Distorting The Outlook For 2011

 

 

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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.

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