Asian Chemical Connections

......spare a thought for whoever at Formosa ends up carrying the can for perhaps the biggest blunder in the history of petrochemicals. Any other candidates?

A guest blog - see Vanishing Post Boxes on this great blog by the authors of the book Freakonomics put me in mind of all those demand and supply forecasts that are invariably wrong.
Yes, I know I've written about this ad nauseum - see my last article on this subject.But surely, there has to be a better way of reaching investment decisions, a method that doesn't just cover your backside by using a consultant as a convenient whipping post.

The International Energy Agency has further brought forward its forecast on when China will become the world's biggest polluter to 2007 from 2010. Only three years ago, they were predicting not before 2025!
Coal-fired power stations are big cause of rising greenhouse gas emissions in China, says the IEA.
Will this result in a harder approvals process for not only coal-fired power stations, but also coal to chemicals?
And what about the international response to China's growing greenhouse gas threat? Will it become harder to invest in China?
Or do you care? Maybe not now, but you might in a few years' time when you either cannot build more ethylene and C2 derivatives to serve the China market, or have to find some new, cleaner ways of making C2s from renewables.

The industry we work either for or with is about as popular as George Bush Junior at I was about to say a wedding party in the Gaza Strip; but actually probably about as popular as George Bush at just about any wedding party in the world, even in some parts of Texas these days.
The point is we need some imaginative rebranding and advertising. A great example is this highly amusing ad from the agency BBH http://www.bartleboglehegarty.com/ for Smirnoff Raw Tea http://www.youtube.com/watch?v=PTU2He2BIc0
This is one of my familiar old themes, but if we can use this level of imagination in our marketing and job-recruitment efforts, we might start attracting more young people into the industry. We want the YouTube and My Space generation who might even - and let's be optimistic here as it's early in the morning my time - begin their careers wanting to make the world a better place through chemicals, Of course, they will inevitably end up bitter and twisted thanks to the corporate machine.
But still, we might end up with enough recruits to run the chemical plants and businesses of the future. We could also win the general public over, thereby reducing pressure for more nonsensical legislation like Reach.
Interested? Let's hold a "Marketing The Chemicals Industry" conference.

Petrochemical markets are being badly ruffled by two recent Chinese government decisions.
In late June, there was the decision to change the VAT export rebate system for yuan-priced product.
And then this week there was a widening of the deposit rules governing import duty and VAT rebates on petchem imports priced in US dollars.
But beyond the immediate disruptions to imports and domestic sales, the long term implications could require a major strategic shift by chemical companies.
See below for detailed anaylsis. But in short here, as China phases out its low-quality manufacturing through these and quite possibly other further measures, chemical suppliers will have to move up the value chain with their customers.

As everyone focuses on when the next downturn might arrive, macro issues such as the implications of a likely US withdrawal from Iraq are rarely publicly discussed.
But if I were on the board of any company making investment decisions, I'd be worried.
If the US withdrawal from Iraq is well managed then fears such as those expressed in this article will come to nought. Sadly, "Iraq" "the US" and "well managed" are words and phrases that rarely share the same sentence and so the future looks a little shaky to say the least.

......how long will it last is the inevitable question. Demand growth has been so strong so far this year with very little new production coming onstream that while crude oil and the price of monomers have set a floor for pricing, they no longer appear to be the main drivers behind fluctuations and increases; in other words, supply is so tight that it is the demand pull rather than the cost push that's the dominant factor behind pricing this year. The attached slides from Chow Bee Lin, Senior Editor at ICIS pricing, illustrate this point - Download file
But Chinese inflation is rising. This has led to negative real interest rates on savings, leading to money being poured into ever-more frothy (remember, lots of froth makes one giant bubble) local equity and real estate markets.
Inflation everywhere could be back with avengeance - made worse by the US interest rate cut that has led to more hot money flowing out of the US into China, India and other developing countries.
Plus there are the long term implications of the global credit crisis beyond. A lot of the polymers being shipped to China and elsewhere are for re-export to the US and Europe as finished goods.
And, of course, the second half of next year marks the beginning up the big new capacity upsurge.
But the doommongers, including myself, have been calling time on the industry upcycle for three years now.
Maybe the super-cycle, as it is now lovingly called, will continue if demand growth in Asia continues to accelerate.

Maybe I've been to too many conferences this year, and indeed over the last decade, and have seen too many forecasts go wrong.

Call me cynical, or plain wrong, but...........

With naphtha prices so high, heavy aromatics and pygas feedstock for producing benzene are not only expensive but are also in tight supply due to operating rate cutbacks.

Longer term also, as we've already discussed here, there are major doubts over whether China will produce enough naphtha to operate all the petrochemical projects it is building when the priority is gasoline and diesel production.

The economics of naphtha and pygas-based benzene look seriously challenged, therefore, both in the short and long terms.

And as the extended article below warns, watch out for King Coal as China ramps up exceptionally economic coal-to-benzene production

I sincerely hope not, but all the signs are there because of:

*A financial crisis which nobody again saw coming, this time with global implications

*What could prove to be too much spending on new equipment and capacity. This time high equity prices have paid for these investments rather than US dollar-denominated bank loans, as was the case in 1997.

The fundamentals are still strong, as today's article from ICIS news on share-price collapses points out. Asian demand is at much higher levels now than 11 years ago.

But the power of sentiment should not be underestimated.

It's too early to read the long-term effect on petrochemical pricing. More volatility seems certain with sentiment driving shifts in pricing on every piece of negative or positive economic and stock market news.

Lower feedstock costs on cheaper oil will also play a role, but as the extended article below points out, the impact on the real economy will take time to assess. It is this impact that will set the long-term direction and determine whether we the downturn has, finally, arrived.

I could easily be accused of ceaseless pessimism, but growth in China is moderating - regardless of what your view is of the extended article below on the impact of the bad-weather crisis.

Slowing exports were already eating into estimates of GDP growth, and these estimates surely what companies can expect in chemical export volumes to China, before the arrival of the worst snow storms in 50 years.

Shortly after I wrote this article (see below) on the doom and gloom surrounding China polyolefins markets, hey presto, prices rallied and I was wondering whether I needed to be wiping egg off my face.

But shortly after the slight rally occurred, a polyolefins trade told me it was likely to be the last margin grab, the last push to maximise earnings on the back of stronger crude as stock markets around the world tumbled and investors piled into commodities. However, prices did enter new territory - in the case of most grades of PP, for example, breaching the US$1,5000/tonne barrier on a delivered basis.

I think he could've been right. Based on the assessment of PE and PP markets by ICIS pricing last Friday, it certainly seems as if the recent retreats in crude (brought about by a realisation that weaker economic growth will ultimately undermine demand for oil and other commodities) and concern about the impact of the likely US recession has led to greater caution among buyers.

And, as I keep saying, this caution comes as the buyers prepare to benefit from the great supply surge.

The mood at the recent NPRA International Petrochemical Conference in San Antonio, Texas, was mixed, despite all the economic gloom.

Some producers said they were still making money - especially those selling into manufacturing sectors benefiting from a rise in exports due to the weak dollar.

What's certain, of course, though is that things will get worse regardless of the health of the global economy. The down cycle is just around the corner.

But we could quite easily see, as this extended article below speculates, another period of under-investment following all the over-investment that markets will need to absorb over the next 3-4 years.

Plus ca change, plus c'est la meme chose.

Very interesting speech from Alan Kirkley, Vice President of Strategy and Portfolio for Shell Chemicals, which first of all goes over the predictable ground of where we are in the cycle and the threat from the Middle East.

However, he then makes the valid point - which I made earlier this week - that the end of the world has not necessarily arrived for the US and Europe.

There are some big question marks over how much more capacity the GCC region will be able to add post-2012, and perhaps even further afield as global LNG markets take off. Gas cracking may no longer as consistently benefit from feedstock at virtually give-away prices.

The likes of Shell and ExxonMobil have existing technology and know-how to make more highly competitive basic petrochemicals - and to take maximum advantage of the petrochemicals/refining interface.

Kirkley predicts that there will be an increasing use of hydrocracking to make petrochemicals, tapping into light ends that have a diminishing value in the gasoline pool and more revamping of catalytic cracking capacity towards olefin production.

Given the likely continued high cost of EPC and raw materials, anybody with a fully depreciated refinery requiring only relatively modest investment could be in a strong position.

But, of course, the first task is to survive the current downturn in one piece.

First of all, apologies to readers for my complete neglect of this blog over the last six weeks. I can only plead overwork and being too stunned by the collapse of the global economy to think about the blogosphere.

I promise regular posts from now on, provided I am not once again dazzled by the headlights of the advancing global-calamity juggernaut.

Now to the actual first post since early June: The recent fall in crude prices provides some hope for hard-pressed liquids cracker operators confronting the squeeze of higher feedstock costs and weaker demand.

But the pricing decline is partly a reflection of just how bad demand has become - surpassing all estimates of reductions in fuel consumption in both Asia and the West. It's not just energy efficiency triggered by high prices that has driven crude down, but also the credit crisis.

Another reason why crude has fallen was the decision by the US to meet with Iran.

Fundamentally, crude supply remains constrained and it would only take an Israeli attack Iran (a strong possiblity over the next six months) for oil to reach $200 a barrel.

Commodity chemical companies need a different approach to customer management, new methods to deal with with highly volatile raw material costs and fresh ways of keeping costs down. Otherwise those without feedstock advantages are in danger of going bust.

ICIS training plans to run hands-on courses, complete with exercises on customer management, negotiation skills and price assessment with our partner - International eChem.

This article from The New Scientist suggests we might have to develop a whole new way of asssesing what drives all commodity markets.

Intuitively, everyone knows that the herd instinct matters. But to measure this mathematically, or statistically, seems a mountainous but fascinating challenge.

At least it will keep the a few academics off the streets for a few years and journalists busy writing articles.

Regular readers of my blog might have seen last week's post linking through to the New Scientist article about research into new ways of assessing how markets behave. Prompted by the irrationally steep falls triggered by the credit crisis (or maybe they were reverse - the previous high valuations were based on irrationality, leading to a return to 'fair value'), the research looks at herd behaviour. Researchers are trying to quantify the influence of rumours over privately held views and verified and publicly available information.

Now The Eonomist has written about neuroeconomics - the emerging science of using magnetic resonance imaging (MRI) scans to study how emotions affect behaviour.

Companies in years to come might be able to install hidden MRI devices that can map the feelings - and therefore the likely buying or selling positions - of suppliers, customers and competitors.

Imagine waking up in the morning, ringing up your ethylene customer and saying "My offer price is $1,150 FOB Korea only to be told "I know already and I know this is irrational and not based on your real cost position. Did you have an argument with your wife last night?

In my previous post, I talked about the collapse of the Doha round of trade negotiations and how this didn't auger well for a new global agreement for setting greenhouse gas-emission limits and a worldwide price on carbon.

The chemicals industry needs clarity. A global price for carbon would enable companies to plan R&D investments over the long term.

I also discussed how it seems more than likely that if no global agreement on carbon prices was reached, countries and regions with pricing mechanisms already in place would have to impose import tariffs based on carbon content. The tariffs would be levied on intermediate and finished goods from places where there were no carbon-pricing mechanisms.

But in this thoroughly globalised world, who should bear the blame for CO2 and other emissions?

Christopher L Weber from the Carnegie Mellon University in Pittsburg, Pennsylvania and his colleagues have concluded that one-third of China's CO2 emissions are the result of exports. This is up from only 12% in 1987 and 21% in 2002.

Could proof of collective blame for emissions made through the WTO or other international bodies result in icarbon mport tariffs becoming unworkable?

You could spend fruitless years and millions of dollars in lawyers' fees trying to determine what percentage of tariffs to levy on companies at different points of production and logistics chains.

Shouldn't anyone who exports to China - whether for re-export or domestic use - carry the can for the country's emissions?

Might unworkable import tariffs force the EU to scrap or limit its cap-and-trade system out of fear of an investment drift?

The next US president could also be deterred from introducing a price on carbon, especially if the economic crisis drags on. Protectionist sentiment has risen since the slump began.

A consultant once told me a wonderful story - so wonderful I don't even care whether it's true or not - about how the monthly European benzene price in the 1950s was calculated based on the US price once the latest issue of Chemical Market Reporter had arrived in Rotterdam by boat.

Are we now wasting time and money on dealing with market volatility that's the result of how we gather and process information?

Nicholas Carr of The Atlantic.com argues that the Google age is making us think and behave differently.

The furious linking between one site and the next, the feeling of never knowing enough, of never being entirely up-to-date, might have turned us into what the playwright Richard Foreman calls "pancake people". In other words we have a broad range of knowledge thanks to all that surfing - but have an inability to read more than a couple of pages of text at any one time and to take a break from information-trawling long enough to consider what we have read. We have, as a result, lost our intellectual depth.

As our attention spans ever-shorten with the volume of information and information-solutions out there, are we making energy and chemical markets more volatile?

Are we no longer able to take a deep breath and stand back and contemplate what is really going on?

The financial players and the physical traders contribute to erratic price movements because they have an interest in volatility, but to what extent?

Could it be that the way we gather and process information plays a bigger role in erratic price movements than the speculators?

Fundamentals still play the biggest role. For example, oil supply is so stretched that the slightest disruption to production - or even only rumours of a disruption - can have a big effect on pricing.

But the speed with which information is flashed around the globe and how we react to that information might be increasing volatility in tight markets such as crude.

Quantifying the impact of the way the Internet is shaping the way pricing markets behave could be a job for the nueroeconomists who I wrote about earlier this month.

Perhaps the good old days were better, when CMR arrived by boat and a few wise old men with leather patches on their jackets puffed on their pipes and came up with a benzene price that was more stable and less damaging to both buyers and sellers. Or is this just rose-tinted and ill-informed nonsense?

James Burke (see picture above) has so far been proved wrong about the information technology revolution giving us the ability to be free, to create our own realities and to not be dictated to by governments, companies or other institutions.

In this clip from his wonderful series, Connections, he envisages such an era because knowledge will be freely available.

This is the great democratisation of knowledge written about by Chris Anderson in The Long Tail.

Sadly, the reverse has happened. We have become a slave to our machines - from our mobile phones, to our Blackberries to our PCs - and a slave to markets that we are nowhere close to predicting or controlling.

But give Mr Burke a break. His programme was broadcast in the 1970s, was way ahead of its time and perhaps so far ahead that one day his prophesies will come true.

A drowning man will grab hold of any floating debris - even a plastic bag made from standard-grade Chinese polyethylene (PE).

Hence, last Friday a statement by Wang Tianpu led to a few days of excited speculation about the cancellation of several Chinese cracker projects.

The president of Sinopec Corp, the Hong Kong-listed arm of the Chinese refining and petrochemical giant, was quoted in press reports as saying that projects that had already been postponed would be suspended indefinitely (taken as a face-saving euphemism for cancellations). He also reportedly said that the pace of other projects would be adjusted.

"Fantastic. At last we are seeing some commonsense," said a Singapore-based executive with a Western polylefins producer.

Sadly, though, only a few days later, Tianpu amplified his statement by saying that 2008 petrochemical expenditure would be cut by only $675m - amounting to much less than the cost of one cracker.

The excitement that greeted his first statement was the result of concerns over just how bad conditions could become over the next few years.

The hope was that a much bigger budget cut might take place - affecting the timing, or even the continued existence, of projects slated for commissioning in 2009 and beyond.

ICIS Plants & Projects estimates that 21 per cent of global ethylene capacity additions in 2008-12 will be accounted for by China.

The Middle East will be responsible for a further 36%, resulting in worldwide C2 capacity increasing to 156.3m tonne/year from 135.5m tonne/year.

China has every strategic reason to push ahead with more petrochemical capacity, even if growth looks precarious on the back of the likely frequent boom-and-bust cycles created by tight crude markets.

And we all know about the Middle East advantage, even if it might be eroding a little on tighter feedstock supply and higher capital costs.

"The knowledge society will strike back - eventually. Energy efficiency and renewable energy will be rewarding projects," says Norbert Walker, Chief Economist at Deutsche Bank in his Asia Trip Report 2008.

So if you are not in the Middle East and not in China, are not moving up the innovation curve or don't have good refinery-petrochemical integration (ideally, you will have a combination of all the above) you are in big trouble.

You're only option is to sell your business to some gullible fool during the next up cycle -but you'll have to be quick as the recovery is unlikely to last for long!

Yes, that's my target for the truck above, which is actually for 4-11 year olds and my son is only 22 months - but what the hell, don't we all deserve a second or, in my case probably a tenth or perpetual, childhood? And I am trying to teach him the value of recycling (the above picture is of a recycling truck) - even more bad news for the conventional chemicals industry.

The truck was S$249 (Singapore dollars) two weeks ago, has fallen to S$199 and surely has much further to go as the deflationary spiral begins to bite. My target is S$100, provided, of course, it hits this level before Santa sets off with his reindeer and his elves etc (poor old reindeer - less carrots this year, and I imagine Santa will be laying off some of his little helpers and moving those he retains to flexible short-term contracts with less healthcare and other benefits. Do the elves have a union, though? Not sure...answers, please).

But the serious point is that the deflationary vicious spiral - delayed purchases and higher savings rates leading to worsening corporate results, more unemployment and further delayed purchases - may have only just begun.

I remember reading an article in The Economist a few months ago which concluded that the US would not suffer a Japan-style decade-long slump because it had inflation. Not now.

Down every product chain, in the case of lego from crude oil to the plastic (acrylonitrile butadiene styrene) to the finished goods, inventory has been manufactured using high- cost raw materials. Remember when crude was above US$100/bbl? It seems almost a distant memory.

So this means everyone - from the retailer in Singapore selling my boy's truck right up to the ABS producer and the cracker, aromatics and refinery operators - will have to endure lots of hair cuts in this first circle of the deflationay spiral.

Volker Trautz of LyondellBasell is right to say that destocking of this nature is a big cause of weak demand at the moment - and that the true nature of underlying demand might not emerge until Q1 next year (see below for interview).

But by the time the first quarter comes around, we could be into the second loop of a deflationary spiral that might push is into something as bad as the Great Depression, or a global version of Japan's long and painful economic paralysis.

What's your strategy to survive this?

18 November 2008 17:45 [Source: ICIS news]

HOUSTON (ICIS news)--Petrochemical customers have cut purchases as they expect prices to continue falling - a trend that has masked the true level of demand during the global economic slowdown, the CEO of LyondellBasell said on Tuesday.

Starting in the third quarter, customers reduced purchases on the expectations that prices would fall in upcoming weeks, said Volker Trautz, LyondellBasell CEO, during a conference call.

Such destocking accelerated in the fourth quarter, Trautz said.

At the same time, demand has dropped because of the global economic slowdown, he said. "The economy has clearly slowed."

LyondellBasell will not have a clear picture of underlying demand until the first quarter, he said.

As it is, LyondellBasell has idled an olefins plant and reduced operating rates as a result of the slowdown, Trautz said. The company has also shut down polymer plants.

The company has reduced its 2009 capital expenditures programme to $800m (€632m), the minimum deemed necessary to meet safety and environmental standards, Trautz said. LyondellBasell has also adopted a cost-cutting programme.

In the upcoming months, LyondellBasell may consider selling off noncore assets, such as real estate, the company said.

In all, the company should generate cash in the fourth quarter, which should allow it to reduce its net debt, Trautz said.

In other news, LyondellBasell expects to remain in compliance with its covenants in the fourth quarter and in 2009, the company said.

($1 = €0.79)

By: Al Greenwood
+1 713 525 2653

We need great leaders in the current crisis.

Below is the kind of speech I'd like to hear from my CEO - delivered in person - if I worked for a chemicals company.

Everything that now follows is fiction and any resemblance to an industry leader, either living or dead, might sadly be purely coincidental:


"Things are really bad - there is no disguising it, and they will get a great deal worse. This is at least the worst global economic crisis since 1980-1982. Conditions are a lot worse than during the Asian financial crisis of 1997-98 when markets fairly quickly recovered.

"The financial security of hundreds of families depends on our company. Many of the main breadwinners of these families work for us.

"I have been through this myself - I was made redundant. It's not just the money that counts, it's the loss of self-esteem - because work for many of us goes to the core of how we define ourselves, of who we are, of what we mean to ourselves and others."

"I will do my very upmost to avoid having to tell anyone to leave for economic reasons. The only reason I will willingly let anyone go is if they make a careless mistake.

"We are all in this together, we must watch each others backs, support each other, encourage each other - and try not to make any mistakes.

"I would rather see volumes go down substantially than for us to acquire raw material from suppliers or sell product to customers in difficult financial positions.

"We need excellent market intelligence on the viability of all our suppliers and customers. How strong are their business models and credit positions? This knowledge needs to be constantly revised.

"I am not asking you to take any risks out of anxiety to achieve unrealistic sales targets. I will be revising those targets down, and will revise them and down even further if necessary - regardless of the initial impact on our share price.

"I believe that caution over business conditions will earn us the long-term support of our banks and our shareholders. I really don't care about my share options in the short term - all that matters is that we survive this together. And anyway my share options - and those of the fellow directors - will be worthless if we go bust.

"We cannot afford to make the mistakes of overbuying raw materials or over committing on sales because of our own credit position, the extreme energy-price volatility and the uncertainty over what is 'fundamental' demand'.

"Inventories have been run down because the industry was living in chemicals 'parallel universe', as Paul Hodges of International e-Chem so rightly pointed. Stocks were built-up earlier this year as crude prices soared on anticipation of further price rises up and down the product chains.

"This flew in the face of clear signals that the economic crisis was deepening. These signals included the collapse of Bear Stearns and the US government rescue of Freddie Mac and Fannie Mae. We were also guilty of this and I take the responsibility for following the herd.

"Once bitten twice shy and so everyone is as a result keeping stocks low. And as I've already mentioned, energy-price volatility and the uncertainty over demand is depressing buying and selling activity. Inventories are also being kept to a minimum due to the financial year-end.

"This means that I do not see our raw-material costs and finished-product prices moving up by anymore $20-30/tonne until at least the New Year and so there are no substantial gains to be made out there. But pricing hasn't necessarily hit the bottom and so declines could be much bigger than any temporary and slight increases - so the danger of taking a risk for the potential of a very small gain is the risk of a huge loss!

"But I am telling my sales team to be prepared for sharp upward price corrections at some point - possibly as early as January 2009. Demand is still out there, if only at very-much reduced levels, and once the end-user demand re-emerges, our prices could literally double overnight from very low levels.

"This creates an even greater risk for us and so the policy will remain the same: be cautious, don't take risks and if you miss targets and there is good justification for doing so, you will not be penalised. I would rather lose the odd upside deal when prices start rising and falling in large amounts than run the risk of a disastrous mistiming of raw-material buying and an increase in our operating rates.

"And finally, let's forget about the crisis for the rest of this evening. DINNER'S ON ME - LET'S GO AND GET DRUNK."

"
Yes, a great story in The Daily Telegraph describes how bankers are being written into Christmas pantomimes in the UK as villains. Their reputation has fallen almost as low as that of marketing executives.

But the few bankers that are still around are still shamelessly peddling their wares, including hedging mechanisms for the poor old chemicals industry. The other route to wealth for monsters of leverage is buying plants from bankrupt companies and leasing them out to operators with sufficient cost control to meet whatever feeble demand remains over the next few years.

On naphtha, the more immediate problem is a seriously weird market. As of Friday last week, naphtha was trading $257.50-258.50/tonne CFR Japan for first-half January delivery, according to ICIS pricing.

West Texas Intermediate crude was meanwhile at $53.50/bbl, meaning a multiple of crude to naphtha of less than five times compared with the usual eight or nine times.

In the normal world you would expect refiners to make big run cuts in response to abysmal petrochemical demand for naphtha and the collapse in gasoline consumption. This would restore multiples close to their historic norm.

But as everyone knows, we are not living in a normal world.

The heating oil season, though, is beginning in the northern hemisphere, creating the risk that naphtha might increase.

Would it be wise to lock in cheap prices now through either hedging or stocking up on physical cargoes, just in case naphtha returns to its usual relationship with crude?

At some point, petrochemical demand has to improve, no matter how anaemic. In such an event, prices might literally double overnight from their historic low levels - meaning good returns for anyone who has locked in their feedstock costs.

Is my colleague in London a cat lover? I am, but did not take offence at the analogy.

If I knew when chemicals prices were going to rebound, I would tell you - but only for some hefty fees.

By Nigel Davis
LONDON (ICIS news)--Beware the 'dead cat bounce'. Global chemical market intelligence service ICIS pricing editors are seeing some spot prices in Asia moving up from recent lows although contract prices remain severely depressed.
Are these the first signs that feedstock-to-product price differentials are recovering?
A dead cat bounce is a "figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals in the stock," according to Wickipedia. It is derived from the notion that "even a dead cat will bounce if it falls from a great height".
As with the world's stock markets, it is too early to call the upturn with anything approaching a degree of certainty. Chemical prices globally are falling because of much weakened feedstock costs.
Oil prices this week have dipped below $50/bbl which is hardly a position from which chemicals prices might be expected to recover.
But looking beyond that, it is the global demand slowdown that is giving the worlds' chemicals markets the jitters.
Industry economists work with real data and they have little visibility. Their forecasts make salutary reading.
The American Chemistry Council's (ACC's) chief economist, Kevin Swift, for instance this week told the New York Society of Security Analysts (NYSSA) that chemicals production in the US could fall by as much as 5.7% next year. This is a forecast for the sector excluding pharmaceuticals.
In the ACC's 2008-year end analysis and outlook Swift notes that forecasting now involves considerable uncertainty.
The general consensus, however, is that recession is spreading across the globe and this is affecting the business of chemistry worldwide.
"Global business of chemistry growth has essentially stalled since earlier in the year, with outright decline in the developed nations and slowing growth in most developing nations," the ACC's report says.
"As a result, global output will moderate significantly in 2008 and will further slow in 2009 before a recovery emerges in 2010. For the business of chemistry in the US the recession will adversely affect demand into 2009, resulting in lower production volumes."
Other sector economists point to slowed growth in the US and a sharp slowdown in Europe, Japan and elsewhere. The outlook is hardly bright, whichever way you look at it.
Analysts have continued to talk about the lack of visibility for the sector which is battling the demand slowdown, or rather consumer disinterest, against the backdrop of lower feedstock and product prices.
Demand has all but ground to a halt in December across great swathes of the sector. The (multi) million dollar question is when will it return.
Producers widely believe that demand will return once price/feedstock cost ratios have stabilised. There will be a new floor from which producer might expect to see greater interest in their products and from which they could hope to drive prices higher.
But we have yet to find the floor in relation to feedstock costs. And the chemical industry's customers themselves are not exactly overwhelmed with new orders.
The situation could change but is unlikely to do so rapidly and certainly not before the start of the New Year.
Swift suggests that the indicators for the US economy will become more negative as consumers retrench, sales fall, inventories rise, and production falls, which is hardly good news for chemicals.
A similar patter of reduced payrolls, mderating incomes and a "viscoious self-reionforcing cycle" is seen across other major global economies.
It pays to look forward, certainly, but it is too early yet to be overly optimistic. "Things will get worse before they get better," Swift says in his latest ACC report, "but eventually they will get better when confidence returns".

I was working with a chemicals consultant last month in India who gave me this priceless description of the true nature of a company:

"A company is a collection self-interested individuals who just occasionally -- and purely randomly - carry out actions that are for the benefit of the company as a whole".

Sounds like a comment, or a moan for those who actually care about who they work for, worth submitting to Lucy Kellaway, the corporate agony aunt, at the Financial Times.

In these straitened and grim times, the potential for office politics and such pontificating on the nature of the corporate world - as people sit around twiddling their thumbs and waiting for the bankruptcy administrator - must be huge.

Everyone will be looking for someone to blame. I blame Eric Cantona for leaving Leeds.

OK, this blog is supposed to focus on the long term, but in line with just about everybody else, all I can think about is the immediate and my collapsing share portfolio and the value of my home.

As a bit of light relief (and also, by the way, because it's my job) I've been taking a close look at polyoefins markets over the past week. More to follow on aromatics later.

It does appear as if current price levels are unsustainable, that buyers know it and that some modest further price gains are possible.

Some modest re-stocking was inevitable after the inventory-loss disaster of H2.

And the world economy hasn't completely stopped. Maybe we are only (?!) talking about 10-20% of lost demand into mainly consumer durables.

Perhaps also crude can't fall that much further, providing a floor for polyolefin pricing.

But the question now is how long pricing will remain around this new level, fluctuating by small increments with buyers maintaining an incredibly cautious approach.

If quarters turn into years, who will be left to pick up the pieces when the economy finally recovers?

At the moment, a shell-shocked chemicals industry is still recovering from the impact of destocking following the huge inventory write downs in Q4.

The next step will be to measure the state of genuine, end-user demand and how this compares with the fantastic growth we saw in 2003 right through until the end of H1 2008.

Comparisons will inevitably look bad, even if, as some hope, recovery arrives in the second half of this year. This is bound to have a pyschologically dampening effect on markets.

Plus, chemicals and plastics markets are about to be roiled by large amounts of new capacity.

Recent price rises in the aromatics and olefins chains might, therefore, be reversed.

And so cost will remain King in the second of 2009, and perhaps for several more years.

The rise of private equity in chemicals, which I examined in a previous post, resulted in claims that the sector's more efficient management techniques would result in money being made "even at the bottom of the cycle".

But key to survival may no be longer innovative financial engineering and cutting costs social and bureaucracy costs incurred by previously much bigger, listed companies.

It might instead be all about chemical engineers getting every last cent of value out of production processes through optimising "every pipe and every valve," says my colleague Nigel Davis - editor of the Insight section of ICIS news.

It will be fascinating to watch how this plays out - and what becomes of chief financial officers.

Herein begins an occasional series where I offer advice on how to make a little cash.

By the way, is it me or do I get the sense that a lot companies haven't woken up to the severity of the crisis we are in? A recovery this, and I think quite probably next year, is out of the question. We need to find new sources of growth to replace the US consumer who isn't going to start spending money again in the same volumes as before for a good many years.

Anyway, here is my handy tip: purely by coincidence discover one day that quite fortuitously you have priced your local product so high - way above international levels - that this has attracted competitively priced imports. Take advantage of this wonderful, joyouous happenstance, this glorious instance of serendipity and lodge an antidumping petition.

India has launched a petition for PP anti-dumping action against Saudi Arabia, Singapore and Oman. This is the first case of this type in India.

Producers, as we predicted on this blog earlier on, will be increasingly attempting to protect their home markets as everyone searches farther and farther afield to place distressed volumes.

Expect also that countries such as India - which much more lower applied than bound tariff rates under its WTO agreement,- will seek to raise tariffs to maximum levels predicted by the international trade body.

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Petrochemical markets, as is the case with stock markets, are I believe in the midst of a bear-market rally.

As chemicals consultant Paul Hodges predicted on his blog last year, restocking in Q1 was inevitable after the great inventory run-down of the fourth quarter.

Paul has consistently made the right calls on the economic crisis and on its implications for the chemicals industry. His accuracy in predicting the major events - from crude-oil pricing to the collapse of Bear Stearns - can be demonstrated by visiting his blog.

Read his post today which provides are summary of how we got we are and where the global chemicals industry appears to be heading.

Petrochemicals benefited from the Q1 restocking, of course.

We have also seen an across-the-board price rally sustained by a lot of speculation in China made possible by ample availability of credit. The question now is whether credit will be restricted as China becomes concerned over inflation.

Petrochemicals pricing has also been supported by stronger naphtha due to firmer crude, first of all because of refinery rate cuts when the Q4 crisis occurred and more latterly a huge programme of refinery turnarounds in Asia. According to oil and gas consultancy Purvin & Gertz, this turnaround programme is due to come to an end around June.

Naphtha supply will increase in H2 on more exports from India, higher production from one condensate splitter in the Middle East and the start-up of another splitter. Supply could increase in Asia by 20-30%.

I think crude is likely to trade around the $50/bbl mark for the rest of this year so this will set a floor for liquid-feedstock costs.

However,I don't believe that petrochemical producers will be able to use tight naphtha as a justification for maintaining current price levels because of the increased supply.

Petrochemicals supply will also lengthen when Asias' big cracker turnaround season ends after June.

Middle East project delays are likely to continue, but some further extra supply in polyolefins, MEG, aromatics and propylene oxide (PetroRabigh is in the process of starting up the region's first PO plant) can be expected in H2.

The second half of the year could also see the start-up of lots of capacity in China. But how much volume actually hits the markets will have to be closely tracked.

Demand will be better this year than in 2008, but hey, so what?

Last year was exceptional bad because of the destocking, and all the economic uncertainties will not be compensated for by the boost from government stimulus packages.

So, in short, expect feedstock-price support to weaken and for petrochemical supply to lengthen in a persistently weak demand-growth environment.

The big unanswered question is to what extent the recent price prices were also the result of speculation in China. In methanol, an incredible two-thirds of Q1 imports were for speculation on futures markets.

As Paul again points out on his blog, the volume of contracts being traded on the Dalian Commodity Exchange is nothing short of staggering (an average of 1Om tonnes a day during the first quarter!).

Has this contributed to LLDPE prices trading above LDPE over the last few weeks for the first time in two years?

How much of the chemicals and polymers that have been imported into China recently, or purchased locally, and are being held in inventory for speculation purposes? To what extent has this speculation been made easier by increased credit?

With as many as 30m migrant workers laid off in China and export-focused factories operating at only 50% of capacity, how can all this increased chemicals trade be justified by an improvement in the final demand for finished goods?

China's economic stimulus package is kicking in. Over the last few days I hear of improved sentiment in China that the worst might be over.

But given that 10-30% of China's economy (depending on who you believe) is dependent on exports, it would take a heck of an effective stimulus package to boost domestic growth sufficiently to replace all the lost export trade in the second half of this year.

We've also picked up anecdotal reports that factories are being kept running by soft loans from banks for social stability reasons.
It's unlikely that the total extra production will replace all the volumes lost through factory closures.

But at the end of certain product chains you could see China exporting deflation in H2 to relieve inventory - another reason to believe that chemicals pricing will decline in the second half.

However, it might not be in China's interests to flood oveseas markets with goods at bargain-basement prices if this triggers international tensions and a further rise in protectionism.

Overseas chemicals players seem to have benefited from the relative strength of China's market with volumes of benzene and polystyrene, for exampe, being shipped from Europe.

Large increases in polyolefin shipments from the US to China are also being reported, in the case of PE the result perhaps of comparatively cheaper ethane versus naphtha.

The word on the street, from our price-reporting team, is that nobody can really say for certain whether the recent price rises are the result of improved demand or speculation.

But add all the above factors together and it seems a sharp correction from June onwards remains very likely.

And the more uncertain that price direction remains the closer the correlation might be between oil and naphtha and chemicals pricing on a daily, weekly or perhaps even a longer-term basis.

In the absence of clear direction, crude and equities might end up as the only guides available (or perhaps chemicals might even move in the opposite direction to equities in China as a lot of traders traditionally move their money between the two - and also property - depending on where they think the next gains can be made).

For the traders in China and those who know know how to play the domestic markets extremely well, it's also a question of maximising returns from micro-price movements.

On a weekly basis, one trader estimates that domestic polyolefin prices have fluctuated by $50-100/tonne in 2009 compared with $40-50/tonne in 2007. Last year can be discounted as an exceptional year because of the inventory building and the H2 collapse so, hence the comparison with 2007.

The Dalian exchange must also be adding to this volatility.

Bear-market rallies are better than no rallies at all, of course, and we could several more rises and sudden dips in chemicals pricing before this crisis is over.

Good news, bad or indifferent? It was hard to gauge a clear picture from the Q1 macroeconomic numbers for China.

While retail sales grew at 14.7% in March compared with 11.5% in February, exports fell 20% during the first quarter.

GDP (gross domestic product) growth was 6.1% for the whole quarter, less than half of the pace at which the economy was expanding in md-2007.

Prime Minister Wen Jiabao has warned against "blind optimism" over the speed of the recovery, according to the New York Times. He cited weak overseas demand, overcapacity in some industriess, job losses and low investment in the private sector as the reasons why the foundations for recovery were not solid.

Export trade won't recover until the Western consumer starts spending again close to pre-crisis levels. Without such spending it might be reasonable to assume that China will struggle to post any further years of double-digit growth.

Overcapacity in some industries includes petrochemicals, although markets have been kept tight temporarily for reasons we've already covered in this blog.

The huge government spending programme planned for refining and petrochemicals could worsen the overhang.

China's petrochemical self-sufficiency ambitions could force all but the Middle East and a few other low cost producers out of being able to export some products to China.

I noticed in this Economist article that industrial production was sharply up in March by 8.3% and I read elsewhere that factory gate prices slipped by 6% - again in March - from 4.5% the previous month.

I've picked up anecdotal reports - again mentioned earlier on this blog - that factories are running hard in the textiles and garments sector to keep people in jobs, aided up soft banks. This conjures up an image of rows of warehouses stacked high with shirts that nobody wants to buy.

Is there a danger that in H2 China will export deflation to relieve some of its finished-goods inventory pressures? If so, what would this mean for the business of chemicals?

A sure way of telling might be a survey of purchasing managers in the West, asking whether they have been offered unusually large quantities of very cheap Chinese goods.

Jun Ma, Deutsche Bank's Chief Economist for Greater China issued a note this morning about the possibility of restrictions on the growth in loans because of poor lending practices.

This followed a warning against credit risks by Liu Mingkang, chairman of the China Banking Regulatory Commission, which this Wall Street Journal article has also picked up.

There are widespread anecdotal reports of commodity chemicals prices being over-inflated because easy lending has made it easier to speculate.

This speculation is across chemicals and polymers, futures exchanges for chemicals and polymers such as the Dalian Commodity Exchange and prroperty and stock markets. The same trader can often be dabbling in all the above.

One of my good contacts and friends had a "Joe Kennedy" moment last week (this refers to the famous story where the father of John F Kennedy was advised to invest in stocks by a shoe shine boy. He promptly went out and sold his shares just in time to avoid the Wall Street Crash).

The trader's moment came when he was asked by a Bangladeshi customer for ten full container loads of polyethylene (PE).

"I knew something was very wrong because there is no way demand in Bangladesh would justify this size of shipment. It was obvious this was for speculation," he said.

This followed a call from a Chinese chemicals trader who had never traded in polyolefins before asking for a cargo on behalf of a friend of a friend. "It was obvious he knew nothing about melt indices, the product or its applications. I could hear the sound of the herd stampeding towards the edge of the cliff."

