Asian Chemical Connections

By Malini Hariharan

Confirmation has come in from the Siam Cement Group (SCG) that it is in the race to acquire stakes in two Indonesian companies - Chandra Asri and Sulfindo Adiusaha.

"We are interested in both firms in Indonesia as petrochemicals are SCG's core business. But we cannot disclose anything at the moment because the deals are quite big," said SCG's ceo.

As mentioned by the blog last week, Singapore's Temasek Holding is interested in divesting its 22.9% share in Chandra Asri for $400m. Chlor-alkali and vinyl's producer Sulfindo owners, the Victoria Group, are said to be looking for $700m for the whole company.

SCG's interest in the chemical assets follows its acquisition of an Indonesian ceramics producer and building materials distributor earlier this year. SCG had said at that time that it would utilise cash reserves of $2.5bn for strategic acquisitions in the Asean region.

The Sulfindo asset would significantly expand SCG's share of the Indonesian PVC market which it currently serves from a 120,000 tonnes/year plant operated by subsidiary TPC Indo Plastic & Chemical.

Others interested in Chandra Asri, Indonesia's sole cracker operator, are Thailand's PTT Chem and South Korea's Honam Petrochemical. And Hanwha Chemical is said to be interested in Sulfindo.

By John Richardson

"IF we build polymer capacity in India the demand will come," a very senior industry executive told the blog last year. He amplified this statement by explaining that greater availability of plastics would always stimulate strong demand growth for low-end packaging materials etc in emerging markets in general, as the poor became a little less poor.

Back in May 2010, when he made this statement, India, China and other developing countries such as Indonesia and Vietnam were enjoying soar-away growth. "Decoupling" from troubled Western economies was once again in fashion.

Confidence was high at last May's Asia Petrochemical Industry Conference (APIC) in Mumbai as many of the delegates talked about tight markets by 2014-15.

The search for new locations for new capacity was already on to serve this voracious emerging-market growth, given that Middle East ethane supply is so severely constrained.

The momentum continued into late 2010 as JP Morgan published its famous SuperCycle theory, claiming that it didn't matter what happened in the US and other Western markets. Incremental polyethylene (PE) demand growth would be so strong in China that a decline in US consumption wouldn't even matter on a global basis, the bank claimed.

Investors in commodities and equities etc quite often have very short-term perspectives and so don't really care whether theories, such as the one above, turn out to be true over a period of years. All that matters to these investors is that enough people believe a particular idea over a millisecond (in the case of the high-frequency traders), an hour, a day, a week, a month or a quarter.

But it is the job of senior chemicals industry planners to see through all of this.

Right up until this May's APIC, in Fukuoka, Japan, there was still talk of a peak in the cycle by 2014-15 and the need for lots of new polymer and other plants.

Denial continues in some quarters.

"Even though chemical and industrial stocks have been hammered, 2012 profit estimates still show 20%+ gains across the board for the group. Even second half 2011 estimates show double-digit earnings growth," said an industry observer yesterday.

Emerging markets cannot by themselves provide enough momentum to save the world from a new recession - and quite likely a new Great Depression.

As we highlighted on Wednesday, China faces a debt crisis that could destabilise its financial system and across the developing world, inflation threatens growth.

And as we also point out in Chapter 4 of our e-book, Boom Gloom and the New Normal, what it means to be "middle class" in China and India is radically different from the West.

Low-end packaging sales might benefit from the poor becoming slightly less poor in India and China and other emerging markets.

But average income levels are way below those in the West, meaning that "decoupling' was always a fallacy for manufacturers of mid-range and high-end consumer goods. It will take several decades for emerging-market average earnings to catch up with those in the US and Europe.

Even the alleviation of rural poverty is now under threat, putting into question the argument made by the senior executive we quoted at the beginning of this post - that if polymer capacity is built in countries such as India, demand will come.

The latest issue of the World Bank's Food Price Watch shows that global food prices in July were 33% higher than a year earlier.

Maize was up by 84%, wheat by 50% and live hog prices in China were 50% higher.

In India, the wholesale prices of rice and wheat were 9% higher in the first week of August from the same period last year, says the Australian Financial Review.

Food-price inflation is also a problem in Indonesia, Thailand and Malaysia.

In 2008, during the last big run-up in global food prices, the World Bank estimated that 105 million people were pushed into its definition of extreme poverty. A further 44 million people are now faced with being pushed into extreme poverty, it adds.

Fundamentals are thought to be mainly the cause of this latest rally in food prices, as opposed to the speculators who were blamed for what happened in 2008.

The fundamentals include poor harvests caused by bad weather - and changing diets in the developing world as the relatively small but super-rich upper-classes eat a lot more meat. This is taking land away from cereal production for food, as is the rise in the use of biofuels.

A further problem is that the supply of arable land in China has been reduced due to the surge in real-estate construction since 2008, enabled by the country's huge economic stimulus package.

In the longer-term, how does the world properly feed itself when you also take into account water shortages and climate change, if you believe that climate change is real?

Later chapters in the book will look at megatrends such as food and water. We will discuss the opportunities, as well as the challenges, that these megatrends represent for chemicals companies.

All the problems we now face are highly complex, global in nature and constantly evolving -and so this is very much work in constant and difficult progress.

But what is already crystal clear is that there is no going back to the old approach of simply building a plant on the assumption that demand will inevitably expand to consume its capacity.

By John Richardson

A CAREFUL reading of all the major ICIS pricing reports covering olefins, polyolefins, aromatics and their derivatives over the last few weeks reveals very few mentions of the phrase "peak demand season".

This time last year, the reports were full of references to the seasonal surge in production of finished goods in China in time for the Thanksgiving and Christmas sales seasons in the West.

The reason is obvious: In comparative terms, this year's peak demand season has been exceptionally weak and therefore hardly worth discussing at all. 

"The container-shipping industry is contending with the longest stretch of near-zero rates in its half-century history on the Asia-to-Europe route, as a capacity glut combines with the slowest growth in trade since 2009," wrote Bloomberg in this article published last week.

"Commerce on the world's second-busiest container route rose 4.2 percent in the second quarter, the weakest since the end of 2009, Woking, England-based Container Trade Statistics Ltd. estimates."

It is a similar story on the Asia-US route, of course, due to all the macro-economic problems.

In polyolefins, what seems amazing at first glance is why pricing has held up so well.

Polyethylene (PE) and polypropylene (PP) were each, for example, only assessed $10-20/tonne lower last week. As the graph below shows (click on the link), pricing has remained pretty stable in the face of what is clearly a new global recession.

AsiaPEpricingSept52011.ppt

There are two reasons for this, which are:

1.) Olefin and polyolefin supply losses in Q3 have been huge - as this slide from our latest ICIS Worldwide Ethylene Plant Report illustrates - click here: AsiaEthyleneCapacityLossSept2011.ppt. Several scheduled turnarounds in Asia are now, however, coming to an end and some technical problems look as if they are close to being resolved. For instance, Formosa Petrochemical Corp hopes to restart its 700,000 tonne/year No1 cracker at Mailiao in Taiwan during the first half of this month

2.) The oil price has yet to free-fall. But the blog agrees with Paul Hodges, UK-based chemicals consultant, when says: "I used to think that prices would eventually stall and then re-stablise at around $60 a barrel, and this is still my base case. But I think the damage that has been done to demand by high oil prices may be so great - in combination with the other economic problems emerging around the world - that we may end up back at $25 a barrel."

