Asian Chemical Connections

By Malini Hariharan

High density polyethylene's (HDPE) premium over linear low density PE (LLDPE) is likely disappear in the second quarter reversing a trend that has lasted for nearly a year.

LLDPE supply is getting tighter with few capacity additions due this year. Additionally plant turnarounds in Asia and the Middle East are also likely to curtail availability, point out the Bee Lin Chow and Sheau Ling Ong in this report on ICIS news.

Swing producers have also been focusing on HDPE as the product has so far offered better returns. But they may have to rethink their decision later this year.

One Middle East producer has predicted that LLDPE prices will be $50-60/tonne higher than HDPE in 2012 and 2013.

This will be a significant change from the current situation where LLDPE is around $100 cheaper than HDPE film grade in China and Southeast Asia.

And in comparison, between August 2009 and April 2011, LLDPE was priced at a premium of as much as $130/tonne to HDPE in China, India and southeast Asia, according to ICIS.

While capacity addition in LLDPE has slowed down HDPE volumes are set to grow this year once Saudi Polymers commissions its plants with a total capacity of 1.1m tonnes/year. The company is widely expected to start commercial operations in Q2.

Iran is also due to commission two swing plants in 2012 and 2013 but the start up schedule remains uncertain given the political problems and economic sanctions that the country faces.

Meanwhile, PE producers in Asia and Europe are continuing to push for higher numbers. The blog is hearing of an upturn in pricing this week in China and producers in India have also announced price hikes.

In Europe, PE prices are approaching record high levels with producers targeting an increase of $200/tonne following an increase in ethylene contract prices, writes Linda Naylor in a report on ICIS news.

European PE prices in 2012 have already risen by more than 20%, and the new proposed hikes would take the amount of increase beyond 30% if implemented.

With crude oil trading at a 43-month high, naphtha-based producers in Asia and Europe are under pressure to raise prices. But whether this can be sustained remains to be seen.

By John Richardson

ANOTHER week has gone by with no evidence of significantly stronger polyethylene (PE) volumes in China.

Rising labour costs, because of mandated government increases in minimum wages, and the shortages of labour post-Lunar New Year, are still making it difficult for plastic converters to run at full capacity.

The recovery in pricing since the New Year has been almost entirely cost-driven, as the naphtha-based producers try to recover lost ground.

This was reflected in analysis by ICIS pricing, which, while assessing PE pricing at $10-40/tonne higher for the week ending 2 March, said that this was the result of oil and naphtha cost pressures. Producers had responded to the cost pressures by raising prices, prompting some restocking among end-users who were worried that oil and therefore naphtha would go even higher, added ICIS pricing.

Despite the $10-40/tonne increases in PE, margins remain under immense pressure. Northeast Asian integrated high-density PE (HDPE) margins fell to their lowest level since ICIS records began - minus $67/tonne - according to the Weekly Asian ICIS PE Margin Report. Integrated Northeast Asian low-density PE (LDPE) margins fell into negative territory for the first time since our records began.

This is all very worrying for those who have predicted that the market will enjoy a strong rebound in 2012, after last year's disappointing demand growth. It is hard to see where the recovery is going to come from.

By John Richardson

LAST week we discussed how inland markets in China - which are booming thanks to government efforts to raise rural income levels - offer huge opportunities for petrochemicals producers.

Here are a few further reasons to believe that it will be local rather than overseas producers which benefit the most.

Beijing has been building big, new worldscale crackers in order to help satisfy demand in western markets, including the 1.2m tonne/year PetroChina facility at Dushanzi in Xinjiang province, north western China. It is the country's biggest cracker, is integrated with a 10m bbl/day refinery and is located within a gas-processing hub.

China also plans to increase the average size of existing and future crackers to 700,000 tonne/year from just over 540,000 tonne/year, as part of the 12th Five-Year-Plan.

The plan also stipulates that the percentage of non-naphtha feedstock used in the country's C2 plants should rise to 20% by 2015 from 5% in 2010. If forecasts of a global oversupply of liquefied petroleum gas (LPG) come true, this might help Chinese producers better compete with low-cost Middle East imports.

Another concern for importers is the scale of China's petrochemical ambitions. It wants to raise total C2 production to 24m tonne/year by 2015 from 15.2m tonne/year in 2010.

"Projects are sure to be delayed, and perhaps even reduced in scale, but nobody doubts the central government's determination to boost petrochemical self-sufficiency in the long term," said a polyolefin industry source

"I actually think that at the commodity end of the business, even with strong inland growth, it is going to be very hard for overseas producers to compete, unless they are located in the Middle East.

"The higher-cost guys are going to be caught between the rock of the Middle East and the hard place of bigger domestic capacities. The answer, if you have the technology, is to focus on value-added polymer grades for the developed eastern and southern markets in China."

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By Malini Hariharan

The Indian government is being asked to give a fresh boost to the chemicals industry in the 12th Five Year Plan beginning from 1 April.