So the trader liquidated all his positions late last week ahead of what he thought would be sharp price falls in polyolefins in China. It will be interesting to see if he was right.

In the longer term, as the Economist article also points out, better infrastructure - a major feature of the stimulus package - will help boost domestic growth and reduce reliance on exports.

If the government also manages to introduce a good nationwide health and social security system, domestic growth could really accelerate. I would bet that China has a much better chance of success than the US.

But China is China and if there is a way of making money out of a crisis, the famously savvy Chinese traders will find a way.

The danger is that this sends misleading signals about the true state of demand to outsiders - and at the moment, we are all desperate for any bit of good news. Has this made us a little more gullible than normal?

Speculative bubbles in property and construction - brought to an end by credit restrictions- was the start of the country's economic decline, The Economist adds.

Government policy was wrong.

If factories at the end of some chemical product chains are being kept running at high operating rates for social rather than demand reasons, this could turn out to be another flawed policy.

"Nobody can see until the end of the month - never mind into the third quarter," commented an olefins trader recently.

"The reason is that very senior managers are too busy micro-managing everything, from getting involved in trying to track commodity chemical price direction to insisting on signing off every expenditure over a few hundred dollars.

"The problem with these senior guys when they track markets is that they are so out-of-the-loop - assuming that they have ever actually been in the loop - that they don't know what they are doing."

I heard of one big company where the CEO has even insisted on signing off travel authorisation to next week's APIC conference in South Korea.

In these days of tight credit and collapsed sales, it's understandable that much tighter control on spending is essential.

And during the boom years, can we all honestly say that every single trip we made was entirely commercially justified - and that we were always sufficiently foused on the bottom line to get maximum value out of each trip? Look back at your old expenses forms and count up the number of genuine "drinks with Mr Kim" entries.

It will be interesting to see how the lessons being learnt today will be remembered when the economy has fully recovered.

But from a HR perspective, a tough sign-off regime needs to be well-communicated.

So does the senior guys tracking shifts in chemicals pricing - whether competently or incompetently - otherwise the workers on the ground are likely to become demoralised.

They are unlikely to be able to leave in this current climate, but will surely perform far worse if they feel their opinions are being ignored for no good and well-explained reasons.

Off-the-record, of course, how does your company measure up?

And did you fiddle your expenses during the good times?

The timing of when to strike the ball is everything in the wonderful sport of cricket - and also, apparently, in the American pastime of baseball.

An Australian banker is fond of reminding the English how much better his country is at playing cricket.

But his gloating doesn't extend to how well he's been timing dipping in and out of equity markets of late. Like a lot of other "cashed up" people he is suffering from the "if only" syndrome.

"A lot of money seems to be pouring into stock markets because it has nowhere else to go. I didn't expect this run to last as long," he said.

All the moving indicators are pointing upwards with crude above $55/bbl on Thursday where he thought there would be very tough resistance.

"There's so much crude in storage which has been acquired by the financial traders who perceive the economic recovery is just around the corner. This is a big risk.

"Equity markets are also responding as if a recovery is only three months away. They usually price in a recovery about a quarter ahead of when it actually happens, but I believe that the recovery - or rather the bottom of the market - is at least six months away."

And in his view, you have to be very careful how you measure "recovery" in the context of the worst economic downturn since possibly the Great Depression.

The first important measure is the effect of inventory adjustments on GDP (gross domestic product) growth.

In the US, for example, total inventory reductions subtracted $50bn from growth in the fourth quarter of last year, he said.

The first quarter adjustments will see a further $100bn or so of production cuts and the second quarter possibly in excess of $150bn.

The collapse of liquidity in Q4 2008 forced companies across all sectors to make much quicker operating-rate cuts and plant closures than occurred at the start of previous recessions.

"There was simply no re-financing available so the companies had no choice."

BASF has reduced is global production by 25%, Bayer Material Science has taken 300,000 tonne/year of polycarbonate (PC) capacity temporarily off-line and Dow Chemical's average operating in the fourth quarter was just 64%.

"I expect some inventory replenishment down many of the production chains in Q3 in the US, and probably elsewhere," he added.

"This could give the false impression that we have reached the bottom of this crisis and recovery has begun."

Inventory building in Q3 would need to be measured against consumer spending, he said.

Retail sales on big-ticket durable items such as autos and homes might take longer to bounce back in the West than in Asia. Cost consciousness could also extend for some time to clothing, food and tourism.

Individual wealth has been badly dented by the fall in stock markets relative to their peak and the collapse in housing.

"Savings rates are likely to continue increasing as a result of this loss in wealth - even more so if unemployment keeps on rising."

Recoveries in GDP growth in the third quarter of this year would also need to be measured against the same period in 2007 rather than 2008, he added.

"This will give us a measure of how far we are away from returning to the boom conditions of 2004-07."

The crisis began in the third quarter of 2008.

Any comparison between Q4 2009 and Q4 2008 would be even more misleading as the global economy ground to a virtual halt during the last quarter of last year.

Comparing 2007 with 2009 is crucial for the chemicals industry as new capacity was planned on the belief that growth would continue at levels close to the great boom years.

"Even if were still in a global boom we would still need capacity to shut down," said Paul Hodges, chairman of UK consultancy International eChem.

"In most building block products we are now faced with 20% oversupply."

It could be a very long time before the world economy enjoys another period like 2004-07.

Consumer and corporate credit is likely to remain much more restricted because of financial-sector reforms.

"You also have to look at the potential for credit-card debt going bad to undermine consumer spending and the stability of the banks," the banker added.

"The first quarter results of the Western banks were very misleading. They looked good because of a reduction in competition due to consolidations and bank failures.

(Also, the banks could hardly fail to make money as governments were practically giving money away)

"But behind the numbers you could see warnings over just how much bad debt could result from credit-card defaults.

"As much as 25% of the revenues of some commercial banks come from credit-card transactions."

Consumers who are not in danger of default will be eager to pay off their plastic debts rather than incur 20% interest charges, he said.

The other big risk is the rate of recovery on corporate debt that's gone bad. Optimists think it could be as high as 40%, whereas others are warning of returns of as low as just a few cents on the dollar.

There appears to be the risk of a least a double-dip recession - perhaps even three dips.

Commodity chemicals prices started going up before the current equity-market rally.

This followed the deep global production cuts in aromatics, olefins and derivatives and a rebound in feedstock costs.

It's a moot point whether the cuts, combined with delayed start-ups in the Middle East, created genuinely tight markets or just the perception that they were tight.

In the end, though, the result was the same - raising the age-old conundrum of whether sentiment or fundamentals are driving markets.

A danger is that rising crude prices and the stock-market rally could lead to chemicals production being ramped up (if it hasn't happened already), despite the uncertain outlook for consumption.

Confidence can be a dangerous thing.

It's a great deal easier to off-load shares when you think the market has turned than a warehouse full of polyolefins.

The current run-up in equities might go on and on - perhaps even for several years, according to economist Russell Napier.

But he warns, in this excellent video interview with FT journalist John Authers, that an extended boom in equities doesn't necessarily mean the economic fundamentals are sound.

For example,the stock market rally after the dot com bubble burst was fuelled by too-lax lending. Was this in effect a bear-market boom?

Now governments are pouring money into economies the world over to stimulate consumption.

This will lead in perhaps as long as 2-3 years time to a big inflation problem, the Chinese losing their appetite for US Treasuries, Treasury yields doubling and a cataclysmic bear market with the S&P falling to 400.

Until then, S&P could easily double from its March low, predicts Napier

Do you have the courage to stick your money in and wait?

It still feels counter-intuitive that the current run-up will last a few years given the scale of consumer and corporate debt.

But since when has logic had anything to do with anything?

This very interesting note from Jun Ma, chief economist for Greater China at Deutsche Bank (see the end of this post) offers evidence to support what this blog has been worried about for some time - the quality of China's economic rebound.

The government would presumably be less concerned about the sharp increase in loan growth if the extra money had substantially boosted domestic consumption.

Instead, a large portion of the new loans could well have ended up in the hands of speculators (helping to drive chemicals prices up), Factories also seem to have been encouraged to keep operating rates high for social reasons - and state-owned enterprises area wash with cash for industriall investments. This is crowding out borrowing by private companies.

My fellow, Paul Hodges, points out that Wal-Mart is actually reporting a decline in consumer spending at its stores in China.

Net lending falls 70%mom to RMB592bn in April

RMB net lending fell sharply to RMB592bn in April from RMB1.9tn in March, broadly consistent with our expectation. We believe this reflects the success of the window guidance (about 3 weeks ago) by PBOC and CBRC that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget.

Going forward, the continuation of these factors will likely lead to a further decline in net lending to about RMB300-400bn per month in the remainder of this year.

As lagging indicators, the yoy growth in outstanding loans remained at 29.7% in April and M2 growth accelerated a little to 26%. Within a few months, we expect these yoy rates will begin to moderate following the decline in monthly net lending.

We see two main implications from the slowdown in net lending. First, net lending is a good leading indicator for QoQ GDP growth in China, with a lead time of about one quarter. The 70-80% fall in QoQ net lending in Q2 implies that QoQ GDP growth will likely moderate in Q3, following its peak in Q2 (at an annualized rate of 12-14%). Together with other factors such as a more visible corporate capex slowdown and a less supportive inventory cycle, it will likely result in a second phase of economic deceleration (measured on a QoQ basis) from Q3. On a YoY basis, the second down-leg of the economic cycle will likely begin in Q1 next year, as YoY growth lags QoQ growth by about two quarters. Second, net lending has a high correlation with market turnover in the A share market. The decline in net lending growth will therefore likely be associated with reduced liquidity for the A share market going forward.

Yoy inflation falls further in April

CPI inflation declined to -1.5% yoy in April, down from -1.2% in March. Producer prices are also declining, falling 6.6% yoy in April, vs a fall of 6.0% in March. Both figures are identical to our forecasts. In the CPI index, a 0.8%mom decline in food prices led the index down. Other commodity prices were essentially unchanged on the month according to the Ministry of Commerce. We expect yoy CPI inflation to remain in negative territory for another three or four months and PPI inflation to remain negative for six months. Upside risks to inflation stem from the possibility of higher wheat prices after a drought earlier in the year and the possibility of higher pork prices as farmers have slaughtered pigs in recent weeks due to the 10% drop in pork prices amid the Swine Flu outbreak (note that mainland China reported its first confirmed swine flu case today). Month-on-month PPI inflation - much more influenced by non-food raw materials prices - should recover on stronger demand due to rising gov't-led capex and inventory restocking in coming months, but these price increases may not be sustained beyond mid-Q3 when we think the QoQ increase in the number of new projects starts to fall and the inventory cycle turns less favorable.

Consensus opinion tends to swing firmly in one direction and then the other.

For example, in the good old days of 2007 you would have been pretty hard-pressed to find many in the chemicals industry who saw anything but a mildly cyclical downturn.

But the widely-held view now - that we are facing five years of incredibly tough times, the first period of this length in the history of the business - might also not come true.

"In 1992, the same was being said but then within 12 months the industry was in recovery," said an old industry hand.

"I don't know what the macroeconomic factors might be on this occasion. If I did I could make a fortune. In 1992, it was the unexpected emergence of very strong Asian demand.

"But even if the economic news keeps getting ever-gloomier, the industry itself might make yet more adjustments to bring supply much more in line with demand."

He cited the sweeping production cutbacks that have already taken place as evidence that the will to make the necessary changes exists.

"Leveraged and private-sector companies will just not sit on their hands. In the distant past, action was slow because the industry was mainly state-owned."

These included Dow Chemical reducing operating rates to a 63% average in Q4 last year, BASF shutting down 25% of capacity in Q1and Bayer Material Science idling 300,000 tonne/year of polycarbonate (PC) capacity - again in the first quarter.

The cutbacks seem to have been more extensive than in a recession of this comparable severity - the one which occurred in the early 1980s.

"Chemical companies had no choice because raising working capital through re-financing was simply impossible," says a Singapore-based banker.

Maybe if cash flow remains constrained by ever-weaker revenues - even if the financial system is repaired - companies will face no option but to permanently shut down capacity and definitively cancel projects.

The extent of the capacity closures to date suggests that markets being brought back into balance is possible far more quickly than the doom-mongers (including myself) expect.

A few major bankruptcies might make this process very rapid indeed through closure of a large amount of a capacity in one fell-sweep.

Apologies for letting this blog slip again, but have been busy trying to make a crust presenting ICIS training courses.

And so as a bonus for our army of avid readers, here are my extended thoughts on the above:

In the midst of the economic crisis it would be so easy to bury your head in the proverbial sand and forget that once the recovery does arrive, the same old feedstock-cost problems seem almost certain to re-emerge.

"The profitability of your average Asian naphtha cracker with the right level of investment in derivatives was extremely good throughout 2007. This was particularly the case if you were processing C4s into butadiene," said an industry observer.

"But in the first half of last year margins turned negative because of rising crude and naphtha costs. Every manufacturer down every product chain frantically built inventory because of the fear that oil would reach $200/bbl by the end of the year."

Of course we all know what really happened: Crude prices collapsed in Q4 resulting in the biggest inventory losses in the history of the chemicals industry. Stocks simply had to be liquidated due to the non-availability of working capital.

Governments are lavishing cash on stimulus packages in a desperate effort to return the world to business as usual.

This might on the surface seem the sensible thing to do, but unless that money is spent wisely in boosting energy conservation and renewable technologies, a return to strong growth could hasten the return of $100/bbl plus crude.

There's not much sign of smart investment in China. A surge in bank lending has been used to ramp up steel and aluminium production and provide the finance for manufacturers of finished goods to run their plants hard in order to limit job losses.

China announced a $586bn stimulus package last November and then in March disclosed plans for heavy investment in ten industrial sectors, including refining and petrochemicals.

"While the (investment) proposals may boost the economy, and thus energy demand in the short term, they could also lead to continued growth of energy-intensive industries in the medium to long term," writes the UK-based Cambridge Energy Consultants in an article on its website.

The Obama administration has also come in for some pretty fierce criticism over a cap-and-trade-bill before the House of Representatives. Lots of emissions permits would be given free under the bill, offering benefits to coal-based electricity generators and other energy-intensive industries.

Oil industry experts are queuing up to warn that the economic crisis has cut capital investment by the small independent oil companies in harder-to-get-at conventional crude reserves. The oil majors have slowed down development of unconventional sources of oil, such as the Alberta Tar Sands.

OPEC warned at its recent meeting that the fall in prices was resulting in lower investment, and the Paris-based International Energy Agency estimates that spending on oil and natural gas exploration will fall by 21% this year over 2008. This would represent $100bn less spending on building reserves.

The implications of a return of very expensive crude are obvious for Asia's petrochemical industry, which is largely naphtha-based.

The Middle East gas-based producers would once again stand to benefit due to another surge in margins as, of course, global petrochemical prices are oil-driven.

But what if everyone suffers? Could the return to crude in excess of $100/bbl re-awaken inflation, further stoked by excess liquidity resulting from government stimulus packages?

The danger is that we might repeatedly see nascent economic recoveries nipped in the bud by surging energy costs.

BASF announced last June that it was looking at making petrochemicals from biomass using its catalyst expertise, and said that it had made good progress at the laboratory stage.

Numerous companies were also looking at methanol-to-olefins technologies, including ExxonMobil and LyondellBasell.
China's coal reserves offer an opportunity to make methanol into large amounts of olefins and transportation fuels.

Let's hope that cutbacks forced on companies by the financial crisis have not included freezing research into attempting to break the crude-petrochemicals link.

Another concern is the long-term outlook for naphtha supply.

The US announced new car and truck fuel-efficiency regulations last week, which, in the short term could increase the availability of the feedstock.

By 2016, all new autos will have to meet a 39 miles per gallon standard (mpg) standard, up 42% from the current 27.5 mpg. Trucks will have to do 30 mpg versus 23 mpg today.

"Europe was already heading for an enormous gasoline surplus by 2015 even before this announcement," said Paul Hodges, chemicals consultant with the UK based International eChem.

Diesel demand in Europe has surged at the expensive of gasoline. However, the Europeans have been able to export their way out of gasoline surpluses due to shortages in the States.

But these exports were already under threat from increases in US refining capacity and the mandated steep rise in ethanol blending, added Hodges.

"The new fuel-efficiency standards will increase the pressure for European refinery closures, but in the interim there could be a disposal problem.

"This could create the opportunity for cost-advantaged naphtha supplies into the hard-pressed European and US petrochemical industries."

Eventually, though, refinery capacity will have to close because, as one Asian-based oil and gas consultant put it "there is going to be a worldwide glut of gasoline. Even on a straight-run basis before you look at more advanced processing, there will be a big surplus requiring rationalisation."

It is far too early to say whether refinery closures will lead to a net reduction in available naphtha.

Asia is adding capacity as Europe confronts the need to rationalise. In 2009-10 alone, 2.7m bbl/day of refining capacity is due to be come on stream in Asia Pacific, according to oil and gas consultancy FACTS Global Energy.

But naphtha exports from the Middle East could decline as the region looks to crack more naphtha in order to widen its petrochemical-product slate.

In Abu Dhabi, for example, a naphtha cracker complex is due to start-up by 2013.

Anyone with either access to advantaged ethane, propane and butane or with a proven technology that breaks the refinery/petrochemicals interface might be OK during the next oil shock.

The key for Asian liquids-based producers without either of the above must surely be maximising feedstock flexibility.

This flexibility could include cracking more liquefied petroleum gas (LPG).

LPG should be in abundant supply once liquefied natural gas (LNG) demand is booming again on higher oil costs and rising environmental concerns.

LNG producers either extract the gas during initial processing or leave it in the LNG to be taken out at re-gasification terminals.

Whatever are the solutions, they need to be found and found quickly if surging stock markets are proof of a quicker-than-expected economic recovery.

As I've been warning on this blog for some time, the explosion of credit in China has created a great deal of paper-bottomed optimism over the recovery.

Fitch, the ratings agency, has just raised its macro-prudential risk indicator ffor China from category 1 (safe) to category 3 (Iceland et al) because of the lending surge and public debt.

China's Banking Regulatory Commission warned last week: "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy."

And Andy Xie, the often-quoted Sino-bear, says in the same article I've linked to above from The Daily Telegraph: "Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation."

This is probably one of the main factors behind the boom in speculation in linear-low density polyethylene (LLDPE) futures on the Dalian Commodity Exchange. PVC futures were also recently launched on the exchange.

As my fellow blogger Paul Hodges points out on his blog, Chemicals & The Economy, China is at risk of repeating the mistakes of the West: an unsustainable rise in credit.

The obvious danger, as has been flagged up before, is a sudden collapse in chemicals demand and pricing as inventories are unwound (built up with too-easy) as tougher lending conditions are imposed. This could be an even more dramatic bursting of the current equities and commodity price bubbles if it occurs at the same time as sharp fall in crude (which seems likely if equities are hammered.

Source of picture: gilesbowkett.blogspot.com

The excellent daily energy and shipping report, The Schork Report said today that the bottom had "fallen out of the entire (energy) complex."

With the Bulls on the defensive, the authors believe that crude could retreat towards $60/bbl.

Natural gas markets are so oversupplied that prices in the region of $2/mBTU are possible, it adds.

Back in March, the report offered what I think is the best summary of the denial of fundamentals that's taken over equity and commodity markets recently:

Our concern is this: with each passing session it appears more traders are encouraged to "participate", hence, the market keeps moving higher. That happens enough times and soon you have $100 oil and Matt Simmons all over the tube alleging the Saudis are doctoring their books and that Petrobras and ExxonMobil didn't just find all of that oil in Brazil. Then, just like we saw last spring, when the price path of the market decouples from the fundamentals, perception trumps reality and high prices become the justification for higher prices. All because the
smart money [sic] doesn't want to "miss out".

Since March, August WTI prices on the NYMEX have rallied from $58.07/bbl to a $73.48/bbl high (+26½%).

Despite some recent headlines pointing to tighter oil supply (for example, more civil unrest in Nigeria and US dollar weakness) the energy-market mood has changed.

Until last week greed seemed to be chasing greed. "The market was going higher...and they (the speculators) went on a buying spree because once again, high prices justified high prices," wrote Schork on July 6.

So what began as a bear-market rally ended up as a growing consensus - which perhaps too few dared challenge - that the recovery would be V-shaped. Doesn't this sound an awful lot like the consensus views of decoupling and ever-rising energy costs which prevailed during H1 last year?

What changed last week was a fall in June US consumer confidence and a sharper-than-expected rise in unemployment. The employment-to-population ratio also fell to its worst level since 1984 and average hourly earnings have remained stagnant in two out of the last three months.

An indication of just how far we are away from a consumer-led US recovery is that US gasoline prices fell last week - for the second week in a row. This was the first consecutive weekly decline this year and occurred even though this is the peak driving season.

Chemicals pricing has increased in line with energy costs - as this chart from ICIS pricing shows. Naphtha, ethylene and polyethylene (PE) have been chosen as examples.

View image

Global production cutbacks and delays to Middle East start-ups have also helped sustain a chemicals price rally which began in February.

Efforts are being made to push through further prices rises. European PE and polypropylene producers are, for example, bidding for 10% July increments. These are aimed at recovering higher upstream costs and improving margins.

But the new capacity won't be delayed forever. China's import demand has already started to weaken on anticipation by buyers of extra volumes in H2 and resistance to price hikes.

This is bad news for the US and European producers. They have enjoyed strong exports to Asia in Q1 and during some of the second quarter, which has helped them keep domestic markets tight.

As I said last week, chemicals companies that have continued to manage inventories well during this paper-bottomed boom will be in a better position than those who have been taken in by the markets.

My last blog entry quoted a North American industry source who was concerned over the potential for physical delivery on the Dalian futures exchange to flood the real market and send prices crashing.

In my ignorance of how futures markets works, and as a typicaql semi-numerate journalist, I therefore asked a colleague with a futures/mathematical bent to help out. This will hopefully allay the above fear.

Here is his explanation (please feel free, as always, to disagree):

If you look at the English part of the website you'll see that several months before a contract expires (.e.g. in April for July delivery) there is an enormous amount of open interest (the dating system is confusing as each contract starts with 10 after which it makes sense).

They will agree in advance to cash settle before the expiry of the contract and so you if then look at a few days before a particular contract closes the open interest declines dramatically as once a contract does close and no cash settlement takes place, physical delivery has to take place. This helps to explain the very small delivered volumes also reported on the site.

See an Insight piece from my colleague Becky Zhang in our Shanghai office -. It seems as if the producers and buyers are not using the market in a big way to hedge; it's more the speculators trying to make lots of good money.

This raises an interesting separate point on the debate over whether there are large volumes of physical polyolefins in inventory.

Why would a lot of people bother renting a warehouse, taking delivery and taking all the risks associated with this when you can just go on the exchange and make money out of purely paper trading?

The other good thing about Dalian, as I understand it, is that you can get your money out straightaway - and with such incredible volatility on a daily basis you stand to make (or lose) money very quickly. This a lot quicker return than waiting to close a physical position.

This still leaves the longer-term issue of whether the market could become a de facto pricing influence. This could happen either because people believe it's important (to use another cliché again a self-fulfilling prophesy) or if the big producers and buyers start using it in a big way to hedge.

This is all work in progress so I will keep asking.

The above also doesn't explain why LLDPE demand has apparently remained resilient in the physical market, even though this is not an agricultural film-buying season.

I am also still working on the issue of the influence of availability of imports of recycled polyolefins.

Source of Picture: http://blogs.suntimes.com/ebert/

We have just started doing our research and so more details later - but see attached this Excel spreadsheet - lendingVDalianOI.xls

It compares the increase in lending from China's banks with the amount of open interest in the Dalian Commodity Exchange's linear-low density polyethylene (LLDPE) futures contracts.

Volume traded on the exchange has risen to mind-boggling heights this year - 99.9% of which is cash settled involving no intention by either party to provide or receive physical delivery.

As you can see from the Excel, when lending rises in one particular month the following month has seen increases in activity on the exchange.

Up to July 17, open interest on Dalian was at Yuan250bn with lending rising by Yuan1.43t trillion in June.

If July carries on its current pace Dalian activity might well exceed that in June after only Yuan664.4bn of credit was issued in May.

"An increase in available credit in China normally takes about a month to find its way into people's pockets and so there may be a correlation," a friend who reports on the financial industry told me over the weekend.

"It would be interesting to also compare the rise in credit with the response of local stock markets (up by around 80% from their November lows) and other physically and paper-traded commodities."

The other way to look at it could be to take the overall rise in credit this year to see the year-on-year influence on markets. This should also include the property sector, which, according to The Economist, has seen home purchases rise by 80% up until June.

Those who speculate on the stock market are likely to also to chance their arm on property - with some of these same gamblers also chemicals traders (so you might seeing switching of exposure between different markets, leading to dips and rises in activity that doesn't always respond in simple straight lines to increased credit; in other words keep it simple by just looking at the effect of the overall rise in lending).

Our obvious next step is also to see if any similar pattern has emerged in "physical" PE markets.

This might go someway towards answering the concern that the price recovery - which still shows no signs of faltering, according to ICIS pricing (see slides below) - involves a great deal of speculation.

PP-PEICIS20July.ppt

Source of Picture: Chinasnippets.com

Perhaps this post will help explain why a perplexed Hong Kong-based financial analyst wrote to me the other day, in response to my probably failed efforts to adequately explain rising chemicals demand in China:

"I stilll don't understand why polymer imports from PP, PE, PVC, and even SM (+15% per month avg) are up by so much this year."

One reason is a property boom that has some scary long-term implications (all the SM for EPS for insulation, for example, and PVC. Despite China's self-sufficiency in PVC local carbide plants suffered when oil prices collapsed.)

Fund manager Stephan van der Mersch, writing on the China Financial Markets blog describes a recent trip to Guiyang, the capital of Guizhou province as follows:

"I thought I'd seen insane excess in the past - 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc.

" We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon. The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction."

Michael Pettis, author of the blog, later in the same post repeats his prediction that China could suffer a Japanese-style long period of slow growth rather than a dramatic crash - because of China's control over the banking system.

But he warns that this could be at the expense of consumer growth, as I had written about earlier on this blog, if the cost of cleaning up the banks is forced onto the public.

And he adds that the current property boom is being driven by:

*Buying sentiment returning to levels of the last boom - 2007

*Developers buying land again, resulting in land prices once more skyrocketing

*Negative real interest rates on bank deposits and, as mentioned many times before on this blog, the explosion in liquidity

*Construction industry loans being rolled over from short into long-term liabiltiies

"If a meaningful portion of Chinese household savings is in real estate that never will be occupied or won't transact for the next decade (and then transacts at a potentially lower rate 10 years out given that the building has been rotting for ten years and the construction quality sucks), are those savings really there?," he writes.

"China needs to increase domestic consumption for stable internally driven growth. You can't increase domestic consumption if you're buying real estate. So this is yet one other way that this whole liquidity injection is preventing a transition to a consumption-based economy. You really do wonder how long the Chinese will keep up this level of "pump priming". If they realize how much they're screwing themselves for the next decade, the central government might just tighten liquidity.'

If and when liquidity is tightened signifcantly in China, a major support to global chemicals pricing and demand wil have been removed.

Michael's blog is currently being blocked in China, he says.

"Bob, I think I we should give this up as I can't get a wireless connection and I couldn't be bothered to talk to anyone."
Source of Picture: Faculty.SMU.Edu

.
......and the effect on the quality of data and analysis is one of my big concerns - particularly at a time like this when petrochemical markets are becoming harder to fathom (many thanks to Andrew Keen and his excellent book, The Cult Of The Amateur).

The overwhelming volume of information on the Internet has led to the emergence of a new breed of journalist/company researcher/data gatherer.

No longer is it necessary to speak to people on the telephone and/or to interview them face-to-face.

Instead it is possible for the clever writer/researcher to compile an article from an Internet search. You can cobble together a convincing story (on the surface at least) by lifting data, analysis - and even quotes - without checking the accuracy for yourself.

The benefit of direct contact with multiple sources is that with experience and over time you get to work out who is reliable and who isn't from your assessment of character and motives etc; in other words, intuition.

There is no substitute for getting out of your comfy chair and travelling through the Chinese hinterland in search of the Holy Grail - real inventory levels (that's unless, of course, you are frightened of someone finding out that you are fraud with very little sincere knowledge of and interest in what you do).

Yahoo Messenger etc have further eroded the need for direct contact - again, taking away the human interaction which I believe is essential to get good quality information.

Now we have a generation of journalists/researchers who are spoilt - and I am sure overwhelmed also - by all the free information out there. Because you've never had to get off your proverbial rear end to tell a convincing story to your boss, you quite probably don't even know how to.

And more recently we have seen the emergence of an army of amateur and totally untrained citizen journalists, researchers and "experts" who can witness the riots in Burma from the comfort of their armchairs and nobody will be able to tell the difference (in other words, they make it up).

I was talking to a corporate relations officer of a certain International Oil Company the other week. He told me how one of his senior executives was so disgusted by the banality of the questions being asked that he gave the interviewer his business card back and said, "I think you should recycle this."

I once suggested to someone that while the Internet was of course essential (who would want to go back to parchment after William Caxton came along?), an experiment should be tried with young journalists/researchers/analysts etc.

I suggested that we should switch off the Internet, give them only a telephone, a travel budget and a list of contacts, along with some hard-copy resources, and assess whether they were able to assemble original and accurate information.

We could then offer training for those who fell below the mark. He accused me of being an "Old Fart".

But I am not sure how much of this was motivated by the fear of telling the Emperor he really had no clothes as opposed to a genuine belief that I was wrong.

Make your own mind up about the role of the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) and polyvinyl chloride (PVC) futures contracts from the interviews below.

The first quote is from Sinopec - from an ICIS news story.

There then follows my interviews with a major Asian producer and a consultant based in Asia.

The chart below shows the correlation between Dalian LLDPE and domestic physical market prices in China, courtesy of CBI - our joint venture partner in China.

  My next step, after what the major producer has said, is to do some research into any links between Dalian and pricing in the overall chemicals market.

Sinopec's view

"We will not take futures price as pricing references. The impact of futures prices on spot markets will remain only a reflection of market sentiment," a senior official in Sinopec's synthetic resin department."

"This is the result of the limited amount of physical deliveries taking place through the futures markets."

The Asian producer:
"
The Dalian futures market LLDPE price plays a big role in the Chinese polymer market. Although it trades only LLPE and PVC, it has become a trend setter for the entire market.

Many traders and end users also take part in the trading. Sinopec and PetroChina follow the Dalian market ."

The consultant

"The Dalian exchange has become a reference point for producers. Even though they are not trading on it (no hedging is taking place as it's also financial and chemicals traders) there is a psychological effect as it's a daily price that's very easily accessible: just log on to the screen each morning and there you go.

"In the absence of a complete picture of what's happening in China, Dalian is as good a guide as any.

"This doesn't mean that the volumes will go down necessarily - this depends on whether bank lending remains free and easy.

"I see an upside potential for pricing in Q3 because the new capacities won't have hit the market then but I see things turning bad from the fourth quarter."

Peering through the fog

On the theme of data again, in the ideal world it might be possible to send thousands of hardworking foot solders out into the field in China to chase down every warehouse of polymers and count every single pallet of polyolefins.

Not not really - don't talk nonsense; in reality, this is far too big a job for anyone.

But why not some kind of inventory survey to help pierce the gloom? If it works it could be extended to other products.

There clearly is a need as this paragraph from an excellent Insight piece on the Q2 chemicals results by Nigel Davis indicates:

"The impact of the recession has been widespread and deep. There is so much talk about the apparent end to de-stocking but inventory levels are still low. BASF said that its customers were ordering at very short notice and only in small volumes. The inventory situation is opaque. There are no reliable figures."

Source of picture: waittilnextcentury.blogspot

Back to an old theme, the Dalian Commodity Exchange, this story from ICIS news talks of how physical cargoes are being bought and then sold at a price fixed now for November delivery. At the time of writing this was realising a $169/tonne profit.

This could be old news, but I had only been really thinking about paper trade - i.e. the practice of dipping in and out on a daily basis to make a quick buck with only cash settlements taking place.

If this is widespread this is altogether different. It raises the possibility that if a lot of these types of trades take place and there is a sudden fall in the price, those left holding the contracts close to or at maturity might panic. You then could have the classic self-perpetuating downward price spiral in the market as a whole.

And if physical deals like this on the exchange increase, it would be harder to say that the market has no relevance to determining real-world pricing.

Arbitrage like this also might have the obvious effect of forcing increases in off-exchange PE prices (and posssibly all polyolefins as the exchange is apparently being watched by producers every of grade).

As any such increases in the regular market would not be the result of fundamentals, wouldn't this add to volatility?

Or alternatively I suppose, if enough physical cargoes were delivered through the exchange, supply might tighten sufficiently to maintain strong prices in the regular market!

Source of picture: 1st-commoditytrading.us

It's only one comment from one consultant, but this is what he said today about the growing role of the Zhenghou Commodity Exchange's purified terephthalic acid (PTA) futures contract.

"PTA futures have been exerting a huge impact on spot pricing starting 2H July.

" It was up to Rmb 8200-8250 middle of last week, but came off to Rmb 8000 on Friday, which has stalled forward momentum in the PET Chain (PTA/MEG/Polyester)."

Bear with me on this for a possible reason why the Zhenghou exchange could be lagging Dalian in its influence on the overall market.

Polyester producers have only recently started taking advantage of ample bank lending in order to raise operating rates.

Polyolefin off-takers have been dipping into the enormous amounts of easy cash flowing into the economy since as early as Q1.

"The polyester sector is much more heavily dependent on exports. As a result, confidence has only recently picked up with the firmer belief that the global recovery has arrived," the consultant said.

But as he points out there is NO actual stronger consumption of polyester. Rates are being increased on the assumption tha textile and garment orders for the next overseas buying season, due to start in September, will be strong.

Why not indulge in a bit of paper trading to offset any potential physical inventory losses?

And if it's not the producers involved in Zhengzhou it might be the traders. They could be taking advantage of rising uncertainty over underlying demand versus speculation and inventory levels.

Sound familiar?

Confidence along all the chemicals value chains is always a key issue because of the ability to aggressively manage inventories, according to the London-based chemicals analyst Paul Satchell.

So there's the ever-present risk of sudden and very disruptive de-stocking. The longer the current rallies in commodity prices and stock markets continue, the greater might be the risk that confidence becomes excessive and mistakes made last year are repeated.

If the events of last year have taught is anything it's that markets don't behave rationally.

Those who arrive late for the party just as the punch bowl is taken away might suffer the most - along with those who've been there for a while but don't make an exit before the bar closes.

Inventory rebuilding
There's plenty of evidence of inventory building in Asia which might not always in response to strong underlying demand. For example:

*Polyethylene (PE) inventories in China at the second and third distributor levels were at very high levels in June, according to one industry report. Polypropylene (PP) inventories were, however, at normal levels.

*Benzene, toluene and monoethylene glycol (MEG) inventories were said by several sources to be also very high in July. Hydro-dealkylation (HDA) and toluene disproportionation (TDP) operating rates were also reported to have been raised - a long with benzene production from coal-based steel plants. Strong overall reformer economics, up until the end of the first half of August, could have lead wrong decisions on production levels

Polyester operating rates were said to be on the rise from H2 July as producers tapped into ample bank lending in order to increase rates. This was on the assumption that the September buying season for textiles and garments would be strong, leading to a big improvement in exports. The next Canton Trade Fair will also be a major indicator (the textile and garments phase of the fair takes place between 31 October-4 November). But there are already signs of improvement: The textile and garment industry exported $14bn goods in June, up 13% from the previous month, said the National Development and Reform Commission. But this was still 10% down on a year ago.

A big influence on confidence will be whether China can be successful in taking the air out of its current real-estate and stock market bubbles.

Supply of new loans in July dropped to $52bn from $197.5b in June - a 77% reduction.

(China might not want to do anything more to spoil the mood of the party before the 60th anniversary of the Revolution, which takes place on the 1 October).

But this bubble has yet to reach the scale of the last one which went pop in October 2007.

At its peak so far this year the Shanghai Composite Index has traded at 3.8 times its book value, barely half the 7.2 book multiple in October 2007, according to the Financial Times newspaper.

There's also plenty of caution
The inventory building we talked about earlier only applies to China and traders in just about every commodity everywhere in the world.

Chemicals companies outside China seem to be exercising extreme caution because of the huge inventory losses incurred in Q4 last year.

"Inventories are being kept low because there is very little visibility down the value chains," said a UK-based chemicals consultant.

"The credit crunch means that it remains difficult to finance inventories.

"Chief financial officers have just spent months explaining away large inventory losses from the fourth quarter. They are unwilling from a career point of view to risk having to go through the same performance again. "

The focus is cost control with market share taking second place.

As one Asian industry source put it: "Sixty per cent of our focus used to be winning on business in a broad range of markets and 40% on cost efficiency; now these percentages have been reversed and we would rather lose sales than break our tighter budgets."

The same applies to operating rates. US and Europe have maintained deep operating rate cuts - and have idled or permanently closed many plants - with the Northeast Asians also said to be showing very good discipline at the cracker level.

Middle Eastern players were in contrast reported to be running flat out in August following production problems in H1. These prevented them from taking full advantage of strong Chinese import demand.

The main focus in polyolefins is on selecting which grades to be produced based on pure economics rather than, again, on winning or maintaining market share.

But will this type of caution be enough to prevent a sudden reversal in petrochemical pricing?

The Oil Factor
The big danger is that any retreat could be driven by an unwinding of heavy speculation in crude.

At the moment the market remains in full-carry contango, meaning the combined cost of storage and borrowing (the full-carry cost) is below the futures price.

If this changes - or quite simply storage space runs out - there could be a sudden stampede for the exit.

What seemed counter-intuitive is that oil prices were at mid-August levels when estimates of demand kept falling.

This is unless you accepted that the oil market was again being speculator-driven.
Petroleum demand would be 1.8m barrels of oil per day lower than it had forecast in June, said oil, gas and refining consultancy Purvin & Gertz.
OPEC said in a report in August that the "market remains fundamentally weak". And it noted that US consumption is "still showing a massive reduction."

Could it all happen at the same?
This big worry is that Chinese growth could fall on less economic stimulus as oil prices collapse and much-delayed new Middle East petrochemical capacity hits the markets.

China is also due to start-up several major cracker projects in the second half of this year.

But the first half of this year was far better than anyone dared to expect. There was a strong recovery in petrochemical pricing with some reasonable spreads at the polyethylene end of the chain as this chart shows (the same applied to PP)

View image

Let's just hope that the traders in all the commodities, including chemicals, don't spoil the recovery before real demand has the chance to catch up with the improved confidence.

