Asian Chemical Connections

By John Richardson

IT IS always dangerous to assume that the future will be exactly the same as the past - a big lesson from the recent financial crisis.

But so seems to have been the assumption amongst China's polyolefin traders late last year as a close look at import statistics for December and January, supplied to us by the New York-based International Trader magazine, reveal.

In December 2007, for example, 251,600 tonnes of high-density (HDPE) arrived at Chinese ports compared with 292,664 tonnes in December 2009.

January 2010 arrivals totalled 363,129 tonnes against 223,456 tonnes in January 2008 (a "normal" year as there was no economic crisis) and 227,818 tonnes in January 2009.

December 2009 polypropylene (PP) shipments totalled 373,669 tonnes as against 251,179 tonnes in December 2007 (again a more valid comparison than Dec '08 - just about the high-point of the recent crisis, when arrivals were 266,463 tonnes).

 "We all thought that credit in China would remain as ample as before, supporting demand and polyolefin pricing," a Shanghai-based trader said today, echoing comments made by a Singapore competitor last week.

Polyolefin pricing has since slipped in Asia (see chart below) because of reduced lending by local banks, labour shortages in Guangdong province and new capacities.

Source of graph: ICIS pricing 

"Interestingly, the new restrictions in local credit might actually provide some support for imports over the next few months as the overseas traders can more easily lay their hands on LCs from international banks," said an industry observer.

"But on a net basis imports are still likely to be down this year over 2009 on slower growth in China and new capacities."

Consultancy Nexant ChemSystems wrote in a Q1 review released earlier this week: "At least five new crackers (in China), with a combined capacity totalling more than four million tons per year of ethylene achieved commercial production in the first quarter. Most crackers are integrated with further new derivative capacity on site."

By Malini Hariharan

In a research note released today, UBS has highlighted plans by Formosa Chemical and Fibres (FCFC) for major expansions at Ningbo, China.

The Taiwanese petrochemicals major is in the process of getting Chinese government approval for a new 1.5m tonnes/year PTA plant, a 200,000 tonnes/year PS unit and a 150,000 tonnes/year ABS plant, said UBS. There is also the possibility of a 200,000 tonnes/year phenol plant at the site.

These projects would further build FCFC's presence in China where it currently has capacities for around 600,000 tonnes/year of PTA, 300,000 tonnes/year of ABS and 200,000 tonnes/year of PS.

It looks like the company is moving ahead with downstream investments first rather than waiting for the Chinese and Taiwanese governments to lift restrictions on refinery and cracker investments on the mainland. The Formosa group of companies has for a long time been lobbying for a removal of this ban as they would like to create an integrated refining and chemicals hub in China along the lines of what they have at Mailiao in Taiwan.

Expansions have also been lined up by FCFC in Taiwan for which the company expects environmental clearance by the end of this year, said UBS but did not provide any further details about the project.

By John Richardson

The chairman of China Construction Bank has spoken about the dangers created by China's GDP (gross domestic product) expanding by more than 9.5% in 2010, which, according to many analysts, seems highly likely: GDP is estimated to have risen by 11-12% in Q1.

"It (too-rapid growth) will mean more duplication of construction, more excess capacity and higher waste of capital," the bank's chairman, Guo Shuqing, is reported to have added.

Oversupply of money and increased liquidity leading to inflation and asset-price bubbles were further problems he identified.

New bank lending amounted to one-third of China's GDP in 2009 - and at Yuan9,600bn ($1,400bn) was double the amount leant the previous year.

This latest official warning about overheating - a concern long-expressed by this blog - might indicate that further economic tightening measures are being considered.

Basic chemicals and plastics exporters to China, as we also keep repeating, are therefore going to need to budget for the possibility of a sharp dip in business during the rest of 2010.

We keep saying these things because we continue to be fed the same bland public-relations speak from chemical company officials.

They keep insisting that China will continue to deliver stellar growth, both in the short and long-term (we'll revisit the longer-term issues later this week).

If this vacuous nonsense is just for the consumption of the odd gullible journalist perhaps that's fine, as maybe beyond our view some sensible scenario planning is taking place.

But at the very least what journalists write about is being read by investors, meaning over-expectations could be followed by a sharp drop in share prices.

Source of picture: www.destination360.com

Dear Reader

Please click here - ChinaChems2009AndOutlook.doc for my review of what happened in China last year and Q1 2010 and for some pointers for the rest of this year.

All the best
John Richardson

Flagging Recovery

Source of picture: www.guardian.co.uk

By John Richardson

THE latest US Institute of Supply Management survey signalled a buoyant manufacturing sector, in line with likely Q1 GDP (gross domestic product) growth of 5%, says the latest Weekly Chemistry and Economic Trends report from the American Chemistry Council.

"Consumer spending is expanding and this continued into March as evidenced by light vehicle sales. Moreover, consumers appear to be regaining some degree of confidence," continued the report.

Light vehicle sales rose from an annualised 10.4m units in the year to February to 11.8m in March with the Conference Board's latest consumer confidence index showing a strong increase.

But as fellow blogger Paul Hodges points out light vehicle sales were 15-17m per year in 1995-2007.

"With each auto using $2973 of chemicals, according to the ACC, this means the market is currently worth just $35bn versus its peak of over $50bn," writes Hodges.

And the 162,000 improvement in non-farm payrolls - announced late last week which has contributed to this week's rallies in equity and crude prices - was placed into context by the excellent Lex Column in the Financial Times over the weekend.

"Recruiting for the census and a rebound from snow-hit February boosted the count, but clearly more people were hired than fired," writes Lex.

"The problem, however, is that the job market is unlikely to stick to the recovery script from here.

"Natural workforce growth is one impediment, as is return of the discouraged. The broadest measure of unemployment, capturing those who give up or take part-time work, stands at 18 per cent. Moderate economic growth will keep headline unemployment frustratingly close to double digits.

"From where will a strong rebound in demand for US goods and services come? China is tightening and Europe is moribund. US states must rein in spending. Inventory restocking is largely complete, so businesses need higher sales to generate activity.

"Ample spare capacity means industry can survive with little investment. Small businesses, responsible for almost half of recession job losses, need to seek credit from regional banks feeling nervous about commercial real estate exposure."

