Asian Chemical Connections

Source of picture: robertsamsterdam

By John Richardson

IT will only be a question of making a large rather than a huge amount of money if you only take into account the relatively minor increases being forecast for Saudi Arabia's petrochemical feedstock costs.

The cost rises would have been far more dramatic if Saudi Aramco had got its way in a debate with the country's chemicals producers, says HSBC in a report published last week.

Aramco had wanted to increase gas costs to bring them quickly in line with current US levels - $4-5/mBTU - but HSBC says: "We believe policy makers are in favour of a phased approach."

If the bank is correct this could have implications for investment decisions both in the States and Saudi Arabia.

The rise of shale gas has made the US a possible location for new capacity, a dramatic turnaround from just a few years ago when all the talk was of feedstock cost-driven plant closures.

US producers would still be comfortably to the left of the correct if HSBC is right. But based on raw material costs only, Saudi Arabia is forecast to remain in the most advantageous of all positions.

The cost increases being predicted by HSBC include ethane rising from 75cents/MBTU to tr $1.25/mBTU in 2012, $1.50/.BTU in 2013 and $2.00/mBTU in 2014.

Current implied ethane costs in Saudi Arabia are just $47/tonne, according to HSBC. An increase in the gas price to $2/mBTU by 2014 would therefore not make that much a difference.

It is not just about feedstock pricing, though, as construction costs in the Middle East in general can fetch a premium because of expensive labour.

Petrochemicals markets might become more regional on a rise in trade protectionism.
Fortunately, there hasn't been a dramatic increase in trade barriers since the economic crisis but as long as deep-seated economic problems in the west continue, this danger will persist.

Saudi Arabia, despite efforts to grow domestic downstream consumption, is likely to export most of its petrochemicals for a long time to come. It therefore benefits a lot from low import tariffs etc.

The debate about the future competitiveness of Saudi Arabia versus the US and elsewhere could be a side issue if the Kingdom cannot resolve its current shortage of gas.

Extensive naphtha cracking is an alternative to using ethane, propane and butane. But industry observers argue that the economics of using naphtha in Saudi Arabia are a lot weaker.

The very well-documented Saudi ethane shortage is a factor behind the dearth of new cracker complexes currently planned for start-up in the country after 2011.

Aramco is making strenuous efforts to boost gas supply in order to supply not only petrochemicals but also the electricity generation, desalination and fertiliser sectors, adds HSBC.

This is a double-edged sword: While these efforts might reap more feedstock for petrochemicals, they also reflect the rising alternative values for natural gas - one of the main reasons why the price of gas is expected to rise.

Fifty per cent of all Saudi off-shore platforms are now devoted to gas exploration compared with 20-40% in the past, says the bank. Aramco has set itself the target of delivering 3 to 7 trillion cubic feet of additional non-associated gas supply each year.

The reason, as we have said, is the rise in demand for gas from non-petrochemical applications - most significantly electricity.

Unless supply increases are concurrent with the growth in gas demand over the next two decades, more than 60% of total Saudi energy production would have to be diverted to meet local needs, says HSBC.

This would result in a big revenue loss for the country through a reduction in oil exports and global crude prices would rise.

So the race is on to meet ambitious growth targets for natural-gas extraction as the scale and nature of these investments places upward pressure on pricing.

Aramco is to devote 10 per cent of its total capital spending on developing six offshore gas facilities over the next five years, adds the bank.

This will be non-associated gas and so the economics are very different from associated gas, which comes as a by-product of oil production.

Foreign investors have to also be attracted to these dedicated gas fields. Prices charged for output from the wells has to be high-enough to meet their rates of return.

In the old days, back in the 1970s when the Saudi petrochemical industry was first established, life was a lot simpler.

There was less competing demand for gas and so there were fewer alternatives to providing feedstock to the industry at very attractive prices (before 1998, ethane costs were only 50 cents/mBTU).

A feature of the gas-cost debate appears to have been unexpectedly high oil prices over the last few years.

These are viewed as having created exceptional profits and a cost advantage in "excess of what had been implicitly guaranteed when the (petrochemicals) industry was established," writes HSBC.

What level of profitability will be deemed as acceptable in future?

How will this decision affect confirmed future gas prices and overall government support for the petrochemicals industry?

By Malini Hariharan

Its not just China and India that have posted healthy demand numbers for last year.

Vietnam maintained double-digit growth in polyethylene (PE) and polypropylene (PP) last year, driven mainly by the local food packaging sector, reports ICIS pricing editor Bee Lin. PE consumption increased 27% to 800,000 tonnes while PP demand was up 14% at 650,000 tonnes.