The Canton Trade Fair

Source of picture: Blawg.lehman.com

This interesting article from Bloomberg says that while petrochemical output in China rose in August, textile production actually contracted.

We don't as yet have any breakdown for specific petrochemicals.

If the overall increase includes higher aromatics-to-synthetic fibres output then the gamble that the chain has taken on improved sales of textiles and garments will have so far failed to pay off.

As we discussed earlier on this blog, there is evidence of higher output down the entire synthetic fibres chain.

A key measure of improvement in exports to the West of textiles and garments will be the next Canton Trade Fair which takes place in October-November.

Source of picture: Wikipedia

Because benzene has so many end-uses it's widely seen as a pretty good barometer for the overall health of the industry.

As C6 led the recovery last time are recent declines a sign of another broad-based retreat?

See the slide below:

View image

Or is it more the problems we highlighted earlier in the week that are specific to the aromatics and fibre-intermediate chains?

PX and PTA have also been on the retreat of late.

Before winding up for the weekend, see this report from the New York Times.

More later......

Source of picture: rateyourmusic.com

...steal a lot and they make you a King," wrote the great Bob Dylan in A Sweetheart Like You on his great 1980s album, Infidels.

This seems appropriatea as we commemorate exactly 12 months to the day since the West's financial system imploded.

Obama is talking tough on new regulations - and I am sure he sincerely means it - but Wall Street seems to control the overall Washington agenda.

Why does it matter for the chemicals industry? Because the distortions in energy, other commodity and equity markets are creating a false impression for the industry.

As the president says: "It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system and a more broadly-shared prosperity."

Hear, hear.

Forget supply and demand, just record the index cards....

Source of picture: Heatusa.com

This amateur pundit is beginning to think he got it very wrong.

"I've been thinking the same thing - I was as gloomy as you a few months ago," said an oil-and-gas consultant friend of mine this morning.

"The Singapore property market is close to its all-time highs of 1997.

"The consumer-confidence indices have seen a complete about-turn from 12 months ago.

"Could the improved sentiment itself result in this being a U rather than a W-shaped recovery?"

"Maybe the Chinese government will continue spending as much as it can to stimulate the economy as a hedge against the US dollars.

"Why buy more Treasuries when dollar weakness seems to be a long-term factor with the risk that the dollar might also be replaced as the reserve currency?

"It could well be in China's longer-term interests to keep investing heavily in moving the economy from an export to a domestic focus.

"This will need to involve winding down policies that have provided temporary relief from the global crisis (i.e. huge increases in bank lending and other stimulus policies) in favour of reforms that will boost the pace of genuine, underlying consumption growth.

"These need to include better healthcare and pension systems, financial sector liberalisation and deregulation of distribution and logistics."

"It seems amazing that only a year ago we were talking about something as bad the Great Depression of the 1930s.

"Perhaps the problem is that we've been looking too much at fundamentals - at supply and demand from oil down to finished goods.

"The focus instead should perhaps have been on international capital flows.

"We need to more carefully study how money flows between borders and between different equitiy markets, commodity futures markets and over-the-counter (OTC) trading,"

Here are my views...

Electronic trading systems have revolutionised the speed of capital flows.

The IntercontinentalExchange website, for example, says that transactions on its wide and ever-expanding range of markets each take only two milliseconds.

You have dollar and oil markets sitting on the same exchange. Movements in both markets are presented in real time.

Has this contributed to the correlation between a weaker dollar and higher crude prices -along with the rise of index funds linking the two?

Energy prices have been virtually divorced from stock levels since 2003 and so recent historic-high storage of oil, refined products and natural gas is nothing new.

The current bull-run in crude might well last until real demand catches up.

It seems unlikely that interest rates will rise before then. The US government will want to avoid banks - which are benefiting from public fundingand less competition - in trouble again.

Ironic, isn't it? Bail-out money is being used to make more bets. The bigger the bets the less the risk for a financial institution.

And maybe even the speculators have done us a favour by pricing in future tight supply now.

An issue for chemicals companies is controlling their production and stock levels to reflect the genuine needs of their customers.

The task of separating market froth real and immediate demand would surely benefit from some harder thinking.

Source of picture: Chinaenvironmentallaw.com

Talk around the water-cooler in Shanghai offices at the moment is the fall in the cost of a car-license plate in September to a lowest bid of Yuan 27,000 ($3,953) from around Yuan 36,000 in August.

"It surprised everyone because the forecast had been for the price to actually go up to Yuan 42,000," said an ex-pat based in Shanghai.

This has created one of those agonising "if only" moments as he registered his car last month.

But more importantly, the surprise reduction might be an indication of softening auto demand after months of heady growth.

Domestic sales rose by 29.18% during the first seven months of this year over the same period in 2008 to 8.33m units, according to the China Association of Automobile Manufacturers.

The monthly price for license plates is set by auction so this could be an early pointer of the effect of reduced bank lending.

Instead, though, it might be merely a lull ahead of the long Chinese national holidays, which take place on 1-8 October.

"The decline in the price happened despite new regulations making it harder to buy a cheaper plate from outside Shanghai for use in the city," the ex-pat worker added.

"There were around 13,400 bidders for 8,500 license plates this month as against 18,000 for 8,000 plates in August."

Petrochemical prices are also on the slide, according to ICIS pricing.

Fibre intermediates had fallen for four weeks in a row as of last Friday.

Raffia-grade polypropylene (PP) was at $1080-1120/tonne CFR China main port compared with $1130-1200/tonne CFR China a month earlier.

Again, though, it's hard to discern to what extent these falls are due to a pre-holiday business wind-down against something much deeper and more fundamental.

"There are a lot of official statements in the local press about how too much lending went into speculation in real estate, in stock markets and in commodity markets in general. Lending rules are getting tougher," the office worker continued.

"I think there's also a danger of China following the US by enjoying a dangerous 'wealth-effect' from rising property prices. This seems unsustainable as real-estate costs are rising much faster than incomes.

"As was with the States again, leverage is on the rise through grey loans. State-owned enterprises (SOEs) borrow from the banks at preferential rates and then re-lend to less creditworthy companies and individuals."

Even pig farmers are involved in speculation through stockpiling copper and nickel, according to this article from Bloomberg.

Should we now be searching pig sties and farmers' fields for bags of polyethylene (PE) pellets?

"China, please please do what we did and spend what you might not be able to afford..."

Source of picture: The Daily Maily

Whether or not China's pace of economic recovery will be maintained would have become an intensely boring topic of discussion if it wasn't so important for all our livelihoods.

More data specific to polymers and chemicals has emerged as to just how staggering the rebound has been: Imports of un-compounded polyvinyl chloride (PVC) were up by 100% in the year to June compared with 2008, according to International Trader Publications Inc.

Benzene, vinyl-chloride monomer (VCM), methanol and propylene imports were up by 100-550-% during the same period, the publishing company added.

"During the last recession, when prices bottomed around December 2001-February 2002 period, there were also spikes in imports of some products into China," said Jean Sudol, the company's president.

"What was different then versus now is that fewer products were involved, the spikes were nothing like the magnitude we are seeing now, and the surge only lasted 1-3 months. This time it's endured for 7-8 months."

Evidence of weaker demand has emerged over the last few weeks.

At the risk of boring you yet again (if you are not too worried about your job), is this demand-decline partly the result of too-much of inventory re-building of chemicals, polymers and of semi - and finished-goods?

All will hopefully become a little clearer after the very-long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of this break, overstocking and bleaker economic prospects.

On the surface, a lot of the macro-economic numbers look terrific: Retail sales grew by 16.6% in the first half of this year and by 15.4% up until the end of August.

But scratch the surface and you find that retail sales include government purchases and shipments to shopkeepers before any sales to consumers are recorded.

"This makes them a very bad proxy for consumption," writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University's Guanghua School of Management.

Retail sales-growth was in excess of the expansion in GDP (gross domestic product) over the last six years, he adds.

"Consumption (real consumption and not the retail-sales numbers) has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year," he argues

"Not surprisingly, this implies arithmetically that consumption is declining as a share of GDP."

The China Economic Quarterly (CEQ), an online research publication, agrees that the retail sales numbers aren't much use in tracking genuine consumption. Even government officials don't attach much credence to them, it adds.

But, unlike the more-pessimistic Pettis, the CEQ believes it's well within China's capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).

The reason is that there is still plenty of money in China's state-owned banks to support high levels of lending with equal oodles of cash around to maintain investment in public infrastructure.

As to asset bubbles which might lead to drastic government slowdown measures, the "hysteria is premature", writes the publication in its third-quarter issue.

"Price-earnings ratios are well under half their truly speculative October 2007 peaks.

"Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading -and investment buyers is so large that the market can continue to rally for another year or so."

But it warns: "Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms."

"We are pretty optimistic about financial sector liberalisation; less so about service-sector reform."

China has finally created a bond market, meaning capital is being more accurately priced rather than always handed out virtually free to state-owned enterprises (SOEs).

A new stock market for small -and medium-sized enterprises will probably begin trading in Shenzhen in the fourth quarter this year.

These measures should help shift the economy away from dominance by the SOEs towards what in theory are more-efficient private companies.

Extra credit mechanisms are also being created to increase the availability of consumer finance.

"But we have yet to see much evidence of a serious effort to deregulate service sectors, notably distribution and logistics, that remain sink-holes of state-dominated inefficiency," the publication adds.

Liberalisation and deregulation are crucial in re-balancing the economy away from exports and towards a genuine growth in consumption as a share of GDP.

"Don't trust the government, any doctor or any lawyer," I was once told by a drunken tour-guide in Greece before he started reciting poetry.

In this case we have to trust the Chinese government in the hope that it can do a better job than certain White House administrations.

You could argue that wouldn't be particularly difficult.

Source of picture: zerohedge.blogspot.com

It might seem a little melodramatic (and it's a wonderfully melodramatic name), but what kind of threat do dark pools - and other off-exchange trading mechanisms - present to all our livelihoods?

You can see that the World Federation of Exchanges might have a financial motive in making their complaint to the G20 over the threat these mechanisms represent to their "macro-economic role".

But after the role that the shadow banking system played in the financial crisis you have to be worried.

The $64,000 dollar question has to be how you regulate dark pools etc.

And for the sake of melodrama: Unseen forces, unaccountable and anonymous, might start determining all our livelihoods.

Sudden and entirely unpredictable shifts in global commodity markets could push countries into financial ruin and even wars.

At least in the case of the exchanges, because pricing is transparent, you can challenge the logic of say the futures price of oil being way out of step with supply and demand fundamentals.

But the problem with these dark pools etc is that you won't have a clue on what might happen until it hits you.

SWIMMING IN OIL?

Source of Picture: fashionfunky.com

The threat posed by Iran test-firing its Shahab-3 missiles and a rally in US equities on increased M& activity in the drug and technology industries pushed crude slightly higher yesterday after last week's steep declines.

This is yet further evidence that the oil market is why out of sync with real demand for the black stuff and just about all its derivatives.

"July's Vehicle Miles Travelled (VMT) figures were released last week, with total miles driven clocking in at 263.4 billion miles, up 2.3% from July 2008," writes today's Schork Report, the daily online data and analysis service for energy and shipping markets.

"That is a solid increase but keep in mind: Gasoline prices have decreased by 38% since last year.

"Further, July 2008's VMT figure was 3.5% lower than July 2007. Therefore, this year's 'increase' was 1.3% below 2007 and 0.5% below the 2003-07 time-step, thereby continuing a steady VMT decline."

This is more evidence that we are miles away (excuse the pun) from the credit-fuelled demand levels of 2003-07 for everything from barrels of oil and gigajoules of natural gas to synthetic dog coats.

Chemicals demand in the UK might not return to pre-recession levels until as late as 2020, Oxford Economics has warned.

But don't bet against speculators pushing crude prices back up again, especially if conflict breaks out with Iran over the missile testing and the alleged development of nuclear-weapons capability.

This is despite weak demand, as the Schork Report has pointed out, and deeply oversupplied crude and crude products markets.

Such is the oversupply that even a disruption in Iranian production (Iran is the world's fourth-largest producer) might not make much of a difference, assuming that the conflict doesn't spread to elsewhere in the Middle East.

"Saudi Arabia was running just about flat out in 2007. Now it has 6m barrels a day of spare capacity," said an oil industry observer last week. 

Recent falls in gasoline mean that its pricing could be close to "meltdown", according to this report from Bloomberg.

And as my fellow blogger Paul Hodges pointed out last week, the historically high amount of oil in floating storage is now being delivered to refiners due to a narrowing of the contango.

So I am with those who believe we are heading for $45 a barrel before the end of this year. 

Still, a two-way bet might be advisable - just in case there is another rally.

.....said Mervyn King, governor of the Bank of England

Source of picture: northbriton45blogspot.com

ANY excitement over US house-price figures for July - which showed the biggest monthly gain for years when they were released yesterday - has to be put into the kind of context that undermines a lot of recent positive economic numbers.

The price recovery is partly the result of the $8,000 tax credit for first-time buyers and the Federal Reserve buying mortgage-backed securities. The tax credit expires at the end of November.

Inventory of unsold homes is at its lowest level in more than two years, according to The National Association of Realtors.

But there's a "shadow inventory" of delinquent or foreclosed mortgages of some 7m houses, according to Amherst Securities.

This matters to the global chemicals industry because of the large amount of chemicals and polymers which go into your average US home.

More importantly, without the return of some kind of "wealth effect" (this still seems a long way off in real-estate as the S&P Case Shiller Index is still 30% below its 2006 peak) it's hard to see a sustained rebound in US consumer spending.

"It's the level, stupid - it's not the growth rates. It's the levels that matter here," Mervyn King, governor of the Bank of England, was quoted as saying last month.

Levels to be concerned about include western consumer indebtedness that is still too-high relative to income expectations and credit availability, wrote Mohamed El-Erian in the FT yesterday. He is chief executive and co-chief investment officer of Pimco.

Bank balance sheets are also still too geared for the comfort of regulators and the managers of the banks, he added.

As my colleague Nigel Davis saidthis Insight article from ICIS news, real levels of lending to businesses, especially the small -and medium-sized ones, remain constrained.

Unemployment has also risen well beyond expectations and it will take years for the jobless rate in the US to return to its natural rate, El-Erian continued.

Yesterday I quoted the excellent Schork Report which put into context some more supposedly encouraging statistics: July's Vehicle Miles Travelled (VMT) figures were released last week, showing a 2.3% increase from July 2008.

But as the authors pointed out: "The July number was still down by 3.5% compared with July 2007."

This was a year when demand for just about everything under the sun was at historic highs.

Further - the modest improvement in July 2009 happened after a 38% year-on-year fall in gasoline prices.

Growth in urban VMT was less than that for rural travel, according to the latest statistics.

Urban driving is seen a stronger indicator of overall economic health as it includes travel work.

Unemployment was therefore a threat to the "nascent recovery", added the Schork Report.

The US Conference Board's latest index of consumer confidence, which was also released yesterday, seemed to support the Schork view: The index slid to 53.1 in September from 54.5% in August.

How should chemical companies respond to these challenges?

There will be more on this, and the implications for Asia, over the coming days and weeks.

The Chinese government appears to have an important objective to achieve while promoting commodity futures trading in the country?

A report in today's Wall Street Journal says that the government is positioning its futures markets in setting world prices for metal, energy and farm commodities. Jiang Yang, chief futures industry policy maker and assistant chairman of the China Securities Regulatory Commission is quoted as saying that the government has a long-term goal of increasing China's influence in pricing. Yang also says that futures may assure Chinese commodity importers of 'fairer deals'.

Pic source: Xinhua

The big implications are for the oil market as China imports huge volumes every year. The Shanghai Futures Exchange is said to have plans of introducing its own contract for crude oil next year. This may not be an immediate threat to the Nymex contract but the development needs to be watched closely especially if it has the support of the Chinese government.

"Beijing believes hosting big futures markets will enhance the country's economic security by essentially advertising what the world's biggest customer for some commodities considers a fair price. For the rest of the world, the exchanges could mean less guesswork about China's buying habits, possibly reducing volatility in the global market."

The strength of Chinese buying in the physical market has for some time now guided global petrochemical prices. But with the lldPE and PVC contracts turning out to be spectacular hit this year on the Dalian Commodity Exchange will these contracts soon become a reference for global pricing?

I have been digging a little deeper into the Map Ta Phut issue and it looks like expectations of major delays to projects at the site were a little premature.

Construction has not stopped despite a ruling by Thailand's Central Administrative Court to stop work on 76 projects at the site. The ruling was directed at the government which has so far not asked companies to halt work as all the projects have received environmental clearance. The government has now appealed to the Supreme Court and Thai companies are also planning to approach the court.

Although work is ongoing companies may not receive permission to commission their projects if the issue is not resolved quickly. The first of the major projects due at Map Ta Phut is PTT Chem's 1m tonnes/year cracker. The company is still hoping to commission this at the end of the year though it is unlikely to run at full capacity until a new gas processing facility is brought onstream in first quarter of 2010. PTT Chem's plan is carry out a maintenance shutdown at one of its smaller crackers to divert feedstock to the new cracker during the commissioning period.

Pic source: Wikimedia Commons

Nobody is very clear on how quickly the government will be able to sort out the Map Ta Phut problem. I was told by one Thai analyst that anyone giving dates is surely bluffing. But he believed that it is likely to take months rather than years to work out a compromise.

The government is certainly under a great deal of pressure - investment, employment and GDP will be hit if projects at Map Ta Phut get delayed but at the same time it cannot afford to ignore the demands of the local people.

And what the people want is full implementation of Section 67 of Thailand's 2007 constitution. This guarantees Thai people the right to participate with the State in preserving the environment and stop any project or activity which may damage the environment unless it has been evaluated and approved by an independent body made up of representatives from private environmental and health organisations.

But the government has yet to form an independent body or pass a law that companies can follow while seeking environmental clearance for their projects.

It will certainly do so now which means that companies will need to carry out a Health Impact Assessment (HIA) study besides the Environmental Impact Assessment study (HIA). And this, in the words of the analyst, will not only take more time but will also be a tougher hurdle to clear.

Confused Direction

Source of picture: China Daily

A TIGHTER monetary policy is being evaluated by China's State Council, one of the country's most-powerful legislative bodies, according to numerous media reports - including this one from Reuters.

And the chairman of China's sixth-biggest lender was quoted in the Financial Times today as saying that the government should not be afraid of a "moderate slowdown" in the economy.

"Monetary policy must not neglect asset-price movements," added Qin Xiao, chairman of China Merchants Bank.

These comments follow bank loans surging by 149% in the first nine months of this year over the same period in 2008 to $1,260bn.

Economists are divided between those who think that the surge in lending will be inflationary and those who believe it will be deflationary because of new industrial capacity.

But it seems clear the government is getting worried. It faces the hard job of easing back on stimulus without causing a double-digit recession (overhasty increases in deposit rates caused a sharp and painful slowdown in 2007).

The rate at which lending is increasing has already been slowed with stricter guidelines on preventing easy money from being channelled into speculation.

Now that something bigger appears to be in the offing, when can we expect the big policy shift?

Not before next February's Chinese New Year, said Stephen Green - economist at Standard Chartered in Shanghai.

Expect chemicals markets to be blighted (or blessed if you are trader who makes the right moves) with rumours and counter-rumours about policy changes until official announcements are made.

The longer the details remain unconfirmed, the more likely it is that buying ahead of the holidays will be quieter than anyone had expected.

Even when the announcements are out there, debate could rage on the impact of the measures - making it even harder for producers and buyers to read the tea leaves.

Source of picture: www.msnbc.msn.com/id/23512037/

CHINA is making export gains at the expense of other higher-cost competitors that might not be sustainable because of reasons including rising trade protectionism and economic rebalancing.

Chemical companies need to factor in this risk - and take into account how overall demand might merely be shifting location rather than increasing.

Knit apparel is a good example where, according to this article by David Barboza in the New York Times, American imports from China jumped by 10% in July this year compared with the same months in 2008.

This was as US imports from Mexico, Honduras, Guatemala and El Salvador fell by 19-24%. Barboza was quoting data from Global Trade Information Services.

It is not just emerging markets that are suffering as a result of China's increasing dominance in textiles.

The beleaguered European industries are also in the firing line with the EU evaluating extending antidumping duties on imports of shoes from China and Vietnam.

"Reductions in raw-material import tariffs and increases in export-tax rebates have helped Chinese apparel producers push their prices down," said said Ying Min Ye, president of Beijing-based Chem1 Consulting at the Downstream Asia Roundtable Asia oil and gas event in Kuala Lumpur. Malaysia.

The conference, organised by the World Refining Association, took place earlier this month.

You can add to these advantages a Yuan which is now being pegged to the US dollar, resulting in steep depreciations against other Asian currencies. Between March and September, the Yuan had fallen in value by 10% against a basket of Asian currencies, said Barclays Capital.

A further huge advantage is, according to Nicholas Lardy of the Peterson Institute for International Economics (quoted in the same Barboza article), flexibility in labour markets.

This means the ability to cut wages without worrying about troublesome trade unions or restrictive employment legislation.

The biggest comparative boost of all might well be the flood of cheap lending. China has pump-primed its economy through a huge increase in bank loans.

The US removed safeguard duties against imports of several categories of Chinese clothing last December, according to a new report from Textiles Intelligence, providing China with another edge.

The EU removed similar safeguard duties in December 2007.

Both sets of duties were the result of damage caused to local industries when The Agreement on Textiles and Clothing (ATC) came into effect on 1 January 2005

Here, therefore, could end some of the head-scratching over steep increases in fibre-intermediate pricing in 2009.

Restocking and crude oil have been important factors.

What might have also benefited the market are China's gains at the expense of others.

The country's yarn output grew by 9% in the six months to June 2009 over the same period last year, Yin added at the same event.

Fibre output rose by 10% and polyester production by 13%. Click here for a copy of his full presentation - .5 Yingmin Ye 1.pdf

It's not just in low-end clothing where China is making gains, but also in electronic goods - at the expense largely of the Japanese.

Japan has seen its share of electronic-good exports to the US fall by 18% in 1999 to 7%, added Barboza.

In the last year alone, China's market share of the US electronics goods market has doubled from 10% to 20%.

Sales of electronic materials to China were up by 15% in Q3 over the second quarter, said Andrew Liveris, CEO of Dow Chemical, when the company's third-quarter results were released last week.

Coatings and infrastructure sales rose by 16%, polyethylene (PE) 10% by and the automatic sector 5%, he added.

From a Dow perspective, if it's taking sales away from Japanese electronic chemicals companies all well and good.

But displaced demand doesn't necessarily add up to greater overall demand.

Another important point is that when all is said and done, China's exports as a whole are still down on the first half of 2008.

China exported $521 billion worth of clothes, toys, electronics, grains and other commodities in H1 2009, according Barboza.

Although lower than declines suffered by other exporters such as Japan and Germany, this figure still represented a 22% fall over the first half of last year.

Returning to the theme of winners and losers from China's boom, Australia - despite seeing its currency rise in value by 40% against the Yuan in March-September - has made big net gains through a surge in commodity exports.

It's the same story for Indonesia.

"Commodities and high-tech goods have gained [because of the recovery in China]. But anything in between, China can often produce itself, so countries in these areas are under more pressure," said Tai Hui, an economist at Standard Chartered in Singapore in this article from the Financial Times.

Malaysia and the Philippines were losing out because they competed directly with China in many export markets, he added.

"Market stability has improved, but we continue to remain cautious about the ability of some economies to sustain growth," continued Liveris when the Q3 results came out.

"This is especially true of the US and Europe, and until these economies return to 'normal', we believe global growth will be muted."

This is also especially true of China.

Last week we discussed how domestic consumption was much less than investment as a driver of January-September GDP (gross domestic product) growth.

The relatively high investment component of GDP points to several risks and concerns:

*An increase in export-based industrial capacity. Now that it's on the ground, China will be tempted and able to keep this capacity running, even in very weak market conditions

*At the moment the US seems to be more worried over China's willingness to keep on funding its huge deficits than damage to jobs caused by aggressively cheap imports. But how long will this last as unemployment climbs towards 10%? Could we see a big increase in trade protectionism?

*Bubbles in real estate and equities. Real-estate prices have risen by 73% so far this year. Confusing signals are emerging from the government over whether or not monetary tightening will occur in 2010. Leave it too late and these bubbles could get more out of hand; act too hastily and the economic rebound will be set back

*Assuming that the investment number reported for Q1-Q3 also includes money spent on stockpiling oil and other commodities, will the high levels of imports continue? Monetary tightening is a threat along with sudden dips in import demand as China starts running off inventories

*Meagre underlying growth in domestic consumption. Nominal GDP only increased by 4.7% in the first nine months of this year, indicating that deflation was behind the higher headline number of 7.7% Although a lot of people might have made theoretical and real money out of real estate and equities, this doesn't suggest a healthy state of affairs for the average worker.

A weaker currency, import tariff rebates, increases in export taxes and soft and plentiful bank loans for new capacity hardly suggest rapid economic rebalancing towards domestic growth.

Has China put in place the right policies to move quickly enough towards this rebalancing to keep the rest of the world happy?

Can it move any quicker given the country's social and economic pressures?

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

It helps to have a commodity bull on your side and that's just what the Dalian Commodity Exchange (DCE) has succeeded in doing. Jim Rogers, the noted investment guru, will be a senior advisor to the exchange.

Jim Rogers is, as always, positive on the future of China and also commodities (see TV interview below).

It is not yet clear what Rogers will be doing in this new role but his appointment will help DCE realise its ambition of becoming a leading commodity exchange in the world. The Futures Industry Association (FIA) says that the DCE is the largest futures exchange in China and is ranked ninth in the world. It has the world's biggest trading market for plastics (lldpe and PVC) and the second-largest for agricultural products.

This blog has been regularly highlighting the growing volumes of lldPE and PVC transactions on the DCE. Lldpe contracts totalling 75.719m tonnes have been traded on the exchange so far this year, up 185.67% from last year. PVC contracts, which were was introduced in May, totalled 21.829m tonnes.

And the exchange could see more action in the coming months. China Daily reports growing interest from major foreign traders to participate in Chinese exchanges. They will have to work their way around government regulations but leading banks such as Goldman Sachs, JP Morgan and Barclays Bank have compelling reasons to invest in China. The paper says that the Shanghai exchange's copper futures now rivals that of the LME while DCE's soyabean volumes already exceed that of CBOT.

Source of picture: Businesweek

More evidence is emerging of the big rebound in Chinese exports resulting from government subsidies, including a Yuan now pegged to the dollar, soft and plentiful bank loans and export-tax rebates.

More than 9,000 quality control inspections of goods set for overseas shipment took place in Q3 this year - a 32% increase over the same quarter last year, said AsiaInspection, which carries out monitors these inspections.

Book and stationery inspections were up by 24%, toys 32%, shoes and fashion accessories 58% and textile apparel 63%, according to this news report on the latest AsiaInspection findings.

A further boost to China's textiles industry was the EU's removal of restrictions requiring companies to source a percentage of their textile business from within the EU in January 2009, the report added
.
But Q3 2008 saw the collapse of Lehman Bros and the virtual grinding to a halt of the global economy, so comparisons with the third quarter of this year were always likely to appear good.

Export trade has bounced back from its low point. It is widely recognised, though, that it could be a very long time before shipments to Western markets return to 2007 levels.

Still, the October Canton Trade Fair reported a 20% increase in electronics, hardware, tools, transport vehicle and building material exports orders from overseas buyers as against the April Canton Fair.

Together, these products account for around 60% of China's total exports.

And the damage done to China by the crisis is far less than elsewhere.

For example, the country's semiconductor market is expected to fall 6.5% by value to $68bn in 2009, down from $72.9bn last year, according to this report, quoting iSuppli.

This compares with a forecast 16.5% fall in the global chip industry.

Consumer electronics exports by volume are, however, expected to be down by 10% to 30% in all categories except LCD-TVs and Set-Top Boxes, where growth is expected.

What on earth does this all add up to then?

Here's what I think:

*China's exports have rebounded from their low points more quickly than other countries due to all the government support.

*Because of its ability to aggressively discount, China is gaining bigger market shares from other countries in certain export sectors - most notably textiles and garments.

*China is likely to be able to grow market share even further as it can cut costs by even more, notwithstanding a big increase in trade protectionism

But, as we have already said, demand in the West is unlikely to return to 2007 levels for a very long time and so China is only gaining bigger slices of a much smaller overall pie.

The country's export trade has also been boosted by cheaper raw materials as result of import tax cuts and lower pricing.

The dramatic increase in chemical import volumes is partly due to both the above factors - and, of course, stronger domestic demand.

Take methyl methacrylate (MMA) and polymethly methacrylate (PMMA) as examples. Pricing remains way down on its July 2008 peak, as this graph MMAPPMAPricing200809.ppt from ICIS pricing shows.

MMA imports have risen by 293% in January-September over the same month last year, according to China customs. In September, overseas shipments increased by 87% to 16,309 tonnes.

PMMA imports were up by 67% in January-September with September cargoes totalling 20,829 tonnes - a 22% increase.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

Japanese chemical majors have raised their sales and profit forecasts for the second half of the fiscal year ending 31 March 2010, but the revisions are marginal and companies are still holding a conservative outlook.

Earnings in the first half of this fiscal year have been better than expected but the stock market is not impressed. It appears investors are being guided by the cloudy outlook for H2.

A Tokyo-based analyst highlighted three major risks that Japanese companies foresee:

• Inventory adjustments in China for petrochemicals and globally in the auto and LCD sectors
• A rise in naphtha prices led by higher crude oil prices
• Rising availability of product from new petrochemical capacities in the Middle East.

Mitsui Chemicals has forecast sales of Yen1,210bn as compared to Yen1,487.6bn in 2008-09. Operating loss is expected to narrow to Yen15bn from Yen 45.5bn last year.

Sumitomo Chemical expects to post petrochemical sales of Yen500bn in 2009-10, down 9.6% from the previous year. Total sales are projected at Yen1,620bn, down 9.4%.

At an analyst meeting yesterday Sumitomo Chemical disclosed that operating rates at its joint-venture PetroRabigh complex in Saudi Arabia are still quite low, especially for polyethylene (PE). Although the situation is improving the company expects full operations only at the end of this year.

PetroRabigh has posted losses yet again. Third quarter losses had widened to Riyals844.7m from Riyals155.9m in the same period last year.

Japanese companies are continuing their efforts to widen their footprint in China. Mitsui Chemicals and Sinopec have agreed to proceed with a joint venture for production of phenol and ethylene, propylene diene terpolymer (EPT). At a recent analyst meet, Mitsui's ceo disclosed that the project would be a 50:50 joint venture. Asked if the jv would be expanded to include ethylene and propylene production, the ceo said there was no immediate plan but there was some potential.

Mitsui's ceo is also reported to have said that the company was interested in acquisitions in agro-chemicals or speciality chemicals. Among the Japanese majors, Mitsui is most exposed to commodity chemicals and is under greater pressure to diversify if product portfolio.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

It pays to have a domestic focus and Reliance Industries has shown this again in its results for the first half of fiscal 2009-10.

Its petrochemicals division delivered Rs43bn in earnings before interest and taxes (EBIT), a 23.8% growth over the same period last year. The company attributed this to higher margins on improved domestic realisation. The concentration on India helped the company maintain nearly 100% utilisation and hold inventory at low levels.

The Indian market often gets lost in the larger Asian/global picture which is very much dominated by China. But this market has been seeing steady demand growth since last year and it is one of the few markets to have expanded despite the economic crisis.

Reliance estimated PP demand growth at 28% in the last six months; PE at 15%; PVC at 36% and polyester at 15%. Packaging, infrastructure and auto sectors were the key drivers.

The company anticipated a stable margin environment in 2010 as India is expected to keep growing. It also emphasised that it would continue its 'predominantly domestic market orientation in order to sustain high operating rates' - a plan that will no doubt be helped, in the case of PP, by hefty anti dumping duties imposed on imports from Saudi Arabia, Singapore and Oman. A second investigation on PP imports from South Korea, Taiwan and the US is due to be launched soon and there have also been reports of producers asking for an investigation into PE imports.

Expanding the domestic focus will not be easy. India is oversupplied in PP and likely to remain so for another couple of years despite the high demand growth numbers. PE would also be oversupplied once Indian Oil Corp starts its new cracker complex.

IOC expects to achieve mechanical completion of the cracker by the end of this month and start commissioning activity in December. The derivative plants (PE, PP and MEG) are likely to start at end-March or early April.

This is the schedule on paper. But given the many project delays around the world, don't be too surprised if this one also slips.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

The Indian government has announced 17 November as the date for a public hearing to discuss the provisional anti dumping duties that it had imposed in June on imports of polypropylene (PP) from Saudi Arabia, Singapore and Oman.

The hearing will give a chance to all affected parties to present their case. Such hearings are usually a formality and do affect the end result which is a confirmation of the provisional duties.

But I have been told that it may be different this time as the Saudis, led by Sabic, are likely to put up a spirited defense. The Saudis have been busy pulling lots of government strings for the duties to be revoked.

Sabic and Advanced Polypropylene were hit the hardest - duties on their PP exports range from $440-$820/tonne. I was told that one of the reasons for the high level of duties was 'the lack of cooperation in sharing data' when the Indian government had sent its questionnaire earlier in the year. However, this attitude appears to have changed.

There's a lot at stake here and this is why the 17 November hearing is crucial. India is already in surplus and looks likely to be in this position for the next couple of years. So there's every reason for Indian PP producers, Reliance Industries and Haldia Petrochemicals, to check competition. On the other hand, many Indian processors are unhappy as the duties would force them to rely on local supply.

For the Saudis, and also other Middle Eastern producers, India is not such a big market for PP. But the ADD threat is a worrying global trend that they want to ensure does not take off.

Besides India, China is investigating methanol and 1,4-butanediol (BDO) imports from Saudi Arabia. And the European Union (EU) is investigating on polyethylene terephthalate (PET) imports from United Arab Emirates (UAE) and Iran.

The growing protectionist measures have provoked a long chain of protests with the most recent one being in October by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA Secretary General Dr. Abdulwahab Al-Sadoun has said that the association will strengthen coordination with Gulf Cooperation Council (GCC) Governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by anti-dumping regulations and other trade restrictions
"The GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules," he said.
The investigations may not sound fair to GCC producers but they face an uphill task in convincing the Indian and Chinese governments to ease protection to local producers. A lot will depend on what the GCC governments can offer or withhold.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

Talk of Reliance Industries acquiring LyondellBasell is once again gaining momentum. A report in today's Economic Times says that the company is close to announcing a major overseas acquisition with the target being part of the assets of LyondellBasell. The announcement is likely to be made on or before Reliance's annual general meeting on 17 November. Reliance shares rose 3.1% in morning trade.

Citing a banking industry source the report states that the transaction could be around $6bn, nearly double the estimate made by another media report in September.

One my industry sources says that something is brewing and Reliance is on a shortlist of companies that will be participating in LyondellBasell's reorganisation. The source was unable to give names of others on this shortlist.

Details about the proposed buy are still sketchy and today's media report, like the previous one, raises more questions than answers. In what form is Reliance likely to participate - will it be by acquiring an equity stake that LyondellBasell's creditors will soon get through the company's rights offer? Or will it be an outright purchase of some/all assets? Can it happen before LyondellBasell completes its reorganisation or will Reliance be participating in the reorganisation by buying assets/equity?

One analyst thinks that today's report of an imminent announcement is a little premature and a major development is likely only after LyondellBasell emerges from Chapter 11.

It is difficult to evaluate how beneficial the deal would be to Reliance without knowing much of the details. There are certainly parts of LyondellBasell that would be a good fit for Reliance - its PP assets, a global marketing and distribution network and the technology portfolio.

Reliance certainly has the cash for a big ticket acquisition. But the company is not known to be very aggressive when bidding for overseas assets and this is one of the reasons why it lost out on acquisition opportunities in the past. Will it be the same story this time?

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

China's immense appetite this year for all petrochemicals has been puzzling many of us. This blog has been regularly asking questions and some answeres for the polyester and PTA markets were provided by YJ Kim of PCI Xylenes & Polyesters at the Indian Petrochem 2009 conference earlier this week.

Kim pointed out that preparatory work for the Shanghai Expo in May 2010 was a major demand driver. The budget for the Expo is twice that of the Beijing Olympics in 2008.

The Olympics is estimated to have created nearly 1m tonnes of polyester demand. So if you double the budget then surely polyester demand would be way above 1m tonnes.

If this is true for polyester I think it is also safe to assume that the Expo is also a major driver for polymer consumption.

Kim also observed that the a fall in transaction volumes at the Shaoxing textile market should not be interpreted as a decline in overall business as six more wholesale markets have sprung up in China, and there is even one in Xinjiang. The average daily trading volume at Shaoxing has fallen to 4-5m metres this year from a peak of 6m metres.

Here are a few other highlights from Kim's very good presentation.

• China's 2nd 10-Year West Development Plan will create another polyester boom. Production growth is likely to be around 7% for the next three years but will swing to double digit post 2011 once demand explodes in western China. Polyester production forecast for 2009 is 21.8m tonnes.
• Global PTA inventories are very low and the industry needs to build up stocks. In China, 18-21 days is the normal PTA stock level. But the market is currently living on less than two weeks inventory. If China rebuilds stocks by 500,000 tonnes over the next six months it could swing global operating rates by 2%.
• Firm PTA prices this year have been driven by a recovery in demand and involuntary production cuts due to shortage of paraxylene. PTA margins have been exceptionally strong this year
• China is likely to import nearly 6.5m tonnes of PTA in 2009 and would need to import around 6m tonnes annually for the next three years. The trade grid for PTA could change once China complete its antidumping investigation into PTA exports by South Korea and Thailand. A review has been completed but it appears that Korean and Thai producers are individually negotiating with the Chinese commerce ministry. If Korea is hit by antidumping duties it will be forced to look for new markets. India, the Middle East and Europe would be the likely targets. The Korea-EU free trade agreement is due to start from July 2010 which would allow for zero duty imports.

By John Richardson in Shanghai and Malini Hariharan

China is set to see polyolefins demand growth of 30% or more this year, depending on the which particular grade, according to preliminary estimates prepared by companies and market analysts.

Even if you take into account last year's relatively low growth rates (I say relative because despite the economic crisis, demand for some grades of PE grew by as much as 7% - which by itself would be the envy of most other countries), the 2009 forecasts take your breath away.

