By John Richardson
THE euphoria sweeping through the US petrochemicals industry seems to indicate strong support for the "supercycle" theory.
Some of the comments made during the first-quarter results season certainly point that way, as does the upbeat mood of presentations made to investors over the past few months.
A consensus view appears to have emerged: we are through the bottom of the cycle; that not enough capacity will be added over the next few years; and that, therefore, by 2015-2016 everything will be wonderful.
Morgan Stanley first started talking about the chemicals "supercycle" - a view that has subsequently been supported by several other banks - in a report from October 2010.
"An inflection point in the global plastics market, driven by China and India [has been reached]. After a recent period of slower growth and a decoupling from global GDP growth, we now expect the strongest period of ethylene demand growth in the past 20 years," the report stated.
"We forecast that in the next five years, incremental annual consumption in China and India alone will equal the total current consumption in the US, until recently the world's largest ethylene consumer, and still responsible for 15% of the market.
"Global capacity should grow at just 2.3% in 2011-14. Utilisation rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally."
But, as Torsten Penkuhn, the head of BASF's petrochemicals business in Asia, told ICIS news in an interview earlier this month, the industry has a history of shooting itself in the foot by overbuilding capacity when confidence is high.
Where there is cheap feedstock and finance, companies will build. Individual companies are often unaware of the cumulative effect of all their competitors doing exactly the same thing.
Kunal Agrawal, a Singapore-based chemicals analyst with BNP Paribas, provides some numbers to support this view in a report released last week.
"While we believe the Middle East will find it challenging to approve and commission incremental gas-based crackers, we see significant opportunities globally for continued investments in naphtha-based crackers," he writes.
"We recently conducted a detailed bottom-up analysis on global refining capacity-addition plans during 2010-15. We found that at least 10m bbl/day of refining capacity is scheduled to be commissioned during the period, which, in our opinion, will provide enough feedstock for an additional 16m-17m tonne/year cracker capacity.
"These are projects for which either construction is already in progress or EPC (engineering, construction and procurement) contacts are being awarded.
"Sufficient naphtha and liquefied petroleum gas (LPG) will be produced by the 10m barrels per day of refining additions to supply a further 11m tonne/year of ethylene capacity that has yet to be announced," he adds.
This would be on top of the substantial number of studies into new crackers - and plans to expand existing facilities - that have already been announced in the US over the past few months. The mood of the industry has been transformed by abundant shale gas and confidence in the global economy.
Getting a cracker built by 2015-2016 that isn't already reasonably underway, certainly beyond the initial study phase, would be a big challenge.
But Agrawal adds in the same report: "We also believe the surplus capacity commissions through 2009-11 will require a couple of years of digestion before we see global utilisation rates tightening substantially."
Extra production is being planned during a period of increasing economic uncertainty.
The battle against inflation in China threatens to subdue growth for at least the next few quarters.
And, assuming the Chinese government wins the battle, it faces the huge task of weaning the economy off its addiction to exports - one of the main strategies under its current five-year plan (2011-15).
A period of transition appears inevitable as slower export growth (and therefore growth of chemical and polymer imports) is replaced by domestic consumption.
For the supercycle theory to come true, Asia must continue to do all the heavy economic lifting, as the outlook for the US and Europe is at best fragile.
The Morgan Stanley case was that strong Asian growth would be enough by itself, because the size of the continent's consumption meant that it would drive the global ethylene cycle.
Agrawal disagrees. He writes: "In our opinion, a chemicals bull cycle needs to be supported by robust developed market (48% of demand) and [our italics] emerging market growth.
"Excluding any new capacity expansions, beyond the ones which are already under construction (also excluding the recently announced US shale gas based expansions), we see global ethylene operating rates improving from the cyclical 2010 bottom of 84.6% to 89.7% by 2015," he says. This would be lower than the 91.5% average in 2004-2007.
The risks of rushing into investment look like they are mounting. But the age-old dangers remain for those companies that pause: losing ground on market share and economies of scale.