Pic source: toursvietnam.net

These figures do not account for volumes that were re-exported especially in second half of 2010 when Vietnam faced a shortage of US dollars. Import activity also declined during this period.

The official exchange rate was pegged at Vietnamese dong (D) 19,500 to one US dollar for most of last year, but it was very difficult to obtain US dollars at the local banks, said local traders.

US currency was available in the black market, but at a much higher rate (more than D22,000), and that had made imports too costly for local companies, they added.

A local industry source estimated that Vietnam exported around 12,000 tonnes of PP last year.

Vietnam's first PP plant of 150,000 tonnes/year, part of the Dung Quat refinery, started operations last year. But the plant produced only around 50,000 tonnes in 2010.

In Indonesia, PE demand for 2010 was estimated at 750,000 tonnes, up 6% from the previous year, while PP grew by 8% to 850,000 tonnes. Food packaging was again a key driver.

Indonesian PE imports were expected to grow as domestic capacity was only around 750,000 tonnes/year. But PP production volumes were likely to increase from last year's 520,000 tonnes as Tripolyta planned to raise its capacity by 120,000 tonnes to 480,000 tonnes/year.

By John Richardson

THE signs are ominous as they have been since the beginning of the crisis.

Intuitively, it still feels as if we are heading for some major macroeconomic problems. As Andrew Liveris, CEO of Dow Chemical, put it last week: "Overall, the world continues to recover to pre-recession levels. However, with inflation concerns in emerging geographies, lingering unemployment issues in the US and sovereign debt issues in Europe, we remain prepared for a reversal of momentum."

Call a crisis for long enough you will eventually be proved right, based on the maxim that what goes up must eventually come down,.

But rising oil prices, along with overall inflation, do seem to pose the most immediate threats for 2011 over what was a fantastic 2010.

ExxonMobil Chemicals lower sequential quarter-to-quarter segment earnings in Q4 last year reflected an inability to fully pass on rising feedstock costs and new petrochemical capacity, my colleague Nigel Davis wrote last week."The closing quarter of 2010 was a disappointing end to the year for many petrochemical producers," wrote chemicals consultancy ChemSystems in a report published last week.

"Renewed pressure on feedstock costs depressed profitability of petrochemicals in many markets, eroding strong gains in margins achieved in the first half of the year," added the consultancy.

Not surprisingly it was the European producers who were hammered the hardest because of their reliance on liquid feeds. Naphtha costs surged on crude and the severe northern hemisphere winter made liquefied petroleum gas (LPG unaffordable. The end-result was cracking margins being squeezed by Euros160/tonne, according to ChemSystems.

The US did much better because of its natural gas advantage with average polyethylene margins down just 5%.

Cash margins for Middle East producers were in contrast 14% higher.

So where do we go from here?

A key measure will be how Asian petrochemical markets respond as they return from the Chinese New Year Holidays this week, provided one can separate the usual nonsense talked by the huge trading community from what is really happening.

This could obviously be a very tough year for the higher-cost Northeast Asian cracker players as a result of further erosion of market share in China and the pressure from higher crude. As fellow blogger Paul Hodges pointed out last week, 2010 polyolefin import data showed a substantial gain for the Middle East in China at the expense of Japan, South Korea - and also Southeast Asia.

"The considerable cumulative excess capacity built since 2008 will take many years (to absorb) and operating rates will remain heavily depressed in the near term," ChemSystems added.

It is likely, as we have said before, that more of this cumulative excess capacity will hit the market in 2011 than in 2010.

By John Richardson

VERY occasionally the blog deviates from its close coverage of petrochemical markets to focus on broader business issues. Today is one such occasion after a discussion with a manager of a major Asian chemicals trading operation.

The manager is convinced that the good times are behind us, to refer back to the petrochemical markets environment very briefly, as a result of weaker Chinese demand growth, the substantial threat that rising energy costs pose to the global economy. He also warned of seemingly positive US macroeconomic indicators that he said had created a "false dawn".

Maybe on all the above he is just trying to present a bearish picture as he has gone short, not just in chemicals trade but also in his myriad other investments which the blog freely admit that it does not understand.

But what is admirable about this manager are the occasional pep talks he gives to his team.

In his latest pep talk said: "These will be difficult times after an excellent 2010.

"You have my promise that I will give you all the support you need on the detail and delivery of your work in what's going to be a challenging 2011. If things go wrong I will take the blame and if things go well I will not take all the credit with our directors.

"If you feel at any time that I am not communicating clearly and effectively let me know. My door is always open.

"You will not be blamed for not taking big risks this year. Let's play it cautious. We are in this together."

What a boss, eh? Anybody else like that out there? Please let the blog know.