Hear, hear. From a chemicals-industry perspective, there's clearly a risk of mistaking restocking from historically-low inventory levels for a solid recovery.

By Malini Hariharan

Commissioning activity at Indian Oil Corp's (IOC) new cracker and derivatives complex at Panipat, India, is progressing well, according to a company source. Operations at the new 857,000 tonnes/year cracker have started.

"Onspec propylene is in the storage tank and ethylene is expected in a day or two," he said.

Among the derivative units, the polypropylene (PP) plant with a total capacity of 600,000 tonnes/year is due to start first and should be up by end of the week. Next in line are the 350,000 tonnes/year swing high-density polyethylene (hdPE)/linear-low density PE (lldPE) and 325,000 tonnes/year monoethylene glycol (MEG) plants. Operations at the two plants are expected to commence from mid-April.

A 300,000 tonnes/year standalone hdPE plant is currently scheduled to start at end-April.

The start up has been quite smooth so far with commissioning of derivative units delayed only by a few weeks. IOC had said in early March that the PP, MEG and swing PE plant would start operations by the end of that month.

Source of picture: www.thewecc.com

By John Richardson

Confusing messages continue to emerge from Beijing over whether a revaluation of the Yuan is imminent, a debate that has major implications for the chemicals industry.

The Financial Times reported this morning that senior government economist Ba Shusong had said that China could widen the currency's daily trading band and allow it to resume its gradual appreciation that was halted in July 2008 due to the credit crisis.

But Bloomberg quoted Jiang Yu, spokeswoman for China's foreign ministry, yesterday as saying that a rise in the value of the Yuan would not help correct China's trade imbalance with the US. This perhaps suggests that the Chinese government will argue the case for no revaluation during important meetings in Washington later this month.

Nevertheless, the same article quotes Stephen Roach - Morgan Stanley Asia chairman - as predicting that a US decision to delay a verdict on whether or not Beijing is a "currency manipulator" has eased tensions and made it more likely that a managed float will be resumed. The Treasury's verdict had been due on 15 April.

As we pointed out in late March and yesterday, the irony of the extraordinary rise in exports to China of chemicals and plastics during 2009 was that these volumes probably helped to further undermine the domestic consumption base of the US and European exporters. A lot of the increased volumes went into filling the inventories of new partly export-focused manufacturing plants built as a result of China's huge economic stimulus.

If the value of the Yuan does rise then how hard will some of these new manufacturing plants run - particularly the ones making low-value products where the current currency advantage is crucial for maintaining thin margins?

If their operating rates are forced lower as these factories lose competitive advantage, this might contribute to lower chemicals and plastics import volumes.

But the bigger deal for the chemicals industry would be an easing of trade tensions between the US and China, thanks to the resumption of a manged float and a clear policy for gradual appreciation. Increased trade tensions and resulting sanctions could otherwise severely damage the fragile and uncertain economic recovery.

US chemicals producers might also benefit if their local customers enjoy an improved competitive position as a result of a stronger Yuan.

But this will only occur if other lower-cost manufacturers don't step in to gain any market share lost by the Chinese!

By John Richardson

Polypropylene (PP) appears to have become very tight in China over the last week as a result of a reduction in import availability and a resurgence in buying activity.

"PP is incredibly tight right now because the supply from North America is no longer available for delivery to China," said a Singapore-based trader.

There's been a sharp decline in availability from North America as a result of rising propylene costs.

C3s have risen by 53% since November 2009, according to my Houston-based ICIS pricing colleague, William Lemos. Contract pricing for April settled on Tuesday at 7 cents/lb higher ($154/tonne).

The surge in US propylene has been driven by reduced refinery operating rates on the dismal state of the refining industry globally.

PP producers have become more heavily dependent on feedstock supply from FCCs over the last 12 months due to crackers switching to lighter feedstocks.

"US Gulf Coast crackers are running on 82% ethane and only 18% naphtha compared with 65% ethane and 35% naphtha a year ago," a North American industry source told the blog earlier this week.

The switch to lighter feeds is the result of tumbling US natural gas prices relative to crude, a response to the big rise in local gas supply.

"I haven't seen virtually any US material arriving in China so far this year and the Middle East producers, for whatever reason, don't seem to be able to fill the gap right now," the Singapore trader continued.

But the lack of US dollar material has only tightened the China market over the last week as before then buyers were largely on the sidelines, the trader added.

"What happened about a week ago was the sudden re-entrance of the baxially oriented (BOPP) finished-film producers who hadn't been buying raw-material resins for several months," he said. 

"These finished-film producers are big in scale in China, using the latest modern equipment, and so when they buy they buy in big volume.

"I think they came back in a rush because both yarn and BOPP film-grade resin prices had slipped to very affordable levels (these converters can run either yarn or BOPP film-grade resin through their machinery).

"A big factor behind their re-entry into the market was the rise in oi prices."

Yarn grade was at $1,250-1,300/tonne CFR main port China and BOPP film-grade resin was at $1,280-1,350/tonne CFR main port China, according to the ICIS pricing assessment for the week ending April 2.

As the ICIS pricing graph below indicates, pricing for these two grades has declined recently.

All homopolymer grades were in tight supply with stocks in bonded warehouses almost exhausted, the trader added.

This might just scupper the hopes of European buyers who are keeping an eye on availability in Asia in an effort to gain relief from high local PP pricing.

PP prices have already increased in Euros200/tonne in 2010 with further rises of as much as Euros130/tonne on the cards, according to my London-based ICIS pricing colleague, Linda Naylor.

PP Producer inventories in Europe have been low a result of restricted supply of C3s due to refinery and cracker operating-rate cutbacks.

Propylene supply is restricted because European refineries are running low on the terrible state of refining margins.

Cracker rates were also cut back earlier this year in an effort to initially prevent ethylene from becoming oversupplied.

By Malini Hariharan

Has the steady increase in crude oil prices last week prompted Chinese buyers to resume purchases? That is what a Shanghai-based distributor of Middle East product is hoping. And it is the only explanation that he can find for concluding a sale of nearly 10,000 tonnes of polyethylene (PE) yesterday.

After weeks of carrying stocks at his three warehouses in the country the trader was pleasantly surprised to transact this business. Buyers are probably looking at crude and thinking that it is the right time to buy, he said.