We will give you more details of the numbers next week.

As always with unexpected events, the search for after-the-facts reasons has begun.

One factor is the sharp drop in availability of recycled material that has forced converters to concentratre more on virgin resin.

A further reason is, of course, China's enormous economic stimulus.

This has included a big rise in bank loans, a factor behind the third explanation behind the forecasts: A sharp rise in speculation.

"Non-traditional traders entered the market who only wanted to get their hands on polyolefins in order to use the 90 days' credit for something else," said an industry source.

"They would take the credit and use it to speculate on say equities. Sometimes they made such big profits out of the stock market that they were willing to sell PE and PP at a loss."

The strong growth - combined with big cuts in production by Chinese producers in Q4 last year and early 2009 - help to explain the surge in polyolefin imports.

HDPE imports were up 73% in January-September and LDPE by 85%, according to China Customs.

The question now, obviously, is whether this great performance will be repeated in 2010.

We've been saying this so many times this year, but new capacities are a threat.

They keep getting delayed, but on paper China is set to increase PE capacity by more than 40% next year.

And will the Chinese government, worried about asset -price bubbles, reduce economic stimulus?

The Thai Supreme Court's decision to uphold a September injunction halting development of $12bn of petrochemical and power projects could affect the on-schedule start-up of capacities of a large amount of petrochemicals capacity.

Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claims that most of its 25 petrochemicals projects will be unaffected by the verdict. The reason it gives is that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.

Further - media reports say that former prime minister Anand Panyarachun will review the court ruling and make recommendations in the first quarter of next year.

In all, according to the reports, only 11 out of 76 projects at the site have been given the go-ahead by The Supreme Court.

The petchem start-ups that might be affected are as follows:

*PTT Polyethylene's 1m tonne/year ethane gas cracker, which was due onstream by the end of this year, according to a Thai industry contact who spoke to this blog. Downstream of the cracker will be 400,000 tonne/year of linear-low density polyethylene (LLDPE), 300,000 tonne/year of low-density polyethylene (LDPE) and 400,000 tonne/year of high-density polyethylene (HDPE), according to ICIS Plants & Projects

*The new Siam Cement/Dow Chemical complex centred on a cracker that will produce 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene). Also at the site will be a big new metathesis unit downstream of which will be a PP unit (currently checking the capacity). In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects

*The PTT and LyondellBassel joint venture, HMC Polymer, which comprises a 310,000 tonne/year propane dehydrogenation (PDH) unit and a 300,000 tonne/year polypropylene (PP) plant. This plant had been due to start-up by August this year, the blog was told.

*The PTT/Asahi Kasei Chemicals joint-venture 250,000 tonne/year acrylonitrile project, due on-stream in Q4 next year, according to ICIS Plants & Projects. This will involve Asahi Kasei's propane route to PP. This would be the first commercial plant in the world to use propane rather than propylene as feedstock

News reports list chlor-alkali and vnyl chloride monomer (VCM) projects by Vinythai and a polyvinyl chloride (PVC) project by Thail Plastic & Chemicals as also being delayed. We are checking the details.  

According to The Nation newspaper, these are the 11 projects which were given permission to continue by the Supreme Court:

. Clean energy and product quality enhancement/Rayong Refinery
2. Gas recycling enhancement/HMC Polymers
3. Clean energy, oil vapour controlling unit installation/Star Petroleum Refining
4. Oil vapour controlling unit installation/PTT Aromatics and Refining
5. Air pollution improvement/Indorama Petroleum
6. Wastewater treatment improvement/PTT
7. Chlorine vaporiser and wet scrubber installation/Aditya Berla Chemicals (Thailand)
8. Tank relocation/Map t Tank Terminal
9. LPG/Brutene Depot-Wharf/PTT Chemical
10. Loading Arm Installation/Star Petroleum Refining
11. Petrochemical Depot-Wharf/Map Ta Phut Tank Terminal

Is history about to repeat itself?

Source of picture: www.vietbao.vn

The last year for polyolefins has been a bit like the wonderful 1980s and early 1990s for genuine football fans - when the often-repeated phrase of Manchester Utd supporters was "next year, definitely" when they were talking about their prospects for winning the then First Division Championship (just replace "next year with "next month").

Sadly, of course, the rest is bitter and painful history when it comes to "Utd".

The question now, after a year of constant project delays and problems with output from existing production, is whether the same will soon apply to polyethylene (PE) and polypropylene (PP) as oversupply crashes the market in 2010.

No matter what the demand outlook - and we'll look at demand later this week - the on-paper increases are just too big to prevent major market disruptions.

"Practically every month this year we've seen buyers retreating from the market expecting a flood of supply that simply hasn't happened," said a Shanghai-based source with a leading Asian polyolefin producer.

The most recent example was the steep fall in pricing just before the October holidays - by some estimates as much as $200/tonne - on false anticipation of stabilised production at PetroRabigh in the Middle East and at the Fujian and Dushanzi complexes in China.

After the October break prices bounced back.

But surely some time in the New Year all three of these new plants, which have been hit by technical problems, will reach 100% or thereabouts (whatever rates the market - or perhaps in the case of the Middle East unbeatable economics and in the case of China government policy - determines).

China is due to increase its high-density polyethylene (HDPE) capacity by 45% next year, linear-low density PE (LLDPE) by 35% (there are no new low-density PE plants) and PP by more than 30%, according to CBI China.

How quickly these further new volumes are introduced into the market will again, though, depend on the extent of technical problems that have plagued the start-up of ever-bigger and more complex plants. The shortage of experienced engineers has made the process more problematic.

A key measure will be Sinopec inventory levels as it contends with this potential flood of new supply.

So far this year it has apparently controlled inventories exceptionally well after the painful experience of late 2008.

By Malini Hariharan

I have been trying to get some clarity on what is happening at Map Ta Phut and what companies are planning to do.

Construction activity has not yet stopped despite the Supreme Court ruling last week which suspended 65 projects, says a PTT source. The government has yet to issue a notice to the companies. So it looks like prime minister Abhisit Vejjajiva has not acted on his plan to inform companies about the court order.

The situation is complicated. Most of the projects have received EIA approval and complied with all existing rules and regulations. Article 67 of the constitution asks for a health impact assessment (HIA) study to be evaluated by an independent body but that body has yet to be formed. A government panel, led by former Thai prime minister Anand Panyarachun, has been given the task of drafting new regulations and set up an independent body. The panel is now trying to accelerate the process and is likely to complete its task by the beginning of next year.

PTT's biggest concern is its No6 gas separation project which would provide feedstock to PTT Chem's new cracker. The cracker is not on the list of affected projects and can start at the end of the year. PTT Chem's plan is to carry out a turnaround at an existing cracker to divert feedstock to the new plant. PTT is also working on a plan to supply ethane from its No2 and No3 gas recovery plants where the company is due to complete a modification project by the end of the year. This project is not the list of 65 projects.

But the new cracker is unlikely to run at 100% until the No6 gas separation plant is commissioned.

PTT is also busy working out a strategy to ensure commissioning of this project in Q1 2010. One alternative being evaluated is asking the Central Administrative Court for a waiver as the project had already received EIA approval. This appeal could well be rejected as HIA is now needed. So PTT has also started preparing a HIA report which can be put up for approval once an independent body has been set up.

I was also told that another alternative under preliminary evaluation by PTT and Siam Cement is suing the government agency responsible for sanctioning their projects. "That is because the companies have done everything to comply with the rules; they have not done anything wrong," says the source.

More buying of junk in H1 next year that nobody really needs?

Source: www.blogcleveland.com

By John Richardson

TWO theories about growth in China next year revolve around either an appreciation or devaluation of the Yuan.

The appreciation theory is far more widespread as it assumes no global double-dip economic recession.

It's assumed that by mid-2010 inflationary pressures will be build to the point where fiscal tightening will be needed, through, for instance, a cut in new loans and a rise in interest rates.

Part of this tightening would also include a long-awaited appreciation of the Yuan from around 6.8 to the US dollar, where it is at the moment, to 4.8.

Until and if this happens we could continue to see hot money pouring into and around China's economy as everyone tries to maximise Yuan revenue ahead any appreciation.

Weird and wonderful speculation
This has led to all sorts of weird and wonderful examples of speculation this year, including in chemicals markets.

My very able colleagues at CBI tell me, for example, that cargoes are sometimes being bought for the sake of the credit that is then used to punt in another commodity - for instance, equities.

There was one case of an ethylene dichloride (EDC) shipment that was sold at below raw material costs because the trader had used his credit to make a fortune from speculating elsewhere.

More such speculation will happen in H1 next year if the motive to gamble in order to make a currency gain remains high, particularly if economic policy stays broadly on the same expansionary track.

Yesterday, the State Council announced that economic policy would stay mainly unchanged for the time being because of a continued focus on boosting domestic consumption.

Some new pro-consumption measures are to be introduced, such as increasing cash-for-clunker car rebates.

Trying to let the air out gently
But two measures were also announced yesterday that might slightly deflate very bubbly auto and housing markets. As we reported yesterday, auto sales in November increased by 96% year-on-year.

The air-sucking steps are:

*The purchase tax on cars with engine sizes of 1.6 litres or less will be raised to 7.5 percent from 5 percent, though that is still lower than the 10 percent tax rate for most other cars

*Individuals must own their homes for five years to be eligible for sales tax exemption, up from the previous minimum of two years. In July, the China Banking Regulatory Commission decided to tighten mortgage conditions for second-time homeowners and big banks announced that they would start to offer discounts on mortgages only to selected qualified applicants

Government policy makers have a poor record of implementing the right housing policies at the right time, says Rosealea Yao of the Beijing-based online economics research publication, The China Economic Quarterly (CEQ).

The reason is that data on the property market can be misleading.

For example, there's recent evidence that stocks of unsold homes are increasing in several local markets, such as Beijing, Shenzhen and Hangzhou, whereas year-on-year nationwide sales accelerated by 48% in October.

A heavy-handed approach in 2007, involving interest rate rises and a reduction in credit to developers, caused the last collapse in China's property markets.

So the point she makes that if further measures are needed to cool the housing market and the overall economy down from mid-2010 - which the CEQ believes will be the case - the central government needs to tread very carefully.

The dilemma for China is that while a healthy construction sector is crucial for the economy, so is making sure that property prices don't increase out of the range of average earners.

Expect even more chemicals volatility
It seems very possible, therefore, that if inflationary pressures do start to build, chemicals pricing could become even more volatile and unpredictable ahead of any new government measures.

"There have been much closer links this year between overall economic sentiment, reflected in global and local equity markets, and what's happening in polyolefin pricing and trading patterns," said an industry source.

So when the rumour-mill starts churning about fiscal tightening, expect to see polyolefin markets - and perhaps chemicals markets in general - responding to fluctuations in share prices.

These fluctuations might, of course, have no relevance whatsoever to the underlying fundamentals of chemicals supply and demand.

What about the other theory?
We have long-argued on this blog that oil prices are way out-of-kilter with immediate demand.

They have been this way since 2006, but right now the fragile global economic recovery has increased the risk of a sudden and sharp correction.

Some unforeseen crisis, more globally systemic than Dubai World, could result in a retreat to the US dollar and a collapse in crude back to $30-40 a barrel (where some believe it should be based on the physical market fundamentals).

This would result in the Yuan appreciating much faster than the Chinese want - because of its link to the dollar - as they try to gradually rebalance their economy away from exports and towards more domestic consumption.

A competitive devaluation of the Yuan might then take place in order to protect export trade, leading to deflationary pressures from Chinese exporters. We could then be in the middle of major global trade war.

Let's hope for a more benign outcome!!

This is a huge subject, one that this blog will need to keep revisiting - and if you tell us we've got it wrong, we'll always listen and respond.

Are we seeing the start of a major shift, or is this a ridiculous stretch?

Source of graph: International eChem

By John Richardson

Volatility in China's polyolefin prices has greatly increased in 2009 as a result of closer links with short-term  changes in crude oil and equity prices, said market observes and participants.

This is obscuring real levels of demand and making the planning process even harder, they added.

Linear-low density polyethylene (LLDPE) futures prices on the Dalian Commodity Exchange have closed tracked the shifts in the cost of crude oil since July 2008 - when the contract took off, said Paul Hodges of the UK-based chemicals consultancy, International e-Chem (see graph).

"Daily or even weekly fluctuations in crude don't necessarily reflect a change in the fundamentals of any chemical or polymer market," he added.

"What matters, of course, is supply and demand in a particular market and effect of crude prices on feedstock costs when you buy your raw materials."

But Hodges believes that a growing army of speculators are moving LLDPE prices on the exchange in line changes in crude as they try to make money out of daily price volatility.

China's huge increase in bank lending has made speculation in all sorts of commodities a lot during easier during 2009, he added.

"Although volumes on the Dalian Exchange have gone down a lot recently (they peaked at 85m tonnes in April of this year), it is still a great guide to sentiment in the overall physical polyolefin markets in China," said a Shanghai-based source with a major Asian polyolefin producer.

"The market is so hard to read at the moment that Dalian has become as good a guide as any. Nobody is actually pricing off the exchange, but it's helping us assess the mood.

"The Dalian exchange is shifting on a daily basis in line with equities." (equities often follow, lead or move in tandem with shifts in oil prices).

When the Dubai World debt crisis erupted in late November leading to global dips in equity markets the LLDPE futures contract also fell, he added.

On the Thursday and Friday of that same week very few buyers in China were prepared to commit to any polyolefin purchases, said Shanghai-based commodity information service CBI.

LyondellBasell's chief operating officer, Ed Dineen, also recently said that China's physical-market PE prices were being increasingly driven by crude.

Polyolefin pricing had become much more volatilie in 2009, making sales and marketing strategies very hard to plan, said a Singapore-based source with a second Asian polyolefin player.

"The maximum visibility I can hope for these days is 2-3 weeks out, and so to describe this as a sales and marketing strategy would be a stretch," he added.

"Estimating levels of real demand has become much harder these days because poylolefin pricing is moving in line with equities - which move often on pure sentiment."

It can be a dirty business....

Source of picture: www.China-environmental-news-blogspot.com

By John Richardson

THE sharp drop in plastics recycling in China has added 8-10 percentage points to virgin polyolefin demand growth in 2009, estimates a major Asian producer.

"It's a much bigger than we had anticipated and we're of course evaluating whether recycling will remain at the same depressed level next year," the producer added.

This appears to further confirm the impact of the recycling dip which we first recognised as important to the China growth story back in July.

Polyethylene (PE) demand is expected to grow by 31.5% in 2009 with polypropylene (PP) rising by 24%, according to Shanghai-based commodity information service CBI.

A second producer gives the following four explanations for the dip in recycling:

1.) Tougher regulations governing imports. "Legislation was made more rigorous because of environmental protests over water supply being polluted during the scrap cleaning processes," said this second producer. But interestingly, he added: "The central government faces the problem that tougher regulations are threatening the livelihood of millions of people. For example, in one inland province some 500,000 were employed in the re-processing industries, earning 4,000-5,000 Yuan a month compared with just a few hundred Yuan before the growth of recycling. Beijing is under a lot of pressure from local authorities to relax the rules." Clearly, this is a situation that needs to be monitored

2.) Less availability of scrap-plastic imports as a result of reduced exports of finished goods from China. During the global economic boom years, huge quantities of refrigerators, TVs etc were shipped to the West from China wrapped in plastic which was then returned to China

3.) The bankruptcy of a lot of traders in Q4 last year who dealt in scrap plastic and a reluctance of those still in the business to take the plunge again. Credit in China has also been so abundant that it's been very easy to borrow money to buy cargoes of freshly-manufactured resin

4.) The Delta between recycled and virgin material not being wide enough for most of this year to justify using the second-hand stuff (it has to be at least $400/tonne)

The implementation of a zero-tariff regime in Asean from 1 Jauary 2010 has raised concerns among polymer producers in Indonesia and the Philippines about intense competition from Singapore and Thailand leading to a erosion in market shares.

Producers from these two countries are lobbying to defer or block implementation of zero tariffs. But a trade lawyer says the going will be difficult.

"I have heard that Indonesia is pushing for a postponement of the new duty structure. Even if the government agrees the customs department is not prepared as [new] forms are not ready," says one Singapore-based exporter.

But Edmund Sim, partner with Appleton Luff, points out that it would be difficult for Indonesia to renegotiate as the agreement has already been ratified. "It is pretty much impossible," he says.

Pic source: Fotopedia

"What is allowed under the free trade agreement (FTA) terms is for a country to suspend tariff concessions if it can be determined that increased imports have caused injury or economic damage to local companies. But in the history of FTAs this has very rarely been implemented. And even if this is put place it would be a temporary measure - say for a period of 3-5 years," says Sim.

The second option is to go for antidumping action.

"If the industry is worried about a flood of imports they can go in for this option by proving that pricing was unfair and that the local industry suffered material injury. This type of action is possible and can be extended for an indefinite period," says Sim.

But this is an expensive option because of high legal fees and it takes time to enforce. Companies also have to wait for a few months before they can initiate action.

"You have to build a record. You cannot say on 2nd January that there is dumping. You need time to build the case; usually 6-8 months is enough to get data to make a claim," he points out.

"The simple option [of raising import duties] ended when the FTA was signed. Now they have the safeguard option, which is untested, or antidumping, he adds.

Besides the Asean FTA, Indonesian media has reported that companies are also asking for a delay in the implementation of the Asean-China FTA, which comes into force from 1 January 2010.

There is a provision in the Asean-China FTA for a temporary delay in tariff reduction by reclassifying goods as 'sensitive' and 'highly sensitive' products. The duty elimination could then be delayed to 1 January 2015.

But the problem for Indonesia is that there are limits on the number of 'sensitive' and 'highly sensitive' products and the deadline for classifying goods was back in 2004, points out Sim.

It is also uncertain whether China and other Asean countries will allow Indonesia to deviate from the FTA.

"Either way, for Indonesia to delay tariff elimination will require some agreement by the other Asean members and China [in the case of the China-Asean FTA] otherwise Indonesia will be in breach of its legal obligations," says Sim.

By John Richardson

China's capacity to produce polyethylene and polypropylene will expand at a double-digit pace next year, while demand growth is expected to ease, says Longston Li, analyst at Shanghai-based CBI.

CBI expects China's polyethylene (PE) capacity would jump by 1.99m tonnes in 2010 to 11.1m tonnes, while its polypropylene (PP) capacity would increase by 2.74m tonnes to 12.7m tonnes.

"This will include not only new capacities due to start next year, but the impact of plants that were commissioned in the second half of 2009. Many of the players in the China market believe there will be great supply pressure in 2010," says Li.

China's PP output could rise by as much as 2.6m tonnes next year when plants commissioned in the second half of this year were taken into account.

While demand for PE and PP will continue to increase the extraordinary growth witnessed this year (see this entry) may not happen again.

Li expects PE demand to rise 7.1% next year to 16.27m tonnes in 2010, while PP demand would grow 12% to 14.55m tonnes next year, moderating from the projected 31.5% surge in demand for PE and 24% jump for PP in 2009.

The following excel file has a list of Chinese PE and PP projects due to start next year.
China 2010 projects.xls

Polyethylene (PE) and polypropylene (PP) producers expect trade to pick up only from the second quarter of 2010 when restocking activity will resume, writes our colleague Bee Lin.

Chinese importers are unlikely to build stocks before the Lunar New Year holidays which are in February. Operating rates at plastic units would also be low during this period.

Producers would then have to wait until March for a revival by when they would also see some support emerge from olefin markets. A heavy cracker turnaround schedule in Asia next year should keep ethylene and propylene supplies tight and prices firm.

An estimated 22 crackers would be shut for maintenance in 2010 compared with 15 facilities that were taken off line in 2009.

By Malini Hariharan

Even as market players celebrate the finish of what has been an unexpectedly good year there are not many who expect a repeat performance.

A key concern is Chinese demand which saved the industry in 2009. A massive government stimulus package boosted domestic consumption and imports of a wide range of petrochemicals.

But is this sustainable? And no is the answer that I am hearing. That of course makes betting on China a risky proposition.

Pic source: kafka4prez

"We expect Chinese demand to be good in the first quarter. But what will happen in the second quarter will depend on whether government stimulus will continue. Margins were good in 2009, but they will probably be squeezed next year," says a South Korean polyethylene exporter.

David Jiang of Beijing-based Sinodata Consulting says the Chinese government can't continue investing for growth.

"China faces an overinvestment problem in the coming years. Many industries face oversupply. Chemical companies are building plants for polyvinyl chloride (PVC), methanol or dimethyl ether (DME) despite low operating rates. The average industry operating for methanol and DME in H1 2009 was only 30-40%," he points out.

These investments are mostly made on government funding and few promoters care if the projects will make money. "It is a government gift," he adds.

Any deceleration in Chinese demand next year would coincide with the completion of more new projects in the country and elsewhere in the region. New capacities commissioned in 2009 are also expected to stabilize operations next year.

"We may be entering a period when supply would be easing. Will demand growth offset that? I kind of doubt it," says Mazlan Razak of Dewitt & Co.

But there are also reasons to not be too pessimistic about 2010.

Firstly, the global economic outlook looks better next year. This means that on the demand side, things will pick up in the rest of the world, points out Mazlan.

And though the Chinese government is likely to go easy on its stimulus program, it is unlikely to allow the economy to slow down.

A rise in the yuan dollar exchange rate could draw money from overseas and keep the asset bubbles from bursting.

A stronger yuan would make imports attractive and support overseas players in the Chinese market, says the Korean exporter.

China has the resources to chase growth and it has regularly been surprising sceptics. Let's hope it will once again do so.

By Malini Hariharan and John Richardson

Expect the unexpected and you probably stand a good chance of making money in the polymer market.

Defying expectations of a slowdown in demand ahead of the Chinese new year in February markets have started 2010 with a bang - material is short and prices are steadily moving up.

Prices have risen by $50-170/tonne from early December. LdPE is now being talked about at $1450/tonne cfr China, lldPE at close to $1400/tonne cfr China while hdPE at $1350-1450/tonne. PP has hit $1300/tonne in China and one trader thinks that it will cross $1350/tonne by the end of the week.

"I bought a load of material in December and so I am delighted. Everyone else was being bearish, but I thought with the economy doing so well, why not [buy]," says a second trader

The first trader describes the markets as "being on fire" supported by the strength in crude oil prices ($81/bbl today) and tight availability because of plant problems in the Middle East and Asia.

Supplies from new plants (Sharq, Yansab, Fujian Petrochemical and Dushanzi Petrochemical) are still not arriving as expected, says a third trader. And if you add turnarounds and operating problems to the equation buyers face a very tight market.

However, there is still not much confidence that the bull run can be continue after operations at new plants stabilize. Concerns about the health of the global economic continue to cloud the picture. There is nervousness in some quarters that very high prices will only lead to a steep fall in the future. "Remember 2008? Everyone is scared of a repeat," says one producer.

But leave room for the unexpected to create surprises at least in the short term. For instance, severe winter conditions across most of the northern hemisphere are affecting petrochemical production.

Pic source: Xinhuanet

Our colleagues at ICIS news have reported that naphtha is short in Asia as a result of reduced shipments from Europe. This has forced lower operating rates at some aromatics units and Formosa's three crackers in Taiwan.

There have also been unconfirmed reports of a reduction in operating rates at some crackers in Europe.

In China, heavy snow in the northern provinces has closed expressways and affected movement of products, reports ICIS news. Chemical producers were also facing power shortages and they do no expect the situation to ease before March.

And China's cold spell could also affect start up of new plants. The second trader says Tianjin Petrochemical's new cracker complex is likely to start only after the Chinese new year, a delay from the earlier target of end-2009.

We have also heard that start up of new methanol-to-propylene (MTP) projects in the north, such as the Datang Power project, could be delayed to the second quarter.

"This season is not good to start up; companies would not like to take the risk," says a Beijing-based industry source.

More delays would tighten supplies further. And if demand holds up the bull run may not end very soon.

By Malini Hariharan

The Wednesday post on this blog highlighted some of the unexpected turns that the Asian polyolefins market has been taking.

There have been more developments over the last two days that are likely to influence markets in the short term.

• ICIS news reports that Sabic will significantly cut its January and February polyethylene (PE) allocations to China and Southeast Asia due to some production problems. The company's buyers have confirmed this. One Chinese buyer said that his allocation has been cut by as much as 60-70%. PE prices had not reacted to this news today and were still weighed down by Thursday's sharp fall in lldPE futures on the Dalian Commodity Exchange, said traders.
• Ineos was forced to shut its 320,000 tonnes/year lldPE plant in the UK due to problems caused by cold weather. This could further tighten the European market.
• An explosion in a naphtha storage tank at Lanzhou Petrochemical killed five people. The company, a subsidiary of PetroChina, has shut down a 240,000 tonnes/year cracker and associated PE and PP plants at the site as a precautionary measure. Its other 460,000 tonnes/year cracker, in the same area but at another site, has not been affected.

Pic Source: Xinhuanet

• And petrochemical production at Texas in the US could be affected by unusually cold weather. Temperatures in the region have hit a 14-year low and are expected to remain at current level for the next three days. Companies have started taking precautionary measures but some traders fear the weather could trigger outages.

By John Richardson

THE BIG gap in credit growth between China and the developed world has been thrown into further relief by recently released data - raising inflationary concerns in the world's most important economy, while emphasising how rich-world countries remain on government life-support systems.

Broad money supply growth was a huge 30% in China in the ten months to November 2009, according to The Economist.

This compares with a fall in money in supply in the Euro area over the past year with US money supply only increasing by 1.2% in the six months to November last year.

In Australia, lending to the business sector declined by 8.2% in November 2009 year-on-year, said the Reserve Bank of Australia (RBS).

A strong indication of the importance of government life-support is that thanks to low interest rates and Canberra's tax credits for first-time buyers, credit to the real-estate sector grew by 8.2% in November over the same month in 2008, the RBS added.

This supports the anecdotal stories I keep picking up of credit remaining very tight in the developed world, particularly for small -to medium-sized chemicals companies, end-users and traders. While banking systems might have been rescued from financial collapse, the surviving banks are too busy rebuilding capital to take the risk of increasing lending to businesses - and perhaps also because they fear another bust could be around the corner.

It also seems likely that even where banks are more relaxed about credit, rich-world companies in certain sectors - certainly including chemicals - are maintaining very tight cash-management policies because of this same fear of another bust.

"In this financial environment no-one is holding more than 2-3 weeks inventory cover," said an Australian plastics processor.

"Who could finance it and take the risk in (such) a volatile market?"

Some converters have, according to one Singapore-based polyolefins trader, been constantly caught out by new supply that hasn't arrived due to all the project delays -and now most recently production problems in Saudi Arabia.

This forced them to restock when low inventory levels became quickly depleted during several supply-side shocks in 2009 and into the first weeks of this year. This has made an awful lot of money for the traders.

The converters - and also many of their suppliers who also continue to exercise careful cash-management - appear to be aware of the risk of a sudden collapse in crude and other commodity prices.

The danger of a mini-repeat of H2 2008 lingers. Everyone down all the chemicals chains could again be left with big inventory losses if the bull-runs in crude, commodity and equity markets suddenly come to an end at a time when stocks are high.

But as Paul Hodges, chemicals consultant with International eChem has pointed out, rising crude and chemicals prices automatically increase potential losses - no matter how strict your inventory management.

Watch out for much more on all these themes (and a great deal more) throughout this week.

Source of picture: www.forums.comicbookresources.com

By John Richardson

I loved the analogy in yesterday's Lex column in the Financial Times, comparing the objectives of any central bank to those of Kaa, the python in Jungle Book (nice excuse for a picture to brighten up the blog).

The serious point is that while issuing assurances that overall policies supporting growth remain in place, the job of any central bank is to at the same time gradually stifle signs of overheating without alerting the rank-and-file noticing.

China failed in late 2007 to lull the average girl or guy in the street to sleep - as we've noted before - through introducing overly harsh slowdown measures that caused the country's last big economic contraction.

The raising of the reserve requirement ration to 15.5% from 15% for big commercial banks - which was announced last week and came into effect yesterday - was hardly likely to go unnoticed.

As a senior contact we spoke to yesterday commented, polyolefin prices "paused for breath" at the end of last week on the news as other commodity and equity markets slipped very slightly. 

But nobody is pressing the panic button as yet.

Lex adds, though, that fourth-quarter GDP (gross domestic) numbers are due out on Thursday.

If these indicate what the government agrees are more signs of dangerous overheating, then other measures might be taken sooner rather than later - perhaps interest and/or deposit-rate rises.

Previously, we had been told that further tightening using one of the three big economic sticks (bank reserve requirements, deposit or interest rates) was unlikely over the next few months - and possibly not until the second half of the year.

The risk of investor panic might cause hesitation, though, despite the data meriting swift measures; it's very hard for China to do anything these days without what seems like infinite scrutiny.

In other words if China fails to act soon - because it's caught in the global economic headlights with no chance of  escape - it could be storing up bigger problems for the future.

By John Richardson

Linear-low density polyethylene (LLDPE) pricing in China has become increasingly divorced from industry fundamentals as a result of the growing role of the Dalian Commodity Exchange's futures contract, claimed a Singapore-based polyolefin trader late last week.

And the contract is setting the physical market, resulting in Dalian performing a similar role that of NYMEX on the price of crude as result of very easy lending conditions, a petrochemicals consultant added today.

Financial as well as polyolefin industry players have become heavily involved in Dalian, the trader added.

The big growth in LLDPE volumes traded last year -as this chart from my fellow Paul Hodges illustrates - was supported by the huge surge in banking lending in China.

The contract is also being used by polyolefin traders to make money through pure one-way speculation and as a means to hedge risk in the physical market, the trader said.

"Buyers are using the contract to hedge, although I have seen little evidence of producers trading on the exchange.

"Everybody seems to be using the exchange as an indication of sentiment and if they are not actually setting pricing off Dalian, they are using it as a guide."

But the consultant added: "I believe that Dalian is, in fact, setting the physical market as PE becomes more speculative.

"It has come to play the same role as NYMEX for crude oil, meaning that the contract often moves on sentiment and speculation rather than on fundamentals."

Assessing the pricing outlook for PE now involves looking at comparative margins on real estate, equities and other futures contracts in metals and agricultural commodities, the trader continued.

"It's not just about looking at supply and demand fundamentals anymore," he said.

"Financial and chemicals industry player will look at margins across all the different futures contracts, and in equities and in real estate, to decide where the best returns lie and flip their money accordingly. I have to do the same to figure out PE price direction."

China's huge increase in lending has had comparable effects on the physical market with polyolefin traders, and traders in other chemicals and polymers, sometimes only buying a particular cargo in order to get their hands on credit in order to speculate elsewhere.

This has led to some chemicals and polymers cargoes being sold at below cost because sufficient profits have been made in other commodities.

"It's also worked the other way round - i.e. somebody raising credit through buying another commodity because his main objective has been to speculate in polyolefins," added the trader.

So go figure this: You have an increasingly speculative physical PE market which is so divorced from the fundamentals that there's a bigger need to hedge. The problem is that one of the major hedging mechanisms - the Dalian contract - is also highly speculative!

The multi-million dollar question now is whether China's decision to tighten liquidity through raising the reserve requirement for commercial banks will reduce the amount of froth in the PE market and across commodities in general - both for physical cargoes and on futures exchanges.

As Paul Hodges also noted last week, several fiscal tightening measures have already taken place which could reduce trading volumes in both the Dalian LLDPE and polyvinyl chloride (PVC) futures contracts. We will look at relationship between physical PVC pricing and the futures contract in a later post.

LLDPE trading volumes so far this year are down by 27.77% on January 2009, according to the exchange's website today.

This might make a successful launch of a major futures contract in polypropylene (PP) - rumoured to be under evaluation in China this year - problematic.

PP producers are reportedly jostling for position to get their grades accepted under this planned contract in order to support physical sales.

If a grade made by only one producer is traded through a PP contract, a hedger could be more likely to also buy physical volumes of that grade as, in theory, hedging should work more efficiently.

But China constantly loosens and tightens credit and so, even if Dalian becomes less relevant this year, it might well come back.

There are also indications that the Chinese government wants to make exchanges such as Dalian more sophisticated in order to set its own global benchmark prices for commodities.

"It no longer wants to be just the price taker from exchanges such as NYMEX. It also wants to be the price setter," said a Shanghai-based chemicals industry observer late last year.

By Malini Hariharan

After experiencing steep price hikes over the last few weeks should seller start preparing for a fall? Signs of resistance and a slowdown in buying are being seen across a few products suggesting that price corrections may be imminent.

ICIS news reports today that the price rally in PE and PP in South Asia and the Midle East may reverse as buyer resistance is building up. The supply situation is also improving as plants in the Middle East have started ramping up operating rates.

Buyers in these markets are also taking cues from the Chinese market where buying is slowing down ahead of the Chinese new year holidays in mid-February.

And another ICIS news report yesterday talked of paraxylene (PX) markets turning bearish in the short-term as supply has lengthened following an easing of demand.

A Sinopec source is reported to have said that despite production issues in the Middle East and China and the heavy turnaround schedule in Japan, end-users were not buying as they did not have any immediate requirement to cover.

But the one factor that could halt or ease price corrections is naphtha which is running strong at around $750/tonne cfr Japan on tight supply.

By John Richardson

CHINA'S soaring fourth-quarter GDP (gross domestic product) growth - and the release of the latest inflation statistic - has heightened fears among economists that interest-rate rises will be necessary, risking collapse in house prices if it's not managed skilfully.

Inflation rose to 1.9% in December last year from 0.6% in November, according to this same article in today's Financial Times.

As we've mentioned before on this blog it was higher deposit rates in late 2007 that caused the country's last economic contraction as property values and the stock market fell.

On this occasion an inflationary head-of-steam is being built up through not only rising real-estate prices (they were up in Shenzhen by 90% last year, for example, indicating that much more moderate nationwide statistics don't reflect localised inflation hot spots), but also higher food and utilities costs.

Just a few weeks ago the betting seemed to be on no rate rises before the second half of this year.

Now with the release of this latest GDP growth number, as we had suggested might happen earlier this week when we quoted the Lex column in the Financial Times, some pundits now think a rate rise before then is likely.

Higher deposit and/or borrowing rates - to follow fiscal tightening measures that have already been taken - would have another negative consequence for China: A stronger Yuan, denting export competitiveness for an economy that still remains around one-third dependent an overseas trade, despite all the talk about booming local demand.

A growing view seems to be that the Yuan will arise by around 3% against the US dollar. This would also dampen some of the speculation that has boosted petrochemicas demand (see details in link in paragraph above).

Yesterday we quoted Mazlan Razak, petrochemicals consultant with DeWitt & Co in Kuala Lumpur, as saying: "The last time China tightened liquidity in 2007 we saw a dip in PE imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006."

This is obviously the impact on only one polymer, and so tread with great caution when making plans for this year.

By Malini Hariharan

Less then a week after the blog had highlighted Braskem's plans for global growth through acquisitions the company has announced that it will buy the polypropylene (PP) assets of US-based Sunoco.

The $350m deal, still subject to regulatory approvals, gives Braskem 950,000 tonnes/year of US capacity and makes it the third largest PP producer globally, ahead of Asian heavyweights such as Reliance Industries Formosa and PetroChina. Reliance is of course looking to become the largest PP producer by acquiring LyondellBasell.

Returning to Braskem, its chief financial officer Carlos Fadigas said that the acqusition makes the company the eighth largest resins producer globally and the aim is to be among the top five producers by 2010.

He also highlighted that the Sunoco deal was aimed at opening doors for other acquisitions in the U.S. Analysts expect Braskem to be looking at more PP and also PE assets in the US.

And analysts see Braskem using US plants to tap Asian markets.

In an ICIS news report Walter de Vitto, oil and gas analyst for Tendencias Consultoriaa said: "Braskem's strategy is to use Brazil as its base and produce resins in the US at lower costs compared with Brazil, which would make its products more competitive in the international market and could open other doors in Asia."

"By entering the US market, Braskem would have cheaper natural gas as feedstock, which would make access to Asian markets more feasible," de Vitto said.

Braskem did point out yesterday that the Sunoco buy makes it one of the most competitive PP producers in the US as two of Sunoco's plants are located outside the US Gulf giving it access to refinery propylene at a discount.

The feedstock advantage stems from reduced logistics costs, said Fadigas, adding that 60% of US refineries are located outside the US Gulf area.

Sunoco has 70% of its feedstocks on contract and relies on the spot market for the remaining 30%, reports ICIS news.

"Hello everybody - welcome to the island of Sodor. Time to flip your positions'

Source of picture: www.dragoart.com

By John Richardson

MY three-year-old son has, quite rightly, an incredibly short attention span. A child of that age should be overwhelmed with the excitement of lots of wonderful experiences and possibilities.

But I would argue that some of those who write about and analyse financial and commodity markets should be able to retain a consistent thread of thought for slightly longer than it takes my son to switch from wanting to play Thomas The Tank Engine train tracks to screaming, stamping his foot and demanding a splash-around in the swimming pool.

There's a lot more money riding on effectively playing the deception game these days, though - for example, $20bn was invested in the oil futures markets in the first half of last year compared with $8bn in H1 2008, according to a commodities consultant.

So the motive to talk up good news or amplify bad news from one day to the next is incredibly strong, thanks to a ludicrous waste of government money that should have gone into creating real jobs in real and worthwhile industries.

To give you an example, the world was all doom and gloom late last week on tightening credit in China, poor economic news out of the US and the wider implications of Greece's government-debt crisis. Commodities prices across-the-board had been softening for several weeks.

And then on Tuesday of this week, whoosh - we had been saved by bullish global manufacturing data and manufacturers' sentiment indices.

Oil prices, as a result, had bounced back by earlier today to $76-77/bbl from around $73/bbl late last week.

Benzene bids for March loading were at $965/tonne FOB Korea and offers for April material at $980/tonne FOB Korea at noon today, according to ICIS news.

Benzene had been assessed at $910-935/tonne FOB Korea by ICIS pricing on 29 January, $115/tonne lower than the week before.

This is not a criticism, by the way, of my colleagues at ICIS pricing as their job - and it's a very difficult one - is to reflect the day-to-day shifts in sentiment in highly liquid markets such as benzene.

Short-term benzene price direction is increasingly being driven by erratic intra-day movements in crude - reflecting the huge capacity to gamble in oil futures. Every scrap of contradictory macroeconomic news and trade data is being seized upon to make a fast buck.

Perspective is what's needed and a big, deep proverbial breath, provided by journalists such as those who write the excellent Lex column in the Financial Times.