We are heading for some very difficult times. 

Although the fourth quarter might be too soon for the major correction that we believe will eventually happen in crude oil, petrochemicals supply is set to lengthen not only in the olefins chain but also in paraxylene (PX) and styrene monomer.

Strong support from demand seems unlikely as the "peak demand season" is over, Q4 is traditionally a little quieter and the uncertain economic outlook is resulting in a lot of risk-aversion.

Another factor to consider when making your market-assessments for the rest of this year is  China's decision late last month to change how bank-reserve requirements are calculated.

"This is already making trade finance a lot harder to obtain," a Singapore-based polyolefins trader told us late last week.

The policy involves banks being forced to include "margin deposits", or collateral deposited by customers for letters of credit and other guarantees, in calculating the share of deposits they must put aside for reserves, according to the Wall Street Journal.

The move would "seriously cut off" traders' access to short-term credit, affecting 50-60 per cent of China's commodity traders, Henry Liu, head of commodities research at Mirae Asset Securities, was quoted as saying in the same newspaper.

Small and medium-sized enterprises were already struggling to obtain credit because of previous attempts by China to tackle inflation.

The West has looked to Asia to support growth since late 2008, but now the prospects for growth everywhere look bad.

A case in point is the PE market.

"The overriding sentiment in the European PE market this week is one of uncertainty over demand in the coming weeks," wrote our European polyolefins editor Linda Naylor in her latest report, published last Friday.

"Few doubt that Asia will continue to soak up volumes and many players look to Asia for direction in the mid-to-long term."

The Singapore-located trader we quoted above, however, also told us: "Traders are now looking to re-export Middle East from China to Europe because they have overestimated the strength of demand in China."

By Malini Hariharan

The Taiwanese government is once again talking of removing a ban on cracker investments by Taiwanese companies on the mainland.

The country's minister of economic affairs said late last week that the government is willing to consider lifting the ban provided certain conditions are met.

Taiwanese companies must have a controlling stake in any joint venture and guarantee exports of raw materials back to Taiwan. Companies would also need to upgrade their operations in Taiwan.

The minister disclosed that these conditions would be negotiated with the Chinese government during the next Economic Cooperation Committee meeting likely to take place end of this month.

The minister's statement comes after Sinopec, the Fujian government and a consortium of Taiwanese companies including China Petrochemical Development Corp, Ho Tung Chemical Corp , LCY Chemical Corp and USI Corp, signed a letter of intent for a $4.5bn joint cracker project.

The 1.2m tonnes/year cracker complex, to be located in Gulei, Zhangshou city, will be adjacent to a new 16m tonnes/year refinery. The companies did not disclose their stakes in the venture or provide a timeline for the project which has yet to be approved by the Chinese authorities.

The minister's statement offers hope to private Taiwanese companies that have already invested in derivative plants in China and interested in upstream expansions. An investment overseas, especially in the fast-growing China market, is the only alternative available to these companies as they have been unable to expand at home because of a powerful green lobby.

But it should be remembered that this is not the first time that the government has talked of relaxing the ban. Politics have previously come in the way and although relations between China and Taiwan have improved with the implementation of the Economic Co-operation Framework Agreement (ECFA) the blog thinks the Chinese government may not be willing to concede to all the conditions identified by the minister.

For instance, there is no reason why the Chinese government should accommodate to the the stipulation that Taiwanese companies have a majority stake. Currently foreign shareholding in cracker joint ventures is restricted at 50%.

And rather than ship raw materials such as ethylene and propylene to Taiwan, the Chinese are likely to be keen on capturing all the value addition.

The Taiwanese minister's statement is certainly welcome but companies still have a lot of work to do in softening their government's very rigid position on cracker investments on the mainland.

By Malini Hariharan

Despite a bleak global economic environment in the near term and uncertainty on how deep the next crisis will be chemical industry executives appear to be remarkably bullish about future prospects as is evident in KPMG's latest industry survey.

Eighty five per cent of the 142 senior chemical industry executives surveyed in June expected revenues to increase next year.

Among the different regions, executives in the US were the least optimistic but even here 77% predicted a revenues to grow in 2012. Asian executives were understandly most bullish with 96% confident of revenue growth with 49% expecting a significant increase and 47% seeing a moderate increase.

The confidence was despite expectations of higher raw material costs next year and concerns among European and US executives on the macro economic risks.

So where will growth come from? The most cited answers were expansion in new markets, new product development and acquisitions.

Sixty six per cent of executives said their companies would be involved in a merger or acquisition as a buyer in the next two years. In addition, 70% of executives said their companies had enough cash on the balance sheet to pursue strategic acquisitions.

And 80% planned to boost capital spending next year, for new products and services, acquisitions, and research and development. All of the executives surveyed in Asia-Pacific predicted higher capital spending.

The optimism in the survey is very different from the current mood on the ground for many petrochemicals. As mentioned in the Monday post, the peak demand season in China has turned out to be very weak and there is a general reluctance on part of Asian buyers to hold stocks. In Europe too, weak demand has started exerting downward pressure on prices.

The American Chemistry Council (ACC) said in a recent report that there has been a "marked deceleration [in chemicals production] in some countries and regions, a downturn." It added that most leading indicators of global industrial activity signalled "further softness".

The survey makes interesting reading but it is best to take the results with a pinch of salt.

By Malini Hariharan

There are some exceptions to the generally weak petrochemical markets seen in Asia these days and monoethylene glycol (MEG) is one such product.

Spot prices have hit a 44-month high of $1,275-1,280/tonne CFR China and are expected to soon cross $1,300/tonne, close to levels last seen in January 2008, reports Judith Wang, ICIS pricing editor for MEG in Asia.

The price spiral was attributed to speculators who were banking on tight supplies, as a result of plant turnaround in Asia and the Middle East during September-October, to keep markets firm.

Sellers were said to be in no rush to offload cargoes, while end-users were anxiously snapping up available volumes ahead of the National Day holiday in China from 1-7 October.

Purified terephthalic acid (PTA) too has risen driven by tight supplies for its feedstock paraxylene (PX). Spot PX prices were assessed $45/tonne last Friday with a delay in the start up of CNOOC -Kings Group's 840,000 tonnes/year plant at Huizhou, China and other turnarounds influencing market sentiment.

Everyone in the polyester chain is banking on strong demand during the peak manufacturing seasons for the textile sector over the next couple of months.

But there are few signs yet that demand will be as robust as last year given the uncertain economic outlook in Europe and the US.

The average operating rate at Chinese polyester plants is hovering at around 80%, the same level as August. High raw material prices have put pressure on polyester margins and any increase in operating rates will only lead to higher MEG and PTA prices and worsen the squeeze.

By John Richardson

IT was interesting to read late last week about how certain chemicals analysts still believe that the big slump in the sector's share prices might merely be a rough patch, possibly just a correction.

In this same excellent piece from my colleague Nigel Davis, Citi US chemicals analyst PJ Jukevar talks about how "battled tested" chemicals companies" have learnt since 2008/2008 to put "value over volume". In other words, capacity will again be quickly shut down to bring markets back into balance if we do end up in a protracted downturn.

There is also a lot of discussion about two classes of chemicals companies. This comprises those more exposed to the cycle because they make highly commoditised stuff where there is lots of competition, against products where there are fewer players and so more of an ability to exercise market discipline (plus more "value-added" differentiation).

