in 2009.

The fast moving consumer goods sector expanded by 12% in 2009 and major players expect growth to be higher this year.

Polymer demand was robust in 2009 and the last quarter was especially good.

"We saw a resurgence in demand since November. Q3 [October-December 2009] was superb; it was strong across all polymers," says one market player.

"PVC growth should be more than 20% in 2009-10 as pipe demand has been going up regularly. The infrastructure and agriculture sectors are the key drivers," says a source from a local PVC producer.

Will this trend continue? There are as yet no signs of a slackening in fundamental demand although any fall in prices from the current high levels should result in inventory correction.

The economic outlook too is positive with the government increasingly confident of achieving GDP growth of 8% in the year ending 31 March 2010.

But there is also pressure on the government to act fast to tame inflation. Spiralling food prices pushed the wholesale price index up 7.31% in December strengthening the case for the government to tighten liquidity and withdraw stimulus measures introduced during the crisis period.

India is not the only country facing this problem. The Asian Development Bank has warned that while Asia, excluding Japan, will expand by 6.6% this year (up from 4.5% in 2009) led by China and India inflation is a major threat for both countries.

Quick action will certainly be needed to keep the growth story intact.

By John Richardson

The tight supply olefin-polyolefin supply that has characterised markets since the first quarter of last year continues with no sign of relief for resin buyers until at least early April.

But whereas production problems and start-up delays are likely to remain aplenty, the argument for further price hikes has been undermined by falling feedstock costs resulting in a big boost to integrated polyolefin margins.

This will offer some relief to plastics processors who have been complaining of exceptionally squeezed profitability.

The demand outlook received a blow last week when China announced its first major fiscal tightening steps since the beginning of the global economic crisis. But while sentiment was affected by the decision, it seems too early to call a tangible dip in China's spectacular recovery.

The legion of production issues includes lost output from the Yanbu site in Saudi Arabia as a result of a power outage in late December.

"Yansab and Yanpet had to close down as water entered the plants due to heavy rains which resulted in a power failure," said a source.

"Yanpet has restarted but Yansab is expected only by end-January."

This hasn't been confirmed by SABIC, although the Saudi major's customers told ICIS news earlier this month that polyethylene (PE) and polypropylene (PP) allocations to Asia had been cut, which seems likely to extend into February cargoes.

ExxonMobil is due to shut its 900,000 tonne/year cracker in Singapore in mid-February for two weeks to change some parts, ICIS news was told by a source familiar with the matter.

The energy giant's customers in Southeast Asia and China said their February linear-low density PE (LLDPE allocations from the producer would be cut by 20-30%.

And our source added about the Middle East: ""Material from the new Sharq complex at Al-Jubail in Saudi Arabia, which came on-stream earlier this month, is unlikely to hit the Indian market until end-January."

He also claimed that long-running problems at another major Saudi Arabia complex -which came on-stream last year - still haven't been resolved.

The Al-Waha 450,000 tonne/year PP plant, also at Al-Jubail, was due to re-start by 7 December following an outage. However, another source said early last week that it had yet come back on-stream

All these tightening factors have been further compounded by an outage at Fujian Petrochemical in China in December, a reported outage at Petlin Malaysia - also in December - and the recent extremely cold weather that restricted plant operations and distribution in northern China.

"The general view is that supply will remain tight and demand good until early April, after which there's more uncertainty," said a Shanghai-based source with a major Asian polyolefin producer.

Markets were slightly spooked by last week's decision by China to raise the reserve requirement for banks following two inter-bank interest rate rises in the space of a week, the source added.

"These were really the first credit-tightening steps taken since the start of the economic crisis and so it has given everyone cause to pause for breath.

"But nobody is expecting the government to do much more to adjust the economy over the next few months.

"We did see, however, some downward pressure on Yuan prices in the second week of January - a week earlier than we had expected - because of the government steps.

"The focus now is on inventory management ahead of the Chinese New Year (the official holidays this year are from 13-19 February) as nobody wants to get caught with high stocks going into the New Year.

"As for current inventory levels, it's tight at the first level of distribution (the bonded warehouses) but a bit longer, although not alarmingly high, at the second local level.

"There's going to be an inevitable slowing down ahead of the New Year, of course, and some softening in prices but nobody is expecting a drastic collapse."

