Asian Chemical Connections

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

By John Richardson and Malini Hariharan

THE view from a particular geography, grade of polyolefin or end-use application might be distorting the outlook for 2011.

In China and India and other emerging markets demand growth continues to astound and even though the rates of expansion might have slowed down this year, percentage increases are from much bigger bases.

China's PP demand grew by 6% in January-August this year compared with the same period in 2009, said CBI - the Shanghai-based commodity information service.

Linear-low density polyethylene (LLDPE) demand soared by 34% with high-density (HDPE) 15% higher, added CBI.

LLDPE is tight globally because of a shortage of butene-1 that's not going to go away. This is the result of the switch to lighter cracker feeds in the US, the overall pressure on liquids cracking operating rates from increased gas-based production and refinery operating-rate cuts.

The polyolefin has also gained market share at the expense of low-density PE (LDPE) - which at first benefited from tight supply through higher-pricing, but now seems to be suffering from demand destruction.

LDPE demand in India fell by 22% in April-August, according to a major Indian producer.

But India continues to see robust growth in other polymers. For instance, PP demand is expected to grow at 13-14% in 2010-11, the producer added

This would be lower than the record 26% in the previous year but still very healthy.

The other big factor affecting the whole of the whole of the polyolefins industry has been delays in starting-up new projects and stabilising production at complexes brought on-stream over the last two years.

"Approximately 8m tonnes of PE that could have been exported from the Middle East during 2010 won't be due to these production issues. There is also the shortage of associated gas," said a Singapore-based industry source.

Saudi Arabia needs to be producing 10m bbl/day to run its gas crackers at 100%, but its OPEC quota stipulates output in the mid 8m bbl/day range.

One could go on and on. In Europe, lack of investment in maintenance is said to be a factor behind average cracker operating rates totalling only 82% in H1 this year. The crackers that were functioning were running at above 90% - suggesting good market conditions.

So you add all of this together and you could be tempted to draw the conclusion that 2011 will be as good, perhaps even better, than 2010.

"I think we are bumping along the bottom of the cycle as far as margins are concerned. South Korean companies are expecting another fly-up in pricing by the end of next year. My view is that this is a bit early, but it's not far away," said a Taiwan-based financial analyst.

The danger in his thinking is that Middle East production problems are, according to some reports, being resolved - and so a lot more PE and PP will soon hit the markets.

"True, but I don't expect oil demand globally to return to pre-crisis levels for at least three more years. This means no change in Saudi Arabia's OPEC quota during that time," said a source with a leading Middle East producer.

The longer maximum output is delayed in the Middle East, the greater the ability of booming emerging markets to cope with the volumes when they finally arrive, remains a common view.

It feels like one almighty muddle when you balance this optimism against persistent macro-economic worries in the West. Without a healthy West - which drives the vital re-export trade from Asia - the recovery has to remain highly suspect.

"As we move into the remainder of the year, the recovery has waned. The boost from inventory restocking has played out and underlying demand remains weak," wrote the American Chemistry Council (ACC) in its 3rd Quarter Situation and Outlook report, which was published last week.

Overall US plastic resins output will rise by 4.5% in 2010 before declining to 3.9% next year and 2.5% in 2012, added the ACC in the same report.

The confusion has made forecasting supply and demand very difficult, according to South Korean-based chemicals analyst (has it ever been easy?).

"The fourth quarter is likely to be better than expected. Earnings for the South Korean companies may continue to be strong for the next two quarters and for the whole year will be higher than 2009," he said.
DeWitt & Co, the petrochemicals consultancy, had factored in cracker operating problems but had not anticipated the extent of the difficulties at new crackers in the Middle East and other parts of Asia such as Thailand, said the company's Kuala Lumpur-based consultant, Mazlan Razak.
Nobody seems to have anticipated so much lost production.

"There is a big gap between actual production and nameplate capacity. Unless these crackers raise their production the situation will remain good; margins will be positive," added Razak.

Another argument being used is that the industry will heal itself even if margins head south through closures of high-cost capacity.

But the source from the Middle East producer we quoted earlier on believes that there will be no further European consolidation because of the risk of missing out on imminent good times.

"It is being argued that profitability will be back at peak levels by 2015," said an industry observer, who is based in London.

"Part of this argument for record profitability is that some people will shut down in the interim - but this is an oxymoron, as why would people shut down if record profitability is forecast?"

"The 2015 peak also assumes global GDP (gross domestic product) growth of 3.8% per year, which is far too high an estimate."

One much-more optimistic sales director with a North American polyolefins producer hopes that such pessimism is accepted by his company, as it will mean that he will continue to exceed his monthly targets.

We are just journalists and so are required to mainly stick to reporting what people tell us, and so we sincerely hope you haven't read through this article expecting any definitive answers.

Looking for such answers elsewhere might turn out to be equally futile, but all of us have to keep on trying.

 Tokyo at nightSource of picture: liveworldtours.com

By Malini Hariharan

it is easy to write off the Japanese petrochemicals industry which has for long struggled to find a solution to the dual pressure of rising global competition and an anaemic home market.

Japanese companies, once at the forefront of the Asian industry, have already given way to newer players from countries such as China, India and Thailand. Product portfolios have been trimmed and alliances formed to ensure profitable operations.

"The names of the companies may have not changed but their product mix has changed remarkably," says senior executive adviser at consultancy Accenture Japan, Ryota Hamamoto.

"Some companies have relocated their production facilities overseas and reassigned their Japanese employees to new smaller but sophisticated high-end specialities business without laying them off as their counterparts in Western countries usually do."

And more restructuring appears inevitable.

"The new ethylene capacities in the Middle East and China will result in Japanese producers losing market share. It is possible that 1.5-2.0m tonnes/year of Japanese ethylene capacity, or 3-5 less competitive plants, will be dismantled in the coming 5-6 years, " Hamamoto predicts.

The remaining crackers will need to operate as companies need hydrocarbon feedstocks to maintain their lucrative speciality chemicals businesses.

However, companies can delay the inevitable as long as markets such as China remain robust.

Hamamoto points out that Japanese ethylene production nosedived to 6.8m tonnes in 2008 from 7.8m tonnes in 2007.

"At that time some pessimistic analysts had forecast that output would fall further to 6.1m tonnes in 2009 as a fall in domestic demand seemed inevitable. But to our surprise, production hit 7.1m tonnes mainly as a result of strong demand from China and other Asian countries," he explains.

Hamamoto cautions that it would be unwise to dismiss all Japanese crackers as being uncompetitive.

"Most of the crackers are 30-40 years old and rather small; so one would think that their cost competitiveness is poor. However, the major producers are quite competitive as their plants are fully depreciated and are run at high operating rates with minimum accidents.

"Additionally, the plants are fully automated and companies have invested in energy saving technologies to compensate for the small size, old design and high cost of feedstock.," he says.

One example is Showa Denko.

A Showa Denko source explains that the company has attempted to raise its competitiveness to a higher level by making changes to its 695,000 tonnes/year Oita cracker.

Earlier this year, Showa Denko recently replaced seven small furnaces at the cracker with two high-efficiency furnaces; improved the waste heat recovery system and renovated the pre-distillation system.

The new furnaces give greater feedstock flexibility as they can crack liquefied petroleum gas (LPG), natural gas liquids (NGL), kerosene and light oil. The company says that the changes will improve energy efficiency by 5.3% and reduce carbon dioxide emissions by 6%.

