Asian Chemical Connections

By John Richardson

IT seems inevitable that petrochemical markets will respond positively to the Chinese government's decision to reduce bank-reserve requirements by 50 basis points.

There will quite likely be a relief rally in the Dalian Commodity Exchange's futures contract in linear-low density polyethylene (LLDPE) and a recovery in physical prices.

But lost demand is lost demand. Even if China were to further lower reserve requirements, and cut interest rates, which is being predicted for Q1, the country's biggest export market - Europe - confronts the likely break-up of the Euro zone.

And the risk is that if China relaxes liquidity by too much, inflation will remain above the annualised target of 4 per cent. Its non-performing loans crisis would also very probably become even more severe.

If it fails to relax credit further, however, and if it refuses to relax restrictions specific to the real estate sector, property prices will continue to fall. A lot more angry people could take to the streets to protest against the fall in their value of their homes.

It is all about balancing risk for the government as it seeks, as always, to stay in power.

The credit restrictions are essential as Wen Jiabao tries to narrow the widening gap between the rich and poor. Another angry constituency is the "sandwich generation", which has been priced-out of private accommodation.

No matter where the government turns, it finds itself boxed in by its policy decisions.

It is boxed in as evidence mounts that credit tightening and global economic problems have substantially slowed-down the growth of the economy, perhaps beyond what had been planned.

GDP (gross domestic product) growth estimates are being revised down for the remainder of this year and for 2012. Seaport cargo volumes, domestic freight volumes, electricity output, passenger trips and housing construction are also down.

The latest purchasing managers index also shows that manufacturing is contracting across the country.

Another key economic indicator is PE demand, which as this chart from Global Trade Information Services, shows was flat between January-October this year. This compares with 53 per cent growth in 2008-2010.

The problems facing China are complex and could take years to resolve. The chemicals industry cannot depend on China to compensate for declines of demand in the West. Anyway, this notion was always a fallacy.

By John Richardson

THE lack of depth and thought behind "analysis" of the economic challenges facing developing economies has worried the blog for some time.

It is undoubtedly the case that as hundreds of millions more people in countries such as India and China emerge from poverty, the opportunities for the chemicals industry are enormous.

For the first time in their lives these people will have a small amount of money to spend on a few basic luxuries such as a single-serve portion of shampoo, or maybe if they are exceptionally lucky a motor scooter.

These are some of the themes we explore in Chapter 6 of our e-book, Boom, Gloom & the New Normal.

They will not be middle class in the Western sense of the word. In fact as the chart below shows, by Western standards many of the richest people in India would qualify for social welfare problems.

Constant talk about the rise of the Asian "middle classes", without qualification of what exactly this means, is highly misleading. This is not a sudden enormous army of BMW-buying Western-style consumers.

And so it is up to chemical companies, prompted by more-informed investors, to start describing exactly how they are going to innovate down the value chain - i.e. how they are going to keep costs low-enough to help manufacture a refrigerator that, say, retails for less than $50.

Manmohan Singh compromises to the point where "policy has no direction"

Source of picture: Wikipedia

By John Richardson

IN A week during which the Eurozone could quite easily break-up, the influence that individual political leaders will have on shaping our economic future has been thrown in to further stark relief.

And in some countries it is political systems that are in question, most notably in India where the nature of coalition politics, resulting in endless compromises in an attempt to keep all the various constituencies happy, is a major threat.

"Manmohan Singh (the country's prime minister) has to compromise so much that policy has no direction anymore. Nothing is being done," a senior polymer industry executive, and an Indian national, told the blog last week during its latest visit to Singapore.

"It is not only coalition politics that is the problem. It is also because Singh is a civil servant with a weak political power base. He owes his position to the Congress power brokers. Therefore, everything he wants to do he has to run past the people who put him there, leading to dilution of all his objectives."

Singh has been forced to put liberalisation of retail-sector ownership rules on hold. Forty per cent of India's food production rots before it gets to the people who need it, and so there is a crying need for improved distribution that might well have resulted from foreign-owned retail networks run by Wal-Mart, Tesco etc.

The blog's Indian friends say that confidence in the political class in general has evaporated because of the 2G telecoms and Commonwealth Games corruption scandals. This is understandable when refrigerators were reported to have cost as much as $10,000 each in the build-up to the New Delhi games.

Two years ago, the Indian stock market soared and confidence was high when the Singh "led" Congress government was re-elected.

But positive sentiment is one thing and genuine reform is another. India is still being held back by the coalition politics we mentioned earlier on, appalling corruption, restrictive labour practices and chronically bad infrastructure.

As we discuss in Chapter 6 of our book, Boom, Gloom & the New Normal, the money needed for infrastructure was supposed to come from the telecoms companies now being investigated for corruption.

Because few people trust the government, and public servants, income tax collection levels are low.

As a result, domestic and foreign investors have to foot most of the bill for urgently needed improvements in not only infrastructure, but also the agricultural sector, in order to avoid growth being stalled. This isn't going to happen because of the lack of confidence in politicians.

"No-one talks anymore of matching China's double-digit progress," wrote James Lamont in an article in the Financial Times on Saturday.

"The rupee is 13 per cent weaker than when the year began, as direct investment slows and foreign money leaves the stock market. Many analysts now say India has missed a golden opportunity to build up a domestically driven economy that had been little damaged by the 2008 global financial crisis."

Economic growth in the quarter to September fell to its lowest level in more than two years, with polyolefins demand likely to be flat or in negative territory in 2011. 

The potential for a wasted opportunity is nothing short of genuinely tragic (the word is so often misused) for a country, which according to the World Bank, is home to around 410 million poor people. This is 37.2 per cent of the population.

And as we discussed yesterday, poor in an Indian context is beyond the imagination of those of us in the West; it is hundreds of millions of people living on $2, or even less than $2, a day.

The "New Normal" will involve enormous political disruption and change in both the West and the East.

Chemicals and other companies need to play a role in shaping a new political agenda, where society's needs are placed above that of short-term political popularity and survival.

We need bold and visionary business leaders, along with, of course, political leaders of the same calibre.

By John Richardson

The "beggar my neighbour" trade wars that many economists feared would erupt after the global financial crisis were delayed thanks to fiscal stimulus.