ICIS pricing assessed PE and PP US dollar prices as stable last week after the early New Year rallies (see graphbelow), supporting the belief that there's been a pause for breath.

But PE producers were still pushing for higher prices on the grounds that feedstock ethylene and energy costs had increased, again according to ICIS pricing.

Not so according to the 15 January issue of the ICIS Weekly Asian PE Margin Report.

"Integrated low-density PE (LDPE) margins in Northeast Asia rose by $51/tonne (10%), their highest level since May last year," said the report.

And it added that integrated high-density PE (HDPE) margins also increased by $51/tonne, or 16%, to their best position since September 2009.

Both increases were attributed to a 2% dip in the price of naphtha outweighing a slight decrease in co-product credits and the flat polymer prices we've already mentioned.

Source of picture: www.forums.comicbookresources.com

By John Richardson

I loved the analogy in yesterday's Lex column in the Financial Times, comparing the objectives of any central bank to those of Kaa, the python in Jungle Book (nice excuse for a picture to brighten up the blog).

The serious point is that while issuing assurances that overall policies supporting growth remain in place, the job of any central bank is to at the same time gradually stifle signs of overheating without alerting the rank-and-file noticing.

China failed in late 2007 to lull the average girl or guy in the street to sleep - as we've noted before - through introducing overly harsh slowdown measures that caused the country's last big economic contraction.

The raising of the reserve requirement ration to 15.5% from 15% for big commercial banks - which was announced last week and came into effect yesterday - was hardly likely to go unnoticed.

As a senior contact we spoke to yesterday commented, polyolefin prices "paused for breath" at the end of last week on the news as other commodity and equity markets slipped very slightly. 

But nobody is pressing the panic button as yet.

Lex adds, though, that fourth-quarter GDP (gross domestic) numbers are due out on Thursday.

If these indicate what the government agrees are more signs of dangerous overheating, then other measures might be taken sooner rather than later - perhaps interest and/or deposit-rate rises.

Previously, we had been told that further tightening using one of the three big economic sticks (bank reserve requirements, deposit or interest rates) was unlikely over the next few months - and possibly not until the second half of the year.

The risk of investor panic might cause hesitation, though, despite the data meriting swift measures; it's very hard for China to do anything these days without what seems like infinite scrutiny.

In other words if China fails to act soon - because it's caught in the global economic headlights with no chance of  escape - it could be storing up bigger problems for the future.

By John Richardson

Linear-low density polyethylene (LLDPE) pricing in China has become increasingly divorced from industry fundamentals as a result of the growing role of the Dalian Commodity Exchange's futures contract, claimed a Singapore-based polyolefin trader late last week.

And the contract is setting the physical market, resulting in Dalian performing a similar role that of NYMEX on the price of crude as result of very easy lending conditions, a petrochemicals consultant added today.

Financial as well as polyolefin industry players have become heavily involved in Dalian, the trader added.

The big growth in LLDPE volumes traded last year -as this chart from my fellow Paul Hodges illustrates - was supported by the huge surge in banking lending in China.

The contract is also being used by polyolefin traders to make money through pure one-way speculation and as a means to hedge risk in the physical market, the trader said.

"Buyers are using the contract to hedge, although I have seen little evidence of producers trading on the exchange.

"Everybody seems to be using the exchange as an indication of sentiment and if they are not actually setting pricing off Dalian, they are using it as a guide."

But the consultant added: "I believe that Dalian is, in fact, setting the physical market as PE becomes more speculative.

"It has come to play the same role as NYMEX for crude oil, meaning that the contract often moves on sentiment and speculation rather than on fundamentals."

Assessing the pricing outlook for PE now involves looking at comparative margins on real estate, equities and other futures contracts in metals and agricultural commodities, the trader continued.

"It's not just about looking at supply and demand fundamentals anymore," he said.

"Financial and chemicals industry player will look at margins across all the different futures contracts, and in equities and in real estate, to decide where the best returns lie and flip their money accordingly. I have to do the same to figure out PE price direction."

China's huge increase in lending has had comparable effects on the physical market with polyolefin traders, and traders in other chemicals and polymers, sometimes only buying a particular cargo in order to get their hands on credit in order to speculate elsewhere.

This has led to some chemicals and polymers cargoes being sold at below cost because sufficient profits have been made in other commodities.