Showa Denko, says the source, is looking at further improvement in production efficiency with an aim to reduce costs and does not have plans for further plant shutdowns other than those announced.

Japanese companies are also investing time and money to develop alternative production routes and make value-added products.

Mitsubishi Chemical has built a pilot plant to make propylene using methanol/dimethyl ether (DME) and other olefins from a naphtha cracker. It has also tested a new butadiene technology that uses butene as a feedstock although a decision to commercialise the technology has yet to be taken, says a company source.

Idemitsu has successfully developed metallocene polypropylene (m-PP) and is constructing a 40,000 tonnes/year plant at Chiba scheduled for completion in Q4 2011.

Prime Polymer, a joint venture between Mitsui Chemicals and Idemitu Kosan, is also strengthening its presence in metallocenes.

A 240,000 tonnes/year metallocene linear low density polyethylene (m-lldPE) plant at Ichihara will be expanded by 60,000 tonnes/year by November 2011.

And there are plans for a new 200,000-300,000 tonnes/year m-lldPE plant overseas for start up in 2014. Possible locations include Singapore and China with a final decision due to be made in H2 2011.

Random copolymer m-PP is currently being test marketed for food packaging and there are plans to start produce around 50,000 tonnes/year at an existing PP plant at Osaka by end of fiscal 2010, says a company source.

Homopolymer m-PP and block m-PP are also being developed at a pilot plant although a decision has yet to be made on commercialising these grades.

These efforts show that while Japanese companies no longer dominate the Asian petrochemicals landscape they still have the capacity to teach a few lessons to other regional players.

Michael Corleone once told his fiancee, "The old way of doing things is over - even my father knows that. In ten years time, the Corleone family will be entirely legitimitate" and ten years later he was still killing lots of people. So beware of what follows...

Source of picture: www.i-italy.com

By John Richardson

IT has been a remarkable year, one that has exceeded just about all expectations in Europe, the US and Asia as my colleague Nigel Davis wrote in an ICIS news Insight piece yesterday.

Confidence remains high that we could even be though the bottom of the cycle, as we said on Monday.

We have talked at length about the supply issues that continue to keep markets tight in certain grades of polyolefins. While overall profitability, as this Nexant ChemSystems report points out, might have been down very sharply in Q3 over the second quarter, this doesn't reflect persistently strong pockets of profitability.

On Monday we also referred to how excellent demand growth in certain geographies - most obviously, of course, in India and China - might be distorting what on a global basis remains a very shaky outlook.

But the doom-mongers, including us until the first quarter of this year when we started questioning our old assumptions, keep being wrong. What if the old ways of measuring demand growth are no longer good-enough because of an historic shift in the way the emerging-market economies are behaving?

"Look at India, China, Indonesia and Vietnam. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," a Singapore-based oil and gas consultant told the blog yesterday.

This got us thinking that the gizmos that people want today are creating much-greater chemicals and polymer demand than a macro analysis of the fundamentals might indicate.

Clever marketing campaigns and technology innovation are creating more wants that at any other time in history (in the West, though, the focus has switched back to needs).

"The standard approach is you take an estimate of GDP (gross domestic product) growth for a particular country and use that to calculate the rise in consumption of plastics and chemicals," continued the consultant.

"This has been the traditional base method, with varying degrees of further sophistication, that companies, consultants - everybody - and you as journalists have slavishly reported these numbers as if they were the gospel truth - have used in the past."

The blog now wonders whether we need deeper analysis further downstream into different end-use applications to understand the impact of emerging market growth - that stimulation of greater wants - on demand. What, for example, will be the consumption of polymethyl methacrylate into flat-screen TVS and polypropylene (PP) into autos?

"I read recently that Indian auto sales have risen by 30%. This is probably why India is reporting such strong demand-growth numbers for random co-polymer PP as you wrote about in Monday," said the consultant, who agreed with our above point.

One assumption we used to hold was that all investment bubbles had to eventually burst.

But could emerging markets behave differently because of demographic, resource availability and government policy differences with the West?

For example, property prices have increased three -to four fold in Mumbai over the past five years.

The city is short of housing (even the middle classes are being forced to live in poor-quality housing or even slums because of this shortage), and so why shouldn't price rises continue at around the same pace?

In Singapore, the property market is going sideways following government tightening measures - but limited land availability and population pressures might guarantee long-tem inflation, albeit at more moderate rates than recently.

As we said, we need more detail - more granularity - as you go further downstream which requires deeper study into the opportunities and also the risks of the emerging-market boom.

The most obvious risk is the impact on energy costs if this boom continues. Are there enough resources to meet these levels of growth?

How will making better use of resources, through dealing with issues such as water pollution and all the challenges of urbanisation, benefit the chemicals industry?

But returning to the here and now, there seems to be a deep mistrust of the conventional top-down way of looking at things.

As a result, the pessimists are not being believed as they have long been predicting another post Lehman Bros collapse, but it has yet to happen.

This represents a danger in itself in that just because a lot of the commentators have been wrong so far doesn't necessarily mean they will continue to be wrong.

But month after month when sales figures keep exceeding budget targets that have been based on some of the gloomier forecasts, what is the chemicals corporate world supposed to think?

By Malini Hariharan

Yes, the Indian economy is growing and propping up demand for all polymers.

The blog had highlighted a few weeks back that polypropylene (PP) demand expanded by 13% during the April-July period and the expectations are that this rate will be maintained for the full year ending 31 March 2011.

Raffia, the biggest end-use segment for PP, has been a big driver and is projected to expand by 18-19%.

The strength in the local PP market means that India will export less PP than anticipated, said one industry source. He estimated that Indian exports were likely to hit 600,000 tonnes for 2010-11 as compared with 660,000 tonnes in 2009-10.

As for polyethylene (PE), demand (domestic sales plus imports minus exports) for linear-low density PE (lldPE) and high-density PE (hdPE) expanded by only 6% and 1% respectively during April-August.

LldPE demand was estimated at around 400,000 tonnes while hdPE was 600,000 tonnes.

But low-density PE (ldPE), demand declined by 22% to around 120,000 tonnes.

Pic source: World News

Poor availability from local producers was the main reason for the lower growth rates for PE, said industry sources. "There were production issues at many plants; local availability was tight," explained a second source.

HdPE imports rose 6% to about 180,000 tonnes while lldPE imports were 14% higher at 160,000 tonnes. LdPE imports declined 25% to 60,000 tonnes, reflecting the tight supply globally for this product.

HdPE and lldPE imports were up but traders were hesitant to import huge volumes as prices were on a downward trend from May to July, he added.

Indian ldPE demand was also affected by a widening of the price delta with lldPE which has crossed $150/tonne in the last few months.

Industry players expected a recovery in the coming months and were confident of 10% growth in hdPE and lldPE for the full year.

LdPE should also return to positive territory to post a growth of at least 4-5%, said the second source.

But a third source believed that this would be difficult as "availability is just not there globally".

Meanwhile, local supply issues have yet to be fully resolved.

Indian Oil Corp is still struggling to stabilise operations at its newly commissioned Panipat cracker and derivatives complex and has taken a 15-day shutdown from 1 October.

Reliance Industries is said to be running both lines of its swing lldPE/hdPE plant at Nagothane but at reduced rates because of feedstock issues at the cracker.
And Haldia Petrochemical's complex on the east of India also had to be shut earlier this week to fix a problem at the naphtha cracker.

By Malini Hariharan

It was supposed to be a mere formality.