A working group for the chemicals industry has detailed key measures that the government must take to ensure growth of 12% during the plan period (2012-2017).

Top of the list are improvement in infrastructure and feedstock availability. The group has recommended that the government encourage 'consortium cracker' projects to be built at Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) across the country.

The government can also help in securing feedstock from gas and oil rich countries, such as in Middle East and Russia.

Export of surplus naphtha from the country should be disincentivized and made available as feedstock for new petrochemical units.

New technologies such as coal-to-methanol/olefins/acetic acid and coal gasification need to be encouraged and incentives should also be given for use of bio-based raw materials.

The recommendations come after a weak performance by the chemicals industry (except the specialities chemicals sector) during the last five years. Production of basic organic chemicals declined by 6% on due to stiff competition from imports and low availability of feedstock which constrained operating rates at Indian plants.

The working group is quite clear that the industry can grow only if the government follows a clearly defined strategic road map. The alternative is to see Indian demand being served by overseas suppliers.

India has a tough task ahead. Many of the recommendations by the working group are not new but government action so far has been consistently slow.

Foreign investors have already starting building plants elsewhere in Southeast Asia or the Middle East with an eye on servicing the Indian market at least for the next decade. Luring them to India will be difficult unless there is some real action on the ground.

By Malini Hariharan

The drama continues in the Asian butadiene market. Bids this week are about $100/tonne lower than sellers' price ideas, writes Helen Yan in an ICIS news report. Buying indications have dropped to $3,350-3,400/tonne CFR Northeast Asia.

Butadiene prices appear to be going through another downcycle, reflecting the fundamentals of a market that it is structurally tight over the long term.

Spot butadiene prices have fallen steadily, from a peak of $3,900-4,000/tonne in early February, on strong resistance from buyers who have been unable to pass on the price hikes.

The average butadiene price in February was $3,800/tonne CFR NE Asia, as against $3,700/tonne for polybutadiene rubber (BR). BR producers usually need a price delta of $600-700/tonne for profitable operations.

Several downstream styrene butadiene rubber (SBR) and BR producers in China, Japan, South Korea and Taiwan have already cut production, and this has started to affect butadiene markets.

Traders are also holding back purchases in anticipation of further decline in butadiene prices. A sale tender for a 2000 tonne butadiene cargo for March loading is said to have drawn little buying interest.

The shift in the butadiene market comes at the worst possible time for Asian naphtha cracker operators, as their margins have been squeezed by the rapid rise in feedstock costs.

As we discussed earlier this week, Northeast Asian integrated high-density polyethylene (HDPE) margins have fallen to their lowest levels since ICIS records began. Low-density PE (LDPE) margins in Northeast Asia slipped into negative territory for the first time since we started tracking the data.

The cost push has even forced Sinopec to trim operating rates at its crackers.

Polyethylene (PE) prices have inched up this week in China on improved buying sentiment. But the margin squeeze is unlikely to ease if naphtha continues to climb.

By Malini Hariharan

As expected, excitement around shale gas is running strong at the CERAWeek conference in Houston. But an element of caution is also visible with the majors appearing to be in no rush to finalise their investments.

Shell is still a few years away from taking a final investment decision on a proposed cracker in the US, said CEO Peter Voser. Shell is considering Pennsylvania, Ohio and West Virginia as possible sites for the project and is likely to firm up a location one early this year.

But Voser said the company could still have the cracker up and running by 2017 if it began construction in 2014.

Chevron Philips Chemical is still evaluating sites for new polyethylene (PE) plants, said Mark Lashier the company's executive vice president of olefins and polyolefins. Chevron Phillips plans to build a 1.5m tonne/year ethane cracker and two PE plants, each with a capacity of 500,000 tonnes/year.

The company has already chosen its Cedar Bayou site in Baytown, Texas, for its cracker.

The shale industry is still evolving and that is evident in the reports of US shale operators shifting their focus to oil production because of low gas prices.

Steven Mueller, the president and CEO of Southwestern Energy, said shale gas production has created a glut of 500bn cubic feet of gas.

Charles Stanley, the president and CEO of QEP Resources, said the industry is pulling capital from dry gas plays to plays rich with natural gas liquids and crude oil, which will act as a balancing mechanism by reducing natural gas production.

Shifting from gas to oil requires adjustments in well placement as oil does not flow as easily as gas. But it appears companies are slowly learning how to do this.

Industry players also acknowledged that environmental issues could well delay the progress of shale gas.

Methane emissions are an area of concern. "Some environmental groups that once supported switching from coal to gas for electricity generation are no longer doing so over concerns about methane leakage," pointed out Voser.

Peter Oosterveer, Fluor's group president for energy and chemicals, stressed that the industry needs to be upfront and transparent about the potential risks of fracking.

"I don't think the industry does that particularly well," he said. "The challenge with shale gas is it is a fragmented industry, with a lot of small players."

But as pointed out by Oosterveer, the stakes are too high for the industry to dodge their social responsibility.

