Asian Chemical Connections

By John Richardson

THE blog, a bit like Wile E Coyote who always fails to catch Road Runner, has been amazed in recent weeks at certain people in the chemicals industry who, in public at least, fail to grasp the complexities confronting China's economy in 2012. We wish that our experience would, at least for some of the time, triumph over hope.

It seems as if the attitude is that "last year was an exception and everything will therefore be back to normal in 2012."

This is based on the assumption that the government will further relax credit conditions following its 50 basis-point cut in bank-reserve requirements in late 2011. A total of a further 200 basis points are forecast to be cut from reserve requirements by the end of this year, although economists expect interest rates will remain unchanged because of the danger of resurgent inflation.

The worst of possible outcomes also seems to have been been ruled out in the assumption that chemicals demand growth will rebound strongly in 2012  - i.e. a severe, new global recession driven by problems in Europe. 

Let's firstly deal with the argument over the easing of credit.

Further reductions in reserve requirements would certainly be welcome, as would more targeted measures to help China's struggling small and medium-sized enterprises (SMEs), which make up the bulk of the country's chemicals and polymer buyers.

But a rebound in inflation to above the government's target of an annualised increase of a maximum of 5%, remains a significant threat.

Interestingly, the country's official purchasing manager's pricing sub-index for December increased to 47.1 from 44.4 in November.

This was ignored by government officials, who preferred to instead focus on the fact that the index also showed that manufacturing activity narrowly avoided a contraction - rising to 50.3 in December from 49 in November (below 50 being a contraction).

The crucial question, though, is "at what cost?" Monetary easing has evidently already fed-through to producer pricing, thereby perhaps adversely influencing consumer pricing.

Controlling inflation remains a crucial task for Beijing in order to maintain social stability, particularly in a year when a leadership transition will take place.

Communist Party leaders, led by President Hu Jintao, are expected to retire by November in a once-in-a-decade leadership change that could, as Jeremy Page writes in the Wall Street Journal, "paralyse decision-making".

The retiring leaders will be anxious to protect their own legacies - while making life relatively smooth for the new incumbents - by not taking any drastic decisions.

Hence, moderate credit easing could well be the order of the day, in order to avoid re-inflating the real-estate asset bubble that has been a significant source of social disquiet among China's "sandwich generation".

A "steady as she goes approach" might, as a result, be the approach for 2012. This would leave the task of tackling systemic longer-term challenges confronting China to the next generation of leaders.

These problems include huge local government debt, rising labour costs, and reducing the economy's dependence on exports, which we will examine in a blog post tomorrow. 

The worst of possible outcomes

The steady as she goes approach assumes that either a collapse in the Eurozone can be avoided or short of a collapse, Europe's own version of political paralysis is enough to drag the world into a severe recession.

Europe's crisis is already having a severe effect on China.

Gordon Chang, the famous China sceptic, claims that China's exports and imports were flat in November, when government stockpiling of cheaper commodities was discounted.

Electricity output growth, a key measure of overall economic activity, was at a ten-month low in November.

Only 34% of China's economy was driven by internal consumption in 2010, which suggests that in the short term there is little that Beijing can do in the event of external trading conditions getting worse - other than blind panic.

This is where we should be really worried.

If the world enters a severe recession, China's leaders might be forced to engage in an all-out trade war in order to protect manufacturing job, thus, hopefully, keeping a lid on social unrest.

Chang argues that the number of public demonstrations rose from 70,000 in 2005 to approximately 280,000 in 2010 - way above the official figures of 80,000-100,000.

The last thing the government needs is tens of millions of angry factory workers taking to the streets, in a year when it is trying to sell to the public the concept of a smooth transition of political leadership.

But, of course, as the Great Depression proved, protectionism doesn't work.

If China were to, for example, competitively devalue the Yuan, increase export tax rebates for exporters, or go soft on new environmental regulations that have undermined the competitiveness of low-end manufacturers, the West would respond with trade barriers. This would make the macro-economic climate for China, and everyone else, even worse.

And so to assume that China will inevitably return to strong chemicals demand growth in 2012 is one heck of a big and harmful assumption.

By John Richardson

IS China facing a bad debt crisis as serious, or perhaps even worse, than sub-prime in the US and sovereign debt in Europe?

Despite all the bland reassurances the blog keeps hearing from chemical industry executives about the tremendous growth prospects in China, this is a valid question as we try to assess the prospects for 2012 and beyond.

We are not saying, as we discussed last month, that the opportunities are not indeed tremendous in China and other emerging markets.

It is just that we continue to feel that the level of debate, in public at least, doesn't take into account the big risks China faces as it confronts its bad-debt crisis.

As we discussed yesterday, economic policy is likely to be conservative in 2012 as a leadership transition takes.

But the longer the politicians dither, the bigger the debt problem could become - as has been the case in Europe.

Ratings agency Fitch is concerned that 30% of China's loans could turn bad, we wrote in November.

"It means that $2.5 trillion of loans might not be paid, and yet 2010 GDP was only $5.9 trillion," we were told by our fellow blogger, Paul Hodges.

"Even if we halve Fitch's estimate, this would still mean loans worth 21% of GDP would not be repaid. This is a big haircut even by eurozone standards."

More recent analysis by Bloomberg tallied the debt disclosed by 231 local government financing companies that had sold bonds, notes or commercial last year - up until 10 December. The total outstanding was $622bn, more than the size of the current European bailout fund.

The article suggests that, despite official central government data to the contrary, China is failing to curb borrowing as local governments panic and borrow more money.

They are caught in a vicious circle of needing to borrow more to generate cash flow in order to meet obligations on existing borrowings.

This cash flow is being generated from completion of property projects, but real estate prices are falling in response to the central government's deliberate policy of driving-down property prices.

A handful of property developers in Beijing reduced prices by 20 percent in mid-December, according to this report from Reuters. And even the government-controlled Xinhua news agency is reporting that overall property prices in Beijing will fall by 10-20 per cent over the next six to 12 months.

The central government will have to eventually step in to take bad debts off the books of the state-owned banks that have leant money to the local authorities.

But, as we said, the longer that Beijing waits as the new generation of leaders settles in, the bigger the problem.

What also needs to happen is for the central government to address the heart of the issue: The dependence of local authorities on land sales to raise revenue.

Exactly how do you go about dismantling, and then rebuilding, an economic system?

Firstly, you would face the need to fill the revenue shortfall confronting local authorities no longer able to depend on land sales. Land sales typically account for 40 percent of the money raised by provincial and city authorities. 

And secondly, local government officials are likely to resist change as land deals have been a tremendous source of additional income through corrupt payments.

The new generation of leaders need to find a solution not only because of the danger that the bad-debt crisis could get much worse.

One of the causes of rising social unrest is the seizure of agricultural land for commercial development, as illustrated by what happened in Wukan.

By John Richardson

SAUDI Arabia's petrochemical producers could soon, or may already, be paying $1.50-2.00/mmBTU for their ethane supplies.

"We are not sure whether the proposed increase from $0.75/mmBTU will take place from 1 January this year or from early 2013, but we think it is going to happen," said one industry source on the sidelines of last month's Gulf Petrochemical and Chemicals Association (GPCA) conference in Dubai.

