Asian Chemical Connections

Source of picture: http://www.referenceforbusiness.com/

By John Richardson

GROWTH in Europe isn't going to return to 2008 levels before 2012, said BASF CEO Jurgen Hambrecht on the release of the German diversified chemical giant's financial results for last year."

Overall, there are no signs of a self-sustaining, long-term recovery. We are still significantly below the capacity utilisation rates that were seen ahead of the crisis," he added.

"(We expect) the majority of growth to come from the emerging economies in Asia, especially China, and from South America.

Stimulus programmes are being wound down, credit is becoming tighter, excessive national debt is leading to austerity measures, the number of jobs is falling and overcapacities still exist.

"There are further risks associated with geopolitical tensions and a trend towards protectionism."

Whenever anybody tries to talk-up the recovery story over the next year, these words will be worth returning to as a crucial reality check.

By Malini Hariharan

And Sumitomo Chemical has discovered this.

The company recently said that PetroRabigh, its joint venture with Saudi Aramco in Saudi Arabia, has managed to secure fresh ethane allocation of 30m scf of ethane for a second phase of projects.

Ethane is running short in Saudi Arabia and getting an allocation, even a small one, is an achievement. But the second phase will need to use naphtha - about 3m tonnes. This will come from PetroRabigh's phase one which includes a refinery.

For phase one PetroRabigh had received an allocation of 95m scf of ethane sufficient to support a 1.25m tonnes/year cracker.

Details about the second phase are still sketchy. A feasibility study is due to be completed in the third quarter of this year and if viability is confirmed the projects will start up in Q3 2014, says Sumitomo

Pic source: PetroRabigh

The products being studied include ethylene propylene rubber, thermo plastic olefin, methyl methacrylate monomer (MMA) and poly methacrylate (PMMA), low-density polyethylene (ldPE), ethylene vinyl acetate (EVA), caprolactam, polyols, cumene, phenol, acetone, acrylic acid (AA), superabsorbent polymer and nylon 6.

But PetroRabigh phase two does not figure in Sumitomo's three-year plan, unveiled recently, as the plan runs only till fiscal 2012.

The plan does not have any surprises in terms of company strategy but Sumitomo has set some very tall sales and profit targets which might be difficult to achieve.

Despite an uncertain global economic outlook the company has set a sales target of Yen2,400bn and operating income of Yen190bn in fiscal 2012. This would mean a return of equity of 20%, up from the 1.8% projected for 2009-10.

"The numbers are too aggressive. Sumitomo has large exposure to cyclical businesses such as petrochemicals and information technology (IT); it will be quite difficult to achieve [the targets] if the recent price trend continues. The price assumptions for ethylene and polyethylene are very optimistic. A recovery in domestic petrochemicals is a dream story," says a Tokyo-based analyst.

To achieve its overall targets Sumitomo has said that it will quickly maximize profits and cash flows from major investments including its PetroRabigh cracker and derivatives joint venture with Saudi Aramco.

In petrochemicals, the company's policy is to ensure sustained profitability by establishing global operations. To achieve this Sumitomo plans to establish a worldwide marketing operation built on globally standardized products.

Profitability of operations in Japan would be strengthened, says the company without giving specific details on how this will be achieved.

"The issue of [improving] petrochemical competitiveness in Japan has been discussed for a decade; many people are sick of the discussion. The product mix is important. There should be more high performance chemical products. Sumitomo and Mitsui Chemicals have to change its business structure and not rely on ethylene derivatives," says a second analyst.

Sumitomo too is thinking along the same lines.

"We will increase the proportion of value-added petrochemical products we produce domestically from the current 70-80%," says a company spokesman. All options are being explored including new technologies and feedstocks and alliances.

A recent example of activity in this area is the new 150,000 tonnes/year propylene demonstration facility, a 50:25:25 joint venture by Idemitsu Kosan, Sumitmo and Mitsui.

Each company will contribute C4 fractions to the new unit and offtake propylene in proportion to their investment.

Sumitomo is unwilling to give details on what it plans to do with the extra propylene and would only say that it would be used for downstream production.

These and other initiatives are expected to help Sumitomo achieve petrochemical sales of Yen785bn and operating profit of Yen30bn in fiscal 2012, up from forecasted sales of Yen500bn and an operating loss of Yen9bn in the current financial year.

But the share of petrochemicals and basic chemicals in total sales is projected to shrink in the future from 43% in 2009-10 to 30% in fiscal 2020 as Sumitomo's priority is to achieve a balanced business portfolio.

Pharmaceutical and agrochemicals would contribute about 30% of total sales in 2020 almost unchanged from the current level, while the share of information and communications technology (ICT), battery and fine chemicals portfolio would expand to 30%, up from 21%.

Investments will be made to ensure this balance. The petrochemicals and basic chemicals segment would draw only about 20% of the company's investment dollars through 2020 while the other two segments would each draw 40%.

By Malini Hariharan

LyondellBasell's board is reported to have rejected Reliance Industries' revised $14.5bn buyout offer.

The rejection is not surprising as LyondellBasell is said to have valued itself at $15.5bn in its restructuring plan.

Reliance still has room to up its offer although financial analysts are worried that a high-priced deal would not be favourable to shareholders. And this was evident in the stock market today with Reliance shares moving up in reaction to the latest news reports. Investors perceived the rejection to be positive as it saves Reliance from making an expensive buy.

But if an acquisition makes sense then it is probably time for Reliance to be more aggressive and place an offer that LyondellBasell would find difficult to reject.

Meanwhile in another interesting twist to the story, the New York Post says that Apollo Management, the private equity company which is one of LyondellBasell's key creditors is looking at merging the company with Hexion Speciality Chemicals. Apollo has an investment in Hexion.

By John Richardson

THE current glum mood in the Asian fibre intermediates chain is in stark contrast to the optimism in polyolefin and other petrochemical markets.

A broad-based price rally has occurred following the end of the Chinese New Year (CNY) holidays belying fears, for the time being at least, that China's credit tightening will force a decline in pricing.

But the contrasting misery in paraxylene (PX) through to bottle and fibre-grade synthetic resins serves as a warning of how overconfidence can be a dangerous thing in this exceptionally uncertain economic environment.

Back in early November it was assumed that Chinese textile and garment manufacturers would - as they have nearly always done in recent history -benefit from a pick-up in orders from the US.

So stocks of paraxylene (PX), purified terephthalic acid (PTA) and synthetic fibres began to build up.

"What also led to the inventory build at a time when business would normally be fairly quiet were expectations of higher crude prices," said Leonard De Guzman, Philippine-based petrochemicals consultant with DeWitt & Co.

The US orders didn't come in because textile and garment business was lost to Brazilian, Mexican and other non-Asian competitors, and oil prices didn't go up.

"The cost-consciousness of the Western retailers, such as Wal-Mart and JC Penney, is getting even more ferocious, meaning even Chinese garment manufacturers are not cheap enough," De Guzman added.

"I just don't see a quick recovery on the High Street in the US and Europe and this will continue to place pressure on the Asian apparel and non-apparel industries.

"Despite all the talk of rapidly rising domestic consumption in countries such as China, this is still a heavily export-dependent region and so trade with the West remains crucial."

This trade needs a kick-start ahead of the crucial March-to-May production and sales season.

"What's stopping this from happening at the moment is cotton prices," continued De Guzman.

"Very poor harvests in Q4 2009 in China and the US led to the China and New York futures markets registering steep rises over the CNY week."

Bumper harvests were reported in India, Bangladesh and Pakistan but this had no effect on the cotton price as none of these countries had futures markets, explained De Guzman

"And so now we have synthetic fibre prices being supported by cotton. The textile mills in China, which are running at average operating rates of 60%, need a break from cheaper raw materials.

"The price of cotton is keeping synthetic fibers high as fibre makers are linking their prices to cotton rather than raw materials."