This latter group might get through the rough patch relatively unscathed, argue some chemicals analysts.

Regular readers of the blog will hardly be surprised to discover that we don't agree with any of this.

In our view it was Federal Reserve liquidity that was a substantial factor behind driving share prices, in general, higher during 2008/09. The chemicals sector rode on the back of this and also benefited from cost savings, the operating discipline Citi talks about - and China's economic stimulus package.

Fed liquidity did not mean that on a global basis demand was back where it was before the crisis during the 2009/2010 recovery, even though emerging markets were booming.

The rise in share prices was substantially because investors - faced with record-low interest rates in the US - were chasing higher returns in equities, oil prices and other commodities. The oil price remains in demand destruction territory thanks to the speculators.

The signs are that the Fed might not be able to extend its ultra-loose liquidity policy much beyond keeping interest rates very-low for the next two years - because of resistance within the Fed.

Plus, of course, there is global aversion to risk - benefiting government bonds, gold etc at the expense other commodities and equities. There will be mini-recoveries in the appetite for risk, sure, over the next weeks and months, but this will not mean a return to a bull market.

The reason is the macro-economic problems. No matter where you turn they are mounting, evolving and together represent a once-in-a-generation shift to a New Normal.

Take the Eurozone and the bitter divisions over how to solve the crisis as just one example.

Germany's Finance Minister Wolfgang Schauble has rejected International Monetary Fund (IMF) calls for a softening of the European austerity drive.

"Pursuit of debt reduction by deflation only - in a world whose savings rate is already at a record high - means the Euroland recession could well be prolonged and deepen into a recession next year," Charles Dumas from Lombard Street Research told yesterday's Australian Financial Review.

Two years on from the start of the Eurozone crisis, we still seem to be some way from broad agreement on how to solve the crisis. This does not bode well.

India has now raised interest rates 11 times since March of last year and food-price inflation has been above 9 per cent for five weeks in a row.

A new global food crisis - driven by fundamental changes in the demand and supply of food - threatens emerging-market growth in general. This raises questions about existing emerging-market growth models.

China continues to struggle with the harmful side effects of its stimulus package.

Attempts continue to cool inflation without preventing a collapse in property prices that would leave the country with a potentially destabilising non-performing loans crisis. As we discussed earlier this week, the latest attempt to rein in liquidity - a change in how bank-reserve requirements are calculated - has further reduced the ability of chemical traders and buyers to source credit.

China's 12th Five-Year Plan (2011-2015) involves perhaps the biggest overhaul in economic policy for a generation. This looks likely to set the economic direction for the next decade or more, not just the next five years.

Policy changes are going to have a big, disruptive effect on chemicals demand.

Take the auto sector as one example.

Government policymakers are leaning towards more limits on the rise in car ownership in order to address China's steeply rising dependence on imported oil, its traffic jams, air pollution and shortages of land in many areas for more road construction.

This is despite strong industry pressure to reinstate reduced sales taxes and subsidies for rural purchases. The incentives resulted in a 33% surge in sales in January-July 2010 over the same period in 2009. After the incentives were removed, January-July 2011 sales were up by just 5 per cent.

Individual cities, such as Beijing, have also introduced restrictions on new vehicle registrations in order to deal with chronic traffic congestion and dreadful air quality.

The government is considering raising minimum kilometres per litre, or miles per gallon, requirements for new vehicles - and introducing new subsidies to promote the production and sales of fuel-efficient and battery-powered cars.

For the numerous foreign and auto makers who are building-up capacity in China - perhaps on the assumption that the old growth model still applies - these are worrying times. Annual auto production capacity is expected to rise from 17 million vehicles in 2010 to 31 million vehicles by 2013, according to consultants JD Power & Associates.

All chemical companies fall into one category - those dependent on demand.

There are fewer producers of polyurethanes (PU) than say polyethylene (PE), and so the PU producers might be able to react more effectively in the short term to declines in demand.

But the scale of the global economic changes we are undergoing at the moment - as we enter the New Normal - are so great that nobody can possibly be immune.

And this is not merely a rough patch or a correction.

By John Richardson

THE odd chemicals trader who has gone long might well seek to talk-up his or her markets by claiming that the slowdown in China's inflation rate is great news.

But nobody interested in anything beyond the sale of the next cargo should read anything too-positive into the decline in consumer inflation in August to 6.2 per cent from a three-year high in July of 6.5 per cent.

Although the official government data suggests that prices have peaked for the moment, there are some major risks ahead.

China seems to have entered a phase in its development where inflation remains elevated and will not respond in the right direction to government measures, economists are warning.

Ben Simpfendorfer, managing director of economics consultancy Silk Road Associates, told the Wall Street Journal that the latest inflation figures "provide temporary relief, but calls for policy easing are dangerous".

Rising demand for food and double-digit wage growth suggest the economy is in the midst of a structural inflation shift, he added.

"Inflation continues to bubble away under the surface and would quickly re-emerge, especially given the structural pressures on wages, land, and raw materials," Simpfendorfer said.

"Inflation remains the most likely trigger of a hard landing in 2012, especially if the People's Bank of China was to ease policy at this point."

And the fall in the August inflation rate might, in fact, only represent a statistical anomaly, according to economists at ANZ bank in Australia.

"The moderation in headline inflation is largely due to a high base recorded in the second half of 2010," they said.

"As sequential growth remains upbeat, it is too early to say that inflationary pressures have eased.

"Food prices, led by pork, are still on the rise, suggesting strong inflation expectations and soaring pesticide costs."

More important is the structural shift we referred to above as land becomes more expensive and the surplus supply of rural workers is reduced. This is possibly because demographic factors that threaten China's economy in the long term are already coming into play.

Another factor in the reduced supply of rural workers prepared to move to China's southern and eastern provinces - its manufacturing heartland - as a result of the success of government efforts in raising rural incomes.

Wages in the manufacturing heartland have also been increased, by as much 30 per cent in some provinces in 2010. This was in response to rising public unrest over lousy pay and terrible working conditions.

The central government is committed to a long-term objective of further raising wages in an effort to stimulate domestic demand - although it could face stiff resistance from the state-owned enterprises worried about eroding margins. The powerful central government body, the National Development and Reform Commission (NDRC) might also fight further wage hikes as long as inflationary pressure remains strong.

Inflation has averaged 2-4 per cent over the last decade, but would range between 4-6 per cent over the next ten years, Bo Zhuang, an economist with Trusted Sources, a consultancy, told the Financial Times.

Because the inflation would now be in this higher band, sudden and unexpected disruptions to the economy, such as a drought, had the potential to result in double digit increases in the cost of living, he warned.

A lot of the talk about China's inflation problem has centred on the notion that it is mainly due to a temporary rise in food and fuel prices - for example, the surge in pork prices. The cost of pork is expected to moderate as more live hogs (soon to be dead, unfortunately for them) become available.

But Alistair Thornton, a China Analyst at HIS Global Insight told the New York Times that non-food inflation was the highest in over a decade.

Food prices, which account for around one-third of the consumer price index, rose 13.4 per cent in August compared with the previous year, whereas inflation for goods other than food was 3 per cent higher, he added.

This all suggests big structural changes in China as the government attempts to make the poor slightly less poor. 'Economic rebalancing" is the buzz-phrase as Beijing attempts to most domestic demand and lower the dependence on exports and investment as the main drivers of growth.

