Asian Chemical Connections

By Malini Hariharan

The long-awaited merger between PTT Chem and PTT Aromatics (PTTAR) was finally announced last week.

A presentation made to financial analysts gave details on what the merged entity will look like, planned synergies and opportunities for growth.

The new company with a total petrochemical capacity of 8.261m tonnes/year and petroleum products capacity of 228,000 bbls/day will be a clear leader in Thailand (ahead of Siam Cement Chemical) and also in Southeast Asia. It will be second to Petronas Chemical in terms of enterprise value but number one on revenue and assets.

Source: PTTAR

Synergy projects have already been identified which would require an investment of $92m. These include tapping the offgases, C3/C4, heavy aromatics and other streams from the PTTAR's refinery as feedstocks for PTT Chem's existing crackers and optimisation of facilities such as oil tanks, jetties, and steam and gas turbines, Once completed by 2015, these projects would yield annual benefits ranging from $80.2m to $154.1m.

The merged entity sees opportunities for expansion in value-added products/ differentiated products such as polyurethane, propylene oxide (PO), polycarbonate, polymethyl methacrylate and caprolactam.

In a statement to the Stock Exchange of Thailand (SET) the two companies also talked about improvement to the refining process that would result in increased production of hydrowax which will be used as feedstock for a new cracker project. No further details were available about this project.

The merger of PTT Chem and PTTAR is the first stage in the full consolidation of all the PTT affiliates. The next stage will see a merger of IRPC with the new company.

"This is our future plan, to combine all the petrochemical units in order to gain market capital, add value to our assets and improve cost efficiency," said PTT president and chief executive Prasert Bunsumpun at a press conference last week.

By John Richardson

THIS might amount to a little more than a ripple in a teacup if the Middle East crisis brings the global economy down (as we said on Monday, crude could go to $220 a barrel if the crisis spreads to Algeria. Equity and oil markets were jittery yesterday on the belief that that unrest could, after all, spread to Saudi Arabia).

But nevertheless, in an attempt to carry on as if life were normal we have been talking to the polyolefins market over contrasting views about the immediate prospects for linear low-density polyethylene (LLDPE).

One view is that insufficient butene-1 feedstock will continue to constrain availability - along with the wide delta with low-density PE (LDPE).

LLDPE can replace LDPE in some applications or the two polymers can be blended together in varying proportions depending on economics.

Investment in LPDE has been insufficient over recent years to meet demand and many producers have also switched plants to higher-margin ethylene vinyl acetate (EVA) production, demand for which is being driven by the solar-panel industry.

EVA is used to make the encapsulants that go into the solar panels.

"Butene-1 remains tight right now, but not quite as tight as last year. However, supply is about to be reduced as a result of the Asian cracker turnaround season that is just starting," an olefins trader told the blog.

"Another factor that is already making butene-1 tight is the switch by European crackers to lighter from heavier feed. Every cracker that can crack propane is cracking propane as opposed to naphtha, because of the wider differential in the cost of the two feedstocks" (More on this subject later).

One of our senior industry sources disagreed.

He said: "Sure, there was butene-1 tightness a couple of years ago but more recently this has been an excuse used by producers to achieve their strategies. This is a C2s game not a C4s game as ethylene costs matter a lot more.

"High-density polyethylene (HDPE) prices have gone too low over the last couple of years as a result of antidumping duties by the US against plastic bag imports from China and Malaysia."

(Confused? Here's the explanation: LLDPE and HDPE are often produced in swing plants and so although each of these polymers have different end-use applications, the relative strength of each of their markets is crucial for production-volume decisions)

"In other words, what I am saying is that the market overreacted to the duties.

"Further support for HDPE has been provided by very expensive polypropylene (PP) due to the surge in propylene costs. Injection-grade HDPE can be substituted for PP.

"HDPE pricing in Europe has subsequently recovered slightly. This should have been the case in Asia also, but demand is currently awful for all grades of polyolefins so nothing is moving - the whole market is flat.

"Swing producers in Asia, the US and Europe are, as a result, swinging back more towards HDPE away from LLDPE.

"There is no change in the Middle East because plants there that are supposedly swing only produce HDPE as it a technically easier polymer to make."

"The trouble is that a producer can look at his own output and economics in isolation forgetting that everybody is likely to be doing the same.

"So you might end up with several hundreds of thousands of HDPE suddenly arriving in the market at the same time that can send prices heading in the opposite direction.

"Once you have made the production switch it has to remain in place for 3-6 months because of orders placed by your customers. While it is easy for a producer to quickly switch between HDPE and LLDPE it takes converters a lot longer.

"These decisions are crucial because you are looking at several hundreds of millions of dollars per 1m tonnes of additional production."

To the blog this is all fascinating stuff. Maybe we need to get a life?

By Malini Hariharan

With naphtha crossing $1000/tonne yesterday Asian petrochemical producers reliant on this feedstock remain caught in a tight spot. Costs are continuously rising while market direction for key derivatives is uncertain.

Ethylene and propylene prices are holding firm at around $1,350/tonne CFR Northeast Asia and $1,500/tonne CFR Northeast Asia respectively, supported by a cracker outages and upcoming turnarounds in South Korea and Japan. And aromatic prices are tracking developments in upstream markets with benzene at around $1,180/tonne FOB Korea.

But the Chinese polymer market continues to trouble producers. As explained by the blog earlier, demand is weak as credit tightening has affected traders and end-users.

"It is a difficult market. Looking at crude oil and naphtha, we need a price increase of over $100/tonne for polypropylene (PP) in April; but we will probably have to start with $30 and if successful, ask for more. The big constraint is weak Chinese demand," explained one South Korean producer.

As for polyethylene (PE), he thinks it is better to forget exports and instead focus on the Korean domestic market.

His only hope is that turnarounds in Q2 will keep supply tight. Additionally, spiraling naphtha prices should force at least some Asian producers to cut output. And eventually, the sentiment of rising crude oil prices should trickle down to the polymer markets.

Crude oil prices declined by a few dollars yesterday after news emerged of a possible peace plan for Libya. However, the situation is still very fluid and there is every possibility for a rebound.

Not surprisingly then, some cracker operators are looking at propane/butane as an alternative to naphtha. The Saudi Aramco March contract price for propane is at $820/tonne FOB Arabian Gulf while butane is priced at $860/tonne FOB Arabian Gulf.

The premium on spot propane is now $15-20/tonne but the delta is still lucrative, pointed out one industry source.

While Asian naphtha-based producers are struggling, their counterparts in the US are well placed.

In a recent report Alembic Global Advisors sees a scenario beneficial to US ethane-based producers.

"US ethane based producers would continue to enjoy very healthy margins benefiting from the pricing umbrella provided by high cost naphtha based producers. It is worth noting that if crude oil prices continue their ascent the US ethane based cost advantage may widen further."

As a rule of thumb if natural gas prices remain flat while crude oil prices rise by $10/bbl, US ethane based ethylene margins should expand by around $120 per tonne, the analysts estimated. And the key beneficiaries would be Dow Chemical, LyondellBasell and Westlake Chemical.