"It's also worked the other way round - i.e. somebody raising credit through buying another commodity because his main objective has been to speculate in polyolefins," added the trader.

So go figure this: You have an increasingly speculative physical PE market which is so divorced from the fundamentals that there's a bigger need to hedge. The problem is that one of the major hedging mechanisms - the Dalian contract - is also highly speculative!

The multi-million dollar question now is whether China's decision to tighten liquidity through raising the reserve requirement for commercial banks will reduce the amount of froth in the PE market and across commodities in general - both for physical cargoes and on futures exchanges.

As Paul Hodges also noted last week, several fiscal tightening measures have already taken place which could reduce trading volumes in both the Dalian LLDPE and polyvinyl chloride (PVC) futures contracts. We will look at relationship between physical PVC pricing and the futures contract in a later post.

LLDPE trading volumes so far this year are down by 27.77% on January 2009, according to the exchange's website today.

This might make a successful launch of a major futures contract in polypropylene (PP) - rumoured to be under evaluation in China this year - problematic.

PP producers are reportedly jostling for position to get their grades accepted under this planned contract in order to support physical sales.

If a grade made by only one producer is traded through a PP contract, a hedger could be more likely to also buy physical volumes of that grade as, in theory, hedging should work more efficiently.

But China constantly loosens and tightens credit and so, even if Dalian becomes less relevant this year, it might well come back.

There are also indications that the Chinese government wants to make exchanges such as Dalian more sophisticated in order to set its own global benchmark prices for commodities.

"It no longer wants to be just the price taker from exchanges such as NYMEX. It also wants to be the price setter," said a Shanghai-based chemicals industry observer late last year.

By Malini Hariharan

After experiencing steep price hikes over the last few weeks should seller start preparing for a fall? Signs of resistance and a slowdown in buying are being seen across a few products suggesting that price corrections may be imminent.

ICIS news reports today that the price rally in PE and PP in South Asia and the Midle East may reverse as buyer resistance is building up. The supply situation is also improving as plants in the Middle East have started ramping up operating rates.

Buyers in these markets are also taking cues from the Chinese market where buying is slowing down ahead of the Chinese new year holidays in mid-February.

And another ICIS news report yesterday talked of paraxylene (PX) markets turning bearish in the short-term as supply has lengthened following an easing of demand.

A Sinopec source is reported to have said that despite production issues in the Middle East and China and the heavy turnaround schedule in Japan, end-users were not buying as they did not have any immediate requirement to cover.

But the one factor that could halt or ease price corrections is naphtha which is running strong at around $750/tonne cfr Japan on tight supply.

By Malini Hariharan

Reliance's bid to acquire LyondellBasell has taken an interesting turn after yesterday's court ruling.

The US bankruptcy court has allowed Lyondell Chemical, the US arm of LyondellBasell, time until 15 April to file a reorganisation plan. During that time, no other competing reorganisation plans can be filed with the court.

"... With so much going on, I'm not of a mind to open up exclusivity to anybody other than the debtors," the judge Robert Gerber is reported to have said at the hearing. He was referring to the complexity and antagonistic nature of the case.

The court also rejected a request by unsecured creditors to expand the scope of an examiner to review how Lyondell was evaluating Reliance's offer.

Gerber said it would be inappropriate for him to look to an examiner to do his job.

"While I may growl and grimace with the (number) of those issues, I will do my job."

A source familiar with developments says the ruling was not a setback and that Reliance will have to re-evaluate its strategy.

"The unsecured creditors' bid [to include the Reliance offer] has been rejected. That route is closed.

"Reliance can still make a binding bid to the LyondellBasell management and then they can take it to court; it can also increase its offer. Reliance will have to evaluate [options]," says the source.

Reliance is clearly keen on pushing ahead.

By John Richardson

CHINA'S decision to temporarily halt lending by some banks - which was announced yesterday - as it attempts to further cool the economy will likely have a significant effect on chemicals demand and pricing.

This follows last week's decision to raise bank reserve requirements and two increases in the inter-bank lending rate in the space of just one week earlier this month.

"The last time China tightened liquidity in 2007 we saw a dip in polyethylene (PE) imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006," said Mazlan Razak, Kulua Lumpur-based petrochemicals consultant with DeWitt & Co.

