Asian Chemical Connections

The price of coal.....

Source of picture: www.guardian.co.uk

By John Richardson

A big shake-up in China's chlor-alkali to carbide-based polyvinyl chloride (PVC) industry is underway which could have major implications for the global industry, we have been told by industry observers.

In a clear demonstration that it is better to be lucky as well as clever in this business (or if you cannot be clever at least try to be lucky), this could have a negative impact for importers.

The importers have benefited from the dire state of the local industry over the last couple of years, which, post-restructuring, might emerge as a great deal more lean and mean.

Global PVC capacity totals 40m tonnes with China accounting for around 20m tonnes of this, according to Maggie Zhu, markets analyst for chlor-alkali and PVC at Shanghai-based CBI - the research and analysis company.

"Capacity is a great deal more than demand and so operating rates are, as a result, at only 60-70%," she added.

Coal and electricity prices have been increased which has put pressure on the less competitive producers, forcing their operating rates down and thereby allowing in greater volumes of ethylene-based vinyls imports.

Rising input costs are the result of what we discussed earlier this week: The drive to hit the 11th Five-Year Plan emissions targets.

But in the case of the heavily oversupplied chor-alkali and vinyls sector higher raw-material seem to also be about forcing the pace of plants closures and mergers and acquisitions.

A lot of consolidation has already taken place: In 2007, the average size of PVC plants was 100,000-120,000 tonnes/year and now it is 200,000-300,000 tonnes/year, Maggie added.

There are plenty of smaller plants still around, though, with capacities of as little as 15,000-20,000 tonne/year.

The most vulnerable to further restructuring appear to be the eastern coastal producers which still lack sufficient scale in chlor-alkali down to carbide-based PVC (the ethylene-based coastal PVC players such as Shanghai Chlor-alkali Chemical Co are a different proposition).

Coastal chlor-alkali-to-carbide players are a long distance from coal supplies and lack common ownership with coal mining and power-generation companies.

A long distance from where coal is mined obviously adds to logistics costs, whereas lack of common ownership with the miners and the electricity producers means raw materials are not priced on a captive basis.

So you could end up with mega chlor-alkali to carbide-PVC producers out west under the ownership of these raw-material providers.

China is investing huge sums of money in improving its road and rail infrastructure - meaning logistics costs and time to markets might come down.

Importers could therefore soon have to start worrying a great deal more about their landed costs in the big eastern and southern China consumption markets versus these new mega local players.

By Malini Hariharan

Predictions about a steady recovery in petrochemical margins from financial analysts have multiplied in recent weeks and producers too have turned bullish with many expecting to sail through 2011 without any major difficulties.

But in the midst of this optimism a few cautionary voices can still be heard.

Analysts at South Korea-based Woori Investments predicted in a recent report that petrochemical margins would continue to decline in 2011 as utilization rates at new plants in Southeast Asia and the Middle East pick up gradually. This would coincide with a slowdown in Chinese import growth due to a rise in local production.

Pic source: www.egmcartech.com

"We believe that [global ethylene] supply will rise 10m tonnes over the next year, topping our global demand growth estimate of 5m tonnes over the same period," the analysts estimated. Their forecast was based on the assumption that commercial production would start at new facilities with a total capacity of 6.2m tonnes/year and higher utilization rates at plants that were expanded in 2010.

However, this should not pose much of a problem for hybrid South Korean companies such as LG Chem which should benefit from strong growth potential in the battery business.

The analysts were more bullish on the refining sector with projections of high oil prices and strong refining margins in 2011.

"We expect Asian refining margins to expand from an average $4 in 2010 to $6 in 2011, and that oil prices and refining margins will increase further if the US and European economies recover quickly," they said.

Global oil demand has risen rapidly on growing consumption in developing countries, including China. This has led to most refining facilities ramping up utilization--leaving little room for additional increases as of Oct 2010, they added.

Among the South Korean refiners, their top pick was SK Energy although S-Oil could become attractive if paraxylene (PX) prices continue to rise after the company completes a capacity expansion in Q2 2011.

"I am so happy to be supporting polyethylene film pricing"....

Source of picture: Canada-China Agriculture and Food Development Exchange

By John Richardson

IT looks as if attempts by polyolefin producers to raise prices for December deliveries have, as we predicted last week, been largely unsuccessful.

Some grades of polypropylene (PP) edged up by $10-20/tonne but polyethylene (PE) across all grades remained unchanged, according to last Friday's assessment by ICIS pricing,

What's highly curious is that while our colleagues report that the production cuts by Sinopec and rising feedstock costs had pushed up PP, the same wasn't the case in PE.

The blog will be attending the Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai this week and so shall endeavour to dig out the reason for this disparity.

The slight improvement in PP is unlikely to have done much to compensate for the sharp rise in raw-material costs.

And the latest edition of the ICIS pricing Asian PE margin report illustrates the ground that was lost last week.

Click here for pricing and margin graphs - PricingMarginGraphs6Dec2010.ppt

Integrated PE margins fell, for example, by $60/tonne on a 4.3% rise in feedstock costs and after a $55/tonne fall in stand-alone margins, these high-cost producers will be struggling to cover fixed costs.

The fourth quarter started with a roar with November volumes exceptionally strong, some producers and traders had claimed.

One spurious argument was that this was a peak demand season, driven by strong pre-Chinese New Year (CNY) sales.

But other than the usual kick to demand provided by the agricultural film season for low-density polyethylene (LDPE) and linear-low density PE (LLDPE0, we feel that markets were being talked-up to try and compensate for stronger raw-material costs.

End-users are bound to continue to feel nervous at the moment with more interest rate rises quite possibly on the cards in China very soon and reports that the property market could be weakening.