Plus the enormous economic stimulus package, which we have written about on many occasions, has created strong inflationary headwinds - particularly, of course, in the real estate sector.

The good news on this score might be that new-home prices dropped or remained steady in August, compared with those in June of this year, in 31 out of 70 major cities, according to official government data. Average residential land prices were 9 per cent lower in August over July 2011.

The government, however, still faces the longer term problem of achieving a gradual cooling-down in the property sector. A collapse in pricing would cause major social unrest as all the citizens who lost money took to the streets. Non-performing loans would also rise to the point where they could even threaten the stability of the financial system.

But let's take the very short-term perspective of the chemical traders we mentioned at the start of this post to conclude this post with a bit of good news - a rather refreshing change.

Lower inflation in August is likely to mean that Beijing will be in no rush to further raise interest rates or bank-reserve requirements (although last month's changes in how bank-reserve requirements are calculated was bad news for chemicals trade).

The goal posts have also been moved: Prime Minister Wen Jiabao has adjusted the government's annual target for inflation upwards from 4 per cent to 5 per cent- meaning, perhaps, even less need for tighter liquidity.

That's alright then - everything is wonderful.

By Malini Hariharan

After methanol-to-propylene (MTP), Chinese companies are racing to build propane dehydrogenation (PDH) plants with eight new projects announced over the last three months.

The blog estimates that PDH projects with a total propylene capacity of 4.6m tonnes/year have been planned for completion in 2013-14 (a full list is available here China PDH projects.xlsx).

Most of the companies have yet to confirm the derivatives planned downstream of the PDH project and some such as Zhejiang Julong Petrochemical have indicated that some of the propylene will be sold in the local market. The companies have also not said if feedstock propane will be imported or sourced locally.

The interest in propylene is understandable. Chinese propylene demand, which accounts for 15% of global consumption, is estimated to be growing at 5-6%/year. And the country imported nearly 1.5m tonnes of propylene last year.

But can PDH economics be viable in China? Successful PDH operators in the Middle East have access to cheap propane and it is uncertain if this is going to be the case in China, especially if it has to be imported.

Some analysts are predicting ample availability in the country as natural gas is displacing liquefied petroleum gas (LPG) as a domestic fuel. Dimethyl ether (DME) blending with LPG is poised to take off with new national specifications likely to be announced by June 2010. Trials are also being carried out to use pure DME as a household fuel which should release even more LPG for petrochemical use.

On the supply side, the start up of new refineries has resulted in increased LPG capacity and the trend is likely to continue.

An easier approval process is likely another reason for companies to build PDH plants rather than crackers which are firmly in the hands of state-owned companies.

By Malini Hariharan

The International Energy Agency (IEA) has once again trimmed its oil demand forecast for 2011. And rising fears of a sustained global economic slowdown have also prompted the agency to cut the forecast for 2012.

The IEA made it clear that expectations of 'business-as-usual' 4.5-5% global GDP growth were unsustainable. It cut its own assumption of GDP growth to around 4% in 2011-12 and as a result trimmed 2011 oil demand by 400,000 bbls/day to 89.3m bbls/day while demand in 2012 was forecast at 90.7m bbls/day.

The IEA acknowledged the 'paradox of weakening economic growth and oil demand indicators on the one hand, and $110/bbl crude on the other'.

"This is a market that's been tightening for the past 12 to 15 months. This year the tightening has been more about supply outages than demand. Demand growth has slowed," said David Fyfe, head of the IEA's oil industry and markets division, in an interview.

But he expected tightness to ease in the coming months if there were no further disruptions to supply.

Availability should significantly improve once Libya is back in action. But when will this happen is still unclear.

"We are using a fairly conservative assumption for Libya. Until we see a resolution of the security situation on the ground, we would prefer to be cautious on the resumption of oil supplies," said Fyfe.

Oil prices were quick to react to the IEA forecast with Brent falling to $112.39/bbl immediately after the announcement.

A further softening cannot be ruled out and this would only enhance the bearish sentiment seen in most petrochemical markets.

By John Richardson

THE credit crisis that is limiting chemicals and polymer trade in China is continuing, even though local initiatives have been launched to help small and medium-sized enterprise (SMEs) with the central government indicating that more help could be on the way.

As we have discussed before on the blog, the trade finance crisis affecting the SMEs is a major reason why chemicals sales have fallen quite dramatically in China during 2011. In products such as polyethylene (PE) producers are now even talking about flat or negative growth in demand for this year.

Beijing is set to ease lending restrictions on the SMEs over the next few weeks,according to the Hong Kong Standard newspaper.

And in Zhejiang province, Rmb40bn of additional loans to these hard-pressed companies have already been issued online.

Shanghai city authorities have launched a lending scheme for SMEs, according to Bloomberg, as the economic damage to a critically important part of the Chinese economy becomes more apparent. It is estimated that private companies in general generate 80 per cent of the country's employment and more than 50 per cent of economic output.

The 2008 economic stimulus package made the credit clampdown necessary because of all the excess liquidity still flowing around the financial system.

Those who have made money from the economic stimulus - real-estate speculators, mining companies etc - are taking advantage of the plight of the SMEs by setting up private lenders and credit guarantor companies (both functions are often performed by the same company).

How this works is that fees are charged to the SMEs for obtaining loans from banks (usually 0.5-1 per cent of the value of a loan annually), according to this article from the Wall Street Journal.

Guarantors will also require machinery or other physical assets to be used as collateral against loan default.

And when these private companies provide lending themselves, interest rates can be as high as 30 per cent - in excess of four times the official lending rates from the state-owned banks.

The private lenders - which are categorised in China as non-bank institutions - issued Rmb287.5bn of loans in June this compared with Rmb124.9bn a year earlier, according to government data.

So successful have these lenders become that some are listed on the Shanghai stock exchange.

Despite of efforts to relieve the plight of the SMEs, there is no great confidence in chemicals markets that the lending situation will greatly improve during the rest of this year.

"We were all taken a bit by surprise by the August inflation number at 6.2% - we had expected it to fall to 5.9 %. It looks as if underlying inflationary pressure is stronger than we expected," a senior executive with a global polymer producer told the blog earlier this week.

"And so we don't expect any big positive changes in the liquidity situation in China during the remainder of 2011.

"Two big converters, who were also acting at traders, have recently gone bust in Guangdong with debts of Rmb100m each.

"The government has deliberately targeted the speculators that they blame for a lot of the unnecessary heat in the economy.

"The problem is that these speculators are also often converters - SMEs."

As you can see, the irony is that by clamping down on financing to one set of speculators (the converters who double up as speculators), the government has encouraged the rapid growth in another speculative area of the economy: Private lending firms.

By John Richardson

THE blog hears that some industry observers are persisting with the Supercycle theory for petrochemicals based on "decoupling" - i.e. emerging markets will compensate for any new recessions in the West.

We find this baffling as evidence points to a lost year of growth in China. The prospects for next year seem to us highly uncertain because of a host of factors which we will examine in detail over the coming weeks - including the objectives of the 12th Five-Year Plan (2012-2015). And, as we discussed on Monday, the struggle against inflation seems likely to extend into 2012.

Returning to 2011, several contacts have commented that they cannot understand how we keep talking about flat, or even negative, growth for polyethylene (PE) when GDP growth is still forecast to be a very-healthy 8-9 per cent.