Traders have used easy lending conditions to speculate in polyolefins, other commodities and real estate, boosting sentiment, adding to overall consumption, he added.

China's huge increase in bank lending has led to traders in chemicals and polymers sometimes only buying a particular cargo in order to get their hands on credit so they can speculate elsewhere, a Singapore-based polyolefins trader told us late last week.

"This has led to some chemicals and polymers cargoes being sold at below cost because sufficient profits have been made in other commodities," he added.

"It's also worked the other way round - i.e. somebody raising credit through buying another commodity because his main objective has been to speculate in chemicals and polymers."

This is a view shared by the Shanghai-based chemicals information service, CBI China.

The fall in local equity markets in response to the latest tightening announcement will - if sustained - have a negative wealth effect, leading to less consumption of finished goods.

And yesterday's announcement of a moratorium on some new lending could affect the overheated property sector.

Stronger chemicals and polymers demand has been partly the result of people buying homes - sometimes for speculation or just to get in before costs have gone higher.

The improved demand was through the pick-up in construction and furnishing new homes - for example, kitchen utensils.

Credit to sustain last year's huge improvement in auto sales may also become more limited.

But with China needing to sustain strong consumption growth as it attempts to rebalance its economy, and for reasons of social stability, the government might need to take some steps to sustain consumption - particularly in the property sector.

On other hand, if inflationary pressures get worse necessitating a deposit and/or lending rate rise, a dip in final demand for chemicals seems unavoidable.

Rate rises would likely be accompanied by a strengthening of the Yuan - a further disincentive to the speculation in chemicals and other commodities that's been drive by the desire to maximise local currency earnings. The motive has been to generate as many Yuan as possible in order to switch to US dollars once an appreciation occurs.

A gradual appreciation seems likely from the current rate of around Yuan6.8 to the US dollar with the betting on a final medium-term target of Yuan4.8.

Morgan Stanley has predicted a possible 3 per cent increase in the value of the Yuan this year so you can imagine some investors cashing in on their speculative earnings when and if this occurs. Others might hold on for further increases.

A stronger Yuan would also weaken export competitiveness and possibly import volumes of chemicals and polymers for re-export as finished goods.

Chemicals and polymer pricing (see chart below as an example) has been driven up tight supply and higher feedstock costs in the early weeks of this year.

The outlook for supply remains exceptionally uncertain with production problems likely to continue. On the supply side, therefore, a strong argument has been made for continued tightness.

But with crude already weakening on China's credit tightening, the growth in US stockpiles and warmer weather in the northern hemisphere, this could well give chemicals and polymers end-users a bit more leverage.

Last week's dip in crude, and therefore naphtha, has already resulted in a fall in benzene by $30/tonne to tonne to $1,020-1035/tonne FOB Korea, according to the ICIS pricing assessment for the week ending 15 January.

While naphtha and benzene spreads and therefore margins have been spectacular and overall cracker margins excellent - with cracker-polyolefin margins also very good - the end-users we've spoken to have complained about their own contrasting poor profitability.

Sentiment was already pointing to possible price corrections in Middle East polyolefins with oversupply creating short-term bearishness in paraxylene, my fellow Asian Chemicals Connections blogger Malini Hariharan wrote in a post earlier this week.

And as one senior polyolefin industry source commented following last week's announcement of an increase in the bank reserve requirement, prices had "paused for breath" after their strong New Year rally.

By John Richardson

CHINA'S soaring fourth-quarter GDP (gross domestic product) growth - and the release of the latest inflation statistic - has heightened fears among economists that interest-rate rises will be necessary, risking collapse in house prices if it's not managed skilfully.

Inflation rose to 1.9% in December last year from 0.6% in November, according to this same article in today's Financial Times.

As we've mentioned before on this blog it was higher deposit rates in late 2007 that caused the country's last economic contraction as property values and the stock market fell.

On this occasion an inflationary head-of-steam is being built up through not only rising real-estate prices (they were up in Shenzhen by 90% last year, for example, indicating that much more moderate nationwide statistics don't reflect localised inflation hot spots), but also higher food and utilities costs.

Just a few weeks ago the betting seemed to be on no rate rises before the second half of this year.

Now with the release of this latest GDP growth number, as we had suggested might happen earlier this week when we quoted the Lex column in the Financial Times, some pundits now think a rate rise before then is likely.