But whether this will continue is uncertain especially as crude oil prices slipped yesterday after the US reported an increase in inventories.

The trader is finding it extremely difficult to decipher the Chinese PE market. He is quite sure that the massive volumes imported in 2009 have not been digested. Some amount has probably been re-exported but quite a lot is still in the hands of speculators who flocked to the market following a huge increase in bank lending last year.

Like almost all participants in the Chinese market he also has interesting anecdotes to tell.

"A young man, probably in his twenties, approached me last year wanting to buy 300,000 tonnes of PE. It turned out that he knew nothing about the business. But he had access to money thanks to his father who was an important government official with the right connections. And he believed that investing in polymers would give a good return.

"There are many like him. I do not sell to speculators but I have found that they still get hold of my product. I discovered how only after I received a quality complaint from a company that I had not heard of. I traced the flow of material using the lot number and I found that end-users have sold to speculators, sometimes even at a discount. They did this as they were paid immediately which kept their cash flow positive," he explained.

He is convinced that speculators will eventually exit the market causing a huge price correction. But this will happen only when banks demand repayment of the loans made last year.

Jim Chanos gets it right more than 70% of the time (unlike Alan Greenspan)

Source of picture: New York Post

Somebody has to play the devil's advocate, but having just finished reading Gillian Tett's excellent Fool's Gold about the financial crisis, this is about more than just trying to provoke a response; it's about challenging the dangerous assumption that the future will always be the same as the past.

Here's an article about the dangerous assumptions surrounding China which are accompanied with a dangerous amount of complacency.

By John Richardson

"WE are often derisive towards the ability of governments to do what markets do better," said Jim Chanos, the famous investor, in a recent lecture.

"When it comes to China, though, everybody is willing to bet that nine guys in a room [the country's top leadership] will get it right all the time. I am willing to bet this is not the case."

You hear the same level of confidence from chemicals company executives that Beijing will skilfully engineer persistently high levels of economic growth, both in the short and long term.

"Because of good government control - and because one party dictates all - the economic prospects remain very good," said one Singapore-based senior executive with a global commodity and speciality chemicals giant.

And a source with an oil-to-chemicals major, who we considered naming but decided it was unfair to single him out as this view is so commonly expressed, added: "Nobody doubts that China's long-term economic prospects are good."

He clearly hasn't listened to the likes of Chanos, who made a fortune from short selling ahead of the global economic crisis and sees similar opportunities presenting themselves in and around China.

He was widely quoted in the financial press in February as saying that China is going to crash.
But if you watch the video of his lecture, he says he was misquoted and instead argues that he meant that there are pockets of overheating and overcapacity in the Chinese economy.

He recommends shorting companies that have heavy exposure to China's property sector - including western building-material suppliers and property developers. You could put many chemicals and polymers companies into this category.

His longer-term view is that China's growth model - rapid urbanisation accompanied by heavy fixed-asset investments - needs to change.

Urbanisation is reaching a demographic peak, as are the economic benefits being delivered by providing basic education, he argues.

State-directed lending is inefficient by nature as the inputs into the economy (the costs) are greater than the outputs, as was proven by what happened in the former Soviet Union, adds Chanos.

He accepts that as innovation improves and as the focus moves away from state-directed and therefore inefficient lending - and as latent domestic consumption is further unlocked - China's potential is enormous.

But he makes the valid point that getting from A to B won't always be a smooth process. This will mean frequent periods of uncertain growth and a great deal of volatility.

There also has to be a chance that China doesn't make the transition.

This makes the claim we quoted earlier - about the country's undoubted strong long-term prospects - a little like the view expressed before the economic crisis: that there would never be a US nationwide house-price collapse.

A period of uncertain growth in China appears to be taking place right now.

Earlier this week, for example, Guo Shuqing, the chairman of China Construction Bank, reportedly warned about the danger of GDP expanding by more than 9.5% in 2010.

"It [too-rapid growth] will mean more duplication of construction, more excess capacity and higher waste of capital," he was quoted as saying.

Many analysts believe growth will exceed 9.5% this year, and estimate that in the first quarter the economy expanded by 11-12%.

Oversupply of money and increased liquidity leading to inflation and asset-price bubbles were further problems, the bank chairman was also reported to have said.

This latest official warning about overheating - one of many over the past few weeks - might indicate further economic-tightening measures are being considered.

His comments also support some of the inefficiencies in China's growth model highlighted by Chanos - most notably, money being poured into new industrial capacity that has added to further overcapacity in many industries.

Urban fixed-asset investment rose by more than 40% last year and by 28.6% in January-February 2010, according to official data.

"The strong import volumes we saw for a wide range of chemicals and polymers in 2009 were partly the result of this rise in investment in new industrial capacity," said a UK-based chemicals consultant.

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

Western chemicals companies benefited from this inventory building.

US linear low density polyethylene (LLDPE) exports to China rose to 318,369 tonnes in 2009 from 183,293 tonnes in the previous year, according to data from China Customs.
US polypropylene (PP) exports increased to 493,381 tonnes from 117,673 tonnes.

Overall LLDPE imports jumped by 49% to 2.2m tonnes and PP imports by 57% to 4.2m tonnes, according to the New York-based trade data and analysis service, International Trader.

Just one of the many complications exporters to China are contending with is how all these new plants will run now that inventories have been filled.

One factor is the shortage of labour in Guangdong province, an unintended consequence of government efforts to boost economic conditions in western and northern China. This has reduced migrant-labour supply in Guangdong, the export-processing heartland.

Returning to the Chanos theme, inefficient investments in too much industrial capacity could mean greater exports of finished goods from China at a time when trade tensions over the value of the dollar versus the yuan are already very high.

If trade barriers are erected in response to a rise in low-priced exports of finished goods, this will add yet another degree of uncertainty to chemicals and polymer import volumes.

Heading West,,Jeddah's container port

Source of picture: http://ofwngayon.com/home/?p=257

By John Richardson

SABIC has increased its exports of PE to the US in response to high pricing and what could be weaker demand in China, a source with a North American producer told the blog earlier this week.

"I have heard of more linear-low density PE (LLDPE) cargoes in particular being shipped from Saudi Arabia, the source added.

