Asian Chemical Connections

By Malini Hariharan

The petrochemical industry is all about making the most of unexpected developments and that is what we are seeing in paraxylene (PX) and purified terephthalic acid (PTA) markets.

Led by polyester, PX and PTA prices have risen to levels last seen in 2008. And polyester has been benefiting from a run up in cotton prices, which had hit a 140-year high last week.

The recent market developments have been welcomed by producers of PX which has been structurally long this year and hampered producers' efforts to raise prices improve margins. But PX-naphtha spreads have finally risen to over $450/tonne from around $250/tonne last quarter.

"PX producers are at last getting a piece of the profit; it is finally tight," said Leonard de Guzman of Dewitt & Co.

Operating hitches at PX facilities of CNOOC Kings, Fujia Dahua and Oman Aromatics, along with a reduction in Iranian exports following the country's decision to feed reformate straight to gasoline production tightened Asian PX supply at a time when PTA and polyester plants were running flat out.

Meanwhile, Chinese PX plants were running at reduced rates of 70-80% in August and September, forcing some buyers to seek imports, thereby pushing spot prices higher.

"People were caught off guard by the prices and demand seen in October. All of a sudden there was a newsflash that cotton was too expensive and that substitution demand for polyester would increase; everyone has been rushing to buy," explained de Guzman.

He added that polyester was completely driven by cotton with buyers deciding between paying $1,900/tonne for polyester or $3,000/tonne CFR China for cotton.

Pic source: www.diytrade.com

With cotton still running high there should, on paper, be room for further price hikes along the polyester chain. However, market players said the outlook was hazy.

The tightness in PX supply was expected to ease by the end of this year, knocking off an important support to spot prices.

"The original expectation was that cotton prices would fall in Q4 and drag down PX and PTA prices; so PTA producers delayed turnarounds to this quarter which would result in lower demand for PX," pointed out de Guzman.

The shutdowns at PTA plants would tighten supply of the material, while demand was expected to spike as nearly 1.2m tonnes/year of new polyester capacity came on stream in China during August-September. By the end of the year, China's total polyester capacity was projected to grow 8% to 28m tonnes/year.

But de Guzman did not see room for much improvement in the polyester market as producers continued to ramp up production to maximize profits.

"The issue is that margins are so huge that producers are running above nameplate capacity; stocks are building up and after a while producers will start competing by either cutting prices or cutting operating rates."

He also pointed out that polyester buyers were resisting paying higher prices.

Further downstream, Chinese textile factories were also reluctant to accept spikes in costs of cotton and polyester.

Transaction volumes at the China Textile City had dropped to 5.3-5.5m meters/day last week, down from 6.5-6.7m meters/day in mid-October.

They have slowed down purchasing because price increases of end-products cannot catch up with the jumps in raw material costs, said a Chinese polyester maker.

With resistance creeping in there is a real danger of an early end to the recent PX/PTA price rally.

By John Richardson

A GREAT deal more polyolefins supply is expected to hit the Asian markets over the next few months resulting in what two chemicals analysts tell the blog will be depressed margins up until March next year.

After that the analysts - one in Singapore and the other in South Korea - predict that we will begin to climb towards the sunny uplands of the supercycle, justifying the already very-high share prices of petrochemical companies, especially those in South Korea.

By the way, the blog is in Seoul at the moment and we will be talking a great deal more about the South Korean industry over the next week or so.

Returning to the supply issue, we were told a couple of weeks ago that the giant 800,000 tonne/year Borouge polypropylene (PP) plant at Ruwais in Abu Dhabi had achieved commercial production. This was confirmed to ICIS news by a source close to the project late last week.

Source of picture: marketoracle.co.uk

Qatar Chemicals (Q-Chem) was reported to be in the process of starting up its 350,000 tonne/year high-density polyethylene (HDPE) plant at Mesaieed in Qatar two weeks ago - with a big new linear low-density (LLDPE) facility in Asia also said to have recently achieved commercial runs.

Bangkok Polyethylene has started test runs of its delayed 250,000 tonne/year HDPE facility at Mab Ta Phut in Thailand, again according to ICIS news

Several PE plants have come back from turnaround or are about to do so, including Titan Chemicals in Malaysia and SK Energy in South Korea.

But we have been here before, of course, many times over the last 18 months.

Who can really guarantee, given the plethora of technical problems that have plagued recent start-ups, that further problems will not be encountered?

As for demand, well, that depends on reliable economic forecasts and as a chief executive officer interviewed by the blog caustically remarked yesterday "the more economists are wrong the more their views are in demand - so it perhaps helps them that they keep getting it wrong."

By Malini Hariharan

Conventional wisdom suggests that it is best to build a plant where the market is. But can ready availability of material develop markets.

Take the case of India. In an interesting presentation at India Chem last week, Mathew George of Indian Oil Corp (IOC), pointed that each of the top five polymer consuming states in the country (Maharashtra, Gujarat, Daman, Uttar Pradesh and West Bengal) had a polymer plant.

Source: IOC

The western region of India with its strong industrial base has always been a magnet for the plastics processing industry. But the rise of Uttar Pradesh and West Bengal has been purely supply driven. Gail (India) started a gas cracker and polyethylene plants at Auraiya, Uttar Pradesh in the 1990s while Haldia Petrochemicals commissioned its naphtha cracker complex at West Bengal in 2000.

George also identified ten distinct processing clusters in the country with activity concentrated in areas that offer the best tax incentives.

Source: IOC

The analysis has interesting implications for IOC which has just commissioned its cracker complex at Panipat in Haryana state in northern India, which currently accounts for only 2% of India's polymer consumption.

The Haryana state government has been talking of developing a polymer processing cluster but progress has been slow. Until this happens IOC will have to rely on neighbouring states some of which are seeing increased investment activity.

There is also Pakistan next door and IOC has already moved around 1000 tonnes by rail. The Lahore market has the potential to absorb even larger volumes but logistics bottlenecks and politics will have to be overcome.

We are deeply ashamed of ourselves....

By John Richardson

AT the risk of boring you completely senseless let us once again return to the subject of liquefied petroleum gas (LPG) and its likely usefulness as a cracker feedstock over the coming years.