By Malini Hariharan

C4 buyers are a troubled lot. Availabilty of the product is tight and will remain so for the foreseeable future.

So it was not surprising to hear that concerns about C4 supply dominated discussions at the recent 6th ICIS World Olefins Conference in Brussels.

From a surplus in 2010, Europe is predicted to be short in 2011. The region is also expected to emerge as a net importer with demand growing by 20,000-40,000 tonnes/year.

The weakness of the European raffinate 1 market relative to its feedstock, crude C4, and its co-product butadiene (BD) will have a negative impact on butadiene extraction utilisation rates if it persists, INEOS market manager for C4s David Cartwright said at the conference.

He pointed out that raffinate 1 pricing had fallen into a negative €45/tonne ($62/tonne) spread on average in the 2010-2011 period, having previously averaged a premium of €48/tonne in the pre-crisis 2006-2007 period, and that this was not sustainable.

If BD extraction rates were to be limited by poor raffinate market performance, it would be another nail in the coffin for European BD consumers already facing the prospect of tightening BD supplies and soaring prices, reported ICIS pricing editor Nel Weddle from the conference.

And the supply outlook in the US is equally grim as the crackers were expected to continue using ethane as feedstock.

Ethane presently accounts for around 65% of US cracker feedstocks, but the Barry, Dow Chemical's co-monomer and global C4s business director, estimated that number would rise to 70% by 2015.

Buyers are now hoping that high BD prices would push some end-users out and help demand and supply return to a more balanced position.

"There is a natural cap to future BD price increases, some will be forced to exit," said Christof Krogmann, vice president petrochemical projects of major BD consumer LANXESS.

The high prices could also make alternative on-purpose routes viable. This includes butane/butene dehydrogenation and bio routes to C4.

By John Richardson

"Just when you think it is the right time to make an investment case to a board of directors, the particular opportunity you have been studying has an annoying habit of disappearing," said a business development manager for a global polyolefins producer.

His comments reflect the increasingly complex world in which we live. Interactions between environmental pressures, shifts in government policy and changes in consumer behaviour are just some of the factors that can rapidly result in an opportunity becoming yesterday's news.

A product might very simply also get too expensive, resulting in demand destruction.

A classic case in point about how opportunities can suddenly vanish is the ban by India's Supreme Court from 1 March this year on gutkha - a mix of tobacco, betel and other ingredients - when it is packaged in single-serve polyethylene (PE) pouches.

This sector accounts for about 50,000 tonnes/year of PE demand in India.

The moral case for pushing sales of gutkha, a chewing tobacco, is pretty dubious to say the least.

"Apart from the obvious health risks, what is really sad is that very low-paid workers chew this stuff in order to suppress their appetites. It is cheaper than food," added the business development manager.

So the idea behind banning plastic packaging is to reduce the nationwide scale of the industry, making supply more local and therefore harder to access, he said. PE is used to preserve the shelf-life of the tobacco, increasing availability across the country.

One might think that this is an opportunity well worth losing for the wider good.

The danger now, though, is that the tobacco test case could be used by local non-governmental organisations (NGOs) to attack more defensible areas of India's plastic-pouch industry.

"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," said an India-based industry source.

Pouches or sachets 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 104,000-kilolitre Indian shampoo market in 2008, up from 71% in 2006 and 73% in 2007.

India faces a huge plastic waste-management problem, hence the concern that the NGOs will go after the wider industry.

"True, there is a big waste issue. But these sachets cost just a few cents each and with incomes still very low for most Indians, this pushes a little luxury into hundreds of millions of lives," said a second India-based industry source.

"For the women factory workers who cannot even afford a whole bottle of shampoo, the odd sachet at the weekend with a picture of a Bollywood star on the sleeve makes them feel a little bit like that Bollywood star for a few seconds."

If this is tugging at your heart strings, also think about the economic potential: giving India's vast army of low earners a taste of being middle class raises aspirations, encouraging consumption growth for all manner of products made from chemicals and polymers.

India's polyolefins industry will therefore need to battle hard and battle smart to protect the segment.

This is a good example of how rising public awareness about chemicals and polymers in general makes engagement with governments and NGOs ever-more important.

At a much more prosaic level, a product can quickly become too expensive before an investment opportunity can be pursued.

Low density PE (LDPE) is a case in point, where demand in the Indian market fell by 6% last year due its high cost, according to a local industry estimate.

The cost has soared because of lack of investment in LDPE capacity, once seen as a sunset product because of the development of linear low density PE (LLDPE) - a substitute for film applications.

LDPE has remained popular because it can be very easily processed on what is often very far from state-of-the-art machinery in Asia.

Boosting extrusion- or coatings-grade LDPE consumption has been seen in the growth in the plastic pouches we have just been talking about.

Pouches for food and non-food items are often made from multi-layer structures, including LDPE, LLDPE, metallocene LLDPE and metallised polyethylene terephthalate (PET) film.

Despite this strong source of demand, many LDPE producers have switched their plants to ethylene vinyl acetate (EVA) production, where margins have been better. A booming end-use sector for EVA is to make encapsulants for solar panels.

"Another problem is that you can only make extrusion- or coatings-grade LDPE via the autoclave process," the business development manager added.

"The autoclave process is expensive in energy costs and is difficult to operate. Nobody, as a result, has invested in autoclave capacity for many years."

This might logically lead to full-scale and costly research into new production processes for LDPE extrusion grade - or into other polymers that can do the same job.

But the danger is that an overall ban on plastic pouches in India drives a 500-tonne freight train through demand growth.

Such uncertainties could make incremental changes in technologies and product mixes, rather than any major research and development initiatives, the way forward.

In this ever-more complex and changing world, you would then run the risk of losing the biggest opportunities of all.

By John Richardson

CHINA'S polyethylene (PE) market - a reasonable proxy we often use for the chemicals and polymer industries as a whole - remains worryingly weak, according to several traders and producers interviewed by the blog this week.

Modest restocking did take place last week, leading to a very slight improvement in sentiment and an edging up in pricing, but as one trader told us: "All this probably amounted to was end-users hedging against further hikes in raw-material costs."

But while import prices might have edged up for some grades, domestic prices remained flat or declined.

A Southeast Asian end-user asked us the question, after looking at the cost pressures from crude upwards and the rally in polyolefins prior to the current lull: "Could this be a repeat of 2008?"

We think quite possibly, yes. On a wider basis this is a concern we have raised before.

The rally in crude, now driven by a supply (Libya etc) rather than a demand story, as was the case last year when it all about a booming China, could cause significant macroeconomic damage. Our advice to the end-user was to be very cautious over trying to hedge raw material costs by stocking-up on resin.

"We continue to see quite significant re-exports from China because PE inventories remain pretty high," added the trader.

A producer concurred and pointed out that the underlying cause of the current lull in the market is different from that which occurred in Q2 last year.

Click here for a pricing graph - PEpricingMarch42011.ppt

At that time speculative imports of resin, resulting from lax lending conditions, resulted in a steep fall in pricing as traders off-loaded their high stocks.