More than a month back India's commerce ministry formally recommended final anti-dumping duties on polypropylene (PP) imports from Saudi Arabia, Singapore and Oman. For duties to be implemented the commerce ministry's recommendation has to be approved by the finance ministry.

But this approval has yet to come.

This particular case has been controversial from the start. Saudi producers have been irked by the commerce ministry's ruling that the Saudi formula for pricing propane, feedstock for PP, gave them an 'unfair advantage' over other international producers.

As reported by the blog earlier, Saudi producers risked more dumping and other duties from countries around the world if India's ruling sets a legal precedent.

Saudi producers, through the Gulf Petrochemical and Chemical Association (GPCA) have asked the Indian government to throw out the case before it damaged economic relations and warned that the case would be taken to the World Trade Organzation (WTO) if India imposed ADD. They have also used the Saudi government to press the right buttons in New Delhi.

Pic source: Legaljuice.com

Sources close to affected Saudi producers believed that the delay was an indication that their efforts to pressure the Indian government were working.

A local media report in late September quoted the Saudi ambassador to India: "I am confident that this anti-dumping issue will be solved once and for all in near future."

The ambassador also stated that India's finance minister was looking into the issue.

But sources close to Indian PP producers believed the delay was routine. "There is no precedent of the finance ministry rejecting an anti-dumping recommendation made by the commerce ministry," said one source.

But this case has set precedents from the start. Maybe there is room for one more.

Here's the stereotype....

Source of picture: www.watblog.com

By John Richardson

WE talked last week about how emerging markets continue to astound when it comes to demand, meaning that we might have to take a long and hard look at the parameters used to measure growth.

Further support for this argument came from a visit the blog paid last Friday to Reliance Industries' Jamnagar refinery and petrochemicals complex in Gujarat, India. Many thanks to the good people at Reliance Industries Ltd (RIL) for arranging the trip at very short notice - particularly Kamal Nanavaty, president of the company's crackers and polymers sector, and his team.

Anyway, during the trip it was pointed out to me that the first 1m tonne/year of polypropylene (PP) capacity at Jamnagar - which was brought on-stream in 1999 and integrated with the first refinery - is produced via four reactors.

The additional 900,000 tonne/year of PP of nameplate capacity is produced via just two Unipol reactors. This facility, fed by the second refinery at the site, was started-up in 2008.

Never before had a single Unipol reactor been designed to produce 450,000 tonne/year. The design has been replicated at the Yansab petrochemicals complex in Saudi Arabia, which was commissioned earlier this year, the blog understands.

The reason for the scale of the reactors at the second Jamnagar PP plant is the rapid growth in the Indian market. Demand is of a much-bigger volume than most commentators had expected and so it made economic sense to build reactors on this scale to produce single grades for extended periods of time.

Opportunities abound for further game-changing growth. For example, the Indian industry is reported to be working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper-carriages to bedding made from non-woven PP.

Arguments being used include reducing what must be the enormous laundry bill incurred by state-owned Indian Railways. And as the non-woven PP sheets and pillowcase are disposed-of after one use, passengers would be guaranteed a clean bed.

Further - it makes it very economically viable to recycle PP-made bed clothes as there is only collection point: Where a train journey terminates.

An estimated six billion people travel by rail in India every year.

On a global basis, challenges still abound for the petrochemicals industry.

Perhaps the biggest current macro-economic threat at the moment is the eruption of an all-out currency war followed by waves of trade protectionism.

But for those on the ground with local knowledge of the changing characteristics of emerging markets, strong returns could continue.

Or has the blog abandoned its useful cynicism?

The brightest and the best, but will there be enough of them?

Source of picture: schoolsinnewdelhi.com

By John Richardson

EDUCATION, education and education are three of the biggest challenges facing developing countries over the next 10-20 years.

This will determine overall growth of economies. Without the right skill sets the rapid rates of growth we have seen over recent years might not be maintained, resulting in social and political pressures.

And at a petrochemical industry level, a shortage of engineers isn't just a developed-world phenomenon as the blog discovered when it talked to the Singapore Chemical Industry Council (SCIC) earlier this year.

In the Middle East, the challenge is to provide the right kind of education as it seeks to move downstream from oil, gas, refining and petrochemicals. Success is crucial in tackling high youth unemployment.

"The region is riding a wave of demographic changes - high birth rates, declining mortality rates and a young population," wrote HSBC in a recent report on Middle East petrochemicals.

"Government estimates place more than half of the Middle East's population under the age of 20, meaning that they will join the workforce over the next decade."

The problem is at its most acute in Saudi Arabia, where, according to HSBC "over half the population of 18.5m is under 20 years old and only 3m, or 16% of the population, are in the workforce.

"Around 2m Saudis are between the ages of 20 and 24, and in this age range only 0.5m are employed, including expats.

"Of the 1.8m Saudis between the ages of 15 and 19, few have jobs. All this suggests that around 1.7m jobs must be found in the next 10 years - more if women are to play a greater role in the workforce."

This helps to better-explain the drive to go downstream into manufacturing components of finished goods, and even the finished goods themselves, in the three plastic processing parks being developed in the region - two in Saudi Arabia and one in Abu Dhabi.

On a straight cost-competitiveness basis, it seems to make little to build manufacturing industries Gulf Co-operation Council (GCC) region. Arguments against include low domestic consumption due to low population levels, lack of sufficient local skill sets and therefore expensive labour.

You can perhaps make a stronger argument for Iran because of its much-higher population, notwithstanding the sanctions issue.

But demographic pressures in the GCC make it likely that manufacturing industry will be made to work, even if heavy subsidies are needed.

Local people will still have to be educated to the right levels to work in these industries, though, and so can the biggest of the GCC countries - Saudi Arabia - deal with this issue?

"My colleagues and I were joking a few years ago about Saudi Arabia having a car components business but no longer, as in around four years time we now think they will have one. One day they might even build their own autos," a petrochemicals industry source told the blog recently.

"It is a huge challenge for the Saudis, but I am convinced they will get there. A patronising view from the West is that they spend all their time sitting on proverbial camels staring into proverbial sunsets.

"But these are extremely bright senior people who have been to INSEAD, Harvard etc and are determined to put the education system right from the bottom-up.

"They are looking at the Singapore system and trying to copy it from the Kindergarten level upwards. I know of one Singaporean guy who is talking about franchising a whole series of Kindergartens in Saudi.

"And at the top end of the education system they are looking to partner top Western universities with their own universities - again following the example of Singapore."

India faces the risk that if it fails to reform its education system, growth could hit the buffers.

The top universities are excellent, but places at the Institutes of Technology and Institutes of Management are incredibly scarce, said this article from Amy Kazan in the Financial Times.

This same article - and one in The Economist - also argued that below the top universities, education was poor and in need of major reform.

India, like Saudi Arabia, has a highly youthful population. This will only be a competitive advantage over China - where the population is ageing - if the education problems can be solved.

"The (Indian) workforce may be young and growing, but 40% are illiterate and another 40% failed to complete school," wrote The Economist.

"The Boston Consulting Group sees a shortfall of 200,000 engineers, 400,000 other graduates and 150,000 vocationally trained workers in the coming years. Meanwhile, there are 62m surplus workers in agriculture, most of them barely skilled."

On our trip to India last week, Reliance Industries Ltd (RIL) expressed its concern over the domestic shortage of chemical engineers.

RIL has to battle hard to find enough of the brightest and the best to run its plants due to fierce competition from the tax-free Middle East.