In Tuesday's column - on the release of all that bullish trade data etc - Lex wrote: "Surveys can be disconnected from reality. In the US, for example, the Institute of Supply Manager's survey (the latest figures from which were very strong) excludes small companies and therefore half the workforce."

If only all the front-page headlines on that same day had read something like "Surveys Can Be Disconnected From Reality".

One can but dream....

By Malini Hariharan

I have been reading a transcript of Dow Chemical's Q4 2009 earnings call and here are some interesting comments made by Andrew Liveris, the company's ceo.

Despite recording revenue and volume growth in 2009 Liveris was cautious on the outlook for 2010 citing an uncertain economic environment.

But constraints in Middle East supplies could lead to an early recovery.

"Even though there will be capacity adds, it won't come on when people think it will come on. We are one of the best operators out there and we had a slow start up of our Kuwait assets and we are very good at this. So I would tell you, you have not as much supply coming on as people think."

On the demand side, if global GDP expands at around 3% this year it would result in polyethylene (PE) demand growth of 4.5%. As global inventories are low across the chain restocking would push growth above this level, he said

Add to this 6-9m tonnes of high cost liquids cracking capacity rationalisation, 3m of which is already permanently down, gas not as freely available in the Middle East as people think and ethane cost advantage in the US which is now the second lowest cost producer on ethane.

Pic source: ICIS

"So when you put all that together, I think there is a case for a trough-like environment in 2010 with the excess capacity, a recovery in 2011 and a peak environment in the 2013 timeframe," he said.

He pointed out that Dow had effectively capitalised on its flexi-feed crackers and 20% of its US production in Q4 2009 was exported to China.

On implementing the asset-light strategy for basic chemicals, Liveris stressed that he was "not in a hurry to get it done at the wrong valuation" especially as the business generated an EBITDA of 1.7 last year.

"That is in a trough, demand led trough and great recession of all time. So we know we have a very high performing asset. The partners we are talking to are all strategic. There is three of them," he said.

And Dow was keen to implement the asset-light strategy for its chlorine business after completing ethylene-PE and styrenics.

"Today a good chunk of our chlorine capacity in Louisiana and Texas will feed our downstream chlorine envelope for performance businesses and be advantaged because it is integrated. You can expect us though to continue to find meaningful partnerships with people who want to be in PVC. So in essence, we will use our competitive advantage to partner with others because you have to have scale in the chlorine side. That should help us create an asset-light strategy for chlorine. We are determined to do that."

ICIS news also reports that Dow still plans to start up the first units at its Ras Tanura joint venture with Saudi Aramco in 2014 or 2015.

Prices have fallen for Middle Eastern engineering, procurement and construction (EPC) contracts and this has given a reason for Dow to delay releasing contracts.

But Liveris said Ras Tanura was moving ahead 'nicely on its milestones" and Dow would have more to say on the project by the middle of the year.

By John Richardson

The start of the next dip in what this blog has long thought would be a double-dip economic crisis looks as if it could have begun.

If not now, it's going to happen at some point because of major global imbalances.

What's worrying right now is the combination of:

*Potentially weaker demand from Chinas as credit is tightened due to inflation concerns

*Government debt crises in Europe

*More negative than positive news on employment from the US

Further evidence of China's inflation challenge has emerged with the announcement that Jiangsu province, in eastern China, is to raise its minimum wage by at least 12% . Other major exporting and manufacturing provinces are expected to follow.

Concerns over Greece's ability to fund its budget deficit - along with other Euro zone countries such as Spain and Portugal - has been the main reason for the sharp fall in global equity and commodity markets over the last two weeks, according to the Financial Times.

Darius Kowalcyk, chief investment strategist at SJC Markets in Hong Kong, was quoted in the FT as saying that contagion thinking was behind the sell-off as concerns grew over a new global downturn.

"Asia continues to be so dependent on exports to the developed world, that if these developed market governments cannot fund their stimulus spending, then they will not grow and Asian exports will suffer," he added.

The across-the-broad collapse in markets is being partly blamed on exchange-traded funds - for example, the US dollar/crude funds. These operate via highly complex super-fast computer programmes that can move hundreds of millions of dollars within a fraction of a second.

The greenback has rallied as a shelter in the new economic storm, forcing crude down - revealing the lie that the rebound in oil was mainly due to stronger macroeconomic fundamentals.

Last year was a story of huge global economic stimulus with little or no focus on when this spending would have to be reduced.

"It seems the market (now) wants to accelerate an issue (winding down this spending) that the authorities were hoping that time would heal," Jim Reid, strategist at Deutsche Bank was quoted as saying in the FT.

A McKinsey report on Western debt - released last month - warned that investors might worry about public debt before private sector deleveraging had been completed.

The result could be a cut back in public debt before the private sector had completed its own reduction, damaging growth by far more than if an orderly wind-down took place, the report added.

Even with an orderly wind-down it could take a further six-to-seven years for the West to bring debt down to sustainable levels, said the study.

Worries over public debt in the Euro zone has caused a sharp fall in the shares of European banks with big exposure to weaker economies such as Greece, Spain, Portugal - and also Ireland and the UK (see table below from the European Commission, via The Economist, of the world's biggest national debtors measured as percentage of GDP).

 The full article in The Economist where this table was drawn from is well worth a read.

Logically, therefore these European banks might have to tighten lending - stifling finance to companies, particularly the medium and small-sized.

As for US unemployment, the overall jobless rate had fallen to 9.7% from 10% in January, with the retail and manufacturing sectors gaining 42,000 and 11,000 new jobs respectively.

But 8.4m jobs have been lost since the crisis began, 1m higher than previously estimated.

And most disturbingly of all, long-term unemployment - those without a job for 27 weeks - jumped to 6.3m from 2.7m a year earlier in January!!!

We'll be looking at the effect that these macro issues will have on chemicals over the next week or so.

By Malini Hariharan

A few weeks back I had written about robust demand growth figures emerging from the Indian polymer market. I will be posting some numbers over the next few days but ahead of that I would like to highlight what industry players have been saying on the major growth drivers and also developments in the BOPP sector where huge capacity additions are underway.

Polyethylene (PE), polyvinyl chloride (PVC) and polypropylene (PP) posted double-digit growth in 2009 and even polystyrene (PS), a laggard in the best of times, also reported a positive story.

Restocking has contributed to the numbers but producers also report a fundamental increase in demand. It must be remembered that India was one of the few countries to post growth during the meltdown of 2008.

Packaging and infrastructure continue to remain the key drivers with healthy contribution also from the automobile and electronics sectors.

A strike called by jute workers in December has helped increase sales of PP and hdPE in the raffia sector. India's Jute Packaging Materials Act mandates that jute should be used for most foodgrain packaging. But the strike has curtailed jute supply and prompted government departments to issue orders for raffia bags.

Orders amounting to 20,000-25,000 tonnes of PP have already been issued, says one industry source. And as the strike is still on, a second source estimates that the figure is likely to hit 50,000 tonnes by 31 March 2010. This figure includes hdPE but PP will have a bigger share.

"If the strike continues there is going to be tremendous pressure on raffia grade," says the first source.

And the second source adds that many processors who have received government orders for raffia bags are facing problems in securing material.

The raffia sector accounts for around 32% of PP demand and 16% of hdPE.
PP volumes in this segment are estimated to have grown by nearly 20% during April-December 2009.

Moving to BOPP, this segment continues to show good growth but processors expressed concern about the overcapacity that is building up in the country.

India's installed capacity for BOPP film during fiscal 2009-10 is estimated at around 258,000 tonnes/year during 2009-10. This is projected to rise to 336,000 tonnes/year in 2010-11. Demand in 2009-10 was around 195,000 tonnes and is expected to reach 250,000 in 2010-11.

Indian manufacturers of BOPP film will have to export but face competition from China.

"There are three places in world where demand growth is growing - India, Middle East and China," says Indrajit Ghosh, general manager business development, at Uflex.

But the problem is that capacity additions are taking place at all three locations.

He estimates that global BOPP capacity last year was around 5.7m tonnes last year as against demand of 5.3-5.4m. Global demand growth is expected to be in the 7-8%/year range.

"There are huge capacity increases taking place in the Middle East and Africa - Rowad International will add a 3000 tonnes/month line in Saudi Arabia; Gulf Packaging will start a 2500 tonnes/month line in Saudi Arabia; Flex will commission a 3000 tonnes/month line in Egypt and two plants with a total capacity of 6000 tonnes/month will start in Nigeria," says Ghosh.

Uflex will also be starting a line in Egypt in the next three months.

"There are lots of plants in China and the country is continuing to expand. Every year 8-10 new lines are coming up," he adds.

And the problem is that China too will be aggressively targeting the export market.

By John Richardson

MORE evidence that China will not remain as easy a sink for surplus polyolefin volumes - especially in the case of the higher-cost importers - is emerging.

"There are plans to open a bonded warehouse in Guangdong province to sell RMB material converted into US dollar product," a Singapore-based polyolefin trader told me yesterday.

Those who want to buy polyolefins for re-export as finished goods always prefer to buy overseas material priced in US dollars, as this is exempt from the full 17.5% rate of value-added tax (VAT).

The importers deliver this stuff into bonded warehouses ahead of collection for processing and re-export.

"If the manufacturers involved in the re-export trade were to buy RMB material they would only be exempt from 13 percentage points of the VAT," the trader added.

"As a result, it's always more expensive to buy local material for this purpose."

But if there are now plans to deliver Sinopec and PetroChina-sourced product into a bonded warehouse, the competitive landscape might have started to shift.

"How it works is once you have converted RMB-priced product into resin priced in US dollars, which has to involve the use of a bonded warehouse, it becomes exempt from the full rate of VAT - the same as the imports," continued the trader.

"The only drawback is that you cannot then re-price the polymer back into RMB."

China is rapidly increasing its polyolefin capacity, therefore making the option to supply into this re-export market more viable as it is no longer as dependent on overseas suppliers.

The country's polyethylene (PE) capacity is due to increase by 1.99m tonne/year in 2010 to 11.1m tonne/year, while its ability to produce polypropylene (PP) is to set to rise by 2.74m tonne/year to 12.7m tonne/year, according to Shanghai-based commodity information service, CBI.

It's easy to imagine much more local volume being delivered into bonded warehouses as China's capability to produce polyolefins continues to improve.

China's producers are able to minimise costs in ways not open to some of the higher-cost importers, such as those in South Korea and Japan who operate sub-world-scale naphtha-based cracker and derivative complexes.

Some exporters from Europe would also be vulnerable, while the US ethane gas advantage might be able to buy a number of its PE players a little more time.

The commodity-grade end of the business could end up even more firmly in the hands of the local Chinese producers and the Middle East players.

By Malini Hariharan

India will soon initiate an anti-dumping investigation into polypropylene (PP) imports from South Korea, Taiwan and the US. This follows an application made by Indian PP producers last year.

A couple of market sources have forwarded the letter that has been issued to the embassies of the three countries and a government notification will be issued soon.

PP imports during July 2008-June 2009 will be investigated.

Meanwhile, the Indian government has yet to present its final findings on an anti-dumping case that was launched last year on PP imports from Saudi Arabia, Singapore and Oman.

Provisional duties for six months were announced in July last year.

"Technically there should be no provisional duties; but the final findings are likely to be presented only in mid-March," said a trader.

He also highlighted that importers were facing problems in clearing material sourced from producers hit by provisional anti-dumping duties.

"The customs department is not releasing material and asking for a bond," he said.

A second market source said a notification on extension of provisional duties by two months was likely to be released soon.

A post-Chinese New Year dream....

Source of picture: http://www.scsa.net.au/

By John Richardson

The large amount of polyolefins delivered to China over the past few months is causing further head-scratching and anxiety among producers and traders.

One view, well rehearsed previously on this blog, is that this is further evidence of a speculative bubble that will pop as a result of tighter bank lending in China.

There might be even more pressure on this "bubble" following China's 12 February decision to raise bank-reserve requirements for the second time in a month.

However, some economists argue that was only to be expected, and is a regular tightening exercise that takes place post Chinese New Year (CNY) to even-out lending. There is traditionally a surge in lending ahead of the CNY.

The big anti-inflationary step, which has yet to happen, would be to raise deposit and/or lending rates, they argue.

Returning to polyolefin markets, the optimistic view is that widely reported high inventory levels will be quickly absorbed when CNY comes to an end (the official holidays in China run from 14-19 February).

High stocks are being reported both in bonded warehouses (for imported US dollar-priced material) and in other warehouses (for locally, yuan-priced product).

"Around 1.3m-1.4m tonnes of polyolefins were delivered to China in December and a further 1.3m-1.4m tonnes in January, according to our analysis," said a Singapore-based trader, who is among the optimists.

"Although China's imports of many products are generally high in December, prior to a slowdown for the [Lunar New Year holidays] in January/February, the volumes this December were exceptionally high," said Jean Sudol, president of US-based trade-data analysis service, International Trader Publications.

This suggests that there might be inventory pressures in China in more than just polyolefins, given that January is always a quiet time for demand across the board.

So what drove reports of in the context of what is already going to be a stellar year for shipments to China?

"In early November, linear low density polyethylene (LLDPE) prices for physical cargoes were below those on [the] Dalian for the settlement month of May 2010 and beyond," said the trader.

(China's Dalian Commodity Exchange offers monthly futures contracts in LLDPE film up to a year ahead. The contracts have become an important indicator of sentiment and therefore physical price direction).

"The stronger futures pricing in early November reflected crude increasing to around $82/bbl and forecasts from banks that it would reach $95-100/tonne in 2010," he added.

"It was also down to confidence that Chinese growth would remain very robust in 2010.

"[The] Dalian is used as a proxy for the direction of all physical polyolefin pricing, and so we saw a lot of interest from traders in acquiring all grades of PE and polypropylene (PP) to ship to China, after this early November turning point."

Low density PE (LDPE) was also buoyed by very tight supply due to outages, he said.

This analysis of what drove increased imports and prices in November-January was supported by a source with a major global polyolefin producer.

"It's easy to assume high inventories in China indicate a bubble, but I am not that sure," said the source.

"On the growth side, yes, measures have already been taken to cool the property sector. There might also be a little less easy money available to fund speculation and discretionary spending on consumer goods.

"But I think this will be replaced by further strong consumption growth in less-developed regions, and huge government infrastructure spending throughout China.

"Infrastructure projects launched last year have yet to be completed with more spending on roads, railways etc still to come."

The Singapore-based trader and the source with the producer both point to the absence of panic among the Chinese traders and distributors holding high stocks.

"Nobody is in a rush to liquidate. The reason is that despite the credit tightening, possible US restrictions on proprietary trading by banks and more anxiety over European government debt problems, polyolefin pricing has only edged down since late January," said the trader.

Prices for several grades of PE in Asia fell by $10-50/tonne for the week ending 5 February, according to ICIS pricing. PP remained either stable or increased by $20-30/tonne, depending on the grade.

Both PE and PP pricing were reported to be stable for the week ending 12 February as the Asian market was closed for the Lunar New Year holidays.

One might well ask what on earth the connection is between a possible US clampdown on investment banks, sovereign debt issues in southern Europe and polyolefin pricing.

"The link is that on a day-to-day basis at least, sentiment in wider commodity and equity markets is playing an increasing role in what people are prepared to pay for polyolefins," said the producer.

Low producer inventories outside China are a big factor behind why pricing has only eased slightly since the gloomy macroeconomic news broke, said the trader.

"Producers have managed their stocks so well that they can afford not to budge on what is pretty much theoretical pricing at the moment, as the market is so quiet ahead of the [Lunar New Year]."

Concurring with the producer's view on continued strong economic growth in China during 2010, the trader added: "As early as the first week of March, we should begin to see the strength of demand after the New Year.

"I think we will see these high polyolefin inventories easily absorbed as Chinese buying picks up ahead of the peak season for manufacturing finished goods, which occurs during the summer months."

Let's hope for everyone's sake that he proves to be right, as further strong support from China is crucial for the survival of this tentative, very nervy and very patchy recovery.

By Malini Hariharan

It is not surprising to read that Reliance Industries has raised its offer for LyondellBasell by $1bn to $14.5bn. The blog had been told last month that a higher offer was one of the strategic moves that Reliance would have to make.

The Wall Street Journal reports the new Reliance offer would give some creditors a chance to get cash for their claims. "Creditors could also choose to receive stock in the restructured Lyondell under the new offer. A third option would allow some creditors to receive stock and also purchase additional Lyondell stock in a rights offering," it states.

And the revised offer would give Reliance only a minority stake in the company but also a supervoting power to control Lyondell's board.

A source close to developments had earlier told the blog that Reliance would not be interested in a small stake.

"Anything less than 26% would not be acceptable; [with 26%] there is a possibility of a board seat; there is some legal standing," he had said.

The source was, however, unwilling to comment today on the latest move and would only say that the deal was at a sensitive stage.

The Wall Street Journal also reports that Reliance has been attempting to persuade LyondellBasell to accept its offer as "a tie-up would create up to $1 billion in cost savings from synergies between the two companies".

But will this coupled with the $14.5bn offer be enough to tempt a reluctant LyondellBasell management? Maybe not as the company's own restructuring plan is said to value LyondellBasell at $15.5bn.

The company's recent announcement that it has reached a $450m settlement to satisfy a dispute with unsecured creditors indicates that it is making good progress on its own.

Is it time for Reliance to be more aggressive or is bumping up the offer a billion dollars at a time a better gameplan?

By Malini Hariharan

The China market appears to have started the year of the tiger on a strong note. We are not yet hearing a roar but at least it is not a whimper.

Pic source: Xinhua

A polyolefin market participant says that traders have started making enquiries after the Lunar New Year holidays. End-users are not yet coming up to buy but there has been a recovery in exports. "The order book scenario is getting better," he says.

There were some concerns before the holidays that inventory levels may be too high but he believes that they are not alarmingly so especially with the first line traders. "They look high considering the reduced number of working days [in February] but on a volume to volume basis they are at a normal level," he says.

Another polyolefin trader described the market as stable to tight. "International producers are waiting and watching. But the feeling is that local prices are getting better."

And there was positive news from the Dalian lldPE futures market which delivered a surprise yesterday moving by up 3%. The rise was attributed to higher crude oil values and a firm physical market. The rise in values contradicted earlier expectations that China PE prices would collapse after the holidays, market participants told ICIS news.

ICIS news also reports that offers for PVC edged up by $20/tonne after the holidays. While buyers had expected a fall in offer levels given the recent decline in feedstock costs producers said that strong seasonal demand would exert upward pressure on prices.

In a report released today Woori Investment & Securities says that prices of PE, PP, MEG and PTA moved up yesterday as the Chinese market reacted to the rise in crude prices during the holidays. And demand was firm on concerns of a supply shortfall due to maintenance shutdowns South Korean and Japanese plants over February-April. It has forecast petrochemical prices to remain solid through April.

It might still be too early to draw a clear picture of the next few months. Turnarounds will certainly constrain availability but a lot will also depend on the volumes that come out from the Middle East, especially from the plants that had faced operating issues in December-January. And not to forget there is also the influence that China's recent credit tightening moves will have on speculative activity and demand for petrochemicals.

By John Richardson

"IF YOU want to develop a good memory, you should learn to stop xxxxxxx forgetting, you brain-dead idiot" a former editor of mine often said, in his charming Glaswegian accent, after I had made the same mistake yet again.

The same might apply to petrochemicals where maybe, just maybe, shutting down capacity with so few new projects being planned post-2011 could end up being the wrong decision - prompted by the mistaken belief that history won't repeat itself.

This chart, drawn up by my colleague and fellow Asian Chemicals Connection blogger Malini Hariharan, lists the paucity of announced investments in the Middle East. (It's hard to think of that many projects elsewhere.)

The chart shows announced new ethylene additions for the region: 

Source: ICIS

"I noticed that 2015 was the date identified by KPMG by which time 14 of the 43 crackers in Europe should have shut down," said a senior industry source yesterday - referring to a recent study by the management consultancy.

"But by 2015-16 I think we could be in the midst of the next up-cycle and so anybody who exits this business, no matter how uncompetitive they seem to look right now, might end up regretting it."

I wasn't entirely sure, having only met this particular source once before, whether he was having a little fun with a gullible journalist by suggesting that old European crackers really have a future in a world dominated by the Chinese and the Middle East.

His broader point, though, was as old as the hills and might still have validity: Companies overbuild when they have money and markets are tight, suffer when supply lengthens and so hardly invest at all; they once again find themselves in very tight markets and so on and so on.

In the midst of all the talk of a new and permanently-changed competitive landscape, this reminds me of how the Japanese government back in the early 2000s warned that around 2m tonne/year of the country's uncompetitive ethylene capacity would have to close dow within a couple of years.

All of that capacity is still running and has made good money from the China boom.

The above scenario - of an upswing by 2015-16 - presupposes, though, that the world economy won't suffer any further cataclysmic setbacks.

Put yourself in the position of a European cracker operator with all the above uncertaintie. Unless you are absolutely forced to shut down why bother?

It would be pretty damned annoying to be the first to shutter your plant - only to later find out that you were also the last due to a strong market recovery!

By Malini Hariharan

Just when Asian propylene prices started easing comes news of disruptions in production and price hikes in the West.

Propylene availability in Europe was hit after a strike by Total's refinery workers early in the week resulted in the closure of 36% of France's C3 capacity. This forced Total to declare force majeure on propylene supplies. Then Shell Chemicals declared force majeure on ethylene and propylene supplies from its Moerdijk cracker in the Netherlands due to reduced operating rates.

The strike at Total has been called off and production at the refineries will be restarting soon but the developments helped tighten an already short European market and supported an increase in the March propylene contract price, reports ICIS news.

The US too is expected to see increases in propylene prices with one producer nominating a $110 increase for March.

Asian propylene prices have yet to react strongly to these developments although sellers are trying to raise prices. They will of course be supported in this endeavour by upcoming cracker turnarounds.

"Some traders are also trying to take Asian propylene to the West; we had an offer. But the arbitrage window is not big. Asia appears to be adequately supplied," says a source from a major Asian cracker operator.

Meanwhile, the propylene situation has started to impact PP markets. European buyers are bracing for PP price hikes in March while offers in the Middle East have already risen by $30/tonne, reports ICIS news. Availability from this region is likely to be constrained in March as Oman Polypropylene and Advanced Polypropylene will be carrying out maintenance shutdowns in March.

"Polymer markets opened with a bang after the Lunar New Year; prices went up yesterday. There are the Asian turnarounds and people are still struggling with new plants," the source points out. This is certainly creating room for optimism, he adds.

By Malini Hariharan

Many Asian aromatics producers are optimistic that the worst is over and a gradual improvement in global demand coupled with firm Chinese demand will help them through 2009.

There is also the expectation that a pressure on refining margins will lead to more plant closures which would also help the aromatics business.

A source at an integrated refinery and aromatics producer points out that nearly 2m bbls/day of refining capacity addition took place last year and another 800,000 bbls/day of capacity is due by next year.

"This will be offset by reduction in capacity in Europe and the US. We have seen reports that suggest that nearly 7m bbls/day of capacity will have to close," he says.

"In the future the refining industry needs more investment to meet environmental regulations. Investment at old plants this investment is not justified and they will have to close," he adds.

An industry analyst says that every refiner talks of closures but wants another company to implement them.

Refiners with high cost facilities in the West are the ones under greatest pressure but pushing through a capacity reduction programme is not always easy as Total's experience in France shows.

The company confirmed on 8 March that it would permanently shut down its Dunkirk operations due to a collapse in demand. The refinery had been idled in September last year.

Despite assurances of zero job losses unions were quick to call for a new strike.

The first source says that some refineries may limp along for a year or two. But eventually poor profitability will force a shutdown although governments may have to step in to help companies close plants.

By John Richardson

PROPYLENE pricing is heading for "a crash" in Asia as a result of spot supply increasing by around 20,000 tonne/month, a senior industry source has told the blog.

Shell Chemicals will have a surplus 440,000 tonne/year of C3s from its Singapore cracker - in the process of starting up right now - as the oil-to-chemicals major failed to attract propylene derivatives investors, he added.

"There will also be a substantial surplus from the Map Ta Phut complex when the Dow Chemical/Siam Cement cracker is on-stream."

The Dow/Siam cracker is again in the process of being commissioned.

A second industry source added: "The market is bracing itself for huge C3s surplus once Shell is fully operational.

"You can add to the Singapore and Thailand surpluses, 150,000 tonne/year from Vietnam (the PetroVietnam fluid catalytic cracker) and 100-150,000 tonne/year of additional supply from Saudi Arabia."

Olefins supply has been pretty tight in Asia of late, helping to support the sustained rally in polyolefins (see graph below)Source of graph: ICIS pricing

With a lot more polypropylene (PP) capacity due on-stream this year, it's easy to forecast that this greater supply will combine with weaker support from feedstocks to bring about the long-awaited trough in PP pricing.

"We are talking about an awful lot of extra spot C3s into what is a very thinly-traded spot market. I can see propylene going from being a co-product back to by-product status," added the first industry source.

More liquefied petroleum gas (LPG) cracking and changes in cracker severity will probably be methods producers use to reduce the propylene surplus.

PP producers might benefit. They should have greater ability to discount as they battle for market share against their polyethylene (PE) competitors.

(Ethylene markets will also become longer, with new merchant-market supply including 115,000 tonne/year from Shell in Singapore However, the total surpluses don't look as if they will be as disruptive as those in C3s)  

And the stand-alone PP producers - some of whom have had to shut down recently as a result of high C3 costs - may be able to resume production.

.....but time to party for some thanks to re-exports to Brazil

Source of picture: edgsgonesouth.com

By John Richardson

It's a funny old world - or so it seems in poylolefins at the moment as traders re-export resin from China to Latin America and elsewhere.

"I phoned up a trader in China the other day and asked if he wanted to buy some consignments of polyethylene (PE)," said another trader, based outside China.

"He asked me whether I would instead like to buy material for re-export."

And yet another trader - who is based in Singapore - added yesterday: "A lot of the re-exports have gone to Latin America, but I have also sold material to Bangladesh and Israel.

"Some of the shipments have made money. For example, I bought Linear-low Density PE (LLDPE) from Brazil at $1,170 CFR China a few months ago. Last week, I sold the same cargo back to Brazil at $1,450. With freight at $170/tonne I made a decent profit.

"Other re-exports have lost money, though, as traders have cut their losses due to high inventory levels in China.

"I estimate around a total of 10,000 tonnes has been re-exported over the last few weeks.

"This is a very small amount when measured against the huge volumes traded, but it seems to have helped sentiment a little. Confidence has slightly picked up in the Chinese trading community as a result of the re-exports easing inventory pressures."

Bonded warehouses in the south, the east and the north of China were, however, still close to full, he added.

"The problem is that traders purchased a lot of material in November and December because confidence at that time was high.

"They underestimated the risks of weakening monomer prices undermining support for both PE and polypropylene (PP) pricing, and measures the Chinese government has taken to slow the economy down."

Successful start-up of the new 800,000 tonne/year Shell cracker in Singapore took place on 22 March, according to an official announcement.

And in Thailand, Mab Ta Phut Olefins was heard to have achieved on-spec production at its 900,000 tonne/year naphtha cracker, ICIS news reported yesterday.

Shell was expected to export around 150,000 tonnes of ethylene and 250,000 tonnes of propylene on an annual basis, while Mab Ta Phut Olefins would ship out more than 100,000 tonnes of propylene a year, the same news report added.

But the blog has been told that much more than 100,000 tonne/year of extra propylene will be available for export from Thailand over the next 12 months.

And returning to ethylene, exports are expected to increase from Qatar and Saudi Arabia.

The mood among poylolefins buyers has shifted in China towards one of much-greater caution, added the Singapore-based trader.

"I recently visited five factories where all the factory owners knew that resin was long and didn't feel in a hurry to buy beyond their immediate needs.

"They can smell blood in the air as new capacities are coming on-stream and plants that have already started up are ramping-up production.

"The buyers also know that the traders are coming to the end of their 90-day credit terms and so are desperate to sell stuff out of the bonded warehouses.

"End-users are also becoming much more cautious because of the uncertainty over government economic policy and a potential Yuan revaluation. And they are struggling with the labour shortages."

The good news, though, seems to be that overseas producers are in comfortable positions due to their low stock levels.

"We are in no hurry to sell as we continue to manage our production very prudently," said a Singapore-based source with a global polyolefin producer.

The trader said that this was a comment that had been made by many of the big Asian ex-China and Western producers

"One of these producers has been offering PP homopolymer grade at $1,350 CFR China, which is completely unworkable as the current China price is $1,310, suggesting a comfortable position."

But the longer-term issue remains the strength of growth in China this year (to repeat, we think it's bound to be lower than 2009) as all the new capacities start-up.

By Malini Hariharan

I recently met a businessman at a dinner party. After exchanging the usual greetings he eagerly disclosed his plans for a new business venture - trading in polymers.

"There will be three of us in this business; we plan to import polymers in bulk from Taiwan and China; each consignment will not be less than 500 tonnes," explained this Mumbai-based businessman whose main activity was extending short-term finance to local companies.

He probably sensed my surprise and confessed: "I don't know anything about polymers. I will only be providing money."

And he was convinced that polymer trading was a great investment opportunity.

"I have studied it carefully; it's better than [investing in] gold," he said very enthusiastically.

Pic source: Empire State Ventures

I have not crunched any numbers but can polymers yield better returns than gold?

What about all the volatility in pricing? Has the great price crash of 2008 already been forgotten? And what is this about importing from China? Yes, there have been plenty re-export offers out of China in the last few weeks but surely that is only temporary.

There are many others in India who have been drawn to polymer trading. And the reason for this is the very healthy profits seen last year.

A veteran polymer trader told me recently that 2009 was a great year in which he had recovered all the losses that he had posted in 2008.

"Indian polymer demand has been fantastic but it has attracted a lot of new traders; even some processors are into trading as they see more money in this than in processing. It has become a very competitive market," he complained.

A second trader had a similar story to narrate. "Everybody sees this as a quick money making opportunity; they all want to trade.

"Many of the small traders operate on wafer thin margins, rotating product for a margin of only Rs 250-300/tonne ($5.50-6.50).

"This is putting pressure on us as my customer has other lower offers. We cannot entice him or tell him about our relationship; we cannot fight that," he said rather sadly.

He probably will have to wait for the next big price crash when polymers will look like fool's gold.

By Malini Hariharan

The Asian olefin and polyolefin markets have softened in recent weeks but the US market remains on a different track, as seen in these reports filed by my colleagues on ICIS news.

Ethylene prices are still firm on tight supplies. Spot ethylene for March/April was at 61-63 cents/lb, up from 42.5-43.0 in January. Availability has been hit as a result of a number of unexpected cracker shutdowns which started in early January after Texas experienced unusually cold weather.

The high prices mean that US PE exports are likely to drop in the coming months. A trader estimated that ethylene would have to drop to 40cents/lb for PE to be competitive in the export market.

Ethylene prices are expected to correct in the coming months as the supply situation is easing with crackers resuming operations. But one producer was not too worried and said that margins would be at acceptable levels even if ethylene dropped by 20cents/lb as ethane prices were also weakening, said one producer.

Many of the US companies including Shell, have prepared themselves for an extended period of low ethane prices. An executive from the company said that investments made at its crackers in the US over the last few years have given Shell the capability to crack 70% gas feedstock. The earlier configuration was 70-75% liquid cracking.

The shift to a lighter feedstock slate has been one of the factors supporting a surge in propylene prices. The situation has also been aggravated by unexpected cracker shutdowns and a decline in US operating rates due to weak demand for fuels.

Around two-thirds of US propylene now comes from refineries, due to declining output from crackers.

Meanwhile, Nova expected the second quarter to remain strong with continued growth in PE demand. And although the US-Asia arbitrage window has closed, Nova has been able to export from its Joffre operations in Canada because of freight advantage. PE is put in bulk rail containers and sent to Vancouver port from where it is shipped to Asia.

By John Richardson

IT IS always dangerous to assume that the future will be exactly the same as the past - a big lesson from the recent financial crisis.

But so seems to have been the assumption amongst China's polyolefin traders late last year as a close look at import statistics for December and January, supplied to us by the New York-based International Trader magazine, reveal.

In December 2007, for example, 251,600 tonnes of high-density (HDPE) arrived at Chinese ports compared with 292,664 tonnes in December 2009.

January 2010 arrivals totalled 363,129 tonnes against 223,456 tonnes in January 2008 (a "normal" year as there was no economic crisis) and 227,818 tonnes in January 2009.

December 2009 polypropylene (PP) shipments totalled 373,669 tonnes as against 251,179 tonnes in December 2007 (again a more valid comparison than Dec '08 - just about the high-point of the recent crisis, when arrivals were 266,463 tonnes).

 "We all thought that credit in China would remain as ample as before, supporting demand and polyolefin pricing," a Shanghai-based trader said today, echoing comments made by a Singapore competitor last week.

Polyolefin pricing has since slipped in Asia (see chart below) because of reduced lending by local banks, labour shortages in Guangdong province and new capacities.

Source of graph: ICIS pricing 

"Interestingly, the new restrictions in local credit might actually provide some support for imports over the next few months as the overseas traders can more easily lay their hands on LCs from international banks," said an industry observer.

"But on a net basis imports are still likely to be down this year over 2009 on slower growth in China and new capacities."

Consultancy Nexant ChemSystems wrote in a Q1 review released earlier this week: "At least five new crackers (in China), with a combined capacity totalling more than four million tons per year of ethylene achieved commercial production in the first quarter. Most crackers are integrated with further new derivative capacity on site."

By Malini Hariharan

Commissioning activity at Indian Oil Corp's (IOC) new cracker and derivatives complex at Panipat, India, is progressing well, according to a company source. Operations at the new 857,000 tonnes/year cracker have started.

"Onspec propylene is in the storage tank and ethylene is expected in a day or two," he said.

Among the derivative units, the polypropylene (PP) plant with a total capacity of 600,000 tonnes/year is due to start first and should be up by end of the week. Next in line are the 350,000 tonnes/year swing high-density polyethylene (hdPE)/linear-low density PE (lldPE) and 325,000 tonnes/year monoethylene glycol (MEG) plants. Operations at the two plants are expected to commence from mid-April.

A 300,000 tonnes/year standalone hdPE plant is currently scheduled to start at end-April.

The start up has been quite smooth so far with commissioning of derivative units delayed only by a few weeks. IOC had said in early March that the PP, MEG and swing PE plant would start operations by the end of that month.

By Malini Hariharan

Has the steady increase in crude oil prices last week prompted Chinese buyers to resume purchases? That is what a Shanghai-based distributor of Middle East product is hoping. And it is the only explanation that he can find for concluding a sale of nearly 10,000 tonnes of polyethylene (PE) yesterday.

After weeks of carrying stocks at his three warehouses in the country the trader was pleasantly surprised to transact this business. Buyers are probably looking at crude and thinking that it is the right time to buy, he said.

But whether this will continue is uncertain especially as crude oil prices slipped yesterday after the US reported an increase in inventories.

The trader is finding it extremely difficult to decipher the Chinese PE market. He is quite sure that the massive volumes imported in 2009 have not been digested. Some amount has probably been re-exported but quite a lot is still in the hands of speculators who flocked to the market following a huge increase in bank lending last year.

Like almost all participants in the Chinese market he also has interesting anecdotes to tell.

"A young man, probably in his twenties, approached me last year wanting to buy 300,000 tonnes of PE. It turned out that he knew nothing about the business. But he had access to money thanks to his father who was an important government official with the right connections. And he believed that investing in polymers would give a good return.

"There are many like him. I do not sell to speculators but I have found that they still get hold of my product. I discovered how only after I received a quality complaint from a company that I had not heard of. I traced the flow of material using the lot number and I found that end-users have sold to speculators, sometimes even at a discount. They did this as they were paid immediately which kept their cash flow positive," he explained.

He is convinced that speculators will eventually exit the market causing a huge price correction. But this will happen only when banks demand repayment of the loans made last year.

By Malini Hariharan

Reliance Industries is moving ahead with its Jamnagar cracker project and is looking at completing it in 2014, reports ICIS news.

Preliminary activity on the project, which was put on hold after the 2008 economic crisis, has resumed. Discussions are on for technology selection and a firm start up date will be set after contracts have been awarded.

The cracker, which would have a capacity to produce 1.3m-1.6m tonnes/year of ethylene and small volumes of propylene, would use offgases from Reliance's two refineries at the same site as the primary feedstock. Other refinery feeds would also be cracked.

The derivative slate includes mono ethylene glycol (MEG), low-density polyethylene (ldPE) and linear-low density polyethylene (lldPE).

It is not only the cracker project that is being revived. Reliance is also refreshing plans for new capacities in purified terephthalic acid (PTA), polyester, styrene butadiene rubber and butadiene rubber (BR).

The company had said last year after the completion of its second refinery that it would renew its focus on the olefins and derivatives project.

With Indian petrochemical demand showing very healthy growth prospects it makes sense for Reliance to expand in the country. And as its effort to grow the petrochemicals business inorganically by acquiring LyondellBasell has failed its time for Reliance to return to something that it is very good at - building mega projects.

By Malini Hariharan

Chinaplas has just concluded and my colleagues have filed some great reports from Shanghai.

Worries about a margin squeeze in the second half of the year persist but polymer producers seem to be increasingly confident about long-term growth prospects.

The chairman of the China Plastics Processing Industry Association (CPPIA) talked of the endless potential of China's domestic market and confidently predicted that the country would have no problems in delivering a 10% growth in demand for polymers and rubber.

"Last year, people were uncertain about what the long term market outlook would be. But the situation looks very positive now," said William Yau, chief executive officer (CEO) for Borouge's marketing arm (see video interview below*).

But in the short term, although demand and supply were normal, there could be ups and down, he admitted.

Yau also said that Borouge II would start up in mid-2010 but the full polyolefins output of 2m was likely to be achieved only by the end of the year or early next year.

The PP industry should be able to escape from another round of restructuring, said Anton de Vries, senior vice president for Europe, Asia and international olefins and polyolefins at LyondellBasell.

"I personally don't expect to see major consolidation in the PP sector. I may be wrong, but I think it's going to be limited, more limited than what we saw in the downturn (in early 2000s)," he said.

The PP sector had gone through a major rationalisation process in the previous downturn in the early 2000s, and further consolidation would be "more difficult," he said.

He also expected LyondellBasell to exit Chapter 11 bankruptcy protection as early as next month and list on the New York Stock Exchange (NYSE) in Q3.