This time around there seems to be a genuine slowdown in demand taking place as a result of government measures aimed at taking the heat out of the economy. My fellow blogger Paul Hodges points to the fall in the Baltic Dry Goods Index and a recent OECD report as indicating this slowdown.

"End-users remain short of credit because of the new restrictions on lending. It is very quiet out there," a second trader told us.

On this occasion, unlike in Q2 last year, pricing has yet to fall off a shelf.

The reasons include an extensive cracker turnaround season which is restricting supply. This includes a nine-week turnaround that was begun at the ExxonMobil complex in Singapore earlier this week.

Another factor is the obvious cost-push from higher naphtha.

We made the point a couple of weeks ago that crackers mainly exist to convert ethylene into PE and that therefore co-product credits (strong propylene, benzene and butadiene) could only support margins for a limited period.

The March 4 ICIS Weekly PE Margin Report for Asia supported this view.

"Integrated PE margins in northeast Asia nosedived this week by around $155/tonne on a 7.0% rise in naphtha feedstock cost," wrote my colleagues.

"Naphtha prices are the strongest since August 2008. Co-product credits rose by 3.2% on firmer butadiene and propylene prices; polymer prices were unchanged.

"Integrated low-density PE (LDPE) margins are the lowest since July 2010 and integrated high-density PE (HDPE) margins are in negative territory and are the lowest this decade."

Standalone margins, however edged up slightly as ethylene prices declined.

The Ras Laffan cracker in Qatar was reported to be again exporting C2s after resolving technical problems. This might have been a factor behind weaker ethylene.

More ethylene could be on the way from the Middle East if the decision first by Saudi Arabia - and now apparently by other OPEC members - to increase crude output results in more associated gas feedstock.

Alternatively, the ethylene could be converted into more resin and/or monoethylene glycol (MEG).

Higher-cost producers in Asia might have to respond with production cutbacks that could well include extended turnaround periods.

By John Richardson

IF exploration and production (E&P) is the dog and refining the tail on the dog, poor old petrochemicals is merely a flee on the tail of the dog, goes the old saying.

Hence last November we reported on the strange case of how China's drive to hit emissions targets under its 11th Five-Year Plan had led to coal-fired power stations being closed down.

Manufacturers in China's southern and eastern provinces responded by switching on their diesel-run generators, thereby greatly boosting the demand for gasoil.

Sinopec was forced to cut polyethylene (PE) and polypropylene (PP) production as distillation columns were adjusted to make more gasoil at the expense of lighter ends, such as naphtha.

Gasoil that had been cracked directly in steam crackers was also diverted into the diesel pool.

Apparent oil demand grew by 17.7% in December last year as a result of refineries being run hard to meet the gasoil deficit, according to the International Energy Agency's February 2011 Oil Market Report.

"China's refiners also ran very hard in January in order to stockpile gasoil ahead of an anticipated demand spike over the Lunar New Year Period and to keep drought-hit areas well-supplied," a Singapore based refinery consultant told us.

"This resulted in gasoil exports falling to their lowest level since late 2008."

China's trade deficit for February was the largest in seven years and much-bigger than anyone had expected.

This could have been either the result of the Lunar New Year denting demand more than anyone had forecast, and/or that government tightening measures are substantially slowing the economy.

Could this mean that refineries are now sitting on stockpiles of gasoil? If so, will Sinopec cut back on operating rates or try to get rid of middle distillates by increasing supplies to its crackers?

Might Sinopec also re-adjust distillation columns to make more light ends again, including naphtha, thereby further increasing petrochemical feedstock availability?

The resulting increase in domestic petrochemicals production would be a further blow to Asian and Western importers, who, we believe, are facing more supply from the Middle East. OPEC has reportedly increased oil quotas, thereby making more associated gas available to run crackers in Saudi Arabia, Kuwait etc a lot harder.

Our assumptions about China could be entirely wrong, of course, but what we have suggested above is certainly worth checking out. Or perhaps you can point out what is really going on out there?

Another potential complication highlighted by the IEA relates to coal supply.

"Coal shortages could emerge, notably in winter, thus boosting gasoil use again: some observers note that bottlenecks are becoming much more serious, while coal stockpiles are heavily depleted (although imports are growing rapidly)," writes the agency, again in its February report.

This is worth further research. If coal supply is already severely constrained, or becomes so, we could see a repeat of late last year. Local petrochemicals production could be cut back rather than increased.

By John Richardson

THE earthquake and tsunami that hit Japan on Friday afternoon is still hard to take in. We send our sympathy to everyone connected with this disaster and just hope and pray that the rescue efforts go exceptionally well.

As Japan returns to work this morning it will confront the huge cost of rebuilding at a time when its economy is struggling with slowing growth and lack of confidence in the government.

But this is a country that has overcome huge obstacles in the past and we are sure that history will repeat itself.

It seems almost in bad taste to talk about the impact on refining and petrochemicals, but of course life has to go on.

And so we have been trying to piece together the impact on these two industries both in Japan and elsewhere.

Petrochemicals plants at Ichihara, Chiba prefecture, and Sendai, Miyagi prefecture were reported to be still on fire 15 hours after the disaster occurred.

Chisso Corp's Goi Complex, which includes polyethylene (PE) and polypropylene (PP) plants, is at Ichihara.

Maruzen Petrochemical shut down its 480,000 tonne/year crackert at Chiba, east of Tokyo, after the earthquake.

Keiyo Ethylene shut is 690,000 tonne/year cracker at Chiba.

Keiyo Ethylene Co is 55 percent-owned by Maruzen Petrochemical and 22.5 percent each by Mitsui Chemicals and Sumitomo Chemical.

Idemitsu Co, Showa Denko and Mitsubishi Chemical are also reported to have closed down plants in order to carry out test.

Some 1.7m tonne/year of ethylene capacity is thought to be off-line.

There was also a fire over the weekend at the chemical factory of JFE Chemical in the Chuo ward in the city of Chiba, Chiba prefecture.

JFE Chemical produces coal tar, benzene, toluene and xylene and industrial gases including oxygen, nitrogen and argon.

JX Nippon Oil & Energy shut its paraxylene facilities in Kashima, Ibaraki prefecture, with a combined capacity of 600,000 tonnes/year, and in Kawasaki with a combined capacity of 350,000 tonnes/year.

Around 1.2m tonne/year of refinery capacity is thought to be also shut down. These include three JX Holdings refineries, one refinery operated by Cosmo Oil, another by TonenGeneral Sekiyu and a final one run by Kyokuto Petroleum.

The 220,000 tonne/year Cosmo refinery, which is at Ichihara, was reported to be on fire.

Japan is a major importer of naphtha and so crack spreads elsewhere will be under downward pressure due to the drop in demand.

Ten naphtha vessels were said to be heading from Europe to Japan when the disaster happened.

This could add further length to a European market that was already struggling to cope with oversupply.

By John Richardson

OUR sympathies again go to the people of Japan. The main focus should be on providing as much support as possible to the rescue efforts and let's hope that petrochemical companies globally step forward.