Polyolefin supply will increase as production is increased at plants that have suffered from technical problems and delayed start-ups.

Our fellow blogger, Paul Hodges, also makes the very interesting point that refineries might have more naphtha available to dispose of into petrochemicals as a result of the diesel short ages in China (part of the reason for the Sinopec production cuts) and Europe.

Refineries are running harder at the moment to tackle lack of diesel.

As a result, petrochemical producers might be tempted, or perhaps even required in order to maintain internal balances, to run harder as more naphtha is also produced.

This year was probably better than anyone even dared to expect, but almost every day it seems as if the challenges for 2011 are multiplying.

By Malini Hariharan

It is not just China where polyethylene (PE) producers face problems.

Indian producers have been struggling to place volumes as huge imports during the last couple of months have saturated the domestic market.

PE import volumes were said to have hit a record high of 104,000 tonnes in October. And my colleague Prema Viswanathan reported recently that imports during April-November were up by 10-12% to 600,000 tonnes.

And producers only have themselves to blame for the market impasse. Plant problems earlier this year tightened supply and this opportunity was used to raise local prices.

Meanwhile, unreliable domestic supply and a big gap between local and international prices prompted traders and end-users to turn to imports.

With stocks piling up, Indian producers have adopted two strategies to ease the pressure and balance markets.

Pic source: trekearth.com

Prices have been dropped in recent weeks. This has yet to result in a significant improvement in sales but the gap between local and international prices has been bridged and fresh imports blocked.

Another option being pursued was exports which in the words of a source close to one producer 'makes more sense'.

"Fundamentally, the Indian [market] condition is not bad; what's happening is temporary as long as the China market is OK ," he added.

But the health of the Chinese PE market remains uncertain given that producers have yet to push through December price hikes.

By John Richardson

The huge and long-lasting impact of the economic crisis on the US chemicals industry is detailed in the excellent Year-End Situation and Outlook report from the American Chemistry Council (ACC), which was released late last week.

Light vehicle sales and housing starts will still be below 2006 levels in 2015 - the final year in the industry advocate group's forecast period.

The number of light vehicles sold in 2006 totalled 16.5m which fell to 10.4m in 2009, the lowest point of the crisis for light vehicles.

A recovery in sales to 15.9m in 2015 is forecast by the ACC.

Source of picture: Theodore's World

Housing starts were 1.81m in 2006, falling to a low point of 560,000 in 2009 and are forecast to gradually increase to 1.51m in 2015.

The housing market - which is crucial for the US chemicals industry as each new home contains around $15,000 worth of chemistry - bottomed-out this year, according to the ACC.

But with the US and global economic recoveries in such a fragile state, with house prices back to 2003 levels, and with an estimated "shadow inventory" of 5m homes waiting to be sold, further downward corrections cannot be ruled out. This shadow inventory represents homeowners on the sidelines waiting to see if and when the market improves.

A further worry is that mortgage defaults are mainly among sub-prime borrowers in 2008, but are now primarily among borrowers with safer loans, who, the ACC says, "have become delinquent due to a job loss or other economic setback".

The unemployment rate rose in the US last week, providing further evidence that this is a jobless recovery.

Employment losses in the US chemicals industry have totalled 180,000 over the last decide with 80,000 of these losses - 40% - occurring since the crisis began in 2007, adds the ACC.

But it is not all doom and gloom: US chemicals exports were up by 16.8% this year over 2009, resulting in a $50.1bn trade deficit switching to a $3.7bn surplus. Plastic resin exports were up by 15% (we will attempt to provide you with more details later on).

The rebound in global trade and the shale-gas story are the factors behind this reversal.

Further shale-gas technology improvements and movements up the learning curve might make US ethane-based ethylene production even more advantageous.

The Marcellus and other shale-gas fields, however, lack infrastructure to deliver natural-gas liquids (NGLs) to petrochemical producers.

Public concerns over groundwater pollution from fracking could result in "ill-conceived" legislation with excessive demand growth a further risk, says the ACC.

Before companies start detailed evaluation of petrochemical investments based on increased US natural-gas reserves, the ACC predicts that further capacity closures are on the cards. This will obviously be of older, higher-cost facilities.

Overall US industry operating rates were only 74.1% in 2010, it says.

(This suggests that the return to profitability enjoyed by producers is as much about carefully matching production to demand as well as feedstock costs)

Capacity utilisation is only expected to edge-up to 79.8% in 2015, pointing to the likelihood that the industry might still be a long way from expansions.

Could it be that by the time investments are being seriously studied, the gas advantage will have significantly eroded? Or might it have even disappeared altogether?

Before you say "nonsense" how many of you predicted the shale-gas revolution and its impact on US natural-gas prices?

By Malini Hariharan

Global monoethylene glycol (MEG) markets are likely to remain robust in 2011, supported by strong demand from China and a lack of new capacity additions, a top executive from MEGlobal told the blog at the 5th Gulf Petrochemicals and Chemicals Association (GPCA) forum being held in Dubai, the United Arab Emirates (UAE).

"If the dynamics stay intact, there is nothing that we see now [to show] that 2011 will not be as good as 2010. And that is across the chain; our optimism is dependent on our customers remaining profitable," said Ramesh Ramachandran, CEO and president of MEGlobal
.
This year has been a surprise for producers of MEG, a commonly used intermediate in the production of polyester fibres that go into clothes, as a widely expected industry downturn did not materialise. Prices and margins recovered throughout the year, supported by the strength in the polyester industry - especially in China.

Global MEG demand was expected to rise by around 10% to 21m tonnes by the end of this year, driven mainly by Chinese demand, which was expected to hit 9m tonnes, up from around 7m tonnes last year.