The graph attached - View image shows the surge in US PE on the back of more expensive ethylene during Q1.

What does this trade - apparenly via both bulk containers to the bigger inland US converters and in bags to the smaller, coastal processors - also tell us about the China market?

PE indigestion in China seems high as a result of overstocking late last year and in early 2010.

"I remember that you had asked me where all the heavy imports in Q4 and January this year were going," added the source with the North American PE producer.

"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."

China's PE buyers have appeared to be standing on the sidelines over the last few weeks at a time when Saudi capacity is ramping. YanSab is apparently back at 100% after electrictiy-supply problems caused an outage earlier this year and the the second Sharq complex has just come on-stream.

But as we heard yesterday, a rise in oil prices might have brought China's PE buyers back into the market in significant numbers.

Source of picture: www.wrh.noaa.gov/hnx/newslet/sum...mber.htm

By John Richardson

Hope springs eternal when it comes to trying to fathom the direction of the polyolefin market in China.

One particular hope rests on March import numbers from China Customs, due to be released later this month.

The data might just give a pointer to the extent that new local capacity has displaced the need for imports - and whether all the talk about credit-tightening has translated into weaker demand.

"March will be the first 'normal' month in 2010, when comparisons might just be valid with import volumes last year. Late January and the whole of February were distorted by the build-up to the Chinese New Year," said a Southeast Asia-based petrochemicals consultant.

New local capacity includes Tianjin Petrochemicals. Volumes from the recently-started complex are being seen in much greater quantities in the market, according to several traders and producers.

The Dushanzi Petrochemical complex also recently came started up in China. Some sources report large volumes from this site hitting the market, while others have yet to see significant deliveries.

Output from new plants is being absorbed as producton from the Fujian Refining & Chemicals complex, which came on stream at the end of August last year, is close to 100% of capacity, according to a source familiar with its operations.

But what will make the March numbers hard to read, as so often happens with China import statistics, was until recently a huge inventory overhang in polyethylene (PE) - the result of heavy buying by traders of overseas material late last year.

"I remember that you had asked me where all these heavy imports were going," said a source with a major North American PE producer.

"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."

Credit remained extremely easy to obtain late last year with less concern over the Chinese government's efforts to cool the economy down, said a Singapore-based polyolefins trader.

"Many of the traders made the dangerous assumption that the future would be the same as the past.

"Recently, the government has been talking about cutting loan growth by 22% compared with 2009."

Such has been the inventory overhang in PE that small quantities of resin imported into China has been re-exported to Brazil, Bangladesh and Israel, the trader added.

But my fellow blogger Malini Hariharan, who was in Shanghai last week, talked to Asian producers and traders who reported that PE inventories are slowly coming back to normal as a result of a dip in buying activity.

What is strange is that PP shipments also surged late last year - and yet the PP market is in radically different shape to that of PE.

"Our assessments of rolling inventory indicate that PP stocks in China have not been as high as those for PE," the Southeast Asian-based petrochemicals consultant added.

"Reduced availability from the US in January-February has certainly been a factor behind this and this has been reflected in pricing. Whereas PP pricing had remained pretty solid over the past few weeks, PE slipped by $50-60/tonne."

The drop in supply from the US is due to the 53% rise in propylene costs since November 2009, with April contracts prices settling at 7 cents/lb ($154/tonne) early last week.

In short, therefore, if the March import figures show a sharp drop in both PE and PP this might tell us little about the underlying, long-term state of the market (PE numbers could be down on this huge inventory overhang with PP also lower, partly on lack of availability).

And if the statistics surprise on the upside, be careful of anybody who argues that this is a firm indication that China's underlying demand is booming.

"OK, credit has got a little tighter locally, but there are still an awful lot of speculators out there," continued the Singapore-located trader.

"I have done a lot of business with other traders in China who only want to buy resin in order to get hold of the 90 days' credit for speculation in other commodities.

"A lot of foreigners don't understand what continues to underpin demand in China.

"These traders will buy resin in US dollars and then sell in Yuan at a loss to local end-users. They will then use the credit to try and make money in steel, coal and other hot commodities before the 90 days are up."

This complex intra-trade business is now been further bolstered by rising expectations of a Yuan revolution, he added.

"The hope is that if you borrow in US dollars and convert to Yuan the local currency will have strengthened by the time your 90 days are up."

This suggests that a bursting of the bubbles in steel, coal and other commodity prices would have a big knock-on to demand for polyolefins, as would a Yuan revaluation.

And it also suggests that any month's polyolefin import statistics need to be taken with a large pinch of salt.

So what's the sentiment like among buyers then, perhaps a more useful pointer to the underlying state of the market?

"Overall, it's one of cautious optimism over the economy. But they know there's a lot more new capacity just around the corner," said a Hong Kong-based polyolefins trader.

New ethylene capacity in Asia and the Middle East alone - including, of course, a lot of downstream PE - will total 9.5m tonne/year in 2010 with global demand growth in normal market conditions around 5m tonne/year, according to ICIS data.

"Increased supply from the Middle East has been particularly big in linear low density PE (LLDPE) so far this year," continued the Singapore trader.

"A major producer from the region plans to deliver 40,100 tonnes into warehouses in Singapore in April for sale to China and Southeast Asia.

"This same producer only sold a total of 200,000 tonnes to China in the whole of 2009."

He added that high density PE (HDPE) would also get ugly.

New PP capacities in 2010 include the 800,000 tonne/year Borouge plant in Abu Dhabi and the 400,000 tonne/year Siam Cement facility in Thailand.

The Borouge plant will start up in the third quarter and Siam Cement in the fourth quarter, according to ICIS plants and projects.

The volume of new capacities seems to be far too big to prevent a severe margin-squeeze at some stage, with most estimates indicating that this will happen in the fourth quarter this year.

But making an educated guess about what this margin-squeeze will mean for the China market remains about as easy as nailing water to the wall.

By Malini Hariharan

H2 is just two months away but one China-based market participant says that there is still a total lack of clarity on price direction for the rest of the year.

Buying activity picked up last week but he is not confident that this can be sustained. And he is certainly not expecting China to deliver a repeat of last year's record rise in imports and demand.