Jamail Malaikah, president and chief operating officer of National Petrochemical Industrial Co (Natpet), the Saudi PP producer described the outlook for the PP industry as excellent.

Not surprisingly, he was not worried about the overcapacity that has been built up in PP and expected Middle East plants to run at full rates.

"We believe most of these plants will be running at a good operating rate in the second half [of] 2010. But I think the impact of the overcapacity on price will not be of high magnitude," he said.

He was also optimistic that the upcoming propane price revision in the Kingdom would turn out to be favourable for producers.

And he also talked about the reasons for the frequent operating problems in the Middle East.

Malaikah said the quality of engineering materials used in building petrochemical facilities may have deteriorated due to mass production necessitated during the plant construction boom in 2005.

"There was a lot of pressure on services, EPC (engineering, procurement and construction) contractors, on vendors, on engineering manpower. The pressure caused some vendors to produce more than their capacity, at the expense of quality," he said.

In other production news, Qatofin is likely to achieve commercial production at its new 450,000 tonnes/year lldPE plant in May or June.

Siam Polyethylene, the Dow Chemical and Siam Cement lldPE joint venture, expects to start operations at its delayed 350,000 tonnes/year plant in the H2 2010.

"We have been given clearance to resume construction which is excellent news as this product is much-needed by the market," said Peter Wong, Commercial Vice-President, Asia-Pacific Basic Plastics, at Dow.

The project had been due on-stream in the first half of year, but work was temporarily halted by a court injunction that have affected numerous other projects at the Mab Ta Phut site in Thailand.

And Siam Cement's president also revealed that the company is looking for acquisition opportunities in Asia.

"We believe that [Asia's petrochemical sector] will go through more acquisitions and we're now looking for acquisition opportunities as well," said Cholanat Yanaranop.

(More videos from Chinaplas are available here)

By Malini Hariharan

After seeing very strong pricing for the last few months US propylene and polypropylene (PP) buyers have started talking of imminent correction.

PP buyers expect a 7-10cent/lb ($154-200/tonne) drop in May prices, reports ICIS news.

The prediction is based on improved propylene availability.

Earlier this week the US Energy Information Administration (EIA) released data that showed a 12% increase in propylene stocks for the week ended 16 April. The increase came amid higher US refinery operating rates - 85.9% compared with 78.4% in the second week of January.

And the US is now even looking at exporting propylene with one cargo reportedly settled for early May shipment to Europe.

Propylene contract prices had moved up by over 50% in the last six months but a significant drop in May contracts is now being predicted.

By Malini Hariharan

The blog has been writing about the softening in olefin and polyolefin prices in the US. But the European market presents an interesting contrast offering arbitrage opportunities for those willing to take the risk.

Operating rate reductions have been reported at crackers in Priolo, Italy; Tarragona, Spain; Carling, France; Cologne, Germany; and in the UK at Grangemouth, writes Nel Weddle the ICIS pricing olefins editor.

However, none of these have been officially confirmed by the companies concerned. But operating issues have been confirmed at Borealis' cracker at Porvoo, Dow Chemical's No 2 cracker at Terneuzen and LyondellBasell's plant at Berre in France.

Enquiries for spot ethylene have increased but propylene remains soft as problems at derivative plants has freed up supplies.

Linda Naylor, the ICIS pricing editor for polyoelfins, reports that tight supplies have forced some PP buyers to agree to a price hike of Euro30/tonne (about $38/tonne) for May shipments.

Buyers had hoped that the tightness experienced since January would ease in May. But the situation has not eased because of operating issues at plants around the region.

Firm European prices should tempt traders to bring in product from other regions. But no deals have been reported as a weak Euro coupled with expectations of a price slide in the second half of the year has made traders reluctant to take a position in the market.

By Malini Hariharan

Ras Laffan Olefins Co (RLOC) is studying an expansion of its new cracker by using propane as a feedstock.

At a recent news conference, Mohammed Yousef Al Mulla, general manager of Qatofin, the Qatar Petroleum-Total joint venture downstream of the 1.3m tonnes/year cracker, said that while the cracker was currently running at 100% ethane a change of feedstocks was possible in the future.

"There is a study going on, maybe in the future we will use propane with mix feed of ethane, but we don't know how much it will produce. We may reach 1.6m, but for the time being we will produce 1.3m, there is a study to increase to 1.6m utilising propane in the future," he is reported to have said.

Propane is probably the only route available in the near term for RLOC to boost capacity as Qatar is running short of ethane.

Also at the news conference, Qatar's minister of energy and industry reiterated the country's commitment to petrochemicals and using propane as a feedstock.

"In this business you always try to be innovative and bring new ideas. Mix feed of propane. All these assumptions are in our agenda," he said.

And Qatar should have plenty of propane available as it is poised to become one of the world's largest producer of liquefied petroleum gas (LPG) by 2010/11 with production of around 14m tonnes.

By Malini Hariharan

The weakness in Asian markets is spreading with steep drops also being reported in olefin prices.

Ethylene prices dropped by $160-170/tonnes last week while propylene declined $90-110/tonne, writes my colleague Soo Hwee, ICIS pricing editor for olefins.

The poor market conditions were attributed to softness in crude oil and naphtha prices as well as lack of support from polyolefins that are also under pressure. Nervousness about Europe and the impact of credit tightening in China have also played a role.

Buyers have strategically moved to the sidelines in anticipation of further reduction in prices while cracker operators have started talking about operating rate cuts if economics continue to weaken.

What happens in the Chinese polymer market over the next few days will be crucial. As reported by the blog last week, stocks with major producers have climbed close to record levels. And export offers are still being heard.

An Indian trader said this morning that he has received offers from China for high-density polyethylene (hdPE) at $1200/tonne cfr India, $1230/tonne cfr India for linear-low density PE (lldPE) and $1430/tonne cfr India for low-density PE (ldPE).

The trader has not yet signed any deals but the offers have turned out to be useful for bargaining with his regular suppliers.

"They [traders] know they can always manipulate prices the moment something goes wrong. The events of 2008 has spoilt the market; producers could earlier take a firm stance but that does not work now," said a frustrated international producer.

The Indian polymer market is broadly following the direction set by China but price drops so far have not been as substantial.

"Arrivals [of imported cargoes] have been low and producers do not have much stocks," explained the trader.

But it could just be a matter of time before Indian prices catch up with those in China.

By John Richardson

WE will explore the following issues in a lot more detail over the coming days, assuming that the crude and financial market turmoil continues.

But for now here follows the interpretation of the crisis from a source with a major polyethylene (PE) producer.

The themes are consistent with what we have been picking up from numerous conversations at APIC and this week.

In summary, here, and as I said we will give you more details later, this crisis is financial-sector driven and doesn't reflect the strength of growth in Asia - which has been very good. The US has also enjoyed a moderate recovery.

But if confidence goes, and the financial-sector fear spreads to the wider economy, then there could be a new global recession.

But to talk about collapsing chemicals demand is far too premature. Prices have so far corrected on lower and increasingly volatile crude oil as inventories are re-adjusted.

Enough - I am getting carried away!

In his words, our source told us last night:

"The European market remains tight because of outages and operating-rate discipline. Overall cracker op rates remain at around 80% and the tight market means that price rises to compensate for higher dollar-based feedstock costs are being pushed through. For example, Dow has announced (an attempt at) a Euros70/tonne PE price rise.

"The high PE inventory levels in China could well be the result of material imported in November-December when prices were low."

By Malini Hariharan

Is this the right time to buy petrochemical stocks? Asian equity analysts are having a tough time answering this question being posed by portfolio managers across the region.

They are seeing a 'mini downcycle' emerging with a weaker second half relative to H1 2010 and potentially a weak H1 2011, explained one equity researcher. So the perfect opportunity to accumulate petrochemical stocks would be later this year as investors can then benefit from expected improvements in profitability in 2011-12 and 2013.

"Many investors did not buy petchem stocks in late 2009 and H1 2010 and they missed out the good times; so a lot of portfolio managers are starting to pay attention. They believe that they need to catch the next upturn," he added.

Pic Source: Stockmoneymarket.com

Some other investors with a shorter investment horizon are looking at shorting petrochemical stocks in anticipation of weaker stock prices later in the year, said another researcher.

But a big problem is forecasting earnings for petchem companies. Many had not anticipated the margin recovery in 2009 and visibility for the rest of this year and 2011 is still cloudy.

The ongoing downward pressure on olefins, polyolefins and many other petchem prices is closely linked to developments in crude oil and the global financial market where risk-averse investors are collecting back liquidity.

Petchem prices are likely to stabilise only after crude does. And when that will happen is still an open question.

By John Richardson

LAST week's sharp decline in polyethylene (PE) pricing in China is being partly blamed on converters who occasionally act as traders liquidating their raw-material inventories.

Trading activity by end-users can account for more than 10% of total sales activity in the Chinese market in any one week, the blog has previously been told.

A broad-based price correction on declining crude was reported by ICIS pricing for week. For example, linear low-density PE (LLDPE) was assessed $90/tonne lower at $1,160-1,230/tonne CFR China on 21 May compared with the previous Friday. High density PE film was at $1,120-1,150/tonne CFR China - down $60/tonne.

"The converters saw crude slipping and so might well have entered markets in great numbers to sell their stocks. It should be remembered that compared with conventional traders they are always in a stronger position to trade resin because they get cheaper supplies from Sinopec and the local Chinese/foreign joint-venture producers," speculated one industry source.

"I think this activity by the processors could have played an important role in the price declines. From their perspective you can understand the decision to re-sell their stocks as the economic outlook at that time was exceptionally uncertain on worries that the European debt crisis could lead to a new global economic crisis.

"Also weighing on their minds were lending restrictions in China designed to cut overall credit growth and slow the property sector down.

"It might have seemed a lot safer to sell inventories rather than produce plastic goods that nobody might want to buy. The other risk they could have been hedging against was further steep declines in crude that would have left them unable to pass-on their raw material costs to their customers."

This is obviously highly speculative, and only one opinion, but it does point to just how difficult the Chinese market is to read. More research is needed by this blog - and more opinions are more than welcome.

This theory, though, does offer support to the argument we will develop over the coming days: That the recent price declines do not necessarily reflect weaker fundamentals. The demand-growth numbers we are going to provide for Q1 point to the China boom story continuing.

And a further illustration of how PE markets could have separated from the fundamentals was what one producer described as a "growing correlation with the Dalian Commodity Exchange over the last week or so."

As we have reported before, Dalian offers a futures contract in LLDPE that at times reportedly leads physical pricing. This was the case last week when the contract fell 5%, the maximum allowed in one day's trading, which was followed by a drop in physical RMB pricing.

"At times of extreme volatility and uncertainty, the Dalian becomes the market-setter. Somebody needs to do a study into how Dalian moves with the local stock market, with crude and in turn how Dalian then actually influences the deals that are done in the real market and how the correlations have varied since the futures contract really took off early last year."

Over to the statisticians......

By Malini Hariharan

There is some good and not so good news from China. Import and production numbers for January to April are now available and they tell an interesting story.

The good news is that Chinese demand, measured in terms of imports (data from China customs) and local production (data from CBI China), has continued to grow. For the first four months of this year, low-density polyethylene (ldPE) and polypropylene (PP) demand was up 10% at 1.2m and 4.4m tonnes respectively. Linear-low density PE grew even faster at 36% to 1.9m tonnes while high density PE (hdPE) demand expanded by 28% to 2.6m tonnes.

Imports of ldPE were up 35% at 638,000 tonnes, lldPE rose by 19% to 950,000 tonnes while hdPE imports increased 9% to 1.27m tonnes.

However, PP imports dropped 7% to 1.35m tonnes as commissioning of new plants pushed up local production by 20% to around 3m tonnes.

And a closer look at the numbers for lldPE and hdPE reveal that much of the demand growth was captured by local production which grew by over 50% for both the polymers.

The start up of new plants was expected to displace imports and there is evidence that this is quickly happening. The details of imports by country are not yet available but it is likely that Middle East producers have pushed out traditional Asian suppliers.

A South Korean producer I talked to today was not enthused by the China numbers. He admitted that Iranian and other Middle East producers were edging them out from the Chinese PE market.

It is also likely that a good percentage of production and imports during January-April have ended up as inventory and are now being liquidated by traders and even converters.

Meanwhile, the turmoil in Chinese markets shows no signs of easing.

"Buying ideas are very bad; we are waiting for concrete enquiries. Chinese converters are not buying as they are worried that the European crisis will result in a fall in orders for finished goods," said the producer.

Other markets around Asia are also on the same track. My colleague Prema writes that even a 6% reduction in offers and an assurance of "price protection" has not induced South Asian polyolefin buyers to resume purchases.

Source of picture: http://www.andrewgriffithsblog.com/

By John Richardson

DOOM-MONGERS are scratching their heads as to why the global petrochemicals industry has remained in such a healthy state over the past 18 months.

Old assumptions are, as a result, being challenged. It would be a painful irony if these assumptions are changed just as a new global economic crisis creates yet another set of realities.

Right now, it is far too early to say that the end is nigh.

Sure, we have seen Asian ethylene margins take a hammering over the last couple of weeks - but all that seems to have happened is that they have gone from obscenely good to still pretty good in historic terms.

The correction was always going to take place as the full impact of Shell Chemicals in Singapore switching from a major net buyer to a net seller of ethylene was felt by a thinly-traded spot market.

The fall in oil, polyethylene (PE) and mono-ethylene glycol (MEG) prices on the escalation of the euro crisis for the week ending 21 May were obvious other factors.

Last Friday (28 May), ICIS pricing reported no further reductions in PE values, whereas ethylene had tumbled a further $160/tonne to $980-1020/tonne FOB Korea.

But the decline in ethylene came before the end-of-the-week rebound in crude to around $75/bbl.

This reaffirmed that the weakness in petrochemicals pricing is all about the euro crisis, China's economy, geopolitical tensions in Korea and their impact on confidence across many economies and industries.

To get back the original point of this article, just why therefore have the doom-mongers been proved wrong - and why do the optimists believe that this will continue to be the case?

"I think it could be because petrochemicals demand-growth in the four biggest emerging economies in Asia - China, India, Indonesia and Vietnam - is much-higher than many of us had expected," said a former doom-merchant.

"I think we need to go back and re-examine our assumptions and re-crunch our data. Maybe, for example, we are no longer looking at growth multiples of 1.2 times GDP (gross domestic product); perhaps they should be more like 1.5 times."

The other big factor we've well-documented on this blog is delays in project start-ups.

These look set to continue because of a myriad of issues including manpower, technologies and the use of inferior equipment when building costs were at their peak.

The iron operating-rate discipline of Western producers also looks likely to persist.

Highly-nervous shareholders will accept nothing less and for private equity companies such as LyondellBasell and Ineos, cash-flow remains King.

My London-based colleague Nigel Davis, editor of the Insight section of ICIS news, reports that inventory management in Europe remains exceptionally rigid down all the value chains.

"European crackers are running at an average operating rate of around 80%", added a source with a North American PE producer.

So if the euro crisis does escalate, resulting in damage to strong Asian economic fundamentals and the moderate improvement in the US, production is likely to be cut even further. This might be enough to bring markets back into balance, provided this new economic crisis isn't worse than the last one.

And if the oil price was to fall to the low $60s/bbl and stay there, a further output cut by OPEC is likely to happen in attempt to get the crude price back up to the target range of $70-80/bbl.

This would mean even less associated gas for Saudi Arabia's crackers. They are already operating at below 100% because of feedstock supply reductions resulting from the current OPEC production quotas. 

A further factor behind strong margins has been the steep drop in ethane-gas prices in the US thanks to the rise in overall gas supply.

We all knew that butadiene, and C4s in general, would become tight because most of the new cracking capacity is gas-based. What nobody had predicted was the big switch to lighter feeds in the US by existing cracker operators.

So anybody operating a liquids cracker with butadiene extraction is enjoying excellent returns.

As we said, it is still very possible that we will get through this current crisis intact with margins remaining very strong.

And with so little new capacity planned for post-2011, what are the odds against another fly-up sooner than is expected by the pessimists?

By Malini Hariharan

If you are trying to find an explanation for the recent price movement in Asian polyolefin markets, a report in today's Wall Street Journal offers some clues.

China, says the report, has been eating into some of its reserves resulting in a decline in prices of commodities such as refined copper, iron ore and lead. This was reflected in the drop in imports of these products in April.

This is classic Chinese buying behaviour that extends to petrochemical markets- buy huge volumes to push up prices and then hold back purchases to drive prices down.

Analysts at Macquarie Securities noted after a field visit that some end-users of steel, such as auto makers and home appliance producers, are 'choosing to eat into their own inventory rather than continue to purchase' on the open market.

It is entirely possible that these auto makers and home appliance producers are following a similar strategy for purchase of polymers.

The blog had noted last week that China's polyolefin demand for January-April showed healthy growth. But, mirroring the trend seen in other commodities, imports were down in April.

Imports of high-density PE (hdPE) and polypropylene (PP) were down 23% and 15% respectively in April compared with the previous month.

However, Macquarie also believes that underlying demand for cars and refrigerators in China remains robust and that manufacturers soon will stop draining their stockpiles and return to the market.

This may take a while as Chinese manufacturing growth appears to have slowed down in May.

Pic Source: The China Post

The Purchasing Managers' Index (PMI) for the month was down 1.8 percentage points from April while the new orders index declined 4.5 percentage points.

The news dragged down stock markets but the FT reports that economists are not worried.

"The slowdown in the headline manufacturing PMI suggests that the overheating risk is likely to ease as tightening measures filter through. That said, we see robust economic growth without double-dip risks, not least because of massive infrastructure investment and resilient private consumption," said HSBC's chief economist for China

Economists also pointed out that PMI has fallen in May every year since the series was launched in 2005 and the decline should be seen as a seasonal phenomenon.

By Malini Hariharan

Asian aromatics markets are getting increasingly hard to read not merely because of volatile crude prices.

Demand, usually strong at this time of the year, has so far failed to materialise. The US gasoline season has started on a slow note. In Asia, benzene demand has been hit by maintenance shutdowns and operating troubles at styrene plants. And Chinese refiners have preferred to use MTBE instead of toluene for gasoline blending.

On the supply side, operating rates at reformers and pygas-based units have been kept high in anticipation of demand. And even now, producers are hesitating to cut output as they do not want to be caught with low stocks once demand kicks in.

"Though the market is long now, the volumes can be easily consumed when demand comes," says Leonard de Guzman of Dewitt & Co.

But when that will happen is still uncertain. The US is said to be awash with gasoline and summer driving is predicted to remain much lower than what it was two years ago.

The US Energy Information Administration's (EIA) Gasoline Summer Consumption and Supply report predicted an increase of just 0.9% in gasoline consumption this summer, but gasoline stocks were about 7m bbl (3%) higher than the start of the 2009 driving season.

Source: ICIS pricing

The net result is an oversupplied market that pushed benzene prices down by 18% in May and toluene by 17%.

Prices rose last week on stronger crude prices but fell again in the last few days.

Producers are struggling with high stocks. It is estimated that Sinopec is holding a benzene inventory of around 40,000 tonnes, double the normal level.

De Guzman predicts that Asian benzene will be slow to recover as the global inventory situation has still to be resolved.

The key, he says, is operating rates at reformers - will they be cut or will producers keep them running in expectation of the summer gasoline demand and also a recovery in styrene demand.

By Malini Hariharan

The weakness in Asian petrochemical markets is continuing with buyers taking cues from developments in the crude oil and stock markets.

In polymers, despite a slight rebound in polyethylene (PE) prices late last week the buying sentiment remained negative in China. The mood worsened today following a 5% fall in linear-low density PE (lldPE) futures on the Dalian Commodity Exchange (DCE).

Trading of September lldPE futures on the DCE was stopped right after it opened at 9:00am local time, reports ICIS news.

Purified terephthalic acid (PTA) futures also dropped by about 4% and trading of September contracts was halted on the Zhengzhou Commodity Exchange (ZCE) at around 11:00am.

"The futures market is under panic sentiment today on the back of multiple negative news over the weekend," said a source referring to falling crude values and also stock prices.

And not surprisingly, the physical market was quick to react. PTA prices fell to an eight-month low.

LldPE trading slowed to a trickle today, reports my colleague Bee Lin from ICIS pricing.

"The physical market has fallen into an uneasy silence as buyers are not interested to bid, and sellers are unsure what price to offer," said one trader.

Local producers and traders have so far refrained from lowering offers as they are not confident that this will be sufficient to draw buyers. But the question is how long can they hold on.

By Malini Hariharan

Asian polyolefins (PO) producers are seeing no signs of an immediate recovery in demand and pricing as buyers in the key China market continue to remain on the sidelines.

There are just too many negative factors, says one producer referring to concerns about the economic health of Europe, the Chinese government's efforts to control asset bubbles, volatile crude oil and additional supplies from new plants in the Middle East and China.

This is probably the reason why prices in the physical market did not increase despite an improvement in linear-low density polyethylene (lldPE) futures on the Dalian Commodity Exchange.

A second producer does not expect Chinese demand to pick up for the next couple of months. "The controls on real estate mean that the construction sector will be weak. We are also hearing that car companies are holding very high inventories of more than 1m cars; they do not want to produce more. And while the film sector is not too bad, the agricultural film season is over," he explains.

Chinese exporters of finished products are reported to be seeing delays in shipments as European buyers have asked for deliveries to be spread out over a long period.

And another worrying trend, says a market participant, is that Chinese buyers at the second level of polymer distribution chain are backing out of contracts. That is contributing to the pessimism, he adds.

Asian producers are also anticipating higher export volumes from the US where domestic polyethylene (PE) prices are continuing to fall.

US producers have reduced June offers by 4cents/lb, reports ICIS news. And buyers are gunning for further reductions.

"I expect more, maybe a couple of cents," a US buyer said. "Our demand isn't slow. I think they [producers] just built up inventory while pretending they were short."

A question that is being increasingly asked is whether Asian producers will start cutting operating rates to prop up markets.

But as can be seen in this chart, from ICIS pricing, margins for Asian naphtha crackers have fallen sharply in June but are still fairly comfortable at around $200/tonne.

"The second half of 2010 could get more dicey especially if the new Middle East capacities for ethylene and PE flood the market. Margins will then start to deteriorate. In 2001, Asian cracker margins were not even $100/tonne. We are not there yet but the potential of getting there is very real," says Larry Tan, ICIS pricing's director of data & analytics in Asia.

But in the midst of all the pessimism certain segments such as lldPE hexene and lldPE octane are doing well. Producers' inventories are still at manageable levels. And there is confidence that Chinese demand for local consumption will remain strong, although exports, despite the jump in China's May numbers, is a matter of concern.

Never look on the bright side of life...

Source of picture: thescratchingshed.com

By John Richardson - fresh back from a long break in Europe (more on this later).

"If you keep predicting a catastrophe, John, you will eventually be proved right," a senior executive from a major Asian petrochemicals producer told me in mid-2007.

At that time it seemed as if the industry would be undone by a huge increase in supply which would be way in excess of demand.

This correspondent got the timing of a downturn roughly right - sometime in H2 2008 - but was completely wrong about the cause. As we all know it was the collapse of Lehman Bros and the subsequent global economic crisis.

But I didn't see the 2009 recovery coming and keep being amazed by the resilience of growth in Asia.

I come from a part of the world - the county of Yorkshire in the UK - where people have a reputation for being gloomy, stubborn, cussed and taciturn. This is probably to do with the awful weather and food (with the exception of outstanding Indian food), and so perhaps it's not surprising that I have often taken the negative view.

In contrast, the senior executive quoted above has always been optimistic and to date his projections for stellar petrochemicals demand growth in Asia have been proved correct.

He was originally a salesman, as were or are many of my other contacts who share similar sunny dispositions, and so their persistent optimism is hardly surprising; have you ever met a miserable, nay-saying sales executive who was also successful?

The perhaps laboured point I am trying to make here is that how you view the world is crucial in interpreting the myriad, complex signals that can point to either a rosy view of the economic future - or one that would make a Yorkshire man who enjoys wallowing in misery truly happy.

And let's take this a step further: If the dominant view is optimistic right now, when there are as many reasons to be positive as negative, perhaps we will get out of this current euro-inspired crisis unscathed.

But if the overriding opinion becomes the opposite, this will amplify the flight from risk and the short-selling in oil, stock and other markets to create a self-fulfilling prophesy of economic implosion.

I am hardly in a position to give advice on positive thinking, given my background. I will leave this to my ever-sunny American friends.

What I can suggest, though, is that you MUST NOT under any circumstances visit Yorkshire - other than to watch the greatest soccer team on earth, Leeds Utd.

Europe and China: A two-tier market is hard to bear...

Source of picture: blog.pinkcakebox

By John Richardson

CHINA'S polyolefin pricing is likely to remain under downward pressure over the next few months as a result of a persistent inventory overhang, new supply and weak construction and auto markets, two traders and one producer have told the blog.

And as we reported earlier this month, falling US PE prices are raising concerns over very competitively-priced imports from the States.

The weakness in the Chinese market is in contrast to Europe, where tight supply is keeping prices firm and is attracting imports.

A further negative factor in China might be a stronger Yuan, which could encourage price-cutting by local suppliers, the producer said.

But so far this week the local currency has both weakened and strengthened against the US dollar following the weekend announceement that it would be allowed to trade in a wider daily band across the US dollar.

One argument is that the government's decision was designed to engineer more volatility in order to discourage currency speculation and not a stronger Yuan.

Reports that the Yuan will definitely strengthen therefore seem premature.

"The polyolefins inventory overhang is still the result of the surge in bookings from overseas in late November and early December," said the first of the two traders we spoke to, who is based in Guangzhou, Guangdong, China.

"We are also seeing the affects of new supply, in both China and the Middle East.

"A symptom of the downward pricing pressure has been the recent re-export of Iranian material.

"As was the case when the re-export market opened-up on the last occasion, we are not talking about big volumes and the size of the total trade has been exaggerated. However, the shipments are hurting sentiment."

The second trader, who is based in Hong Kong, concurred and added: "There is going to be no relief on stock levels from local construction and auto markets that have slowed down considerably.

"Construction is being affected by all the government measures to cool the property sector, whereas tighter credit conditions are hurting autos.

"Auto manufacturers are telling us that they also have high inventories as a result of vehicles manufactured earlier this year on the assumption that extremely strong growth levels would be maintained.

"I am hearing that tighter credit is reducing private purchases, with many of the entire 2010 fleet orders by government companies brought forward in to Q1 because they anticipated that credit would be reduced."

A source with a major Western producer agreed with both traders and added: "I am concerned that we might have seen the best of Chinese demand for imports for this year in the first half.

"China's new plants are running reasonably well and we are seeing stabilisation of production at some recently started-up Middle East facilities.

"The positive news, though, is that OPEC oil quotas continue to limit production at established Middle East plants and we are definitely going to see more delayed start-ups."

The weekend announcement over the Yuan led to sharp fluctuations in its value in both directions on Monday-Wednesday.

"It is early days yet, but if the Yuan was to show consistent greater strength this is likely to create a further negative for pricing," added the first trader.

"Greater local currency strength would give buyers more ability to buy overseas material - i.e. they would need fewer Yuan to buy dollar-priced imports.

"The priority right now at Sinopec is to maximise the off-take from newly-commissioned local plants.

"So watch out for active centralised downward-management of pricing, plus more aggressive discounting by individual producers, in order to gain market share.

"A forward indicator of this would be reliable reports of rising Sinopec inventories following a sustained period of Yuan strength."

A stronger Yuan would also weaken the competitiveness of local finished good exporters, such as the auto makers, thereby providing a further motive for Sinopec to manage polyolefin pricing to the benefit the local industry.

....again

By John Richardson

THE sharp fall in polyethylene (PE) pricing in China is being blamed on speculative acquisition of cargoes by traders in March and a rise in local production.

Apparent consumption (imports plus local production) is reported to have surged to 1.7m tonnes in March and 1.5m tonnes in April compared 1.3m tonnes in February and an average of 1.3m tonnes per month in 2009.

These high numbers reflected both stronger imports than in January and February and successful stabilisation of production at several new plants in China. Domestic production is said to have averaged around 800,000 tonnes per month so far this year compared with less than 700,000 tonnes a month in 2009.

This is slightly different from the story we were told last week, when traders and producers were blaming excessive inventories on high overseas bookings dating back to as early as November-December of last year.

But as a senior industry source, who has worked in Asian polyolefins for 25 years, told the blog today: "You can obviously hold PE in storage for an unlimited amount of time - and there is a willingness in China to hold on for long periods - so the high stock levels could be a combination of both November-December and March bookings."

Interestingly, stock levels for polypropylene (PP) appear to be far lower with apparent consumption only around 1.1m tonnes/month in March and April - about the same as the monthly average for 2009.

"This reflects the fact that there are far more speculators in PE than PP, the reasons being bigger PE capacity and the ease of substituting PE for PP. PP is harder to substitue for PE because of shrinkage and other issues," the senior industry source added.

So why did the traders pile into PE imports in March at a time when it must have been very clear that local production had substantially increased?

One factor was probably confidence in the economy - somewhat undermined since by measures designed to cool-down the property sector.

My fellow blogger Paul Hodges also points out: "Don't forget that in Q1, Goldman came out with incredibly bullish noises about $96/bbl oil, whilst all the technicians were busy forecasting higher prices by end-June." (there were other equally bullish forecasts)

"If one was a trader on the Dalian Commodity Exchange (where a futures contract in linear low-density PE is traded), one would have seen the oil price rising in March - the bullishness of many analysts about the outlook for China and oil.

"This was occurring while the  physical linear-low density PE (LLDPE) price was actually weakening."

The problem is that futures and physical traders are one and the same so confidence in the Dalian might have been infectious - prompting the rise in imports.

The big question now is whether this is just a period of temporary indigestion or is the start of a sustained macro-economic and PE supply-driven downturn.

Cautious hope was being expressed late last week that pricing might have reached the bottom.

"I believe we are floating at the bottom of the market at this point and appropriate operating rate corrections will be made by producers to prevent further declines," said a source with a major North American-based global producer.

"In China, going by an annualised 10% growth in consumption, even without economic stimulus, the increase in domestic capacity of 19%  taking place this year should still allow imports to remain steady."

But Hodges makes a very strong case - as I have in the past but now remain slightly less convinced and a little more hopeful (or maybe I am living in cloud cuckoo land?) - that the game is over as the global economy weakens.  

By John Richardson

ASIAN ethylene and polyethylene (PE) margins both fell last week - a further indication that the Chinese market remains weak.

Bonded warehouses are still full of PE as a result of high imports in March at a time when local production was being ramped up, the blog was told this morning.

But nobody seems clear about the outlook for final end-user demand in an increasingly uncertain domestic and global economic climate, which is being reflected in highly volatile crude-oil prices.

This has led to some converters reverting to the hand-to-mouth buying patterns that occurred immediately after the start of the economic crisis in September 2008, we have been told.

A further factor behind the negative buying climate is the imminent start-up of more capacity and, as we reported last week, success relative to the Middle East by China in stabilising new production.

Sinopec's priority also appears to be in keeping the new plants running at or close to 100%, even if this means weakening Yuan-based pricing.

Naphtha-based Northeast Asian (NEA) ethylene margins fell by $50/tonne for the week ending July 9, according to the ICIS pricing Weekly Asian Ethylene Margin Report. This was the result of an $8/tonne in naphtha costs and a $20/tonne fall in C2 prices (see separate article below).

NEA margins averaged $474/tonne in Q1, $378/tonne in the second quarter and only $222/tonne so far in Q3.

Linear low-density PE (LDPE) and high density PE (HDPE) margins for integrated producers in NEA (i.e. those with captive ethylene supply) were also down for the week ending 9 July, according to the ICIS pricing Weekly Asian PE Margin Report.

LDPE margins fell by $60/tonne and HDPE by $65/tonne on weaker PE pricing and a rise in naphtha costs. LDPE film-grade prices had slipped by $30/tonne and HDPE film by $20/tonne in the China CFR market.

HDPE injection grade NEA margins averaged $398/tonne in the first quarter, $357/tonne in Q2 and $305/tonne so far in Q3.

"There is no storage space available in any of the bonded warehouses in southern or eastern China," said a Shanghai-based polyolefins trader.

But he added that there were contradictory reports of high or only medium storage levels in the domestic warehouses that store resin priced in Yuan.

"I don't think inventory levels actually matter that much. There is such uncertainty about the outlook that we are seeing some converters managing inventory the way they did in late 2008," said a Southeast Asian polyolefins sales manager.

"In other words, purchasing is hand-to-mouth with a great reluctance to buy anything more than minimum quantities because of oil-price volatility."

Another factor behind the reluctance of buyers is signs of weakening growth in the Chinese economy. For example, on a month-on-basis basis auto sales slipped in June with a senior government official warning last week that property prices were heading for a significant correction.

Further new supply just around the corner includes the 540,000 tonne/year Borouge 2 LLDPE plant. Production at the 1.5m tonne/year cracker which will feed the PE plant was due to be stabilised by the second week of July, ICIS news had reported.

It is easy to paint a very gloomy outlook for the PE market - and it seems likely that some of the problems we've dealt with above apply to other chemicals and polymer markets.

We will endeavour to look at these other markets over the next few weeks.

Several Factors Behind Ethylene Price Weakness
The fall in ethylene prices to $850-900/tonne FOB Korea occurred despite an outage at the Formosa Petrochemical Corp 700,000 tonne/year No 1 cracker, which is set to last 2-3 months.

But Formosa already had high C2 inventory levels built-up ahead of a turnaround at its 1.03m tonne/year No 2 cracker, according to ICIS pricing.

Asian spot ethylene markets have also lengthened this year on the start-up of the Shell Chemicals' 800,000 tonne/year cracker in Singapore.

Saudi Arabia has also reportedly increased ethylene exports in the last few weeks on lower PE operating rates due to the weak Chinese demand and an outage at a PE plant.

Cargoes are also being lifted from Abu Dhabi, where Borouge is in the process of commissioning its new 1.5m tonne/year cracker and associated downstream plants.

It is therefore to very hard to work out to what extent this latest ethylene price decline (four weeks ago pricing was at $900-650/tonne FOB Korea) is the result of weak demand versus these other factors.

Source of picture: www.en.cn.national

By John Richardson

THE decline in China's GDP (gross domestic product) growth from 11.9% in Q1 to 10.3% in the first quarter is, no matter how you try to dress it up, bad news for the chemicals industry.

Government officials and some economists are arguing that the moderation is not that dramatic and indicates success in taking heat out of the economy.

But this ICIS news article points out that further growth contractions are ahead with third-quarter growth expected to slip to 9.8% and Q4 to 9.4%.

Interestingly, government efforts to achieve emissions targets are expected to damage industrial production - still by far the biggest contributor to growth - through the closure of energy-inefficient chemicals and other plants.

The drop in Q2 GDP confirms what has been evident in chemicals markets for several months now as demand from key end-use sectors such as construction has slowed.

In the case of polyethylene (PE), as we wrote yesterday and last week, weaker economic expansion comes at a time of high inventory levels. It could be as late as Q2 2011 before stocks are normalised.

And the price falls across many commodity chemicals that we've seen over the last few weeks are also partly the result of the China slowdown. Other common factors have been a dip in exports of finished goods from China to the West and the volatility in crude, which seems to be resulting in more hand-to-mouth buying patterns among end-users.

A source with a major monoethylene glycol (MEG) producer told the blog earlier this week: "We have actually seen weaker-than-expected demand in China since the end of the Lunar New Year in February.

"Coastal storage tanks are full and with China MEG demand growth this year as 6-7% against a global capacity increase of possibly as much as 10%, we have problems."

To quote an example for another product chain, Asian June toluene diisocyanate (TDI) contract prices fell $350/tonne from May on weak demand and a supply glut.

It is time to take stock of what will be a much more difficult environment over the next few quarters.

By Malini Hariharan

Yansab posted a net profit Saudi Riyal (SR)502.4m ($134.0m) in the second quarter, its first full quarter of commercial operations. However, results could have been better if its plants had run at full capacity.

Analysts at NCB Capital estimate that average utilization rate was below their expectation of 93% for the quarter.

"We had assumed a similar 93% utilization rate for the remainder of the year, however will likely reduce this somewhat as the company ramps up production at a slightly slower pace than our original outlook," said NCB in a recent report.

Yansab's 1.3m tones/year cracker is based on 38% ethane and 62% propane feedstock mix.

In an earlier report this year NCB had referred to problems faced by Yansab in securing its full feedstock allocation.

"Yansab receives 35,000 barrels per day of propane from Aramco, which is actually 10,000 barrels per day below its full requirement. As a result, the ethylene cracker will likely run at a sub-optimal utilization rate. Though Sabic is seeking approval for additional propane from Aramco, we believe it may be difficult to secure this due to rising domestic demand amid limited supply."

Sabic has a 51% stake in Yansab.

It also pointed out that the full feestock allocation (35,000 bbls/day of propane and 80m cubic feet/day of ethane) was sufficient to produce only 1.25m tones/year of ethylene and 325,000 tonnes/year of propylene, which would imply an operating rate of 93%.

The blog has been regularly hearing and reporting about feedstock issues constraining operations at Saudi crackers. It also appears that there is a mismatch in plant capacity and feedstock allocation and achieving 100% operating rate is unlikely to take place very soon.

By Malini Hariharan

A spurt in Chinese buying enquiries in the last few days has awakened hopes in some quarters of an upturn in polyolefin pricing with one trader predicting a $50-70/tonne rise in the coming weeks.

The prediction, he says, is based on his experience with the commodity cycle - as buyers in China are willing to pay a little more, producers will soon start holding back material and push for an even higher number.

The question though is to what extent prices can be raised.

Some producers still see an oversupplied market, especially for polyethylene (PE).

"There are some [positive] signals in the PE market but this could just be short-term; we need to watch to market for some more time," says one producer.

But the rise in Chinese bids has had a knock-on effect in other Asian markets - buyers are no longer clamouring for reductions, he adds.

He also thinks that yesterday's fire at Formosa Petrochemical's refinery at Mailiao, Taiwan, could have an impact on sentiment.

Pic source: Focus Taiwan

The fire at a desulphurising unit has been brought under control but company has shut down the 540,000 bbls/day refinery as a precautionary measure, reports ICIS news.

Operations at Formosa's two residual fluid catalyst crackers (RFCC), which have a combined capacity of 168,000 bbl/day and can produce around 650,000 tonnes/year of propylene, were temporarily halted. And the company's olefin conversion unit (OCU), which can produce 250,000 tonnes/year of propylene, was also down, they said.