By John Richardson

The impact of Chinese government policy adjustments on petrochemicals demand was further highlighted late last week, when auto-sales figures for January-February were released.

Sales declined by 4.4 percent, the worst two-month start for the industry in seven years, with local-brand sales falling by 17 percent.

This is sure to dampen the mood further in polypropylene (PP) markets, where naphtha-based exporters to China are in particular struggling to cope with high feedstock costs and lacklustre overall demand.

The slump in auto sales was attributed to high fuel prices.

However, there are other longer-term factors also at play here, which are likely to influence auto-sales growth over the next several years.

In its battle against inflation, traffic congestion and pollution, the government removed auto subsidies in 2011. The subsidies had caused an unsustainable spike in demand in 2009-2010, as was the case across many consumer-goods sectors.

The 12th Five-Year-Plan (2011-2015) involves encouraging the production of more fuel-efficient vehicles.

In addition, consolidation in an oversupplied auto sector is being promoted.

Overall policies designed to stimulate more sustainable growth are not going to be abandoned, and if anything, are likely to be further strengthened. This was re-emphasised by last week's National People's Congress.

In the short term, financial markets will get excited every time a statistic indicates the possibility of stronger growth in China.

Thus, the fall in February inflation to a 20-month low of 3.2 percent has been by some commentators as giving China more flexibility to stimulate the economy.

But such numbers are not going to change the overall economic direction towards a different kind of growth in China.

And, as always, looking behind short-term numbers is important.

In the case of inflation, the January-February average was 3.9 percent, only a fraction below the government's annual target of 4 percent. Inflationary pressures are also expected to pick-up in H2, especially if oil prices remain firm.

By John Richardson

THE danger that high oil prices pose to the global economy, and therefore, of course, petrochemicals demand, has been highlighted by a new report from HSBC.

It makes the point that quantitative easing, which has led to investors fleeing a weaker dollar into commodities, is a major contributory factor behind the rally in crude. Equally important is the perception that an escalation of the Iranian crisis would cause major supply disruptions.

But, as HSBC argues in its report:

*The oil market looks far from tight. OECD demand is falling and growth in non-OECD countries is also on the decline. Since last summer, the International Energy Agency (IEA) has downgraded its global demand-growth forecast by 750,000 barrels per day. US oil-product demand has fallen by 4-5 percent so far in 2012 compared with the same period last year. Chinese demand rose by only 1 percent in December last year, as against 8-10 percent in December 2011.

*We have been here before. High oil prices caused demand destruction ahead of the global financial crisis in 2008, and also last year. In 2012, "US shoppers are staying away from the malls and using public transport, rather than there are own cars, to get there," writes HSBC. In petrochemical markets, the blog has heard how affordability is hurting end-users in China, restricting the ability of producers to fully pass-on rises in naphtha costs, which have, of course, been driven by stronger crude.

*Fears over a supply crunch, should Iran close the Strait of Hormuz (in itself, an unlikely scenario, we think, because of the consequences for Iran) are overplayed, adds the bank. Russia and Brazil are increasing production, as is the US as a result of the shale-oil revolution. HSBC believes that in the unlikely event that Iran was to close the Strait of Hormuz, it would be unable to maintain the closure for long. Releases of crude from strategic reserves, the diversion of Middle East crude to world markets via the Red Sea, and increased Saudi Arabian, Angolan and Nigerian production, would also be enough to make up for any shortfall.

But as we discussed in chapter 3 of our e-book, Boom, Gloom & The New Normal, oil is essentially a financial instrument where supply and demand fundamentals matter far less than the role of the speculators.

The speculators are again threatening the global economy, thanks to the disproportionate influence of the financial sector on Western economies. In chapter 10 of our book, due out later this month, we suggest ways in which this influence can be reduced.

By John Richardson

THE big US petrochemicals story at the moment is, of course, shale gas and the potential it offers for the local industry to substantially expand capacity.

This would, in theory, give producers a strong position to export to South America, Asia and Europe. Exports are going to be essential as the US market, no matter how well it grows, will not be able to absorb anywhere close-to the amount of new polyethylene (PE) capacity being planned.

The polypropylene (PP) story is a little more complicated. Propylene availability is being reduced as a result of existing cracker operators switching to lighter feeds and supply of C3s from refineries being reduced. New cracker projects are also mainly ethane-based.

The US has the potential to go some distance towards compensating for any PP shortfall by investing in propane dehydrogenation (PDH)-to-PP facilities. Shale gas is also yielding big increases in propane and butane supply, as well as ethane.

But while new US PDH production will be advantaged, it will not be advantaged enough to offer a platform for exports, said Stewart Hardy, the UK-based consultant with ChemSystems.

Returning to PE as the big potential "export story", therefore, the blog remains sceptical over whether the US would be able to find easy markets. Global growth prospects are fragile and China might well become far-more self-sufficient.

Turning the story on its head, the US might also become an export target for producers unable to sell into China.