Like everywhere else in the world, India also faces the problem that chemicals engineers are often lured into information technology or finance.

Chemical companies and industry associations in developing countries are going to have to continue to work hard and smart with governments in an effort to tackle these education challenges.

Over the coming weeks and months the blog will be talking to the industry about initiatives already taking place and those being planned.

Will enough be done? We certainly hope so and if we have any bright, or more likely otherwise, ideas of our own we will let you know.

By Malini Hariharan

Shenhua Ningxia has finally produced onspec propylene at its new 470,000 tonnes/year methanol-to-propylene (MTP) plant after starting trial operations last month.

This marks the successful start of China's first MTP project, which is also the world's largest. There is one more due by the end of the year -Datang Power's 450,000 tonnes/year MTP plant.

Pic source: CCPECO

Shenhua Ningxia plans to start trial operations at the downstream 500,000 tonnes/year polypropylene (PP) plant in the next two months with commercial operations scheduled for early 2011.

Meanwhile, the country's first methanol-to-olefins (MTO) plant operated by Shenhua Baotou has been taken offline and is likely to restart at the end of the month.

A company source said the shutdown of the whole complex, including utilities, was to prepare the site for the winter months. It would also allow the company to assess operating problems discovered since commissioning in xxx.

A second maintenance shutdown has also been planned for next April.

The Shenhua Baotou complex includes 1.8m tonnes/year methanol unit, 600,000 tonnes/year MTO facility and plants for 300,000 tonnes/year of polyethylene (PE) and 300,000 tonnes/year of polypropylene (PP),

There is a great deal of interest in China on developing coal-to-chemical projects. And as highlighted by the blog earlier, successful commissioning of the first few projects is likely to trigger a new construction wave.

Let's catch the bus from now on....

 Source of picture: hybridcars.com

By John Richardson

THE blog has long been worried about the difficulty, probably the impossibility, of accurately measuring real Chinese growth.

And it gets harder as the country now has some 130,000 polyolefin traders and distributors, according to an estimate we heard last week.

We keep touting our idea of an inventory sentiment index which would involve interviewing, say, 100 producers, buyers and traders inside China and the same number outside the country. We would ask them the simple question of whether they thought stock levels were higher, lower or the same as the previous month.

The latest sign-up to our idea is Nikhil Meswami, executive director and head of petrochemicals at Reliance Industries Ltd (RIL).

The concept of the index reflects how China is an information black hole, into which attempts at accurate number-crunching disappear without trace.

This problem applies not just to polyolefins, of course, but also to crude oil - as Jason Feer, Vice President and General Manager Asia Pacific for the Argus Media Group, pointed out in a speech at this week's APPEC oil and gas conference in Singapore.

"The data coming out of China raises many questions. We have seen the headline numbers - crude demand is supposed to have risen from about 7.2m barrels a day in the summer of 2008 to 9m barrels this summer," he said.

But he admitted that after studying the data, he couldn't work out where all the crude was going. He added that he had reached the conclusion that the around one million Chinese buying vehicles each month must be driving them home from the showroom, parking them in front of their homes so their neighbours could see them and then continuing to catch the bus to the shops and to work.

A study of fuel-oil and gasoil consumption hasn't helped.

Demand for fuel oil - used for power generation and as feedstock for small refineries - was volatile and directionless, he said.

Gasoil or diesel is generally thought to be a good indicator of manufacturing-based economic growth, but, despite China's economy ostensibly expanding at 8-10% this year, demand had only recently returned to pre-Beijing Olympic levels, he added.

China has become a significant exporter of gasoline thanks to new refinery capacity, but even taking these shipments into account, the oil-consumption data still doesn't add up.

"Every month there is 400,000-800,000 barrels a day (of oil demand) that we simply cannot account for."

China has been injecting 200,000-300,000 barrels a day of crude into strategic stockpiles, but Feer said that this had been going on for a couple of years "so it does not account for the recent growth in demand.

"In the end, I do not have a solution to this mystery. As a well-known, know-it-all, this is a bit frustrating.

"But I think it shows that amid the hype that China's economy is growing at 8% and has turned itself into a market based on domestic demand, there are real questions about the quality and nature of the growth we are seeing and the data coming out of China.

Plus ca change, plus c'est la meme chose.

George Mitchell of Devon Energy - The "Father of Shale Gas"

By John Richardson

US polyethylene (PE) input costs will be 50% less than those in Europe and Asia beyond 2012, says a new report by Morgan Stanley.

The extraordinary gap in competitiveness is the result of the shale gas revolution that has sharply reduced US ethane costs.

Not so long ethane was above $11/mBTU in the States, but since the tipping point was surpassed on shale-gas technology, prices have ranged between $4-5/mBTU, resulting in a dramatic of US cracker feedstock slates.

Next year, though, Morgan Stanley expects natural gas liquids (NGL) supply to tighten in the US before lengthening again in 2012.

Last month we reported on a crisis of plenty for Northeast US shale-gas producers as they attempt to find a home for ethane which they view as a contaminant. The petrochemical feedstock could be moved by pipeline to Canada or liquefied and shipped to the Gulf Coast.

Once upon a time, just three years ago, Dow Chemical's weakness was that a big chunk of its production was based in the US.

But now Morgan Stanley says: "Longer term, Dow remains the most leveraged stock in our coverage universe relative to the Gulf Coast advantage that is forming within the global petrochemical industry".

When we spoke to Ben van Beurden, executive vice president of Shell Chemicals, earlier this year he told the blog that it was too early to talk about capacity being expanded in the States to cash-in on the ethane advantage.

Shell has been doing the opposite - reducing its US ethylene capacity while reversing its liquids/gas feedstock mix: It has gone from 75:25 liquid:gas feed to roughly 25:75 liquid:gas feed today.

But interestingly, in discussions that the blog held with senior Asian industry executives earlier this week, doubts were raised over the commitment of a US company to a steam cracker project in the region.

"We are not sure how serious they really are as a more viable option might be to build in the US," one of the industry sources told us.

And yesterday another of our sources told us of the here and now - i.e. the strength of US PE exports to China in September.

"Shipments to China totaled more than 200,000 tonnes last month, representing the second biggest-volume exports from anywhere in the world. This was the result both of low gas prices and the fall in the US dollar.

"The South Koreans and Japanese had slipped out of the top five and Singapore was way down, and so I don't know what these three countries were doing with all their material."

This all illustrates the importance of keeping track of changes in technology in order to improve the accuracy of forecasts.

The blog can only observe from the sidelines and wonder how this is done, but keeping track must surely involve taking into account the work of the outliers, those who defy conventional wisdom.

In the case of shale gas, this would have meant listening to and believing George Mitchell of Devon Energy at a time when his colleagues thought him a little eccentric. His vision has helped transform the industry's economics.

By Malini Hariharan

The Chinese are back from their holidays and they are buying. This coupled with supply constraints and firm crude prices is fuelling a surge in petrochemical prices.

Paraxylene (PX) prices hit a 2-year high this week on speculative activity and production problems at a couple of Chinese plants, reports ICIS news. Spot numbers are at $1265-1275/tonne cfr China, up $150/tonne from last week.

Pic source: livetradingnews.com

Monoethylene glycol (MEG) producers are pushing for a $120/tonne increase in November contracts while spot prices have shot up by $155-160/tonne in the last month to $945-960/tonne cfr China.

Fibre intermediate producers are no doubt looking at the strength in downstream markets when raising their price expectations.