The China market is redefining itself this quarter, he says.

Stocks, which had built up over Q1 and Q4 2009 are slowly coming down. Speculative activity is also easing as Chinese banks tighten credit availability.

He expects many new traders/speculators who entered the market in 2009 to exit. The froth that was seen last year would slowly evaporate, the market player added.

On the positive side, China has been reporting a steady rise in monthly export numbers.

Pic source: Financial Times

They are not yet back to pre-crisis levels but this will contribute to polyolefin demand growth, he adds.

As for revaluation of the yuan, he thinks the Chinese government will follow its own timetable and will not want to hurt exports in the process. As the third quarter and fourth quarter are viewed as the peak manufacturing season when exporters make money, the government is unlikely to disturb exchange rates during this period, he adds.

Although the outlook is hazy, he expects prices to fluctuate in a narrower band this year with crude oil propping up numbers at the lower end of the range and increased availability from new plants preventing significant increase in prices.

By John Richardson

Inventories of copper, aluminium, lead and nickel have risen as prices for all these commodities have also surged, says this article in The Economist.

Source of graph: The Economists

Copper stocks total half a million tonnes in metals-exchanges warehouses in what HSBC analyst Andrew Keen describes as a market that's departed from fundamentals.

The reason behind high stocks and rising prices is the willingness of traders to take positions in the belief that demand for these commodities will get even better next year.

And surprise, surprise, a lot of these hopes rest on China's economy continuing to expand at or at least very close to the rates we saw in 2009 and in Q1 2010.

But pointers to significant further economic tightening in China are emerging every few days.

Last week, for example, the People's Bank of China issued three-year bills for the first time in about three years in order to reduce liquidity. Financial analysts told ICIS news that Beijing was becoming more creative as it attempted to keep a lid on inflation short of interest-rate rises.

And last week also, there were reports quoting unidentified sources that Shanghai is considering a property tax in order to clamp down on investment properties. The source of the original news story was Shanghai Securities News, affiliated to the state-owned Xinhua News Agency.

This suggests the government is at least thinking about such a tax, and maybe is using the news stories to sound-out market and public reaction.

A slowdown in China's overall growth would obviously mean that demand for metals would be less than is being anticipated, leading to a sudden unwinding of stockpiles.

If interest rates globally start to increase - a possibility as governments ease back on economic stimulus - this could give metals traders another reason to develop cold feet.

As the pricing of all commodities are so heavily interlinked these days, crude, chemicals and plastics pricing could also head south.

What's interesting and needs more research by this blog are the more direct links between trading in chemicals and plastics and other commodities, such as metals, which seems to be common practice in China.

Parallel trading contributed to a sharp rise in China's polyethylene (PE) stocks in March, which we talked about yesterday.

Source of picture: www.hongkiat.com/blog/twitter-wa...ue-bird/

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By John Richardson

CHINA's polyethylene (PE) and polypropylene (PP) demand growth is set for a dramatic decline in 2010-12, according to the latest estimates from Shanghai-based commodities information service CBI (see table at the end of this blog post).

This year was probably never going to be as good as 2009 due to the need to cool the Chinese economy down following the biggest economic stimulus in the history of the world.

But the extent of the declines being forecast - and these numbers are in line with industry expectations - are perhaps bigger than some of the optimists anticipated.

For example, overall PE growth is expected to fall to 8.6% in 2010, 7.7% in 2011 and 7.4% in 2012. Growth last year was a staggering 30.3%!

By Malini Hariharan

While looking at China it is easy to get distracted by the activities of the majors - Sinopec and PetroChina. But there is a strong second tier that is steadily becoming more visible.

Yantai Wanhua, a major producer of isocynates, is an example.

The blog recently heard from a source close to the company that it has ambitious plans to become a leading integrated player in the global polyurethanes business.

Pic source: China.com

This is reflected in the recent move made by its parent, The Wanhua Industrial Group, to acquire a stake in Hungary's Borsod Chem, which plans to become Europe's largest producer of toluene di-isocynate (TDI) and second largest of methyl diphenyl diisocyanate (MDI).

But Yantai Wanhua's major investments in the future will be in China.

Work is already underway to build 11 plants at a new chemical park in Shandong, which the company says will be a low cost, fully integrated isocynates complex. Major facilities include a 600,000 tonnes/year plant for MDI and 300,000 tonnes/year of TDI and the site would also have plants for caustic soda, formaldehyde, nitric acid, aniline and nitrobenzene.

Completion of this project in 2013 would give the company 1.5m tonnes/year of isocynates capacity in China.

The source also highlighted two other projects that are being planned. In Shandong, the company is studying an interesting route to produce propylene oxide (PO).

It is looking at importing M100 (a type of Russian fuel oil) as a feedstock to produce propylene and then PO. If feasible the project could come up in 2013.

And it is also looking at participating in a coal chemistry park at Shaanxi to produce benzene and aniline.

Yantai Wanhua is clearly working towards giving the global isocynate majors a run for their money.

By John Richardson

China's first-quarter GDP (gross domestic product) growth of 11.9% - the number released yesterday by the National Bureau of Statistics - is way above the 9.5% that the chairman of a major local bank has reportedly said is the maximum the economy can sustain for the full year.

"It (too-rapid growth) will mean more duplication of construction, more excess capacity and higher waste of capital," Guo Shuqing, chairman of China Construction Bank was quoted as saying earlier this month.

The soar-away Q1 growth was slightly ahead of predictions made in separate polls of analysts by Dow Jones and Reuters that had each predicted GDP would rise by 11.5%. China's economy grew by 10.7% in the fourth quarter of last year.

So now the question is what further steps the government might take to rein in growth.

Can it rein in growth sufficiently to prevent too much overheating - or is there so much money sloshing around the economy that there is little that can be done in the short term?

By John Richardson

AN enormous amount of new linear low-density polyethylene (LLDPE) output should, in theory, be destabilising Asian markets right now due to recent start-ups and increased production at plants brought on-stream last year and in early 2010.

But the big question is to what extent global production is being constrained by a shortage of co-monomer butene-1.

In the Indian domestic market plant shutdowns have created a tight market, although industry sources say that butene-1 isn't tight locally.

The co-monomer is, however, tight in Saudi Arabia, Qatar and the West, according to other sources.