This is further evidence of the pressures confronting Saudi Arabia as it deals with shortages of natural gas both for petrochemical producers and electricity generators.

The blog's discussions during GPCA also re-affirmed that even if additional ethane supplies were plentiful, petrochemical producers wanting to only build basic cracker and derivative complexes would struggle to gain feedstock allocation from the government. Heavy focus remains on adding value downstream, which, the Saudi government hopes, will help resolve its unemployment problem.

Saudi Arabia, as we've discussed before, is searching for more natural gas through developing non-associated gas fields (it is associated gas, via oil production, that is in tight supply).

However, chemicals analyst Hassan Ahmed, of New York-based Alembic Global Advisors, in a recent note to clients, said that Saudi non-associated gas fields would take 5-6 years to develop. Gas from these fields would also cost around $4/mmBTU, he added.

Meanwhile, natural gas costs in Qatar and Iran were now $3-4/mmBTU, he said.

Qatar has its own version of the region's natural-gas shortage due to problems with the stability of its giant North Field, leading to a moratorium on new developments.

But there is sufficient feedstock available for the big Qatar Petroleum/Shell Chemicals project to move forward.

There are also some suggestions that more natural gas for further petrochemical projects may soon become available in Qatar.

In Iran, following the privatisation of much of its petrochemicals industry, the government has steadily increased the cost of gas as the country also struggles with shortages - this time resulting from economic sanctions.

The Middle East gas issues are, of course, taking place as the US is awash with ethane thanks to shale gas.

But should companies be focusing so heavily on feedstock availability when the real issue is the once-in-a-generation changes in the global economy?

We think not. Building big new petrochemicals capacities when you have the feedstock advantage, on the assumption that demand will inevitably always catch-up with supply, is no longer the right approach.

By John Richardson

WE will see, as we did in the second half of last year, chemical price recoveries on restocking as inventories are at very-low levels down many of the value chains. It will only take slight improvements in confidence for markets to suddenly bounce-back.

Further monetary easing China is likely to buoy confidence post-Chinese New Year. A recent poll of economist by Reuters predicted that bank-reserve requirements would be cut by a further 200 basis points.

But the Chinese government risks reigniting inflation if it relaxes lending conditions by too much and so the approach to monetary easing is likely to be cautious, especially given that this is a year of leadership transition in China.

China's dependence on Europe, and on the general export environment, for growth is another major concern.

The amount of new sovereign bond sales that need to take place in Europe this year is just one of the factors that could cause a severe escalation of the Eurozone crisis. The moderate success of recent bond sales was the result of thin trading volumes during the recent end of the Christmas and New Year holiday seasons.

US consumers are also hardly in a position to drive global growth, as this article from the New York Times indicates.

"As the weak US economy trudges on, consumers are leaning on credit cards to pay for holiday gifts, many bought at discounts. They are dipping into savings to cover higher costs of gasoline, food and rent.

"They are substituting overseas for domestic travel, keeping their washing machines and refrigerators longer."

The reasons for the sluggishness of consumer spending in the US were flat incomes, modest job growth and the fact that more than 40 percent of jobs created in the past two years had been in lower-paying sectors, such as retail and hospitality, added the NYT.

And so this will be another disappointing year for the global chemicals industry.

High oil prices - which could go higher on geopolitical issues - and weak demand for chemicals, leading to a squeeze on margins, is another problem. We will look at this in more detail next week.

By Malini Hariharan

Asian paraxylene (PX) and purified terephthalic acid (PTA) markets have started 2012 on a contentious note that is likely to be repeated for the rest of the year.

The January Asian Contract Price (ACP) for PX is in disarray with major producers and buyers unable to agree on a number. Only ExxonMobil settled at $1,445/tonne cfr Asia with most of its buyers but other players have rejected this figure.

JX Nippon Oil and Idemitsu Kosan have declared a price disagreement for January and are expected to privately negotiate a settlement for contracted cargoes.

Initial nominations for January ranged from $1,510 to $1,550, significantly higher than the December ACP of $1,390/tonne cfr Asia. The hikes were attributed to tight supplies in January and February ahead of new PTA plant start-ups in China. But faced with negative margins for most of Q4 2011 buyers were in no mood to accept the price hikes.

The problems with the January contract follows the controversy in October 2011 when differing price expectations had held up negotiations. The difference this time is that at least one producer managed to arrive at a settlement but the rest of the market did not accept this.

PX supplies are projected to be tight in 2012 and so a repeat of the January disagreement looks very likely.

Nearly 11.5m tonnes/year of PTA capacity is due to be commissioned in Asia this year while only two new PX plants with a total capacity of 1.4m tonnes/year are scheduled to start up.

There is already news of one delay. China's Dragon Aromatics' 800,000 tonnes/year PX plant at Xiamen has been delayed by 5 months to Q3 2012 as a pipeline linking the plant to the company's PTA unit has not been completed, reports ICIS news.

Bohan Loh, the ICIS pricing editor for PX in Asia, estimates that new entrants to the PTA market have so far managed to cover only 10% of their PX requirement on contract. Contract premiums for 2012 have risen sharply with some players paying as much as $15/tonne to secure sufficient volumes.

Spot PX markets are likely to see considerable volatility this year. Producers will be looking for every opportunity to push for higher numbers but if price hikes cannot be passed along the chain, negative margins would lead to operating rate cuts among PTA makers.

But negative margins may not deter companies starting up new PTA plants. These players are likely to be active in the spot market, willing to pay high prices to to secure volumes required for a smooth start up.

By John Richardson

POLYETHYLENE (PE) inventory levels are thought to be so low at the converter end of the business in China that a case is being made for a strong recovery in demand and pricing post-Lunar New Year.

A further factor behind the anticipated rebound are forecasts of further credit easing by the Chinese government. For example, HSBC is predicting that bank-reserve requirements will be cut by 150 basis points in H1. Reserve requirements, the percentage of deposits against lending that the state-owned banks have to lodge with China's central bank, were reduced by 50 basis points late last year. 

Investors in chemicals stocks are very confident of a post-New Year rebound in PE - and in some other petrochemicals on the basis of the same arguments, said a Middle East-based chemicals analyst.

"This means that, to a large extent, a big recovery in key petrochemical markets is already factored into share prices."

But does the argument hold up?

Downstream stock levels are low, according to the traders and producers we have spoken to over the last week.

Producers, however, have conceded that they are sitting on pretty-high inventories themselves, the result of persistently weak demand throughout Q4 and into early January, added the chemicals analyst.

"This is despite operating rate cuts. Northeast Asian crackers are currently running at 80-90 percent, including the South Koreans who rarely cut production."

And so the danger is that if prices were to begin to rebound after the New Year, the Northeast Asians might be tempted to rapidly deplete producer inventories and then raise operating rates in order to regain lost market share. This could bring the price recovery to a fairly swift halt.

The Northeast Asians struggled in the China market throughout 2011 as Middle East production at plants brought on-stream in 2009-2010 stabilised.

For example, Global Trade Information Services, the chemicals trade-data provider, estimates that PE shipments from Northeast Asia to China fell by 22 percent in January-September 2011 over the same period the previous year. Middle East shipments rose by 21 percent.