But as we said yesterday, life goes on. The Japanese stock market was down around 5% this morning in early trading, suggesting fears about serious damage to the economy. There is anxiety that another earthquake could occur over the next few days.

Here is a research note from UBS, which as you can see, estimates that 20% of Japan's refining capacity and 27% of its ethylene capacity and 30% of its aromatics production is shut down.

As we said in our post on Sunday, Japan is a major importer of naphtha and so some refiners will struggle to place their volumes. However, UBS sees an upside for Asian refining margins.

In the immediate term Formosa Plastics Corp, Formosa Chemicals & Fibre and LG Chem are expected to benefit the most from the outages as a result of their product mix, adds UBS. They should be able to gain market share in China.

The lost production might also help to rebalance what has been a weak polyolefins market in China.

The supply disruptions, which seem very likely indeed to be long-term .In the confused situation at the moment seems possible that major structural damage has been caused to refineries and petrochemical plants.

This is the UBS note in full:

Impact on Japan refining industry
The devastating earthquake and tsunami in Japan that took place on 11 March has resulted in 20% of refining capacity loss in Japan (900-950K bpd) or 3.5% and 1%of Asia and global refining capacity respectively. While some refineries are shut for safety concerns, Cosmo Oil has shut its 220K bpd refinery in Chiba due to fire

.

Implications for Asia refining market
Singapore complex refining margin jumped from US$7-8/bbl to US$15/bbl after
Hurricane Katrina hit the US Gulf coast in late Aug 2005, which resulted in 1.4mn bpd refining capacity loss. We believe Asia refining margin should see more upside in the near-term and major refiners in the region such as GS Holdings, SOi and Thai Oil are best-positioned in Asia.

Impact on Japan petrochemical industry
Around 2mn tpa ethylene capacity in Japan have been affected by the earthquake,
which translates to 27% of total ethylene capacity in Japan or 4% and 1.4% of Asia
and world ethylene capacity respectively. It has been reported that total aromatics
capacity being affected should be around 5.7mn tpa, or 30% of Japan production.

Implications for Asia petrochemical market

We believe any supply disruption in Japan could potentially impact South Korea and
Taiwan as these two are the main competition in China petrochemical market.
Looking at Japan's major export products, we believe FPC and FCFC in Taiwan and
LG Chem in South Korea are best-positioned to gain market share in Asia.

By Malini Hariharan

News is slowly trickling in on the status of Japanese petrochemical plants. Only four of the country's 14 crackers have shut down while a few are running at reduced rates, reports ICIS news.

JX Nippon Oil & Energy has shut its 460,000 tonnes/year cracker at Kawasaki while Maruzen Petrochemical has shut its 520,000 tonnes/year cracker at Chiba. And Mitsubishi Chemical has shut two crackers, with a total capacity of 828,000 tonnes/year at Kashima after a power outage. Mitsubishi has also shut its phenol plant at the same site.

And Japan Polypropylene has had to stop operations at its two polypropylene (PP) plants with a total capacity of 669, 000 tonnes/year.

Nearly 22% of the country's refining capacity of 4.52m bbl/day is estimated to have shut down. This includes JX Nippon's refineries in Sendai, Kashima and Negishi, as well as the Chiba refineries of Cosmo Oil and Kyokuto Petroleum.

A fire at JX Nippon's storage tanks at Sendai has yet to be put out and storage tanks at Cosmo Oil's in Chiba, were also still ablaze.

JX Nippon has also shut its benzene plants and is likely to declare force majeure on paraxylene (PX) supply

Shutdowns extend beyond petrochemicals across a wide range of sectors. For instance, Suzuki Motors is reported to have halted production at six of its factories while Toyota Motor has halted operations at all its 12 plants.

But Asian petchem markets were largely stable on Monday with players still assessing the impact of the shutdowns.

By John Richardson

ASIAN paraxylene (PX) and styrene markets look set to be the most affected by the loss of Japanese exports as the slide below from Bob Townsend at the UK-based consultancy, International eChem (Iec) illustrates. 

Japanese Exports.ppt

My fellow blogger Paul Hodges, also of IeC has analysed the data behind the charts to produce a breakdown of Japan's 2010 exports across the olefins, aromatics, fibre intermediates and polymers chains.

There are unconfirmed reports a 10% increased in Asian PX prioce as a result of the loss of production at JX Nippon Oil.

ICIS asessed pricing at around $1,740/tonne (€1,253/tonne) CFR (cost & freight) Taiwan and/or China Main Port (CMP) earlier today.

JX along with fellow Japanese producer Idemitsu Kosan and global major ExxonMobil are crucial to the Asian market as they nominate the monthly Asian Contract Price.

The nominations are then negotiated with the big five big buyers, two of which are Mitsubishi Chemical and Mitsui Chemicals.

The loss of Japanese PX production comes during a heavy turnaround period. Polyester producers in China are already complaining about squeezed margins and so it will be interesting to see whether the higher PX costs can be passed on down the chain.

A good article from my colleagues Peh Soo Hwee and Felicia Loo at ICIS news neatly summarises both the impact on naphtha of the loss of Japanese production and details of exactly which petrochemical plants are down across the major product chains. Our post from earlier today provides more detailsl these shutdowns.

The Kashima and Sendai ports have also been closed as a result of the disaster - meaning that even where chemicals plants are still operating, shipments may not be possible.

Again our sympathies go out to everybody caught up in this tragedy. We pray and hope that the rescue efforts go well and that Japan is soon able to focus on the rebuilding efforts.

By Nigel Davis

For some, life goes on. For others, everything is lost.

An email to the BBC on Tuesday from a resident in Mie, Japan, 350 miles from the stricken nuclear power plants on the east coast of the country, described a relatively normal day.

Utilities are available but people are feeling nervous and there is some stockpiling. "It feels as if there are two Japans at the moment," the correspondent, John Stephenson, said.

So, one question among so many at this particularly difficult time is: how are the two Japans coping, indeed surviving, in the face of such adversity?

The impact of the earthquake and tsunami on Friday 11 March, and now the aftershocks, can still only slowly be pieced together.

The world's eyes are on the damaged nuclear reactors. But the Nikkei stock market index had crashed by 10% at the close on Tuesday, reflecting the sharply negative economic outlook. Oil prices plunged.

Assessing the impact of the disaster on the petrochemical industry, and on regional markets, so far is difficult to say the least, although some headway is being made.

Reports suggest that important crackers and other production units are not operating.

We know for certain that ethylene and aromatics production is hit. ICIS has reported the closure of ethylene, benzene, paraxylene (PX), propylene oxide, propylene glycol, polyvinyl chloride, titanium dioxide and polyether polyols plants, and reduced output at others. It could take weeks or months for these units to come back on stream.

Paraxylene prices have climbed following a supply force majeure announcement by the world's largest PX exporter, JX Nippon Oil.

Three of its PX plants, with a combined capacity of 950,000 tonnes a year, located in the devastated Miyagi prefecture, are shut down.

Five refineries have shut down in Japan - a Cosmo oil refinery continues to burn - and port activities have been disrupted, putting further strain on foreign trade.