China would eventually account for 50% of the global MEG market, said Ramachandran.
"You may debate about when this will happen, but it is only a matter of time," Ramachandran said.

Besides demand, supply-side factors also helped producers in 2010 as operating problems constrained availability.

Ramachandran stressed that while on paper global MEG capacity was in excess of demand, forecasts should not be based on this "simplistic view"
.
"Not all capacity runs all the time; our take home message from last year has been that overcapacity does not mean oversupply," he said.

He cautioned that although MEG was a commodity, one should not assume that it was easy to produce as it involves difficult technology.

Source of picture: /bjgeruite.en.made-in-china.com

There needs to be an estimate of effective capacity; in our view there is a 10% swing between nameplate capacity and effective capacity over the course of the year," he added.

With demand in key markets such as China and India running strong, Ramachandran acknowledged that MEGlobal, which currently produces 1m tonnes/year of MEG and markets another 2m tonnes/year of product, would soon need new capacities.

"We need to build; we definitely need to bring economically viable capacity as our customers are growing. We have nothing to announce now, but we are looking," he said.

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The GPCA annual forum runs on 7-9 December.

By John Richardson

THE next OPEC meeting - which takes place in Ecuador this Saturday (11 December) - is crucial for petrochemicals for two reasons.

Firstly, the crude market has turned bullish recently as a result of the early onset of winter in Europe and the growing belief that the oil-supply cushion is being reduced.

So if OPEC decides not to pump anymore oil forecasts by certain banks (here we go again, eh?) of higher crude prices next year might appear to be more likely to come true.

Goldman Sachs is predicting average prices of $100/bbl for West Texas Intermediate in 2011 and $110/bbl in 2012.

JP Morgan last week raised its forecast for 2011 Brent average prices by $3/bbl to $95/bbl.

An OPEC decision to maintain quotas - or maybe to increase quotas by an amount that doesn't satisfy markets - might prompt a surge in buying by some petrochemicals end-users.

This would be on either the anticipation of higher crude, or oil actually moving higher.

If crude does move higher we can guarantee that the Dalian Commodity Exchange's (DCE) futures contract in linear low-density PE (LLDPE) will move up on Monday. This is provided there is no off-setting further negative economic news emerging from China or anywhere else.

Depending on how the rest of next week plays out, we could then see physical prices of PE and polypropylene (PP) also firming.

This has been a pattern on many occasions this year as end-users have tried to beat higher crude in a min-repeat of 2008 with, to some extent also, the same risks.

The second reason why the OPEC decision needs to be carefully observed is that if quotas are kept where they are now, there will be no extra associated gas available to raise Middle East petrochemical operating rates.

But before polyolefin end-users (back to our comfortable stomping ground!) view this as another reason to stock-up on inventory, they might be well-advised to take into account the compensating impact of more stable production at new plants in the Middle East.

A further positive factor for the converters could be higher operating rates at naphtha crackers, resulting from the push by refiners to maximise diesel production.

By the way: Two major Middle East petrochemical producers told an industry observer - who the blog spoke to late last week - that they don't that OPEC will raise its quotas.

By John Richardson

OPEC's decision to maintain crude quotas at current levels could give the banks further ammunition to manipulate opinion that the black stuff is genuinely in tight supply.

There is plenty of evidence that oil is, in fact, still pretty long - and that this bull-run is yet again about speculators talking up the market. Petrochemical producers and end-users who rush-in to build raw-material inventory do so at their peril.

"The crude price has to be about speculation because there is still 6m bb/day of spare crude output," an oil and refining consultant told the blog late last week on the sidelines of the Gulf Petrochemicals and Chemicals (GPCA) conference in Dubai.

"There is also still 2-3m bbl/day of surplus refinery capacity and gasoline inventories in the US were recently five times their historic average.

"The banks have once again a lot at stake in making the crude bull argument. Refinery margins will recover next year, but not by that much. It will be the complex, full-conversion refineries that will benefit the most and not the simple refineries.

"Even diesel inventories are high in the US and have been at comfortable levels in Europe, despite the cold weather."

Source of picture: Arabianbusiness.com

One immediate benefit for petrochemical supply and demand balances is that the OPEC decision will mean no further associated gas supplies to boost Middle East output. We discussed this last week when we reported that quotas were forecast to remain unchanged.

As far as the immediate effect on polyethylene (PE) pricing is concerned (a reasonable proxy for the polymers industry as a whole), higher crude in response to the OPEC verdict might exert some upward pressure.

But the negative factors in the China dominated the mood late last week.

Importers were staying on the sidelines fearing what our colleagues at ICIS pricing said could be a "meltdown in the commodity markets" as a result of further measures by China to control inflation.

Price assessments were therefore left either unchanged or $20-30/tonne, adding more weight to our belief that efforts by importers to raise December prices will fail (if they haven't already).

More bad economic news emerged at the end of last week. China's inflation rate rose to 5.1% in November, up from 4.4% in October - leading to a further increase in the bank-reserve requirement.

A three-day government conference to set economic policy for 2011 ended on Sunday with the following statement released to the media: "Strategic economic restructuring will be accelerated and stabilising price levels will be given a more prominent position."

The excellent China Economic Quarterly - the Beijing-based research service - was predicting several further interest-rate rises and additional hikes in the bank-reserve requirement during 2011, even before last week's government meeting.

Further monetary tightening now seems even more likely in light of the official comment we have just quoted.

"I think the current uncertain, worried mood in the market will persist until March next year," a polyolefin trader told us, again on the sidelines of the GPCA.

"Some more clarity, and perhaps a bit more confidence, should emerge after then - when the National People's Congress (NPC) meets to confirm more details of the 12th Five-Year Plan."

Any price rises up until March will therefore be in response to higher crude and could well be only minor and subject to sudden reversals, he believes.