Fibre economics were very good with staple filament yarn at more than $1500 and raw material costs at $1130, said De Guzman

"This link to cotton is the reason why their customers - the textiles and garment manufacturers - lost orders, and so this could be the wrong decision.

Polyethylene terephthalate (PET) bottle chip economics were very different as producers were struggling to keep their heads above water, he added.

Further upstream from naphtha, margins are being squeezed.

"Naphtha was at $730/tonne CFR Japan recently which compared with spot PX at $1,000-1,020/tonne CFR China," said De Guzman.

"The PTA producers are on paper actually doing alright. With PX at around $1,000 tonne the minimum needed to cover production costs is $830/tonne CFR China, and so the current PTA price of $950/tonne CFR China is very comfortable.

"But sales or transaction volumes are likely to be very low at the moment, which is why the PTA price hasn't budged for some time.

"It should fall, but when a PTA producer asks his customer 'If I cut my price would you buy more?' the usual answer is no, so there is no incentive to do so."

Despite the broad-based post-CNY price rallies, De Guzman worries that too many buyers in too many product chains are chasing higher oil prices rather than responding to stronger demand.

"I just don't see the demand there, not in the fibre chains, not in styrenics - not anywhere in fact."

Source of picture: Dachangplastic.com

By John Richardson

WHAT a difference ten years have made in the plastics processing industry, according to a Southeast Asian converter who sees China's machinery=manufacturing prowess as an opportunity and threat.

"Ten years ago I considered buying a process machine from the US for $300,000 but it was just too expensive," said the processor.

"I recently purchased two machines from China - which are of better quality than the one I could have bought ten years ago -for only $100,000. This is great news for me.

"But I think the ease of availability of capital combined with the big improvements in China's capability to build processing machines for certain plastics processing sectors is contributing to the strong demand growth.

"It has been easy, particularly over the last year, to add processing capacity on the assumption that strong continued government stimulus will mean a sufficiently strong market."

So if the government withdraws stimulus in the wrong kind of ways as it tries to cool the economy down, the processing sector could be one more industry in China increasing its exports of surpluses. We are already seeing this in finished baxially oriented (BOPP) film.

By Malini Hariharan

The current slowdown in M&As is perhaps for the best as according to a recent report by Alembic Global Advisors the chemical industry has a track record of value destroying M&A activity.

The study, which looked at deals of over $500m since 1990, evaluated M&As on stock performance, return on capital, operating results and synergies and found that many failed to achieve their objectives.

On stock performance, the study found that an initial 3-6 month period of outperformance after a deal was followed by underperformance over 1-3 year period.

Hefty premiums are often paid in the hope that a deal will result in considerable synergies especially through cost reduction and increased revenues from an expanded customer base.

But synergies are often not significant enough to justify premiums. And operating expenses as a percentage of sales usually fall marginally in the few years after the deal but are not sustained.

Operating margins also follow a similar trend reflecting the lack of revenue synergies through an increased customer base.

And all of this is reflected in the weak return on invested capital (ROIC) seen post deals. Alembic Global's analysis showed that the average ROIC for the five years before the deal was 11.32% while the post deal number was 9.46%.

Have financial players who have been quite active in the chemical sector fared any better?

"By and large private-equity deals in the chemicals sector have proved to be extremely profitable generating returns in excess of LBOs (leverage buyouts) in other sectors and far outstripping returns generated by publicly traded chemical companies," says Alembic Global.

The reason for this lies in the focus on cash flow as this is necessary to service the high debt levels that LBOs bring. Firms acquired in private equity deals are also unlikely to make capital spending errors that destroy value. And importantly, financial buyers are known for their focus on improving the bottom line by streamlining product portfolios and cost improvements, points out Alembic Global.

By John Richardson

THE whinging is getting almost unbearable in Southeast Asia over the Asean-China Free-Trade Agreement (ACFTA).

The deal was under discussion for EIGHT years and yet chemicals and polymer producers and customers seem to have left it until after-the-fact to start raising objections.

Indonesian industry association representatives have gone as far as to suggest that 7.5m out of the country's total of 30m manufacturing jobs are under the threat as a result of ACTFA.

And at a conference in Singapore today I had to endure polymer producers from Southeast Asia moaning about not being able to compete with big bad China.

"There's no point in complaining now. What needed to happen was for industry representatives to take an active interest in negotiations for these free-trade deals right from when they first began," said a well-informed source.

"But instead this was pushed to the back of the collective mind. Clearly, China's competitive position has improved greatly since the talks started eight years ago, which is exactly why producers should have been constantly engaged in the debate.

"It will be very, very difficult to change the terms of ACTFA now because of the level of politics involved."

The approach of the Southeast Asian industry players was in stark contrast to that of their counterparts in India who managed to get petrochemicals excluded from an India-South Korea free-trade deal a few years ago, he added.

Have the lessons being learnt? Let's hope so as discussions take place for Singapore-European Union (EU), Thailand-EU, Vietnam-EU, Indonesia-EU and Malaysia-EU free-trade deals.

More on these negotiations later on.

By Malini Hariharan

Reliance Industries appears to have hit the end of the road in its quest for LyondellBasell which has filed its own restructuring plan, rejecting a $14.5bn Reliance offer.

LyondellBasell has said the Reliance offer was not "sufficiently valuable to abandon" its amended reorganisation plan.

"The proposal...did not assure a higher overall value for LyondellBasell than that upon which the [reorganisation] plan is based; it continued to provide Reliance with effective control over LyondellBasell, even if it owned only minority position and did not pay a premium," LyondellBasell said in its court filing.

"It [Reliance] did not put any Reliance assets at risk should a transaction be pursued and fail," LyondellBasell added.

It is not surprising to read that Reliance has distanced its Indian assets. The Basell and Lyondell merger has clearly revealed the risks of failing to do so.

LyondellBasell is now waiting for the court to approve its plan and hopes to emerge from bankruptcy by the end of the year.

Media reports say that Reliance will not be increasing its offer although the company has yet to confirm this.

But analysts, who think anything over $14.5bn would be too expensive, have already started suggesting that it is time for Reliance to look at other acquisitions.

One analyst suggests that Dow Chemical's commodity chemical assets would be a better fit. Dow had attempted to spin off into a joint venture with Kuwait's Petrochemical Industries Co (PIC) but the deal was called off at the last minute.

The analyst suggests that Reliance could look at a similar joint venture or even an outright purchase and this would be cheaper than LyondellBasell as Dow has indicated that it is looking for $8-12bn while LyondellBasell is unlikely to come to the negotiating table for anything less than $16bn.

But Reliance had tried for Dow's assets and lost out to PIC. Dow recently confirmed that it is in talks with three companies for a divestment. And industry sources say that a deal with PIC could still be possible.

Source of picture: www.turkeytravel.com

By John Richardson

THE economic crisis continues to force the global chemicals industry to think on its feet due to, among many other things, persistently tight credit in some regions.

China has also become even more of an important market with every rumour and counter-rumour about levels of demand there influencing sentiment throughout the world - including, as we'll talk about in a moment, Turkey.

This almost obsessive focus on in China is a reflection, I think, of weak growth fundamentals in the US and Western Europe. The flawed hope remains that China and other emerging markets can return the chemicals industry to the same level of health it enjoyed in 2003-07 without a developed world recovery.

"Banks in Turkey are less willing to lend to the basic plastics business because of the experience of Q4 2008 when prices collapsed and many producers were left with large inventory losses," said a Turkish polyolefin trader who I spoke to earlier this week.

"The good news is that because our mortgage sector is less developed than in some other places, our banks are not burdened with large debt.

"But they are still cautious and this caution means that as a trader, you have to marshal credit very carefully and, wherever possible, help your customers. The distributors we deal with are now keeping around 5-10% of their annual revenues as stocks compared with 10-15% before the crisis."

The oversupplied container-shipping industry has also rationalised vessel availability, resulting in a steep rise in freight costs from Asia to Turkey, he added.