Purified terphthalic acid (PTA) is trading at 25-month highs of $1025-1045/tonne cfr China. Prices of polyethylene terephthalate (PET) bottle-grade chips are running at over $1300/tonne fob Korae/China - a level last seen in May this year. And polyester fibre and yarn prices are rising because of a shorfall in cotton production.

Caprolactam is also nearing record highs with prices rising $70-100/tonne this week to $2670-2730/tonne cfr China. Supply is tight due to plant turnarounds while demand was firm with the start of the peak manufacturing season in China.

The lifting of government restrictions on industrial energy use in China's Zhejiang province - the country's capital for textile production - is also said to have boosted the production of nylon yarn

Polymer markets are also seeing a surge in prices and buying activity with polyethylene prices moving up $40-70/tonne in China.

Offers for polystyrene (PS) and acrylonitrile butadiene styrene (ABS) are up $50/tonne on rising feedstock costs.

The strength in markets is good news for producers who have been cautiously optimistic about Q4. But with costs also rising more price hikes would be needed to preserve margins. Will the bull run continue?

Cloth nappies?....you have to be kidding

Source of picture: babygavin.com

By John Richardson

IT IS the biggest transformation that the global economy has probably ever undergone, resulting in numerous opportunities and challenges for the chemicals industry as emerging markets continue to boom.

The obvious opportunity is for those who can meet voracious demand growth. But where will the supply of affordable commodity chemicals and plastics come from to prevent this remarkable transformation from stalling?

Innovation will be the key at the higher end of the business, as resource constraints create the need for new technologies.

Breakthroughs will be needed, for example, to raise energy efficiency and provide clean and safe water for the tens of millions of people who every year are migrating to ever-more overcrowded cities.

But while the long-term upward trajectory seems assured as the developing world displaces the West as the main global economic driver, medium and short-term dangers abound; the most obvious one right now is a currency war.

"Look at India, China, Indonesia and Vietnam alone. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," said a Singapore-based oil and gas consultant.

"Traditional spreadsheet-based methods of measuring growth are no longer good enough by themselves. Some amazing disruptions are taking place that you need to be aware of in order for your old models to be thrown out so you can start again."

Take India as a good example, where the local polyolefin industry is working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper carriages to bedding made from non-woven polypropylene (PP).

Arguments being used include reducing what must be the enormous laundry bill incurred by the state-owned Indian Railways. And as the non-woven PP sheets and pillowcases are disposed of after one use, passengers would be guaranteed a clean bed.

Furthermore, it makes it very economically viable to recycle PP-made bed clothes, as there is only one collection point: The train's terminus.

An estimated 6bn people travel in India by rail every year. Nobody has calculated how much extra PP demand this could amount to.

But it has been estimated that if India switched entirely from sacks made of jute, a natural material, to those made from raffia-grade PP, this would create the need for an extra 1m tonnes/year of the polymer.

End-users in India and other emerging markets are incredibly cost-sensitive, however.
And in many cases, these disruptive changes are not about sophisticated polymers, as in the case above with efforts to replace sacks made from jute.

The Gulf Cooperation Council (GCC) countries in the Middle East will not supply the huge new volumes required because of a shift in strategy and feedstock availability.

Producers in India, such as Reliance Industries Ltd (RIL), and those in China are in a great position to meet the demand. Sometimes they have both location and feedstock cost advantages.

In the case of RIL, it has a strong raw materials position thanks to its huge refinery capacity at Jamnagar, in India's Gujarat state.

As for China, "the focus has swung back from refinery-based petrochemicals to adding more coal-to-olefins and also coal-to-monoethylene glycol (MEG) capacity, due to the recovery in oil prices", according to a senior source with a US polyolefins major.

"We are spending a lot of time studying the economics of our coal-to-olefins process, while also evaluating the efficiency of competitors."

It might not be too far a stretch to suggest that the US might see expansions to meet the demand for commodity plastics, thanks to shale gas.

But 45-degree straight-line growth was never going to happen.

"In Singapore, Hong Kong and across Asia, the rich investors with money to spare have been pouring too much money into property and equities," continued the above source. "They have been followed by those who are now highly leveraged, who have borrowed at extremely low interest rates."

Property-market restrictions in Singapore and China have already slowed price rises, with some early signs of reductions in China.

Inflation, however, was still a big problem in Asia, the source added.

"Official inflation rates don't always reflect what's really happening because baskets of goods included in measures of inflation haven't been adapted to reflect changes in economies.

"Governments across Asia might have to raise interest rates and if they get the timing and scale of the rate rises wrong, this could cause investor panic. Other policy decisions are possible and these carry equal risk.

"The temptation may instead be to carry on with ultra-loose monetary policy in order to prevent currencies from rising too much, as everyone struggles to deal with the weak US dollar. This will cause bubbles to inflate even more.

"A full-scale currency war is my biggest fear, accompanied by increased trade protectionism - for instance, the recent US House of Representatives vote on the Yuan. This vote sends an important signal, even if it doesn't get past the Senate or a veto by the president."

The dreaded double-dip recession might be almost upon us, unless we are lucky enough to escape for now thanks to an exceptional amount of inter-governmental coordination and compromise.

Whatever the number and the extent of the dips in growth over the coming decades, though, the overall dynamics seem irreversible.

One Singapore-based PP sales executive put it very neatly when he said: "Once you've got used to using stuff made from chemicals and plastics, you are not going to turn back, no matter what your economic problems.

"If you have young children, why on earth would you want to switch back to using cloth diapers from disposal diapers?"

By Malini Hariharan

Nearly two years after SABIC and ExxonMobil signed an agreement for a multi-billion dollar 50:50 joint-venture elastomers complex iin Saudi Arabia, the two majors have yet to take a final decision on the project.

At last year's GPCA forum in December, Mohamed Al-Mady, SABIC's CEO, had indicated that the two companies were waiting approval from their respective management boards while work was on with contractors for detailed engineering and cost estimation.

And there has not been much progress since then.

Pic source: www. tv.ae

Talking to reporters on Sunday after announcing the company's results for the third quarter, Al-Mady confirmed that a final decision has yet to be taken.

"We are moving to the detailed feasibility study ... we have not reached final decision ... (It is expected) some time early next year," he said.

The blog has already written about weak economics for derivative projects in the Middle East. Could this be a reason for the hesitation on part of the two majors to quickly implement this project?

Another downstream project being pursued independently by SABIC's fully owned affiliate Petrokemya is also moving slowly.

Following SABIC's acquisition of GE Plastics, Petrokemya had revealed in early 2008 plans for the Kingdom's first acrylonitrile butadiene styrene (ABS) plant with a capacity of 200,000 tonnes/year.

Al-Mady said on Sunday that the project has not been cancelled. But it appears that the capacity of the project is being reviewed.

Meanwhile, Ibn Rushd, another Sabic affiliate, is expected to finalise bids for expansion of capacities for purified terephthalic acid (PTA) and polyethylene terephthalate (PET).

Progress may be slow but with gas in short supply SABIC has no alternative but to persist in its efforts move downstream and this was confirmed by Al-Mady.

"We have to be realistic. The investment cycle takes time to find the gas ... SABIC is a global company we cannot wait for the gas to come we have to do business either in downstream, in innovation ... until the gas is available."

By John Richardson

In theory there should be an additional 20-30m tonne/year of liquefied petroleum gas (LPG) coming on-stream between 2008-2012, according to Petrochemical Corp of Singapore (PCS) - the Singapore Jurong Island-based cracker operator.