The reason why we keep going on and on about this subject is because an extra bit of raw material flexibility could make all the difference for the marginal producers in Asia, such as those in Japan.

Even assuming you subscribe to the sunny uplands theory, if you are far to the right of the cost curve it cannot do any harm at all to look at ways of improving your returns.

Our other big motive for being a little obsessed with LPG is that as gas feedstock is short in the Middle East.

This is helping support the argument for tight supply in 2012-2013, resulting in Asian cracker operators with no current feedstock advantage searching for ways to justify ramping up their capacities.

We know of one cracker project in China which could be 80% dependent on Middle East LPG imports with the remaining 20% comprising naphtha sourced from local refineries.

And putting two and two together and maybe making five, Qatar Petroleum took a stake in Petrochemical Corp of Singapore (PCS) last November and there are plans to build an LPG receiving terminal on Jurong Island.

Qatar is where most of the LPG surplus is supposed to come from and Singapore wants to eventualy raise its ethylene capacity from 4m tonne/year to 6-8m tonne/year. QED a grassroots cracker based on LPG?

LPG markets have been unexpectedly tight this year for a variety of reasons - but as we blogged about on Monday, oil and gas consultancy FACTS Global Energy thinks this will change from 2011 as the great supply flood finally arrives.

But a South Korean industry source we spoke to earlier this week vehemently rejected any notion that LPG would be so oversupplied that it would be a good feedstock choice for green field crackers

"If you look at history the maximum LPG cracking season in any one year has been eight months and this year it's made good sense for about 8-10 days because of all the unexpected demand and supply issues," he said.

"I am convinced that this is not going to change. Supply is going to increase in a big way, sure, but it is going to be easily eaten up by incremental demand from countries such as Indonesia, India and Vietnam."

This is where a little bit of knowledge might be dangerous. What the blog wasn't aware of is the drive to use LPG rather than kerosene and wood for domestic fuel in all the above countries for health reasons.

In Indonesia, the motive behind switching from kerosene to LPG is also to end black-market profiteering from the illegal resale of kerosene. In theory, you could do the same with LPG but this would require a lot more investment in storage and distribution.

"A problem with LPG is you get slightly less propylene and fewer C4s and pygas (propylene and C4s are in tight supply) and so this also weakens the case for it as a cracker feed," our source continued.

Apologies are in order here. We had been told by other contacts that LPG cracking can produce MORE propylene. The blog has donned a dunce's hat and is sitting in the corner in shame.

"LPG will remain a useful alternative feedstock at certain times of the year, but with all the uncertainties over surpluses, why invest in even more flexibility?" our source added.

"In South Korea, Taiwan and Japan, for example, there is the capability of producing around 500,000 tonne/year of ethylene via LPG which hasn't made economic sense in 2010. Why spend money to raise this number any higher?"

By John Richardson

SOUTH Korea is set to raise its ethylene and propylene capacities by 700,000 tonne/year and 740,000 tonne/year by 2013, Seo Kyung Sun, executive director of the consulting business of Seoul-based Chemical Market Research Inc (CMRI) told the blog last week.

Downstream expansions in polyethylene (PE), polypropylene (PP) and ethylene vinyl acetate (EVA) are also due to take place.

This is further evidence of the optimism - driven by the supercycle theory - which is sweeping through the petrochemicals industry.

The blog visited Seoul last week and came across widespread support for the Morgan Stanley view that market conditions will tighten in 2012-14, leading to historically strong profitability.

Not so long ago South Korea was picked out by consultants as one of the countries which would have to further consolidate, rather than expand, in the face of a flood of new lower-cost Middle East capacity.

But that capacity has been drip-fed into markets, due to all the production and feedstock issues we have documented many times on this blog before, as demand growth has also exceeded all expectations.

South Korean companies - as we will detail later this week - are cash-rich thanks to excellent 2009 and 2010 financial results and soaring share prices, and so funding these expansions will be not be a problem.

Source of picture: noonablog.com

And we understand that in addition to the already-announced projects we are going to detail below, several more expansions - postponed as a result of the 2008 global economic crisis - are being re-evaluated.

We have also been told that one of the South Korean companies we met with last week is considering an investment in a cracker project in China with a Middle East partner that would supply imported liquefied petroleum gas (LPG) feedstock.

South Korea's current ethylene nameplate capacity stands at 7.6m tonne/year with Yeochun Naphtha Cracker Centre (YNCC) the country's biggest cracker player, added CMRI's Kyung Sun.

"YNCC, a joint venture between Daelim and Hanwha Chemicals, has expanded ethylene capacity by 50,000 tonne/year this year and will add a further 300,000 tonne/year in 2012. All the additional ethylene will be for export," she said.

Honam Petrochemical is scheduled to raise its ethylene capacity by 250,000 tonne/year in 2012 while also increasing high-density PE (HDPE) by 250,000 tonne/year, she continued.

And next year will see LG Chem expand ethylene by 100,000 tonne/year. No details were immediately available as to what these extra C2s would be use for.

The country's current propylene capacity is 5.7m tonne/year with expansions set to come via steam cracking (410,000 tonne/year) and fluid catalytic cracking (330,000 tonne/year), said Kyung Sun.

Honam will use its additional propylene output to add to 200,000 tonne/year of PP, she added.

SK Energy is set to increase its linear low-density PE (LLDPE) capacity by 20,000 tonne/year with Hanwha planning a 40,000 tonne/year EVA expansion.

Let us hope, as we've said before, that all this confidence doesn't end in tears.

Please stop taking the Mickey..

Source of picture: China Daily

By John Richardson

ECONOMIC bubbles have been given their name for a good reason: They behave exactly the same as the soap bubbles that were prevalent at Hong Kong's Disneyland, where I paid with my three-year-old son yesterday.

So when the momentum of rising equity and commodity prices - mainly driven by what's happening in emerging markets - slows down the surface tension of economic bubbles eventually increases and they go pop.

It doesn't have to be one major event that causes such events and so it won't necessarily be another Lehman Bros-scale trigger that will cause equities and commodity prices, including chemicals, to retreat. It could instead be a loss of confidence that causes the momentum of bubble inflation to slow down, leading to investors exiting as they cash-in on their profits.