By John Richardson

INTELLECTUAL property right protection has long been a nightmare in China thanks to the ability of government research institutions to rapidly and very effectively copy technologies. Blueprints for these technologies have to be handed over to local authorities by foreign joint-venture partners.

The constant challenge is balancing this risk against the enormous opportunities.

And now a former Dow Chemical scientist, Lui Wen, has been found guilty of conspiring to steal company secrets and sell them to firms in China by a jury in Baton Rouge, Louisiana, the US.

Lui, who worked for the company from 1965 until he retired in 1992, also paid another company employee a $50,000 bribe to gain information about how the company made a polymer used in automotive hoses, jackets for electrical cables and vinyl siding. He worked with the polymer, Tyrin CPE.

A DuPont scientist is also reported to have been found guilty of stealing company secrets in order to pass them on to China.

This problem could get worse as China attempts to produce not only ever-greater volumes of commodity petrochemicals, but also the smarter stuff.

At least in the West, though, legal systems are usually pretty effective at enforcing intellectual property rights - as the Louisiana case illustrates.

What hope that China, too, might one day develop a similarly effective legal system?

By Malini Hariharan

Spot ethylene prices in the US have moved up following a fire at Enterprise Products natural gas liquids (NGL) complex at Mont Belvieu, Texas, on 8th February.

The complex is said to be among the world's largest underground storage centres for NGLs.

Pic source: ICIS

Spot ethylene offers rose to 49cents/lb, up from 45.50cents/lb, as market participants expected the fire to disrupt ethane supplies to crackers.

LyondellBasell said that it had reduced the operating rate of its cracker at La Porte, Texas. But the fire had caused only minimal disruptions at the company's two crackers in Channelview, Texas.

Other companies relying on ethane supplies from Enterprise have yet to cofirm if their operations have been affected.

But Asian ethylene markets saw limited impact from the fire, said ICIS pricing editor Soo Hwee Peh. Prices were holding steady at $1,290-1,320/tonne cfr NEA on limited spot availability from the Middle East amid talk of delays in term shipments from the region.
Upcoming cracker turnarounds were also supporting prices.

By John Richardson

SAUDI Arabia's crude-oil reserves may have been overstated by as much as 40% or 300bn barrels, according to this article on February 8 in the Guardian, based on cables between Saudi and US diplomats obtained by Wikileaks.

The blog the Oil Drum used the occasion of the article to recap its many posts on the Saudi, and the Middle East in general's, overstatement of crude reserves.

Unreliability of reserve figures dates all the way back to the 1980s when OPEC said it would base quotas on reserve levels and hey presto, many of the members increased their reserve levels. Independent auditing of these new levels hasn't taken place, it is claimed.

The immediate implication of the Wikileaks cables is that Saudi Arabia might well not have enough spare capacity to prevent crude prices from rising in the future.

This is a separate issue from the oil price right now which has been pumped-up by rising political unrest in the Middle East and speculation. As this recent article in the Financial Times points out, supporting the long-held view of the blog, there is plenty of slack all the way along the supply chain to create the substantial change of a sharp price correction. This decline would be exacerbated by the speculative money pouring out of the market.

As far as the long term goes the latest Wikileaks scoop will delight followers of the Peak Oil theory.

We remain unconvinced whether the ancient theory is now at last about to be proved right. There is an awful lot of natural gas oversupply at the moment and the potential for a great deal more thanks to shale gas and growth in liquefied natural gas (LNG) capacity.

This other Oil Drum post points to an example of another technological breakthrough, like shale gas, that could raise US oil production by at least 20%.

But what Wikileaks has re-emphasised is that, surprise, surprise, Middle East reserve figures are not to be trusted. And in the case of Saudi Arabia, it may see a decline in its role as the world's most-important swing producer.

Great uncertainty also surrounds how much natural gas the Kingdom will produce in the future, according to an industry observer who spoke to the blog earlier this week.

This has big implications for availability of gas feedstock for petrochemicals and for the future price of the feedstock.

"Saudi Aramco is making lots of investments in onshore and offshore gas exploration," he said (see the link above for details of these investments).

"We have yet to see any production from these investments. In the Empty Quarter in Saudi Arabia, two of the foreign investors in gas exploration have not renewed their licenses to carry on exploring.

"And even if many of the new wells start producing gas nobody has a firm idea on how wet or dry the resulting output will be."

By Malini Hariharan

A few months back the blog had expressed sceptism on a Chinese company's plans for a methanol-to-olefins (MTO) project based on imported methanol. The economics of such projects appear doubtful but many Chinese companies are looking to go down the same road.