But now politicians will be under increasing pressure to erect trade barriers.

"We are seeing a rise in antidumping cases involving chemicals," a trade lawyer who specialises in the chemicals industry told the blog last week. More details later.

The chart above, from Comstock Partners, was first used by our fellow blogger Paul Hodges.

It begins on the left hand side of the chart with the world before 2007. As China funnelled its savings from export earnings into industrial capacity, debt levels in the West rose.

China was left with overcapacity in industry and the West with overcapacity in financial services, leading to harmful innovations such as sub-prime mortgages.

As we said, fiscal stimulus delayed the shift to excess capacity and the weakness in pricing power phases.

Quantitative easing (QE) in the US created positive sentiment but did nothing to address the country's underlying problem of weak employment prospects for the middle classes. Financial services have been the main beneficiary of QE.

US unemployment has declined by just one percentage point over the last two years, commented Janet Yellen, vice chairman of the Fed recently.

Private sector employment remains more than 6 million below the record levels of early 2008, she added.

In Europe, sovereign imbalances that date back to the formation of the Euro threaten the break-up of the Eurozone. Any deal reached this week is unlikely to resolve the underlying problems.

China helped to delay the shift to excess capacity and weakness in pricing power. Its enormous economic stimulus of late 2008 enabled chemicals companies to export their surpluses as China sucked-in every spare molecule.

But as we have discussed before, this stimulus merely brought demand forward. It also led to socially disruptive inflation and a property bubble that now threatens the stability of its banking system.

China, despite an easing in inflation, cannot afford a stimulus programme anywhere close to the scale of late 2008. The risks are further pumping-up the property bubble, higher overall inflation and, as a result, widening the gap between the rich and poor - not to mention making the bad-debt crisis worse.

It might introduce further limited measures to ease credit conditions - for example, more support for its struggling small and medium-sized enterprises.

But nobody can realistically expect a return to the easy credit of 2009-2010.

We are therefore set to enter the "excess capacity" phase in 2012 when the less-competitive chemicals companies will lose pricing power. The Middle East will be OK, of course, because of its feedstock advantage with Sinopec continuing to run plants hard for "social" reasons rather than economics. Everyone else is likely to struggle.

Down many production chains from chemicals to finished goods there will be pressure on politicians for more protectionism.

A clear indication of this shift in mood was the bleak view that the US-China Economic and Security Review Commission took of China's adherence to World Trade Organisations practices since its admission in 2001.

The blog continues to be disappointed, a little like Wile E Coyote who of course never catches Road Runner, about how people just don't get the fundamental changes to the world economy that we outline in our e-book, Bloom Gloom & the New Normal. 

An example of this lack of understanding was analysis we heard last week that the Yuan was inevitably going to appreciate further against the US dollar in 2012.

Why not include in your scenarios the possibility of a competitive depreciation, as "beggar my neighbour" trade wars develop?

By John Richardson

FURTHER relief rallies in petrochemical markets that occur over the next few weeks and months will not change the overall direction.

Buyers will inevitably run short of stocks down all the value chains and we thus will see some more brief flurries of price rises.

Another driver of inventory rebuilding will be recoveries in the oil price and stock markets. But such recoveries will merely reflect investors pouring money into more risky assets on an improvement in sentiment. It will, as we said, not change the direction of the underlying fundamentals.

Many investors in oil, other commodities, including petrochemicals, and shares have, of course, a very short-term perspective. All they care about is making money out of these "relief rallies" and getting out before markets tank again. The best analogy I have heard came from fellow blogger Paul Hodges when he described what we are going through at the moment as equivalent to a squash ball bouncing down a flight of stares: The overall direction is down, but there will be mini peaks and troughs on the way.

China's willingness and ability to buy when it's cheap and then quit will drive many of these bouts of restocking.

Take paraxylene (PX) and mono-ethylene glycol (MEG) as current examples.

PX shipments to China from the US and Europe were approximately 75 percent higher in November alone compared with the first ten months of this year, according to ICIS news.

Nearly 60,000 tonnes of November and December MEG cargoes from the US are heading for China, about 80% of the 75,417 tonnes that were shipped during January-October.

Given that PX and MEG prices are sharply lower, this is hardly surprising (see slide below):

Last week's decision by China to cut bank-reserve requirements by 50 basis points, and likely further measures to ease liquidity, will make it easier for buyers to stock-up.

Global markets might be so weak for certain products that a return of Chinese buyers might not be sufficient to even cause a modest and brief recovery in prices.

In the case above, an essential question to ask is the extent of lost sales in the US and Europe along the synthetic fibre chains. According to data from consultants PCI, 1.85m tonnes/year of PTA capacity in Europe was shut for between 2 and 10 days in September to November, while 1.59m tonnes/year of US PTA capacity will be shut for a total of 15 days in December because of poor margins.

Another factor behind increasing fibre intermediates shipments from the West to China is the desire by US and European companies to, as always, monetise inventory before they close their books at the end of December. This will help boost financial results and thereby, of course, share prices.

There is a rapidly closing window of opportunity for booking cargoes to China that will arrive sufficiently ahead of the 2012 Chinese New Year, which falls on 23 January. Nobody in China, as is always the case, wants to be in the position of cargoes arriving just as customs and logistics companies start winding-down their operations for the Lunar New Year.

US polyethylene (PE) producers are also trying to shift as much volume as possible to China in order to beautify their end-year financial results, an industry source told the blog.

"But right now this is proving difficult as firstly, the delivery window ahead of the Lunar New Year is closing and secondly, container shipping space is limited."

Some chemicals analysts will argue that the odd price recovery, and these bouts of re-stocking, will mean that their flawed analysis is, after all, right - i.e. that we are heading for an up-cycle in global operating rates on strong overall global demand. For example, ethylene capacity utilisation is still being forecast to reach 90 per cent by 2014.

It is not going to happen. As we began to describe in our posts on Monday, Tuesday and Wednesday this week, and will continue to outline over the coming weeks, with what we hope will be useful summaries of our key conclusions as we go along, we are entering a new a global recession - quite possibly a Depression.

The winning chemicals companies will be those which adapt their businesses to the New Normal.

By John Richardson

EARLIER this week we talked about the possibility that China might devalue the Yuan rather than allow it to further appreciate.