Higher deposit and/or borrowing rates - to follow fiscal tightening measures that have already been taken - would have another negative consequence for China: A stronger Yuan, denting export competitiveness for an economy that still remains around one-third dependent an overseas trade, despite all the talk about booming local demand.

A growing view seems to be that the Yuan will arise by around 3% against the US dollar. This would also dampen some of the speculation that has boosted petrochemicas demand (see details in link in paragraph above).

Yesterday we quoted Mazlan Razak, petrochemicals consultant with DeWitt & Co in Kuala Lumpur, as saying: "The last time China tightened liquidity in 2007 we saw a dip in PE imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006."

This is obviously the impact on only one polymer, and so tread with great caution when making plans for this year.

By Malini Hariharan

After overcoming legal objections, Braskem took the final step late last week to announce the merger of the petrochemical operations of Petrobras, Odebrecht and Quattor, to create not only Brazil's largest petrochemical company but also America's largest polymer producer.

The plan now is to develop the company to become one of the world's five largest producers, said Bernardo Gradin, Braskem's ceo at a press meeting. "The future is soon," he said.

Braskem is in talks with U.S. companies, Gradin said but declined to give more information.

"Since last year, we've wanted to acquire a company in the U.S.," Gradin said. "We've had talks, but for now we have nothing to announce. With the financial crisis, a lot of interesting opportunities appeared, but the improvement in the markets has reduced this."

The company may seek assets from Dow Chemical, Sunoco or Ineos Group Holdings, says this report.

Braskem has also charted out "aggressive growth plans" in Mexico and Venezuela.

Completion of the deal, which effectively nationalises Brazil's petrochemicals industry, gives Braskem a capacity of 3.04m tonnes/year of polyethylene (PE), 1.97m tonnes/year of polypropylene (PP) and 510,000 tonnes/year of polyvinyl chloride (PVC). With a total capacity of 5.51m tonnes/year, the merged company would he ahead of ExxonMobil (5.31m tonnes/year) and Dow Chemical (4.83m tonnes/year).

The deal is unlikely to face regulatory hurdles despite the new company's domination of the local market. The Brazilian government reportedly considers the petrochemical market as a global one and the deal gives Braskem only a 3% share of the global market.

By John Richardson

IT is always useful to make a note of both what economists are saying and where they are coming from.

To give you an example, I was at a conference last year when I heard a ridiculously rosy outlook for both emerging and developed economies, delivered by an economist working for a certain bank.

This bullishness remains in stark contrast with a refinery industry grappling with overcapacity in the US, for example, resulting in the need to close operations down.

The same will eventually have to happen in petrochemicals in higher-cost countries such as Japan and South Korea when big volumes of much-delayed polyolefin capacity finally hits the market, according to Mazlan Razak, Kuala Lumpur-based petrochemicals consultant with DeWitt & Co.

True, returns from petrochemicals - a very real industry that makes stuff that is tangible and worthwhile (quite often a perquisite in recent times for actually losing money) - were much better in 2009 than anyone had expected.

How good margins exactly were on a genuinely-valid comparative basis (with 2007 during the economic boom) is something we will look at on this blog a little later.

What we can say for certain right now, though, is that volumes on a global basis were way down as Western companies kept overall operating rates at very low levels. I suspect that those who made the best returns were the chemicals traders who guessed the right way during an unexpectedly strong rebound.

Back to my original point, the banks and other financial institutions have a vested interest in talking up this recovery, potentially creating false and harmful optimism among chemicals and other manufacturing companies.

The weight of evidence remains overwhelming to support the view that in the developed world, recovery is anaemic and far from complete.

China is another story which we have dealt with many times before on this blog. It emerged more clearly last week that inflation followed by interest-rate rises are big threats to China maintaining the sort of growth we saw in 2009.

Back the developed world and a new report from the McKinsey Global Institute (see chart below) - Debt and De-leveraging: The Global Credit Bubble and its Economic Consequences.

Most rich countries have seen huge increases in their ratios of debt to GDP (gross domestic product) over the last ten year, according to a summary of the report in The Economist.

Britain and France are the most extreme with increases in their ratios by more than 150 percentage points each, to 465% and 365% respectively.

Financial sector debt increased hugely, in line with the big rise in household debt (it was all the exotic financial instruments which caused the economic crisis that enabled household debt to increase so sharply).