In its annual review on China's coal chemical industry, Consultancy ASIACHEM states that "a number of enterprises in China's coast regions are planning to take the advantages of good logistic conditions and the adjacency to consuming market and invest in MTO projects based on outsourced methanol".

Ningbo Heyuan, Dalian Dahua Fujia, Zhejiang Xingxing New Energy Technology, Jiangsu Shenghong Group and Chia Tai Energy Chemical have announced plans for such projects. And Ningbo Heyuan has even secured financial support and started construction of a 1.8m tonnes/year MTO plant. The project, which would yield 600,000 tonnes/year of ethylene, is scheduled to be onstream by 2012, says AsiaChem.

The successful commissioning of Shenhua Batou's MTO project last year and availability of local technology has spurred interest in MTO projects.

Pic source: Shenhua

Asiachem estimates that more than 20 MTO and methanol-to-propylene (MTP) projects with a total capacity of 10m tonnes/year have been planned. The blog has so far counted 12 projects - details available in this file china coal chemical projects.xlsx.

Interest in coal-based monotheylene glycol (MEG) projects is also picking up with more than 20 projects in the pipeline.

The coal-to-chemicals wave is here to stay.

By John Richardson

THE optimism of Saudi Arabian petrochemical producers remains extremely high, according to an industry observer who spoke to the blog.

One might think we were to some extent stating the blatantly obvious as their margins will have swelled thanks to higher oil prices.

But there is also little concern among the producers that higher crude might cause a global economic bust, said this same observer - despite what we believe is a great deal of evidence to the contrary.

Another risk he pointed to in quotes below was operating-rate increases which end up being out of sync with the market.

This is a risk we have highlighted before. To a significant extent rate increases might happen because the feedstock is available rather than because the market is in a healthy-enough state to take increased volumes.

In his words, this is what he told us:

"The Saudi crackers are continuing to run at 80-85% and so obviously if there is more associated gas available through increased oil output, then we could see these crackers going to 100%. I estimate that this would represent a total of an additional 1m tonne/year of ethylene - in other words, one extra worldscale cracker.

"If all the European crackers were to go from their current operating rates of an average of around 80% we are talking about a lot more - 2.5m tonne/year of extra ethylene. This would obviously also depend on feedstock availability -i.e. how the refineries run in Europe for the rest of this year - and on demand.

"The mood among the Saudi producers remains exceptionally buoyant, the best for several years.

"Earnings in 2010 were excellent and they feel that this year could be even better. They were sold out by mid-January and told their customers 'come back in February when we will probably raise prices.' This also applied to some producers elsewhere.

"There is no real talk of the big macro-economic risks. Even if China's percentage growth rates slow down you are talking about lower growth from a much-bigger base than 5-10 years ago. China's polypropylene (PP) consumption is now bigger than that in the US.

"On logistics, and as well as on feedstock, what you see and what you calculate is different from what the companies say.

"You visit plants and you see resin stacked in the desert. They say 'this is because our capacity is so big', but obviously when you plan a complex you factor in sufficient storage to prevent resin from degrading in the desert.

"On feedstocks you can calculate from the trade data and earnings that they are, in fact, running at a lot less than 100%."

Chinese workers are on the hop....
 

Source of picture: advanced-fibre.com

By John Richardson

CHINA'S polyolefin demand in the few days of proper trading that have taken place since the Lunar New Year has been described as "horrendous" and "grim" by two traders the blog spoke to yesterday.

This was confirmed by a source with a leading Asian producer - but not for the major macroeconomic reason that you might well assume.

Higher interest rates, bank-reserve requirements and other measures designed to slow the economy down are not behind weak short-term demand, according to our sources.

On the contrary, the producer believes that China's government is now "ahead of the curve" in combating inflation and therefore the prospects for the rest of the year remain good.

The Dalian Commodity Exchange has in fact rallied post-New Year on the belief that the interest rate shock to the economy has already been factored in.

What has instead been given as the reason for poor demand is the traditional Chinese custom of job-hopping after the festive period.

A lot of factories in southern and eastern China are reported to be struggling to operate at full rates because migrant workers have quit their jobs in order to move on to pastures new, shortly after collecting their annual bonuses.

In light of this traditional seasonal labour-disruption problem, polyolefin imports before the holidays seem excessive.

"My contacts tell me that the bonded warehouses in the south and the east are full with resin being stacked in car parks," one of the traders told us.

"The market will correct itself, as it always does, by re-exports from China. The re-exports are never great in volume but they can be enough to tip the balance in the right direction.

"I've been able to re-export to Turkey and Vietnam. Other traders have also moved material to South America."