We have since been told by a senior chemicals industry source that this is exactly what the Chinese government is evaluating in case the worst of possible outcomes occurs - the break-up of the Eurozone.

Even if this is not being considered, the tone of this article from the China Daily, an official government mouthpiece, indicates that Western pressure for a rapid currency appreciation could easily backfire.

China has already seen the competitiveness of its manufacturing industry undermined by higher labour costs and now faces the threat of mass layoffs in the event of a Eurozone collapse.

Uncertainty over the direction of the Yuan is just one example of the difficulties chemicals companies face in planning their budget targets for 2012.

There are no guarantees anymore. Even continued strong GDP (gross domestic product) growth is no longer a certainty in China, according to this article from the Financial Times.

Last month, the government of the city of Guangzhou in southern China had to cancel or severely scale back its plans to auction land on four occasions. This was the result of lack of interest from private developers, who have been starved of capital as a result of a raft of measures introduced by Beijing to cool property prices.

The problem is that land sales account for 40 per cent of local authority revenues and without this income, city and provincial governments will struggle to fund the tried-and-tested route to boosting GDP growth: Building lots of bridges, roads, public buildings and airports etc - all of which generate chemicals demand.

A further difficulty is that local governments have used land to guarantee bank borrowing. If land values keep falling, these loans will turn bad, adding to China's non-performing loans problem.

The central government is caught between a rock and a hard place as it needs to reduce property prices in order to keep the "sandwich generation" happy. But by so doing it might, as we've just described, severely weaken the economy.

And so what are the odds of GDP growth falling to 6 per cent next year from the consensus view of 8-9 per cent? Chemical companies might be wise to build 6 per cent, or even lower, into their "worst case" scenarios.

Meanwhile, the extent of demand weakness became even more apparent to the blog during its visit to Singapore last week. Acrylontrile butadiene styrene (ABS) demand had fallen by a full 10 per cent in 2011 over 2010 as a result of credit tightening, a decline in shipment of finished goods to the West, we were told by our colleagues a Chemease.

The high cost of butadiene, and to a lesser extent acrylonitrile, had also eaten into volumes to the benefit of high-impact polystyrene (HIPS), which can be used for some of the same applications, they added.

The blog would be interested to hear convincing arguments as to why next year will be better for ABS - and for all the other polymers.

By John Richardson

TEN years ago this weekend China officially joined the World Trade Organisation (WTO), and so no doubt numerous speeches have been given about all the benefits to the global economy.

Here is a somewhat more negative perspective:

*As the diagram above seeks to illustrate, China hugely built-up its manufacturing industry to take advantage of Western demand for consumer goods. As the Western Babyboomers entered their peak consumption years, meeting this demand-boom was outsourced to China. As export earnings surged, China placed a great deal of its cash in US Treasuries in order to prevent the Yuan from rising in value. This kept long-term interest rates low, thereby encouraging financial innovation as banks sought better returns elsewhere, leading to lots of cheap credit for "middle America", enabling it to buy more stuff from China and so on and so on...So you can argue that one reason the sub-prime crisis happened was China, although, of course, it was really the fault of the greedy banks.

*Now that the Western babyboomers are ageing, China has no choice but to re-focus its unbalanced economy on domestic consumption (see our last point for more details).

*China stacked the export cards in its favour not only through an undervalued Yuan, but also through low energy, financing and labour costs - and poor environmental standards, leading to appalling levels of pollution in cities such as Beijing. This has created a much-wider gap between the rich and poor and an alarming public-health crisis.

*Millions of manufacturing jobs have been lost in the West to outsourcing as median incomes for the middle classes in countries such as America stagnate.

*Allegations continue that the Yuan is undervalued, by about 25 percent, and that China has yet to sufficiently open-up its markets to foreign competition. Particular concern has been expressed about its "indigenous innovation" rules.

*While exporters face the full 17 per cent VAT levy, which helps makes foreign goods in China expensive, Chinese export-based manufacturers that depend on imported raw material get a VAT rebate.

*Tensions over China's trade position threaten a global trade war.

*Eight out of ten computers in China are said to run on counterfeit software as concerns remain over poor intellectual property rights standards in general. China requires foreign investors to hand-over technology blueprints before joint ventures can be established. This has allegedly led to chemicals technology being copied. In one case we heard of recently, the value of one foreign-supplied technology is being undermined because a local copy results in lower-quality product (we best not mention the details).

*It has been a tremendous decade for chemicals and polymer demand. Double-digit growth in demand in China during most of the years since 2001 has been largely the result of China deliberately re-engineering its economy in order to become the "workshop of the world". As its economy undergoes a difficult restructuring in order to encourage more domestic demand, the chemicals industry faces a "demand growth gap".

By John Richardson

LACK OF visibility over what the New Year will bring for the global chemicals industry is a key feature of just about every conversation held with industry executives at the moment.

Perfect forecasting is, of course, always impossible, but with the Eurozone in deep crisis and even China potentially facing its own bad-debt crisis, the immediate outlook seems exceptionally murky.

The fear factor dominates, according to the chief executive officer of a major European-based performance chemicals and polymer producer.

"Buyers have become very worried. They are buying in smaller individual lots, in smaller total volumes, and are waiting very late in each month to make their purchases," he said.

Stock markets rallied after the European leaders' meeting last Friday - an example of how positive macro economic news can restore some degree of confidence.

A further example of the instant effect of positive macro news was last week's increase in the Dalian Commodity Exchange's linear-low density PE (LLDPE) futures contract.

This followed China's decision to lower bank-reserve requirements by 50 basis points, which, according to one polyolefin industry source, was also a factor behind the decision by two producers to raise their LLDPE December offer prices to China.

But whereas one swallow might make a summer for chemicals traders who want to get in and out during what of late have been brief market rallies, producers face the pressing need to draw-up robust scenarios for the whole of next year and beyond.

This task is complicated by the fact that Friday's European deal has failed to address the Eurozone's long-term problems. Bank failures before Christmas seem quite possible, as is the loss of France's Triple A credit rating. 

And as for China, while the cut in reserve requirements was good news, the polyolefin industry source added: "I don't see any change in the government's overall policy of keeping liquidity much-tighter than during the great lending binge of 2009-2010.