In America middle-income families built up most of the debt whereas in Spain it was poorer families, an example of a lack of uniformity in how household debt was built up across the developed world.

Deleveraging has barely started.

The composition of debt has shifted, however, from the private sector to governments with the financial sector cutting back the most.

Half of the ten rich countries in the survey have one or more sectors that are "highly" vulnerable to debt reduction.

These include households in America, Britain and Spain and to a lesser degree, Canada and South Korea - as well as commercial property in America, Britain and Spain.

The survey looked at 32 examples of sustained deleveraging in the past where the debt/GDP ratios have fallen by at least 10% after financial crises.

Typically, deleveraging began two years after the beginning of a financial crisis and lasted six-to-seven years.

In almost every case, output shrank for the first two or three years of the process.

McKinsey identified reasons why this current period of deleveraging could be more protracted than in the past, which include:

*The scale of indebtedness is higher. The highest previous ratio was Britain at 286% after the Second World War, but on this occasion more than half the countries in the McKinsey survey have debt totalling more than 300% of GDP

*The number of countries afflicted simultaneously is a lot greater, meaning that rapid expansions of output through exports is not easy on this occasion (plus, the export competition from China has increased enormously since the 1980s and 1990s recessions)

*Big increases in public debt, while cushioning the declines in demand in the short term, increase the overall debt reduction that will eventually have to take place. Once private sector deleveraging is done then the public-sector wind-down will have to begin

A further problem is that investors might worry about public-sector debt levels before the private sector deleveraging has been completed, pushing up bond yields - for example, the recent concerns over Greece.

The result could be a cut back in public debt before the private sector has completed its own reduction, damaging growth by far more than if an orderly wind-down takes place.

By John Richardson

CHINA'S capacity expansions in industries including steel, aluminium and petrochemicals continue to astound.

Take polyvinyl chloride (PVC) for example., where, according to a new report by ChemSystems, "capacity (in China) has expanded from 5m tonne/year in 2003 to over 15m tonne/year in 2009, almost 90 percent of total global capacity expansion over the period.

"Despite legitimate environmental concerns, relating both to massive carbon emissions and mercury pollution, the development of acetylene-based capacity in China shows no sign of slowing.

"The government's effort to restrict the construction and expansion of less efficient, environmentally hazardous plants has had little impact on the overall pace of development, although has perhaps prevented some sub-scale projects from moving ahead."

 This makes one wonder whether the huge increase in bank lending in 2009 and the first few weeks of this year has further added to the capacity-building momentum.

As China's coal/acetylene feedstock advantage is mainly located in under-developed Western China, it hardly requires an enormous leap of imagination to figure out that local authorities will have cashed-in on the opportunity while they had the chance.

                                                       Regional PVC Capacity Additions

.

Source of graph: ChemSystems

The consequences of big feedstock and capital-cost advantages will be felt very keenly in Japan, South Korea and Taiwan. If these projects in China couldn't repay their loans would anyone have the ability or desire to attempt foreclosures?

Japan, South Korea and Taiwan have a collective PVC surplus of 2.4m tonne/year which used to be shipped to China, said ChemSystems.

The search for other overseas markets - where greater distance is likely to create freight-cost and delivery-time disadvantages - could be made extra difficult by ongoing North American capacity expansions.

New projects in North America will be targeted for exported as, of course, the region's construction industry is in major crisis, the consultancy added.

Shintech, part of Japan's Shin-etsu Group, Westlake Chemical and Georgia Gulf were all scheduled to have expanded capacity by this year, according to ICIS news.

Taiwan's Formosa Plastics Corp is due to bring on-stream an 180,000 tonne/year capacity increase in Point Comfort Texas in Q1 2010, says the ICIS Plants & Projects database.

US PVC exports were 202,438 tonnes in November, more than double the 91,859 tonnes a year earlier, ICIS news reported yesterday - quoting the United States International Trade Commission (ITC).

For the first 11 months of 2009, US PVC exports were up 54% from the year-earlier period at 1.914m tonnes, the ITC added.

There are yet more problems for Japan, South Korea and Taiwan: Natural gas prices which remain very low relative to naphtha could give ethane-based US ethylene-to-PVC producers an export edge, along with further weakness in the US dollar.