"This has forced us to look elsewhere for supplies and so now we are sourcing more from Turkmenistan and Bulgaria."

Ten years ago if you had asked anyone in the Turkish chemicals industry about the state of demand in China, you might have been asked why on earth you thought this was relevant.

But in the same interview, the Turkish trader gave me a full run-down of post Chinese New Year demand conditions in China, thanks to his discussions that same day with contacts in Shanghai and Beijing.

Given what he agrees are weak long-term fundamentals in Western Europe, he is as anxious as anyone over whether recent polyethylene (PE) and polypropylene (PP) price declines in China will persist.

He forecasts that overall polymer demand-growth in Turkey, which averaged 17% per annum in 2001-07, will return to double-digit levels by 2011. Growth was minus 6% in 2008 and only 3% positive last year.

But is it realistic to expect this to happen without a recovery in the developed world which seems unlikey to occur until after next year?

By Malini Hariharan

Many Asian aromatics producers are optimistic that the worst is over and a gradual improvement in global demand coupled with firm Chinese demand will help them through 2009.

There is also the expectation that a pressure on refining margins will lead to more plant closures which would also help the aromatics business.

A source at an integrated refinery and aromatics producer points out that nearly 2m bbls/day of refining capacity addition took place last year and another 800,000 bbls/day of capacity is due by next year.

"This will be offset by reduction in capacity in Europe and the US. We have seen reports that suggest that nearly 7m bbls/day of capacity will have to close," he says.

"In the future the refining industry needs more investment to meet environmental regulations. Investment at old plants this investment is not justified and they will have to close," he adds.

An industry analyst says that every refiner talks of closures but wants another company to implement them.

Refiners with high cost facilities in the West are the ones under greatest pressure but pushing through a capacity reduction programme is not always easy as Total's experience in France shows.

The company confirmed on 8 March that it would permanently shut down its Dunkirk operations due to a collapse in demand. The refinery had been idled in September last year.

Despite assurances of zero job losses unions were quick to call for a new strike.

The first source says that some refineries may limp along for a year or two. But eventually poor profitability will force a shutdown although governments may have to step in to help companies close plants.

By John Richardson

PROPYLENE pricing is heading for "a crash" in Asia as a result of spot supply increasing by around 20,000 tonne/month, a senior industry source has told the blog.

Shell Chemicals will have a surplus 440,000 tonne/year of C3s from its Singapore cracker - in the process of starting up right now - as the oil-to-chemicals major failed to attract propylene derivatives investors, he added.

"There will also be a substantial surplus from the Map Ta Phut complex when the Dow Chemical/Siam Cement cracker is on-stream."

The Dow/Siam cracker is again in the process of being commissioned.

A second industry source added: "The market is bracing itself for huge C3s surplus once Shell is fully operational.

"You can add to the Singapore and Thailand surpluses, 150,000 tonne/year from Vietnam (the PetroVietnam fluid catalytic cracker) and 100-150,000 tonne/year of additional supply from Saudi Arabia."

Olefins supply has been pretty tight in Asia of late, helping to support the sustained rally in polyolefins (see graph below)Source of graph: ICIS pricing

With a lot more polypropylene (PP) capacity due on-stream this year, it's easy to forecast that this greater supply will combine with weaker support from feedstocks to bring about the long-awaited trough in PP pricing.

"We are talking about an awful lot of extra spot C3s into what is a very thinly-traded spot market. I can see propylene going from being a co-product back to by-product status," added the first industry source.

More liquefied petroleum gas (LPG) cracking and changes in cracker severity will probably be methods producers use to reduce the propylene surplus.

PP producers might benefit. They should have greater ability to discount as they battle for market share against their polyethylene (PE) competitors.

(Ethylene markets will also become longer, with new merchant-market supply including 115,000 tonne/year from Shell in Singapore However, the total surpluses don't look as if they will be as disruptive as those in C3s)  

And the stand-alone PP producers - some of whom have had to shut down recently as a result of high C3 costs - may be able to resume production.

Heading for the high jump

Source of picture: www.commons.wikemedia.,org

By John Richardson

CHINA'S polyethylene (PE) market looks as if it has gone a little pear-shaped as a result of high inventory levels and buyers anticipating the long-awaited flood of new supplies.

Further factors are labour shortages affecting processors and manufacturers and anxiety over whether the government will take more economic cool-down measures.

Before the Chinese New Year (CNY), I was told by a couple of global polyolefin producers and a Singapore-based trader that stock levels were high in China.

Immediately after the holidays there were reports of low stock levels as prices rose.

The price recovery lasted only a few days and now we are into the third week of falling prices.

Last Friday, ICIS pricing assessments showed further declines across all grades of polyethylene.

Low-density polyethylene (LDPE) film-grade prices were down by a further $30/tonne to as low as $1,350/tonne CFR China, for example. HDPE film had slipped by $10/tonne to $1,300-1,390/tonne CFR China.

The truth about inventories might be that they were high after all before the CNY if you counted cargoes already booked that had yet to arrive.

Now, in a sign of what might be harmful trader panic, we are seeing resin that had been shipped to China re-exported to destinations as far away as Latin America.

"I'm told there are large inventories of resin in China that are now being re-exported to Latin America," said my colleague David Barry, who is our Houston-based US PE editor.

"This type of trade could last a few more weeks or it could last until May, depending on who you ask. "

China often re-exports resin at times of market stress, but the fact that large volumes of shipments are being reported is worrying.

"The traders involved are going to lose money as container freight rates have recently risen on ship owners taking smaller and older vessels off-line in order to make the economics of big, modern ships work," said a source with a North American polyolefin producer.

"But even without higher freight rates, this kind of trade is about minimising losses."

Resin buyers in China have recently cut back on orders because they believe that the long-delayed new capacity surge is finally picking up momentum, according to several traders interviewed by myself and follow ACC blogger, Malini Hariharan.

"The sentiment has changed. Although many of the new plants in the Middle East and China have yet to stabilise production, they are selling more cargoes," said a Hong Kong-based trader with a major Japanese trading house.

A further factor behind the drop in resin sales seems labour shortages.

Processors and finished goods manufacturers are reported to be unable to run at high rates because migrant workers have yet to return from the countryside following the CNY.

The debate is over whether this is a temporary problem or long-term - the result of government economic stimulus in western provinces raising incomes and creating more job opportunities.

As for fears over the economy affecting the mood of the PE market, this seems to be result of last week's announcement that house prices had surged by 10.7% in February, the biggest increase in the last 20 months, as the inflation rate also rose.

Watch out for a closer look at China's property market later this week.

Suffice to say here, concerns expressed by PE market players to our ICIS pricing team of imminent interest rate hikes seem a little overblown.

While the high house-price inflation number is a concern, the number of properties sold fell in January-February, suggesting measures already taken to slow the sector down - such as higher land sales taxes - are working.

Economists I have either spoken to, or whose reports I have read, including the authors of the excellent China Economic Quarterly, think a rate hike won't occur until Q2 or the second half of the year.

But, of course, if you are trader looking to acquire inventory, rather than one of the poor mugs trying to flog the stuff to Latin America, it's always worth seizing on another reason for bearish sentiment.

China's migrant workers - a risky game...

Source of picture: China Daily

By John Richardson

THIS very disturbing Op-Ed piece by Paul Krugman in the New York Times argues that the US needs to impose a 25% tariff on Chinese imports in response to the value of the Yuan being held at an artificially low level.

In 1971, the States placed a 10% tariff on Germany and Japan, forcing both to revalue their currencies.

As one of the comments posted in response to the piece points out, such a high tariff would leave millions of migrant workers in China out of work, thereby creating the potential for politically de-stabilising social unrest. China, unlike the US, doesn't have an unemployment benefits system that would keep people above the bread, or rather rice, line.