Whether even the NPC meeting will change the mood has to be in question as the key issue for market confidence is how quickly China can bring inflation under control.

By Malini Hariharan

A methanol-to-olefins (MTO) wave is gripping China and projects are set to multiply even as questions persist on their economic viability.

Popularity of this technology has grown since the successful commissioning of Shenhua Baotou's plant earlier this year and many mid-sized Chinese chemical companies have queued up to implement projects.

Pic source: Dalian Institute of Chemical Physics

The blog recently interacted with one such company and was bemused by its determination to build an MTO plant in a coastal province with no easy access to coal or methanol.

"We have already got the MTO technology from the Dalian Institute of Chemical Physics; we just need to find the methanol," said one source from a company based on the east coast.

But finding the methanol will not be easy. The company has planned a 600,000 tonnes/year MTO project which would mean importing 1.8m tonnes/year of methanol - the annual output of one mega-methanol plant.

And though China has sufficient methanol on paper, procuring product locally was not being considered because of logistics issues (most plants were located inland) and inconsistent operations.

The logic for the MTO project was simple - the company, which manufactures ethylene oxide and its derivatives, wanted to produce enough ethylene to take care of its captive requirement while the propylene would be sold locally.

Backward integration makes sense in many cases. But how would an MTO unit help this company? Would it not be better to import a few hundred thousand tonnes of ethylene rather than nearly two million tonnes of methanol? And would an MTO project based on imported methanol be economically viable?

But the company's determination was clearly evident as various alternatives to get to the methanol were being evaluated. "We are confident we will be able to do it," said the source.

After this recent conversation the blog decided to compile a list of MTO projects (china coal chemical projects.xlsx) and identified 11 companies with ambitions to go down this route. The blog will not be surprised if many more follow next year.

By Malini Hariharan

Paraxylene (PX) is one of the few petrochemicals to have a contract price recognized all over Asia. However, the Asian contract price (ACP) mechanism which has been in use for over ten years continues to court controversy.

The ACP, a monthly settlement that is negotiated by a handful of large producers and buyers, figures in most contracts across the region.

The entry of new players has often brought forth questions on its relevance. Doubts have also cropped up when contract prices have failed to keep pace with spot numbers. And its demise has been regularly predicted.

In a recent report on ICIS news, my colleague Bohan Loh points out that a fresh debate is brewing even as buyers and sellers near the conclusion of negotiations for 2011 contract volumes. Questions are once again being raised on the relevance of 'an age-old system' that is seen as not fully reflecting feedstock costs and profitability of downstream players.

ExxonMobil, a large producer of PX and a key player in the monthly ACP settlement, has proposed the introduction of a spot-price element in its 2011 contracts. The proposal is for 70% ACP and 30% spot cfr Taiwan instead of 100% ACP.

Only one buyer is said to have accepted this revised formula.

Some players interpreted the move as a sign that the company is looking for higher numbers in 2011 to recoup losses this year.

Others believed that it signaled ExxonMobil's loss of faith in the ACP.

However, it is also likely that the company is only moving towards the most common formula in Asian contracts - 50% ACP and 50% published spot cfr Taiwan prices.

The formula shows that there is a need for the stability that only a contract number can provide.

Despite the many controversies the ACP is a popular benchmark and is unlikely to lose this status.

By Malini Hariharan

After reading news reports about fresh protests against Kuokuang Petrochemical's proposed refinery and cracker complex in Taiwan the blog is wondering whether the company should be spending time and money in pursuing this ill-fated project.

Kuokuang, a joint venture between state-owned CPC Corp and several Taiwanese private companies, has been unable to secure the mandate of the local people since it was first mooted in the 1990s and has struggled to receive environmental clearance.

This time clashes broke out between hundreds of supporters and opponents at Changhua County, hours before a scheduled hearing on the project by the Ministry of Economic Affairs. The police was able to restore order but the hearing ended without any conclusion.

Pic source: The China Post

The company is now looking at scaling down the project which includes a 300,000 bbl/day refinery, a 2.4m tonnes/year cracker and more than 20 downstream units.

While the government is actively supporting the project, which is expected to generate revenue of NT460bn and generate 18,000 jobs, environmentalists are ramping up their protests as they firmly believe that the project would cause irreversible damage to marine life in Changhua County.

Getting local approval appears to be next to impossible and perhaps it is time for Kuokuang's partners to cut short their losses and focus on investments elsewhere in Asia.

Guess who's coming to Christmas dinner

Source of picture: biology.ucf.edu

By John Richardson

THE widespread problem of surging inflation in Asia ex-Japan is a major threat to petrochemicals demand growth in 2011.

Governments need to put the brakes on to prevent economies from overheating.

But the problem is that raising interest rates could cause even more hot money to flow into China, the Indian sub-continent and Southeast Asia as investors seek alternatives to feeble returns in the West.

China seems firmly set on a course of monetary tightening, as we discussed earlier this week, with further rate rises and increases in the bank-reserve requirement on the cards for 2011.

Indonesia, however, has so far refrained from raising the cost of borrowing, which has remained unchanged for 16 months, despite inflation hitting 6.3% in November.

The country's central bank is instead thinking about re-introducing a cap on rupiah accounts held by foreigners.

But, according to this article in the Economist, the reluctance to raise borrowing costs at fast-enough rates has led to private credit growth of more than 20% a year in Bangladesh, India and Vietnam.

Shortcomings in economic policy have resulted in Moody's Investors Service downgrading Vietnam's sovereign debt. This could put more downward pressure on the dong which has lost one-fifth of its value against the US dollar since mid-2008.

The effect on the country's polyolefins market is already very evident. Several traders have told the blog that their business over the last few months as all but ground to a halt.

"Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation," one of these traders, who is based in Singapore, told us.

Vietnamese polypropylene (PP) producer PetroVietman is apparently seeking to export resin, despite the country being in big PP deficit. This is presumably about earning valuable US dollars.

Such is the stagnant nature of the market that there are also reports of a trader re-exporting PP and polyethylene (PE) from Vietnam to China.

There are numerous other risks for petrochemicals in 2011, not least the strong possibility that in polyolefins and mono-ethylene glycol (MEG) new capacities will run better next year, leading to the long-awaited oversupply problem.

But inflation might turn out to be the 10,000lbs bad-tempered rhinoceros sitting in the corner of the proverbial room. No mother-in-law jokes, please.

A permanent separation?

Source of picture: edu.com

By John Richardson

IT IS pretty easy to predict specific events that will cause declines in polyolefins pricing in China next year thanks to the big role that macro-economics now plays in setting the market.

No longer do you need to mainly sweat over increasingly difficult polyethylene (PE) and polypropylene (PP) supply and demand balances to clear the mist from the crystal ball.

It is now a moot point whether, in fact, watching out for the big-picture economic signposts is more useful than the traditional hard grind of collecting domestic production data, imports and real consumption (whatever that is!) in specific end-use sectors.

The last couple of years have seen the evolution of two much-more distinct languages when the market is being discussed: That of the traders and end-users as opposed to the producers and industry observers, who still mainly still stick to the traditional measures.

The reason is the increasing role of the Dalian Commodity Exchange's RMB-priced futures contract in linear-low density polyethylene (LLDPE) which helps act as a guide to price direction across many other grades of polyolefins.

Several sources indicate that the Dalian is set to launch a homopolymer PP contract next year, which they say will be in yarn grade, meaning a potentially even-bigger role for the exchange.

Producers might not be, as yet, be hedging on the exchange - but the traders and end-users certainly are.

And the most active contract on the exchange, usually the one closing four-to-five months out, is being used by end-users in price negotiations for imports.

Traders often import resin to back deals on Dalian. If they guess the futures market the right way they then sell before physical delivery is due, thereby closing out their obligations with the exchange through paper trading only.

Good returns on the Dalian can make them more willing to sell these physical imports in the real market at a discount.

This is causing confusion among producers who see traders off-loading cargoes in declining markets at what look like heavy losses - as they are not aware of what positions the traders have taken on the exchange.

The problem with the Dalian, or any futures market for that matter, is that it can be very difficult to work out who is involved and the extent of long or short positions.

With total volume traded in November on the exchange approximately four times global demand, the vast majority of business is obviously paper trade.

Hedge funds, financial institutions and retail day traders, who are all understood to be heavily involved in the market, don't obviously have any intention of either supplying or receiving resin.

So the big apparent role of the financial players on the Dalian means that is behaving like any other financial instrument.

And because of the big role that the futures contract plays in setting physical pricing, (click below for a graph that illustrates this point), this brings us back to where we began this article: The macro-economic news that sets the daily direction of the Dalian has led to what feels like a diminishing role for traditional industry fundamentals. 

DalianVersusPhysicalPricesDec2010.ppt

The relatively easy job, therefore, of picking out next year's economic signposts involves studying the financial press- and macro-economic analysis services such as the online Beijing-based China Economic Quarterly (CEQ).

The CEQ is predicting three -to four further interest rate rises next year and warns that the bank-reserve requirement (the amount that banks have to set aside against lending) could rise to as high as 25% over the next 18 months.

China has already raised the requirement by six times this year to 18.5% with the latest increase occurring earlier this month.

All these measures are designed to take the heat out of the economy and have, as a result, caused falls in equities and many commodities futures markets, including Dalian.

The housing market could also be a big source of negativity for polyolefin pricing next year.

"Year-on-year construction growth will fall to single digits in the final quarter of 2010 and the first quarter of 2011," writes the CEQ in its Q4 report.

"And year-on-year housing sales could fall as much as 25% in the first three months of 2011."

The CEQ argues that additional monetary tightening will in the great scheme of things be moderate as underlying inflation, taking out the effect of volatile food prices, remains low.

Rising oversupply in residential property will only be a temporary problem because of huge demand for more construction of social housing, the report adds.

It also points out that while China's gross domestic product (GDP) growth might slow down from around 10% this year, the economy will still expand by approximately 8% in 2011. This would hardly be a devastating collapse.

But since when has the truth mattered to financial speculators who tend to enter markets on rumours and exit on facts?

Talking of speculation, you don't have to be a genius to know that crude will set the floor for physical polyolefin pricing, as it has always done, next year.

As we said, Dalian tends to dip and rise in line with equities and commodities in general, including the movements in crude.

"The crude price has to be about speculation because there is still 6m bb/day of spare crude output," said an oil and refining consultant.

"There is also still 2-3m bbl/day of surplus refinery capacity and gasoline inventories in the US were recently five times their historic average.

"The banks have once again a lot at stake in making the crude bull argument. Refinery margins will recover next year, but not by that much. It will be the complex, full-conversion refineries that will benefit the most and not the simple refineries.

"Even diesel inventories are high in the US and have been at comfortable levels in Europe, despite the cold weather."

With truth at a premium next year, it therefore seems likely that negative economic news from China might be counteracted by bullish forecasts by banks of oil moving to $100/bbl or more over the next two years.

The Dalian - and with it the physical market - could as a result be even more volatile in 2011, making the planning process for producers even more difficult.

That is a cheery thought to take into the end-of-year holidays....

By Malini Hariharan

Petrochemical markets, with a few exceptions, will be closing the year on a quiet note.

In polyolefins, buying activity in China has slowed down and sentiment remains weak weighed down by the Chinese government's decision to hike bank reserve requirements. This is despite the recent rally in crude oil prices.