"It wants to bring property prices down to more affordable levels, it wants to reduce overall inflation and it wants to try and reduce the speculative element in the economy. We can therefore expect more bankruptcies of polymer traders."

Another aspect of Chinese government policy involves providing ample financing to "value-added" consumers of chemicals and polymers. These are the converters which are, for example, produce high-quality food packaging films using the latest technologies.

"The lower value processors are being deliberately forced-out of business," added the polyolefin industry source.

Not only has overall demand been less in 2011 than just about anybody had forecast because of credit tightening, but the nature of demand also seems to be changing. A return to the way things were in 2010 seems highly unlikely.

How do companies respond?

Putting large volumes of commodity-grade polymers on a ship and sending them to China, via traders, in confidence that this will always deliver decent returns, has been the successful strategy of high and low-cost producers.

From now onwards, this is going to be much more difficult for the higher cost players. The demand growth outlook looks uncertain because of China's macro-economic problems, and it is increasing self-sufficiency in commodity grades as its manufacturing industries move up the value chain.

More investment will be needed in higher-value grades for those without a feedstock-cost edge - and in on-the-ground market intelligence to identify opportunities.

Companies need to also think about the worst of possible outcomes. For instance, what if a global trade war erupts?

"We are seeing a rise in antidumping cases involving chemicals," said a Singapore-based trade lawyer who specialises in the chemicals industry.

He had forecast such an event would occur in early 2009, but believes that fiscal stimulus in the US, Europe and China delayed the problem.

The current withdrawal of stimulus programmes might therefore explain the rise in the number of antidumping cases.

Conventional thinking is that China will allow the Yuan to further appreciate.

But what if, faced with the loss of export trade to the European Union - its biggest trading partner - it is forced to competitively devalue its currency in order to protect jobs? This would likely encourage a global trade war.

China is not the only emerging market where growth has declined.

In India, polypropylene (PP) demand for the year ending March 31 is expected to contract after two years of double-digit growth. This reflects an overall slowing of the economy due to inflation, problems in the West and lack of investor confidence resulting from corruption scandals.

Here is another possibility to consider: What if the current policy paralysis affecting the Manmohan Singh-led government continues? What will this mean for growth prospects in 2012 and beyond?

It increasingly feels as if the post-Lehman Bros period was a "one-off" for the global chemicals industry, thanks to temporary fiscal stimulus and the return of confidence when it became clear that the global financial system wasn't going to collapse.

Long-term growth in developing markets is still a reason for great optimism. Hundreds of millions of people are emerging from poverty and beginning to buy things made from chemicals and polymers for the first time

But how do chemicals companies cost-effectively supply markets where the vast majority of people are living on $2, or even less, a day?.

The planning process has, perhaps, never been more difficult.

By Malini Hariharan

After years of making money in basic petrochemicals the Middle East focus has firmly shifted to downstream chemicals, a topic that is being discussed in great detail at this year's GPCA forum being held in Dubai on 13-15 December.

As highlighted by the blog in previous posts a combination of factors including lack of ethane, the pressure from governments to diversify and add value are behind the drive to invest downstream.

Sadara, the joint venture between Saudi Aramco and Dow Chemical, is representative of the transformation that the region hopes to achieve. The $20bn project with 26 manufacturing units includes a wide range of value-added derivatives such glycol ethers and amines downstream of a cracker. But the project, which has been in the pipeline since 2007, also illustrates the difficulties in venturing downstream.

A partnership with Dow has given Aramco access to technology but for many other smaller companies this is likely to be a key hurdle.

In a report released at the forum consulting firm AT Kearney pointed out that specialty product technologies are controlled by a limited number of players, demanding dedicated marketing and licensing fees and specialist technical services.

One way to increase access for regional companies is to participate in JV partnerships although technology owners might be reluctant to enter joint ventures given the diminishing feedstock advantage in the Gulf Cooperation Council (GCC) countries.

Middle East players could instead look for potential acquisition of chemical companies with specialist knowledge and this might be an easier option as a weakening global company is likely to result in interesting opportunities.

But Paul Harnick, chief operating officer of KPMG's chemicals and performance technologies practice, pointed out that political issues may prevent transactions if governments decide technology ownership is sensitive.

Also the Middle East faces competition as companies from China and Brazil, which are seeking to build downstream chemicals industry.

"There is evidently a limited number of Western and Japanese partners so Middle East players need to make sure their proposition is more attractive."

Other challenges include marketing expertise, innovation capacity and investment, and logistics as much production will have to be exported in the medium term.

By Malini Hariharan

The US shale gas advantage is a recurring theme at this year's GPCA forum with companies giving more details about their expansion plans.

Chevron Philips Chemical confirmed that it will build a 1.5m tonnes/year cracker at its Cedar Bayou complex in Texas, reports ICIS news

Permits for the project are being filed, said the company's ceo at the GPCA forum.

The company is also looking to add 1m tonnes/year of polyethylene (PE) capacity in the US. Two PE units, each of 500,000 tonnes/year capacity, would be built with one of the plants likely to located at the Cedar Bayou complex and the other at Chevron Phillips' Sweeny complex, also in Texas.

And Shell Chemicals executive vice president Ben van Beurden, told fellow blogger John Richardson that a decision on the location of its cracker project in the US would be announced over the next few weeks.

The complex, which could be built in Pennsylvania, Ohio or West Virginia, would draw ethane feedstock from the Marcellus shale gas field that runs through all three states.

Beurden also emphasised that the company is keen to return to polyolefins production.

"Petrochemicals demand is growing above global GDP growth and a substantial reason for that is polyolefins and so we need to be in polyolefins," he said.

Shell might also build a monoethylene glycol (MEG) plant downstream of its US cracker which is likely to start up in 2016-17.

US ethane production is expected to grow by 33% over the next three years to 1.2m bbl/day, according to projections by the industry. The US produced an average 900,000 bbl/day of ethane in 2011. US ethylene capacity is expected to increase by 24% or 6.4m tonnes/year by 2018, an IHS consultant predicted during the conference in Dubai. This includes expansions and new crackers.