This is likely to push Formosa to enter the propylene spot market to buy cargoes for its polypropylene (PP) and acrylic acid (AA) plants in China as the it would not be able to supply from Mailiao.

Yesterday's fire follows a blast at the company's 700,000 tonnes/year No1 cracker, also in Mailiao, earlier this month. The cracker is not expected to remain offline for 2-3 months.

The company was hoping to defer a late-August turnaround at its No2 cracker but the latest incident is likely to make this difficult.

And the company very likely faces a government investigation into the two accidents.

A Taiwanese media report says that the ministry of economic affairs has asked for a detailed report on yesterday's fire.

It adds that local resident action groups and the opposition Democratic Progressive Party have demanded that the company halt production at the entire complex rather than just the damaged unit and also stop construction of new plants.

Source of picture: anirudhsethireport.com

By John Richardson

WE reported earlier this week that cautious confidence is being expressed that the worst might be over in polyolefin markets with prices having reached the bottom.

"The market seems to be improving and my view there is no much room for further price corrections from a cost standpoint despite the oversupply," said a source with a major global producer in response to earlier our story about the 30% increase in Chinese production in H1.

"If demand recovers or even holds, prices should stabilise at slightly higher levels to where they are today,"

I hate to be pessimistic yet again, though, but sadly I think that any recovery could be a dead-count bounce - an edging-up by producers of prices $10-20/tonne every week or so because of a moderate re-stocking and the cost factor mentioned above.

This is barring major operating-rate cuts - or even some quick decisions on further permanent plant closures which we also talked about earlier this week.

"We haven't seen the worst of things yet and without some permanent shutdowns by higher-cost Japanese and other producers, we will remain in a down cycle throughout 2011 with no recovery until the following year," a senior industry source told the blog.

His view is that the moderate price-recovery currently being talked-up might actually be bad news as it will delay painful decisions on scrapping capacity.

"What we actually need are price reductions of around $50-100/tonne a month rather than any increases," he added.

On the demand, side, as we've said before, China's economy is clearly slowing and problems in the West are mounting - meaning that a rebalancing is needed, even if in the longer-term the outlook for Asia remains amazingly good (the tantalising prospect of shortages beyond 2012 might well put paid to the rationalisation our industry source would like to see, forcing everyone to muddle through).

A very interesting, well-written and extremely thorough article from my colleague Mark Victory at ICIS news earlier this week said that summer demand in Europe across a range of chemicals and polymers was stronger than had been expected.

Here we are broadening the perspective out. The blog doesn't have the resources to, on the whole, cover anything more than the olefins and polyolefins markets, but we from time ot time we are able to point out parallels with what's happening elsewhere in the chemicals industry.

Mark's article points out, though, that factors other than fundamentally strong demand can be used to explain this brighter picture.

I can't also help feeling that there is a lag-effect here - e.g. European sellers of chemicals and polymers into the auto market have yet to be hit by the slowdown in demand from China.

The American Chemistry Council (ACC) late last week also reported a global slowdown in chemicals production, according to an article by another of my ICIS news colleagues, Nigel Davis.

He wrote: "The 'V'-shaped recovery in Asia Pacific has stalled, or "dissipated" in the ACC's words. European output growth has continued to show strong gains but there has been individual national output weakness.

"Production in the UK, for instance, has dropped for the past three months compared with the year-ago periods. UK chemicals output is slewed considerably towards pharmaceuticals, a segment facing tough times, but the country's more basic chemicals output has not recovered strongly.

"The situation across Western Europe is generally different, with a strong rebound apparent from the sharp fall in output in 2008-2009 in countries such as Germany and France.

The pace of growth, however, eased off slightly in June and prospects for the second half do not look good."

By Malini Hariharan

Formosa Petrochemical Corp's problems are mounting after two accidents in less than a month at its refinery and petrochemical site in Mailiao, Taiwan.

Wu Den-yih, the country's premier was at the site last week and ordered an investigation report to be submitted on 6 August.

And in a bid to reassure residents he declared that the company's No 6 naphtha cracker "will not be allowed to re-open unless the cause of the fire is discovered and operating safety is fully guaranteed".

Pic source: Focus Taiwan

It was not clear if he was referring to all the plants at the No 6 naphtha cracker site or only parts of the refinery that were damaged by the fire and the No 1 cracker that was hit by a blast in early July.

The No 6 site includes the refinery, two crackers, an aromatics unit and a number of derivative plants operated by affiliates of Formosa Petrochemical.

Formosa Petrochemical restarted one of its three 180,000 bbl/day crude units in Mailiao last week, with plans to put another unit back on stream this week.

Meanwhile, local residents have started asking for extensive compensation. They want Formosa to pay their health insurance premium, subsidise their electricity bills and even offer jobs to the local young people at the company. Practical considerations appear to have outweighed concerns about health and safety.

Residents have also been seeking a suspension of all operations at the site so that all plants can be inspected. They are also asking for a termination of Formosa Petrochemical's expansion projects.

ICIS news reports that the company has plans to beef up its ethylene capacity by 300,000 tonnes/year and increase the capacity of its refinery to 580,000 bbl/day under the fifth phase of Mailiao complex expansion.

The planned Taiwan Dollar (NT$) 280bn ($8.75bn) expansion - which would involve 43 new projects, including petrochemical intermediates such as methyl methacrylate (MMA) and phenol - is currently being assessed by Taiwan's Environmental Protection Administration (EPA), said Jack Shieh of the Petrochemical Industry Association of Taiwan (PIAT).

"The expansion permit was supposed to be given to them [Formosa] by the end of the third quarter (of 2010) but because of the fires last month this could be pushed back by half a year, said Danny Ho, a Taipei-based petrochemical analyst at brokerage Yuanta Securities.

But the company remains optimistic of obtaining an approval by the end of the year.

Formosa is not the only Taiwanese company facing project-related problems. Kuokuang Petrochemical is still struggling to get approval for its cracker and derivatives project which was first mooted in 2006.

The latest news is the withdrawal of one of its investors.

"I'm not investing. No investment project in the world can defer for so long," said Preston Chen, chairman of the Chinese National Federation of Industries.

He complained that major investment projects in Taiwan did not receive enough support and pointed out that a similar project proposed in Singapore half a year later than the Kuokuang project had started commercial production.

Given a bleak environment for petrochemical projects in Taiwan and also Thailand it is perhaps not surprising that Singapore is gearing up to attract more investments.

By Malini Hariharan

Excess availability of product continues to trouble Asian aromatics markets. Commissioning of new plants and reluctance to cut operating rates has resulted in a steady build up of stocks over the last few months.

Take the case of paraxylene (PX). The spread between naphtha and PX prices has been running below $250-300/tonne, which is usually needed to cover operational costs. But margins for producers integrated to purified terephthalic acid (PTA) have been positive. And it has made sense to operate PX units linked to refineries because of strong reformer economics.

At today's ICIS Asian Aromatics webinar, Bohan Loh, ICIS pricing editor for PX and mixed xylenes, estimated that South Korean PX plants ran at 95-100% in July. Elsewhere in the region operating rates were in the 80-95% range with minor cutbacks only at some plants in China and Southeast Asia.

The market is also seeing volumes flow from 4.52m tonnes/year of new PX capacity commissioned in 2009 (2.9m tonnes/year in China and 1.62m tonnes/year in the Middle East).

In benzene, growing supply in the China market is a key concern, pointed out Mahua Chakravarty, ICIS pricing editor for BTX.

China's dual role as an importer and exporter is further complicating the market. China imported about 621,839 tonnes of benzene last year and exported 278,111 tonnes. Imports in H1 2010 have amounted to 119,051 tonnes while it exported 55,489 tonnes.

Demand has not been too bad. But there is simply too much being produced.

Cuts in operating rates will be needed. The question is who will move first and when.

In the words of one market analyst: "No one wants to be first as they don't want to give their competitor an advantage."

By Malini Hariharan

Just when polyolefin markets have started recovering operating issues are cropping up at plants in Asia.

ExxonMobil was forced to shut its 600,000 tonnes/year polyethylene (PE) plant in Singapore on Tuesday for two weeks due to undisclosed problems. The PE plant had faced problems in early July when it was shut down for about a week.

Shell Chemical's 800,000 tonnes/year cracker in Singapore was shut down on Tuesday evening and it is likely to take 1-2 days for operations to resume, market sources told ICIS news.

"The flare system at Shell's Pulau Bukom manufacturing site was activated in the afternoon of 3 August 2010 due to an unplanned disruption to a process unit," a Shell spokesperson said.

"The rest of the operations [were] not affected," said the spokesperson, without elaborating on the current status of the cracker.

There are now polyolefin plants downstream of the cracker but Shell has a surplus of ethylene and propylene at the site.

In Taiwan, Formosa Petrochemical plans to make a 30% operating rate cut at its PE plants in August and September due to shortage of ethylene. Supply of the monomer has been affected as the company's No1 cracker has been shut down after a fire in early July.

The company has a 350,000 tonne/year high density PE (HDPE) plant, a 264,000 tonne/year linear low density PE (LLDPE) unit and a 240,000 tonne/year low density PE/ethylene vinyl acetate (LDPE/EVA) swing plant

A planned shutdown at its No2 cracker has now been deferred from late August to end-September or early October. But the company also indicated that the operating rate cut could extend to October.

And Formosa Chemicals & Fibre Corp (FCFC) is likely to cut production at its 450,000 tonnes/year polypropylene (PP) plant as Formosa Petrochemical will not be able to supply full volumes of propylene.

Formosa Petrochemical has yet to restart an olefins conversion unit (OCU) and two residual fluid catalytic crackers (RFCC) after a fire at its refinery last month.

"We'll have to cut PP production in August but we don't know yet how much to cut back," an FCFC source told ICIS news.

Another group company, Formosa Plastics Corp (FPC), faces a similar situation.
We don't plan to cut [PP] production yet because we still have propylene in storage. But we may experience feedstock shortage in September and October when Formsoa Petrochemical shuts its No 2 cracker for maintenance," an FPC source said. FPC runs a 350,000 tonnes/year PP plant.

The blog has been highlighting some of the factors behind the recent recovery in prices. The trend continues - PE prices have already inched up by $50-100/tonne this week while PP prices have risen by $40/tonne. Ethylene prices have risen by $20/tonne over the last four weeks led by strong crude and naphtha values.

But the new round of operating problems is likely to create room for producers to push through more price hikes.

By Malini Hariharan

The blog is hearing a number of reports about delays in polymer shipments from Saudi Arabia because of port congestion. This is being attributed to a shortage of containers and labour ahead of Ramadan.

"It is now takes us 25-30 days to get material out of Saudi Arabia as against the usual 15 days," says a source from a company with polyolefin operations in the Kingdom.

The situation is so severe that some shipping lines are considering bypassing Dammam port, the export hub for petrochemical companies in Al Jubail.

Pic source: Edmark International

Another media report states that slow loading and unloading at the port has led to ships being delayed for up to four weeks.

Port authorities tried to play down the crisis but an official attributed the delays to the inability of a contractor to hire enough workers.

Meanwhile, the local chamber of commerce blamed shipping agents for deliberately delaying unloading of cargoes.

The Ramadan holidays have no doubt contributed to the congestion but sources pointed out that there were other factors as well.

Nearly 3-4m tonnes/year of new capacity has come up in Al-Jubail over the last couple of years and most of the output is meant for exports through Dammam port.

While the situation is likely to ease after Ramadan but there will continue to be pressure for another 1-2 years until the port is expanded.

By Malini Hariharan

The first of China's major coal-based chemical projects has finally started trial operations.

ICIS news reports that methanol has been fed at Shenhua Baotou's 600,000 tonnes/year methanol-to-olefins (MTO) plant at Baotou, in inner Mongolia. The unit can produce 300,000 tonnes/year each of ethylene and propylene. But the downstream polyethylene (PE) and polypropylene (PP) units have to start and the company is said to have set a September target for achieving on-spec PE and PP production.

Pic Source: National Research Center for Coal and Energy

The Shenhua Baotou unit is said to be the first large-scale demonstration plant for the MTO technology that has been developed by the Dalian Institute of Chemistry and Physics.

There are two more projects that are likely to start later this year - Datang Power's 450,000 tonnes/year methanol-to-propylene (MTP) and PP project and Shenhua Ningxia's 500,000 tonnes/year MTP/PP project.

Successful operations at these plants is likely to trigger a fresh wave of coal-to-chemical projects.

Consultants AsiaChem expect 2010 to be a critical year for the development of China's coal-based chemicals industry.

The three MTO/MTP projects are likely to be finally completed and evaluation of coal-to-liquids (CTL) plants that started last year would be possible.

Additionally, a demonstration plant for the new coal to monoethylene glycol (MEG) technology is also likely to be completed this year. The plant, which is being built by Tongliao GEM Chemical, will produce 150,000 tonnes/year of MEG and also 100,000 tonnes/year of oxalic acid.

And Anhui Huaihua Group is cooperating with Shanghai Pujing Chemical Technology to build a 1000 tonnes/year syngas-to-MEG demonstration plant. The unit is likely to enter testing stage in September this year and preparation for a scaled-up plant is expected to be complete before the year end.

The consultancy estimates that China has nearly 20 other coal-based MEG projects at the preliminary planning stage.

Nexant Chemsystems estimates that plans for nearly 1.8m tonnes/year of MEG capacity have been announced with four projects, each of 200,000 tonnes/year, already under construction and schedule to start operations in Q3 2011.

The interest in MEG and the new production route makes sense as China imported around 5m tonnes last year and the government has a clearly stated objective of reducing the country's dependence on petrochemical imports.

Its early days yet especially as we don't know the cost competitiveness of the new coal-based technologies but they could well pose a threat to companies relying heavily on exports to the Chinese market

By Malini Hariharan

The Gulf Petrochemical and Chemicals Association (GPCA) is speaking up on behalf of Saudi producers who are worried about the Indian government's recent ruling on dumping of polypropylene (PP).

The Indian position, outlined in a disclosure statement, was that the Saudi price formula for propane gave local PP producers an 'unfair advantage'. And the blog had highlighted a few weeks back that Saudi producers risked more dumping and other duties from countries around the world if India's ruling sets a legal precedent.

In a statement yesterday, the GPCA termed the Indian government's approach to the issue as 'baseless' and urged it to throw out the case before it affects economic relations with the Gulf region.

"This decision is not justified because GCC companies are neither dumping products in India nor causing injury to the Indian petrochemical industry.

"For obvious commercial reasons, including proximity to the source and low local production and distribution costs, the price of feedstock in Saudi Arabia, as in the Gulf region generally, is more competitive than in countries like India that do not have the same endowment of natural resources," said the GPCA.

The argument put forward by the GPCA is not new and was used by Saudi producers during investigation by Indian authorities. The problem though is that no evidence has been provided, or that is what the Indian side has claimed. The blog has also been told that Saudi producers are extremely reluctant to share data relating to costs.

The GPCA has also tried to step up the pressure on India by referring to 'India's desire to improve economic relations with Gulf countries and considering the massive investments and employment of Indian nationals in the region'.

Saudi producers have also turned to the Saudi Export Development Center (SEDC) for support.

"During WTO talks the Kingdom had proved that Saudi feedstock prices were fixed on a commercial basis with gas producers taking a reasonable profit. All WTO members including India have accepted this point. India has signed the WTO agreement. So the Indian argument has no basis," the SEDC chairman said yesterday.

He also said that Saudi Arabia's commerce, finance and foreign ministries had made a lot of efforts to convince New Delhi to change its "irrational" anti-dumping-tax decision.

So will India yield to all this pressure? We should know very soon. The anti-dumping investigation was announced on 23rd February 2009 and according to WTO rules it has to be completed within 18 months which is 22 August 2010.

By Malini Hariharan

The Thai government is doing all it can to quickly resolve the Map Ta Phut crisis but full operations at PTT Chem's new cracker is likely only in early 2011.

Feedstock ethane for the 1m tonnes/year cracker will be supplied from PTT's No6 gas separation plant commissioning of which has been held since last year.

A PTT source told the blog that a health impact assessment (HIA) report is being prepared and will be submitted to a government-nominated independent committee for evaluation by September.

Meanwhile, the company is also waiting for the prime minister to announce a list of Map Ta Phut projects that are harmful to the environment and would require HIA.

"As the gas separation plant is not on this list we can appeal to the central court for a waiver of the HIA report once the prime minister that made the announcement," he added.

But when asked to give a precise date for completion of the formalities, he would only said that since it is beyond the company's control they could only target full operations by early 2011.

However, PTT should be able to supply some additional volumes of ethane once revamping of the No2 and No3 gas separation plants is completed this month.

PTT Chem commissioned its cracker last year but has been running it at around 60% because of a shortfall of ethane.

And start of commercial operations at PTT Chem's new 300,000 tonnes/year low-density polyethylene (ldPE) plant has once again been delayed, this time to September due to technical problems.

Source of picture: keplarllp.com

By John Richardson

It always seemed as if the Asian polyethylene (PE) price rebound was built on a house of cards.

The Chinese economy is slowing down, the country's domestic production has greatly increased and new capacity in the Middle East - though still plagued by start-up and operating problems - is now starting to arrive in much bigger volumes.

Hence the Asian PE report released by ICIS on 13 August, which revealed that, despite further moderate price rises, Asian producers were, at best, "cautiously optimistic".

This followed the previous week's bigger price surge on temporary production issues. 

These included ExxonMobil's outage at its 600,000 tonne/year PE plant in Singapore and the impact of the fire and shutdown at Formosa Petrochemical Corp's No 1 cracker at Mailiao, Taiwan, on ethylene and derivative markets. The cracker is not expected to be back on stream until late September or early October.

A collection of other temporary factors could play a big role in supporting ethylene and therefore PE markets over the next few months - or could swing the other way and make conditions a lot worse.

First, with ethylene, the spot market in Asia has, on paper, become a great deal longer because of a 150,000 tonne/year surplus at Shell Chemicals in Singapore. The Shell cracker, which came on stream in March, is structurally long on C2s.

Lengthy problems in stabilising production of new derivatives capacity from crackers in the Middle East could also lead to more merchant ethylene.

Reasons for the six to nine months it can take to stabilise operations include manpower shortages and the huge scale and complexity of what's being commissioned.
Iran is also structurally long, by as much as 40,000 tonnes/month.

A further difficulty is that plants can, of course, suffer outages. This was the case with the recent report of a big, high density PE (HDPE) facility in the Middle East, which was brought fully on stream last year.

The producer in question was forced to sell 30,000 tonnes/month of ethylene for three to four months - a big reason for the ethylene price declines before the Mailiao outage, an olefins trader said.

The perception is that this current wave of capacity from the Middle East is more susceptible to outages than the previous one, for reasons that are best not to go into in print.

Spot pricing in Asia helps set what consumers pay on contract for their ethylene (term or contract sales account for well over 90% of the region's total consumption), and there are only a handful of spot deals in this region each week. So an extra few cargoes can make a great deal of difference to ethylene pricing.

But feedstock shortages in Saudi Arabia have greatly reduced the country's merchant ethylene sales.

February was the last time ethylene was loaded from the Al-Jubail site in Saudi Arabia, and even then it was only 5,000 tonnes, according to Joe Duffy, petrochemicals consultant with DeWitt & Co.

"Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. Essentially, 500,000 tonnes/year of exports have gone to zero," he added.

Iran's ethylene shipments can also dip very sharply when the power sector and the country's other users of natural gas leave petrochemicals short of feedstock.

Whether Iran can achieve the investment in gas infrastructure to solve this problem is a moot point, given the current issues surrounding sanctions.

Another negative - or positive, depending on which side of the fence you sit - is that increasing demand for long-haul cargoes is creating repositioning problems for ethylene vessels.

Lack of sufficient vessels is also expected to result in higher C2 freights until the end of next year, limiting arbitrage.

"Freight rates are on the rise and could go a lot higher. The Singapore-to-Taiwan rate was, for example, $100/tonne (€78/tonne) in June and has risen to $125/tonne in August," added the olefins trader.

The long-running butene-1 shortage continues to significantly restrict linear low density polyethylene (LLDPE) supply

A wider disparity in container freight rates is benefiting the European PE industry, while hurting Asia.

"We usually see around 30% of Middle East polyolefins moving to Europe with the rest to Asia, but a bigger gap in rates to Europe is resulting in a higher percentage heading this way," said a Singapore-based source with a global polyolefins producer.

"Because of the dramatic recovery in global trade, the gap between freight rates on the European routes to the Middle East compared with China has widened," he added.
"This is the result of China's dominance in low-end manufacturing, creating more fully occupied container space to and from the Middle East and China."

The outlook for European polyolefin demand remains uncertain, but supply has long been tight.

Limited PE and polypropylene (PP) supply was at first the result of deep operating rate cuts when the 2008 financial crisis began - and then also the rapid Chinese economic recovery, which enabled Europe to export significant volumes.

European polyolefin exports to China have since fallen due to displacement by new capacity from the Middle East and China.

But Europe remains tight because of continued operating-rate discipline and the high freight rates that are discouraging buyers from acquiring Middle East material, an industry observer said.

"European PE prices were recently as much as $400/tonne above those in Asia, but that was still not enough to attract Middle East shipments," he added.

The longer all these temporary factors continue the longer producers might be able to squeeze out decent returns.

But the problem remains that an awful lot of surplus capacity still needs to be absorbed by a stuttering global economy.

"We haven't seen the worst of things yet. More permanent shutdowns by higher-cost Japanese and other producers are clearly needed," said a second source with the same global polyolefins producer we referred to earlier on.

People have been saying this for years, though, and plant closures are easier said than done for a myriad of reasons.

The source made a good point, though, when he added: "Rate cuts and permanent closures might occur if price reductions are $50-100/tonne per month rather than the increases we have seen of late.

"Otherwise, we could be struggling with fundamentally long markets throughout next year, with a recovery only occurring in early 2012."

However, if you are higher cost, why not limp through until 2012, given that you might well have loads of money in the bank from the boom period?

Source of picture: the-office.com

By John Richardson

A FURTHER illustration of the Alice in Wonderland world of financial investors versus the fundamentals of real demand was provided by the Dalian Commodity Exchange earlier this week.

"Some investment funds started snapping up linear low density PE (LLDPE) futures in anticipation of improvement in the Chinese property market and hence plastics demand," said Canfeng Zheng, an analyst with Shanghai Chaos Investment in this article on ICIS news.

This theory was spuriously based on a 37.2% increase in real-estate investments during the first seven months of this year, but that was then and this is now.

The Chinese government has taken firm measures to cool the sector down and so to extrapolate from these historic numbers the idea that the sector will continue to expand at previous rates seems bizarre in the extreme.

But, of course, our friends in the financial world only seek to convince enough people for long enough of something being true (these are the poor gullible suckers left as the losing counter-parties in deals) in order to make their money.

From a polyolefins industry perspective as we first pointed out last year on this blog, LLDPE in China has to a significant extent become just another financial instrument. There is also quite a lot of evidence to indicate that the Dalian futures contract serves as a barometer for physical polyolefin markets as a whole.

On at least two occasions, the LLDPE contract has mislead the real market, leading to an overbuilding of inventory - once in late November/early December 2009 and in March of this year.

On this occasion, though, a wide buy-sell gap and a fall in import volumes to a trickle - according to this other report from ICIS news - seems to indicate that the fundamentals are just too bearish for the Dalian to be exerting a baleful influence. As we wrote yesterday, the recovery in PE is built on a house of cards.

But as my fellow blogger Paul Hodges points out, the far bigger threat from our friends in the financial community comes in the form of the underlying commodity we all have to worry about, above probably anything else: Crude oil.

By Malini Hariharan

Indian polypropylene (PP) demand continues to remain strong with most end-use sectors showing good growth and it is local producers who are catering to the additional requirement.

Polypropylene (PP) demand is estimated to have expanded by 13% to 809,000 tonnes during April-July, reports my colleague Prema Viswanathan on ICIS news.

But import volumes have dropped to 114,000 tonnes from 182,000 tonnes during the same period last year.

Reliance's new 900,000 tonnes/year plant at Jamanagar has no doubt boosted domestic supply. But exporters to the country pointed out that provisional anti-dumping duties (ADD) on product from Saudi Arabia, Singapore and Oman had been a major deterrent.

With final duties due to be announced very soon (possibly next Monday) import volumes are likely to fall further during the rest of the year.

Besides these three countries India is also investigating PP exports from South Korea, Taiwan and the US. Provisional ADD against these three countries are likely to be announced in September, said an industry source.

And domestic supply will be even higher this year with the start of Indian Oil Corp's (IOC) 600,000 tonnes/year plant. The company has yet to fully stabilise operations at its new cracker and derivatives complex but volumes have started flowing into the market. The company has also exported small volumes to Pakistan across the land border. If this proves to be successful Pakistan would give a ready outlet for the surplus PP that has been added to the Indian market this year.

Every dark cloud has a silver lining...

By John Richardson

GLOBAL polyolefins markets are being kept very tight be a collection of what might seem like only temporary factors.

But in the case of the butene-1 shortage, for example, (see below) this has been restricting linear-low density polyethylene (LLDPE) for more than a year.

And many of the other reasons for supply restrictions have been dragging on for a long time now, enabling Asian consumption to grow - thus making it easier to absorb new capacities.

This is all well and good provided there is no double-dip recession, of course.

Here's our list for the reasons for persistent tightness, resulting in unexpectedly strong margins for those able to operate:

1.) Reduced feedstock availability in the Middle East. This includes both ethane and also liquefied petroleum gas (LPG). LPG has been tight because of, among other factors, reduced refinery operating rates and increased demand from petrochemicals in the Middle East.

2.) Plants keep falling over in the Middle East and new plants are taking a long time to stabilise because of manpower, technical issues etc.

3) Logistics factors which include port congestion, repositioning problems with ethylene vessels (see the link to the first article above), lack of sufficient ethylene vessels and not enough container vessels. Shortage of enough shipping space is also placing a cap on operating rates because this prevents arbitrage (e.g. polyolefins to Europe from the Middle East).

4) Europe's inability to sell gasoline in big volumes to the States anymore. When the US was enjoying an economic boom, ethanol blending wasn't as big and fuel-efficiency regulations were more relaxed, Europe was able to export its gasoline surpluses to the States. But now that cannot happen, this is forcing operating rates at refineries down, thereby restricting the availability of feedstock to petrochemicals, according to my fellow blogger, Paul Hodges.

5) In the US, the drop in gasoline demand is restricting the availability of propylene; in Europe most of the propylene comes from steam crackers so the lack of naphtha is the problem here. Also, the increased demand for polypropylene) PP due to innovation is another factor behind propylene becoming more expensive than ethylene.

6) Lack of spending on maintenance is reportedly the cause of numerous outages in Europe. Lack of maintenance spending is also a problem for PP production in the US, we have been told

7) In Europe also, the product managers are maintaining margins rather than market share (unlike the state-run companies, such as Sinopec, and the South Koreans). This is further restricting production.

8) Lack of enough low-density PE (LDPE) capacity, with the plants that do exist being pushed so hard to meet demand that outages are occurring very frequently.

9) The butene-1 shortage limiting LLDPE production.

Source of picture: the truth about cars

By John Richardson

WHEN my fellow blogger Malini Hariharan once asked a particularly unhelpful individual who used to track polyethylene (PE) markets what was going on, his only response was "conditions are volatile".

And so as you kick-off this fine and sunny morning (at least it is here in Singapore), here is some further useful advice for you: Conditions are becoming even more volatile.

But unlike the individual referred to above, in a series of blog posts over the coming weeks we will endeavour to explain exactly why pricing markets have become even harder to predict. We believe that old tools of analysis need to be revised and old assumptions challenged.

We are going to start with liquefied petroleum gas (LPG) and how unexpected shortages have curtailed the length of the usual propane and butane "cracking season".

Every summer, when demand for LPG for heating in the northern hemisphere falls, cracker operators that have invested in the flexibility to change feeds often reduce naphtha consumption in favour of LPG. Cracker operators in Japan, South Korea and Singapore have, for example, invested in this flexibility.

But as these two recent graphs from the ICIS pricing Ethylene Margin Report show (click below to view), earlier this summer LPG cracking didn't make economic sense

LPGslide.ppt.

So we talked to oil, gas and refining consultants Purvin & Gertz and they gave us the following reasons why this happened:

1.) Refinery operating rates globally are constrained due to weak oil-product demand, despite the story the financial industry is spinning about booming demand
2.) Asian refineries were undergoing heavy maintenance programmes
3.) The economic crisis resulted in delays to liquefied natural gas (LNG) projects, thereby reducing the extra availability of propane and butane co or by-product that needs to be extracted from the LNG before it is shipped
4.) The well-documented OPEC oil quotas that have limited availability of associated ethane gas have also done the same for associated propane and butane
5.) Petrochemicals demand for LPG has increased due to the increased cracking of propane and butane resulting from ethane shortages, and the start-up of the three propane dehydrogenation (PDH) to polypropylene (PP) projects in Saudi Arabia. This is only a small part of the overall picture, BUT constrained LPG supply in Saudi Arabia - evidence of which came from a recent analysts report about Yansab - is one reason why it is over-simplistic to talk about new supply flooding the market without adding a few important qualifications

The LPG season has belatedly begun thanks to Asian refineries returning from turnarounds and LPG exports from a new gas-separation plant in Abu Dhabi, which is feeding the Borouge II cracker complex with ethane, add Purvin & Gertz.

But clearly there are some new variables for flexible-feed cracker operators that look as if they are here for the long-term and therefore need further study.

Tougher sanctions set to reduce Iranian exports

Source of picture: amix.dk/blog/post/19116

By John Richardson

I met a hedge-fund manager yesterday who wanted a straight answer as to why he felt that ethylene, propylene and polyolefin margins are holding-up relatively well, despite an apparent flood of new capacity.

"The margins, particularly for polyproplyene (PP), are much better than we had expected at this stage in the cycle," he said.

Interestingly, though, the ICIS Pricing Margin assessments for ethylene and polyethylene (PE) paint a different picture. We have calculated that from Q1 this year, spot cracker margins have declined by 66% in Asia, by 50% in the US - but by only 2% in Western Europe. Logistics and feedstock availablility have kept Western Europe very tight.

But even in Asia and the US, the general margins picture - although very useful in pointing towards overall direction - doesn't deal with contract prices as opposed to spot, of course.

And for specific smaller-volume grades where tightness is great, for example, low-density PE (LDPE) extrusion grade, the story seems to be very different. 

The hedge fund manager wanted simple answers in line with the history of the industry - that supply is repeatedly built way ahead of demand and that therefore, an inevitable across-the-board collapse in profitability must occur over the new few months. 

On paper, yes, if you look at the nameplate capacities that have been started-up so far this year - and those still due on-stream - and measure this against likely demand-growth rates, a collapse does seem inevitable. 

It is certainly true that Chinese production at new plants brought on-stream in H1 has quickly been stabilised, which is a significiant negative for supply and demand balances.

But I bored the hedge-fund manager, who I think wanted a good argument to short all petrochemical company shares, why supply constraints elsewhere might just mean that certain areas of the industry will get through this crisis without a collapse in margins to levels seen during previous downturns.

It will be about, I think, analysing companies based on their exposure to particular products. For example, anyone heavily into LDPE in general and linear-low density PE (LLDPE)  - for reasons we have already given on this blog many times before over the last year - might well ride out this crisis without major pain.

But PLEASE - there is a major caveat here: This all depends on no double-dip global economic recession. My good friend and fellow blogger Paul Hodges remains firmly of the view that there is a major risk of a double dip. His views are worth listening to and building into scenario plannning.

In a conversation with an industry observer today, the blog picked up some further perspectives on why history may not repeat itself on this occasion (and even if the margins collapse to previous levels, it seems likely that the explanation will be demand rather than supply-driven).

In his own words, this is what the industry observer told us:

"We need to re-examine our assumptions and maybe lower effective available capacity from Saudi Arabia and Iran.

"Propylene and C4s availability have passed tipping points and so there is a need for a very hard look at more on-purpose production."

By Malini Hariharan

After a fairly steady climb Asian polyolefin markets have hit the pause button.

Demand for polyethylene (PE) and polypropylene (PP) in China and Southeast Asia has weakened but this development has so far been balanced out by continuous reports of operating issues across Asia and the Middle East.

The latest is Yansab's announcement that it was forced to shut its 1.3m tonnes/year cracker last Friday due to technical problems. Operating rates of derivative units have been cut and the company expected normal operations to resume within two weeks.

Al-Waha also shut its 450,000 tonnes/year polypropylene (PP) plant last week and is expected to be up over the next few days.

In China, the Sinopec and Sabic joint-venture 1m tonnes/year cracker is down due to mechanical problems which are expected to take a week to fix. All the downstream polymer plants have also been shut.

Qilu Petrochemical is expected to run its 800,000 tonnes/year cracker at 80% till end-September as repairs to the furnace that caught fire last month have still to be completed

In India, a fire at Gail's high-density polyethylene (hdPE) plant killed one person and injured three others last Saturday. The company has shut down one line and has started an enquiry into the accident.

Reliance's 400,000 tonnes/year gas cracker at Nagothane is running at reduced rates (around 70%) because of an accident at feedstock supplier ONGC's cooling tower has hit supplies of ethane/propane. The situation is expected to continue for a few more weeks and until then one line of the 240,000 tonnes/year hdPE/linear-low density PE (lldPE) plant is likely to remain shut.

Indian Oil Corp (IOC) has yet to stabilise operations at its new Panipat cracker complex and polymer plants. The swing hdPE/lldPE plant was taken offline a few weeks back because of technical problems. And while the standalone hdPE and PP plants are running production of onspec grades is an issue.

Operating issues have struck Asian polymer markets at regular intervals over the last year helping producers stabilise prices.

Will this be the case once again?

By Malini Hariharan

More news of plant shutdowns emerged today with Chinese Petroleum Corp (CPC) forced to stop production at its 500,000 tonnes/year No 5 cracker in Kaohsiung, Taiwan, after typhoon Fanapi resulted in extensive flooding.

Operations were suspended to avoid potential damage from disruption to power supply caused by the flooding, industry sources told ICIS news. The cracker was likely to restart in 2-3 days.

Many other companies at Kaohsiung were also forced to take similar measures.

Pic source: Reuters

Bloomberg reported that nearly 30 petrochemical plants at Kaohsiung were shut as a result of the typhoon, including those belonging to Formosa Plastics Corp and Nan Ya Plastics.

"Floodwaters in Kaohsiung's petrochemical parks were higher than 100 centimeters (39 inches) yesterday and Taiwan Power Co. cut the electricity supply for safety reasons," said Kuo Chao-chung, head of the petrochemical section at the Ministry of Economic Affairs' Industrial Development Bureau.

And Reuters reported that shipments from Formosa Petrochemical Corp were disrupted by the closure of a seaport near its Mailiao complex.

The latest round of shutdowns follows those that were covered by the blog last week and comes at a time when polyolefin markets are interestingly poised. Prices were stable to firm at the end of last week with demand remaining weak

Another excuse for a Dylan picture - ref "Shelter From The Storm"

Source of picture: www.israbox.com

By John Richardson

WEST EUROPEAN polyolefin markets remain tight thanks to the lingering effects of lack of spending on maintenance, several market sources have told the blog.

"Companies were so short of cash from late 2008 that they began to delay maintenance work such as furnace re-tubing," said one source yesterday.

"You normally start to experience production problems 6-9 months after this happens and we have seen this recently with the high number of outages.

"This also happens in really tight markets where nobody wants to be the first one to shut down because everyone is making so much money. So in 2005 we saw a raft out outages."

Tightness in Europe is just one of the consequences of the Lehman Bros-triggered crisis that have created a "New Normal" for markets, to borrow a phrase from my fellow blogger Paul Hodges.

Confusion continues among some industry observers who are familiar with looking at average operating rates and concluding that low average rates indicate poor overall profitability.

Average H1 operating rates for ethylene in Europe were just 82%, but some crackers were running at more than 90% while others were operating at much-lower rates or were shut down, we understand.

This was the result of both technical problems and lack of naphtha from local refiners.

The ICIS pricing European cracker and PE margin reports have consistently shown (here's a report on the 17 September issue) that variable cost margins in Europe remain an awful lot better than many people had dared to expect this time last year.

The overall "New Normal" for markets, including all the other the factors behind tight supply that we've detailed before, is leading to the view that we might just be bumping along the bottom of the cycle right now.

This is slightly earlier than the Q4 low point than had been forecast earlier this year, and, as we said, margins are in a lot healthier shape than had been predicted in Asia and the US as well as Europe.

"It is our view that we might be at the bottom, or close to the bottom, of the cycle as most of the new capacity in this current wave is already on-stream," said a Hong Kong-based chemicals analyst today.

"But most companies are only being cautiously confident because of all the risks ahead - not least, of course, the economy. Only the South Koreans are being very bullish over the prospects for 2011."

This could all still end in tears.

By John Richardson

The consolidation talked about in Indonesia for more than ten years - that between cracker operator and polyethylene (PE) producer Chandra Asri and polypropylene (PP) producer TriPolyta - is finally set to happen by January next year.

Now it will be up to the companies to make the synergies work with the most obvious big question - which we will seek to answer on the blog - how this might bolster plans for new olefins capacity.

Indonesia's ethylene deficit is set to rise from 533,000 tonnes in 2008 to 561,000 tonnes by 2013, according to Japan's Ministry of Economy, Trade and Industry (METI).

The propylene deficit is to rise from 517,000 tonnes in 2008 to 587,000 tonnes in 2013, again according to METI.

                                            Chandra Asri

Source of picture: www.barito-pacific.com

This big import dependence has long been a drag on the economics of the Indonesian industry with an overall lack of integration another big problem.

Lack of integration is still an issue, of course, as PT Titan - the former BP-owned PE plant - is under the ownership of Malaysia's Titan Chemicals.

So if Chandra Asri were to go ahead with a new cracker investment this might well - under the current ownership structures - only benefit the economics of its own PE production and the cost and availability of propylene supplied to TriPolyta.

Titan was recently bought by South Korea's Honam Petrochemical and the South Korean major has told us of its plans to expand cracker capacity at Titan's Pasir Gudang site in Malaysia.

Will this extra ethylene be used to also improve the economics of PT Titan, a big buyer of C2s, or could it be kept at the Pasir Gudang for downstream expansions there?

Could further ownership changes be on the cards?

Watch this space.....

By Malini Hariharan

The blog was able to talk to a Korean polyolefins producer who was not perturbed by the recent weakness in Chinese demand and was fairly confident of selling October volumes.