But many plants are operating normally, and others that shut down automatically as a precaution might be expected to restart soon.

However, the damage caused by the disaster is unimaginable, as is the hardship being suffered by so many people.

Production plants have closed automatically, while chemical company offices have been closed, giving staff time to come to terms with recent events.

According to reports, all of Japan's 12 automobile makers closed their assembly lines, for the first time ever. Some of them will not reopen until Wednesday.

Japan's chemical industry has been dealt a severe blow from which it will no doubt recover, but that recovery will take time.

For some in this business, life goes on as normal, but for others the disruptions to production capability and to trade will take time to come to terms with.

By Malini Hariharan

More companies are reporting damages to facilities after last week's earthquake and tsunami.

Mitsubishi Chemical said in a statement that berths, roads and infrastructure around the plant area at its Kashima site have been damaged and delivery or shipment of cargo "would be next to impossible".

"Restoration of capabilities will take quite some time," it added.

Infrastructure at its subsidary Japan Polypropylene's facility at Kashima has been hit.

"Basic infrastructure at the site is badly damaged and we'll need time to restore that, but damage at the PP plants may not be as serious," a company source informed ICIS news.

The company has a total PP capacity of 346,000 tonnes/year at the site. It has also had to shut down its PP plants at Goi after a fire in a neighbouring refinery run by Cosmo Oil.

Mitsubishi Gas Chemical said the building and equipment at a plant in Fukushima prefecture has been damaged by the earthquake and that operations have been suspended. The plant produces materials for printed wiring boards for use in smartphones and other consumer electronics and makes up to 60% of the global market for wiring-board materials.

Major Japanese electronic companies are said to be struggling with power blackouts and production has been suspended at a number of plants across the country.

Worries about supply-chain disruptions are mounting especially in the electronics and automotive sectors and some Asian businesses have slowed down production.

The impact of this should work its way up to petrochemicals in the coming weeks.

By John Richardson

Dear Reader

Below we take a break from our own coverage and focus on another topic - some thoughts on the future competitiveness of the European petrochemicals industry.
A widely-held assumption has been that a lot of European petrochemicals capacity will have to shut down as a result of lower-cost capacity elsewhere, particularly in the Middle East.

But the European industry enjoyed tremendous profitability in 2010 as a result of production being carefully aligned to demand.

More important reasons for these stellar results were probably the age of the plants and lack of investment in maintenance as a result of the 2008 global economic crisis. This led to a high number of force majeures.

Perhaps the biggest reason of all, though, was lack of naphtha from refineries. The collapse of demand in 2008, a long-term decline in US gasoline demand and the start-up of state-of-the-art "full conversion" refineries in Asia put the older European refineries under a lot of pressure.

Plant reliability should now improve as a result of the strong 2010 earnings.

But these earnings will give the Europeans a greater capacity to hunker down and wait for another fly-up in margins if the next 2-3 years prove difficulty because a weaker macro-economic environment.

Barring another major global recession that effects demand for all petrochemical products, Europe's use of naphtha as its main feedstock could continue to deliver very strong co-product credits.

The lightening of feeds in the US, as a result of the shale-gas bonanza, has helped tighten butadiene, benzene and propylene markets.

So has the most recent wave of new capacity which was predominantly in the Middle East and gas-based.

A further factor behind the C3s tightness has been polypropylene (PP) demand growth above the expansion in global GDP and in excess of that for other competing polymers.

This is the result of PP gaining market share from these other competing polymers, such as polystyrene (PS), and a lot of focus on application development.

Producers have therefore been lured into adding substantial amounts of PP capacity, in excess of feedstock availability.

Another even bigger bonus for European petrochemicals could be greater, rather than less, availability of naphtha over the next few years.

More than 50% of new vehicle registrations in Europe are of diesel vehicles.

European refiners might have to run harder to make diesel which will result in greater naphtha production. Exporting naphtha and gasoline to the US is going to get even harder because of the country's continuing decline in gasoline consumption.

Refining capacity in Europe might, in theory, be shut down in if the losses on naphtha and gasoline exceed the money to be made from diesel.

But the same mentality applies to refining as petrochemicals: Why be the first, and maybe the last, company to close capacity when there could be another fly-up just around the corner? (The global refining industry fairly recently made tremendous amounts of money as a result of the Hurricane Katrina disaster. The disaster left the gasoline market very under-supplied).

Environmental clean-up costs and contract obligations with customers may also continue to act as barriers to closure (as is again also the case with petrochemicals).

And if more overseas companies such as PetroChina - which recently acquired Ineos refinery assets - buy into the European industry they are unlikely to want to shut down.

The big oil companies are divesting refining assets in order to concentrate on more profitable exploration and production (E&P). A good example was Chevron's sale last week of a refinery in Wales, the UK, to Valero Energy.

Smaller companies such as Valero seem unlikely to want to buy-in and close-down assets.

A further factor preventing capacity being scrapped could be the intervention of governments anxious to maintain national fuel supplies.

If European petrochemical producers, therefore, do not shut capacity down as expected who might be the losers if there is another major economic crisis?

We are going to explore this theme in later posts, but the losers could be the South Koreans and other Northeast Asian producers.

They are facing much-tougher competition for import volumes into China from the Middle East. China's import growth could also slow down due to structural shifts in the economy and greater petrochemicals self-sufficiency.

South Korea, Japan and Taiwan are also entirely dependent on imported oil and heavily dependent on imported naphtha.

Like all scenarios there are a few caveats. Here are a few:

1.) The European economic crisis deepens, forcing further closure of manufacturing industry
2.) The Japanese earthquake and tsunami leads to major changes in the global economy, the scenarios for which are laid out in the post from Paul Hodges - which have linked to above
3.) The high price of propylene results in strong growth of on-purpose production, thereby reducing co-product credits for the liquids cracker players
4.) Continued tightness in C3s leads to PP demand destruction and, as a result, eventual weaker demand for propylene
5.) Co-product credits remain so good that the US makes a major switch to heavier feeds (This won't be naphtha as "heavier" in the US means moving from ethane to propane and butane). This weakens the competitive position of the Europeans

By Malini Hariharan

The paraxylene (PX)-purified terephthalic acid (PTA) market appears to be bearing the brunt of the Japanese earthquake and tsunami. Spot supplies of PX have dried up following the shutdown of three Japanese plants with a total capacity of 950,000 tonnes/year.

Spot PX prices surged to a record high $1,815/tonne CFR Taiwan last week as JX Nippon Oil & Energy declared a force majeure on supplies. PTA prices also rose to a 16-year high of $1,500-1,517/tonne CFR China main port, reports ICIS news.

And further price hikes are likely as a number of PTA plants in China and Taiwan are due to shut down for maintenance in the coming weeks. Additionally, some Chinese companies are planning to bring forward turnarounds following a tightening of PX availability from Japan.

Meanwhile, PTA demand is expected to strengthen in the coming months with around 2m tonnes/year of new downstream polyester capacities starting up in China, writes my colleague Becky Zhang.