Meanwhile, Saudi Arabia is working on boosting gas output. In his keynote speech at the forum Prince Faisal Bin Turki, advisor to Saudi Arabia's Ministry of Petroleum and Mineral Resources, said the Kingdom would double its gas production capacity by 2016 as it undertakes aggressive measures of exploration to move gas resources into reserves by utilising and developing advanced technologies.

The new measures will enable the country to grow its gas production capacity to about 15 billion cubic feet (bcf)/day by 2016 from 7.7 bcf/day in 2002.

By Malini Hariharan

The US shale gas buzz is now drawing Middle East companies with Sabic's CEO revealing yesterday that the company is considering investing in a US cracker.

Sabic would pursue the US cracker on its own or with a partner, reports ICIS news.

A shortage of ethane in Saudi Arabia means Sabic has no choice but to pursue opportunities overseas. So far this has resulted in a joint venture with Sinopec at Tianjin, China. But the US ethane bonanza arising from increased shale gas production is obviously too hard to ignore.

"We are in the business of petrochemicals," said Mohammed Al-Mady, adding that SABIC would pursue opportunities in any market where feedstock availability is feasible.

And it is the US that is now offering ample feedstock. The country will generate some 6m tonnes/year of new shale-based natural gas liquids (NGL) feedstock supply over the next eight years, predicted CRA International vice president Neil Checker.

He said that volume would be enough for an additional 5m tonnes/year of olefins and 4.5m tonnes/year of polyolefins in the coming years.

Other Middle East companies are also looking overseas for growth.

Kuwait's EQUATE is scouting for M&A opportunities outside of the Middle East because of gas feedstock shortage in the country, CEO Hamad Al-Terkait said in an interview ICIS news.

"The reason we want to grow outside of Kuwait is the limitation of feedstock. Now is a good time for merger and acquisition. The [price of] assets is getting really reasonable," he said.

"This is the future of EQUATE, and the timeline is open," he added.

Saudi International Petrochemical Company's (Sipchem) CEO said the company is looking to acquire assets or services in Europe and Asia to extend its marketing and manufacturing capability, or embark on greenfield operations.

Sipchem recently acquired Swiss petrochemical trading and marketing firm Aectra through its affiliate firm, Sipchem Marketing & Services Company (SMSC).

"Acquisitions are a good way to gain quick access to local marketing expertise, but we are also open to setting up our own greenfield projects close to our key markets in Europe and Asia if the economics are right," he said.

Meanwhile, Saudi Aramco is likely to emerge as a key player in aromatics as opportunities for expansion in this business are being pursued. The company is evaluating the option of producing aromatics at a new refinery under construction in Yanbu.

An aromatics complex will be built downstream of a new refinery at Jazan that is due to be completed in December 2016. This project will have a combined capacity to produce more than 1m tonnes/year of PX and benzene.

And Satorp, the Aramco Total refinery joint-venture, is due to start producing 700,000 tonnes/year of PX and 140,000 tonnes/year of benzene in the second half of 2013.

By Malini Hariharan

China's second coal-based monoethylene glycol (MEG) plant is due to start in the second half of 2012, reports ICIS news.

The plant, located in Hebi, Henan province, will have a capacity of 250,000 tonnes/year and will be operated by Wuhan Engineering, Haiso Technology, and Hebi Baoma Group.

The three companies successfully tested the technology at a 50,000 tonnes/year plant at the same site earlier this year.

Regular readers of the blog will remember an earlier post that had detailed the tremendous interest in China for this coal-based chemicals.

The first plant of 200,000 tonnes/year by Tongliao Jinmei Chemical started a while back but the blog understands that it is not yet running at full capacity. There have been quality issues which the company is attempting to resolve. A key problem is said to be in catalyst adsorption and coking when operating rate is raised.

The plant is now running at around 70%, up from below 50% in November, and cargoes have been shipped to East China.

While the Middle East ethane-based companies are the most cost-competitive MEG producers, Chinese coal-based players are likely to have a lower cost position than producers using naphtha as feedstock, says China International Capital Corp (CICC) in this report.

The cost of producing MEG from coal is likely to be around CNY4,500/tonne if plants operate at full capacity, says this report. That would result in a gross margin of more than 40% at a tax-excluded MEG price of nearly CNY8,000/tonne.

The cost for Chinese naphtha-based MEG producers is estimated at CNY6,000/tonne assuming WTI crude at $90/bbl but excluding credits from propylene and C4s.

This probably explains why Tongliao has started construction of a second MEG plant of 400,000 tonnes/year that is due to be completed in 2013.

There's certainly a huge local market available for Tongliao and other companies. China's MEG consumption is expected to hit 9m tonnes in 2011 with import dependency running at around 70%.

By John Richardson

THE blog has been mystified throughout this year over why senior industry executives appear to remain "in denial" over the weakness of global petrochemicals markets.

Time and again we have heard the comment that the falls in demand were only the result of de-stocking.

The public mood of the industry has soured a little of late, but still seems to be predicting a reasonably strong 2012 and a guaranteed "business as usual" future beyond next year.

In private, though, everybody the blog met at last week's Gulf Petrochemicals and Chemicals Association conference in Dubai was talking about a very difficult year ahead.

But even during these private discussions, confidence was expressed that European leaders would finally get their act together and resolve the Eurozone crisis. This was perhaps because nobody was in the mood so close to the holiday season to contemplate the unthinkable - the collapse of the Euro. As the great poet TS Eliot wrote, "Humankind cannot bear very much reality".

What of this public face of the industry? Why has it remained so stubbornly optimistic, despite many petrochemical markets showing signs of persistent weakness since March as a result of deep-seated, structural economic problems, such as those we have tracked in China?

One observer, who shares many of our concerns over 2012 and beyond, offered a rather cynical explanation.

"Nobody wants to be the first chemicals company in any particular sector of the industry to issue a profit warning, as history has shown that the first company to cut earnings forecasts suffers the sharpest decline in its share price," he said.

"It is better to wait until somebody else takes the plunge and then when everything turns bad, the best strategy is to blame forces beyond your control - i.e. "we didn't see this one coming". Investors tend to be reasonably forgiving if they think that a particular company, or sector of chemicals, is suffering from forces beyond its control."