"During bull runs, like the one we are experiencing right now, the longer a rally lasts the more investors start becoming deluded that this time it will be different, that this time the boom will last forever," a former investment banker, who is based in Hong Kong, told the blog late last week.

"I know of several hedge funds which have strategies in place to take advantage of the end of the current run."

Ironically, it might be Asian investors who have made a fortune from the boom who pour money into hedge funds based in this region that are ready to short markets in a big way.

"Chinese investors are emerging as new a source of capital for (hedge fund) managers in Asia as fundraising from international institutions has become tougher after the financial crisis," writes Bloomberg in this article.

In the same article, the news service reported that hedge fund JT Greater China Long/Short Fund was launched in Hong Kong last week by a former senior adviser to China's state pension fund and the ex-head of Morgan Stanley's prime brokerage.

The blog remains convinced that the long-term trajectory for chemicals demand is very positive. Emerging markets have surpassed a tipping point, meaning that levels of consumption will over the next few decades compensate for any long-lasting problems in the West.

But this doesn't meant to say that the road ahead won't be rocky and littered with fragmented and slippery bubbles, in what indeed is an ugly sentence with an appalling mix of clichés.

John Authers, in his excellent The Long View in last weekend's edition of the Financial Times, makes the point that the rallies in equities and commodities since Lehman Bros can be exactly correlated with the availability of lots of cheap money.

And the latest round of Fed quantitative easing has resulted in more cheap money and the expectation that interest rates will remain depressed for a long time.

This in turn, of course, has led to the flood of money into emerging markets in search of higher returns, creating the danger of currency wars and inflationary pressures that hedge funds are likely to attempt to take advantage of.

"For investors, there is money in bubbles, so it is best to go with the herd and buy anything that would benefit - gold, oil and emerging markets could also rise much more before the bubbles burst - and make sure to get out in time," writes Authers.

For chemicals markets the dangers are that real demand pictures get distorted as buyers hedge against the anticipation of higher oil prices by building stocks (sounds familiar?).

And as the great scramble to guard against feedstock inflation gathers momentum, those who trade in chemicals might well be tempted to come out with outlandish and silly stories to justify why "real demand" is strong - i.e. to promote a bit more panic among the buyers.

We will detail suspected examples of these silly stories over next week or so.

Chemicals producers preparing budget plans for next year need to be prepared.

By John Richardson

THE potential returns from LG Chem's electric battery and electronic materials are tremendous and are leading to some bullish forecasts from analysts as to future earnings.

What will be interesting, though, is what will be the main driver of profitability for the South Korean major over the next few years - its newer businesses or good old-fashioned petrochemicals.

LG is now the biggest polyvinyl chloride (PVC) and acrylonitrile butadiene (ABS) player in China, and is set to raise its ABS capacity at its Ningbo site in China by 100,000 tonne/year.

"China has closed down a lot of its less efficient carbide-based PVC plants during a period when demand growth has remained exceptionally strong," an industry source told the blog today.

"The closures had been on the cards for a long time, but were delayed by at first vested local interests and then the economic crisis. But now they have happened, and with the economics of the carbide process always questionable, the ethylene-based producers have a big opportunity."

Adding further petrochemicals capacity might seem more of a sure-fire bet - especially given all the talk of a supercycle - compared to the constantly shifting world of electric batteries and IT-related materials.

And so it will be interesting to see how the company, which won our Top 100 award for 2009, will develop over the next few years. (The blog met with Peter Ban-suk Kim, LG Chem CEO and vice-chairman, last week to present the award).

Analysts at South Korean-based Shinhan Investment Corp take a positive view of the companies' prospects in all its business areas.

In an investment note released late last week, Shinhan wrote:  "LG Chem's operating profit is forecast to increase 6.5% YoY to W2.9548tr for 2011. The petrochemical division will continue to expand on favourable market conditions.

The information and electronic material business, which turned sluggish in 2H10, will regain momentum in 2011.

The IT industry is showing signs of bottoming out in 4Q10 and smart phone market growth will boost the demand for LG Chems' small-size rechargeable batteries.

High expectations for mid- and large-size rechargeable batteries LGChem is strengthening its position in the EV (electrical vehicle) battery market after a battery supply deal with Renault. Its guidance for 2015 sales of rechargeable batteries has been revised up from W2tr to upwards of W3tr.

The company is also making a push into the energy storage system (ESS) market by winning contracts from the U.S. utility industry. Rechargeable battery earnings growth will likely outpace the market's expectations.

Commercialization of LCD glass plates LG Chem's LCD glass circuit board business will soon begin to make earnings contributions. The company's No. 1 glass circuit plant is scheduled for completion in 2H11 and will begin commercial production within the year. LCD glass circuits will contribute more to earnings than mid- and large-sized rechargeable batteries.

LG Display, a captive customer, is expected to purchase W4tr worth of glass circuits in 2010. If 70% of

LG Display's glass circuit demand is supplied by LG Chem, similar to its polarizing film supply to LG Display, it alone generates W3tr in sales and W1.2tr in operating income with an operating profit margin of 40%."

By Malini Hariharan

Speculative fever has struck the Chinese purified terephthalic acid (PTA) market with domestic prices soaring by 26% in just one week.

PTA futures trading on the Zhejiang Commodity Exchange (ZCE) was suspended for the whole day Tuesday, after values soared by more than 10% in just three days, writes my colleague Becky Zhang on ICIS news.

Regional PTA values followed the lead of China prices, climbing to a record high of $1,280-1,320/tonne CFR China Main Port.

Pic source: Forbes

The rapid rise has resulted in concerns of a sharp price correction and one Chinese producer conceded that the price spike was "irrationally strong".

"One must take the cautious road once demand from end-markets winds down as a resistance to hefty prices," said Kuang Bo, analyst at Yangan Future Broker.

"Waning demand would build up inventory and finally bring down prices and margins of the whole industry," she said.

But PTA is only following the trend seen in polyester and cotton markets. Polyester spot prices in China also shot up 40% in the last week.

As for cotton, it continues to set new records.

The March-delivery contract hit $1.5195/lb on the ICE Futures after the US government cut its estimate on global production and inventories and cited a shortage in China, the world's biggest buyer and consumer.

The China Cotton Index (CC Index 328), a major gauge of cotton prices in China, rose to 28,891 yuan ($4,332) per ton on Monday, up by about 100% from last year.