This is the explanation we have been given by a Shanghai-based polyolefin industry executive:

"I think PE demand growth will be flat this year because so much stock was built up at the resin end of the business down to finished goods during the great credit flood.

"A lot more traders came into PE and into commodities generally, and started to speculate and take long positions during 2009-2010 when credit was easy.

"They were caught out in March/April when the market turned bearish and are still, as a result, sitting on high inventory levels.

"I think also that there must be a great many finished goods in storage because of the lack of consumer confidence. There is a real, tangible increased fear over the future and I see less consumer spending and more savings."

Traders are suffering from a reduction in liquidity as a result of increased interest rates and bank-reserve requirements, we think. They have also been affected by an adjustment in how banks are required to calculate their reserve requirements.

So it seems likely to us that in this credit-starved environment with demand so uncertain since March/April, many traders have been forced to dump material on the market, thereby suppressing prices and reducing demand for new material. Numerous traders have reportedly gone bust.

Polypropylene (PP) looks a little better as demand will still grow by 4-5 per cent this year compared with 2010, added the industry executive.

PP demand has been badly dented by the removal in government subsidies for autos. The removal of subsidies is part of both the efforts to control inflation and a major strategic shift of economic direction under the 12th Five-Year--Plan. It therefore seems unlikely that they will be restored.

"For polyolefin operating rates to stand still - i.e. where they were last year - you would need the China market to grow at 6-8 per cent during 2011," added a chemicals analyst.

"If the Supercycle theory were to come true you would need growth in China to be in the region of 10 per cent, which is clearly not going to happen this year.

"The West is almost certainly heading for recession. It must not be forgotten that the US and Europe still account for around 60 per cent of global polyolefins demand."

"Flat or negative growth in the West for polyolefins seem possibilities, making it even harder to support the notion of a SuperCycle.'

Quite.......

By John Richardson

Confidence among Middle Eastern petrochemical producers remains high because they obviously now that as long as oil prices do not collapse they will continue to make excellent money, said a chemicals analyst.

The blog believes that there is a very strong chance that crude will collapse to as little as $25 a barrel as we enter a new global recession. This would result in even the likes of SABIC being forced to think again as petrochemical pricing in turn collapses.

The mood in the Middle East is not only being buoyed by good margins.

"Market share is being gained thanks to the ironing-out of production problems," the analyst added.

As we have reported before on the blog, frequent technical issues at new plants is one of the reasons why petrochemical supply was tight in 2009-2010. New supply was drip-fed into markets rather than arriving in a sudden flood as many observers had predicted, with demand during the recovery from the late 2008 crisis bolstered by government stimulus packages.

Many of the technical problems look as if they have been resolved, resulting in a substantial surge in exports from the Middle East, the analyst added

"Overall petrochemical exports from the port of Dammam in Saudi Arabia were substantially higher in August compared with July," he said.

"We have seen a steady improvement in output throughout 201l with no one notable exception - Saudi polypropylene (PP).

Technical problems at the 450,000 tonne/year Al-Waha Petrochemical plant forced a shutdown on 1 July with production resuming in August, according to our colleagues at ICIS news.

Operating rates at National Petrochemical Industrial (NATPET), a 400,000 tonne/year operator, were reduced in July in order to resolve problems at the plant.

And Petro Rabigh - the 700,000 tonne/year producer - underwent an extended turnaround in an effort to resolve issues at its deep catalytic cracker that ended in August, ICIS news was also told.

PP output is up at all three plants as demand in China takes a battering from a sharp slowdown in auto sales.

An overall increase in Middle East petrochemical output is occurring as governments pull back on economic stimulus - most importantly in China.

Polyethylene (PE) trade data from China for H1 of this year show the big gains made by the Middle East as overall demand fell by 2.5 per cent.

The rest of this year does not look good for the higher cost producers in Japan, South Korea and elsewhere as there are no indications of China easing back on its battle against inflation,

And for everybody, including even the Middle East, it is hard to find reasons to be optimistic about 2012.

By John Richardson

EVERYWHERE you turn it is bad as fear over the future dominates the mood of polyolefin producers and buyers.

Aversion to risk seems to have increased because of the concern that this could be September 2008 all over again. Hand-to-mouth buying is the norm as no purchasing manager who values his or her job wants to be caught on the wrong side of a sudden collapse in crude-oil prices.

Last time around, when Lehman Bros went bust in September 2008 triggering the global financial crisis, governments came to the rescue through economic stimulus.

Markets were also buoyed by frequent technical problems at new Middle East plants during the 2009-2010 recovery. The great supply surge was always going to happen next month, then the month after that and so on and so on. Traders, supported by plenty of easy financing in China, were all-too happy to "help out" buyers who suddenly found themselves short of material.

Austerity is now a widespread policy in Europe with doubts over the extent to which the US will be able to overcome its political divisions and further boost its troubled economy.

Limited help for China's struggling small -and medium-sized enterprises (SMEs) has been announced in certain areas of the country over the last two weeks. The central government has also indicated that it might introduce nationwide measures to help the credit-starved SMEs, which make up the bulk of China's chemicals and polymer buyers - and which account for more than 50 per cent of economic output.

But the battle against inflation - the reason why credit conditions have got worse for the SMEs - looks very likely to stretch into next year. This would mean no great improvement in overall tight lending conditions that have badly dented China's chemicals trade throughout 2011.

"We were all taken a bit by surprise by the August inflation number at 6.2%. We had expected it to fall to 5.9 %, but it looks as if underlying inflationary pressure is stronger than we thought," said a sales and marketing executive with a major polyolefin producer.

"And so we don't expect any positive changes in the liquidity situation in China this year and probably well into 2012."

Beijing is struggling to deal with the harmful impact of its huge 2008 economic stimulus, which includes not only higher inflation but also a steep rise in non-performing loans due to over-investment real estate and other sectors, warn economists.

It cannot, therefore, risk a major relaxation in lending conditions - perhaps even if the global economy enters a new recession.

The government also seems to recognises that its investment-driven growth model is no longer sustainable for environmental reasons, hence the decision to end subsidies for auto purchases.

Since the subsidies were removed last December, auto sales have increased by just 5 per cent in January-July 2011. This compares with a 33 per cent increase for the full- year 2010.

"Polypropylene (PP) prices have come under a lot of downward pressure recently," said a Shanghai based sales and marketing executive with a second major polyolefin producer.

"I think a big factor here has to be autos. We are seeing an erosion of premiums for co-polymer grades (used in auto production) over homo-polymers."

High domestic polyethylene (PE) inventory levels, particularly in low-density PE (LDPE), have been weighing heavily on markets, he added.

Warehouses in Iran are also reported to be full of LDPE that is expected to put downward-pressure on prices in China, Europe and South Asia.

"I think LDPE, which had been tight for so long on very-limited global supply, became too-expensive and has suffered from demand destruction," added this second sales and marketing executive.

As for the Middle East supply story, a chemicals analyst believes that many of the production problems that plagued new plants during 2009-2010 have been ironed out.

"Overall petrochemical exports from the port of Dammam in Saudi Arabia are up," he said.

"We have also seen a substantial easing of a shorter-term tightness in PP as a result of less technical problems at three major Saudi plants."

Some 1.5m tonne/year of capacity was affected by difficulties at the plants in July-August, including the 700,000 tonne/year Petro Rabigh facility, according to ICIS news.

Everywhere you turn markets look bad, as we said earlier.