An interesting ICIS Insight article by my colleagues Chow Bee Lin and Michelle Klump discusses how the South Koreans could take advantage of the US-South Korea Free-Trade Agreement that comes into force on 15 March. This will allow the South Koreans to export PP to the US with reduced duties, they point out.

The US-South Korea FTA also involves a reduction in PE import duties.

Exporters to the US have traditionally faced an additional "non-tariff barrier": US converters take delivery of polymers via railcars and then store their inventory in large-scale silos, whereas exporters mainly move product around the world in plastic bags, which are stored in container ships. 

Anybody wanting to penetrate the US market has had to bear the extra labour cost of taking the pellets out of bags and placing them in railcars, after arrival at US ports.

It also takes around two months to ship polymers from South Korea to the US, my colleagues also point out.

But an industry source believes both these additional barriers to trade are now avoidable.

"The South Koreans can ship in bulk containers, allowing polymers to go directly into the US silos system," he said.

They can also deliver into local distribution hubs and then agree on pricing, rather than set pricing before delivery, or while cargoes are at sea, he added.

Customers would, as a result, not have to wait two months for delivery as they would be able to place their orders directly with these local distribution hubs.

By Malini Hariharan

The polyester chain is feeling the strain of poor Chinese demand.

Weak export demand and Chinese government policy are also impacting this sector, as is the case in polyolefins.

A further factor behind the problems in the polyester chain is the fall in cotton prices, as fellow blogger Paul Hodges points out.

Monoethylene glycol (MEG) spot prices have plunged this week to a 15-month low to $1,015-1,020/tonne cfr China Main Port on panic selling.

Traders have been rushing to offload cargoes to make room for new arrivals, reports Becky Zhang on ICIS news. Chinese tanks are running full with total MEG stocks in the country estimated at nearly 800,000 tonnes.

The volumes would probably have been digested easily in a good month. But demand has fallen in recent weeks, as Chinese polyester producers have cut production on weak margins.

The average sales-to-output ratio for polyester producers has been at 50-70% since early February, as the textile industry is seeing fewer domestic and export orders.

Falling spot MEG prices have had an impact on contract numbers with MEGlobal lowering its April nomination by $20/tonne to $1,200/tonne.

The scene in purified terephthalic acid (PTA) markets is equally serious. Producers are facing a persistent squeeze on margins.

Spot paraxylene (PX) prices were at $1,650-1,660/tonne CFR Taiwan and/or China Main Port on 12 March, while PTA prices were at $1,180-1,195/tonne CFR China Main Port, ICIS data showed.

Assuming a conversion cost of $120/tonne, non-integrated PTA producers were incurring a loss of around $41/tonne on a spot basis.

This has forced some producers such as South Korea's Samsung Petrochemical to bring forward a turnaround of its 700,000 tonnes/year plant by two weeks to 24 March.

Market players in the polyester chain are now anxiously waiting to see if demand will pick up by end-March or early April, when the textile manufacturing season usually starts.

By Malini Hariharan

Work on commercialising a green route to paraxylene (PX) purified terphthalic acid (PTA) and other aromatics is speeding up.

US companies are at the forefront of recent developments. Virent is looking to produce a sugar-based ­aromatics stream containing benzene, toluene and xylenes using traditional chemical ­catalytic processing, writes fellow blogger Doris de Guzman in the latest issue of ICIS Chemical Business.

The company expects to have its first ­commercial-scale bio-PX plant on line by 2015.

Gevo plans to produce bio-based PX by converting fermentation-derived isobutanol to PX and is targeting commercial production by 2014. The company has already tied-up with Coca-Cola and Toray Industries, which claimed in November last year that it was able to develop the world's first 100% bio-PET fiber in a laboratory scale using Gevo's bio-PX.

Another US company, Avantium, is developing a new sugar-based monomer called furan dicarboxylic acid (FDCA), which can be reacted with monoethylene glycol (MEG) to make polyethylene furanoate (PEF), an alternative to PET resin.

Even SABIC is not ignoring the green wave, and has filed a patent claiming PX production via use of terpenes such as limonene found in citrus fruits.

However, the new routes come with many disadvantages and work still needs to be done on oensuring commercial viability.

Eric Bober of Nexant ChemSystems points out that capital expenditures for the initial commercial plants will be high, as these are first-of-a-kind plants as opposed to the 'nth' plant status of petrochemical facilities. A world-scale conventional PX plant is now 1m tonnes/year and likely four times as large as a bio-PX line.

Bio-derived products will likely locate near the available renewable feedstocks, which could increase logistics costs relative to the conventional supply chain.

Despite these issues, the enthusiasm for these new routes is still strong given the support from consumer product companies that are willing to pay a premium for these 'green' products. But will this continue in the changing economic climate where the focus is clearly on cutting costs?

By John Richardson

THE role of inventory management in European petrochemical price recoveries needs to be re-examined, given persistently weak underlying economic fundamentals.

In Europe, as this ICIS Insight article from my colleague Mark Victory points out, benzene contract prices have risen by 40%, propylene contracts have increased by 20% and ethylene contract prices by 21 percent since December. And he adds that resulting price rises further downstream reflect re-stocking by end-users after the severe reduction in inventories in Q4.