She estimates that 1.9m tonnes/year of PTA capacity in Northeast Asia is due to shut down in March and 5.35m tonnes/year of capacity in April.

With cotton prices still running at record highs there appears to be room for polyester to digest the latest price increases. And with peak textile production season approaching, transaction volumes at the China Textile City in Shaoxing rose to 5.1m-5.2m metres/day early last week.

The only concern appears to be the slow buying in the Chinese polyester market as inventories have yet to be depleted.

By John Richardson and Nigel Davis

THE humanitarian side of this disaster is foremost in everyone's minds with more than 18,000 people now estimated to have died in the Japanese earthquake and tsunami.

Of equal concern is the crisis at the country's stricken nuclear power plants which the International Atomic Agency describes as "very serious".

And the relief efforts following the 11 March disaster have been hindered by bad weather with around 350,000 people in northern and eastern Japan in shelters, according to media reports. Water supplies are still cut to almost 900,000 homes.

But economic effects are, of course, also at the front of everyone's minds with one of the most immediate consequences of tragedy being the tightening of some of the major petrochemicals markets.

As we wrote about yesterday, supplies of spot paraxylene (PX) have dried up following the closure of 950,000 tonnes of Japan's capacity. Spot PX prices last week hit $1,815/tonne (€1,271/tonne) CFR (cost and freight) Taiwan. Purified terephthalic acid (PTA) prices rose to a 16-year high of $1,500-$1,517 CFR CMP (China Main Port).

The polyester chain is being supported by all-time high cotton prices, but going back upstream again to PX and PTA these were already very tight markets before the disaster occurred.

How much longer can the polyester producers down to the manufacturers of apparel and non-apparel keep on absorbing these cost increases? When do we begin to enter demand destruction territory?

Of equal concern is what is not happening in polyethylene (PE) where pricing has remained flat since the Chinese New Year.

This is despite more than of Japan's linear low-density PE (LLDPE) capacity being closed down, with 38% of its low-density PE (LDPE) capacity shuttered and 26% of high-density PE (HDPE) off line, according to ICIS pricing.

Markets were already tight as a result of an extensive Asian cracker turnaround season and so the failure of PE to move up in China is a major worry.

We will examine varying opinions on reasons why PE remains so weak in a post later this week.

But to return to Japan, UBS provided a good summary of production losses in a report issued over the weekend.

Four major crackers remain closed, representing lost ethylene capacity of 31% - number that should decline to 25% by the end of the week, according to UBS.

Propylene capacity has been reduced by 37%.

Forty six per cent of polyvinyl chloride (PVC) capacity is down, 24% of PX and 20% of styrene.

Reuters on Monday listed some stark facts: 1.4m bbl/day of Japan's 4.5m bbl/day refining capacity and 1.7m tonnes of naphtha cracking capacity remain off line. Port facilities had been severely disrupted by the disaster.

With Tokyo Electric Power Co warning of rolling blackouts well into April, even if plants are soon brought back on-stream, there seems a possibility that production will be disrupted again.

How badly plants have been damaged is impossible to gauge at this moment.

Japan has been struggling to restructure uncompetitive parts of its industry for many years and so uncompetitive plants that have been badly damaged may not be rebuilt.Apologies if this sounds a little cold-blooded, but we are trying to think through all the economic consequences of these awful events.

But Japan also makes a lot of high-value chemicals that go into electronics supply chains. This area of its chemicals industry is highly competitive.

Disruption of production here could have a global impact as electronics assembly plants outside Japan are forced to shut down.

For example, The Economist magazine estimates that Japan makes 90% of the epoxy resins used the manufacturing of all the world's printed circuit boards.

By Malini Hariharan

The blog would like to share an interesting analysis in the latest issue of ICIS Chemical Business on the impact of US shale gas on petrochemical producers in the region.

Profitability has of course improved as seen in the results posted by majors such as LyondellBasell.

Shale gas production in the US has grown eightfold in the past 10 years, and now accounts for some 12% of total gas production, writes William Tittle of Nexant.

This growth in production has pushed down natural gas prices which are currently about one-quarter that of oil on an equivalent energy basis.

And at low natural gas costs, there is even more incentive to extract ethane from the gas. US ethane production has increased by one-third to 17m tonnes/year in the past five years and 63% of 2010 US ethylene production of 24m tonne was based on ethane, up from 46% five years ago, points out Tittle.

The availability of cheap ethane has boosted the export competitiveness of US companies. Back in 2004, ethane-based US high-density polyethylene (HDPE) producers had the second highest cost structure in the world.

But now integrated HDPE cash costs from ethane have moved dramatically down the global cost curve, points out Tittle. US producers are among the lowest cost producers in the world, after Saudi ethane, ethane/propane and Canadian ethane-based companies.

The return to profitable operations has already prompted producers to plan for increased use of ethane in the future. That's an easy decision to make.

But a tougher question as Tittle points out is whether to increase capacity significantly when the incremental market to be served is the export market.

By John Richardson

CHINA'S polyethylene (PE) market is in such a bad state that re-exports are now being considered to Europe.

The wide disparity between a flat China market and strong pricing in European has created this exceptionally rare arbitrage opportunity, which, according to an industry observer "has happened before, many moons ago, but not on this scale."

Click here for a slide showing an example of this disparity -

EuropeAsiaHDPE23March2011.ppt

Traders left with too much material on their hands have been re-exporting resin for several weeks now to other destinations such as Vietnam, Turkey and Latin American.

What is remarkable, and worrying, is that PE in China has remained flat despite surging raw-material costs on the high price of crude.

This is despite the facts that we are in the midst of a major cracker turnaround season in Asia and a large percentage of Japanese production is down because of the earthquake and tsunami.

So what's going on?

We have already written about the reduction in available credit, a particular problem for small -and medium-sized enterprises, as a result of increased bank-reserve requirements.

Reduced liquidity must have surely also hurt the levels of speculation among traders that has helped pump up the market over the last couple of years.

Two producers, however, argue that while official credit growth had slowed down, off balance sheet lending made the real total of available financing a great deal higher.

Fitch, the credit ratings agency, has said that banks have shifted money off their books through, for example, packaging loans into securitised products. This has allowed them to sustain high levels of lending.

These kind of practices resulted in Rmb11 trillion of new loans in 2009, way ahead of the official figure of Rmb7.9 trillion, according to Fitch.

"The flat China market is more likely to be the result of a general lack of confidence in future lending conditions," said one of the producers.

"Tougher restrictions on property speculation and the end of tax incentives for auto purchases are other factors."

If the government continues to struggle to control inflation for the rest of this year and into 2012, more measures might have to be taken to cool the economy down.

China's Premier Wen Jiabao also recently said: "China will resolutely press ahead with controls on the property market to curb speculation".

He added that the government will "'severely punish" irregularities in the real-estate market, implement differentiated credit and tax policies, and hold local officials accountable for maintaining stable home prices".

Demand in Japan has, of course, also been hit by the earthquake and tsunami.

And here is something else to worry about: Crude oil production in Saudi Arabia has risen to 9.4m barrels a day from 8.4m barrels a day as part of OPEC's efforts to calm troubled markets, said an industry observer.