Prices of some grades of linear-low density polyethyelene (lldPE) and high-density PE (hdPE) were assessed slightly lower by ICIS pricing last week while polypropylene (PP) prices were unchanged. However, limited availability helped push up PP prices in South Asia by $30-40/tonne. And unrelenting tight supply of low-density PE (ldPE) also pushed up prices in China by $30/tonne.

The Asian ldPE supply situation is unlikely to improve in the near future with PTT Chemical postponing the restart of its 300,000 tonnes/year plant due to technical problems. The plant was shut in mid-November and was expected to restart on 15 December.

Upstream, ethylene prices improved slightly on buying support from China while propylene prices weakened.

Meanwhile, paraxylene (PX) and purified terephathalic acid (PTA) markets will be ending the year on a strong note. Spot PX prices inched up by about $25/tonne last week fuelled by a higher-than-expected Asian contract price nomination. The PX majors have nominated a $125-155 hike in January contracts.

PTA also moved up by about $20/tonne despite uncertainty in the polyester segment where demand has softened in recent weeks. Chinese textile mills have lowered operating rates and production is expected to improve only after the New Year holidays in February.

But PTA producers are bullish about prospects in 2011. This is evident in Chinese American Petrocemical Co's (Capco) decision to restart one of its two idled lines in early February 2011. The line, with a capacity of 250,000 tonnes/year, was shut in mid-2007 because of squeezed margins.

And polyolefin producers are also optimistic despite current market conditions. They are now pinning their hopes on a revival in demand ahead of the Chinese New Year holidays in February. But the blog believes that implementing price hikes will not be easy. Availability looks set to grow and there is as yet no reason for traders to take a long position.

By Malini Hariharan

The debate on the next petrochemical upcycle is heating up. After confident forecasts of a "supercycle" the blog is increasingly hearing more cautious assessments

Take the recent report from Credit Suisse which stresses that while conditions for a period of bumper margins are favourable there are still many uncertainties.

Pic source: avalonwine.com

On the plus side the analysts highlight that global ethylene capacity growth will slow down to a compounded annual growth rate (CAGR) 2.5% during 2012-15 - the slowest pace in 20 years.

While there is still time for companies to build new capacities for this period the challenge of putting a together a project in such a short period is enormous.

But Credit Suisse expects some plants taken offline after the 2008 economic crisis to restart once margins recover.

Cheap gas in the US has given producers the incentive to resume operations while European capacity would normalize as demand conditions and business confidence improve.

Additionally, they expect a rise in Middle East production which has been constrained for the last couple of years by a cut in oil output and consequently a fall in availability of associated gas.

These developments would boost capacity growth to 3.7% over 2011-15.

But for a megacycle to materialise, world economic growth would have to exceed 4.5% on a sustained basis.

The industry, they point out, has seen three peaks in the last 22 years - 1988, 1995 and 2005-07. "1988 was a super peak, with margins 2x higher than the other two instances. Sustained global GDP of 3.5-3.7% CAGR over four-five years will get us to a 1995/2005 type of peak. A global demand rise of 4.5%+ CAGR will get us to the 1988-type peak".

The bank's economists predict global GDP growth of 4.7% in 2010 and 4.4% in 2011. But growth thereafter is still a question.

Another uncertainty relates to demand multiplier. "Over the last 22 years, demand multipliers - ethylene demand growth to global GDP growth - have averaged 1.3x. However the multipliers in this decade (2000-07) have averaged only 0.9x. The question is what are we going to get going forward. Will multipliers rise as demand growth shifts to emerging markets as some have suggested? Or will it be otherwise?" they asked.

This takes us to China and whether the country's domestic demand will be sufficient to take care of any drop in exports. And here the analysts predict that the demand multiplier in the country is likely to weaken rather than accelerate.

"Using China's exports of plastic-related products, we estimate that in 2009-10, China's exports of product accounted for 45% of total ethylene/propylene demand, or 11% of total world demand. Going forward, as export growth slows, and shifts away from the more manufacturing driven products into higher value added things, the demand for petrochemicals from this segment of China's GDP is likely to slow."

The chances of a megacycle are the highest in the last ten years but it would be good to remember that there are also plenty of uncertainties.

By John Richardson

SHELL Chemicals announcement that it has signed a memorandum of understanding (MOU) for a cracker and derivatives project in Qatar seems to have upped the ante in what could be a struggle for only one parcel of feedstock.

Graeme Burnett, Total Petrochemical's senior vice president for Asia and the Middle East, in November re-emphasised the French major's interest in a cracker project in Qatar.

He perhaps sounded the right note when he stressed Total's interest in adding to a particular country's product portfolio in the Middle East through building the styrene and polypropylene (PP) facilities. Qatar only has ethylene derivatives.

ExxonMobil also has a cracker project on its books in Qatar which has reportedly been delayed.

Source of picture: Qatar Living 

When we asked a source close to Shell whether there was enough feedstock for one, two or three new crackers in Qatar recently, he said: "That's a very good question you would need to address to Qatar. The position is not clear."

And last November Ben van Beurden, executive vice-president of Shell, told the blog:
"Ideally, we'd like to build two crackers and two OMEGA process monoethylene glycol (MEG) plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane.

"There are only so many allocations of ethane available from Qatar at the moment and plenty of interested parties."

Qatar's moratorium on new allocations of gas from its North Field and a keen awareness of alternative values for natural gas all seem to be factors in limiting feedstock supply for petrochemicals.

By Malini Hariharan

A surprise court order in India earlier this month has put pressure on plastic packaging and has raised the risk of restrictions on its use in a very popular segment - cheap sachets or pouches that are used to pack a wide variety of consumer products ranging from shampoo to tobacco.