By Malini Hariharan

There is no light yet for companies whose projects have been suspended at Map Ta Phut. Last Friday, Thailand's Central Administrative Court rejected 30 petitions submitted by companies looking to resume work as their projects had received environmental clearance and would not create pollution.

"The outlook is not promising," says a Bangkok-based analyst. He is also not surprised by last week's court ruling. "Nothing has changed for the court to change its mind. All the petitions had information already seen by the court. The court wants companies to follow the constitution," he adds.

And article 67 of the Thai constitution requires health impact assessment studies to be conducted and approved by an independent committee.

The government is still struggling to put together the regulation to implement article 67 and also an independent committee.

Earlier this month, a four-party panel, headed by the country's former prime minister Anand Panyarachun, prepared and submitted a new regulation which was approved by the cabinet. And a 19-member coordinating committee was also appointed to advise the government on approval of projects at Map Ta Phut.

But an environmental group, Stop Global Warming Association, is now seeking to block implementation of the regulation and has filed a petition with the administrative court. The NGO says that no public hearings were held while drafting the regulation despite the fact that it would affect a large number of people and organisations.

Pic Source: Pattaya Daily News

Affected companies are still trying out all options to resume work at Map Ta Phut. Siam Cement said in a statement today that it has already started to comply with the new regulations invoked by the state in accordance with article 67. The compliance process is expected to take between 8-12 months, it said.

And Siam Cement is also trying to "expedite a conclusion through consultation and coordination with official agencies concerned as well as investors to find solutions."

Eighteen projects run by both Siam Cement subsidiaries and its joint-venture companies are among the 64 projects affected by the Supreme Court's order to halt construction. The investment cost of these 18 projects is worth over Baht57.5bn ($1.74bn).

Siam Cement did not identify the 18 projects but according to one industry source the company's joint-venture cracker, hdPE and PP projects are not on the list but a lldPE project is stuck. The blog has not yet been able to confirm this with the company.

Meanwhile, PTT Chem has started its new 1m tonnes/year cracker and expects to achieve on-spec production by the end of this month, reports ICIS news. But sustaining full operations at the new cracker would depend on when parent company, PTT, is allowed to commission its No6 gas separation project at Map Ta Phut.

A PTT source says that the project was 99.8% complete at the end of last year and that construction work is almost over. But after last week's court ruling the company is not able to provide any clarity on when work can resume at the project.

PTT, says the source, plans to work with government agencies and ask them to file a fresh petition in the Administrative court. It is also evaluating approaching the Supreme Court directly. And it also working on a health impact assessment study which should be ready for evaluation by April.

"In the worst case we are looking at a one year delay in the commissioning of the gas plant," says the source.

To keep the new cracker running, maintenance shutdowns will be carried out at PTT Chem's two existing crackers. A 460,000 tonnes/year cracker is due to be shut in mid-February for 35 days while a 515,000 tonnes/year cracker will be shut for 30 days in June.

Extra ethane (around 600,000 tonnes/year) would also be available once PTT completes revamping two of its existing gas separation plants. The revamp project is not the list of affected projects and test runs are due in February.

But even these arrangements may not provide sufficient ethane to the new cracker. "We believe we cannot run it at 100%. We have to wait and see when we finish commissioning of the gas separation plant," says the source.

The delay in the new gas separation plant has implications that go beyond petrochemicals as Thailand will have to import huge volumes of LPG.

"It will be around 100,000 tonnes/month and the government will have to subsidise this. They [the government] are under a lot of pressure. International prices of LPG are in the $700-800 range while the local price is around $330. The government subsidy would be around $1.5bn every month," says the source.

But this is something that the government has known since September last year when the administrative court made its first ruling on Map Ta Phut, points out the analyst.

The Map Ta Phut mess is just one of the many problems that the beleaguered government is facing. The stock market has fallen to a seven-week low on concerns about political uncertainty.

Investors appear to be increasingly worried about an impending collapse of the current coalition government. The Bangkok Post also reports about discontent in the armed forces and rumours of a coup which have spooked the business community.

South Korean producers have for long been dependent on the Chinese market to absorb a large percentage of their output. So it is perhaps not surprising to read that SK Energy plans to move the headquarters of its chemicals division to China. It is also said to be looking at hiving off the chemicals business into a separate unit.