But still, describing LLDPE itself as tight might be going a little far given all the new capacity. It's probably fair to say, though, that it's tighter than high-density PE (HDPE).

So here's a blow-by-blow account of recent new LLDPE capacity and what the blog has been able to gather about how it's operating:

The Fujian Refining & Petrochemicals 650,000 tonne/year plant in China, which first came on-stream at end-August last year, is running at close to 100%, a source familiar with the plant's operations told the blog.

The 450,000 tonne/year Qatofin plant in Qatar officially came on-stream in November last year.

Not much material from the facility had been seen in the market up until recently, as it will have been running either on imported ethylene or C2s borrowed from existing crackers in Qatar.

Now, however, the new 1.3m tonne/year Ras Lafan cracker - Qatofin's feedstock supplier - has started up.

The Qatofin plant is running at 50-60%, an industry source said today.

SABIC's YanSab complex in Saudi Arabia was hit by a power-plant outage earlier this year, but sources now indicate that its 500,000 tonne/year LLDPE plant is running at close to the maximum rate.

The 200,000 tonne/year Dushanzi Petrochemical plant came on-stream late last year and Tianjin Petrochemical's 300,000 tonne/year facility started up in Q1 2010.

Ever-increasing volumes from these plants, both of which are in China, are being reported in the market.

The long-delayed 400,000 tonne/year Sharq facility in Saudi Arabia - the joint venture between SABIC and a Mitsubishi Corp-led consortium - also came on-stream recently.

Some more big start-ups are due later this year.

The Siam Cement/Dow Chemical 350,000 tonne/year plant at Mab Ta Phut in Thailand is due on-stream is expected to come onstream in September this year. Start-up has been delayed by environmental issues.

Dow uses the co-monomer is octene which we have been told is also in limited supply. 

The Zhenhai Refining & Chemical Co 450,000 tonne/year project is due to come on-stream in China in Q2 with the 540,000 tonne/year Borouge facility in Abu Dhabi set for commissioning in the third quarter.

Add all this up and, according to my sometimes admittedly dodgy maths, this comes to 3.84m tonne/year of new capacity due on-stream between Q3 last year and end-2010.

Global LLDPE consumption was between 15-20m tonnes in 2008, according to petrochemicals consultancy, ChemSystems (see slide below).

In other words - even assuming a generous estimate of 20m tonnes for global annual consumption - new Middle East and Asian capacity starting up between Q3 last year and end-2010 represents approximately 20% of this demand.

An awful lot of existing plants would have to be either shut down or be running at low rates for this new production to be easily absorbed.

A lot of capacity in the West might still be idle as a result of weak demand.

And, as we've said, there's also the temporary relief from the co-monomer shortage.

"This is of course one heck of a lot of new capacity, but there is a global shortage of butene-1," said a source with a North American producer.

The shift of liquid-feed crackers to lighter feeds is being blamed for the butene-1 shortage.

US cracker operators have switched to lighter feeds because of the ethane cost advantage over naphtha.

We are looking into other factors behind the lack of butene-1 and how long it might last.

By John Richardson

THE betting remains on trough conditions arriving for polyolefins at some point later this year with new supply expected to begin to severely lengthen markets towards the end of Q2.

A temporary buying strike in China that dragged on for too long - following overbuilding of local resin inventories - has helped create a fairly bullish mood as the huge ChinaPlas exhibition in Shanghai begins today.

As we discussed last Friday, in linear-low density polyethylene (LLDPE) there's just too much due on-stream by the end of 2010 to in theory prevent major market indigestion, regardless of the strength of demand.

A recent UBS report estimates that 8.6m tonne/year of ethylene capacity is due on-stream globally this year with demand growth likely to be only 2.6m tonne/year. This is set to be the biggest annual increase in C2 capacity in a decade.

But the unknown unknowns are too great, in the view of this blog, to be confident in predicting a trough by the end of this year - and there is a chance that the low-point in this current cycle could be pushed into 2011.

LLDPE is tighter than high-density PE (HDPE) because of what appears to be a global shortage of the co-monomer butene-1 with octene also reported to be in tight supply - as again we discussed in last Friday's post.

Other reasons include OPEC's decision to maintain production quotas at levels reflecting post-crisis oil demand, suggesting continued constraints on associated gas and therefore operating rates of existing Middle East crackers. However, quota compliance has reportedly slipped dramatically, to just 53% in March.

The ongoing long-term problem of increasing alternative demand for gas in the Gulf Co-operation Council region will continue to place limits on both existing and new production.

We understand that these days, new crackers in the region can only operate at 90% of their nameplate capacities because of feedstock allocations.

And remarkably, a senior company executive from a leading Middle East producer confirmed to a colleague of mine recently what we had been hearing for several months from contractors: Cost savings were made in buying raw materials and equipment for plant construction when project-financing costs were at their peak in 2005-07, resulting in technical difficulties in starting-up new complexes.

The shortage of senior start-up engineers is another problem, a long with the scale of the plants being built in this current round of capacity additions. These plants are the biggest of their kind in the history of the industry, meaning that smooth start-ups were always going to be a problem.

But one factor that might lead to the cycle low-point arriving this year is that according to the same UBS report we quoted earlier, 46% of this year's ethylene start-ups are in China versus only 17% in the Middle East. Last year around 80% of start-ups were in the Middle East.

General labour shortages, including not only senior engineers but also construction workers, don't appear to be as acute in China as elsewhere.

Infrastructure outside the battery limits of plants, another factor which is rumoured to have slowed capacity additions in the Middle East, are less likely to be a problem in China.

But 15% of Asian current Asian ethylene capacity will be closed down this year for turnarounds compared with 10% in 2009, again according to the UBS report.

And operating-rate discipline among Western producers remains high, with more rationalisation of capacity, especially in Europe, possible.

The scale of recent closures has been big. For example, Shell Chemicals recently disclosed that it had shut 22% of its US ethylene capacity over the past two years or so as it shifted to greater use of ethane feedstock.

By Malini Hariharan

After a decade of inactivity since the Asian financial crisis, Indonesia is once again drawing attention. Two news reports indicate that companies are evaluating major investments in refining and petrochemicals.