The constant focus on quarter-on-quarter results and share prices also make it difficult for companies to develop a longer-term perspective, added a second industry observer.

"The reason is that investors often have a very short-term perspective, particularly in the US and Asia, but less so in Europe. They don't care about the longer-term outlook, provided they can make money over a quarter or two," he said.

Chemicals analyst also tend to avoid taking the risk of being the first to warn of sector-wide declines, added our first industry observer.

"It is a very risk strategy to be an 'outlier" and warn about a sector-wide decline. The reason is that chemicals stocks tend to be very volatile on the upside - e.g. a bout of mild restocking can easily drive stocks as much as 40 percent higher.

"And so, again, if a chemicals analyst is right about the fundamentals but misses any of these rallies, she or he can be out of a job.

"It is better to stick with the pack, with consensus optimism. That way if everything goes wrong, everybody suffers and you can once again say 'none of us saw this coming.' "

Over the last decade, a short-term focus has been fine because of "pent-up demand". Every time economies have struggled, central banks have cut interest, or otherwise stimulated growth, and we have been back to the races.

But now, because of the once-in-a-generation changes taking place in the global economy which we outline in our e-book Boom, Gloom & the New Normal, companies have to start outlining plans for the next 5-10 years.

By John Richardson

THE public mood of last week's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai was resolutely optimistic.

But in the corridors, the dining rooms and the coffee bars of the conference hotel, the mood was radically different.

Taking, as usual, the polyethylene (PE) business as a reasonable proxy for the polymers industry as a whole, everybody we spoke to had given up hope of any recovery in Q1.

The betting was that by the second half of next year, markets would have picked up as a result of a solution to the Eurozone crisis.

When asked why the Eurozone crisis would be resolved, delegates had no argument to offer other than the hope that as politicians stare into the abyss, they would be forced into effective action. As we said yesterday, quoting the poet TS Eliot, "humankind cannot bear very much reality."

"Average European cracker operating rates were 70 per cent in October and 50-70 per cent in November with one cracker closed-down for commercial reasons in December," said a industry observer.

"There will be no recovery in Q1, but I think that the European crisis will be sorted out later next year after it has become evident that the profligate European countries have bitten the bullet and have instigated proper austerity programmes.

"This will allow Angela Merkel to sell a rescue package for Greece etc that will fully deal with the debt problems."

The head of olefins and polyolefins for a major European producer said that he believed H1 would be bad, but that by the second half of next year "everything will be sorted out because the politicians will have to do the right thing".

There were persistent rumours of a delay in the start-up of a major new polyolefins facility, said a North American-based executive with a global PE producer.

If the rumours were true, and if the Euro crisis was resolved, which he believed would be the case, buying sentiment would substantially improve, he added.

Right now, in Europe and In Asia, many buyers remain firmly camped on the sidelines. Caution is the name of the game as nobody wants to be left holding high-priced inventory in the event of "too much reality" - a collapse of the Eurozone and therefore the oil price.

The China market, where pricing is still weak as the slide below from ICIS pricing illustrates, hasn't benefited from last month's 50 basis point cut in bank-reserve requirements, a Singapore-based polyolefins trader told us.

"It is really, really bad out there as liquidity is still very tight. There is just no confidence as smaller converters and traders are continuing to go bust," he told us.

He made the point, which we raised earlier on, that the "Chinese New Year excuse" is being used much earlier than usual.

"The market packed up for the New Year 2-3 weeks ago, even though it doesn't occur until 23 January. We would normally expect business to only start winding down in early January."

A reflection of the lack of risk appetite among overseas and domestic traders was the preference for trading on the Dalian Commodity Exchange over physical cargoes, he added.

"The Dalian contract that closes in January was recently trading at RMB8,700-9,000/tonne for film-grade linear low-density PE (LLDPE). This compared with physical prices of RMB9,300/tonne and so there is, perhaps, a mild upside potential if sentiment improves and the Dalian in response rallies.

"It is the scale of the risk that also matter, though. When bank lending was plentiful in 2010, nobody thought twice about buying local physical local cargoes, even though the requirement was and remains 100 per cent up-front cash deposits.

"On the Dalian, the margin call is only 20 per cent of the cost of each contract and so your ability to leverage is automatically five times higher.

"Plus, if you close your position on Dalian before a contract matures, as most people do, you don't have to take physical delivery of PE that these days would be very hard to sell.

"The futures exchange is giving traders something to do, somewhere to make money, as there is so little real business out there."

By John Richardson

THE US petrochemicals industry might be in danger of being lured into old thinking about the future direction of the global economy as a result of abundant shale gas.

Despite the short-term markets gloom which we described yesterday, several industry executives and observers who we spoke to on the sidelines of last week's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai were sticking to the belief that a SuperCycle was still possible.

"Once we get the Eurozone crisis out of the way, and it will be resolved I believe, there is not enough new ethylene capacity being planned over the next few years. As a result, there is room for all these new US capacity additions," said one industry observer.

But even with cheap feedstock, the export--focused model for petrochemicals may now be flawed, because:

1.) There is no firm evidence that the Eurozone crisis will be resolved. Think of China alone and the implications for its economy if the Eurozone does collapse. Its 2009-2010 stimulus programme cannot be repeated for reasons we have already discussed. Without another huge round of government stimulus, Chinese growth remains very vulnerable to the collapse of exports to its biggest export destination - Europe. As much as 45 percent of all polymers imported into China end up being re-exported as finished goods, says a chemicals analyst. Others estimate that the re-export trade only accounts for 20 percent when end-use applications are analysed, he told us. But neither of these estimates can possibly take into account the overall effect on the economy, and therefore petrochemicals consumption, of a sharp decline in exports to Europe. The reason is that nobody has a clue about the final impact.

2.) The outcome of a collapse of the Euro could be a global trade war, making markets more regional.

3.) China is aggressively moving towards greater self-sufficiency in petrochemicals. This is a government strategy and is not driven entirely by economics. New domestic plants might therefore still be constructed even if, on paper, they do not make much economic sense.

4.) These are global markets and so if China cannot absorb export surpluses, producers in every region, assuming there are no major trade barriers due to a trade war, will seek to find new homes for their product. Even though South America is on the doorstep of the US with the obvious logistics advantages, it might become a 'battle ground" for these displaced volumes.