"In volume terms, high-density PE (HDPE) shipments from the Middle East to China were around 1.5m tonnes up until November last year. This compares with approximately 1.3m tonnes for the whole of 2010," said the chemicals analyst.

Middle East production is set to further increase in Q1 of this year.

This would put more pressure on the Northeast Asians as, of course, overall supply also lengthened.

Saudi Polymers is due to bring on-stream two 550,000 tonne/year high-density PE (HDPE) plants in Q1.

Qatar Petrochemical Co (QAPCO) is planning to bring its 300,000 tonne//year low-density PE (LDPE) unit on-stream in the first quarter of this year, delayed from Q4 2011, according to ICIS news.

Also weighing on buyers' minds, thereby perhaps making them more able to resist restocking, is the start-up of Saudi Kayan Petrochemical Co 300,000 tonne/year facility LDPE, which is due to occur in mid-2012.

"This could also enable Saudi Kayan to run its 400,000 tonne/year HDPE plant a little harder. It has only been running the plant at 50-60 percent in order to avoid surplus ethylene," the chemicals analyst added.

A further negative factor for supply - from a producer's perspective - is a much-reduced 2012 Asian turnaround schedule.

Around 16 crackers are scheduled for maintenance in 2012 compared with 33 crackers in 2011, again according to ICIS news

Based on the nameplate capacities of these crackers, ethylene production loss is estimated to be at around 865,534 tonnes, down by more than 50 percent over last year.

As for the strength of a Chinese demand recovery, driven by monetary loosening, a 150 basis point cut in reserve requirements during H1 would seem to be a big deal. The blog will do a little digging here to find out what the market believes would be the impact.

But as we have written before, Beijing looks set to pursue a "steady as she goes" economic policy, ahead of the November 2012 leadership transition.

European growth is also going to remain weak. As much as 45 percent of PE imports are re-exported as finished goods.

By Malini Hariharan

Chinese methanol demand growth in 2011 has beaten expectations thanks to rising requirement from the gasoline blending and methanol-to-olefins (MTO)/methanol-to-propylene (MTP) segments.

Demand last year is estimated to have expanded by an impressive 30% to reach 26m tonnes, well above earlier forecasts of 19% growth, according to Ken Yin, the methanol editor for China.

Most of the growth was captured by increased local production with import volumes holding steady at around 5.7m tonnes.

The outlook for 2012 is robust with demand projected to hit 31m tonnes driven once again by gasoline blending, start of new MTO/MTP plants and also dimethyl ether (DME)

The strength in Chinese demand should support higher product prices across Asia, writes Heng Hui, ICIS pricing editor covering the Asian methanol market.

Market participants expect prices to hover in the range of $350-450/tonne CFR Asia this year - higher than the $300-415/tonne CFR Asia range seen in 2011.

But spot prices are likely to be volatile during the year. Asian buyers have been reluctant to sign contracts with Iran after the latest round of sanctions by the US and this is likely to force Iranian producers to sell on spot basis.

Additionally, the introduction of futures trading on the Zhengzhou Commodity Exchange (ZCE) is also expected to contribute to spot market volatility.

Another factor that is likely to support higher numbers in 2012 is the lack of capacity additions outside of China. New plants continue to be built in China and total Chinese capacity is estimated to hit 55m tonnes at end-2012, up from 50m at end-2011. But luckily for global producers, the country will still need to import more than 6m tonnes this year.

By John Richardson

THE first quarter of the 2012, and very probably the rest of the year, look likely to be very difficult for Asia's naphtha-based polyethylene (PE) producers as a result of more competition from the Middle East in the vital China market.

The other big negative factor looks likely to be Chinese demand growth.

Early January has at least started with price recoveries.

Polyethylene (PE) spot prices for certain grades edged-up by $10-$20/tonne, according to ICIS pricing assessments for the week ending 6 January.

"Offer prices for February cargoes are likely to be $50-80/tonne higher than those in January," predicted a Singapore-based polyolefins trader.

But a reason for the price recovery is the margin squeeze being suffered by the naphtha-based producers.

"All of those in Asia dependent on naphtha for feedstock, even the well-integrated ones, are losing money at the moment," said a senior executive with a global polyolefin producer.

"Price rises are therefore essential in order to recover some lost ground, which are fortunately being supported by some restocking among Chinese converters. The good news is that converter inventories are low."

The ICIS Weekly PE Asia Margin Report indicates that conditions became particularly bad in Q4 of last year.

For 2011 as a whole, integrated low-density PE (LDPE) margins were down 14% on the previous year as a result of a 30% rise in feedstock costs.

High-density PE (HDPE) integrated margins in 2011 were 20% lower.

High oil, and therefore naphtha, prices were obviously a huge factor in last year's disappointments - with the threat of more pressure to come as a result of geopolitical influences on crude.

But it was the surge in cost-competitive Middle East PE exports to China that was also a major factor behind the margin squeeze, said several producers and industry observers.

"The Middle East had more volumes to place as a result of production being stabilised at several complexes that came on-stream in 2009-2010," said a Middle East-based chemicals analyst.

As profitability declined for the naphtha-based players, so did volumes.

PE shipments from Northeast Asia to China fell by 22% in January-September 2011 over the same period in 2010 as Middle East shipments rose by 21%, estimates Global Trade Information Services, the chemicals trade-data provider.

"In volume terms, high-density PE (HDPE) shipments from the Middle East to China were around 1.5m tonnes up until November last year. This compares with approximately 1.3m tonnes for the whole of 2010," added the chemicals analyst.

More volume is on the way.

Saudi Polymers is due to bring on-stream two 550,000 tonne/year high-density PE (HDPE) plants in Q1.

Qatar Petrochemical Co (QAPCO) is planning to bring its 300,000 tonne//year low-density PE (LDPE) unit on-stream in the first quarter of this year, delayed from Q4 2011.

What could also be weighing on buyers' minds - making them even more able to resist restocking - is the start-up of Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE facility, which is due to take place in mid-2012.

ExxonMobil Chemical is officially scheduled to commission two 650,000 tonne/year PE lines, at Jurong Island in Singapore, in 2012. This will include metallocene grades of the polymer.

Another negative for supply, from the perspective of producers, is that approximately 16 crackers are scheduled to undergo turnarounds in Asia in 2012 as against 33 last year.

Based on the nameplate capacities of these crackers, lost ethylene production is estimated to be around 865,534 tonnes in 2012, down by more than 50% from 2011.

Returning to the increased pressure from Middle East shipments to China, pricing might not have been as competitive if demand had been stronger.

But extra volumes arrived in a market struggling to cope with much-tighter credit conditions, higher labour costs and a stronger Yuan. The small and medium-sized enterprises (SMEs), which make-up the bulk of buyers of all types of resin in China, were hit the hardest.

This is likely to be reflected in PE imports, which, according to several estimates, will have fallen by around 4% in 2011 over the previous year.

In contrast, imports rose by 64.8% in 2009, according to China Customs. This illustrates the degree to which the 2009-2010 credit binge distorted demand.

The big hope for this year is that Beijing's new "pro-growth" policy will make credit conditions easier. The policy was outlined at the government's once-every-five-years National Financial Work Conference, which took place earlier this month.