Taiwan's Chinese Petroleum Corp (CPC) is said to be planning a $2.8bn petrochemical complex at Kalimantan in Indonesia.

Indonesia's Coordinating Ministry for the Economy told the Jakarta Globe that Kalimantan was selected because of the availability of raw materials. He added that CPC planned to team up with a local partner, either a private company or a state-owned enterprise such as oil and gas major PT Pertamina. Teaming up with Pertamina would ensure feedstock supply to the project.

The interest in Indonesia comes amidst strong demand growth in the country and the constraints that Taiwanese companies face in executing large refinery and cracker investments in China. Given a choice, Taiwanese companies would rather put their money on the mainland but government restrictions, on both sides, prohibits this.

The Taiwanese have been waiting patiently for a relaxation in the rules but it appears that they are now losing patience.

But whether CPC will actually execute this project remains a question. It had looked at a similar investment in Indonesia back in 1996 but abandoned the plan after the economic crisis.

The second project relates to Chandra Asri, the country's sole cracker operator, and Pertamina joing hands for a refinery project.

Chandra Asri is said to be looking at teaming up with Pertamina for one of the three refinery projects that it has planned.

Pertamina has received a government directive to team up with other companies build three refineries within 10 years, which would reduce the country's dependence on imported naphtha.

Shortage of local naphtha has been one of the biggest problems for the country's petrochemical producers. It has affected their ability to compete with other regional players and made expansion projects unviable.

Each refinery is estimated to cost up to $5 billion, with a total combined capacity of 900,000 bbls/day of naphtha, reports the Jakarta Post.

The first refinery project would commence this year at Cilegon while the other two would be at East Kalimantan's Bontang and East Java's Tuban.

Other Indonesia petrochemical producers, such as Titan Petrochemical, Trans Pacific Petrochemical Industry, Tri Polyta and Polytama Propindo, are also said to looking at investments.

The refinery-petrochemical integration plan looks good on paper and is one that the industry has been lobbying for a very long time. But what is uncertain is whether there is sufficient commitment and if smaller players have the money.

Many of the petrochemical producers have other long-standing projects. For instance, Chandra Asri has been talking of a cracker expansion and an aromatics unit. Polytama is said to be looking at the expanding its polypropylene (PP) capacity from 280,000 tonnes/year to 440,000 tonnes/year.

Indonesia needs more capacities. Inaplas estiamtes that local PP capacity is able to meet only half of the country's demand of about 800,000 tonnes/year.

But any Indonesia project would also need to take into account the recent start of the Asean free trade area which ensures duty free flow of material from neighbouring Singapore and Thailand. Both countries have already built export-oriented capacities.

Additionally, the implementation of the China-Asean FTA is also threatening the health of the downstream sector. Many Indonesian plastics producers have already expressed concerns their future in the face of low cost Chinese competition.

Does it make sense to build in Indonesia given these uncertainties?

It just might. Feedstock availability is becoming an issue in the Middle East and there are not many projects lined up for the next 5-10 years. In such a scenario companies may well have to look at the next best alternative - building projects where markets are located.

By Malini Hariharan

Reliance Industries is moving ahead with its Jamnagar cracker project and is looking at completing it in 2014, reports ICIS news.

Preliminary activity on the project, which was put on hold after the 2008 economic crisis, has resumed. Discussions are on for technology selection and a firm start up date will be set after contracts have been awarded.

The cracker, which would have a capacity to produce 1.3m-1.6m tonnes/year of ethylene and small volumes of propylene, would use offgases from Reliance's two refineries at the same site as the primary feedstock. Other refinery feeds would also be cracked.

The derivative slate includes mono ethylene glycol (MEG), low-density polyethylene (ldPE) and linear-low density polyethylene (lldPE).

It is not only the cracker project that is being revived. Reliance is also refreshing plans for new capacities in purified terephthalic acid (PTA), polyester, styrene butadiene rubber and butadiene rubber (BR).

The company had said last year after the completion of its second refinery that it would renew its focus on the olefins and derivatives project.

With Indian petrochemical demand showing very healthy growth prospects it makes sense for Reliance to expand in the country. And as its effort to grow the petrochemicals business inorganically by acquiring LyondellBasell has failed its time for Reliance to return to something that it is very good at - building mega projects.

By Malini Hariharan

If you are moving a project to a new location then why not take some time to re-examine its configuration?

That appears to be the thinking at Saudi Aramco and Dow Chemical for their proposed cracker and derivatives complex in Saudi Arabia. As reported on this blog recently, the mega petrochemical project is likely to be moved to Al Jubail from Ras Tanura.

But along with this shift the two companies are now said to be re-examining the product slate. Zawaya reports that the sponsors are trying to decide if it would be better to source some intermediate products from other companies located at Jubail. This would mean fewer units and therefore lower costs for a project that was initially estimated at over $20bn.

The news report also states that while a final decision on the move to Jubail has yet to be made the companies are in discussions with the Royal Commission for Jubail and Yanbu. The project is likely to be based in Jubail II as all plots in Jubail I are occupied. It would be housed next to a joint-venture refinery being built by Aramco and Total which can supply feedstocks to the cracker.

Pic source: Kentz

By locating the project at Al-Jubail, Dow and Aramco would also save on infrastructure development costs as this location is better developed than Ras Tanura. And sources close to the project have also said that contrary to expectations the relocation would help speed up project execution.

But with contracts yet to be awarded completion of the project could easily take another 4-5 years.

By Malini Hariharan

Chinaplas has just concluded and my colleagues have filed some great reports from Shanghai.

Worries about a margin squeeze in the second half of the year persist but polymer producers seem to be increasingly confident about long-term growth prospects.

The chairman of the China Plastics Processing Industry Association (CPPIA) talked of the endless potential of China's domestic market and confidently predicted that the country would have no problems in delivering a 10% growth in demand for polymers and rubber.

"Last year, people were uncertain about what the long term market outlook would be. But the situation looks very positive now," said William Yau, chief executive officer (CEO) for Borouge's marketing arm (see video interview below*).

But in the short term, although demand and supply were normal, there could be ups and down, he admitted.

Yau also said that Borouge II would start up in mid-2010 but the full polyolefins output of 2m was likely to be achieved only by the end of the year or early next year.