The Krugman piece suggests - if his figures about the swelling China current account surplus are to be believed - that it's the country's ability to export its surpluses which is providing perhaps the biggest support to the economy.

In other words, China's recovery, and the corresponding rise in chemical and polymer imports, might be more the result of an export boom than strong local growth

When I say export boom, this has to be qualified by the likely deflationary impact of the recovery in China's exports. Pricing per unit is liikely to be down, but volumes are up. This is a trend being encouraged by the big Western retailers in response to weak consumer spending.

And, ironically, as Western chemicals and polymer producers export every one of their spare molecules to China as welcome relief from moribund home markets, they could well be further damaging customers back home - their local manufacturers!

The article also points to rising trade tensions and an increase in protectionism.

A date to watch is 15 April, when the US Treasury Department is scheduled to announce whether it has classified China as a currency manipulator.

By Malini Hariharan

A new problem is brewing for Iranian petrochemical producers. It appears that the government is quite keen on raising feedstock ethane prices and this issue is now under 'hot negotiations'.

"The National Iranian Oil Co (NIOC) and the petroleum ministry would like to rationalise the price of ethane according to the international trend and not subsidise it; different formulas are being considered," he says.

The price could either be based on heat value or linked to that of propane and butane which have international prices. The formula could also have a mix of these two elements.

The source was confident that an agreement would be reached by the end of the year. The net result would be higher ethane prices. The cost is now less than $75/tonne, he says.

The rationale for price hikes is easy to understand. Like many other governments in that region, Iran too sees gas as a national resource that is for all generations.

"If they sell it cheap now then they will be questioned in the future," points out the source.

Another important factor is Iran's privatisation drive that is part of the country's fourth Five Year Economic Development Plan (2005-2010).

"Previously all plants belonged to the government. So the value was transferred from one pocket to the other. But now plants are being built by the private sector," says the source.

Pic source: Tehran Times

But he was optimistic that the price hike would be moderate as the government would not want to jeopardise petrochemical investments. A compromise is likely to be reached that would give the government better returns on the national asset and keep Iranian producers competitive.

The source was also critical of the privatisation drive as it had resulted in confusion in the market place.

Each Iranian petrochemical company is now free to set up its own sales and marketing operations and not necessarily sell its products through Iran Petrochemical Commercial Co (IPCC). In addition to this, independent sales and marketing companies can also be established that can act on behalf of local petrochemical companies.

And if that is not sufficiently confusing, every company also has the option of continuing to use IPCC to sell part or all of their production.

IPCC has been partially privatised and it is possible that it would eventually be fully privatised.

"The Iranian petrochemical industry is passing through a transition sage where the state-owned companies are being separated into many small private companies, as happened in the former Soviet Union.

"The customer does not come know whether to go to IPCC or the plant operator. The decentralisation has created confusion.

"The passage will be expensive as the country will loose some opportunities. We now have small producers with no brand; we are lost in the market; who will remember us?" he asks.

Smaller companies are likely to consolidate over time although this would not be a state directed effort, he adds.

What's the gas?

Source of picture: wwww.arabianoilandgas.com

By John Richardson

SAUDI Arabian feedstock pricing arrangements for ethane, liquefied natural gas (LPG) and naphtha could change in 2011 - affecting the competitiveness of existing and future investments, two well-placed sources have told this blog.

Ethane is currently still priced at around 75 cents/mBTU and there is a formula for LPG, based on a discount from prevailing CFR Japan naphtha prices, we have been told.

It wasn't immediately clear whether any change in how ethane is priced would affect existing or only future plants.

But the LPG discount available to Saudi Arabia's mixed-feed crackers and its propane dehydrogenation (PDH)-to-polypropylene plants has been reduced by one percentage point per year since 2003, one of the sources said.

"It now stands at a net discount of 20% (we've also been told it is still 28%) with a lack of clarity on what's going to happen next year, as is the case with ethane and naphtha - it's up to the government," he added.

The current formula for naphtha pricing wasn't immediately available, but naphtha use for petrochemicals is minimal in Saudi Arabia.

Perhaps not so in the future as the Kingdom continues to deal with an ethane gas shortage due to dwindling additional supplies via associated gas.

Rising demand for natural gas for power generation is also an issue for Saudi petrochemicals, as is the case across the Gulf Cooperation Council (GCC) region.

The economics of cracking naphtha in Saudi compared with natural gas is being questioned compared with the alternative of shipping the feedstock out to naphtha crackers in Asia. This might now change in either direction.

The second source made the point that even if ethane and LPG prices are adjusted, Saudi's gas cracker and PDH competitiveness - especially in a high oil price environment - will remain very strong.

"A change to how ethane is priced might actually be a good thing as it will mean an even closer look at the viability of future investments," he said.

Source of picture: www.theage.com.au

By John Richardson

A good friend of mine, working for a Singapore-based chemical company, recently had a discussion about a new office seating plan with her company's human (????) resources manager.

"I have decided not to sit you next to xxxxx because, as both of you are so fat, you won't fit into the space we've got available," she was told. I told a former colleague about how I was adopting a child a few years ago, to which the colleague responded: "What's the point of that?"

These are true stories, I am afraid, which help make me think the world is getting ruder, or more stupid, perhaps, particularly when I am in a bleak mood. The declining standard of driving sends me potty, whether it's taxi drivers in Beijing deliberately accelerating toward pedestrians, or the terrible waste of yellow paint in Singapore, where yellow-box junctions are hardly ever clear of traffic.

But it's amazing how manners change when money's at stake - for example, the graciousness and charm of a group of polyolefin traders I met up with a couple of weeks ago. They were very busy networking with potential customers and propagating the story, maybe in an attempt to convince a gullible journalist, that all was well with the China market.

And then you go to a different level, to that of an effective general manager, vice president or upwards. One of my hobbies is to stand back and observe how well they charm their way across a room full of conference delegates. I have rated the performances of senior chemical company executives in just these circumstances over the last decade on a scale of one to 10 and keep a private record of all the scores.

Take this even further - to the level of China's government. Just as every word of Fed statements is studied, so have recent comments by top Beijing officials on efforts to cool the economy down. As much analysis seems to be going into how these words are being expressed as to their actual meaning, for example, how demeanour indicates ability to cope with potential crises.

Perhaps the real test of strength and depth of character should be an assessment of how company executives at all levels behave out of the spotlight. We could fit hidden cameras to their cars and observe how well they drive to and from work. If they fail to come up to the mark they should be sacked, no matter how good their last set of quarterly results.

By Malini Hariharan

Penchom Saetang of Ecological Alert and Recovery - Thailand (Earth) is not a typical activist vociferously denouncing companies for their environmental misdeeds. She is soft spoken and rational in her criticism of the state of affairs at Map Ta Phut, Thailand's premier industrial zone and a major petrochemicals hub.

After spending over ten years studying and documenting the pollution problems at Map Ta Phut she was not surprised to see the local population take legal action last year to block implementation of new projects at the industrial estate.

She is hopeful of a compromise that will enable completion of projects already underway but warns of an anti-industrialisation wave that is spreading across Thailand, especially in the southern provinces where the government would like to create a new industrial zone.

"People of every province have networked to resist investments; now it is almost too late to recover. People are opposing any king of factories, even power plants, as they fear pollution and loss of livelihood; the feeling is very deep," she warns.

And she admits that even she has problems discussing the matter rationally with the local people.

"It is not easy to communicate; if my group acts neutral we will be resisted. It is a very sensitive issue," she says.

The roots of this crisis can be traced to the mistakes made by the government and companies over the years at Map Ta Phut which has generated bad feelings and an antagonistic stance towards industry, says Penchom.

"Map Ta Phut is a modern industrial estate but some local communities don't have supply of clean water; they have stopped using rain water because of contamination

"There was a big incidence of air pollution in 1997 when thousands of students were taken to the hospital. But no one from the factories walked out to acknowledge their fault. The following year there was another incident.