5.) And finally, of course, the future health of the US economy is hardly assured. Even if these plants are based on the assumption that a substantial portion of output will be exported, a reasonably strong local market is still important.

Four grassroots cracker projects have now been announced in the US - by Chevron Phillips Chemical, Dow Chemical, Sasol and Shell Chemicals.

SABIC has also expressed interest in a shale-gas based investment in the States.

The betting at GPCA was that there would be further announcements of both green field investments and expansions of existing facilities.

But the $64,000 questions remain the timing of all these projects, and how many will ultimately go ahead.

Source of picture: Wikimedia Commons

By John Richardson

THE theme of last week's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai was "Moving Downstream, Creating Added Value and Sustainable Growth".

There is a huge effort underway in the Gulf region, as we have discussed before, to move away from only basic petrochemical production.

A wide range of semi-speciality (if such a term exists) and speciality chemicals projects are being planned, in the hope that this will create an "umbrella effect" - a wider range of manufacturing industries downstream of this broader chemicals portfolio, and therefore more jobs.

Sceptics aplenty discussed in private the difficulties in executing this strategy, which include:

*Distance from big consumption markets. Speciality chemicals producers traditionally like to be close to their customers in order to provide "value added" pre and after-sales services. Plus, the economics of shipping some finished goods from the Gulf as opposed to plastic pellets or liquid chemicals are said to be more challenging. In the case of car bumpers, for example, you are essentially paying to ship fresh air in a container, said some commentators.

*Foreign investors might be a little more leery of committing to the region due to diminishing margins as you go further downstream, away from basic petrochemicals.

*Local skills need to be developed in, for example, selling and marketing speciality products, where much-more focus on the final customer is required than basic commodities.

But in what was a refreshing change for the blog, we came away feeling very positive about what the Gulf is attempting to achieve.

At least the industry has a plan, based on wider domestic societal needs, rather than on satisfying investors over the next quarter and on pumping-up the share price - which can be the approach of some Western competitors.

And we feel that, given strong government commitment and ample financial resources, the changes being attempted in the Gulf will be successful, even if they take longer than originally planned.

The blog is taking a break for the festive season (we will back on Thursday next week before, of course, closing-down again over the New Year period). 

We would like to wish all of our readers a very happy holiday season and successful 2012. 

Before we take our leave, here are a few thoughts concerning this year and the outlook for 2012 and beyond. The opportunities are tremendous, but it is not going to be easy....

By John Richardson

THERE will be no return to the Old Normal of easy credit and comfortable demographics where the Babyboomers supported the golden economic period of the early 2000s, is the inescapable conclusion of events this year.

So is the painful reality that the "European project", in its current format at least, is bust. Politicians remain a long way from finding a solution to the Eurozone crisis. If they fail, which seems a strong possibility, we are into a new global recession, quite possibly a Depression.

US politics is a mess. None of the leading candidates for the 2012 presidential election, including the President, get it.

The country doesn't need smaller government and more tax cuts for the rich. What is required is nothing short of a New Deal - heavy investment in infrastructure, energy research, education etc - all of which have been on the decline as a share of total spending since the Reagan administration, according to The Price of Civilisation by American economist, Jeffrey Sachs.

The US political agenda has been taken over since the 1980s by Big Oil, Wall Street and the corporate lobbyists, argues Sachs. And he points out, as we do in Chapter 3 of our e-book Boom, Gloom & the New Normal, that successive waves of financial deregulation, including decisions taken by the Clinton administration, set the groundwork for the 2008 financial crisis.

This year has also proven that the economic rise of China and India will not be steady and easy.

China faces a systemic debt crisis. The cynicism and general pessimism in India over politics and corruption, as the country also wrestles with inflation, suggests a return to the "Hindu rate of growth".

Chemicals companies might still be hoping that we will return to the Old Normal in 2012. Mild bouts of re-stocking are likely to occur, leading to a revival in prices for chemicals and in share prices.

But there will be no sustained recovery until politicians recognise and adequately respond to the scale of the problem, and companies adjust their strategies to cope with the evolving New Normal.

There are some tremendous opportunities for the chemical companies with the right approach, beyond cutting costs and lowering operating rates in the hope that "pent-up demand" - i.e. the Old Normal - will return.

We think companies need to focus their R&D efforts, and in adjusting existing manufacturing, on the following:

1.) The increase in the number of people who are over-55 in the West.
2.) Young people in the West struggling with much-worse employment and earnings opportunities than those enjoyed by their parents during the economic Golden Era of the early 2000s.
3.) The "relative" poverty of the rapidly expanding middle classes in the developing world. This will not be a sudden army of hundreds of millions of BMW-owning foreign-holiday goers, but will instead involve a sharp rise in demand for extremely cost-competitive low-end consumer goods.
4.) The megatrends such as carbon footprint, changing demographics and water and food scarcity.

Some chemical companies already get this and have been talking about megatrends for years. They are well set to prosper in the New Normal.

Other companies that focus mainly, or entirely, on quarterly profit growth and the value of their share price are going to struggle.

By John Richardson

CONVENTIONAL thinking is that when you have a strong feedstock advantage, you should go ahead and build more petrochemicals capacity on the assumption that growth will eventually be sufficient to absorb volumes.

Hence, several more green-field crackers would be announced in the US based on low-cost ethane, butane and propane via shale gas, said a European-based industry observer on the sidelines of this month's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai. To date, four new crackers have been announced - by Chevron Phillips Chemical, Dow Chemical, Sasol and Shell Chemicals.

"The start-up dates of new cracker projects might be pushed-back a bit, but I believe that all of them will happen," he added.

A second industry observer disagreed. He predicted that only one or two grassroots facilities would go ahead, along with a few expansions of existing facilities, because of "great economic uncertainty".

During on-the-record speeches and interviews, the GPCA delegates saw beyond this "great economic uncertainty" towards a period when the world would return to normal.

But in private, delegates seemed considerably more nervous and edgy about the future than during last year's conference.

Most of the discussion was about the Eurozone crisis and its implications for the global economy, including China's ability to absorb petrochemical imports.

"China's 2009-2010 stimulus programme cannot be repeated because this would cause more bad-debt problems," said a senior executive with a North American polyolefins producer.