And a price correction in polyester or PTA would be unlikely if cotton continues to rule firm.

Source of picture: tycoonreport.com

By John Richardson

This is a very dangerous time for petrochemicals producers as they attempt to separate real, sustainable demand from feedstock-cost related price rises and speculation.

A bubble - as we discussed yesterday - seems to have formed in purified terephthalic (PTA) and, according to ICIS news, in caprolactam.

The surge in cotton prices is a factor behind the price rallies in both these production.

You need to ask yourself: To what the extent is the rise in the price of cotton driven by fundamentals versus speculation on the cotton futures markets, and so what's the risk of a collapse?

PTA also has its own future market in China - the Zhejiang Commodity Exchange, where, as we have also reported, trading was suspended this Tuesday because prices rose beyond their daily limit.

And as we also blogged about earlier this week, another inventory-related crisis could hit the chemicals industry if oil prices retreat - along with other commodities and equities - if there is a sudden change in the overall macroeconomic mood.

A few extra servings of scepticism about what chemicals and polymers traders are saying about demand and supply are therefore necessary in order to prevent inventory overbuilding. And my, as we shall detail later on, there are some nonsense stories out there.

This is the fourth quarter when chemicals and polymer demand in Asia usually slows down, and yet price rises in the polyethylene (PE) market continue, as my colleagues on ICIS pricing have been reporting. Click here for a slide illustrating this point:

ChinaImportPEPrices12November.ppt

Last Friday's price increases seem to have been mainly driven by crude and what was happening on the all-important Dalian Commodity Exchange. This points to the very-strong likelihood that recent price rises have been mainly feedstock-cost and sentiment driven.

And yet, in conversations with traders this week the blog has heard a couple of curious stories to support the notion that the rallies are about real supply and demand.

For instance, one Hong Kong-based trader told of us of further production cutbacks in the Middle East as a result of more reductions in feedstock supply to crackers that are dependent on associated gas.

He justified this by claiming that OPEC has further reduced Saudi Arabia's oil quota on weaker global crude demand.

But as we will post next week, the reverse is likely to soon be the case as global oil demand is on the up (there is still a strong argument, though, that the more-bullish forecasts on crude demand do not entirely justify the recent spikes in crude. These appear to have been mainly driven by QE2 and, as a result, what's happening with the US dollar).

The same trader cited further outages in the Middle East, whereas other sources tell us of no major new production problems - and of output being ramped-up at the recently commissioned Borouge complex in Abu Dhabi. There is also more output from Thailand following the recent start-up of linear-low density PE (LLDPE) plant.

(Also watch out next week for a post on how financial analysts may have got ahead of themselves in predicting market-tightening from next year. There is a strong argument to be made that as rising production in the Middle East will make 2011 a more difficult year as extra output is absorbed).

Now let us look about what is being said about demand in the fourth quarter in China.

As my colleague Nigel Davis wrote earlier this week in an ICIS news Insight article, linear LLDPE and low-density PE (LDPE) are benefiting from this being an agricultural film-buying season.

I was highly amused a couple of weeks when a trader told me of how exceptionally cold weather in China had already added a further boost to agricultural film demand as farmers sought to better-protect their crops.

At that time, though, it was the expectation of very cold weather that had driven-up all sorts of commodity prices, including steel - indicating yet again the speculative influences on PE.

Since that time there have been a few days of very cold weather, but now forecasters are expecting milder-than-expected conditions across the south and east of the country. This has led to a slight retreat in oil futures pricing.

The key thing to remember here - as we said before - is that this the fourth quarter when demand traditionally slows down in Asia.

In China we are also well-beyond the peak manufacturing season for finished goods for Christmas.

There are claims out there that PE end-users in China are already ramping-up production of packaging material ahead of next year's Chinese New Year (CNY).

But as CNY 2011 doesn't fall until 3 February this seems exceptionally early to the blog - and any increase in packaging-related demand will not be enough to compensate for the end of the manufacturing season.

Further, it will be interesting to see if overall industrial production in China dips in Q4 as the government continues to strive to meet its 2011 emissions targets.

There are reports that electricity-supply reductions that have already taken place - aimed at achieving the emissions target - have led to a shortage in diesel fuel due to industrial users switching to diesel-powered generators.

This could exert further margin pressure on converters who might be already struggling to cope with higher resin prices.

A question the blog will attempt to explore is to what extent the converters have been able to pass-on these recent resin price increases. This might give us a firmer indication about the real state of demand.

                                    Dubai crucial for Iran

By Malini Hariharan

The blog recently had an opportunity to talk to a few Iranian companies and was impressed by their sanguine approach to the challenges posed by the new round of sanctions.

This too shall pass was the prevailing philosophy.

"We have a long experience [in dealing with sanctions]; we feel the pinch immediately after the announcement but slowly adjust and find new ways to do business," said an Iranian source.

Dubai continues to be the main conduit for exports but in some cases secondary companies have been set up at other locations to mask the trail to Iran.

A second source believed the sanctions were merely a test and was confident that nothing can stop them from exporting product.

They often do not get the best price in the market but no one was complaining about this.

The figures do suggest that Iran has been successfully placing product.

The Tehran Times reported that exports were up 50% (in value) during the first seven months of the Iranian calendar year ended 22 October, with polyethylene (PE) and methanol being the major exports.

The managing director of Iran's Petrochemical Commercial Co (PCC) said the country had defined new target markets such as Africa and South America. He also noted that "the final stages of negotiations between Iran and Egypt were ongoing "for exporting  poylpropylene (PP), urea, fertilizer, methanol and paraxylene".

But China will remain a key market. Iran exported around 350,000 tonnes of High Density polyethylene (HDPE) to China during January-September, up 33% from last year, reports my colleague Bee Lin on ICIS news.

Linear-low Density PE (LLDPE) exports were up 15% at 50,000 tonnes while Low Density PE (LDPE) exports tripled to 187,819 tonnes.

The volumes are set to rise even further as PCC Shanghai, a wholly-owned subsidiary of PCC, has obtained a licence to sell PE and PP in yuan in the Chinese domestic market.

It has also applied for a license to sell liquid petrochemicals in yuan.