Take Europe as the first example. "PE demand is weak and several producers acknowledge that the only way to bring the market into balance is by cutting production," said the 16 September ICIS pricing European polyolefin report.

Turkey is a market worth monitoring because of its large domestic demand and low levels of production.

In tight markets this results in prices rising very quickly as exporters chase better returns than from domestic sales. But in weak markets the reverse happens as everyone fights for volume.

"European producers are selling at very competitive levels in Turkey followed by the Middle Eastern players who cannot place enough volumes in Asia," said in an industry source in Turkey.

"Co-polymer PP has lost its usual Euros50/tonne premium over homo-polymer grades," he added, which suggests that the problems in the China auto market might be crossing borders.

"The only optimistic point is that trader, distributor and converter inventories are not high. They are at, or are probably a little less, than usual levels."

Another cause for optimism is the food packaging business in China which is booming, according to the first sales and marketing executive we quoted above.

However, he warned: "The reason is that people are eating-in more as they cut back on visits to restaurants. Fear about the future is even affecting the Chinese consumer."

The mood in any market can rapidly change and perhaps such a change is just around the corner in polyolefins.

All that is needed is for Europe to resolve its sovereign debt crisis, the US to overcome its political paralysis and China to calm inflation and successfully redirect its economy away from an over-reliance on investment.

No problem then......

By Malini Hariharan

The gas shortage in the Middle East, especially Saudi Arabia, has been well documented with the situation expected to ease in the longer term once investments in new processing plants have been completed.

But in a recent report on the emerging market for LNG, Facts Global Energy (FGE) points out that more countries in this region are likely to start imports in the future. Middle East LNG imports are forecast to rise from less than 2.2m tonnes in 2010 to 15m tonnes in 2020 with Kuwait, Dubai, the Northern Emirates, Bahrain and Saudi Arabia emerging as the key importers.

Gas production in Saudi Arabia is growing with Saudi Aramco making heavy investments. However, this is unlikely to be sufficient to prevent a shortage by 2017-18. Saudi Arabia, says FGE, has the potential to emerge as the largest importer in the region - up to 4m tonnes/year by the end of this decade.

And if Saudi Arabia does not import LNG then it would need to burn at least 750 000 bbls/day of crude oil by 2020 for power generation on top of significant volumes of fuel oil.

As reported by the blog earlier, the Kingdom's booming oil demand, especially from the power sector where consumption is forecast to rise 7-8% annually for the next ten years, has become a matter of concern for planners.

A critical issue for Saudi Arabia and also for other countries in the region is the low price of gas which has been partly responsible for spiraling demand and the current crisis. But a revision in prices, especially for industrial consumers, is inevitable. LNG imports will have to take place at market prices. Plus new gas production, especially sour gas projects, will need higher prices to justify the investment.

Iran has taken the lead in revising prices upwards as part of a new reform plan approved by the parliament in October 2009.

Starting from December 2010, industrial projects including the petrochemical projects have to pay around $2.0/mmbtu for natural gas for the first year of the reform plan, compared with $0.53/mmbtu in early 2010, says FGE.

The ethane price has been set at US$145.1/tonne for the first year of the reform plan. Previously cracker operators paid less than $75/tonne.

Over the next 10 years Iran plans to increase gas prices for industrial projects to 65% of the average of export gas prices.

Saudi Arabia is also due to revise prices next year with some analysts expecting ethane prices to be raised to around $2/mmbtu from $0.75/mmbtu. But given current international price levels a more aggressive approach will probably be needed if the government is keen to curb demand growth.

By Malini Hariharan

Methanol continues to be an exception to the general weakness seen in Asian petrochemical markets.

Spot prices have crossed $410/tonne in the important China market and could remain firm for the rest of the year. Prices have risen by 11% in the last month.

Chinese speculators have been driving up prices as they expect the Zhenzhou Futures Exchange to introduce a methanol contract in October or November, explained Ken Yin, China methanol editor at Chemease.

Financial companies have started to gamble, buying Middle East cargoes which will take 3-4 weeks to arrive in China, Yin added. Stocks in shore tanks along the coast of China are now around 500,000 tonnes.

The strong buying interest has come at a time when spot methanol markets are tight as a result of plant turnarounds and outages globally. End-users of methanol such formaldehyde or acetic acid producers have so far been able to absorb the price hikes, but purchase volumes are said to be limited.

This is not the first time that expectations of an imminent launch of the futures contract have fuelled markets. The contract was due in March and then in June when markets experienced similar rallies.

But if the contract is introduced in the next couple of months there is a very good chance of prices climbing even higher until the realities of the health of the global economy dampens the speculative fever.

By John Richardson

THE big difference in the mood at the ground level of certain parts of the petrochemicals industry compared with that of company board members and investors was thrown into further stark relief earlier this week.

As we discussed on Tuesday, the big polyolefins sector of this industry continues to struggle in China. Growth forecasts for 2011 have proved way off-the-mark as it becomes more and more apparent that demand was, in effect, brought forward by China's huge economic stimulus package. Bringing demand forward amounted to speculation in lots of stuff - from polyethylene (PE) down to finished goods - which is sitting in warehouses unsold, dragging down fresh consumption.

Contrast this with a Credit Suisse client note released on Monday, based on presentations at the bank's Global Chemical and Agricultural Science Conference in New York last week.

"Demand is resilient across most markets; order books and activity levels are resilient, except in construction and southern Europe," wrote Credit Suisse.

Most companies were quietly confident that current demand levels would be sustained throughout the second half of this year - and customer inventories were reported to be lower than in 2008/2009, continued the bank.

My colleague Nigel Davis took this Credit Suisse note as evidence that companies focused on innovation are in a much better place than those which are in pure commodities.

"Time was when the innovation had more to do with process technology (hence costs) than product technology," he wrote in this Insight article. 

"The world has turned, however, and today a constant flow of product improvements, made alongside the process technology changes, are the true drivers of differentiated corporate growth."

Companies that fall into this innovation category include BASF, Dow Chemical, DuPont and Bayer Material Science.

These companies seem well-attuned to the megatrends that will shape global chemicals growth over the next few decades, which we discuss in our e-book Boom, Gloom & the New Normal. The trends include ageing populations in the West, climate change everywhere and water shortages and food security in emerging markets.

And maybe also the companies are well down the track in tailoring their product portfolios to meet the biggest change in China's economic direction in at least a generation.

The central government, as part of its 12th Five-Year-Plan (2011-2015), is focusing on energy efficiency, renewable technologies and environmental protection as it appears to have recognised that the quality of growth is as important as the quantity.

Whether these policies will be effectively implemented is the big question that we will examine in Chapter 6 of our book, which is released in early October. But evidence of Beijing's resolve has already emerged in the auto market, where calls for the re-instatement of the old subsidy system have so far been ignored. 

Further reasons for the dramatic difference in mood between those at ground level - and board members of and investors in these differentiated companies - might include:

1.) The fact that sales and marketing executives of pure commodity companies were probably set unrealistic targets in late 2010, as it wasn't fully understood that demand had been brought forward in China. One of these executives told us last week how he was receiving only one or two calls a day with orders from converters and traders. Last year, his phone virtually never stopped ringing
2.) Traders who made a lot of money during the great China credit binge in 2008-2010 are now either struggling or in bankruptcy

BUT even predominantly speciality chemical companies such as BASF, BMS etc cannot escape the fact that all chemical businesses depend on one very important factor: DEMAND.