"Local people set up their own smelling group to use their nose to walk around Map Ta phut to detect the source of air pollution. They found 7 factories responsible and requested for a temporary closure.

"Every year since 1998 there has been lots of illegal dumping; the erosion of the coastal area is still going on. The local people have demanded several times to stop expansions but this voice was ignored by the Industrial Estate Authority of Thailand, "she says.

Pic Source: Bangkok Post

The first proposal to declare Map Ta Phut as a pollution zone was made in 2003-04 but this was rejected a couple of times.

There was a conflict of interest as some government officials held positions in companies with operations at Map Ta Phut, points out Penchom.

Today Map Ta Phut is in urgent need of a big environmental cleanup and the government needs to focus on this rather that talking of further expansions, she advises.

Penchom also dismisses claims of Bangkok city being more polluted than Map Ta Phut and Thailand having better environmental standards than some developed countries.

"There is a difference in the air pollution cocktail; benzene content is high in Bangkok in areas of traffic congestion but the air does not have as many compounds as Map Ta Phut," she points out.

As for environmental standards, it is only on some parameters that Thailand is better, she says.

"The big problem is VOC and Thailand did not have any regulation before 2009".

But Penchom has a positive attitude and would like to work towards solving the environmental problems.

"It is not easy to change but we want to let them [the government and companies] know that civil society is keeping a watch on them," she warns.

By Malini Hariharan

I have been doing my annual exercise of compiling major petrochemicals projects in India and as usual there not too many.

Making a case for investing in a cracker in India has never been easy and the task continues to be difficult despite the demand growth experienced in the last few years.

Lack of competitive feedstocks remains a main issue. Building a naphtha cracker based on imported raw material makes little sense and will not be viable till the government continues with the current import duty of 5%. And the country does not have gas to develop a gas-based project.

Refiners are looking at integrating with petrochemicals to add value to the naphtha that they are currently exporting. Naphtha surplus has been increasing because the power and fertiliser sectors are switching to gas.

Indian Oil Corp's naphtha cracker at Panipat, which is currently under commissioning, is one example.

Economics of projects such as this one, which is located in a landlocked part of the country, are favourable as the domestic market is the primary target for end products.

"But if you are investing for exports there are better places than India. Besides lack of raw materials poor infrastructure is a major problem," points out one industry player.

And with the fall in import duties and the numerous free trade agreements a company can even invest in places like Singapore and bring in product to service the domestic market although there is a risk of anti-dumping duties.

There are many products where Indian imports are steadily rising. PVC imports are expected to cross 600,000 tonnes in 2009-10 which translates to two world scale plants.

Imports account for over 50% of Indian methanol demand of around 1.15m tonnes. Demand is growing by 10-11%/year and the share of imports is projected to rise as there are no new projects in the pipeline.

"There is a fear factor," explains one Indian methanol producer. "Indian gas prices are increasing and we will be hit if we invest. We would rather have a relationship with a Middle East producer and bring in product," he adds.

In the case of PVC, high power costs is a deterrent for some companies while others face problems in tying up ethylene and chlorine.

Will the projects scenario change?

There is a possibility, says a second industry source. India will see more projects if it delivers the kind of demand growth seen in 2009 for a few more years, says another source.

Then proximity to the market rather than feedstocks would be a key factor.

"Sorry, but there's more to life - I really don't want to do this anymore..."

Source of picture: China Daily

By John Richardson

The labour shortage crisis in southern China - which one trader had claimed would last exactly ten days beyond the end of a recent polyolefins conference - is proving to be a great deal more long term.

A major shift in lifestyle expectations appears to be taking place as younger workers - those who entered the workforce after 1990 - seem less willing to put up with the sometimes awful working conditions in Guangdong's sweat shops.

"In addition, job opportunities are mounting in the central and western regions, including infrastructure construction boosted by the national stimulus plan," writes the outsourcing blog, Perspectives in Responsible Sourcing.

"As a result, would-be migrant workers now choose to stay in their hometowns or move to other rural regions."

The willingness to remain in central and western China seems to have also been boosted by greater subsidies for farmers, and the more recent discounts off the prices of consumer goods - part of China's huge economic stimulus package.

Living conditions the further west you go can sometimes be better than Guangdong province, with more affordable housing and better schools, according to locals quoted in media reports.

Guangdong - where the shortage of workers is estimated to be anywhere between 900,000 (the official government figure) and 3m - has also been hit by wages being lower than the Shanghai, Zhejiang and Jiangsu provinces in the Yangtze River Delta region.

The Guangdong provincial government announced last week that minimum wages would rise by an average of more than 20% from 1 May. Major manufacturers such as LG, Panasonic, Volkswagen and BMW have reportedly already raised their salaries.

But the Yangtze River provinces have also raised minimum wages this year.

"If the re-export heartland provinces get stuck in wages spiral, they are in danger of losing competitiveness," said a Shenzhen-based director of tyre manufacturing company who I spoke to today - a US ex-pat.

"We would be hit even more if the government decides to raise the value of the Yuan, quite possible given all the international pressure."

But this particular tyre manufacturer faces the more immediate issue of being several hundred workers short of the number needed to meet an international order -a problem being reported by other manufacturers throughout Guangdong.

The consequences for chemicals have been seen in the styrene chain and last week in polyethylene (PE), where ICIS pricing assessed that prices for the polymer had fallen by as much as $70/tonne from a week earlier. These declines were partly the result of insufficient workers to run processing plants, in addition to mounting inventories and new PE supply.

This all seems like a classic case of unintended consequences as Beijing officials have long being using policy to encourage more job retention and more growth in central and western China.

A reversal of the overall direction of this policy seems unlikely, but more temporary help for exporters in Guangdong could happen.

But the risk here that any such help raises the anger of the protectionist lobby in the US.

By Malini Hariharan

The blog has recently written about gas availability in the Middle East and upcoming changes to pricing which have big implications for the petrochemicals business.

But the global gas market is seeing wider changes and these have been excellently summarised by The Economist.

The key development has been the rise of shale gas in the US which now meets about half of the country's demand.

The fall in gas prices has already improved the competitiveness of US petrochemical producers. And analysts are predicting that this advantage will continue.

There is plenty of shale gas around the world. According to the Economist article, the International Energy Agency (IEA) has estimated the global total to be 921 tcf ,more than five times proven conventional reserves. But a clearer picture will emerge only after exploration and drilling starts.

Source: The Economist

Meanwhile, rising production in the US coupled with a drop in demand, as a result of the economic slowdown, has already resulted in a global gas glut. And the situation has been exacerbated by greater availability of liquefied natural gas (LNG).

The rise of shale gas has implications for countries like Qatar that has developed its LNG industry to meet US demand.

"That now looks like a blunder. America is still taking some of this LNG, but the exporters' bonanza is over before it ever really began," says The Economist.

LNG prices are likely to come under downward pressure as new projects scheduled to come on stream this year would add another 80m tonnes to annual supply, almost 50% more than in 2008.

Qatar would still make money because of its low production costs but there are many others who would not as they are extracting gas from remote fields.

A question worth asking is whether Qatar turn to petrochemicals if returns on LNG diminish?

The developments in the US market also has implications for Canada. The ceo of Nova Chemicals recently said that the growth of US natural gas capacity may make natural gas production in Canada less economical, which in turn could lead to a feedstock shortage for Canadian petrochemicals producers.

"We are clearly seeing some degree of decline in the west [Canada], and as a result of that, overall ethane supply is down. There is definitely a real structural concern for producers and consumers over the short-to-medium term," he said.

NOVA has expressed its concerns to the Alberta government authorities and is seeking additional incentives for investments in ethane extraction.

The Economist says that while an age of plenty appears to be on its way there are two factors that could reverse the picture.

The first is the uncertainty about how the success of shale gas exploration outside North America. And the second is the concerns voiced by environmentalists about spoiling landscapes and contaminating water supplies.