The Supreme Court has ordered a ban on the sale of gutkha, a mix of tobacco, betel nut and other ingredients, packed in plastic sachets from March 2011 and has asked manufacturers to explore and decide by March on an alternative packaging material.

Pic source: www.thehindu.com

It has also asked the government to conduct a survey on the ill effects of these tobacco products and examine the effect of packaging these products in plastics pouches on human health.

The next hearing is scheduled for 9 March 2011.

Gutkha is a major health risk for millions of Indians addicted to it and a ban on its use makes sense. But what has upset the plastics industry is the court's move to link its ban to packaging. And the worry is that these restrictions might slowly extend to other products packed in plastic sachets (multilayer structures made of polyethylene and metallised polyester).

The order has taken the plastics industry by surprise as the instead of banning gutkha the court has restrained the use of plastic sachets.

"Today it is gutkha; but there are hundreds of products packed in pouches. Tomorrow an NGO can give reference to this case and say shampoos should not be packed in pouches," says an industry source.

For now the court has focused on sachets, which, thanks to the convenience factor, have boosted sales of gutkha.

Sachets are also cheap - products packed in them are usually priced at only a few cents. And they have grown to overtake other forms of packaging in many product segments.

Market research firm AC Nielsen estimates that sachets accounted for 74.5% of the Indian shampoo market of 104,000 kiloliters in 2008, up from 71% in 2006 and 73% in 2007

But sachets are part of a bigger waste management problem that India needs to urgently tackle. The court has already directed the Indian government to finalise and enforce within eight weeks Plastic Management and Disposal Rules that were framed in 2009.

Switching to an alternate form of packaging would pose a greater burden on the environment though this is not easily visible, points out the industry source.

Plastics are the most environmental friendly packaging method in terms of energy savings and emission reductions during production, he adds.

The industry needs to act fast to communicate this message to a wider audience and ensure that new regulations do not adversely affect use of plastics in India. As for the proposed gutkha ban, they need to ensure that the final Court ruling does not carry any negative reference to plastic packaging.

Source of picture: anahoyhanioblogspot.com

By John Richardson

THE blog will be taking a few days off this week as 'tis the season to be Merry', regardless of what you may think is our rather cynical and often-times pessimistic view of the chemicals industry.

We will come roaring back towards the end of this week by the 28th European time and the 29th in Asia to tackle more on the extent of the US shale gas advantage. In the meantime, happy festive season to all our readers as we look forward to what we hope, despite or cynicism and occasional pessimism, will be another prosperous year.

By the way, 50% of the blog (John Richardson) is in the process of relocating to Perth, Western Australia - hopefully in time to gloat about England retaining the Ashes.

Source of picture: alfin2100blogspot.com

By John Richardson

SINCE when has the truth mattered in the battle between environmentalists and the oil, gas and chemicals industries?

This is a game of perception on both sides as estimates of risk are heavily subject to data that is either biased in the way it is collected or how it is interpreted.

And so the environmental evidence being stacked-up to support further growth in US shale-gas production - crucial to the competitiveness of the country's petrochemicals industry - might not matter a jot of if a major pollution incident occurs.

According to energy industry-backed websites such as this - the "fracking" process has been practised without groundwater pollution in Texas for the past 60 years. The only pollution of drinking water that has occurred has been caused by the secondary recovery process, different from fracking, where water is injected into depleted oil and gas wells.

The energy industry also argues that the bulk of chemicals used in the fracking process in the giant Marcellus Shelf are very small in volume and of the type used in disinfectant, cosmetics and even pharmaceutical production.

Benzene, toluene, ethlybennzene, xylenes and naphthalene can also be used in fracking, but these much-more toxic chemicals are not as economic.

There is also environmental pressure, though, over the large amount of sometimes short-in-supply water used in the fracking processThe debate around shale gas seems sure to intensify now that reserves, production, and perhaps therefore the chance of an accident, are on the increase.

In its annual report released this month , the US Energy Information Authority (EIA) estimates that as of 1 January 2009, the US's technically recoverable shale-gas reserves had more than doubled compared with a year earlier.

Ethane production in the States is set to increase by 30% over the next two years to 850,000 bbl/day, according to industry estimates reported by our colleagues at ICIS news.

This implies that the feared lack of fractionation capacity will not hold the growth of ethane supply back, thanks to drill-to-earn provisions.

But, as we have said, the public mood towards shale gas could turn decidedly negative if there is an accident.

Attitudes towards the industry have recently improved, however, according to Sven Royall, Vice-President for Intermediates at Shell Chemicals.

"Four -to five months ago (after Deepwater Horizon) I would have said that the regulatory outlook looked a lot bleaker for shale gas, but it has since got better," Royall told the blog in a recent interview.

"Preventing groundwater pollution is about making sure that cementing and casing is right because the actual shale gas extraction takes place beneath aquifers."

His colleague Iain Lo, who is Shell Chemicals' Vice-President New Business Development and Ventures, said that he had no concerns about operating reliability when it came to the bigger, more experienced shale gas operators.

"There could be issues with the smaller players, however," he warned.

The other threat to projections of ever-improving economics for US ethane-based petrochemicals is an unexpected surge in natural-gas demand from other industries, such as power generation.

And as we have said before, talk of building a new ethane-based cracker in the US might well be premature given the state of the economy.

Current capacity would a first need to be maxed-out - although there could be further smaller opportunities to debottleneck and switch to lighter feedstocks.

Jim Galloghy, CEO of LyondellBasell, has said that it is too soon to talk about building a new cracker in the US. This is despite an initial economic assessment of doing so in the Appalachians.

But Royall interestingly added: "What you need is confidence about gas prices being at the right level for 25 years - the life of a project. This confidence is not quite there yet, but it is getting closer."