The PP industry should be able to escape from another round of restructuring, said Anton de Vries, senior vice president for Europe, Asia and international olefins and polyolefins at LyondellBasell.

"I personally don't expect to see major consolidation in the PP sector. I may be wrong, but I think it's going to be limited, more limited than what we saw in the downturn (in early 2000s)," he said.

The PP sector had gone through a major rationalisation process in the previous downturn in the early 2000s, and further consolidation would be "more difficult," he said.

He also expected LyondellBasell to exit Chapter 11 bankruptcy protection as early as next month and list on the New York Stock Exchange (NYSE) in Q3.

Jamail Malaikah, president and chief operating officer of National Petrochemical Industrial Co (Natpet), the Saudi PP producer described the outlook for the PP industry as excellent.

Not surprisingly, he was not worried about the overcapacity that has been built up in PP and expected Middle East plants to run at full rates.

"We believe most of these plants will be running at a good operating rate in the second half [of] 2010. But I think the impact of the overcapacity on price will not be of high magnitude," he said.

He was also optimistic that the upcoming propane price revision in the Kingdom would turn out to be favourable for producers.

And he also talked about the reasons for the frequent operating problems in the Middle East.

Malaikah said the quality of engineering materials used in building petrochemical facilities may have deteriorated due to mass production necessitated during the plant construction boom in 2005.

"There was a lot of pressure on services, EPC (engineering, procurement and construction) contractors, on vendors, on engineering manpower. The pressure caused some vendors to produce more than their capacity, at the expense of quality," he said.

In other production news, Qatofin is likely to achieve commercial production at its new 450,000 tonnes/year lldPE plant in May or June.

Siam Polyethylene, the Dow Chemical and Siam Cement lldPE joint venture, expects to start operations at its delayed 350,000 tonnes/year plant in the H2 2010.

"We have been given clearance to resume construction which is excellent news as this product is much-needed by the market," said Peter Wong, Commercial Vice-President, Asia-Pacific Basic Plastics, at Dow.

The project had been due on-stream in the first half of year, but work was temporarily halted by a court injunction that have affected numerous other projects at the Mab Ta Phut site in Thailand.

And Siam Cement's president also revealed that the company is looking for acquisition opportunities in Asia.

"We believe that [Asia's petrochemical sector] will go through more acquisitions and we're now looking for acquisition opportunities as well," said Cholanat Yanaranop.

(More videos from Chinaplas are available here)

By Malini Hariharan

After seeing very strong pricing for the last few months US propylene and polypropylene (PP) buyers have started talking of imminent correction.

PP buyers expect a 7-10cent/lb ($154-200/tonne) drop in May prices, reports ICIS news.

The prediction is based on improved propylene availability.

Earlier this week the US Energy Information Administration (EIA) released data that showed a 12% increase in propylene stocks for the week ended 16 April. The increase came amid higher US refinery operating rates - 85.9% compared with 78.4% in the second week of January.

And the US is now even looking at exporting propylene with one cargo reportedly settled for early May shipment to Europe.

Propylene contract prices had moved up by over 50% in the last six months but a significant drop in May contracts is now being predicted.

By John Richardson

The mood on the proverbial factory floor can be very different to that in buoyant stock and other commodity markets as the impact of the economic crisis lingers, with the chor-alkali to vinyls industry in China just one an example of a real industry that is still struggling.

"From the perspective of some of the chlora-alkali producers, this feels like a recovery that is almost entirely index-driven," says Lynn Du, of CBI - the Shanghai-based commodity information service.

"Liquid caustic soda prices were $650/tonne back in 2008 with ECU (electro-chemical unit) costs $330-350/tonne, which was exceptionally competitive, adds Du.

"Many alumina projects have since been put on hold in Australia, Brazil and elsewhere (Australia, Brazil and the US are the three biggest export markets for Chinese caustic). Liquid caustic prices have fallen to $220-230/tonne."

Overall economic confidence notwithstanding, therefore, the local industry looks set to undergo a great deal more pain. The smaller players and those on the coast where electricity costs tend to be higher look particularly vulnerable.

A further problem when you get down to the polyvinyl chloride (PVC) end of the chain is the increased pricing volatility resulting from last year's launch of a futures contract in PVC on the Dalian Commodity Exchange.

"Prices now fluctuate by Rmb600/tonne in the space of just a few weeks. Before the contract was launched it would take several months for pricing to move by this much," adds Du.

Volume traded on Dalian each month is often around 10% of the physical demand - roughly 1m tonnes a month.

Unlike the linear-low density polyethylene (LLDPE) contract on Dalian, most of the PVC business ends up in physical delivery.

So once a PVC contract for a particular month expires, futures speculators might want to offload cargoes or decide to hold.

Nobody is therefore certain of exactly how much is going to hit the real market until it actually arrives.

By John Richardson

One wonders what might be the future of the Saudi Aramco and Dow Chemical project in Saudi now that it has been officially confirmed that it might be relocated from Ras Tanura to Al-Jubail because of escalating costs.

An ICIS news report earlier this week said that the proposed complex could be downsized from two crackers to one - but that an ethane/naphtha feedstock mix was to still under evaluation.

But the blog was told by a source familiar with the project that this could become an ethane-only cracker.

If this is the case how would this fit in with the Saudi objective of diversifying the range of petrochemicals it produces through moving away from predominantly ethane-only feedstock?

Aramo perhaps only gained one of the remaining ethane feedstock allocations (the gas is long-term severe short supply for new projects) on the basis that it would do something more different downstream than the standard polyethylene (PE) and mono-ethylene glycol (MEG) derivatives that have so far dominated the Kingdom's petrochemicals industry.

And if this becomes purely a gas cracker project then obtaining technologies downstream could be less of an issue (the current project's configuration involves lots of technologies Dow owns that cannot be easily licensed, including a Saudi move into chlorine chemistry).

If this remains a mixed-feed project it will be interesting to attempt to discover on what terms the naphtha raw-material is priced. Some consultants argue that naphtha cracking has no cost advantage in Saudi Arabia versus shipping the feedstock to Asia for cracking there instead.

But, of course, there is the wider agenda in Saudi of overall industrial diversification to create jobs, starting with petrochemicals.