This could lead to 5-10m tonne/year more LPG being cracked if the pricing incentives are right, added PCS in a recent presentation.

But as the blog has discussed before, LPG has been much-tighter this year than anyone had expected as a result of the associated gas issue, delays to liquefied natural gas (LNG) projects and reduced refinery operating rates. A further factor has been the increased use of LPG for petrochemicals in Saudi Arabia.

As a result of the lingering impact of the above, it therefore seems questionable whether the PCS prediction that LPG markets will be long in 2011-12 will come true.

Firstly, as we've discussed on many occasions before on this blog - but it is worth re-emphasising because of its importance to global petrochemical balances - world oil demand is being forecast not to return to 2007 levels for a couple more years.

This will mean OPEC will have to manage this lower demand to attempt to prevent a price decline, resulting in Saudi Arabia's oil-production quota being maintained at a level that will limit its propane, butane and ethane production.

LNG projects have been postponed or even cancelled due to the economic crisis. And commissioning continues to be affected by the old chestnut also harming the start-up of on schedule of new petrochemicals facilities - the shortage of qualified engineers, said a Singapore-based oil and gas consultant.

"More than 30 LNG ships are standing idle at the moment out of a global fleet 370. This is an indication of project delays and weaker-than-expected demand," said an industry source.

Some 12m tonnes of LNG that should have been delivered to the US this year will instead to diverted to Asia because of the country's weak economy and the rise of shale gas, said Jason Feer, Vice President and General Manager Asia Pacific for the Argus Media Group, in a speech during last week's APPEC oil and gas conference in Singapore.

The shale gas boom, that has dramatically improved the economics of US petrochemicals producers, might in itself lead to more LPG availability.

But this is not part of the PCS estimate we gave above and outside the US, extra LPG volumes from LPG remain highly speculative as projects are at a very early stage.

Further - a global shale-gas boom could put paid to more LNG projects!

And then, of course, refinery operating rates remain under pressure due to factors including new capacity arriving just as the economic crisis occurred - and the peaking of US gasoline demand due to increased fuel efficiency and ethanol blending.

The jury is out over whether refinery margins have bottomed out with maybe only the complex, modern refiners set to prosper.

And then finally in this long list of reasons why we are not drowning in a flood of LPG, petrochemicals consumption has risen in Saudi due to more cracking of propane and butane and the start-up of several propane dehydrogenation (PDH)-to-polypropylene (PP) projects.

Saudi Aramco recently cut export allocations by 20% because of the associated gas problem and increased demand from petrochemicals, said an LPG trader.

BUT - according to the industry source we quoted above - two gas projects in the Middle East, due on-stream over the next few years, have 7-8m tonne/year of LPG of co or by-product LPG "that they don't know what to do with".

As PCS points out, in a world of more competitive gas-based cracker capacity and increased China petrochemicals import self-sufficiency, feedstock flexibility for the higher-cost Asian (ex-China) and European crackers will be essential to survival.

So making investments in the right separation facilities, in furnace adjustments and LPG storage could be worthwhile - especially as LPG yields a higher percentage of propylene than naphtha, and could therefore help solve a potential long-term C3s shortage.

But the key issue, as we have pointed above, is going to be timing!

By Malini Hariharan

A few weeks back the blog had highlighted the problems related to the disposal of ethane at the Marcellus Shale in northeast US.

Shale gas producers in the region are in a fix as ethane needs to be removed to meet pipeline specifications for transporting gas. However, there is no infrastructure or market in that part of the country.

My colleague Sheena Martin reports that production companies with drilling leases in the Marcellus Shale have heard of at least five proposals for moving the excess ethane.

The frontrunners are looking at moving ethane to Canada and the US Gulf via pipeline, truck and ship.

The cheapest project being considered is the one proposed by Nova Chemical and Buckeye which involves construction of a natural gas liquids (NGL) pipeline to Sarnia, Canada. The pipeline could take 65m bbl/day of ethane and some butane as well.

Another company, El Paso, has looked at taking the ethane to Louisiana using an existing gas pipeline.

Pic source: El Paso

Then there is the proposed Marcellus Ethane Pipeline System (MEPS) which would move 60,000 bbl/day ethane from the shale to interconnect with third-party ethane pipelines. The project is planned for start up in 2013.

Mark West Liberty and Sunoco have also proposed using a new pipeline and ships to move the ethane to the US Gulf coast.

There are other proposals as well but what has not yet been proposed is a cracker on the east coast. But all the extra ethane could well result in at least some capacity expansions and debottleneckings.

Source of piicture: worldofstock.com

By John Richardson

CHINA'S surprise decision earlier this week to raise interest rates - the first rate rises since December 2007 - has badly dented sentiment in the polyethylene (PE) market, said a source with a Western producer.

But estimates of price direction based on this sentiment were mainly notional as nearly all business had been concluded for October, he added.

Discussions for November are only expected to begin next week.

"It is scary out there as sentiment has weakened quite dramatically, but my boss has told me to sit on my hands, to not panic, and do nothing until things settle down," the source told us.

The very fact that he is suffering from the cold sweats over a macro-economic decision, the implications of which will remain unclear for PE for some time, is an indication of how much the market has changed since January last year.

As we have argued on this blog many times before, PE in China has essentially become another financial instrument thanks to the Dalian Commodity Exchange.

And sure enough, when China's rate-rise decision was announced, linear-low density PE (LLDPE) futures pricing declined with monthly contracts falling by as much as 4% in one day - the maximum allowed under the exchange's rules, said a Singapore-based polyolefin trader.

"Pricing for the biggest-volume contract and so the most-watched at the moment - the one that matures in January - has since recovered a bit. I have no idea why," he added.

The trader and the source from the Western producer agreed that Dalian was an important reference and influence.

"It follows equities and crude as they respond to the big economic news," added the source.

In the 13 years the author of this post has been covering polyolefin markets in China, speculation has always played an important role. But now it seems as if it has taken centre stage.

As we have already said, to some extent we are in a hiatus right now - between the end of October business and the start of November - and so the lack of clarity makes falling back on the macro stuff for direction very tempting indeed.

"The market was great on October 8 and 9 after the Chinese October holidays, pushing pricing up very quickly. Since then it's been quiet so talking about transaction levels at the moment is a little academic," the trader added.

But on many occasions over the past 22 months sentiment has been dominant when transparent conditions in the actual PE market were pointing in the opposite direction. For example, imports surged in March this year when it was obvious that Sinopec was ramping-up production. The end-result was overstocking and the weak pricing we saw in April-June.

If everyone switched off their Blackberries and I-Phones and took a deep breath, the world might be a better place.

But, of course, no producer or buyer can afford to do that because of the baleful influence of the Chinese trading and distributor community that has swelled in size thanks to all the stimulus money that has made it so easy to gamble.

The addictive, high-speed flow of information and disinformation via all the Blackberries and I-Phones makes sober and rational pricing discussions a distant and hopeless dream.

A source with a second producer told the blog over lunch yesterday (can a blog eat lunch?): "We don't even bother to explain to converters these days why prices are being increased because it only ends up in a pointless argument. You might as well howl at the moon."

"They know, and we know, that the market rarely makes sense these days thanks to the increase in speculation."

We will - in a subsequent post over the next few days using our imperfect information - attempt to tell a story based on the fundamentals about what the rest of this year should look like.

This is probably a total waste of time.

Watch out for the charging bulls...