The last quarter of last year was a time of severe economic gloom. The Eurozone looked set to collapse and the slowdown in China had already become apparent.

Since then, of course, the mood has improved as a result of the Greek "rescue package" (in inverted commas for a reason). It was inevitable that buyers would have had to restock because their inventories had been so severely depleted in Q4.

A further motive to boost purchases has been the increase in crude-oil prices - a repeat of the "buying forward" pattern which occurs when oil prices are on the rise. But economic growth remains fragile, particularly as the rise in oil prices is causing demand destruction. 

The extent to which restocking has also been driven by supply constraints also needs to be assessed. Deep cracker and derivative operating rate cuts in Europe in Q4 substantially tightened markets.

By John Richardson

IT is still an article of faith among some people in the chemicals industry that all you have to do is concentrate on cost-efficient supply and the demand in developing countries such as China will inevitably continue on an even, upward course.

But this week's extraordinary political events in China further demonstrates that any effective analysis has to take into account the "what ifs" of either further political and economic reform, or a return to the old way of doing things.

Premier Wen Jiabao, one of China's liberal leaders, said in a speech this week: "Without successful political structural reform, it is impossible for us to fully institute economic structural reform and the gains we have made in this area may be lost."

And he warned that unless the "new problems" that had emerged in Chinese society were fully resolved "such a historical tragedy as the Cultural Revolution could happen again".

The 12th Five-Year-Plan (2011-2015), launched last year, highlighted the flaws in this old model. These include inefficient investments, an increase in income inequality and lack of innovation.

The plan laid out a clear path to solve these problems.

But as China undergoes a once-in-a-decade leadership transition, what if the reformists fail and the 12th Five-Year-Plan isn't effectively enforced?

The work of West Indian economist Sir Arthur Lewis (see the above slide), who we discussed in chapter 6 of our e-book, Boom, Gloom & The New Normal, is an indication of what might happen in China if the reformists lose their apparent struggle for power.

China might be caught in a "middle income trap", where it fails to innovate sufficiently to justify higher labour costs.

This is a theme we shall return to in more detail in chapter 10 of our book, which will be published later this month.

By John Richardson

ANOTHER week and sadly a repeat of the same old story: Depressed polyolefins demand in China.

Pricing did, however, increase - by $10-50/tonne in the case of polyethylene (PE) and $10-40/tonne for polypropylene (PP), according to assessments by ICIS pricing for the week ending 16 March.

But our colleagues at ICIS pricing warned that converters continued to struggle with poor demand for their finished products and constrained credit availability, as we have been reporting on the blog for many months now - along with the many other factors shaping growth this year.

Recent price rises had deterred big-volume purchases, they added.

Increased pricing has, in part, been driving by operating-rate cuts.

In Q4 of last year, many Asian crackers were reported to be running at 100 percent, despite weak markets. But now Japan is running at 80-85 percent, Taiwan at 90-100 percent, China and South Korea at 90-100 percent and Southeast Asia (SEA) at 90 percent, added ICIS.

There are also specific factors limiting the supply of C4s-based linear-low density (LLDPE). These include the lingering impact of an outage at the Al-Jubail complex in Saudi Arabia earlier this year, and unconfirmed production problems at a plant in SEA, said an industry source.

If you take a very short-term view of margins, the effort to pass-on strong naphtha costs appears to be reaping results.

Low density PE (LDPE) and high-density PE (HDPE) margins reached historic lows earlier this month.

But for the week ending 16 March integrated Asian LDPE margins were back in positive territory, said the ICIS Weekly Asian PE Margin report. Integrated HDPE margins increased by $61/tonne on better pricing, a fall in naphtha costs and a slight improvement in co-product credits, but they remained negative.

Unless there is a big improvement at the converter end of the business, the more that margins improve, the more will processors resist further price hikes.

By John Richardson

THE shale-gas revolution, which, of course, is already well underway in the US, could also have major implications for petrochemicals in China.

China has 1,275 trillion cubic feet of recoverable shale-gas reserves, according to the Energy Information Administration - more than the US.

As a result, the Chinese National Energy Administration has commissioned a development plan for shale gas.

However, a new report by Deloitte says that:

*The emergence of a major shale gas industry in China would create a struggle for water rights with farmers.

*There are technological constraints and China has traditionally not been very open to inviting-in the international oil and gas companies that own technologies for unconventional exploration and production.

*Coal accounts for 70% of China's electricity needs, whereas natural gas accounts for only 4%. Even though natural gas emits less CO2s than coal, Deloitte believes it is unlikely that China will stray too far from coal for power generation, as most of its modern coal-based electricity plants have been built over the last five years.

Nevertheless, the consultancy adds that China is becoming more open to doing deals with IOCs in order to get hold of hydraulic fracturing technology. Although Shell is the only company to have signed a deal to exploit the country's reserves, negotiations are taking place with ExxonMobil, ConocoPhillips, Chevron and Halliburton, adds Deloitte.