In response to the conference, and to rumours of further cuts in the bank reserve requirement, the Shanghai Composite index had risen by 6.4% between Thursday of last week and Tuesday of this week - its best three-day performance in a year. The reserve requirement is the percentage of money against loans that the state-owned banks have to lodge with China's central bank.

The rise in the stock market was behind a rebound in the Dalian Commodity Exchange's futures contract for linear-low density polyethylene (LLDPE), added the Singapore-based polyolefins trader.

"The contract that settles in May rose by Rmb500/tonne to Rmb9,800/tonne, which, hopefully, will be reflected in physical prices. Sentiment has definitely improved," he said.

A further 150 basis points will likely be cut from the reserve requirement in the first half of this year, said HSBC in a report released earlier this week. The requirement was cut by 50 basis points late last year.

"We (also) expect a larger new loan quota at around RMB8-8.5trn over 2012 compared from 2011's likely actual new loans of around RMB7.5trn," HSBC added in the same report.

But will this be enough to deliver the level of growth in China necessary to restore most of the PE business to good health?

Very probably not as too-radical a relaxation of lending conditions would reignite inflation, which was a major cause of increased social unrest in 2009-2011.

Further - the government will undergo a change of leadership that only occurs once every decade, beginning in October-November this year. This will lead to a cautious, moderate approach to economic policy, with no big changes from last year, as the old leaders retire and the new generation of senior Politburo members settles in, said several economists.

Most importantly of all, as much as 45% of PE imports are re-exported as finished goods.

Global growth prospects look the weakest since 2009, threatening China's export trade.

It is hard to see how 2012 can be anything but difficult for Asia's naphtha-based PE industry.

By John Richardson

POLYETHYLENE (PE) industry planners need to factor in the following as they prepare for 2012:

1.) Oil prices are causing demand destruction in the global economy. They could go higher due to the Iranian nuclear crisis. In real dollar terms, as fellow blogger Paul Hodges has written, crude prices were the highest they had ever been last year, undermining what was already weak consumer spending in the West.

2.) A "demand recovery" in China post Lunar New Year has to be put into the proper context. Restocking has already taken place as converter inventory levels were low. But any recovery will be capped by the Chinese government's limited ability to increase bank lending, and by a worsening export environment for finished goods because of problems in the West. Demand growth in 2009-2010 was exceptional and will not be repeated. "Price recoveries" will be about limited restocking and margin recovery for naphtha-based producers. It will not and cannot be any better than that, despite what stock market and investor sentiment might say in the short term, as the economic fundamentals remain too weak.

3.) Middle East capacity is increasing. Last year also saw higher production at plants brought on-stream in 2009-2010 as a result of technical problems being resolved. The side below, from Global Trade Information Services, illustrates how the Middle East took a bigger share of imports in a weaker China PE market. As we discussed before, overall PE imports are likely to have fallen by around 4% in 2011 over 2010.

4.) Asia's less competitive naphtha-based PE producers will have to display "exceptional, and uncharacteristic, market discipline", in the words of a source with a major North American producer, to bring supply and demand back into balance. Operating rates in Asia were this week said to be at 80-90 percent following cutbacks in Q4 2011. But deeper cutbacks, and plant closures, could well be necessary. The danger is that the reverse happens. The brief price recoveries we are likely to see over the next few months could be brought to an end as producers raise operating rates in an attempt to regain lost market share.

5.) Volumes displaced from China, as a result of higher Middle East production, will continue to search for a home, particularly if the Asian naphtha-based industry fails to show enough market discipline. The US saw a sharp decline in exports to China, as the above slide shows, but managed to largely compensate for this by strong sales to Latin America, according to a chemicals analyst we spoke to this week. This year, however, the US might not be as lucky, as everyone, even the Middle East, seeks outlets other than China - including the US market itself.

What's next? Contact us and we can discuss.

By Malini Hariharan

The Indian project scene continues to see some hits and misses.

Among the projects on track, sources at Gail (India) told the blog last week that expansion of its Pata cracker and a new polyethylene (PE) plant will be completed in Q1 2014.

Mechanical completion is due in December 2013,, while commissioning is scheduled for February 2014.

The new 450,000 tonnes/year swing high-density PE (HDPE)/linear-low density PE (LLDPE) plant is likely to produce around 100,000 tonnes/year of LLDPE. The grade slate is planned to be the same as the current plant.

The company's joint-venture cracker project in Assam, though, continues to be delayed and mechanical completion is now likely to take place only in 2014.

The small 220,000 tonnes/year cracker and derivatives project has been facing many problems including a steep escalation in costs. Lack of experienced people at the site is another problem.

Gail is also looking forward to the start-up of ONGC Petro-Additions Ltd's (OPaL) 1.1m tonnes/year cracker project at Dahej. The joint-venture cracker project includes a 340,000 tonnes/year HDPE unit, a 340,000 tonnes/year polypropylene (PP) unit and two swing HDPE/LLDPE plants, each of 360,000 tonnes/year capacity.

As written by the blog earlier, this project has seen many delays and the earliest that it is likely to start is 2014-15. Construction of the cracker is substantially ahead of the downstream plants, but the commissioning will have to wait as it will be difficult for OPaL to find a ready buyer for such huge volumes of olefins. Additionally, the company is also not building the infrastructure to handle olefin exports.

Gail will have marketing rights to about 38% of the polymer production by OPaL. This includes 400,000 tonnes/year of PE and 130,000 tonnes/year of PP.

Completion of these three projects would raise Gail's total polymer volumes to about 1.7m tonnes in 2015.

The Indian market should be able to absorb a fair bit of these volumes but the company would like to prepare for exports.

Among other projects, HPCL-Mittal Energy Ltd's (HMEL) new 440,000 tonnes/year PP plant is likely to start operations in April. The plant is downstream of a new 9m tonnes/year refinery that is in the process of being commissioned.

Start-up of this plant and Mangalore Refinery and Petrochemicals Ltd's (MRPL) 440,000 tonnes/year plant in H2 would result in higher exports of Indian PP, unless there is a substantial improvement in demand. PP exports from the country are projected to hit 1m tonnes for the year ending 31 March 2012, as demand growth has been lacklustre through most of 2011.

We will review of other Indian projects later this week.

By Malini Hariharan

The blog continues with a review of Indian projects.

State-owned refinery major Indian Oil Corp (IOC) has deferred its paraxylene (PX) and purified terephthalic acid (PTA) projects at Vadodara in Gujarat state, to post 2015.

"The project is on hold because of commercial issues; we are looking at the total PX/PTA picture and deciding when it would be right to start this project," says a company source.

The 370,000 tonnes/year PX and 560,000 tonnes/year PTA project, near the IOC's refinery at Koyali, had earlier been planned for completion in 2013.

IOC has also shelved plans for a PX plant at Haldia, on the east coast of India, as it could not obtain an offtake commitment from Mitsubishi Chemical which operates a PTA plant at the same location, said the source.

Meanwhile, Reliance Industries is in the midst of executing an ambitious expansion programme in polyester and PTA. This includes two new PTA plants, each of 1.1m tonnes/year, with the first plant due in 2013 and the second in 2014.

The company's cracker project at Jamnagar is inching forward, but with contracts yet to be awarded the blog understands that start-up is likely to be delayed by a year to 2015.