He believes that the temporary supply glut might not be fully resolved until late March and therefore doesn't expect significant price increases until then (notwithstanding, of course, some other unforeseen events that move the market).

"Before the holidays producers were talking about raising prices on good demand and higher raw-material costs after the New Year," he added.

"Several had sold all their February material by the first few days of the month.

"But now there is a significant gap between post-New Year offers and concluded business."

Linear-low density polyethylene (LLDPE) offers were yesterday at $1,480/tonne CFR China as against concluded business of $1,450/tonne CFR China, he told us.

Homopolymer polypropylene (PP) offers were $1,580/tonne CFR China compared with limited transactions at $1,550/tonne CFR China.

Returning to the job-hopping issue we mentioned earlier on, what the blog needs to try and get to the bottom of is whether this temporary disruption to labour supply is worse this year than in 2010.

Rising wage expectations as a result of China's booming economy, connected to which of course is the inflation problem, might have made workers more restive than usual.

A growing awareness of their rights as workers, supported by government-mandated improvements in working conditions, might also be factors behind an increase in job-hopping.

By John Richardson

EUROPEAN refiners are "awash with naphtha" as a result of long-term structural length and a lack of arbitrage, a petrochemicals feedstock purchasing manager told the blog yesterday.

The decline in US gasoline demand (according to most experts consumption in the States peaked in December 2007 and has been falling ever since) has left European refiners long on both gasoline and therefore naphtha for several years now.

At the same time the European refiners are under pressure to maximise production to meet strong local diesel demand!

What has added to these long-standing pressures in the last few weeks is closure of naphtha arbitrage to Asia due to the upcoming cracker turnaround season, added our source.

"Brazilian arbitrage is also shut because that market has been well-supplied from elsewhere," he said.

This could, in theory therefore, create an opportunity for European cracker operators to squeeze some heavy discounts out of the refiners.

The high cost of Brent crude, though, which is trading at a big premium to West Texas Intermediate, is underpinning the price of naphtha in Europe.

The scenarios one can describe include cheap naphtha supplies that tempt European cracker operators to overproduce.

Our fellow blogger Paul Hodges believes that the biggest factor behind tight European petrochemicals markets over the last 18 months has been lack of feedstock from the refiners.

Or will refiners cut runs as crack spreads get squeezed?

By John Richardson

IS China's polyethylene (PE) market going through a temporary lull or are we seeing a sea change in conditions that could spell problems for the rest of this year? This was the question, to paraphrase Hamlet, facing the global industry late last week as lacklustre post Chinese New Year (CNY) demand continued.

As we wrote about last week, trader inventories in bonded warehouses are high as a result of imports before the New Year proving to be excessive.

We wrote in that same post that job-hopping after the holidays was restricting the ability of converters and finished-goods manufacturers to run at high operating rate.

But a much more important reason for the weak demand is bank-lending restrictions, according to Rainy Ma, our polyolefins expert in Shanghai, who works for ICIS Chemease.

"Converters and finished-goods producers have the orders, they just cannot get the working capital," she told the blog.

China has increased bank-reserve requirements twice this year with the latest announcement made last week. It has raised reserve requirements eight times since the start of 2010 in an attempt to cool the economy down.

A further factor behind moribund pricing - which as this ICIS pricing graph showed either remained flat or only edged up slightly last week - was the wide gap between offer prices from overseas producers and domestic bids.

The overseas producers we have spoken to continued to claim tight supply across several grades and, of course, higher raw material costs, as reasons not to budge on their pricing (see below for some analysis for producer margins).

Whereas import prices were more or less flat, there were some reports of declines in domestic pricing.

This was the result of traders off-loading cargoes from those overfull bonded warehouses in order to repay 90 day letters of credit due in March-April, the blog was told.

The traders were also continuing to re-export resin to South America and Vietnam in an attempt to tighten the market and to, of course, make some money.

High US ethylene prices have recently made exports difficult for the country's PE producers, including backyard shipments to South America.

Margins for Asian integrated low-density PE (LDPE) and high-density PE (HDPE) producers improved last week, according to the ICIS weekly Asian PE Margin Report.

LDPE margins rose by $48/tonne to their highest level since February 2010 with HDPE margins $65/tonne higher.

Improvements were the result of better co-product credits, particularly butadiene - which has been the case for several weeks now - while naphtha costs remained flat.

But it is polyethylene that over the long-run is the main economic driver of any steam cracker and so what is happening in China will remain a big source of concern.

By Malini Hariharan

Paraxylene (PX) markets are on a roll. Prices have risen by 20% since the beginning of the year and were assessed at around $1,620/tonne cfr Asia late last week by ICIS pricing.