Developing shale gas could also, in the long run. prove cheaper than importing liquefied natural gas (LNG) from Qatar, Australia and Russia, says the consultancy.

Doubts have similarly been expressed over the extent to which China will be able and willing to exploit its coal reserves in order to make transportation fuels and chemicals.

But where there is a will to improve energy security, China is likely to find a way.

The coal-to-chemicals story, and the threat that it represents to companies planning new projects based on exporting to China, is already well-documented.

What if China was to also exploit its shale-gas assets to such a degree that it was left with lots of surplus, and therefore very cheap, ethane, propane and butane?

Right now, this might seem many years away, but never underestimate China's ability to step-up the speed of its investments.

By John Richardson

CHINA'S synthetic fibres chain continues to show serious signs of distress as a result of weak domestic and export demand, according to my ICIS colleagues, Judith Wang and Becky Zhang.

Traders in monoethylene glycol (MEG) must have believed the theory that petrochemicals demand growth in general would be strong, as inventory levels in Chinese ports are estimated at 800,000 tonnes - close to record levels.

MEG was supposed to have a fantastic year due to strong growth and lack of new capacity. A "supply gap" had, in theory, opened up following completion of the last big wave of Middle East plants.

The problem is the extent of damage to demand caused by the big structural changes taking place in the economy.

In addition, as my colleagues have identified, China's apparel and non-apparel export trade is struggling as a result of economic problems in the West.

"A number of Chinese polyester makers said that the peak manufacturing season for textiles may not kick in as usual in March, given soft external demand amid a general weakness in the global economy," they wrote.

And, as my fellow blogger Paul Hodges points out, falling cotton prices are another factor behind declining demand for polyester. Exceptional circumstances, which drove-up cotton prices in 2010-2011, might have distorted estimates of longer-term growth in polyester.

A further problem is the price of crude oil.

"Although most (emerging market) policymakers were engaged in continuous easing in the second half of last year, the mood is beginning to shift," wrote HSBC, in a report on crude, which was released earlier this month.

"The last thing policymakers in the emerging world will want to see is a return of inflationary pressures sufficient to generate renewed social instability; after all, the rising price of basics was one factor behind the Arab Spring."

In December, China's demand for oil grew by just 1% compared with 8-10% in early 2011, according to HSBC.

Increasing fuel costs hurt people in China more than in the West.

The reason is that 96% of Chinese live on $20, or even less, per day. As a result, fuel and food and other basic necessities take up a bigger proportion of incomes in China than in the rich world. Food prices, of course, go up as oil becomes more expensive because of increased transportation costs.  

It is these poor people who were supposed to buy a lot more polyester dresses and shirts this year.

It doesn't appear to be happening. Polyester yarn producers are sitting on more than a month's worth of inventory, and are running their plants at an average operating rate of just 76%, my colleagues added.

By John Richardson

Saudi Arabian oil minister Ali al-Naimi on Tuesday did his best to calm the oil markets by arguing that the kingdom had met all its customers' requests for crude, and was ready to raise output to full capacity of 12.5m barrels a day.

"My only mission is to convey to you that there is no supply shortage in the market," he said.

It is the perception of a future shortage, rather than current demand and storage levels that has, in all likelihood, raised prices to their highest levels since H1 2008. And we all know what happened in the second half of that year.

It would, of course, take another Lehman-style event to trigger a repeat of H2 2008.

But as HSBC has warned, even if that doesn't happen, crude prices could still cause a re-run of last year.

"While confidence has clearly rebounded over the last few months, it is no more than a repeat of developments seen at the beginning of 2011," wrote the bank, in a report released earlier this month, which we have referred to before.

"As last year progressed, initial optimism gave way to more grounded realism. Rather than a sign of lasting recovery, higher oil prices may simply be a contributor to persistent permafrost."

Let us hope that Saudi Arabia is successful.

On Sunday, Christine Lagarde, managing director of the International Monetary Fund, warned that oil prices represented the big, new threat to the world now that Greece has receded from the picture.

The danger is that the financial speculators, who have helped drive crude prices to unsustainable levels, will once again cause major damage to the world economy.

If the current price of oil was justified by economic fundamentals, we would see evidence in petrochemicals markets.

There is no such evidence. Producers across several product chains have cut operating rates, and struggle with depressed margins - a reflection of the "demand destruction" being caused by costly crude.

By John Richardson

The remarkable rollercoaster that is butadiene, and its derivatives, continues.

Although the synthetic rubber market for tyres in China appears to be strengthening, acrylonitrile butadiene styrene (ABS) remains under pressure.

And, in a reflection of what is a structurally extremely tight market for butadiene, LG Chem is talking about further reducing operating rates at its Daesan synthetic rubber plant in South Korea.

The pricing chart below illustrates the extraordinary volatility in butadiene prices.