The US government recently announced that it would begin a two-year study to determine if hydraulic fracturing, a technique used to produce shale gas, threatens water quality and water health.

There are differing views on how long the surplus situation will continue.

Companies that have invested in LNG believe that there is room for both shale gas and LNG in the US market.

Sceptics point out that shale gas is expensive to produce. With gas futures prices stuck below $5/MMBtu - and breakeven prices anywhere from $3-6/MMBtu - they are questioning how long shale producers will run rigs.

The Economist quotes predictions by experts that the LNG glut is likely to ease by 2014 as low prices would force some projects to be abandoned. France's Total is of the opinion that demand recovery would require more LNG projects while the Energy Information Administration (EIA) predicts decades of relatively weak prices.

A complicated picture but certainly one that needs to be unravelled.

Source of picture: The China Daily

By John Richardson

THE outcome of the row between the US and China over the value of the Yuan has the potential to bring to an end a tentative and highly unbalanced global economic recovery, economists and chemicals industry sources have told the blog.

If the US and China cannot reach a compromise on the dispute over the Yuan's strength against the US dollar, an all-out trade war could erupt, which could in the end prove highly counterproductive, they warned.

"Obama is at heart a Union man - he is from the mid-west - and so I think he will succumb to domestic political pressure and introduce measures to protect jobs," said a UK based chemicals industry consultant.

Back in 1971, as Paul Krugman pointed out in an article we commented on last week, emergency import tariffs of 10% were placed on Japan and Germany because of a similar row over the strength of their currencies.

The Nobel Prize-winning economist believes a 25% tariff should be imposed on Chinese imports.

He argues that China's huge holding of Treasury Bills is in America's favour rather than the other way round, which is the conventional view.

Any sudden liquidation of these reserves would drive the value of US government bonds down, thereby reducing China's financial strength, while at the same time pushing down the value of the greenback. This would make it easier for the US to export its way to recovery (provided, of course, there isn't the very likely response of trade barriers springing up around the world).

The weakness in Krugman's argument is, as we said last week, the effect on migrant workers in China's export processing zones and what this would mean for the global economy. A tariff of anywhere close to 25% would leave millions of these migrants of work, creating huge social and political pressure.

An import tariff of this size, hopefully, won't happen, but whether the expected gradual appreciation of the Yuan will appease US public opinion remains to be seen.

Offshore trading contracts are now anticipating a 2.4% rise in the value of China's currency later this year, down from 3%, following recent comments by Premier Wen Jiabao that the Yuan was not undervalued, according to this article in Business Week.

CEOs of Chinese companies have come down on the side of a revaluation, adds the same article.

Financial analysts expect the Yuan's value to increase by between 2-5% during each of the next few years as the main focus in China is on protecting growth rather than controlling inflation.

"This might not be enough for the US as they are in the midst of a jobless recovery. During the 2004-7 boom period it didn't matter that employment was drifting to China because consumer credit was abundant and jobs in the US were being created in sectors such as housing. We are now in a very different place," the chemicals consultant continued.

In its Q1 2010 Situation & Outlook report released earlier this month, the American Chemistry Council wrote that while the US was enjoying a V-shaped rebound, "The weak consumer sector and continued high unemployment will constrain the strength of the recovery."

And the report adds that "with significant declines in household wealth over the past two years, consumers are working to pay down debt and have become cautious in their spending."

Big US retailers are reportedly squeezing more costs out of procurement in order to meet the needs of this more cautious US consumer.

The retailers appear to be getting a lot of help from Chinese manufacturers thanks to the undervalued Yuan and the re-imposition of export tax subsidies.

In other words, China is in a stronger position to export lower-priced goods and by so doing, drive US unemployment even higher.

Further adding to the deflationary impetus is that a big quantity of China's huge economic stimulus seems to have gone into fixed asset investment.

New industrial capacity appears to have been a no-brainer for the big state-owned enterprises.

They received a flood of soft loans from the state-owned banks, perhaps under the assumption that - because both the banks and companies are owned by the government - foreclosure was unlikely if investments failed.

So what could this mean for chemicals demand?

"The strong import volumes we saw for a wide range of chemicals and polymers in 2009 were partly the result of this rise in fixed-asset investments," said a second UK-based chemicals consultant.

"As big amounts of new industrial capacity came on-stream, inventories had to be filled with raw materials, including chemicals and polymers."

Western chemicals companies benefited from this inventory building. For example, US Linear-Low Density Polyethylene (LLDPE) exports to China rose to 318,369 tonnes in 2009 from 183, 293 tonnes the previous year, according to data from China Customs. Polypropylene (PP) exports rose to 493, 381 tonnes from 117,673 tonnes.

But the irony is that as they made export gains, Western chemicals companies could have been further undermining their domestic manufacturing industries through migrating more jobs to China, as we pointed out last week.

If the value of the Yuan is increased, even by only a few percentage points a year, lower-value manufacturing in China - such as textiles and garments - will suffer. Margins at this end of manufacturing in China are razor-thin and therefore dependent on today's currency advantage.

This is another reason to believe that a repeat of last year's extraordinary chemicals and polymer import volumes is unlikely.

.....but time to party for some thanks to re-exports to Brazil

Source of picture: edgsgonesouth.com

By John Richardson

It's a funny old world - or so it seems in poylolefins at the moment as traders re-export resin from China to Latin America and elsewhere.

"I phoned up a trader in China the other day and asked if he wanted to buy some consignments of polyethylene (PE)," said another trader, based outside China.

"He asked me whether I would instead like to buy material for re-export."

And yet another trader - who is based in Singapore - added yesterday: "A lot of the re-exports have gone to Latin America, but I have also sold material to Bangladesh and Israel.

"Some of the shipments have made money. For example, I bought Linear-low Density PE (LLDPE) from Brazil at $1,170 CFR China a few months ago. Last week, I sold the same cargo back to Brazil at $1,450. With freight at $170/tonne I made a decent profit.

"Other re-exports have lost money, though, as traders have cut their losses due to high inventory levels in China.

"I estimate around a total of 10,000 tonnes has been re-exported over the last few weeks.

"This is a very small amount when measured against the huge volumes traded, but it seems to have helped sentiment a little. Confidence has slightly picked up in the Chinese trading community as a result of the re-exports easing inventory pressures."

Bonded warehouses in the south, the east and the north of China were, however, still close to full, he added.

"The problem is that traders purchased a lot of material in November and December because confidence at that time was high.

"They underestimated the risks of weakening monomer prices undermining support for both PE and polypropylene (PP) pricing, and measures the Chinese government has taken to slow the economy down."

Successful start-up of the new 800,000 tonne/year Shell cracker in Singapore took place on 22 March, according to an official announcement.

And in Thailand, Mab Ta Phut Olefins was heard to have achieved on-spec production at its 900,000 tonne/year naphtha cracker, ICIS news reported yesterday.

Shell was expected to export around 150,000 tonnes of ethylene and 250,000 tonnes of propylene on an annual basis, while Mab Ta Phut Olefins would ship out more than 100,000 tonnes of propylene a year, the same news report added.

But the blog has been told that much more than 100,000 tonne/year of extra propylene will be available for export from Thailand over the next 12 months.

And returning to ethylene, exports are expected to increase from Qatar and Saudi Arabia.

The mood among poylolefins buyers has shifted in China towards one of much-greater caution, added the Singapore-based trader.

"I recently visited five factories where all the factory owners knew that resin was long and didn't feel in a hurry to buy beyond their immediate needs.

"They can smell blood in the air as new capacities are coming on-stream and plants that have already started up are ramping-up production.

"The buyers also know that the traders are coming to the end of their 90-day credit terms and so are desperate to sell stuff out of the bonded warehouses.

"End-users are also becoming much more cautious because of the uncertainty over government economic policy and a potential Yuan revaluation. And they are struggling with the labour shortages."