This report says that the relocation is likely to be completed by 2015.

The company's official line is that the move to China is one of many options being considered for globalisation of SK Energy and that nothing has been decided as yet. No deadline has been set for a decision.

But the possibility is quite high as China already a major market for the chemicals division.

Plus SK is pursuing a joint-venture 800,000 tonnes/year cracker and derivatives project with Sinopec at Wuhan.

Progress has been slow and the last reported completion date for the project was 2012-13. A company source says talks have started with the main contractor. But he was unable to give a firm start up date for the project.

"Any Old Iron?"

Source of picture: http://www.investorfsbo.com/refinery.html

By John Richardson

A LONG-TERM shift in refinery economics is posing a major threat to petrochemical margins - along with the delayed supply crisis that's likely to hit the industry at some point over the next year.

"Refiners, when the global economy was booming and particularly after the Hurricane Katrina gasoline supply shock, were pushing out naphtha to achieve balance across the barrel," said Paul Hodges, chemicals consultant with the UK-based International eChem.

"But now you have worldwide oversupply in refining with US gasoline demand peaking in 2007.

"You have ethanol as a percentage of total fuel consumption in the States already having doubled from 5% to around 10% and likely to go to 15%.

"The new auto fuel-efficiency regulations, announced last year, require big improvements in vehicle efficiency - another drag on demand."

And then there is the US economy, which, as we've said before on this blog, faces deep-seated long-term problems, including a far-from-complete deleveraging process.

US refineries ran at 78.4% of capacity in the week ended 22 January, steady with the prior week but down from 82.5% a year earlier, according to data from the Energy Information Administration (EIA), which was reported by ICIS news yesterday.

In the US, naphtha supply is unlikely to be the main issue for petrochemical producers as the big natural gas advantage over naphtha has led to a heavy switch to gas cracking. Instead, it's the availability of propylene from Fluid Catalytic Crackers (FCC) that's the big issue

Proof of this pudding came yesterday when US propylene producers nominated increases of up to 14% for February contracts on lack of availability from refineries, according to the same report already linked to above from ICIS news.

"In Asia, where gasoline demand growth is stronger, refiners outside China are being squeezed by the Chinese who have added so much capacity that they have swung into a gasoline export position," continued Hodges - a fellow blogger.

N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz, agrees.

Low refinery operating rates on poor gasoline and middle distillate markets - along with high Asian cracker operating rates - were likely to increase the East of Suez naphtha deficit in March and April, he recently predicted.

"A couple of recent, seemingly incongruous, headlines caught our eye," wrote the authors of the daily energy and shipping report, The Schork Report, yesterday.

They were referring to the Bloomberg story on January 24 - headlined "Morgan Stanley Expects Oil to Rise to $95 (in 2010) on Demand" and one the next day on the same wire service, which was titled: "Refining Profit Stays Weak on Overcapacity, Ernst & Young says".

"Ninety-five dollars on 'strong demand'....huh? Did anyone on Wall Street see Valero's earnings yesterday," continued yesterday's Schork Report.

But as we pointed earlier this week, you have to be aware of why someone might be making bullish growth forecasts.

"Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446mbbl/d of European and North American refining capacity was closed permanently in the fourth quarter (2009) and why another 663m bbl/d was shut down indefinitely and 560m bb/d partially shut down," the report added.

This amounted to lost oil demand of 1.7m bbl/d by the end of last year, the Schork Report calculates.

But this doesn't mean it's ruling out the possibility of $95/bbl by the end of this year.

If the financial speculators continue to spin their "sustained global economy recovery" story successfully while credit remains cheap and plentiful on continued strong worldwide government stimulus and China doesn't come off the rails, conceivably, yes. Why not?

But this would mean more pressure on refiners margins because even crude around $70/bbl is too expensive given the current economic fundamentals, never mind $95/bbl.

Petrochemicals would be squeezed from both ends of the product chain as refiners cut back even further, thereby reducing feedstock availability - with the firmer crude setting a higher floor for raw material costs.

Producers could also soon face, as we've already said, the long-awaited petrochemicals supply surge and damage to economic growth caused by the higher crude.

I am often accused of being overly pessimistic, but I really do believe petrochemical and chemical companies in general need to plan for a very difficult few years. It would be in everyone's best interests to plan prudently.