This is likely to continue for a few more years, at least. In circumstances like these, buyers tend to frequently panic and overstock in anticipation of further price rises and then operate inventory for longer than would be normal, leading to repeated cycles of sharp price increases and declines.

In China, confusion over the strength of auto markets cannot be helping. While, of course, replacing tyres represents a much-bigger volume business these days thanks to the surge in auto sales in 2009-10, sales of new autos are slowing down.

Can the petrochemicals industry fix the problem of not enough butadiene? A fascinating debate on this subject took place at last month's 7th ICIS World Olefins Conference in Brussels.

The story of butadiene also serves to illustrate how, in this business, sheer luck plays a huge role in success.

Ten billion dollars in earnings before interest, taxes, depreciation and amortisation (EBITDA) were transferred from the world's butadiene consumers to its suppliers during 2011, estimated Rafael Cayuela, butadiene commercial manager for Styron, the global plastics, latex and rubber producer, during the conference.

"This was exactly the same product, the same customers and the same suppliers - nothing had changed except, of course, the supply and demand fundamentals," he added.

By John Richardson

Indian friends of the blog, many of whom work in the country's chemicals industry, have long expressed their view that their country will always muddle through.

Their trust in government to solve long-standing infrastructure and logistics problems has always been low.

Through a great deal of hard work, and enormous amounts of ingenuity, they have therefore managed to prosper.

They were not taken in by the widespread euphoria which greeted the Congress Party's re-election in 2009.

And they are, equally, not that downbeat about the growing pessimism over India's short term, and possibly even long term, economic prospects.

This group of big and small companies, and an army of sole traders and one-man-band entrepreneurs, are likely to continue to do well, even if India fails to tackle its difficulties.

But failure to deal with chronically bad infrastructure, corruption, dysfunctional politics and the huge divide between the rich and the rest of India, would be nothing short of a human, as well as an economic, tragedy.

All the above problems have been around for a long time.

What has changed over the last year or so includes:

*Major new corruption scandals that have drained the credibility of the government, involving first of all telecoms and now the coal-mining sector.

*A sharp decline in domestic and foreign investor investment in India. This is a result of the government being paralysed by the corruption scandals, and by the belief that it is unwilling or unable to push-through further economic reforms. Last week's budget could further weaken foreign investment.

*An increasing bad-debt problem at state-owned banks. 

*High inflation and interest rates.

Chemicals demand growth has, a result, slowed down.

Talk of big new integrated petrochemicals complexes, attracting lots more foreign investment, is also likely to remain just talk. The blog first heard about the idea of these complexes back in 2000, and nothing substantive has happened since then.

The blog sincerely hopes that India does a lot more than just muddle through.

By Malini Hariharan

Despite challenging market conditions in 2011, the global polymers industry managed to post demand growth of 4.5%, with the largest increase recorded by polyvinyl chloride (PVC) at 6.2% and linear-low density polyethylene (LLDPE) at 5.8%, estimates Fabrizio Galie of the ICIS consulting team.

Global demand for commodity polymers, including PE, polypropylene (PP), PVC, polystrene (PS), but excluding expandable PS (EPS), was 178m tonnes last year with China accounting for 27% of this number.

But demand growth in the country was substantially lower at 5.6%, down from the 11% recorded in 2010, as tight credit availability and the overall economic slowdown dampened consumption.

Other Asian countries, such as India, also posted weak performances. As highlighted by the blog earlier, high interest rates and a slowdown in industrial production affected demand. And the scenario has yet to change so far this year.

The surge in crude oil prices and the start-up of new capacities is likely to put further pressure on the market this year, and it will take time for the situation to stabilise, adds Galie.

"The outlook for commodity polymers in 2012 is one of prolonged volatility as much will depend on the global macroeconomic environment," he says.

Assuming a quick economic recovery, global polymer consumption is estimated to reach 214m tonnes by 2015 with PE being the main contributor.

And China will continue to be a large importer even as it brings onstream new plants, he  believes.

By Malini Hariharan

The energy landscape in North America is rapidly changing. After shale gas the focus has shifted to rising oil production from various unconventional sources, which has prompted some commentators to predict that the region will regain its status as a major global producer.

In a new report, analysts at Citibank confidently predict that North America is becoming the new Middle East.

"The United States has become the fastest-growing oil and gas producer in the world, and it is likely to remain so for the rest of this decade and into the 2020s. Add to this output the steadily growing Canadian production, and a likely reversal of Mexico's recent production decline and theoretically, total oil production from the three countries could rise by 11.2m bbls/day by 2020, or to 26.6m bbls/day from around 15.4m at the end of 2011," says Ed Morse of Citibank in The Wall Street Journal.

Five sources of oil could make North America the largest source of new supply in the next decade: oil sands production in Canada, deepwater in the US and Mexico (focused on the Gulf of Mexico), oil from shale and tight sands, natural-gas liquids (NGLs) associated with the production of natural gas, and biofuels.

Morse points out that North America has become an important marginal source of oil and gas globally. Crude-oil imports by the US have been falling after hitting a peak in 2005-06, while exports touched 1.2m bbls/day at the end of 2011.