One contract nomination for March was out yesterday with JX Nippon Oil proposing a $110/tonne increase to $1,730/tonne cfr Asia.

The opening of the East-West arbitrage window has fuelled Asian markets. Plant problems in the US and Europe could create room for as much as 50,000 tonnes of Asian product.

European spot PX prices moved towards record levels last week despite a number of force majeure declarations in the downstream purifited terephthalic acid (PTA) industry. Buyers were said to be willing to pay as much as $1800/tonne for spot PX.

Besides the arbitrage factor, Asian markets were also propped up by unconfirmed reports of a possible delay in the start up of S-Oil's new 900,000 tonnes/year plant. The plant was expected to start at end-March but this could be delayed by two months, said market players.

However, action in the Asian PTA market was muted last week as a fall in futures prices on the Zhengzhou Commodity Exchange dampened sentiment. There were also concerns about the impact of the Chinese government's efforts to tighten liquidity. Labour shortages in the coastal regions had also affected the textile sector and polyester margins were under pressure from high input costs.

Additionally, around 1.5m tonnes/year of Chinese polyester capacity scheduled for maintenance shutdown from 10 February to 10 March which would further hit PTA demand.

But these could be temporary factors as cotton prices continue to remain firm.

In a recent report, analysts at UBS Investment Research noted that cotton prices have risen by 30% so far this year and were expected to remain strong at least until the next harvest season in late Q3 2011.

The analysts were bullish for the entire polyester chain and have revised their spread forecasts for the year.

The average PX-naphtha spread has been raised to $550/tonne from the earlier estimate of $370/tonne. The PTA-naphtha spread has been raised by nearly $100/tonne to $605/tonne while the ethylene-monoethylene glycol (MEG) spread was expected to reach to $350/tonne in 2011, up from the previous estimate of $190/tonne.

"We see limited new capacity coming on stream in 2011-12 for PX and MEG. And with the strong downstream demand, spreads are likely to remain robust in the next one to two years," they noted.

By Malini Hariharan

Asian polyolefin producers face a difficult time with markets being pulled in different directions. Feedstock costs have steadily moved up at a time when downstream demand and price direction remains uncertain.

Political upheaval in Libya and Bahrain pushed WTI crude oil to over $94/bbl yesterday while Brent hit $107/bbl. Naphtha soared to $927/tonne CFR Japan, a level last seen in August 2008.

These developments coupled with tight supply due to upcoming cracker turnarounds raised ethylene price expectations to around $1,350/tonne CFR Northeast Asia while propylene was stable $1,460/tonne CFR Northeast Asia respectively.

However, polyolefin markets in China did not keep pace. Burdened by weak demand and oversupply Chinese traders were looking at re-exporting polypropylene (PP) to southeast Asia, reports my colleague Bee Lin Chow. Yarn and injection moulding grades were on offer at $1,650/tonne CFR Indonesia from China, about $50-90/tonne lower than offers from other sources in Southeast Asia.

In polyethylene (PE), the key linear low density PE (LLDPE) futures contract on the Dalian Commodity Exchange dropped 1.6% yesterday on profit taking. Traders were said to be locking their profits by taking a sell position on the Dalian.

Indian demand was also lacklustre as buyers were unsure of price direction, said one local industry source. The sharp rise in oil prices had not resulted in a spurt in buying as many players viewed this as a temporary situation which would be corrected with an easing of the Middle East crisis, he added.

In addition to this, moves by various Indian states to restrict the use of plastics bags also dampened sentiment. The Delhi government was said to be considering closing down over 400 plastic-bag manufacturing units to ensure effective implementation of its 2009 ban on use of these bags.

The country's Supreme Court also confirmed last week a ban on sale of tobacco products in plastic pouches from 1 March. This segment was estimated to consume over 50,000 tonnes of PE.

A second source pointed out that trading had been hit by the wide difference between international and domestic prices. Local producers have pegged PE prices below import parity levels for the last few months to restrict import volumes into the country. "Fundamental demand is not bad; but the price delta is so high that traders are not risking imports," he added.

By Malini Hariharan

The blog has been updating the status of Indian petrochemical projects and has found that many are running behind schedule.

Reliance Industries' mega cracker at Jamnagar has yet to get off the starting block. The company is holding on to an end-2014 start schedule for the 1.4m-1.6m tonnes/year cracker which will be based on offgases and other refinery feedstocks. Sources close to the company said that preliminary work related to technology selection has been completed and the projects team is only waiting for the green signal. Given Reliance's project implementation record it should be able to keep the schedule if a decision is taken soon.