Source of picture: sbynewsblogspot.com

By John Richardson

A FEW senior industry executives told the blog as long as a year ago that a petrochemicals supercycle was on the way as a result of lack of new supply post-2011 and booming emerging markets demand growth.

The babble of optimism has built-up steadily over the past few months.

Because profitability has remained robust for such an unexpectedly long period, this seems to have undermined the credibility of those who have been predicting a disaster that has yet to happen.

So a new consensus seems to be forming - that we are indeed heading for a supercycle in a few years.

But the herd can be wrong, as the collapse in financial markets so amply demonstrated in September 2008. It could all still end in tears.

A new Morgan Stanley report adds big analytical weight, though, to those confident that we are heading the sunny uplands.

Here follows the executive summary from the report, which argues for:

An inflection point in the global plastics market, driven by China and India: After a recent period of slower growth and a decoupling from global GDP growth, we now expect the strongest period of ethylene demand growth in the past 20 years. We forecast that in the next five years, incremental annual consumption in China and India alone will equal the total current consumption in the US, until recently the world's largest ethylene consumer, and still responsible for 15% of the market.

Our global supply/demand model suggests ethylene utilization rates will tighten. We forecast strong demand growth, averaging 5.6% in 2009-14, and also expect the supply outlook to improve. The credit crunch has halted infrastructure investment by industry titans, and the Middle East appears to be exhausting feedstock quotas. Thus, global capacity should grow at just 2.3% in 2011-14. Utilization rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally.

Implications: In the US, with its advantaged natural gas-based feedstock, cash margins in the next cycle should be 2.4x the average of the past 20 years. Dow and LyondellBasell should be the main beneficiaries. Asian utilization rates are set to tighten the most from current low levels. In Asia/Middle East, we prefer companies with exposure to gas-based feedstocks such as PTT Chemicals and SABIC. Europe should remain structurally weak due to low demand, high feedstock costs, and proximity to potential Middle East imports.

Far more choices now...

Source of picture: www.mhhe.com/business

By John Richardson

THE nature of demand growth in emerging markets is a subject the blog has paid some attention to over the last few weeks.

Taking advantage of this growth will require the ability to innovate in order to tap into the huge opportunities presented by the hundreds of millions of people entering the consumer economy.

This innovation will have to be accompanied by a ferocious attention to cost-efficiency, as many of these millions are earning very low incomes. It takes imagination and flexibility to turn the wants of the rural and urban poor into needs.

In a fascinating conversation with a business development manager with a leading polyolefins company late last week, the blog gained a further glimpse into how these challenges and opportunities are being worked.

The subject was again India and in this case how the polyolefins industry is working with consumer-products manufacturers.

In his own words:

"As a manufacturer of consumer goods, you need to get strategy right - creating a need through marketing for luxuries and then packaging and pricing those luxuries in such a way that the poor can afford to indulge themselves.

"A problem with the chemicals industry in general is that it is often managed by scientists who make it the main boards and not the sales and marketing people - and so innovations are inside out rather than outside in, when a lot of the most-profitable changes can come from what I've just described above."

Fascinating stuff - and again it shows how the old top-down approach to measuring supply and demand has become a very blunt tool of measurement. 

.....quite possibly, yes, but it matters not what you say, only how you tell it

Source of picture: freelancefolder.com

By John Richardson

THIS poor mug might well have been the victim of rumours designed to move the daily price of polyethylene (PE) in China late last week.

The author of this particular post was told that the end of the peak manufacturing guaranteed, along with increased supply, guaranteed lower prices during the rest of Q4 than we have seen in this quarter to date.

Further bolstering the claim of the bears was that China would again reduce power supplies over the remaining months of this year in an effort to achieve 2010 emissions reduction targets. Power cuts in the third quarter cut into demand as plastics converters were forced to either lower operating rates or cease production altogether.

A Google news search provides plenty of support for this theory.The bulls argued for a price rally not based on fundamentals - whatever they mean these days - but rather on a story that originated in London financial markets and has now spread to polyolefin traders in Singapore and Hong Kong.

Tim Geithner, America's treasury secretary, said in a speech last week that no country "could devalue its way to prosperity".

This is being seen as code for "We, the US, have done a deal with the Chinese which will be announced at next month's G20 meeting of world leaders. They will allow the Yuan to strengthen in return for which we won't indulge in anymore quantitative easing that will drive the dollar even further down".

If this theory gains a strong following we could see traders pile into buying commodities of all kinds priced in US dollars in order to sell these commodities in Yuan to cash-in on a later appreciation of the Chinese currency.

Remember - the object here is not to fathom markets through working out real demand.

It is instead all about moving the daily price of PE one way and then the other so those playing the Dalian Commodity Exchange, and physical markets also, can make money out of high levels of volatility.

One wonders how producers and buyers form sensible judgements.

Or maybe they will increasingly just have to accept things as they are and start directly hedging PE through the banks which, of course, are responsible for some of the increased chaos via the Dalian!

As we promised last week - and we do mean it if you can be a little more patient - in another post very soon we will list the supply factors that should, in theory, effect pricing over the remainder of this year.

For what they are worth....

By Malini Hariharan

Cotton prices have hit a 140-year high on the ICE futures in the US creating room for further price hikes across the polyester chain.

Prices of paraxylene (PX), purified terephthalic acid (PTA), monoethylene glycol (MEG) and polyester fibre and yarn have escalated sharply in the last few months as a supply crisis in cotton markets has spurred substitution demand for polyester. And supply constraints, especially for PX, have also helped.

"The entire changed scenario for PX, PTA and MEG is all because of the pull from polyester and that is due to cotton," explained a major producer.

Cotton has already become expensive to the textile industry with prices steadily rising after floods in Pakistan in August damaged crops. And now a cold front is threatening to damage crop in China. This news was sufficient to push cotton futures to $1.25/lb on the ICE on Monday.

Pic source: CCTV

With no visible slowdown in textile demand experts expect cotton to rise further to even touch $1.30/lb which could fuel higher polyester prices.

But a cautionary note is also being heard.

"The situation could change in a year. Very high cotton prices could result in new acreage coming in," said the producer.

And an industry analyst warned that the current high polyester margins would only result in producers ramping up output and then engaging in a price war to offload volumes.

"Its going to get bloody," he predicted.

By Malini Hariharan

With Indian polyester demand growing steadily at 10%/year Reliance Industries has renewed its focus on expansions along the chain.

Projects that were put on hold after the 2008 economic crisis have been revived and deadlines set.

The company's plans include two new worldscale purified terephthalic acid (PTA) plants and investments in paraxylene (PX), polyester and polyethylene terephthalate (PET).

"The first PTA plant of 1.1m tonnes/year at Dahej, Gujarat, is scheduled to start up in the first quarter of 2013, and the second one will start 6-12 months later," said a source close to the company.

Invista would supply technology for the first plant, which would have a single reactor, while Reliance was still evaluating technology options for the second plant, he added. This is a bit of a surprise as Reliance is known to fall back on tried and tested technologies. But the company would obviously like to see what else is on offer.

Part of the feedstock requirement for the PTA plants would be covered by Reliance's 1.7m tonne/year PX plant at Jamnagar. The rest would come from a new 1.3-1.5m tonne/year PX train, also at Jamnagar, which was scheduled to start operations in 2013, the source added.

The new PTA volumes would feed the company's downstream polyester investments at Silvassa, Gujarat, which included a 560,000 tonne/year PET plant and a 360,000 tonne/year partially oriented yarn (POY) unit.