This could well be turned into more PE for shipment to China, further depleting the market share of the higher cost producers.

OPEC only officially abandonded quotas ten days ago and so it might take a while longer before we see these extra volumes. But given that Saudi Arabia can make money in any market conditions they will run surely run harder once they receive the extra feedstock.

By Malini Hariharan

Japan's benzene supply is expected to drop by 10% following plant shutdowns and diversion of product for gasoline blending, reports my colleague Mahua Chakravarty.

This works out to about 40,000 tonnes/month, which is lower than the initial estimate of 100,000 tonnes/month made immediately after the earthquake.

Traders have started booking cargoes from South Korea to meet the shortfall. But this has not had an impact on benzene prices which have eased slightly this week on poor styrene markets.

Five benzene plants with a total capacity of 1.13m tonnes/year remain shut while some plants are running at reduced rates.

In polyolefins, Japan is likely to import product as plants continue to remain shut.

A Taiwanese producer sold around 2,000 tonnes of linear low density polyethylene (LLDPE) at $1,530-1,535/tonne CFR Japan this week for April shipment, reports my colleague Bee Lin Chow.

Chinese re-export offers to Japan have also surfaced although a gap in price ideas appears to be hindering business.

But it is unlikely that Japanese buying will prop up the current weak Asian market.

Meanwhile, Mitsubishi Chemical has confirmed that it will take a few more weeks to restart its plants at Kashima. Plants at the site include two crackers with a total capacity of 828,000 tonnes/year.

"We are doing all in our power to rebuild, but we calculate it will take at least two months for the plants to go back on line," said the company.

Mitsubishi has started inspecting the plants and also commenced some rebuilding activities. But infrastructure at the site has been badly damaged and that is likely to constrain resumption of operations.

This shutdown is likely to affect operations of other companies at Kashima that rely on feedstocks from Mitsubishi.

Shin-Etsu Chemical said that all operations at Kashima, where it make polyvinyl chloride (PVC), have been halted and inspection has yet to be completed.

Besides damage to facilities that power and water supply at the site has been hit.

"At present, it is still unclear how long it takes to re-start the operations at the Kashima plant," said Shin-Etsu

Kashima Vinyl Chloride Monomer's 600,000 tonnes/year vinyl chloride monomer (VCM) remains shut.

"The plant is likely to remain shut for two to three months as it was quite badly damaged by the earthquake," said a source from the company, which is a subsidiary of Shin-Etsu.

By John Richardson

THE blog held a fascinating discussion with a very well-placed industry observer last week, further underlining some of the key challenges facing the Middle East..

These include the well-documented feedstock shortages that will result in a dearth of new capacity post 2012 - and the difficulty in executing the few projects that are going ahead.

Social stability is a key concern right now across the Middle East as a result of the virtual civil war in Libya and major unrest in Bahrain and Syria.

Just a few weeks ago nobody really worried that much about the push for democratic change spreading to Saudi Arabia. But that was then and this is now.

The consequences for the global economy are almost too frightening to contemplate if the Kingdom, the world's most important "swing" oil producer, was to face significant political and social upheaval.

He told us that only one new cracker project would go ahead in Qatar by 2015 due to limited gas availability for petrochemicals. The three-way tussle between Shell, ExxonMobil and Total for this gas allocation therefore continued, he said.

"I also doubt that some of the other projects in the region - in Saudi Arabia and Abu Dhabi - will go ahead on schedule because financing is a long way from being secured."

Another theme we discussed was the increase in Saudi oil production, which he believes has been from 8.4m barrels a day to 9.4m barrels a day (we discussed this last week).

This will surely result in more pressure on Asian polyolefin markets already struggling with moribund Chinese demand.

But the big issue we kept returning to was Saudi Arabia and the possibility of unrest.

"It is now being seriously discussed because of what we have seen in Bahrain etc," he said.

This linked back to the gas shortages limiting new projects that we mentioned at the beginning of this post.

Soaring demand for gas for power generation is one of the reasons why petrochemicals is being short-changed on supply.

"For social stability reasons there is no way that electricity costs will now be increased in Saudi and elsewhere in the Middle East," he added.

This is a region where power is so cheap that air-conditioning units are left switched on when people go on holiday in order to keep houses cool for when they return.

Without conservation driven by price, and with new reserves of gas likely to be more expensive to extract, the cost and availability of the feedstock for petrochemicals seem certain to remain under great pressure.

By Malini Hariharan

The mood at this year's International Petrochemical Conference, hosted by the National Petrochemical and Refiners Association (NPRA) in San Antonio,US, is quite bullish and is evident in the reports being filed by the blog's colleagues on ICIS news.

An improvement in profitability and increased availability of ethane has prompted companies such as Ineos Olefins & Polymers USA to plan expansions.

"We are undertaking engineering studies to debottleneck ethylene capacity at Chocolate Bayou in Texas, with a potential to add a further 115,000 tonnes/year," said Dennis Seith, CEO of the company in an interview.

This would meet the needs of INEOS's commitments to the US Gulf Coast merchant ethylene market, while also supporting the company's high-density polyethylene (HDPE) unit at its La Porte, Texas, complex.

Seith believed the cost structure at the highly integrated site is at a good point for further investment.

INEOS operates two crackers at its Chocolate Bayou, complex, with combined capacity of 1.70m tonnes/year. Downstream it operates 950,000 tonnes/ year of HDPE capacity at La Porte and in its joint venture HDPE operation with Chevron- Phillips Chemical at Cedar Bayou, Texas.

"Today, the US cost position is very good, based on low cost ethane and highly productive capacity - surpassed only by the Middle East and Canada", noted Seith. The low value of the dollar is also helping exports and he pointed out that the latest figures for 2010 showed the US exporting as much as 18% of its ethylene production as derivatives.

Government officials are also pushing more new investments.

"The consensus seems to be that there will be a new cracker somewhere in the Marcellus region; the only question is where," said John Margeson, head of chemicals and plastics in the Resource Processing Industries Branch of Industry Canada.

Margeson said that the Canadian petrochemicals complex at Sarnia, Ontario is being promoted as a contender site for a new North American cracker. The existing complex already has two crackers that could accommodate additional feedstock from the Marcellus shale and, eventually, host a new cracker development.

The Pennsylvania state government also has become active in offering incentives for a new cracker to be sited in the state to take advantage of the Marcellus play that runs through much of the state's territory.

But while shale gas has created room for expansions new government policies could create obstructions for future petrochemical development.

The first is the Clean Air Act which targets limiting and eventually reducing greenhouse gas emissions by major production facilities including petrochemical plants and refineries.

The second policy proposed by the country's EPA is to lower national ambient air quality standards (NAAQS) for ozone and other pollutants.

NPRA and other industry representatives have complained that EPA is calling for ozone standards so low that they would in some cases be below the level of background ozone contamination in open country.

And even more worrying is the move to limit production of shale gas.

NPRA petrochemicals vice president Jim Cooper referred to a planned two-year study of the environmental impact of hydraulic fracturing by the EPA. He pointed out that the scientific panel assembled to frame the study lacked hands-on industry representation and could "stack the deck" against industry.