The good news, though, seems to be that overseas producers are in comfortable positions due to their low stock levels.

"We are in no hurry to sell as we continue to manage our production very prudently," said a Singapore-based source with a global polyolefin producer.

The trader said that this was a comment that had been made by many of the big Asian ex-China and Western producers

"One of these producers has been offering PP homopolymer grade at $1,350 CFR China, which is completely unworkable as the current China price is $1,310, suggesting a comfortable position."

But the longer-term issue remains the strength of growth in China this year (to repeat, we think it's bound to be lower than 2009) as all the new capacities start-up.

Ras Tanura in Saudi - private companies bunkered by feedstock shortage?

By John Richardson

The gas feedstock shortages in Saudi Arabia - which we have commented on before - are such that no private company will receive any allocations in the future, claimed an industry source.

"It's only going to be for Saudi Aramco and SABIC from now on," he added.

Several privately-owned propane de-hydrogenation (PDH)-polypropylene (PP) plants have recently been commissioned in the Kingdom, whereas private ownership of crackers has never really got off the ground.

Saudi Arabia's Minister of Petroleum and Mineral Resources, Ali Al-Naimi, was reported to have said last December that the Kingdom was working on making more ethane available for petrochemicals.

But several well-placed sources we have spoken to have said that this was unlikely to happen anytime soon.

Al-Naimi pledged that investments in the sector would be maintained as Saudi Arabia tries to raise its petrochemicals capacity from approximately 60m tonne/year at the moment to 80m tonne/year by 2015.

This suggests that the way forward to more petrochemicals could well be naphtha - making the decision on how the feedstock will be priced into petrochemicals in the future crucial. An announcement is expected next year. 

Of the $120bn that Aramco has pledged to spend in the Kingdom over the next five years, half will be invested in petrochemicals including the naphtha crackers that are part of the huge Ras Tanura project with Dow Chemical.

Media reports say that plans to expand the refinery at Ras Tanura - which would provide the feedstock for the crackers - has been shelved indefinitely. 

Reports earlier in the week suggested that the petrochemicals portion of the project could be moved due to issues surrounding terrain at the current site, which is on Saudi Arabia's west coast.

Aramco and Dow have not made any comment.

A high chance of more showers

Source of picture: www.stuff.co.zn

By John Richardson

A closer look at last year's polyolefin trade flows illustrates just how vulnerable European producers will be over the next few years to rising pressure from Middle East imports.

"The volume of trade in Western Europe (intra-regional plus imports) for all the grades of polyolefins and polyvinyl chloride (PVC) fell by between 3% and 18%  in 2009," said Jean Sudol, president of International Trader, the New York-based trade-data analysis service.

"But at the same time imports from the Middle East actually increased."

A slowdown of imports into China seems inevitable this year after the staggering increases seen in 2009. For example, low-density polyethylene (LDPE) imports rose by 90% over the previous year to 1.34m tonnes and polypropylene shipments were up by 49% at 4.2m tonnes.

"A reduction in government stimulus, new capacity in China and the difficulty in repeating the sheer size of imports in 2009 points to a slowdown in 2010," added Sudol.

"My guess is that imports won't fall back to 2007/2008 levels and will still be high in 2010, but not as high as in 2009."

So the Middle East producers, as they ramp-up capacity this year and in 2011, will be searching for other destinations to compensate for a dip in demand from China. Europe is an obvious port of call.

ICIS pricing's Worldwide ethylene plant report shows that in the five years from 2008 to 2012, around 29m tonnes/year of new ethylene capacity will be added.

Nearly 16m tonnes/year will be added in the Middle East and around 14m tonnes/year in Asia, of which China accounts for nearly 7m tonnes/year, says the report.

This has partly been offset by the 2m tonnes/year that has closed in North America.

However, some 16m tonnes/year of this capacity growth was still to become operational as of the end of February 2010, the report adds.

"Ethylene demand actually fell in 2008, as economies crashed and extensive de-stocking took place throughout the value chains," wrote my colleagues Paul Ray and Peter Taffe in a recent article on our magazine, ICIS Chemical Business.

"In 2009, demand recovery has been weak. In normal market conditions, a rule of thumb indicates that ethylene demand globally grows at 5m tonnes/year. "

Paul Hodges, UK-based consultant with International e-Chem, added: "These new Middle East plants are going to run at close to the optimum rate of 93%, regardless of market conditions, because of their feedstock advantages,"

A painful reckoning is clearly at hand with restructuring likely to be given some extra impetus by problems in the European refinery industry.

By Malini Hariharan

I recently met a businessman at a dinner party. After exchanging the usual greetings he eagerly disclosed his plans for a new business venture - trading in polymers.

"There will be three of us in this business; we plan to import polymers in bulk from Taiwan and China; each consignment will not be less than 500 tonnes," explained this Mumbai-based businessman whose main activity was extending short-term finance to local companies.

He probably sensed my surprise and confessed: "I don't know anything about polymers. I will only be providing money."

And he was convinced that polymer trading was a great investment opportunity.

"I have studied it carefully; it's better than [investing in] gold," he said very enthusiastically.

Pic source: Empire State Ventures

I have not crunched any numbers but can polymers yield better returns than gold?

What about all the volatility in pricing? Has the great price crash of 2008 already been forgotten? And what is this about importing from China? Yes, there have been plenty re-export offers out of China in the last few weeks but surely that is only temporary.

There are many others in India who have been drawn to polymer trading. And the reason for this is the very healthy profits seen last year.

A veteran polymer trader told me recently that 2009 was a great year in which he had recovered all the losses that he had posted in 2008.

"Indian polymer demand has been fantastic but it has attracted a lot of new traders; even some processors are into trading as they see more money in this than in processing. It has become a very competitive market," he complained.

A second trader had a similar story to narrate. "Everybody sees this as a quick money making opportunity; they all want to trade.

"Many of the small traders operate on wafer thin margins, rotating product for a margin of only Rs 250-300/tonne ($5.50-6.50).

"This is putting pressure on us as my customer has other lower offers. We cannot entice him or tell him about our relationship; we cannot fight that," he said rather sadly.

He probably will have to wait for the next big price crash when polymers will look like fool's gold.

           Riyadh

Source of picture: help.berberber.com

By John Richardson

PRIVATE Saudi Arabian petrochemical companies need not fret about the ethane-gas shortage that two sources had last week told us would hold up their development, according a third industry source we spoke to today, who is based in the Middle East.

"The private companies I've spoken to recently, all see a bright future for themselves in investing in more differentiated downstream products," this third source added.

"The objective is to broaden the range of petrochemicals produced in the Kingdom order to create more downstream jobs. This doesn't necessarily mean having to build a cracker.

"More differentiated petrochemicals, such as acetyls, tend to be smaller in scale than your standardised polyethylene (PE) and mono-ethylene glycol (MEG) plants and there is plenty of spare ethylene within the Saudi system."

The private company Sipchem, for example, decided to cancel its proposed cracker because of mounting costs and the availability of spare C2s, he added.

"It only needs around 250,000 tonne/year of ethylene for its acetyls projects, which are in the process of being brought on-stream right now at Al-Jubail.

And interestingly, more spare propylene might become available if any of Saudi Arabia's four propane dehydrogenation-polypropylene (PP) producers decide to expand.

"Each of the plants has the feedstock allocation to raise C3s output by 20%, but they might not also increase PP capacity.

"And we could be talking about cross share-ownership by feedstock suppliers in some of these downstream projects. If not, discount or transfer pricing arrangements for feedstock off-take are still likely."

As for the Saudi Aramco strategy of potentially cracking naphtha, the source said: "Aramco is losing huge amounts of money on its refinery operations when it sells products locally because of subsidised pricing for gasoline, diesel etc.

"So adding naphtha-based petrochemicals will result in better returns, even if they are weaker than cracking ethane."