Meanwhile, Reliance has started work on a 1.1m tonnes/year purified terephthalic acid (PTA) project at Dahej on the west coast of India. The project is scheduled to be completed in the second quarter of 2013. Reliance has also planned a second PTA plant of a similar capacity at the same site. Technology has yet to be selected but the target date for completion is end-2013. A new paraxylene (PX) of 1.3m-1.5m m tonnes/year at Jamnagar has also been planned for completion at the same time.

The other big PX/PTA project in Baroda, Gujarat, by Indian Oil Corp (IOC) is unlikely to be completed before Q4 2013 as the company has yet to make a final investment decision.

"A decision should come through in 1-2 months; the company would then need 30-32 months to execute the project," said a source close to developments.

This 370,000 tonnes/year PX and 560,000 tonnes/year PTA project was earlier scheduled for completion at end-2012/early 2013.

IOC is also looking at putting up a PX plant at its refinery in Haldia, West Bengal. A decision on this project is dependent on an offtake commitment by Mitsubishi Chemical which operates two PTA plants at Haldia.

"They have to agree on legal and commercial issues; if they arrive at an agreement this year then we are looking at start up in 2015," he added.

One project that has been progressing is state-owned GAIL's 450,000 tonnes/year expansion of its gas cracker at Pata, Uttar Pradesh. The expansion will feed a new 400,000 tonnes/year swing linear low density polyethylene (LLDPE)/high density polyethylene (HDPE) plant. The blog has heard that Univation is likely to provide technology for this unit and startup is scheduled for 2014.

However, Gail's joint-venture cracker project in Assam in Northeast India has been delayed to beyond 2015, said a source close to the company. The sub worldscale project (cracker capacity of only 220,000 tonnes/year) has been facing many problems including a steep escalation in costs.

Local media reports have estimated that the project cost has nearly doubled to Rs 100bn ($2.2bn).

The government is now examining how to make the project viable; more subsidies will have to be offered, the source added.

The project makes no sense but GAIL has no choice but to implement it as the government is keen to develop this part of India.
And lastly, ONGC Petro-Additions Ltd's (OPaL) 1.1m tonnes/year cracker project at Dahej has seen another setback. A source close to the project have told the blog that Daelim and Chevron Philips Chemical who had bagged the contract for a 340,000 tonnes/year HDPE project have parted ways. As a result OPaL will have to reissue tenders and this could mean a delay of 6 months; the Q1 2013 target looks impossible, said the source.

As reported earlier the company faces a situation where its cracker would be completed at least six months ahead of the derivative units. The blog would like to know if olefin traders have started knocking on OPaL's doors.

By Malini Hariharan

South Korea's Lotte Group, parent company of Honam Petrochemical, is making yet another bold move. After acquiring Malaysia's Titan Chemicals last year, Lotte has set its sights on a major petrochemical project in Indonesia.

"We will start the feasibility study to develop a petrochemical project in Merak, Banten province, this year. The investment is estimated to cost between $3 billion to $5 billion," said Shin Dong-bin, chairman of the Lotte Group, after a meeting with the Indonesian president.

Construction of the project is expected to start next year with completion within four to five years.

Lotte already has a presence in the Indonesian polyethylene (PE) market with Honam operating two plants that it obtained via the Titan acquisition.

The Titan acquisition gave Lotte a presence in Indoneisa in the form of a polyethylene (PE). Moving upstream to build a cracker to secure feedstock would appear to be a logical move.

The project appears to be part of a wider Lotte strategy that involves an expansion in the Indonesian retail sector. And Lotte is likely to receive plenty of incentives as the Indonesian government is keen to attract foreign investors.

This will be needed as Indonesia has been a difficult place to justify a petrochemical investment with competition from established players in Southeast Asia and also the Middle East. Chandra Asri, the country's sole cracker operator which relies on imported naphtha, has struggled ever since it commenced operations more than ten years back. The environment has become even more difficult after the implementation of the Asean FTA and the China-Asean FTA this year.

Details of Lotte's planned project are not yet available. It is also not clear if this is in addition to an expansion of Malaysian crackers that Honam had talked about at the time of the Titan acquisition.

And can Indonesia support multiple projects? Chandra Asri is once again talking about expanding its cracker by 400,000 tonnes/year to 1m tonnes/year and debottlenecking its PE and polypropylene (PP) plants. It also plans to diversify its feedstock slate to include liquefied petroleum gas (LPG). The company has tied up with Vopak to start construction of a terminal at the end of this year with operations to being in 2014.

By John Richardson

THE main issue facing Asian cracker operators a couple of weeks ago was how long co-product credits would continue to compensate for a moribund China polyethylene (PE) market.