The only worry that was evident in some quarters was the move by newly privatised companies to enter their market on their own. Previously PCC was the sole exporter of Iranian product.

"They don't have much experience and sometimes undercut other sellers by as much as $100-150; they don't realise that they are running the risk of starting anti-dumping investigations," complained a third source.

The private companies are no doubt been eager to test their wings. But with the going getting more difficult and ingenious ways needed to do business they could eventually return to PCC.

Shell's refinery and petchems complex in Deer Park, Texas

Source of picture http://www.msnbc.msn.com/

By John Richardson

THE excellent third-quarter financial results of the likes of Dow Chemical and LyondellBasell further confirm the extraordinary turnaround in the cost positions of those with a big proportion of their global polyolefins production based in the US.

Some more pain might be ahead for these now advantaged feed producers (if such a phrase had been used by anyone in connection with the US three years ago they would have been advised to seek the help of a psychiatrist) as higher production from new plants in the Middle East is absorbed. We will detail this risk in a post later this week.

But producers can at least look back on a year that has confounded probably even the most optimistic of expectations.

A recently released chemicals research report by the privately held financial institution, the Susquehanna Financial Group (SIG), details just how good 2010 has been in terms of margins.

"We have a more positive view on the ethylene cycle for US producers due to what is turning out to be a longer lasting and greater cost advantage for US ethylene production from ethane feedstock," write the authors of the report.

"With this cost advantage it now appears that the long anticipated 2011-12 downturn due to new ethylene capacity in the Middle East and Asia will be almost a non-event for US ethane-based ethylene producers.

We project that contract cash margins for US Gulf ethylene production from ethane feedstock will trough at $0.15/lb.in 2011 versus our previous expectation of $0.10/lb.

This represents a mid to early peak cycle margin by historical standards - US ethylene margins for all feedstocks troughed at $0.08/lb in 2001-02 and peaked at $0.18/lb in 2006. "

And as we said we will discuss later on this week, SIG see some tougher times ahead as the supply-driven downturn - delayed by all the start-up problems in the Middle East and a reduction of associated gas supply - has yet to fully happen.

"The downturn will be more severe for other feedstocks and regions (other than the US)," the report continues.

"Margins for naphtha-based ethylene production in the US, as well as Asia and Europe, should reach trough levels in 2011-12 before a broad-based upturn starts in 2013 as demand growth absorbs the new capacity.

"US producers should see higher operating rates due to continued export competitiveness. We project US operating rates above 90% in 2011-12 versus low-to-mid 80s globally."

Who on earth would want to exit US ethane-based petrochemicals capacity given such an outlook?

By Malini Hariharan

India's Reliance Industries is evaluating investments in a number of chemicals including olefins and derivatives, acetyls, elastomers and fibre intermediates to increase its petrochemicals production from crude, a senior company executive has told the blog.

"We would like to maximise petrochemical production from our refineries, swing product slate from fuel to petrochemicals and eliminate low value products such as petcoke and fuel oil," said Partha Maitra, president of petroleum business at Reliance at the Indian Petrochem-2010 conference in Mumbai.

Maitra said the new petrochemical investments would result in deeper integration with refinery operations and reduce fuel exports from Jamnagar on the west coast of India - where the company operates two huge refineries with a combined capacity of 1.23m bbl/day - by about 8%.

Currently about 12% of crude is converted to petrochemicals and this percentage would increase to 21.3%, he added.

Reliance was studying opportunities along the entire carbon chain, he said.

This includes an acetyl complex of 790,000 tonnes/year of acetic acid and 150,000 tonnes/year of acetic anhydride based on carbon monoxide from syngas via petcoke gasification.

Acetic acid derivatives such as vinyl acetate monomer (VAM), vinly acetate ethylene (VAE), polyvinyl alcohol (PVA), ethyl vinyl acetate (EVA) and acetate esters are being studied.

"We are still deciding which derivative [to produce]," added Maitra.

Also on the cards is Reliance's fifth cracker in India with a capacity of 1.365m tonnes/year based on refinery offgases.

The cracker will also yield 150,000 tonnes/year of propylene and 90,000 tonnes/year of C4s.

Derivatives being planned downstream of the cracker include 730,000 tonnes/year of monoethylene glycol (MEG), 500,000 tonnes/year of linear-low density polyethylene (LLDPE) and 400,000 tonnes/year of low-density polyethylene (LDPE).

In the aromatics business, the company is considering production of 1.5m tonnes/year paraxylene (PX) and 300,000 tonnes/year of benzene.

"This would be the largest single train PX facility in the world," said Maitra.

The PX will be used captively to feed two new purified terephthalic acid (PTA) units; the PTA will be used for new investments in polyester filament yarn (PFY and polyethylene terephthalate (PET).

As part of a new elastomers complex, Reliance has also identified investments in 100,000 tonnes/year of butyl rubber, 40,000 tonnes/year of poly butadiene rubber (BR) and 75,000 tonnes/year of styrene butadiene rubber (SBR).

Earlier this year, Reliance signed a joint-venture with Russia's Sibur for a butyl rubber plant at Jamnagar.

Also on the cards is a new linear alkyl benzene (LAB) plant with a capacity of 250,000 tonnes/year and a 800,000 tonnes/year carbon black unit.

"This would be the world's largest carbon black plant," he added.

Maitra did not disclose timelines for the various projects but we reported earlier this year that the cracker complex is due onstream in 2914.

Work has started on the PTA and polyester projects which are scheduled to be completed during 2013.

By John Richardson

THE wheels have started to come off the wagon - as we have been warning about over the past week or so - as a result of a broad sell-off in equities and commodities.

Inflation concerns in China and elsewhere, the result of all the hot money flowing into emerging markets due to QE2, dominate as investors seek to minimise risk.

And maybe the new Asian hedge funds we talked about early last week are now ready to swing into action, shorting all sorts of markets and accelerating the downward declines.

We can just about guarantee that we will also see sharp retreats in petrochemical pricing - exposing as flawed some of the reports that recent rallies have been justified by strong demand.

As regular readers know, we keep our closest eye on polyethylene (PE) pricing - now in the case of linear low-density (LLDPE) just another financial instrument in China.

And sure enough as the Shanghai Composite Index suffered a 1.9% decline on Wednesday to follow its 9% fall in Monday and Tuesday, the Dalian Commodity Exchange slipped again.