Specialities might not feel the pain as immediately as commodities from a renewed global recession, but will eventually have to suffer.

And so the blog is still a bit confused by the confidence of companies, expressed during the Credit Suisse conference in New York last week.

Wouldn't it have been more prudent to fully own-up to the scale of the economic risks ahead?

Will you still need me? Will you still feed me? The Beatles asked the right questions back in 1967, when singing 'When I'm Sixty-Four' on their iconic Sergeant Pepper album.

What would happen to the Western BabyBoomers when they became 64? Would they be about to die, as had been the case with previous generations? Or would their future be different? Today, we are starting to discover the answer to The Beatles' questions, as the oldest Boomer reached the age of 64 last year.

Chapter 5 in the blog's free Boom, Gloom and the New Normal: How Western BabyBoomers Are Changing Chemical Demand Patterns, Again, eBook, co-authored with Paul Hodges, covers these and other themes.

It describes how companies need to adapt their business models to this New Normal.
One measure of the change underway is that two-thirds of all those who have ever reached the age of 65 years in the world are alive today. This is the demographic time bomb that faces us.

The Boomers are the richest, and largest, generation that the world has ever seen. But since 2001, they have been entering the 55+ age range, when people typically spend less and save more. By 2020, 33% of the developed-world population will be over 55 years old.

It is not surprising, therefore, that recent 'recoveries' have proved so weak in spite of massive stimulus spending. The Boomers simply don't need more housing or new cars. Equally, they are becoming uncomfortably aware that their pension funds may now have to support them for one or more decades, rather than just a few months or years.

Western women are particularly likely to become more cautious in their spending, as equal pay for equal work remains only an aspiration for many. And whilst women have longer life expectancies than men, 25 per cent are only in part-time employment, according to official figures from the Organisation for Economic Cooperation and Development. So their prospective pensions are even smaller.

Thus we must assume that future demand growth will be slower. We must also plan for a world where regular and deeper recessions are likely to become a feature of the global economy once more, in contrast to the relatively smooth growth seen during the Boomer-led SuperCycle.

But the Beatles provide a reliable guide, if we are prepared to listen to their message from 'When I'm Sixty-Four'. The megatrends such as an ageing population and the need for improved food production provide the key to future success.

FREE DOWNLOAD OPTIONS FOR CHAPTER 5
Click here to download a two-page summary of the chapter
Click here to download the full chapter

By John Richardson

CHINA'S economy would only expand by 5% in H2 of this year and in the first half of 2012 on an annualised basis, said Diana Choyleva, a Hong Kong-based economist for Lombard Street Research.

This was the result of credit tightening as China continued to battle inflation and a slump in export orders for manufactured goods on global economic problems, she added.

The HSBC Flash Purchasing Manager's Index for September, which is a preliminary reading ahead of the release of official factory output figures, fell to 49.4 from a final reading of 49.9 in August. A third consecutive month of contraction, if this preliminary figure is confirmed, would be the softest patch in Chinese manufacturing since the dark days of 2009.

The price of land in Beijing fell by 76 % in August from a month earlier, while in the province of Guangzhou it plummeted by 53%, said Soufun Holdings, China's biggest real-estate website.

Land auction failures surged 242% in the first seven months of this year because of government curbs on the property market, the Beijing Times reported last month.

Prices of new homes declined in 16 out of 70 cities last month compared with July, according to government data.

"We're reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness," said Zhang Zhiwei, Hong Kong-based chief economist at Nomura Holdings.

China's vehicle sales grew by 3.3% in the first eight months of this year from a year earlier to 11.98m units, said the China Association of Automobile Manufacturers. General Motors predicts sales growth of only around 5% for the full-year 2011 to 19m-19.2m units, compared with growth of around 30% last year. Price discounts have started to spread as sales growth weakens, just as auto production capacity ramps up.

Not surprisingly, the Shanghai A-Index was down some 14% from its July level by late last week.

Commodity prices have also taken a hit with copper, viewed as directly representing a broad range of economic activity, down 22% in September. China is, of course, the world's biggest consumer of copper.

Some petrochemicals have been doing better than others on tight supply, such as monoethylene glycol (MEG).

But where severe tight supply is not an issue, such as in the polyolefins chain, prices keep slipping. Asian polyethylene (PE) was down $20-50/tonne and polypropylene (PP) $10-40/tonne lower, according to last Friday's assessments by our colleagues at ICIS pricing.

We could add many more worrying facts about China. For example, we could detail the level of local government debt that might turn sour if there is severe property-market correction (a 76% fall in land prices in Beijing suggests that such a correction is now a distinct possibility).

It would be fascinating to be able to eavesdrop on board room discussions taking place at chemical companies, as the possibility of 5% GDP growth in China is being contemplated.

Or is such a possibility being contemplated? Has it really sunk in yet that as the rest of the world economy goes to hell in a hand basket, there are no longer any guarantees that China will be able to come to our rescue?

By Malini Hariharan

The Chinese government's position on environmental safety has always been difficult to read. The official position for the last few years has been to reduce pollution by closing down old factories and forcing companies to invest in new technologies. But implementation has been sketchy as other priorities such as preserving jobs or boosting provincial economies have on taken precedence.

But is China now getting serious?

Industry sources told ICIS news last week that development of new refineries in the Bohai Bay Economic Region is likely to slow down because of government measures to boost environmental safety.

The move comes after a major oil spill at the ConocoPhilips China operated Peng Lai field at Bohai Bay.

Environmental regulations for petrochemical projects are also likely to be tightened and evaluation of projects would take more time.

Among the projects that could be scrapped are two refineries which are currently in the preliminary feasibility stage. The first is a 10m tonnes/year project by PetroChina and the second a 20m tonnes/year refinery by Shaanxi Yanchang Petroleum Group.

Existing plants could also face a stringent operating environment. The deputy minister of environmental protection recently announced a nationwide safety campaign targeting companies involved in production and use of hazardous chemicals and warned that companies causing pollution "will be severely punished".

"Environmental accidents involving toxic chemicals are on the rise, posing a grave threat to public safety and social stability," he acknowledged. Since January last year, the ministry has dealt with 239 environmental emergencies caused by chemical spills, some of which threatened water safety, he added.

A string of accidents this year and the resulting public outcry suggests that the government may have no choice but to take a hard stance on environment, health and safety issues

By Malini Hariharan

The blog has been trying to get more information on what's driving Chinese interest in liquefied petroleum gas (LPG)-based petrochemical projects.

Plans for eight propane dehydrogenation (PDH) plants have already been announced and more could be in the pipeline as Chinese companies believe the country's propylene deficit will expand in the coming years.

"Globally, LPG is in surplus and propane is abundantly available. There is a huge differential between propane and polypropylene (PP) prices which is driving these projects. Plus given the shortage in propylene companies believe that prices will remain firm," explains the C1 (an ICIS service) LPG analyst at Shanghai.

But although some of the companies have already tied up with international PDH technology providers they have yet to finalise sourcing arrangements for propane.

Most of the projects are in the coastal provinces and companies will be looking to import propane. Some are trying to contact Middle East suppliers for long-term contracts.

The scenario sounds similar to coastal methanol-to-olefins (MTO) and methanol-to-propylene (MTP) projects where companies are looking at importing huge volumes of methanol.