The US is also expected to become a big exporter of liquefied natural gas (LNG), competing with Qatar and other traditional players.

Citibank's analysts conclude that rising energy production will trigger a revival of manufacturing and jobs in the US.

Employment in the oil and gas sector will be boosted by some 500,000,

Around 2.2 million-2.3 million jobs will be created by economic stimulus and by the new hydrocarbon production, they estimate.

The renaissance of the US energy industry also figured high on the agenda at the recent annual meeting of the American Fuel & Petrochemical Manufacturers (AFPM).

"The nation needs to hear that we are energy-rich, not energy-poor," stressed Charles Drevna, president of AFPM at the meeting.

The potential of increased production cannot be ignored, but environmental issues associated with these unconventional sources of oil and gas need to be kept in mind.

New regulations related to the fracking technique used in shale gas and oil production are still being worked out. Industry players have already expressed fears that new government policies will hinder progress.

Politicians seem to be floundering as they seek to restore growth to the Western economy. Their prescriptions swing between austerity and economic stimulus as they argue over what has gone wrong.

But in chapter 10 of our Boom, Gloom & The New Normal e-book we argue that they are on the wrong track. They are putting their trust in an outdated economic theory - the life-cycle hypothesis.

This theory holds that we are all rational beings and plan ahead to ensure we have enough money for our retirements. Policymakers therefore believe that if only they could find the right policy - spending boosts or tax cuts - then growth would magically return.

They don't seem to have realised that most people, like most governments, have been taken by surprise by the rapid increases in life expectancy in recent years. So even if people were rational, it would have been very hard for them to have saved enough money to provide for their extra decade or more of retirement.

This inevitably means growth will be slower. The Boomers simply must spend less and save more to fund their retirement. But equally, there are opportunities to sustain growth by developing new products and services to meet the Boomers' needs as they enter the New Old 55+ generation.

We argue that policymakers need instead to focus on these issues. They should start to debate the best mix of policies to support the need to retool Western economies, to reflect these changing demand patterns.

In addition, we look at the financial sector.

Young engineers and scientists, who would be much better employed in industry, have recently preferred to work in the financial sector where salaries have been far higher. It needs to be reformed and we suggest how this might be done.

We also explore how China's highly ambitious 12th Five-Year-Plan is at risk of failure. A key element of the Plan is moving up the value chain. But can the right levels of creativity and innovation develop without greater political freedom and more democracy?

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By Malini Hariharan

Just days after a recovery in butadiene prices, downstream synthetic rubber producers are once again threatening to cut production as weak demand has pushed them in to a tight corner.

Asian major Korea Kumho Petrochemical is looking at trimming the operating rate at its 210,000 tonnes/year polybutadiene rubber (BR) plant to 85%, and also extending the shutdown of a second plant.

BR producers need to take drastic measures. Butadiene prices rose by $150/tonne last week, while BR prices dropped by $50/tonne. The spread between the two is barely $250/tonne, well below the $600-700/tonne that BR producers need to cover costs, writes Helen Yan on ICIS news.

Any effort to raise BR prices has encountered stiff resistance as an uncertain economic climate keeps demand quite weak. And the correction in crude oil prices is likely to keep buyers on the sidelines this week.

Meanwhile, butadiene supply is expected to remain tight as a result of maintenance shutdowns and outages. Additionally, some crackers in Northeast Asia are running at reduced rates because of poor economics.

This is supporting producers' efforts to raise prices. But unless BR producers pass on these costs hikes, another price correction seems inevitable.

By John Richardson

THE question being asked during the first quarter of this year was, "Why shouldn't Chinese chemicals demand come roaring back after a disappointing 2011?"

The relevant question now, as we move into Q2, is, "Why should it come roaring back?"

Chemicals analysts, and quite a few traders in products such as mono-ethylene glycol (MEG), were misled into believing that a strong cyclical rebound was inevitable.

The logic, on the surface, seemed to stack up. But what some people failed to take into account were the major structural changes taking place in China's economy, the persistent weakness of exports of manufactured goods to the West and demand destruction caused by high oil prices.

And as my fellow blogger Paul Hodges points out, China's Politburo is too preoccupied with the leadership transition to have time to focus on a new stimulus package.

Further, as a polyolefins industry source told the blog in Singapore this week, food-price inflation is still very high. This means China's leaders, even if they had the time, wouldn't be able to risk another hefty dose of fiscal stimulus.

The chart above, from Global Trade Information Services, details what happened in polyethylene (PE) in Q1.

The chart includes combined January/February volumes (red column) compared to 2011 (green) and 2010 (blue).

As Paul Hodges also points out, it shows that:

•Total demand is up only 12% versus 2010, well below GDP growth.
• Local production is up 28%, despite last month's slowdown.
• Overall imports are down 1%, whilst exports are up 160%.
• Middle East and South East Asian net imports have grown rapidly.
• North East Asian, NAFTA and EU net imports have fallen sharply.