JBF Industries has also planned a 1.12m tonnes/year PTA plant at Mangalore in south India. This unit will be downstream of a 920,000 tonnes/year PX plant that is due to be brought onstream by ONGC Mangalore Petrochemicals Ltd (OMPL) in 2013.

These expansions should feed the requirement of India's rapidly expanding polyester industry. Polyester capacity is set grow by 27% this year to 8m tonnes/year and as a result PTA imports are likely to touch 980,000 tonnes in 2012, up from a little over 500,000 tonnes in 2011.

IOC may have deferred its PX/PTA project, but the company is working on a few others. It has started a feasibility study on a 1m tonnes/year acetic acid plant at Vadodara. The target date for this project, a joint venture with BP Chemical, is 2016, said the source.

The project will be based on the 1m tonnes/year of petroleum coke generated at the Koyali refinery.

Besides the acetic acid facility, the project also includes petroleum coke gasification and syngas production.

IOC is also working on a 20,000 tonnes/year butene-1 plant at its cracker complex in Panipat, Haryana.

"We are looking at the ethylene dimerisation route with technology from Axens. Negotiations are ongoing; completion of the plant is targeted for 2014," the source added.

The butene-1 will be used captively at IOC's 650,000 tonnes/year polyethylene (PE) facility at Panipat.

By John Richardson

TRADE protectionism in chemicals is set to rise during 2012 as a result of a weaker global economy, warned a trade lawyer who specialises in the chemicals industry.

"There was a 30-40% increase in the total number of anti-dumping cases in Europe in 2011 over the previous year, and I think this trend on a global basis will continue," said Edmund Sim, Singapore partner at Appleton Luff, a firm of international lawyers.

"You can argue that increased trade protectionism is not a good idea during a period when Europe needs more investment from countries such as China, against which many of these new cases have been lodged.

"But whereas northern European countries are traditionally strongly in favour of free trade, France, Italy, Spain and Greece have always been more protectionist, and they are among the countries most-affected by the Eurozone crisis.

"It is all about protecting jobs where unemployment is high and manufacturing industries are struggling, not just in Europe but in the West in general."

US politicians continue to claim that jobs have been lost to China because Beijing has kept the value of the Yuan artificially low against the US dollar, thereby boosting the export competitiveness of its manufactured goods.

"Mitt Romney has talked about signing into law duties on Chinese imports, based on the extent to which the US calculates that the Yuan is undervalued, 48 hours after becoming President," said Sim. Romney is a leading candidate for the Republican nomination for this year's Presidential election.

"But a bit like using nuclear weapons, this would not make sense as the immediate response from China and elsewhere would be swift and severe, benefiting no-one. I therefore think it may be better employed as a threat rather than actually used."

The latest anti-dumping case involving chemicals is claims by the Turkish government against imports of mono-ethylene glycol (MEG) from SABIC.

"In the case of the Turkish claims, a straightforward anti-dumping claim might have some grounds," said Sim.

"This is where allegations are proven that prices are higher in a producer's domestic market than what it is charging overseas."

But he added that a case for anti-subsidy, or countervailing duties, would be much harder to stand-up. These duties are levied when it is determined that raw-material prices have been unfairly subsidised.

"In the case of ethane to make ethylene and then MEG, this doesn't make sense as ethane cannot be shipped around the world. It is essentially stranded, and so there is no international market price that local production costs can be compared with," said Sim.

India, however, successfully levied polypropylene (PP) anti-dumping duties against SABIC, which were partly based on an argument that feedstock prices were unfairly subsidised, he added.

Propane, used to make propylene and then PP in Saudi Arabia, is internationally traded as liquefied petroleum gas (LPG). Saudi propylene-to-PP producers receive propane feedstock at a 28% discount to CFR Japan naphtha prices - viewed as comparable to the international price of LPG.

Earlier this month, India removed anti-dumping duties against eight Saudi PP producers that were first imposed on 30 July 2009. The duties, ranging between $28.49-323.50/tonne (EUR22-249/tonne), are still in place against Oman and Singapore.

"This was the result of a political deal between the Indian and Saudi government following very high-level talks," said Sim, which might be the outcome of the dispute etween Turkey and SABIC.

Turkish government officials have agreed to re-evaluate the allegations against SABIC, with both sides in the dispute pushing for an early resolution.

By John Richardson

A VERY illuminating discussion with a Shanghai-located sales and marketing manager for a major Asian polyolefin producer reveals how the post- Lunar New Year "recovery" story being sold by the investment community is on even more shaky ground than we at first thought.

Three points worth highlighting, before we publish verbatim what he said, are:

*He believes that end-user inventories are not that low as Chinese converters acquired plenty of stock from distributors in December when it appeared that pricing had bottomed out.

*The modest price recovery over the last two weeks has been driven mainly by intra-trade deals rather than end-user restocking.

*Because of the weak export environment for manufactured goods made from imported polyolefins, this is now very much a domestic-led market. The reason is that the only substantial demand driver is for either imported or local material that goes into domestic final consumer applications. Sinopec is therefore calling even more of the pricing shots than usual - and, despite their margin squeeze leading to efforts to raise prices, overseas producers have very little pricing power. 

Here is what he said:

"Business is better compared with last year. Traders have picked up some additional cargoes compared with December, especially the second-tier domestic traders in China, because of the feeling that prices have bottomed out.

"In the case of homopolymer  polyrpopylene (PP), prices bottomed-out at $1,250 CFR China in mid-December and have since increased, through higher offers from the Middle East, to firstly $1,280-1,290/tonne CFR China and then $1,310/tonne CFR China.

International traders have subsequently tried to push prices a little higher - to $1,320 tonne CFR China or thereabouts - prompting some restocking by these second-tier local traders.

But there has been no great improvement in end-user buying. The end-users remain very cautious and, indeed, so do the traders who are doing only back-to-back deals and don't want to hold cargoes for too long.

The traders are also willing to take modest profits, say $20/tonne, compared with the big profits available in 2009-2010 - the dream years.

The reason for this cautious, conservative approach is that many of the traders lost money last year because of a complete lack of visibility.

In terms of the number of weeks went prices went down, as opposed to up, it was the worst year for the China market in a decade. Some traders went bankrupt, as did end-users.

End-user inventories are not particularly low at the moment because local distributors liquidated stock in December in order to close their year-end accounts. This enabled the end-users to pick up cheap material when prices had reached a temporary bottom.

Most of the end-users seem to have enough material to last until the beginning of February, or even for as long as until mid-February, and so they are in no rush to buy.

But at least there has been a recovery of confidence among the traders, hence the increase in the intra-trade deals, based on this feeling that 2012 will be a difficult year, but not as bad as 2011.

Pricing has increasingly over the last few months been driven by what's happening locally in China - i.e. domestic production for domestic final consumption, and imports which again are used for local final consumption. The reason is weak re-exports because of the problems in the West. This is not a producer-cost driven market at the moment.

Sinopec's pricing policy has therefore become more important. Throughout last year they carefully managed inventories and this has continued into 2012. Small, conservative price increases have been announced by Sinopec since the mild improvement in sentiment.