The other opportunity now emerging is the rising value of propylene versus ethylene as a result of the big switch to cracking ethane away from naphtha.

Dow Chemical CEO Andrew Liveris talks about pushing more propane into the US major's domestic feedstock mix in order to resolve the C3s shortage, in the same article we have just linked to immediately above.

The first option is to address the industry-wide propylene tightness would be to crack more propane in steam crackers,

Despite the technical difficulties that can beset the propane dehydrogenation-to-polypropylene (PP) proces - plus the need for guaranteed long-term low-cost propane supply - might we also see more of these units being proposed in the US?

By John Richardson

OVERCONFIDENCE is perhaps the biggest risk for 2011 as a result of sales volumes that have this year exceeded even the most wildly optimistic forecasts.

The danger is that we have yet to see the worst of this current petrochemicals cycle. Companies and chemicals analysts might have got a little ahead of themselves by predicting that a "Supercycle" will begin from as early as the second half of the coming year.

A strong argument can be made that by 2013-2014 lack of investment in sufficient new capacity could lead to record-high margins. This assumes that the world economy doesn't suffer a double-dip recession.

But cautious commentators are warning that a delayed supply-shock is still on the cards in the New Year, thanks to further start-ups and more stable operations at recently commissioned plants in the Middle East and Asia.

"At the end of 2009 the industry was, in hindsight, too pessimistic and this fed through into sales targets for 2010," said a UK-based industry observer.

"I get the feeling that forecasts for 2011 have gone too far the other way and that we are about to go through a period of absorption as operating rates at new plants increase.

"This is where human nature comes into the game. Product managers faced with targets that are too high could end up chasing market share through maximising output. This would make oversupply even worse."

Chemicals analysts at South Korea-based Woori Investments wrote in a November report that 2011 would see a decline in global utilisation rates.

"We believe that [global ethylene] supply will rise by 10m tonnes over the next year, topping our global demand-growth estimate of 5m tonnes over the same period," said the report.

This was based on commercial production starting at new facilities with a total capacity of 6.2m tonnes/year and higher operating rates at plants already on-stream.

Extra capacity absorption that still needs to take place includes Borouge's 800,000 tonne/year polypropylene (PP) and 180,000 tonne/year linear-low density (LLDPE) plants that started up in the third quarter.

"We are not seeing much material from these plants right now and so we are expecting the real impact to occur next year," said a Singapore-based polyolefins trader in early December.

The same can be said for Saudi Kayan Petrochemical's polyolefin capacities, which includes 400,000 tonne/year of high-density polyethylene (HDPE).

Although the SABIC subsidiary's Saudi-located complex has been on-stream since August, the big volumes seen in the market so far have only been of ethylene.

Source of picture: whrbsportsblogspot.com 

Plants in Thailand, delayed by a complicated environmental muddle, have recently been allowed to start-up. These include Siam Cement/Dow Chemical's 350,000 tonne/year LLDPE and PTT Chemical's 300,000 tonne/year HDPE facilities.

Recently commissioned complexes in China are expected to run a little more smoothly next year.

A further danger hanging over the market is an increase in OPEC crude-production quotas.

The oil cartel left its quotas unchanged after it met in Ecuador earlier this month, but if the cost of crude keeps on increasing the pressure for greater output will rise.

Saudi Arabia's current quota, around 8.5m bbl/day, has resulted in a reduction in associated gas supply to many of the country's crackers. Oil production needs to be at 10m bbl/day for the crackers to run at full rates, estimate several industry observers.

Ethylene exports from the Al-Jubail industrial city on Saudi Arabia's east coast have fallen to virtually zero in 2010 from several hundred thousand tonnes in 2009 because of the cut in associated gas.

Higher oil quotas could result in exports returning to 300,000 tonnes or more over a 12-month-period.

Either that or SABIC might successfully push for much-higher downstream operating rates now that the company, in theory, has more control over its subsidiaries thanks to a new corporate structure introduced earlier this year.

From a "value addition" point of view, exporting ethylene can be viewed as making less sense than shipping-out poyolefins or mono-ethylene glycol (MEG).

One would have thought that major technical issues at complexes such as PetroRabigh in Saudi Arabia will have to eventually be resolved. The Saudi Aramco/Sumitomo Chemical joint venture has suffered around five major polyolefin outages during 2010.

Further support to the market has been provided by what have reportedly been delays at the container port in Al-Jubail.

If customs-processing issues said to be behind the delays are resolved, this could mean a smoother flow of volumes into Asian and European markets.

A consensus is building that refinery margins have bottomed-out, meaning that some refiners might push production harder in 2011. This would help solve the butene-1 co-monomer shortage that has restricted LLDPE production.

The growth side of the story can also be viewed as little more negatively.

New plants in China have raised the country's polyolefins self-sufficiency and the country's GDP (gross domestic product) growth is forecast to fall to around 8% in 2011 from approximately 10% this year.

Lower growth in China is expected to be the result of efforts by the government to control inflation.

Inflation is a threat to growth in many major Asian chemicals-consumption markets including India, Indonesia and Thailand.

"The battle against inflation in Vietnam has been lost by the government," added the polyolefins trader we quoted earlier in this article.

"Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation."

The value of the dong (the local currency) has fallen by one-fifth over the US dollar since mid-2008 and last week, Moody's Investment Service downgraded Vietnam's sovereign debt.

All of the above might have sounded a little like the kind of comments that Ebenezer Scrooge would have made if he had been involved in the chemicals industry.

He is instead the lead character in the Charles Dickens' novel, A Christmas Carol.

But being told to cheer up and show a little more generosity of spirit at this festive time of year is hardly the basis of sound planning.