"Without another huge round of government stimulus, Chinese growth would be badly affected by a fall in exports to its biggest export destination - Europe."

As much as 45% of polyethylene (PE) sold to China is re-exported as finished goods, said a chemicals analyst.

Other macro-economic concerns include:

*The possibility of a global trade war resulting from a collapse of the Eurozone. This could make markets less global and therefore more regional.

*China is aggressively moving towards greater self-sufficiency in petrochemicals. This is a government strategy and is not driven entirely by economics. New domestic plants might therefore still be constructed even if, on paper, they do not make much economic sense.

*These are global markets and so if China cannot absorb export surpluses, producers in every region, assuming there are no major trade barriers due to a trade war, could seek to find new homes for their product. Even though South America is on the doorstep of the US resulting in logistics advantages, it might become a 'battle ground" for these displaced volumes.

*The US economy confronts major long-term challenges. Healthy domestic markets are important for all the proposed expansions, even if export competitiveness is assured as a result of low-cost feedstock.

A return to normal economic conditions would create a tremendous opportunity for those with the feedstock advantage, said another senior executive, who works for a major Asian polyolefins player - again on the sidelines of the GPCA.

"There are very few new plants due on-stream over the next few years," added the executive, who believes that the world's economy will soon be back on track.

"Announced ethylene capacity is insufficient to meet global demand growth, which will be around four million tonnes a year. I definitely believe that a Supercycle for petrochemicals will happen."

His views are in contrast to those of chemicals analysts at HSBC in a report released last month.

"The 'Supercycle' thesis for commodity chemicals - highly popular among investors in 2010, but less so in 2011 as reality has sunk in - has, in our opinion, always been centred on assumptions about demand growth rather than supply," wrote the authors of the report.

"The current investor perception of the sector appears to be that, despite some near-term uncertainties linked to the macroeconomic environment, limited new capacity growth means that a 'Supercycle' environment is inevitable once macro fears subside.

"However, in order to reach the level of operating rates required for a margin 'Supercycle', the rate of demand growth must significantly outstrip the pace of supply additions.

"While the near-term outlook for supply growth remains favourable - we forecast a CAGR (compound average growth rate) of 2.9% over the 2011-15 period - demand growth would need to exceed supply by 150-200 basis points each year for the existing oversupply to be absorbed and a meaningful tightening of operating rates to occur.

"This already challenging task is complicated by a macro outlook that suggests demand contraction in the developed world in 2012 and a prolonged period of slower growth thereafter."

HSBC predicted that developed world plastics demand was a full 15% below the 2007 level in 2011 - and would not fully recover until after 2015.

If HSBC is right, the timing, and perhaps even the entire future, of planned capacity expansions in the US and elsewhere might be in doubt.

Conventional thinking might, as a result, be turned on its head.

What follows is likely to be of little interest to those, like ourselves, who are obsessed by the week-by-week price of polyethylene (PE).

Happy New Year to all our readers and here's hoping that optimism and ingenuity will triumph in 2012 and beyond.

By John Richardson

THE American historian Arthur Schlesinger Jr. has, among others, argued that America tends to experience waves of alternative activism and retreat, according to economist Jeffrey Sachs in his excellent book, The Price of Civilisation.

Thus in the 1870s and 1890s, for example, the great national industries - railways, steelmaking, oil, meatpacking and retailing by catalogue - first came into existence on a continental scale, writes Sachs.

Government stood in the shadows as the robber barons took control, leading to the Gilded Age, he continues.

Then came the reaction, first by the prairie populists, who, like the Tea Party, protested against the evils of Wall Street.

This was followed by the Progressives, who more systematically rolled out a series of reforms designed to restrict the corporate abuses of the financial sector and the robber barons.

The Progressive Era began to wane in the 1910s, and was swept away by the pro-business decade of the 1920s, when the US longed to return to normality after World War I.

"The Roaring Twenties, the prelude to the Great Depression, had strong similarities to 2008: very rapid financial innovation, soaring inequalities of wealth and income, a culture of financial speculation, real estate booms fuelled by easy credit, and then finally a financial crash," writes Sachs.

The Tea Party has expressed popular anger at the failure of Washington to help America's beleaguered middle classes, which have seen their income levels stagnate and employment prospects decline.

Those who fund the Tea Party back tax cuts, deregulation and smaller government as solutions to America's problems.

But it can be argued that these very three policies are the root cause of the crisis facing the middle classes.

Tax cuts have disproportionately benefited the richest few percent of America's population.

As we describe in Chapter 3 or our e-book, Boom, Gloom & The New Normal, deregulation has resulted in dysfunctional oil markets that are now dominated by financial speculation (Fellow blogger Paul Hodges further illustrated in this point in this post from yesterday).

Thus the price of oil kept rising in 2008, even when it was evident that demand destruction was being caused by expensive gasoline etc. The subsequent collapse in crude in Q4 of that year was a major factor behind the global financial crisis - as was, of course, deregulation in derivatives trading that led to the sub-prime mortgage disaster.

Since 2008, the US policies of quantitative easing and the huge bailout of the financial sector have primarily benefited the people who caused the crisis in the first place, the bankers - perhaps because of the close relationship between Wall Street and the financial sector.

Sachs' prescription for rescuing America's middle class includes government investment of a different kind - in education and infrastructure, and, dare we mention it in the current political climate, tax increases.

This would require a strong new political movement in the States, perhaps akin to what occurred during the Progressive Era.

Occupy Wall Street might become such a movement if it develops a coherent political philosophy.

Sachs expresses great hope that the Millennials, those born aged between 18 and 29 in 2010, could be a driver of such a major political re-alignment.

They are, he says, hooked on the Internet, rather than the TV addiction of the Baby boomers, and thereby could well use social networking to drive a new political movement.

The Millennials are also more ethnically diverse, socially liberal and better educated than the generation before - and more trusting of government, hence their support for Obama during the 2008 campaign, followed by disillusionment.

There is hope then, provided the biggest challenge of them all is also recognised and dealt with by the government, corporations and the American public: Demographics.

The ageing of the Baby boomers is radically changing the quantity and nature of demand in the US economy, requiring government, companies and the general public to think and act very differently.