I don't think this year will be radically better than 2011 because the Chinese government cannot raise liquidity by too much, due to the risk of reigniting the inflation problem, but at least the expected further cuts in bank-reserve requirements offer some hope.

However, the external environment remains the big worry.

Producers need to be very cautious about their forecasts for 2012, and we have to work very hard to get closer to our customers. It is about understanding their needs and tailor-making what we have to offer."

By John Richardson

CHINA'S GDP (gross domestic product) growth could fall to only 6.6 percent this year compared with 9.2 percent in 2011, warned Patrick Chovanec, an economist at the Tsinghua University's School of Economics and Management in Beijing in this Reuters article.

Even this very-low rate of growth for China will only be achieved if construction continues at last year's phenomenal pace, he added.

But the government has taken measures to slow the property sector down, with real estate prices falling in many Chinese cities, suggesting less construction activity in 2012.

Other economists are less pessimistic, predicting that 2012 GDP growth will fall in the 7.5-8 percent range.

Data released on Tuesday of this week supported what we have discussed before: How China's economy has become dangerously unbalanced due to its reliance on investment - largely in real estate - and on exports for growth.

Real estate investment accounted for 13 percent of China's GDP in 2011, according to government data, bigger than the 10 percent estimate that some economists had assumed.

Net exports subtracted from GDP growth in 2011 and will probably do so again this year.

The government is expected to further ease lending conditions through more reductions in the bank-reserve requirement - and it has raised the quantity of lending by state-owned banks.

This is unlikely to be anywhere close to enough to return growth to 2009-2011 levels, however, unless Beijing decides to:

*Cut interest rates.

*Relax restrictions on the property sector.

*Introduce more subsidies for purchasing consumer goods, similar to those for home appliances and autos which greatly boosted demand growth during 2009-2010.

*Increase value-added tax rebates for exporters on their imported raw materials, and at the very least halt if not the reverse the appreciation of the Yuan.

The first three of these steps would likely increase inflation back to socially disruptive and economically damaging levels. As fellow blogger Paul Hodges pointed out on Wednesday, food-price inflation rose to 9.1 per cent in December. Ninety six percent of China's population earn less than $20/day according to the Asian Development Bank, meaning that the cost of food is a much-bigger proportion of incomes than in developed economies.

The final step might well trigger a trade war, as we have discussed before.

A further danger is that by relaxing restrictions on the property sector, thereby re-inflating the property bubble, local government land grabs may accelerate again, creating further social unrest.

China is already confronting significant social unrest from villagers angry at local government officials who have acquired agricultural land at knock-down prices and sold it on to property developers for big, personal profits. One local government official in Guangdong Province has been accused of illegally pocketing more than $63 million.

But local governments have become heavily dependent for their financing on land sales , and non-performing loans are rising as real estate values fall - providing a motive to re-inflate the property bubble.

The Chinese government is caught between a rock and a hard place, perhaps as never before. 

All the potential outcomes of whatever policy decisions are taken over the next 12 months challenge the assumption that China will remain a driver of global growth.

As we said, further stimulus will equal more inflation, and perhaps even a level of social unrest that once again challenges the legitimacy of the government - as in 1989.

A cautious, moderate easing of lending conditions, property sector restrictions etc is likely to be not enough to get the economy back on to its previous growth trajectory.

The cautious, moderate approach seems likely at the moment because of the inflation risk - and because of the change in China's top political leadership due to take place later this year.

It took the blog 45 minutes to think through all of this by reading of a few news articles, and reflecting on what we have written before.

On the surface, therefore, we find it strange that chemicals analysts are now queuing up to claim that there will be a strong recovery in chemicals demand growth during 2012. 

Beneath the surface, we all should know the reason why....

Chemicals companies need to see through this.

One more investment bank joined the consensus this week with a new report, but we feel it would be impolitic and unfair to name the bank here.

The arguments made by the banks do not seem to take into account any of the complexities we have detailed above. They are based on assumptions such as:

*Ethylene equivalent demand growth was way below the historic relationship to GDP last year of 1.O x. C2 equivalent growth was about 0.5 percent in 2011 as against, as we said, GDP growth of 9.2 percent, because of tight credit and destocking. It has to therefore return to trend now that credit is being eased, leading to strong restocking.

*Beijing's decision to slightly ease lending conditions, plus long-term "pro-growth" policies under the 12th Five-Year Plan (2011-2015) such as more social housing and better state healthcare provision, will boost consumer spending.

China's government might be panicked into another big stimulus package, leading to a recovery in overall economic sentiment and therefore chemicals pricing and demand.

But this, as we said, would merely "kick the can down the road", creating a big downside potential for growth later in 2012.

By Malini Hariharan

A power outage at Al-Jubail has forced crackers and downstream plants at Al-Jubail, Saudi Arabia, to shut down. ICIS news reports that all polyethylene (PE) and polypropylene (PP) plants at the site were shut yesterday. It is not yet clear which other derivative plants were affected.

LyondellBasell has temporarily withdrawn its February offers for southeast Asia, India, China, the Middle East and Africa, reports Sheau Ling, the ICIS pricing editor for South Asia and the Middle East. LyondellBasell is a joint-venture partner in four PE and PP plants in Al-Jubail.

A source close to the company says the offers have been withdrawn for a couple of days until it has a clearer picture of the situation at the site. Plants are being restarted but it could take a few days for normal operations to resume.

Sabic, which runs a number of plants at the site, has yet to confirm the full impact on its operations.

Market players expect prices to rise in the coming weeks, reports Bee Lin Chow on ICIS news.

Film grade PE offers are expected to rise by at least $20-30 in the coming weeks if the Al-Jubail plants do not resume production soon.

But whether these offers will be acceptable to buyers will be known only after China returns from the Lunar New Year holidays.

By John Richardson

CHEMICALS traders and the financial community, quite obviously, benefit enormously from volatility.

Thus we have seen certain chemicals markets being talked-up by the trading community on the basis that the post-Lunar New Year period will see a surge in demand.

Equally, the job of the financial community at the moment is to sell a story to investors about a rise in chemicals prices being translated into a strong recovery in sector-specific stocks.

But the job of chemicals companies, as we discussed last Friday, should be to see through all the smokescreens and come up with realistic scenarios for the rest of this year, not just the next few weeks.

We hope what follows helps, and we apologise in advance if this seems repetitive - BUT THESE ISSUES ARE JUST TOO IMPORTANT AT THE MOMENT FOR US TO NEGLECT.

One thing that should worry chemicals companies is that in the polyethylene (PE) market - and perhaps in other chemicals and polymer markets - they have reportedly lacked the ability to push-through price increases to compensate for weak margins.

The reason is that demand for imported material has fallen, as a large percentage of imports are re-exported as finished goods. China's export trade has, of course, suffered because of what's happening in the West. PE markets are, as result, much more driven by the domestic final consumer.

Any "surge" in post Lunar-New Year demand might be substantially because factories have been shut down for longer than is usual due to weak export trade. For instance, small and medium-sized tyre factories closed for 2-3 weeks rather than the usual 5-7 days, according to ICIS news. We have heard anecdotal reports of the same extended shutdowns taking place in many manufacturing sectors.