Charles Drevna, president of NPRA, warned that "without the ability to develop those shale gas resources, this could put this country back decades, perhaps never to recover."

"We have been handed a gift in shale gas and abundant natural gas liquids. We simply must develop these resources or we will be set back for decades. I'm very confident that rational thought will prevail, but policy makers have been continually throwing artificial roadblocks to development," he added.

"I hope rational thought will prevail, and I hope it will happen in a timely fashion," he said.

The uncertainty around the long-term prospects for shale gas is one of the reasons why ExxonMobil Chemical is carefully evaluating any expansion in the US.

"We are not a great proponent of forecasting cycles. No-one was predicting the impact of shale gas just a few years ago. That's why we take a long-term approach where we seek to outperform in good times and in bad," said Stephen Pryor, president of the company.

Pryor pointed out that the key to success is feedstock flexibility.

"The question is not whether a project will be cost advantaged in the next three years, but 'will it be attractive in the next 20-30 years?'" he said.

"When you know the market is growing in China, you have to take into account building in the US with US costs, logistics issues and the ability to compete with local China production. And Chinese producers may one day also use unconventional feedstocks," Pryor added.

By John Richardson

LACK of credit and inflation are becoming even greater problems in China, which is reflected in polyolefin markets that remain very quiet indeed.

"It is ice cold out there with very little activity. Importers are waiting and hoping for some kind of improvement," a Singapore-based polyolefin trader told the blog today.

A source with a major producer agreed and added: "Lack of credit continues to be problem for the small -and medium-sized companies (SMEs) due to the increases in bank-reserve requirements.

"Many of the converters, who are SMEs, are struggling to get sufficient working capital to operate at full capacity.

"The other problem, if you can call it a problem, is that the speculators in eastern China are not able to open letters of credit to gamble in the market.

"This is affecting activity in both the physical market and the Dalian Commodity Exchange, pointing to the fact that some of the strong volume growth we saw last year was the result of the ease of speculation."

Cost pressures are another problem, resulting from an official inflation rate in China which is hovering around 5%.

"The packaging film, agricultural film and home appliance sectors are unable to pass on any further resin prices increases. This is part of the reason why polyethylene (PE) pricing has remained basically flat since the end of the Chinese New Year holidays," the producer added.

Crude oil is one obvious cause of the inflationary problem afflicting the whole of Asia, along with rising food costs.

The cost of food is, of course, tied to some extent to that of oil. But rising food prices are also the result of changing lifestyles as more and more Asians tuck into a diet containing much higher amounts of protein.

Wage costs are also on the up in China, the result of official action to reduce social unrest caused by a widening gap between the rich and the poor.

A further trigger for inflation is the huge stimulus programme launched in late 2008, resulting in the rapid and dangerous rise in asset prices, most notably in the property sector.

The stimulus package has contributed to the widening of the gap between the rich and the poor (the rich have got richer thanks to surging asset prices and the ability to speculate in everything from condos to plastic resin due to easy lending conditions).

And so ironically, a short term impact of the government being forced to raise wages is more inflationary pressure as it attempts to reduce inflation through higher interest rates and bank reserve requirements.

The effect on polyolefins had been "a climate of exceptional uncertainty" added the Singapore-based trader.

"This has resulted in lack of buying activity in both PE and polypropylene (PP)."

But strangely enough while PE pricing has, as we have said, been pretty much flat since the CNY, PP has fared slightly better.

Click here for a chart showing PE pricing since January 2011 -

March302011PEPPPrices.ppt

PP pricing, however, has risen steadily since January even if buying right now is exceptionally thin. For example, PP flat yarn prices had risen from $1,480/tonne CFR Main Port China on 7 January to $1,640 tonne on 25 March, according to ICIS pricing.

"It is all about supply. Supply is pretty tight in high-density PE (HDPE) and linear-low density (LLDPE), but not quite as tight as in PP," said the trader.

He attributed current tightness in PP to turnarounds in the Middle East and lost production in Japan (30% of PP production was down late last week because of the earthquake and tsunami, again according to ICIS pricing. However, more than 50% of LLDPE capacity was also off line, suggesting that both polymers will be imported very shortly).

The blog suspects that an additional longer-term reason for tight PP supply is the structural shortage of propylene. This is due to the switch to lighter feeds in the US and continued strong demand growth for PP.

Ethylene and propylene prices both went up last week, but PE remained flat while PP edged up. This appears to support the argument that the polymers are in different supply positions.

The big question, the crucial question, is whether the economic problems in China will last throughout the year.

This could change the fairly optimistic mood evident during this week's National Petrochemical and Refiners Association (NPRA) in San Antonia, Texas.

By Malini Hariharan

The blog has been reading some more interesting reports filed by ICIS colleagues from the International Petrochemical Conference at San Antonio, US. The conference, hosted by the National Petrochemical and Refiners Association (NPRA) concluded yesterday.

* Chevron Philip Chemical's announcement of a a feasibility study on a ethane cracker at an existing US site helped keep up the optimism at the conference.

The cracker could have a capacity of as much as 1m tonnes/year of ethylene, estimated a market source.

The company said that the project would utilise advantaged feed sources expected from development of shale gas reserves in the country. The study is due to be completed in 2011.

"We are finalising our evaluation of potential sites and advancing discussions with... contractors," said chief operating officer, Tim Taylor.

Chevron Philip's announcement follows other planned expansions in the US that the blog listed recently.

* Nova Chemicals will upgrade its Corunna cracker in Canada this year to take 100% light feedstock to take advantage of the increased ethane from Marcellus Shale reserves in the US via pipeline, reported Brian Ford.

* Sabic is progressing on its move downstream into value added products. It plans to commission a world-scale isocynate complex in Saudi Arabia by 2015, the first in the Kingdom. This will be a joint-venture project but the company has yet to disclose who the partner will be.

Sabic affiliate, Saudi Kayan will be commissioning its 100,000 tonne/year ethanolamines in H2 2012.

Sabic's joint venture methyl methacrylate (MMA) and polymethyl methacrylate (PMMA) projects is on track to start up by 2014.

* The industry is looking at a major shortage of monoethylene glycol (MEG). Growth in polyester would require 1.5m tonnes of annual addition to capacity but companies are being constrained by lack of feedstock options.

"You would need to build two world-scale plants every year and a world-scale plant is 700,000-800,000 tonnes, so you need 1.5m tonnes a year of glycol and nothing is coming. That's scary," said MEGlobal vice president for commercial operations Frank Hanraets in an interview with Pearl Bantillo.

"We are looking at all options [to expand]. It's a matter of where you can find the feedstock," Hanraets added.

The supply tightness is expected to continue for the next 3-5 years with global demand expanding by 7%/year and growth in China and India running at double digits.

Hanraets thinks the solution is to look at technologies such as MTO [methanol-to-olefins] and coal-to-olefins. MEGlobal, he said, is looking at these options and also the bio-route which involves using sugarcane to get to ethanol, ethylene and MEG.