The most widely traded LLDPE contract on the Dalian at the moment - the one which closes in May next year - fell by a further 615 Yuan on Wednesday following a 440 Yuan fall on Tuesday.

Discussions with major PE and monoethylene glycol (MEG) producers earlier this week revealed that these two companies were expecting and were prepared for price declines.

They were able to see through some of the more dubious claims about the reasons for recent market rallies. Let us hope that they are not alone.

"We have studied the behaviour of the polyethylene (PE) market in China for the past ten years," said the first of the companies we interviewed, who was referring to reports we have received that this a peak demand season in China.

"Business has slowed down from mid-November onwards until January over the last decade.

"True, this is an agricultural film season that will provide some support for low-density PE (LDPE) and LLDPE demand.

"But I don't hold with the argument that there is already strong demand in China for packaging material ahead of the Chinese New Year (CNY). CNY isn't that big a deal anyway for PE." (He was again referring to comments made by traders to the blog).

"This is definitely a quiet season overall as everyone is trying to minimise the stocks on their books for tax and financial reporting reasons. We are well past the peak manufacturing season in China for making finished goods to be exported to the West in time for Christmas.

"What we think is instead happening is that there is a lot of trader talk to justify higher prices.

"The traders are moving PE to China to take advantage of the potential for a stronger Yuan as the dollar weakens on quantitative easing.

"Traders sell material in China to obtain Yuan that they then place into a deposit account - carrying interest rates of 2.5% which is much higher than you get in many other places - and wait for the local currency to strengthen.

"And so we believe that the demand we are seeing is not driven by fundamentals, but it is instead about speculation and we are worried about inventory levels.

."We are concerned about a sudden correction in commodities in general as all the clever investors profit-take and get out."

The source with the MEG producer told us that his company was also worried about recent price hikes.

"Three months ago inventory levels in China were at an all-time high at a near maximum level of 600,000 tonnes," he said.

"They have come down a bit recently to around 500,000 tonnes, but prices still rose late last week in line with equities and in response to what was happening in crude - and also on the purified terephthalic acid (PTA) and cotton futures exchanges.

"There are supply reasons why MEG has been so strong this year - i.e. the great supply surge hasn't happened this year because of problems with running new plants.

"But we still do not understand why prices went up last week given these still-high inventory levels."

As for what this will all mean for demand growth in China next year, perhaps the most telling and worrying comment in all the recent news reports came from Arthur Kroeber of Beijing-based economic research company, Dragonomics.

"The (Chinese) government's top priority has now switched from guaranteeing growth to controlling rising prices," he was quoted as saying in yesterday's Financial Times.

Are we moving from huge stimulus to de-stimulus and what will this mean for the chemicals industry?

Perhaps not just yet....

By John Richardson

COULD it be that some chemicals industry players and observers, in the great galloping rush to join the supercycle stampede, have got ahead of themselves in predicting that we are already through the bottom of the margins trough?

This distinct possibility was raised by Joe Duffy, consultant with DeWitt & Co, in a discussion with the blog.

"I always get nervous when people talk about 'floods' and 'tsunamis' of new supply. What matters is not the absolute volume as much as whether or not it exceeds expectations," he told us.

"At the start of this year people were extremely pessimistic and maybe going into next year they are a little too optimistic," added Duffy, who is the petrochemical consultancy's vice-president for ethylene, polymers and derivatives for Europe and the Middle East.

"The market can turn the wrong way if supply exceeds expectations by as little as one tonne.

"I am a bit concerned that the growing supercycle consensus is confusing the short and the long-term.

"You can make a case that based on announced capacity that things will tighten a lot in 2014-2015 - and perhaps as early as 2013 if people buy ahead.

"But we at DeWitt still think that next year will be a year of absorption as the plants in the Middle East that are already on-stream run better."

The YanSab and Sharq complexes in Saudi Arabia have yet to maximise production and the recently commissioned giant Borouge complex in Abu Dhabi will take around 18 months to be fully stabilised, several industry sources have told us.

Production downstream of the new Ras Laffan Olefins Co facility in Abu Dhabi is nowhere close to being maximised.

Plus one would have thought the myriad technical problems confronting the PetroRabigh plant in Saudi Arabia will eventually be rectified.

Another factor pointing to further year of absorption is more bullish forecasts about global oil demand for 2011, including one issued by OPEC recently.

"We are assuming that oil demand will be slightly better next year and so there will be more associated gas available for the older, more established crackers," said Duffy.

He explained that older and newer complexes have seen their feedstock allocations reduced to only being sufficient to supply their original design capacities.

An excess of optimism might lead to some major disappointments next year as financial performances and earnings per share fail to live up to expectations.

This could be the case even if the bubbles in commodity prices, driven by too-much easy money, haven't inflicted long-lasting damage now that the air has started to escape.

By John Richardson

AS the blog had anticipated would happen, there were sharp retreats in some chemicals and polymers pricing late last week on the steep declines in equity and crude prices.

Polyethylene (PE) fell by $70-130/tonne, according to our colleagues at ICIS pricing, as the Dalian Commodity Exchange once again demonstrated that it has become a major influence.

Many industry sources now tell us that PE in general (the Dalian has an influence across several different grades) has almost become a financial instrument; in other words, its day-by-day and week-by-week price in China moves in line with the Dalian as the Dalian moves in line with crude oil and equities.

Therefore, you could draw a neat line between last week's dip in PE pricing and the retreats in crude and equities as investors took flight.

Towards the end of the week equities and oil regained ground as confidence reportedly grew that Beijing's measures to tackle rising consumer-price inflation would have a limited impact on the broad economy.

The recoveries were also said to be the result of greater confidence that a rescue package would be successfully agreed for Irish banks.

In parallel, Dalian saw four consecutive days where the futures contract fell beyond the maximum allowed in one day's trading, forcing trading to be suspended, before a recovery on Thursday.

Source of picture: Inoldlasvegas.com

Polypropylene (PP), too, retreated on the influence of Dalian but by a more modest $10-20/tonne as traders seemed to be in a comfortable position to try and ride out the negative sentiment.

Propylene was more steeply down, by $20-70/tonne, as it reacted to the dip in crude futures.