In the short term, the power of overseas PE producers appears to have increased as a result of the outage at the Al-Jubail complex in Saudi Arabia. February offers have been withdrawn, and no doubt will be revised upwards, as a power failure is expected to keep the complex down for several days.

There is also talk right now about the market returning from the Lunar New Year just as the Asian cracker turnaround season gets into full swing. March production losses are said to represent the peak of the season.

But a glance at the ICIS shutdown schedule for 2012 (see chart below) shows that shutdowns are evenly spread throughout the year. And crucially, 50 percent less ethylene production is expected to be lost this year compared with 2011 as a result of fewer crackers being shut down.

Further, new plants in the Middle East are being commissioned in H1.

Demand is the thing, real, sustainable demand - and in China right now there are no guarantees that 2012 demand will be any better than 2011

We find it ironic is that the worst the manufacturing sector in China becomes the more stock markets - and in parallel the Dalian Commodity Exchange - rise on the assumption that China's government will be forced to more aggressively ease bank-lending conditions.

A case in point was last week's release of the preliminary January purchasing manager's index, showing a contraction for the third month in a row. As we have discussed many times, however, and we talked about again last Friday, Beijing's options for easing liquidity seem to be extremely limited.

And finally, what about oil prices and their impact on global GDP (gross domestic product) growth?

"The issue is simple. The world has never before had to live with Brent prices at over $100/bbl ($2012) for so long," wrote fellow blogger Paul Hodges in this post on Friday.

"Demand destruction is clearly taking place on a wider and wider scale. Even if prices fell sharply tomorrow, demand would now still take a long time to recover."

For the European integrated polyolefins industry, it is about managing supply in order to recover lost margins resulting from high crude prices - and also a volatile Euro.

A triple digit increase in the February ethylene contract price is therefore now expected as a result of management of supply in the face of persistently poor demand prospects, again according to ICIS news. 

We suspect this is the case up and down many commodity chemicals chains. 

By John Richardson

MORGAN Stanley has once again produced a very bullish forecast for China's polyethylene (PE) market.

The investment bank was famous for devising the SuperCycle theory in late 2010. It failed to take into account clear signs that 2011 was going to be a bad year.

Version 2.0 of its bullish view on the industry assumes that 2011 was so exceptionally bad that it is confusing us about the longer-term picture.

Here are the investment bank's main arguments, with our counterviews in italics:

*The underlying growth of Chinese PE demand has been hugely underestimated because the distorting effects of inventory build-ups have not been taken to account, according to a report by Morgan Stanley analyst, Vincent Andrews. For example, China Petroleum and Chemical Industry Association (CPIA) data for January-November 2011 show a 2 percent fall in demand when, in fact, it actually increased by 15 percent in the same timeframe. In November, PE demand rose by a staggering 23 percent. We believe that PE demand was brought forward by the huge economic stimulus of 2009-2010 and so destocking was, indeed, inevitable. However, all the reports from the industry that we have received indicate that "underlying demand," whatever that means, has fallen. Converters have been running at low operating rates because of lack of credit and nothing short of a collapse in export orders to the West. General anxiety over the economy, including the fall in property prices, has also weakened consumer spending, say the people we talk to.

*The compound annual PE growth rate will be 7.8 percent in 2011-2016 with the potential to surprise on the upside. This will be the result of the renewed "pro-growth" policy of the Chinese government as it relaxes lending conditions; increasing urbanisation, leading to a substantial boost to growth as relocated workers receive extra government benefits; what Morgan Stanley calls "industrial upgrades" - i.e. the percentage of the workforce with college degrees, which is set to rise from 10% today to 35% by 2020. It is widely accepted that the Chinese government has very little room to stimulate the economy, given the danger of reigniting socially divisive and economically damaging inflation; the pace of urbanisation looks set to slow down because of declining export growth. Where are the jobs going to come from to maintain historic rates of urbanisation, given that the economy remains dangerously reliant on exports? True, the rise in college graduates represents an opportunity, but also a threat to social stability if not enough new jobs are created.

*"By 2015, people born after 1980 will represent 50 percent of China's population. We expect this group to desire greater product substitutes, much like US Babyboomers did in the 1960s, necessitating increased manufacturing to keep pace with consumer demand," writes Andrews. This is contrary to the views of demographers who believe that China's ageing population, the result of its disastrous one-child policy, will be a drag on economic growth; as economist Nicholas Lardy points out in his new book, China's growth model has held-back the increase in incomes versus capital formation as an economic driver; 96 percent of China's population lives on less than $20 a day, according to the Asian Development Bank, and so a comparison with the post Second World War boom years in the US, when average real per capita income levels adjusted for inflation were far higher than in China today, is a little dangerous; and we also cannot discount the risk that Chinese growth will be severely dented by a bad-debt crisis worse than sub-prime in the US.

We could very easily be wrong, but it is always worth planning for a range of possible outcomes.

By Malini Hariharan

China is preparing to bring onstream huge capacities for aromatics this year.

Nearly 1.7m tonnes/year of  toluene capacity is due to be added, writes Dolly Wu in the latest issue of ICIS Chemical Business.

The major projects to keep an eye on are Dragon Aromatics (350kta), Jilin Petrochemical (350kt), PetroChina Sichuan Petrochemical (280kts) and Jiujiang (250kta).

Some of the toluene will be utilised captively at new toluene disproportination (TDP) plants to feed the country's booming demand for paraxylene (PX). TDP and hydroalkylation (HDA) applications accounted for 44% of toluene demand in 2011.

Additional toluene supply means that import volumes are likely to remain stable at around 600,000 tonnes. Demand for the full year is projected to hit 7.4m tonnes, up from nearly 6m tonnes in 2011.

Toluene demand for gasoline blending, the highlight of the local market for the last couple of years, will remain strong. But volumes are not projected to rise significantly, given ready availability of alternatives such as MTBE and mixed xylenes (MX).

China is already self sufficient in benzene and is heading in the same direction for toluene.

By Malini Hariharan

It is the results season and numbers posted so far confirm that the last quarter has been rough with depressed demand, weak product prices and firm feedstock costs affecting earnings.

Siam Cement Group's EBITDA for the chemicals division dropped 25% in Q4 from the previous quarter, while sales revenue declined by 5%. This was despite a 9% jump in polyolefin sales volume (mainly from exports) during the same period. Profit for Q4 was down 79% and down 51% for the full year , partly because of reduced margins, said the company in a presentation to analysts.

Indian major Reliance Industries posted a 11% drop in EBIT in Oct-Dec 2011, compared with the previous quarter. Sales revenues were down 6%.

In a presentation to analysts Reliance highlighted the challenging environment for the petchem industry last year: stagnation in Chinese imports, rising exports from the Middle East (exports have doubled in last 5 years to 15.5m tonnes and increased by 2.2m tonnes in 2011), high oil and naphtha prices resulting in a cost push during a period of demand slowdown.

The Indian market was also weak with polypropylene (PP) and polyethylene (PE) demand declining 6-7% during October-December, from the previous quarter, said the company. PVC was the only exception posting a 21% jump in demand during this period. For the 9 months ended 31 December 2011, Indian polymer demand was up only 4%, a dramatic change from the robust markets seen in 2010.

It was a similar story in the polyester market which was affected by cautious buying and reduced demand as a result of a power shortage in parts of the county. Overall polyester demand was down 2% during April-December 2011.