Singapore's container port

Source of picture: www.gcaptain.com

By Malini Hariharan and John Richardson

A big challenge facing many companies that have built large polymer plants that are located far from key markets is how to move product most efficiently.

These facilities have been built to take advantage of competitive feedstocks in regions such as the Middle East, rather than proximity to customers, which are mainly in the Asia-Pacific region.

Companies have approached this problem in different ways. Some have stuck to the traditional model of producing, packaging and storing product at site and shipping it to the market once orders have been received.

The problem with this is the delivery time, as it can take up to two months to ship product from the Middle East to Asia, by which time prices could have changed two or three times.

Other companies have developed distribution hubs at strategic locations, or hired warehouses at multiple locations to minimise shipment times to customers.

But more innovative solutions are now being adopted. An example is the model that Borouge has developed.

Polyolefins that are produced at Borouge's plants in Abu Dhabi, United Arab Emirates, and destined for the Asia-Pacific region will not be packed at site, but instead shipped in sea-bulk containers to hubs at Singapore and the Chinese cities of Guangzhou and Shanghai, where third-party service providers will handle packaging, warehousing and onward shipment based on sales orders.

All three hubs will become officially operational in mid-2010 and will handle material from the Borouge 1 and Borouge 2 facilities, which have a total polyolefins capacity of 2m tonnes/year. Borouge 2 will be commissioned over the next few months.

"Other petrochemical companies are looking at what Borouge is doing, which is unique, and trying to decide whether to take this type of visionary concept or gamble their existing supply chain models will keep them competitive in the changing environment," says Eric Herman, CEO of CWT Logistics, which is handling Borouge's southeast Asian logistics hub in Singapore.

This is the first time that CWT is going beyond traditional logistics services.

For the Borouge project, it has built an integrated solution, including packaging lines, a container yard and a warehouse designed to handle 330,000 tonnes of polyolefins annually.

The Singapore facility has no silos and will instead rely on gravity to discharge product from the sea-bulk containers - which are regular 20-foot or 40-foot containers lined with polyethylene (PE) or polypropylene (PP) film - to the packaging line.

This gravity system reduces product handling as well as the chances of contamination, Herman points out.

CWT's overall model allows for shorter delivery time, and there are potential savings of up to 30% on ocean-freight costs from shipping product in bulk containers rather than as packaged goods in containers, he adds.

The decision on how to package products can be decided closer to the point of the order from the final customer, avoiding the need for costly repackaging as is often seen in European logistics centres, he says.

In addition, having a packaging and distribution hub in a location such as Singapore means a Middle East-based company can deliver to China or other Asian markets in shorter lead times, enabling it to compete with South Korean and southeast Asian companies that have always had a delivery-time advantage.

"The strategy is to position products closer to the main markets and reduce the overall time it takes to deliver to the end-users," says Herman.

This is possible from Singapore, which is one of the busiest container ports in the world. The heavy traffic also means there is less pressure to return containers and the free time offered by shipping companies before containers must be returned can be maximised.

"It can be seen as expensive to outsource the supply chain. But, firstly, you are only talking about a fraction of overall product costs," he adds.

Secondly and much more importantly, in increasingly volatile markets a shorter lead time preserves cash flow and hedges your bet on product price fluctuations, Herman says.

"You can say that it is cheaper to pack product at the plant itself, but customers are demanding a shorter lead time, similar to the just-in-time concepts developed in the auto industry by the Japanese."

A source from a polyolefins company with joint ventures in the Middle East thinks the model will work.

"Outsourcing of packaging and warehousing reduces capital costs and improves the project's return on investment, which is important when you are fighting with other divisions within the company for investment dollars," says the source.

CWT's Herman adds that outsourcing of packaging and warehousing also allows companies to save land for future plant expansions.

However, another Middle East producer thinks the model will work only for companies that manufacture huge volumes.

To make this model more accessible, CWT is also establishing a multi-user packaging and distribution centre in Singapore, where a company can experiment with, say, 50,000 tonnes/year, says Herman.

He is convinced that now is the time for the petrochemicals industry to learn to outsource.

"You look at Nike - it has outsourced its entire logistics. Most industries have learnt to outsource. The petrochemicals industry is changing fast, and logistics is going to be a key component as more products need to be moved closer to the market," says Herman.

Logistics could well become the next platform for companies to differentiate themselves in the market.

Here's a post from a guest blogger, my good colleague Prema Viswanathan - Deputy Managing Editor of ICIS pricing in Asia.

Ras Tanura and Al-Jubail

Source of picture: www.absoluteastastronomy.com

By Prema Viswanathan

A Saudi Aramco official has confirmed a Reuters report earlier this week that a change of location for the giant Ras Tanura petrochemicals project is under consideration. The project would be a joint venture between Aramco and Dow Chemical.

Al-Jubail is one alternative location being evaluated, which, like Ras Tanura, is a port city on the Saudi east coast (see map above). Other media reports suggest that Ras al-Zour is also being looked into, which is 80km north of Al-Jubai. 

The Aramco official told us that the review into where to build the complex would only result in a slight delay to the start-up - currently targeted for 2014 - and not five years, as was suggested by the Reuters report. He added that this review would lead to the project being improved.

Sources we spoke to in Saudi Arabia this week nevertheless claim that it won't be easy to sort out either keeping the planned complex at Ras Tanura or shifting it elsewhere.

"The project would have to be reconfigured if they shift it to Al-Jubail or any other destination, as it would be very expensive to bring refinery feeds to the facility via pipeline from Ras Tanura," said one source.

But the dilemma is that if the project stays at Ras Tanura heavy investment would also be needed in infrastructure, he added.

"The proposed shift of location makes no sense, as the integration with Saudi Aramco's Ras Tanura refinery is the main impetus behind the project," said a second source.

"This would be negated if they shift it to Al Jubail, which is already clogged with projects."

Upon completion, the complex is projected to produce 8m tonne/year of petrochemicals and gasoline products.

The current plan is for feedstock to be at least partly provided by the expansion of Aramco's existing Ras Tanura refinery, which will add 400,000 bbl/day of capacity.

The blog also understands that the project may have received an ethane gas allocation.

The refinery and petrochemical projects are expected to cost around $25bn and Dow's involvement would be the biggest foreign investment ever to take place in the Kingdom.

By Malini Hariharan

The Asian olefin and polyolefin markets have softened in recent weeks but the US market remains on a different track, as seen in these reports filed by my colleagues on ICIS news.

Ethylene prices are still firm on tight supplies. Spot ethylene for March/April was at 61-63 cents/lb, up from 42.5-43.0 in January. Availability has been hit as a result of a number of unexpected cracker shutdowns which started in early January after Texas experienced unusually cold weather.

The high prices mean that US PE exports are likely to drop in the coming months. A trader estimated that ethylene would have to drop to 40cents/lb for PE to be competitive in the export market.

Ethylene prices are expected to correct in the coming months as the supply situation is easing with crackers resuming operations. But one producer was not too worried and said that margins would be at acceptable levels even if ethylene dropped by 20cents/lb as ethane prices were also weakening, said one producer.

Many of the US companies including Shell, have prepared themselves for an extended period of low ethane prices. An executive from the company said that investments made at its crackers in the US over the last few years have given Shell the capability to crack 70% gas feedstock. The earlier configuration was 70-75% liquid cracking.

The shift to a lighter feedstock slate has been one of the factors supporting a surge in propylene prices. The situation has also been aggravated by unexpected cracker shutdowns and a decline in US operating rates due to weak demand for fuels.

Around two-thirds of US propylene now comes from refineries, due to declining output from crackers.

Meanwhile, Nova expected the second quarter to remain strong with continued growth in PE demand. And although the US-Asia arbitrage window has closed, Nova has been able to export from its Joffre operations in Canada because of freight advantage. PE is put in bulk rail containers and sent to Vancouver port from where it is shipped to Asia.