Feedstock cost is now the biggest immediate worry. A hike in naphtha saw integrated low-density PE (LDPE) margins plummet by $172/tonne, according to the 25 February ICIS pricing Asian PE Margin Report.

But while the crisis in the Middle East might be dominating everyone's attention, the weakness in China hasn't gone away.

Some contacts told us that imported prices for PE edged up by $15-25/tonne last week.

But from most of the meetings the blog held in Singapore last week, we could find no evidence of any improvement in pricing.

End-users remained severely hampered by temporary labour shortages caused by the job-hopping and the credit-tightening we have already discussed.

An improvement in overseas pricing doesn't also marry with continued reports of domestic pricing suffering further declines, said most of our sources.

The main focus in China right now is on reducing high levels of inventories of imported material through, for instance, re-exports by traders to South America, Vietnam and Turkey, they added.

The crisis in Libya is at front of mind, a sympton of which was last week's 8.8% rise in naphtha costs on higher crude.

"The prospects for this year looked very good before Libya. Tunisia and Egypt caused some concern, but we now have no idea about the full implications of what we are confronting," a senior Singapore-based industry executive with a leading polyolefin producer told the blog last week.

A great deal of Saudi Arabia's crude production is in the east of the Kingdom, where there is also a large community of Shia Muslims. It is the Shia majority in nearby Bahrain that have been behind the unrest there.

Assessments of the likelihood of unrest in Saudi Arabia have moved from a "no" probability to a "low" probability in the space of a week.

Saudi's apparent decision to raise oil output last Friday, which helped to calm markets, illustrated once again its crucial role ias a swing producer. Any disruption to the country's production could, as a result, be disastrous for the fragile global economic recovery.

"If crude were to suddenly go to $150 a barrel I could see demand falling overnight by 20%," the senior executive added.

But even if there are no problems in Saudi, analysts at Nomura have calculated that if unrest were to spread to Algeria, crude could rise to $220 a barrel.

Comparisons are therefore being drawn with the 1973 oil embargo, the Iranian revolution and Iraq's invasion of Kuwait.

The big danger is that petrochemical companies may not adequately see this risk.

They could instead look at last year, assume the global recovery will continue, and buy raw materials ahead of further increases in naphtha and other feedstock.

We are confronting another shock for the world's economy on the scale of Lehman Bros. Great caution is needed.

By John Richardson

ASIAN ethylene markets appear to be in a muddle over the Middle East supply picture.

Click here for a graph of the latest pricing - EhylenePrices1March2011.ppt 

A shipping industry source we spoke to recently insisted that more rather than less C2s were being exported from the region as opposed to the reduced volumes being claimed by Japanese traders.

One reason being put forward for the lack of clarity is how Iranian volumes are being reported, given sensitivities around compliance with sanctions.

The upcoming Asian cracker turnaround season and production problems at the YNNC No 1 cracker in South Korea, reported by my colleagues at ICIS news, lend support to the tight-market argument.

But it is fathoming the Middle East situation that remains crucial as the region is the swing producer for ethylene. Iranian volumes are the most volatile on a month-by-month basis.

The 300,000 tonne/year Ras Lanuf cracker in Libya was thought to have been down earlier this month due to the unrest. About half of the C2s are exported to destinations such as Italy, Turkey, Algeria and North Africa with propylene and butadiene shipped out of the complex, we understand

But even if Ras Lanuff were still down at the moment this wouldn't amount to much more than a tiny hill of beans in the overall picture.

"I really don't know for certain if there is less ethylene coming out of the Middle East but I suspect so," an industry source told us last week, reflecting the extent of the uncertainty.

"I don't think the Iranians are exporting as much, although how this is being exported might be obscured for sanctions reasons.

"What I do know is that the Saudis were approaching their contract customers in December to try and get back into old contracts that had been brought to a halt by the shortage of feedstock. In January and February, the Saudis don't appear to have had the extra export volumes that they expected."

This might be the result of less associated gas being available than had been expected, we both speculated.

The question now, following the apparent decision by Saudi Arabia to raise crude-oil production, is whether this will lead to more associated gas being supplied to petrochemicals. We then need to fathom whether this will work its was into more C2s or derivatives exports.

A further factor behind the tight-market view is unconfirmed reports of recent production problems at a major Saudi complex resulting from a flash flood and a power failure.

"I think ethylene will definitely stay tight for the rest of H1 but the second half is anyone's guess," our industry source added.

The blog feels that ethylene might have been talked-up a little last month in an effort to compensate for the flat polyethylene (PE) markets we referred to yesterday.

Right now, though, the uncertainty could well be a symptom of a wider lack of clarity there as fear and caution start to eat into confidence. The obvious catalyst for this is the Middle East.