Middle East companies were also not spared. SABIC attributed lower prices for the worse-than-expected decline in its fourth-quarter earnings, which were down 10% year on year and 36% lower than in the third quarter.

SABIC said that its volumes had been higher during the reporting period but that it had been hit by lower selling prices. A loss at the Saudi Kayan joint venture also clearly dented the net result.

The company's results surprised financial analysts with a fourth-quarter net income of Saudi riyals (SR) 5.2bn ($1.4bn), 44% lower than the consensus estimate of SR7.4bn.

Korean companies have yet to announce their results but analysts are forecasting weak numbers for Q4 2011.

In a recent report on Korean companies, analysts at Woori Investment & Securities said they expected sales of petrochemical companies under their coverage to decline 5.9% quarter on quarter while operating profit was likely to be down 36.5%.

Among the Korean companies, they expected LG Chem to post relatively solid earnings compared to its peers thanks to solid earnings at the company's information and electronic materials division. Honam Petrochemical was expected to post sluggish earnings due to operating losses at overseas subsidiary KP Chem. Kumho Petrochemical was likely to miss consensus due to poor BPA margins and one-off losses and Hanwha Chem was also expected to fall short of market expectations on continued operating losses in its solar business.

By Malini Hariharan

India trails far behind China in the polyester business but there is growing interest in new investments that also extends upstream to purified terephthalic acid (PTA).

The latest entrant to the projects listing is Thai major Indorama Ventures which has signed an MoU with Indorama Synthetics (India) for an integrated PTA, polyester staple fibre (PSF) and polyethylene terephthalate (PET) project.

This is the first joint venture between the two companies which are run by the Lohia brothers.

Details of the planned project have yet to be disclosed. But according to one Indian media report, the $700m venture is expected to be located either in the southern or eastern India start production in three years. The PTA plant would be worldscale with a capacity of 1m tonnes/year with half of the production used by Indorama Ventures and 30% by Indorama Synthetics.

"We have already identified land parcels in four states and [are] going to start negotiation with each of them," said Aloke Lohia, CEO of Indorama Ventures, one of the largest PET producers in the world.

This is the fourth PTA project being planned in India. Reliance Industries is working on two worldscale plants at Gujarat, on the west coast while JBF Industries has announced plans for a 1.12m tonnes/year plant at Mangalore, in south India.

By John Richardson

CONFIDENCE can be very relative. So, compared with late Q4 last year when global cracker and derivatives markets ground to a virtual halt, perhaps it was inevitable that January would see some kind of rebound in the industry's mood.

Deep operating rate cuts in Northeast Asia have been a factor behind this return in confidence. In late December, Northeast Asian crackers were said by one chemicals analyst to be running at 85 percent, including most significantly some of Sinopec's ethylene plants. If Sinopec had indeed cut back to such a level, this would represent a radical change in approach for a company that has always previously run at 100 percent, regardless of market conditions, in order to keep its customers adequately supplied.

"Rate cuts to the mid-80 percent range would give the Northeast Asians considerably market muscle as we enter the post-Lunar New Year period. Once you get below 90-92 per cent, this is when producers begin to wield control over markets," said a senior executive with a global polyolefins producer.

Producers need a strong price recovery to regain margins that slumped very badly last year, mainly because of a very bad Q4. Polyolefins demand in China was weak from March-April. However, margins were held-up by strong butadiene and propylene co-product credits until the fourth quarter, when butadiene and propylene prices declined very sharply. High crude oil prices have added additional pressure.

This "needs must" situation could therefore be behind the apparent improved confidence among producers.

Modest pre-Lunar New Year polyethylene (PE) and polypropylene (PP) price rises are also said to be mainly the result of increased buying by local traders in China. This suggests that the traders also have a motive to "talk" up the market.

Chemicals analysts are playing their part as they talk about strong price recoveries in China, resulting from restocking and the Chinese government's "pro-growth" approach. But while this might result in an improvement in chemical stock prices, this will not necessarily mean that their arguments stack-up.

In Asia, you need to also consider the following:

1.) The risk that hard-pressed naphtha-based crackers producers will, at the first sign of a strong price surge, rapidly increase operating rates to well above 90 percent. There is talk about a "new realism" among the Northeast Asians, but they might quickly return to the old approach of fighting to regain lost market share.
2.) Global capacity additions in the biggest of all the cracker derivatives, polyethylene (PE), are few and far between in 2012 - potentially below demand growth. But there is a substantial amount of new capacity due on-stream in Saudi Arabia in H1, and this year's Asian cracker turnaround season is lighter than in 2011
3.) "Pro-growth" in China will also be relative to 2011, when the government was forced to drastically restrict bank lending. As we have said many times before, Beijing has very little freedom to boost liquidity anywhere close-to the misleading levels of 2009-2010. This year's official bank lending is expected to be 5 percent higher than in 2011, but it also worth noting that most bank lending tends to take place during the first half of each year. And the export environment for manufactured goods looks set to remain weak.

In Europe, too, the cracker business benefited from deep operating rate cuts. Rates were as low as 75 percent in Q4 and have since returned to 85-90 percent, in response to stronger buying by end-users.

But in the European polyolefins business, there is no firm evidence that this stronger buying represents a real demand improvement versus restocking in anticipation of further price increases. February ethylene contract prices have been settled €99/tonne higher than in January, with propylene contracts up by €90/tonne. Attempts at further increases seem likely if the current mood persists.

THE global economy is moving into a difficult period, as it transitions to the New Normal. Debt levels are high, and incomes are under pressure, particularly for the large numbers of people moving into retirement.

Cost must be the key criteria when examining the opportunities for new product development and research. Chapter 8 of our free 'Boom, Gloom and the New Normal' ebook examines the application of this philosophy to the four megatrends that we have identified as being key to the future of the chemical industry, which are:

• Improving water availability
• Improving food production
• Increasing life expectancy
• Reducing carbon footprint

It suggests that the key need is to be practical. Companies should focus:

• In the fields of water/food, on reducing the amount of waste, and the output that is lost when product is moving to market
• In developing new products and services for the over 55s, on core needs such as food, water, health, shelter and mobility
•In turn, this will enable them to 'do more with less'. Carbon footprint will be reduced, and products will be more affordable

This philosophy is quite different from that seen during the 1982 - 2007 economic SuperCycle. Then, companies competed for the middle ground, as we saw in chapter 7. They added features, and pursued the concept of adding value in order to boost profits. Over time, they focused more and more on the wealthier parts of the global population, and became increasingly disinterested in those outside this privileged group.

Today, however, it is no longer viable to focus in this way.

The Western BabyBoomers are joining the New Old generation of those aged 55+, and they face the prospect of much lower incomes as they transition from salaries to pensions.

Similarly, incomes in emerging economies are dramatically lower than those in the West. It is wishful thinking to imagine that these regions can therefore somehow replace the demand for added value products that is disappearing in the West.

Doing more with less is therefore our motto for future success. The chapter contains, as always, a wide range of practical examples to help stimulate ideas within your own business. We are convinced that those who accept its challenges will benefit for many years to come.

FREE DOWNLOAD OPTIONS FOR CHAPTER 8
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