But there seem to be factors specific to the C2s markets sufficient to override the overall sentiment which kept ethylene stable.

Click here for these numbers in graph form -

ICISprices19Nov.ppt

This reaffirms our view that this market has become very hard to read because of more extreme shifts in spot cargo availability.

Benzene, perhaps the mother of all chemicals, was down $15-50/tonne but interestingly, paraxylene (PX) staged a rally later in the week as market participants had time to react to the recovery in equities and crude.

One of the big macro questions is whether China will, indeed, get it right by taking targeted measures that are sufficient to bring inflation under control.

This article from the Wall Street Journal suggests, rather worryingly, that China is now running out of ammunition to fight the hot money flowing into its economy - which at risk of continuing as long as quantitative easing lasts.

Every mood swing in equity and commodity markets is bound to find a reflection in chemicals and polymer markets over the coming weeks as the prospects for next year seem exceptionally uncertain.

By Malini Hariharan

If sourcing PTA has been challenging this year, the bad news is that the situation is unlikely to improve for the next couple of years.

Rapid polyester capacity expansion, especially in China and India, is already outpacing growth in PTA capacities and the situation is set to worsen.

PTA producers, on the other hand, can look forward to healthy margins.

At the Indian Petrochem conference last week, YJ Kim, managing director of PCI Xylenes & Polyesters, Malaysia, predicted: "We are seeing historical high margins this year and this will probably continue next year."

He expected a PTA margin of over $200/tonne until early 2012.

Strong demand would result in plants being run harder. Average global plant utilization rate is forecast to rise to 90% in 2011, up from 87% this year.

Kim pointed out that the average utilization rate in China is 91% this year and plants would have to run at 95% next year to meet demand.

"Industry players say this is not possible and the maximum that plants can run at is 92%. So China will need to import more, but everyone is sold out," said Kim.

Chinese PTA demand is expected to grow by 2m tonnes next year and finding these volumes could be a problem.

Indian PTA buyers too face a similar situation, especially if Mitsubishi Chemical continues to face operating issues at its second PTA unit. Average utilisation in India is only around 75% this year and plants would have to run at a 'challenging' 95% next year to meet local demand.

The situation is likely to reverse only in late 2012 or 2013 once new plants are fully operational. Over 14m tonnes of new capacity is scheduled to come onstream during 2011-2013, mostly in China.

The polyester chain has seen plenty of action this year. And it looks like the excitement will continue.

By Malini Hariharan

The polypropylene (PP) anti-dumping investigation that Indian producers had initiated against exporters from Saudi Arabia, Singapore and Oman has finally drawn to a close.

The Finance Ministry confirmed anti-dumping duties (ADD) late yesterday, just a day before a recommendation made by the Commerce Ministry in August was due to expire.

Pic source: simplifyyourmoney.com

The duties range from $28.49-323.50/tonne (lower than the provisional tariffs announced in July last year) and would be levied for 5 years.

Among the producers affected by the ADD are Singapore-based ExxonMobil Chemical Asia Pacific, Sabic Saudi Yanbu Petrochemical Company and Saudi Polyolefins Company.

For the Saudis, the duties are a major cause for concern as India's commerce ministry has ruled that the Saudi formula for pricing propane, feedstock for PP, gives 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.

The Saudis had put up a strong defense and this was probably why the Finance Ministry took such a long time to confirm the duties.

But the story is unlikely to end here, especially as the Saudis have warned that they will take the case to the WTO if ADD is levied.

By Malini Hariharan

Qatar Petroleum seems to be in no rush to sign up a foreign partner for its next cracker project. With doubts about ExxonMobil's participation, the field has narrowed to Total Petrochemicals and Shell.

Total's proposal for a mixed-feed cracker 'was still in the very early stages,' said Graeme Burnett, the company's senior vice president for Asia and the Middle East, in an interview with my colleague Anna Jagger.

"We hope to have some clarification by early next year," he said.

Burnett also disclosed that the company was looking "to develop projects [in the Middle East] that add something to a particular country's current product portfolio". For instance in Qatar Total would consider investing in products in the C3 chain such as polypropylene (PP) or even styrenics.

"I'm not saying that's in our scope right now. But those are the kind of developments we're looking at," he added.

And he confirmed that the Ras Laffan Olefins Co cracker would reach full operating rates only early next year because of "mechanical" constraints. The 1.3m tonnes/year cracker started in April and has gradually raised operating rate to 60%.

As for Asia, Total's South Korean joint venture with Samsung has started looking at a new worldscale aromatics facility. But details of the project have yet to be finalized.

By John Richardson and Malini Hariharan in Shanghai

A TWO-TIER China polyolefin market had developed in China over the last couple of years - but the $64,000 question right now is: At which of these two levels will most business be settled during December?

The ever-volatile Dalian Commodity Exchange determines the day-by-day sentiment, while overseas producers have long been very effectively managing production in an effort to set physical pricing.

They are being supported by tightness in specific grades such as butene-1-based linear-low density PE (LLDPE) and extrusion-grade low-density PE (LDPE). This tightness can be due to luck rather than just good management.

And so even as the Dalian tanked late last week on worries over more inflation-tackling measures by China's government, overseas producers were reported to be preparing to raise offers for December material. Their attitude on certain grades seemed to be "take it or leave it" because of their claims that they are holding very-limited stocks.

Will they be successful?

On the positive side of the equation are reports from our colleagues at Shanghai-based pricing and news service CBI that Sinopec is to cut polyolefin production in December by 10% (equivalent to 100,000-150,000 tonnes each of PE and polypropylene).

 Source of picture:www.willgoto.com

This decision is apparently about helping to relieve China's diesel shortage or is to do with reaching the 11th Five-Year Plan emissions cuts targets - or maybe a bit of both. Watch out for our post tomorrow when will go into this story in more detail.

Our colleagues at ICIS pricing also say that December allocations from PetroRabigh to China are  expected to be cut by 50% because of yet-more production problems at the Saudi Aramco/Sumitomo Chemical joint-venture complex.

But converters were reported by a producer to be reluctant to buy, resulting in all of his recent sales being to converters and distributors.