Economics of projects based on imported propane is a big question given the poor track record of many of Asia's PDH plants. But the blog was told a familiar story - Chinese companies are not evaluating profitability or doing a balanced analysis. What they are keen on is riding the latest wave.

By John Richardson

AROUND $6bn worth of proposed petrochemical investments in Kazakhstan - the giant central Asian country with abundant oil and gas reserves - once again confirms the three most important factors for success: Feedstock, feedstock and feedstock.

"The gas that will supply these projects is sufficiently advantaged to overcome major construction and logistics challenges," an industry source told the blog.

Final investment approval has been received for a propane dehydrogenation (PDH)-to-polypropylene (PP) project which is to built in the western Kazakh city of Atyrau.

Detailed design and engineering work is now underway with Lummus Technology supplying the licence and basic technology for the complex. Capacities of propylene and PP will each be 500,000 tonne/year with start-up slated for 2015.

Sinopec Engineering will construct the complex which will be operated by Kazakhstan Petrochemical Industries.

And last month, South Korean president Lee Myung-Bak was in Kazakhstan to sign contracts for a series of planned investments including an ethane cracker and downstream polyethylene (PE) capacity. Nursultan Nazarbayev, president of the Republic of Kazakhstan, was the joint signature.

Mr Lee put pen to paper because South Korea's biggest chemicals company, LG Chem, has formed a 50:50 joint venture with KPI to develop the project. Start-up is scheduled for 2016.

The complex, which would again be at Atyrau, would comprise an 840,000 tonne//year cracker and two PE lines with a total capacity of 800,000 tonne/year.

One of the lines would be linear low-density PE (LLDPE) and the other a LLDPE/high-density PE (HDPE) swing plant. However, it is likely that the swing plant would initially only produce HDPE.

"Given that the presidents of the two countries were involved in the signing of the JV it seems inevitable that the project will go ahead," the industry source added.

Total project costs in Atyrau will be significantly higher because of the remote location of the western Kazakh city, he added.

"A village will, for instance, have to be built to house workers who will operate the complexes and a rail line will have to be laid to connect the site with the existing Kazakhstan Railways network."

The further issue is the distance from the markets where the product will be sold - China, Southeast Asia, Russia, Turkey, India and Africa.

One transportation option would be to move product by rail into China.

However, this would face the disadvantages of competition for space on China's railways. Despite heavy investment in new rail capacity, demand for moving goods in general by rail is booming.

LG Chem and KPI might also face competition for freight-car space from PetroChina's Dushanzi Petrochemical complex in Xinjiang province in north western China. The complex is centred on an ethylene capacity of 1.2m tonne/year,

Re-export-based end-users may not be eligible for rebates on value-added tax and import duties if their raw materials enter by one border crossing and their finished goods exit by another crossing point or port.

This would obviously be the case if rail cars were used as finished goods leave China for export markets via coastal ports.

And so one of many options being evaluated is moving goods by rail to a Black Sea port and on by container ship to China.

"Logistics are so important with this project that the rail and shipping routes to market need to be identified and established much earlier than in other projects. Usually, such details are often not settled until a few months before start-up," said the source.

But despite all the hurdles, there is the cheap feedstock we mentioned at the beginning - and the lack of further natural gas feedstock availability in the Middle East.

Kazakhstan might not stop at just propane and ethane-based petrochemicals. Projects based on other hydrocarbon streams available in the Republic of Kazakhstan may be added during later phases of investment, the source added.

By John Richardson

CAN China succeed in transforming its economy from one which is over-reliant on exports to one where domestic consumption is a much bigger driver of growth?

And how long will this process take and in the interim, can we expect a few years of lower GDP (gross domestic product) growth?

As delegates gather for this year's European Petrochemical Association (EPCA) annual meeting in Berlin, these are some of the questions that need to be under discussion.

China's government is not only trying to break the addiction to investment as a principal way to boost growth. It is also introducing a raft of policies designed to boost energy conservation and efficiency.

How should chemical companies position themselves to take advantage of this new direction for manufacturing industry?

The current Five-Year Plan (FYP) (2011-2015) seeks to set the direction of the economy for at least the next decade, not just the next five years.

Hu Jintao, China's president, in an early 2011 speech, talked about more "inclusive" growth, which is one of the slogans underpinning the current FYP.

This is supposed to mean a more rational balance between growth and sustainability, production and consumption and hard and soft infrastructure..

One of the key overall objectives is to raise consumption as a percentage of GDP, which at 35 per cent is less than other developing countries. For example, consumption in India accounts for more than 50 per cent of GDP.

This will involve an attempt to redistribute income.

The big state-owned enterprises (SOEs) have become extremely rich due to government subsidies, including cheap land, loans and energy supply.

While they have been getting rich, this has not been to the benefit of the average Chinese citizen: In the ten years from 1997, the share of workers' wages in national income fell dramatically, from 53% to just 40% of GDP, according to journalist and author Richard McGregor in his book, The Party.

One way of boosting rural incomes would be a more market-based system for setting agricultural product prices.

But if inflationary pressures persist, there could be strong resistance to any changes in how farm prices are set from the National Development and Reform Commission (NDRC).

Breaking the addiction to investment is also going to difficult, according to Chapter 6 of our free online e-book, Boom, Gloom and the New Normal, due to the fact that:

*Up to half of local government financing comes via lands sales to investors in real estate and other types of infrastructure. There are an estimated 45 million local government officials in China. Controlling what they do is a huge task.

*The success of these local officials has traditionally been measured by setting GDP growth targets. The easiest and quickest way to achieve growth is to invest in new real estate, factories, bridges, roads etc

*Big government projects provide tremendous opportunities for corrupt officials to "skim off the top", as the bigger the project the harder it is to keep control of the final cost.

Another aim of the 12th FYP is to move up the manufacturing value chain in the richer coastal and southern provinces.

Targeted industries include renewable energy as China tries to reduce the amount of energy it consumes to produce each unit of GDP.

The central government has lots of cash to spend on research and development and on acquiring overseas payments. But without an improvement in intellectual property rights enforcement will China be able to attract the foreign investment to fulfil its objectives?

And how will it deal with overseas perceptions over the poor quality of its manufacturing?

The July 2011 bullet train crashes at Wenzhou in China might well have damaged these perceptions, as government officials were widely reported to have buried train wreckage in order to impede an investigation into the cause of the accidents.

Only one-third of China's 700 million-strong workforce is skilled or highly skilled. Improving education is therefore yet another challenge.

There might also be political difficulties.

Hu Jintao and premier Wen Jaibao are due to give up their main Communist Party posts in late 2012 and their state posts in 2013. Vice president Xi Jinping is expected to replace Hu.

Most of the nine-member standing committee - the party's decision-making core, which includes Hu and Wen - are likely to step down.

This process could delay decision making as politicians jostle for power, the e-book adds.

Social unrest is a distinct possibility as the economy is retooled - for instance, as coastal low-end manufacturing factories are closed-down and replaced by higher-tech manufacturers.

China's new leaders might, as a result, want to tread the cautious middle path. This would avoid major social unrest and placate resistance from those who have done well from China's existing economic model, such as the SOEs.

"Turning the Chinese economy around is a bit like turning an oil tanker around - it is going to take a very-long time," commented a Singapore-based manager with a global chemicals logistics provider.

The full version of Chapter 6 of the e-book is published in late October. You can download  chapters all the chapters by clicking here.