Pic Source: Beautytwist.com

The POY project was already under implementation and should be completed in the next two years while the PET plant would be commissioned in the first quarter of 2013.

"Silvassa is a texturising hub and Reliance already has a unit there which will be integrated with the new POY unit," he said.

The projects reaffirm the optimism seen in the Indian polyester industry - a result of steady economic growth and the untapped potential of the large rural population.

The country is still a distant second to China in terms of numbers but polyester fibre and filament capacities have grown by 30% in the last four years to around 4.3m tonnes/year while demand is expected to hit 3m tonnes this year. India is already a large exporter, pushing out about 70,000 tonnes every month and this is expected to continue.

By John Richardson

THE Morgan Stanley Supercycle report, which we first blogged on last Friday, has created a big stir among the blog's contacts.

 Click herefor a copy of the report RI_PETROCHEM_BLUEPAPER2010.pdf   

As we said in this ICIS news article on both the Morgan Stanley report, and one from Merrill Lynch which is in a similar vein, the paradigm seems to be shifting away from a supply-driven collapse in margins.

Certain senior industry executives have been telling us for a long while - some claim for several years - (maybe we were not listening hard enough?) that any crisis would not be supply-driven.

But now the majority of people we talk to are climbing on board the same argument - along with the belief that emerging-market demand-growth will be more than good enough compensate for a new recession in the West.

But an industry analyst we talked to earlier this week holds a very different view.

"Think about it - the US consumes around 21m tonne/year of ethylene or ethylene equivalent a year, Europe 24m tonne/year and Japan 7m tonne/year and so you are talking about a total of around 52m tonnes from global consumption of approximately 120m tonnes," he said.

"So I don't think it is right to suggest - as Morgan Stanley does in its much talked-about report - that Chinese and Indian demand alone, never mind the rest of the emerging markets, can compensate for weakness in the West.

"The bank's own data shows a decline in Western consumption in 2000-2009.

"If the US and Europe fall back into recession, and with the energy conservation and environmental pressures growing ever-stronger, their ethylene equivalent consumption is going to decline even further."

This would place even more pressure on China and the other emerging nations to carry the load - but recent evidence suggested that the Chinese economy was slowing down, he added.

Operating-rate problems that have constrained production this year would eventually be resolved leading to oversupply, he said

But he admitted that the associated gas issue was the wild card in the pack. The lack of petrochemicals feedstock via oil wells is likely to constrain production at Saudi crackers for several more years until global oil demand returns to pre-crisis levels.

Research by Kunal Agrawal, Asia Energy Analyst at BNP Paribas in Singapore, supports the oversupply argument.

"In 2009-2011, we see more than 21m tonne/year (30% of 2010E installed capacity) of new ethylene capacity in the Middle East and Asia," he wrote in a recent report.

This will lead to surplus capacity of 11.1m tonnes in 2009-2011 and 12.1m tonnes in 2010-11, he warned.

Operating rates would, as a result, decline to 83% in 201011 compared with the average 96% over the past five years.

The BNP Paribas research - taking into account all the project delays - estimates that while 5.1m tonne/year of ethylene came on-stream in Asia and the Middle East last year, this will have risen to 8.8m tonne/year in 2010, and will climb to 8.5m tonne/year in 2011.

The good news is that if the optimists are wrong this should become apparent over the next few quarters - thereby postponing any rash of new projects.

The bad news is that 2011 budget expectations may have already been raised, leading to another ferocious round of cost-cutting in the petrochemicals industry as margins and share prices tank.

Here is another article on the liquefied petroleum gas (LPG) market, a subject we have covererd several times on the blog over the last few months.

Below we discuss how the temporary supply constraints that have kept LPG tight this year look set to end, creating a very attractive feedstock option for higher-cost Asian cracker operators as they attempt to compete in an ever-more difficult environment.

By John Richardson

THE world is about to be hit by a flood of new liquefied petroleum gas (LPG) (propane and butane) supply, creating a big opportunity for higher-cost Asian cracker operators as they seek to survive in an ever-more competitive world.

An additional 20-30m tonne/year of LPG is due to come on-stream globally in 2008-2012, according to the Singapore-located cracker operator, Petrochemical Corp of Singapore (PCS).

This could lead to 5-10m tonne/year of extra LPG consumption by the petrochemicals industry if the pricing incentives are right, the company added.

"Europe has gone as far as it can in taking advantage of the LPG opportunity, but Asia is only just waking up to the need to be more flexible with some investments in the region taking place over the last 18 months," said Paul Hodges, chairman of UK-based chemicals consultancy, International e-Chem.

 Source of picture: Bombayharbor.com

Some South Korean, Japanese and Singapore cracker operators have already invested in the furnace adaptations and storage facilities necessary to make use of LPG - but many other producers lag behind.

"LPG normally becomes attractive as a cracker feed when its price is around 90% of the naphtha price," added Hodges.

Traditionally, this has been in the summer months in the northern hemisphere when LPG pricing falls due to lack of demand for heating.

The anticipated oversupply of LPG is the result of the ramp-up in liquefied natural gas (LNG) and condensate capacity in the Middle East, said oil and gas consultancy, FACTS Global Energy.

The capacity flood should have, in fact, already arrived by now, but this year has seen a surprisingly tight global market.

Lower LPG production by refineries - the result of oversupply in refinery capacity - is one factor behind the tightness.

Middle East petrochemicals demand for propane and butane has also increased due to a change in feedstock mix.

Recently commissioned gas crackers are running a higher percentage of LPG feedstock than plants that were brought on-stream earlier on because of shortages of ethane.

In addition, Saudi Arabia has seen the start-up of three propane dehydrogenation-to-polypropylene (PP) complexes over the last 18 months.

But by far the biggest factor behind delays in the LPG supply surge is reduced operating rates and maintenance shutdowns at LNG plants, added FACTS.

"It should be noted that this will be temporary and in the longer term, the LNG mega-trains will be strongly required to ramp-up their production to avoid any damage to project economics," wrote the consultancy in a recent report.

LNG production has been reduced because of the same problem afflicting the refinery sector: A lot of new capacity came on-stream just as the economic crisis happened, with the LNG industry facing the added problem of the shale-gas revolution in the US. This has left the States unexpectedly self-sufficient in natural gas and even, possibly, in a position to export rather than import gas.

In Qatar alone, total LPG and condensate production will surpass that of crude oil by 2012, added FACTS in the same report.

Of course, though, cheap feedstock for the smaller, older and therefore more marginal cracker operators in Asia won't by itself be a game-changer.

"Cracking propane and butane changes cracker yields," said a Southeast Asian cracker feedstock purchasing manager.

"As a result, a careful balancing act will need to be performed between savings on raw-material costs and what these different yields will mean for polyethylene (PE), polypropylene (PP) and other olefins derivative production.

"One obvious opportunity from using LPG is increased propylene yields. This might help what could be tight C3 markets over the next few years."

Propylene supply has tightened in recent months as a result, of again, lower availability from refineries.

Other factors have been low liquids cracking operating rates in Europe on lack of naphtha availability (again because of problems in the refinery industry) - and US cracker operators switching to lighter feeds due to the collapse in natural-gas pricing.

A further reason has been the boom in polypropylene (PP) production due to strong demand growth for the polymer.

The shortage of C3s is seen by some industry sources as a serious and long-term problem. Unless it is addressed they worry that PP could suffer from demand destruction.