What is making the converters hesitant could be the rapid rise in prices since July. Up until late November PE and PP had risen by 22-29% contributing to an unexpectedly robust Q4

During the same period naphtha rose by 28% and crude by 19% - indicating that a substantial portion of the increases have been feedstock-cost driven.

Click here for a graph - PriceRisesSinceJuly.ppt 

Add to this the perennial worry about how much polyolefin consumption is the result of trader speculation on attempts to cash-in on a stronger Yuan, and we are back once again to the well-worn and somewhat tired bubble theory.

"End-users pick up their newspapers every day read about the inflation threat in China and possible further government tightening measures," said an industry source.

"The other big macro-economic threat worrying everybody is bank problems in Ireland."

Perhaps some end-users are therefore worried about a sudden collapse in crude-oil prices.

Hedge funds make up a large percentage of current open interest on the oil market, according fellow blogger Paul Hodges.

He writes that they could very quickly head for the hills if sentiment turns, driving oil to as low as $60/bbl.

Converters might well also be worried about the strength of resin demand next year as there are reports that the Chinese government plans to raise interest rates twice more before July 2011 in the battle against inflation.

The big four big state-owned banks recently announced that they have already fulfilled their 2010 quota for lending to real-estate buyers and will not making any further loans this year.

Beijing's Renmin University has warned in a report that government restrictions on the sector could lead to a 20% fall in property prices next year.

If you are converter you also know that a lot more new polyolefins supply should be just around the corner (how long have we been saying this, though, only to be proved wrong by all the production problems?).

December demand is receiving support from agricultural film buying - but history shows that this is generally an off-season.

Plus January is just around the corner - when business quietens down ahead of Chinese New Year (CNY) which falls on 2 February.

A reflection of this uncertain direction is that our colleagues at ICIS pricing left their price assessments for PE and PP in China largely unchanged last Friday.

This is reflected in, as we've said, the producer we spoke to only being able to sell to distributors and traders.

He said that price increases since July had been too rapid - and that further increases of above $50 a week would be very hard to achieve.

This suggests that the customers of the converters - the wholesalers and retailers - are also feeling very uncertain at the moment.

Their uncertainty was evident at the Canton trade fair in October, he added.
(The bi-annual trade fair is a crucial barometer of the strength of overseas demand for China's manufactured goods).

"Order periods were shorter than the previous fair in May because the wholesalers and retailers haven't got a clue where their raw-material costs are going."

Another factor might be the added volatility in the value of the Yuan versus the US dollar as a result of QE2 and macroeconomic uncertainty.

Macro-economic concerns feel as if they dominate at every level of the polyolefins business at the moment.

So we wager that producers will fail in their bid to raise December prices - and that, in fact, further reductions are on the cards over the next few weeks.

By John Richardson

A rumour emerged a few weeks ago that Sinopec would be required by the government to cut its operating rates in order to either or both help China achieve its 11th Five-Year Plan emissions targets and/or increase diesel production.

China is attempting to hit the targets under the plan before the next Five-Year Plan is announced in the spring and is well behind schedule, we have heard.

This is thought to be the result of the economic stimulus package that has greatly boosted industrial production and therefore put behind China behind.

The other theory behind the rumour was that the cutbacks were being planned in order to help China produce more diesel. Gas oil is used as feedstock for crackers in China and so we assume that this raw material would be diverted into fuel, thereby forcing rate cuts.

China is short of diesel because of the attempts to hit the emissions targets. This has caused electricity cuts resulting in factories, both big and small, to switch to their own diesel-powered generators.

Early last week or colleagues at CBI got confirmation that the production cuts would take place. As a result, they received confirmation from Sinopec that this would mean polyethylene (PE) production would fall by 100,000-150,000 tonnes in December and polypropylene (PP) by the same amount. This is equivalent to 10% operating rate cut,

Source of picture: regainyourhair.co.uk

But fathoming China is never easy: A producer told us when we were in Shanghai last week that he had heard Sinopec had only made this statement to jack-up local prices. He added that there was no need to cut rates as rolling power cuts in China, indicating that the emissions targets had already been hit. The end of the cuts would also ease the diesel shortage.

(As we said yesterday, though, we think the polyolefins market will weaken rather than strengthen during December.)

Whatever the truth about the story, the fact remains that China's push to hit its 11th Five-Year Plan emissions targets have been a significant factor in shaping polyolefin and other chemicals and polymer markets over the last few months. We will examine how the drive to reduce pollution has affected polyvinyl chloride (PVC) in a post later this week

Despite the comment from the producer, we have heard yet another story that China is still struggling to hit its emissions goals and so efforts to hit targets will continue until March next year. That is when the 12th Five-Year Plan is due to be formally approved and begin.

Confused? If you were being paranoid you could also believe that this was a conspiracy.....

By Malini Hariharan

The blog is hearing about fresh delays at ONGC Petro-Additions Ltd's (OPaL) cracker project at Dahej on the west coast of India.

Conceived a few years back, the dual-feed 1.1m cracker project, based on ethane separated from LNG and naphtha supplied by parent ONGC, has been jinxed from the start. There have been plenty of delays in issuing tenders and awarding contracts as well as a sharp rise in project cost.

The gas separation plant was completed in 2008 well ahead of the cracker.

The construction contract for the cracker was finally awarded to Linde and Samsung Engineering in December 2008 and technology for a swing linear-low density polyethylene (lldPE)/ high-density PE (hdPE) and a polypropylene plant was selected in February 2010.

Pic source: Samsung Engineering

Work on the cracker has started but construction contracts for downstream units have yet to be awarded. So the company now faces a situation where the cracker is likely to be completed at least six months ahead of the derivative units.

The company is holding on to a start-up date of Q1 2013 but sources associated with the project believe there is little chance of this deadline being met.

"There is a serious delay," said one source. A tender for the downstream units was issued recently but the earliest that this can be settled is Q2 2011, he said.

"We are approaching the Christmas holiday season; plus there are plenty of questions from potential contractions that need to be answered," he added.

He pointed out that the company has also not completed technology selection for an hdPE plant.

OPaL, which has been promoted by ONGC, Gail (India) and Gujarat State Petroleum Corp (GSPC), is one more in long list of Asian and Middle Eastern projects that are unlikely to meet start-up schedules.

And every delay increases the probability of the supercycle theory coming true.