"It's the holiday season so converters do not want to buy. But I see no reason to lower prices. We have sold more than 50% of our October shipments. I think the Chinese buyers will return in the second week of October and we will still have enough time to receive orders and make shipments," he said quite confidently.

But he was cautious enough to encourage his sales team to become more active in other markets around the world.

"I could manage some deals with some longstanding customers; we have some good markets in the Middle East and Africa," he added.

With October out of the way, producers have only two more month to close the year. And it looks like 2010 will not be a bad year. Integrated margins could have been better but they were not in negative territory as had been widely feared by the industry.

"I think the market will remain stable to weak in the fourth quarter; I do not expect prices to crash but there are also not likely to rise very fast. There will be increased supply from the new Saudi plants and also Borouge. These volumes will not crash the market but it will soften a bit," the Korean producer predicted.

With one year out of the way the blog is now accepting predictions for 2011.

By Malini Hariharan

This is a tough time for those who are in the business of forecasting. Predictions of petrochemical margins hitting the bottom in 2009 have so far not materialised and volumes from new plants are being digested quite easily.

"What's happening? It is hard to understand the [market] situation; until when can you be optimistic," questioned a rather confused equity analyst who has been telling his clients petrochemical earnings would fall this year.

"All the analysts have turned out to be wrong [in their forecasts] and their opinions were based on what consultants said. It is becoming really difficult to forecast petrochemical demand and supply," he added.

While operating problems and the time taken to stabilise operations at new plants have kept supply in check, demand has also been good in China and other Asian markets. Producers have had major problems offloading volumes and even a slowdown in Chinese demand for the last few weeks has not prompted panic selling.

LG Chem Petrochemical Earnings

Source: Company

His third quarter operating profit forecast for the South Korean majors (LG Chem, Honam Petrochemical and Hanwha Chemical) is that it will be flat quarter-on-quarter. "At best we are looking at slightly lower than Q2 as July was a big weak. It was only in late August that we saw strong prices and September was nearly flat. But the Q3 estimate is higher than expected earlier," he said.

And, more importantly, 2010 earnings are likely to be higher than 2009.

The goat has been got 

Source of picture: michaelscomments.wordpress.com

By John Richardson

EARLIER this week we blogged on the 25 or so ethylene carriers that could be delivered into the shipping market by 2013 and the risk this poses to freight rates.

Thanks to one of our readers, Mark Mirosevic-Sorgo - managing director of Singapore-based shipping broker Braemar Quincannon - for pointing out that the semi-refrigerated C2s shipping market, while suffering from a fine balancing point, has successfully absorbed speculative new capacity before.

He also stressed, in his comment on the post, that these ships have the flexibility to carry cargoes such as liquefied petroleum gas (LPG), ammonia and vinyl chloride monomer (VCM) - creating the potential for all this extra tonnage to be absorbed across several markets.

But whatever the impact on freight rates, the new-vessel orders point to a very worrying underlying issue, according to a petrochemicals industry source.

"Industry observers are going round saying that profitability in the ethylene chain will be back to peak levels by 2015, based on a global GDP ((gross domestic product) growth forecast of 3.8% per year," he said.

"This seems far too high, but the real issue is that part of their argument for record profitability is that some people will shut crackers down in the interim - but this is an oxymoron, as why would people shut down, if record profitability is forecast?

"Equally, forecasts of record profitability suggest to the great unwashed that more ethylene capacity will be needed and hence more shipping.

"They don't understand that there is no link between ethylene capacity changes and shipping as people always try to integrate supply/demand so they can instead move the derivatives.

"The observers are obviously not saying this, but their assumptions go everywhere, and people are simply drawing what seems to them to be an obvious, though spurious, conclusion. "

Somebody clearly got this bloke's goat, and I think, by the sound of it, for a very good reason.

But if it is fund managers awash with money to invest who have ordered these ships, (as we again said in the original post) the odd $40m down the proverbial sink isn't going to make much difference to their bonuses.

There is also a chance that these particular gambles among many might pay off - especially if, as Mark said, the extra tonnage ends up being comfortably spread across several chemicals.

More importantly for the main industry that this blog covers - petrochemicals in case you haven't already guessed - the industry source's comments point to the danger of new crackers being built before the market is ready.

Nothing new there then.....

Source of picture: http://www.intentblog.com

By John Richardson and Malini Hariharan

THE view from a particular geography, grade of polyolefin or end-use application might be distorting the outlook for 2011.

In China and India and other emerging markets demand growth continues to astound and even though the rates of expansion might have slowed down this year, percentage increases are from much bigger bases.

China's PP demand grew by 6% in January-August this year compared with the same period in 2009, said CBI - the Shanghai-based commodity information service.

Linear-low density polyethylene (LLDPE) demand soared by 34% with high-density (HDPE) 15% higher, added CBI.

LLDPE is tight globally because of a shortage of butene-1 that's not going to go away. This is the result of the switch to lighter cracker feeds in the US, the overall pressure on liquids cracking operating rates from increased gas-based production and refinery operating-rate cuts.

The polyolefin has also gained market share at the expense of low-density PE (LDPE) - which at first benefited from tight supply through higher-pricing, but now seems to be suffering from demand destruction.

LDPE demand in India fell by 22% in April-August, according to a major Indian producer.

But India continues to see robust growth in other polymers. For instance, PP demand is expected to grow at 13-14% in 2010-11, the producer added

This would be lower than the record 26% in the previous year but still very healthy.

The other big factor affecting the whole of the whole of the polyolefins industry has been delays in starting-up new projects and stabilising production at complexes brought on-stream over the last two years.

"Approximately 8m tonnes of PE that could have been exported from the Middle East during 2010 won't be due to these production issues. There is also the shortage of associated gas," said a Singapore-based industry source.

Saudi Arabia needs to be producing 10m bbl/day to run its gas crackers at 100%, but its OPEC quota stipulates output in the mid 8m bbl/day range.

One could go on and on. In Europe, lack of investment in maintenance is said to be a factor behind average cracker operating rates totalling only 82% in H1 this year. The crackers that were functioning were running at above 90% - suggesting good market conditions.

So you add all of this together and you could be tempted to draw the conclusion that 2011 will be as good, perhaps even better, than 2010.

"I think we are bumping along the bottom of the cycle as far as margins are concerned. South Korean companies are expecting another fly-up in pricing by the end of next year. My view is that this is a bit early, but it's not far away," said a Taiwan-based financial analyst.

The danger in his thinking is that Middle East production problems are, according to some reports, being resolved - and so a lot more PE and PP will soon hit the markets.

"True, but I don't expect oil demand globally to return to pre-crisis levels for at least three more years. This means no change in Saudi Arabia's OPEC quota during that time," said a source with a leading Middle East producer.

The longer maximum output is delayed in the Middle East, the greater the ability of booming emerging markets to cope with the volumes when they finally arrive, remains a common view.

It feels like one almighty muddle when you balance this optimism against persistent macro-economic worries in the West. Without a healthy West - which drives the vital re-export trade from Asia - the recovery has to remain highly suspect.

"As we move into the remainder of the year, the recovery has waned. The boost from inventory restocking has played out and underlying demand remains weak," wrote the American Chemistry Council (ACC) in its 3rd Quarter Situation and Outlook report, which was published last week.

Overall US plastic resins output will rise by 4.5% in 2010 before declining to 3.9% next year and 2.5% in 2012, added the ACC in the same report.

The confusion has made forecasting supply and demand very difficult, according to South Korean-based chemicals analyst (has it ever been easy?).

"The fourth quarter is likely to be better than expected. Earnings for the South Korean companies may continue to be strong for the next two quarters and for the whole year will be higher than 2009," he said.
DeWitt & Co, the petrochemicals consultancy, had factored in cracker operating problems but had not anticipated the extent of the difficulties at new crackers in the Middle East and other parts of Asia such as Thailand, said the company's Kuala Lumpur-based consultant, Mazlan Razak.
Nobody seems to have anticipated so much lost production.

"There is a big gap between actual production and nameplate capacity. Unless these crackers raise their production the situation will remain good; margins will be positive," added Razak.

Another argument being used is that the industry will heal itself even if margins head south through closures of high-cost capacity.

But the source from the Middle East producer we quoted earlier on believes that there will be no further European consolidation because of the risk of missing out on imminent good times.

"It is being argued that profitability will be back at peak levels by 2015," said an industry observer, who is based in London.

"Part of this argument for record profitability is that some people will shut down in the interim - but this is an oxymoron, as why would people shut down if record profitability is forecast?"

"The 2015 peak also assumes global GDP (gross domestic product) growth of 3.8% per year, which is far too high an estimate."

One much-more optimistic sales director with a North American polyolefins producer hopes that such pessimism is accepted by his company, as it will mean that he will continue to exceed his monthly targets.

We are just journalists and so are required to mainly stick to reporting what people tell us, and so we sincerely hope you haven't read through this article expecting any definitive answers.

Looking for such answers elsewhere might turn out to be equally futile, but all of us have to keep on trying.

By Malini Hariharan

Yes, the Indian economy is growing and propping up demand for all polymers.

The blog had highlighted a few weeks back that polypropylene (PP) demand expanded by 13% during the April-July period and the expectations are that this rate will be maintained for the full year ending 31 March 2011.

Raffia, the biggest end-use segment for PP, has been a big driver and is projected to expand by 18-19%.

The strength in the local PP market means that India will export less PP than anticipated, said one industry source. He estimated that Indian exports were likely to hit 600,000 tonnes for 2010-11 as compared with 660,000 tonnes in 2009-10.

As for polyethylene (PE), demand (domestic sales plus imports minus exports) for linear-low density PE (lldPE) and high-density PE (hdPE) expanded by only 6% and 1% respectively during April-August.

LldPE demand was estimated at around 400,000 tonnes while hdPE was 600,000 tonnes.

But low-density PE (ldPE), demand declined by 22% to around 120,000 tonnes.

Pic source: World News

Poor availability from local producers was the main reason for the lower growth rates for PE, said industry sources. "There were production issues at many plants; local availability was tight," explained a second source.

HdPE imports rose 6% to about 180,000 tonnes while lldPE imports were 14% higher at 160,000 tonnes. LdPE imports declined 25% to 60,000 tonnes, reflecting the tight supply globally for this product.

HdPE and lldPE imports were up but traders were hesitant to import huge volumes as prices were on a downward trend from May to July, he added.

Indian ldPE demand was also affected by a widening of the price delta with lldPE which has crossed $150/tonne in the last few months.

Industry players expected a recovery in the coming months and were confident of 10% growth in hdPE and lldPE for the full year.

LdPE should also return to positive territory to post a growth of at least 4-5%, said the second source.

But a third source believed that this would be difficult as "availability is just not there globally".

Meanwhile, local supply issues have yet to be fully resolved.

Indian Oil Corp is still struggling to stabilise operations at its newly commissioned Panipat cracker and derivatives complex and has taken a 15-day shutdown from 1 October.

Reliance Industries is said to be running both lines of its swing lldPE/hdPE plant at Nagothane but at reduced rates because of feedstock issues at the cracker.
And Haldia Petrochemical's complex on the east of India also had to be shut earlier this week to fix a problem at the naphtha cracker.

By Malini Hariharan

Shenhua Ningxia has finally produced onspec propylene at its new 470,000 tonnes/year methanol-to-propylene (MTP) plant after starting trial operations last month.

This marks the successful start of China's first MTP project, which is also the world's largest. There is one more due by the end of the year -Datang Power's 450,000 tonnes/year MTP plant.

Pic source: CCPECO

Shenhua Ningxia plans to start trial operations at the downstream 500,000 tonnes/year polypropylene (PP) plant in the next two months with commercial operations scheduled for early 2011.

Meanwhile, the country's first methanol-to-olefins (MTO) plant operated by Shenhua Baotou has been taken offline and is likely to restart at the end of the month.

A company source said the shutdown of the whole complex, including utilities, was to prepare the site for the winter months. It would also allow the company to assess operating problems discovered since commissioning in xxx.

A second maintenance shutdown has also been planned for next April.

The Shenhua Baotou complex includes 1.8m tonnes/year methanol unit, 600,000 tonnes/year MTO facility and plants for 300,000 tonnes/year of polyethylene (PE) and 300,000 tonnes/year of polypropylene (PP),

There is a great deal of interest in China on developing coal-to-chemical projects. And as highlighted by the blog earlier, successful commissioning of the first few projects is likely to trigger a new construction wave.

By Malini Hariharan

The Chinese are back from their holidays and they are buying. This coupled with supply constraints and firm crude prices is fuelling a surge in petrochemical prices.

Paraxylene (PX) prices hit a 2-year high this week on speculative activity and production problems at a couple of Chinese plants, reports ICIS news. Spot numbers are at $1265-1275/tonne cfr China, up $150/tonne from last week.

Pic source: livetradingnews.com

Monoethylene glycol (MEG) producers are pushing for a $120/tonne increase in November contracts while spot prices have shot up by $155-160/tonne in the last month to $945-960/tonne cfr China.

Fibre intermediate producers are no doubt looking at the strength in downstream markets when raising their price expectations.

Purified terphthalic acid (PTA) is trading at 25-month highs of $1025-1045/tonne cfr China. Prices of polyethylene terephthalate (PET) bottle-grade chips are running at over $1300/tonne fob Korae/China - a level last seen in May this year. And polyester fibre and yarn prices are rising because of a shorfall in cotton production.

Caprolactam is also nearing record highs with prices rising $70-100/tonne this week to $2670-2730/tonne cfr China. Supply is tight due to plant turnarounds while demand was firm with the start of the peak manufacturing season in China.

The lifting of government restrictions on industrial energy use in China's Zhejiang province - the country's capital for textile production - is also said to have boosted the production of nylon yarn

Polymer markets are also seeing a surge in prices and buying activity with polyethylene prices moving up $40-70/tonne in China.

Offers for polystyrene (PS) and acrylonitrile butadiene styrene (ABS) are up $50/tonne on rising feedstock costs.

The strength in markets is good news for producers who have been cautiously optimistic about Q4. But with costs also rising more price hikes would be needed to preserve margins. Will the bull run continue?

.....quite possibly, yes, but it matters not what you say, only how you tell it

Source of picture: freelancefolder.com

By John Richardson

THIS poor mug might well have been the victim of rumours designed to move the daily price of polyethylene (PE) in China late last week.

The author of this particular post was told that the end of the peak manufacturing guaranteed, along with increased supply, guaranteed lower prices during the rest of Q4 than we have seen in this quarter to date.

Further bolstering the claim of the bears was that China would again reduce power supplies over the remaining months of this year in an effort to achieve 2010 emissions reduction targets. Power cuts in the third quarter cut into demand as plastics converters were forced to either lower operating rates or cease production altogether.

A Google news search provides plenty of support for this theory.The bulls argued for a price rally not based on fundamentals - whatever they mean these days - but rather on a story that originated in London financial markets and has now spread to polyolefin traders in Singapore and Hong Kong.

Tim Geithner, America's treasury secretary, said in a speech last week that no country "could devalue its way to prosperity".

This is being seen as code for "We, the US, have done a deal with the Chinese which will be announced at next month's G20 meeting of world leaders. They will allow the Yuan to strengthen in return for which we won't indulge in anymore quantitative easing that will drive the dollar even further down".

If this theory gains a strong following we could see traders pile into buying commodities of all kinds priced in US dollars in order to sell these commodities in Yuan to cash-in on a later appreciation of the Chinese currency.

Remember - the object here is not to fathom markets through working out real demand.

It is instead all about moving the daily price of PE one way and then the other so those playing the Dalian Commodity Exchange, and physical markets also, can make money out of high levels of volatility.

One wonders how producers and buyers form sensible judgements.

Or maybe they will increasingly just have to accept things as they are and start directly hedging PE through the banks which, of course, are responsible for some of the increased chaos via the Dalian!

As we promised last week - and we do mean it if you can be a little more patient - in another post very soon we will list the supply factors that should, in theory, effect pricing over the remainder of this year.

For what they are worth....

By Malini Hariharan

Cotton prices have hit a 140-year high on the ICE futures in the US creating room for further price hikes across the polyester chain.

Prices of paraxylene (PX), purified terephthalic acid (PTA), monoethylene glycol (MEG) and polyester fibre and yarn have escalated sharply in the last few months as a supply crisis in cotton markets has spurred substitution demand for polyester. And supply constraints, especially for PX, have also helped.

"The entire changed scenario for PX, PTA and MEG is all because of the pull from polyester and that is due to cotton," explained a major producer.

Cotton has already become expensive to the textile industry with prices steadily rising after floods in Pakistan in August damaged crops. And now a cold front is threatening to damage crop in China. This news was sufficient to push cotton futures to $1.25/lb on the ICE on Monday.

Pic source: CCTV

With no visible slowdown in textile demand experts expect cotton to rise further to even touch $1.30/lb which could fuel higher polyester prices.

But a cautionary note is also being heard.

"The situation could change in a year. Very high cotton prices could result in new acreage coming in," said the producer.

And an industry analyst warned that the current high polyester margins would only result in producers ramping up output and then engaging in a price war to offload volumes.

"Its going to get bloody," he predicted.

By John Richardson

THE Morgan Stanley Supercycle report, which we first blogged on last Friday, has created a big stir among the blog's contacts.

 Click herefor a copy of the report RI_PETROCHEM_BLUEPAPER2010.pdf   

As we said in this ICIS news article on both the Morgan Stanley report, and one from Merrill Lynch which is in a similar vein, the paradigm seems to be shifting away from a supply-driven collapse in margins.

Certain senior industry executives have been telling us for a long while - some claim for several years - (maybe we were not listening hard enough?) that any crisis would not be supply-driven.

But now the majority of people we talk to are climbing on board the same argument - along with the belief that emerging-market demand-growth will be more than good enough compensate for a new recession in the West.

But an industry analyst we talked to earlier this week holds a very different view.

"Think about it - the US consumes around 21m tonne/year of ethylene or ethylene equivalent a year, Europe 24m tonne/year and Japan 7m tonne/year and so you are talking about a total of around 52m tonnes from global consumption of approximately 120m tonnes," he said.

"So I don't think it is right to suggest - as Morgan Stanley does in its much talked-about report - that Chinese and Indian demand alone, never mind the rest of the emerging markets, can compensate for weakness in the West.

"The bank's own data shows a decline in Western consumption in 2000-2009.

"If the US and Europe fall back into recession, and with the energy conservation and environmental pressures growing ever-stronger, their ethylene equivalent consumption is going to decline even further."

This would place even more pressure on China and the other emerging nations to carry the load - but recent evidence suggested that the Chinese economy was slowing down, he added.

Operating-rate problems that have constrained production this year would eventually be resolved leading to oversupply, he said

But he admitted that the associated gas issue was the wild card in the pack. The lack of petrochemicals feedstock via oil wells is likely to constrain production at Saudi crackers for several more years until global oil demand returns to pre-crisis levels.

Research by Kunal Agrawal, Asia Energy Analyst at BNP Paribas in Singapore, supports the oversupply argument.

"In 2009-2011, we see more than 21m tonne/year (30% of 2010E installed capacity) of new ethylene capacity in the Middle East and Asia," he wrote in a recent report.

This will lead to surplus capacity of 11.1m tonnes in 2009-2011 and 12.1m tonnes in 2010-11, he warned.

Operating rates would, as a result, decline to 83% in 201011 compared with the average 96% over the past five years.

The BNP Paribas research - taking into account all the project delays - estimates that while 5.1m tonne/year of ethylene came on-stream in Asia and the Middle East last year, this will have risen to 8.8m tonne/year in 2010, and will climb to 8.5m tonne/year in 2011.

The good news is that if the optimists are wrong this should become apparent over the next few quarters - thereby postponing any rash of new projects.

The bad news is that 2011 budget expectations may have already been raised, leading to another ferocious round of cost-cutting in the petrochemicals industry as margins and share prices tank.

By Malini Hariharan

Speculative fever has struck the Chinese purified terephthalic acid (PTA) market with domestic prices soaring by 26% in just one week.

PTA futures trading on the Zhejiang Commodity Exchange (ZCE) was suspended for the whole day Tuesday, after values soared by more than 10% in just three days, writes my colleague Becky Zhang on ICIS news.

Regional PTA values followed the lead of China prices, climbing to a record high of $1,280-1,320/tonne CFR China Main Port.

Pic source: Forbes

The rapid rise has resulted in concerns of a sharp price correction and one Chinese producer conceded that the price spike was "irrationally strong".

"One must take the cautious road once demand from end-markets winds down as a resistance to hefty prices," said Kuang Bo, analyst at Yangan Future Broker.

"Waning demand would build up inventory and finally bring down prices and margins of the whole industry," she said.

But PTA is only following the trend seen in polyester and cotton markets. Polyester spot prices in China also shot up 40% in the last week.

As for cotton, it continues to set new records.

The March-delivery contract hit $1.5195/lb on the ICE Futures after the US government cut its estimate on global production and inventories and cited a shortage in China, the world's biggest buyer and consumer.

The China Cotton Index (CC Index 328), a major gauge of cotton prices in China, rose to 28,891 yuan ($4,332) per ton on Monday, up by about 100% from last year.

And a price correction in polyester or PTA would be unlikely if cotton continues to rule firm.

                                    Dubai crucial for Iran

By Malini Hariharan

The blog recently had an opportunity to talk to a few Iranian companies and was impressed by their sanguine approach to the challenges posed by the new round of sanctions.

This too shall pass was the prevailing philosophy.

"We have a long experience [in dealing with sanctions]; we feel the pinch immediately after the announcement but slowly adjust and find new ways to do business," said an Iranian source.

Dubai continues to be the main conduit for exports but in some cases secondary companies have been set up at other locations to mask the trail to Iran.

A second source believed the sanctions were merely a test and was confident that nothing can stop them from exporting product.

They often do not get the best price in the market but no one was complaining about this.

The figures do suggest that Iran has been successfully placing product.

The Tehran Times reported that exports were up 50% (in value) during the first seven months of the Iranian calendar year ended 22 October, with polyethylene (PE) and methanol being the major exports.

The managing director of Iran's Petrochemical Commercial Co (PCC) said the country had defined new target markets such as Africa and South America. He also noted that "the final stages of negotiations between Iran and Egypt were ongoing "for exporting  poylpropylene (PP), urea, fertilizer, methanol and paraxylene".

But China will remain a key market. Iran exported around 350,000 tonnes of High Density polyethylene (HDPE) to China during January-September, up 33% from last year, reports my colleague Bee Lin on ICIS news.

Linear-low Density PE (LLDPE) exports were up 15% at 50,000 tonnes while Low Density PE (LDPE) exports tripled to 187,819 tonnes.

The volumes are set to rise even further as PCC Shanghai, a wholly-owned subsidiary of PCC, has obtained a licence to sell PE and PP in yuan in the Chinese domestic market.

It has also applied for a license to sell liquid petrochemicals in yuan.

The only worry that was evident in some quarters was the move by newly privatised companies to enter their market on their own. Previously PCC was the sole exporter of Iranian product.

"They don't have much experience and sometimes undercut other sellers by as much as $100-150; they don't realise that they are running the risk of starting anti-dumping investigations," complained a third source.

The private companies are no doubt been eager to test their wings. But with the going getting more difficult and ingenious ways needed to do business they could eventually return to PCC.

Shell's refinery and petchems complex in Deer Park, Texas

Source of picture http://www.msnbc.msn.com/

By John Richardson

THE excellent third-quarter financial results of the likes of Dow Chemical and LyondellBasell further confirm the extraordinary turnaround in the cost positions of those with a big proportion of their global polyolefins production based in the US.

Some more pain might be ahead for these now advantaged feed producers (if such a phrase had been used by anyone in connection with the US three years ago they would have been advised to seek the help of a psychiatrist) as higher production from new plants in the Middle East is absorbed. We will detail this risk in a post later this week.

But producers can at least look back on a year that has confounded probably even the most optimistic of expectations.

A recently released chemicals research report by the privately held financial institution, the Susquehanna Financial Group (SIG), details just how good 2010 has been in terms of margins.

"We have a more positive view on the ethylene cycle for US producers due to what is turning out to be a longer lasting and greater cost advantage for US ethylene production from ethane feedstock," write the authors of the report.

"With this cost advantage it now appears that the long anticipated 2011-12 downturn due to new ethylene capacity in the Middle East and Asia will be almost a non-event for US ethane-based ethylene producers.

We project that contract cash margins for US Gulf ethylene production from ethane feedstock will trough at $0.15/lb.in 2011 versus our previous expectation of $0.10/lb.

This represents a mid to early peak cycle margin by historical standards - US ethylene margins for all feedstocks troughed at $0.08/lb in 2001-02 and peaked at $0.18/lb in 2006. "

And as we said we will discuss later on this week, SIG see some tougher times ahead as the supply-driven downturn - delayed by all the start-up problems in the Middle East and a reduction of associated gas supply - has yet to fully happen.

"The downturn will be more severe for other feedstocks and regions (other than the US)," the report continues.

"Margins for naphtha-based ethylene production in the US, as well as Asia and Europe, should reach trough levels in 2011-12 before a broad-based upturn starts in 2013 as demand growth absorbs the new capacity.

"US producers should see higher operating rates due to continued export competitiveness. We project US operating rates above 90% in 2011-12 versus low-to-mid 80s globally."

Who on earth would want to exit US ethane-based petrochemicals capacity given such an outlook?

By John Richardson

AS the blog had anticipated would happen, there were sharp retreats in some chemicals and polymers pricing late last week on the steep declines in equity and crude prices.

Polyethylene (PE) fell by $70-130/tonne, according to our colleagues at ICIS pricing, as the Dalian Commodity Exchange once again demonstrated that it has become a major influence.

Many industry sources now tell us that PE in general (the Dalian has an influence across several different grades) has almost become a financial instrument; in other words, its day-by-day and week-by-week price in China moves in line with the Dalian as the Dalian moves in line with crude oil and equities.

Therefore, you could draw a neat line between last week's dip in PE pricing and the retreats in crude and equities as investors took flight.

Towards the end of the week equities and oil regained ground as confidence reportedly grew that Beijing's measures to tackle rising consumer-price inflation would have a limited impact on the broad economy.

The recoveries were also said to be the result of greater confidence that a rescue package would be successfully agreed for Irish banks.

In parallel, Dalian saw four consecutive days where the futures contract fell beyond the maximum allowed in one day's trading, forcing trading to be suspended, before a recovery on Thursday.

Source of picture: Inoldlasvegas.com

Polypropylene (PP), too, retreated on the influence of Dalian but by a more modest $10-20/tonne as traders seemed to be in a comfortable position to try and ride out the negative sentiment.

Propylene was more steeply down, by $20-70/tonne, as it reacted to the dip in crude futures.

But there seem to be factors specific to the C2s markets sufficient to override the overall sentiment which kept ethylene stable.

Click here for these numbers in graph form -

ICISprices19Nov.ppt

This reaffirms our view that this market has become very hard to read because of more extreme shifts in spot cargo availability.

Benzene, perhaps the mother of all chemicals, was down $15-50/tonne but interestingly, paraxylene (PX) staged a rally later in the week as market participants had time to react to the recovery in equities and crude.

One of the big macro questions is whether China will, indeed, get it right by taking targeted measures that are sufficient to bring inflation under control.

This article from the Wall Street Journal suggests, rather worryingly, that China is now running out of ammunition to fight the hot money flowing into its economy - which at risk of continuing as long as quantitative easing lasts.

Every mood swing in equity and commodity markets is bound to find a reflection in chemicals and polymer markets over the coming weeks as the prospects for next year seem exceptionally uncertain.

By Malini Hariharan

If sourcing PTA has been challenging this year, the bad news is that the situation is unlikely to improve for the next couple of years.

Rapid polyester capacity expansion, especially in China and India, is already outpacing growth in PTA capacities and the situation is set to worsen.

PTA producers, on the other hand, can look forward to healthy margins.

At the Indian Petrochem conference last week, YJ Kim, managing director of PCI Xylenes & Polyesters, Malaysia, predicted: "We are seeing historical high margins this year and this will probably continue next year."

He expected a PTA margin of over $200/tonne until early 2012.

Strong demand would result in plants being run harder. Average global plant utilization rate is forecast to rise to 90% in 2011, up from 87% this year.

Kim pointed out that the average utilization rate in China is 91% this year and plants would have to run at 95% next year to meet demand.

"Industry players say this is not possible and the maximum that plants can run at is 92%. So China will need to import more, but everyone is sold out," said Kim.

Chinese PTA demand is expected to grow by 2m tonnes next year and finding these volumes could be a problem.

Indian PTA buyers too face a similar situation, especially if Mitsubishi Chemical continues to face operating issues at its second PTA unit. Average utilisation in India is only around 75% this year and plants would have to run at a 'challenging' 95% next year to meet local demand.

The situation is likely to reverse only in late 2012 or 2013 once new plants are fully operational. Over 14m tonnes of new capacity is scheduled to come onstream during 2011-2013, mostly in China.

The polyester chain has seen plenty of action this year. And it looks like the excitement will continue.

By John Richardson and Malini Hariharan in Shanghai

A TWO-TIER China polyolefin market had developed in China over the last couple of years - but the $64,000 question right now is: At which of these two levels will most business be settled during December?

The ever-volatile Dalian Commodity Exchange determines the day-by-day sentiment, while overseas producers have long been very effectively managing production in an effort to set physical pricing.

They are being supported by tightness in specific grades such as butene-1-based linear-low density PE (LLDPE) and extrusion-grade low-density PE (LDPE). This tightness can be due to luck rather than just good management.

And so even as the Dalian tanked late last week on worries over more inflation-tackling measures by China's government, overseas producers were reported to be preparing to raise offers for December material. Their attitude on certain grades seemed to be "take it or leave it" because of their claims that they are holding very-limited stocks.

Will they be successful?

On the positive side of the equation are reports from our colleagues at Shanghai-based pricing and news service CBI that Sinopec is to cut polyolefin production in December by 10% (equivalent to 100,000-150,000 tonnes each of PE and polypropylene).

 Source of picture:www.willgoto.com

This decision is apparently about helping to relieve China's diesel shortage or is to do with reaching the 11th Five-Year Plan emissions cuts targets - or maybe a bit of both. Watch out for our post tomorrow when will go into this story in more detail.

Our colleagues at ICIS pricing also say that December allocations from PetroRabigh to China are  expected to be cut by 50% because of yet-more production problems at the Saudi Aramco/Sumitomo Chemical joint-venture complex.

But converters were reported by a producer to be reluctant to buy, resulting in all of his recent sales being to converters and distributors.

What is making the converters hesitant could be the rapid rise in prices since July. Up until late November PE and PP had risen by 22-29% contributing to an unexpectedly robust Q4

During the same period naphtha rose by 28% and crude by 19% - indicating that a substantial portion of the increases have been feedstock-cost driven.

Click here for a graph - PriceRisesSinceJuly.ppt 

Add to this the perennial worry about how much polyolefin consumption is the result of trader speculation on attempts to cash-in on a stronger Yuan, and we are back once again to the well-worn and somewhat tired bubble theory.

"End-users pick up their newspapers every day read about the inflation threat in China and possible further government tightening measures," said an industry source.

"The other big macro-economic threat worrying everybody is bank problems in Ireland."

Perhaps some end-users are therefore worried about a sudden collapse in crude-oil prices.

Hedge funds make up a large percentage of current open interest on the oil market, according fellow blogger Paul Hodges.

He writes that they could very quickly head for the hills if sentiment turns, driving oil to as low as $60/bbl.

Converters might well also be worried about the strength of resin demand next year as there are reports that the Chinese government plans to raise interest rates twice more before July 2011 in the battle against inflation.

The big four big state-owned banks recently announced that they have already fulfilled their 2010 quota for lending to real-estate buyers and will not making any further loans this year.

Beijing's Renmin University has warned in a report that government restrictions on the sector could lead to a 20% fall in property prices next year.

If you are converter you also know that a lot more new polyolefins supply should be just around the corner (how long have we been saying this, though, only to be proved wrong by all the production problems?).

December demand is receiving support from agricultural film buying - but history shows that this is generally an off-season.

Plus January is just around the corner - when business quietens down ahead of Chinese New Year (CNY) which falls on 2 February.

A reflection of this uncertain direction is that our colleagues at ICIS pricing left their price assessments for PE and PP in China largely unchanged last Friday.

This is reflected in, as we've said, the producer we spoke to only being able to sell to distributors and traders.

He said that price increases since July had been too rapid - and that further increases of above $50 a week would be very hard to achieve.

This suggests that the customers of the converters - the wholesalers and retailers - are also feeling very uncertain at the moment.

Their uncertainty was evident at the Canton trade fair in October, he added.
(The bi-annual trade fair is a crucial barometer of the strength of overseas demand for China's manufactured goods).

"Order periods were shorter than the previous fair in May because the wholesalers and retailers haven't got a clue where their raw-material costs are going."

Another factor might be the added volatility in the value of the Yuan versus the US dollar as a result of QE2 and macroeconomic uncertainty.

Macro-economic concerns feel as if they dominate at every level of the polyolefins business at the moment.

So we wager that producers will fail in their bid to raise December prices - and that, in fact, further reductions are on the cards over the next few weeks.

By John Richardson

A rumour emerged a few weeks ago that Sinopec would be required by the government to cut its operating rates in order to either or both help China achieve its 11th Five-Year Plan emissions targets and/or increase diesel production.

China is attempting to hit the targets under the plan before the next Five-Year Plan is announced in the spring and is well behind schedule, we have heard.

This is thought to be the result of the economic stimulus package that has greatly boosted industrial production and therefore put behind China behind.

The other theory behind the rumour was that the cutbacks were being planned in order to help China produce more diesel. Gas oil is used as feedstock for crackers in China and so we assume that this raw material would be diverted into fuel, thereby forcing rate cuts.

China is short of diesel because of the attempts to hit the emissions targets. This has caused electricity cuts resulting in factories, both big and small, to switch to their own diesel-powered generators.

Early last week or colleagues at CBI got confirmation that the production cuts would take place. As a result, they received confirmation from Sinopec that this would mean polyethylene (PE) production would fall by 100,000-150,000 tonnes in December and polypropylene (PP) by the same amount. This is equivalent to 10% operating rate cut,

Source of picture: regainyourhair.co.uk

But fathoming China is never easy: A producer told us when we were in Shanghai last week that he had heard Sinopec had only made this statement to jack-up local prices. He added that there was no need to cut rates as rolling power cuts in China, indicating that the emissions targets had already been hit. The end of the cuts would also ease the diesel shortage.

(As we said yesterday, though, we think the polyolefins market will weaken rather than strengthen during December.)

Whatever the truth about the story, the fact remains that China's push to hit its 11th Five-Year Plan emissions targets have been a significant factor in shaping polyolefin and other chemicals and polymer markets over the last few months. We will examine how the drive to reduce pollution has affected polyvinyl chloride (PVC) in a post later this week

Despite the comment from the producer, we have heard yet another story that China is still struggling to hit its emissions goals and so efforts to hit targets will continue until March next year. That is when the 12th Five-Year Plan is due to be formally approved and begin.

Confused? If you were being paranoid you could also believe that this was a conspiracy.....

The price of coal.....

Source of picture: www.guardian.co.uk

By John Richardson

A big shake-up in China's chlor-alkali to carbide-based polyvinyl chloride (PVC) industry is underway which could have major implications for the global industry, we have been told by industry observers.

In a clear demonstration that it is better to be lucky as well as clever in this business (or if you cannot be clever at least try to be lucky), this could have a negative impact for importers.

The importers have benefited from the dire state of the local industry over the last couple of years, which, post-restructuring, might emerge as a great deal more lean and mean.

Global PVC capacity totals 40m tonnes with China accounting for around 20m tonnes of this, according to Maggie Zhu, markets analyst for chlor-alkali and PVC at Shanghai-based CBI - the research and analysis company.

"Capacity is a great deal more than demand and so operating rates are, as a result, at only 60-70%," she added.

Coal and electricity prices have been increased which has put pressure on the less competitive producers, forcing their operating rates down and thereby allowing in greater volumes of ethylene-based vinyls imports.

Rising input costs are the result of what we discussed earlier this week: The drive to hit the 11th Five-Year Plan emissions targets.

But in the case of the heavily oversupplied chor-alkali and vinyls sector higher raw-material seem to also be about forcing the pace of plants closures and mergers and acquisitions.

A lot of consolidation has already taken place: In 2007, the average size of PVC plants was 100,000-120,000 tonnes/year and now it is 200,000-300,000 tonnes/year, Maggie added.

There are plenty of smaller plants still around, though, with capacities of as little as 15,000-20,000 tonne/year.

The most vulnerable to further restructuring appear to be the eastern coastal producers which still lack sufficient scale in chlor-alkali down to carbide-based PVC (the ethylene-based coastal PVC players such as Shanghai Chlor-alkali Chemical Co are a different proposition).

Coastal chlor-alkali-to-carbide players are a long distance from coal supplies and lack common ownership with coal mining and power-generation companies.

A long distance from where coal is mined obviously adds to logistics costs, whereas lack of common ownership with the miners and the electricity producers means raw materials are not priced on a captive basis.

So you could end up with mega chlor-alkali to carbide-PVC producers out west under the ownership of these raw-material providers.

China is investing huge sums of money in improving its road and rail infrastructure - meaning logistics costs and time to markets might come down.

Importers could therefore soon have to start worrying a great deal more about their landed costs in the big eastern and southern China consumption markets versus these new mega local players.

By Malini Hariharan

It is not just China where polyethylene (PE) producers face problems.

Indian producers have been struggling to place volumes as huge imports during the last couple of months have saturated the domestic market.

PE import volumes were said to have hit a record high of 104,000 tonnes in October. And my colleague Prema Viswanathan reported recently that imports during April-November were up by 10-12% to 600,000 tonnes.

And producers only have themselves to blame for the market impasse. Plant problems earlier this year tightened supply and this opportunity was used to raise local prices.

Meanwhile, unreliable domestic supply and a big gap between local and international prices prompted traders and end-users to turn to imports.

With stocks piling up, Indian producers have adopted two strategies to ease the pressure and balance markets.

Pic source: trekearth.com

Prices have been dropped in recent weeks. This has yet to result in a significant improvement in sales but the gap between local and international prices has been bridged and fresh imports blocked.

Another option being pursued was exports which in the words of a source close to one producer 'makes more sense'.

"Fundamentally, the Indian [market] condition is not bad; what's happening is temporary as long as the China market is OK ," he added.

But the health of the Chinese PE market remains uncertain given that producers have yet to push through December price hikes.

By Malini Hariharan

Petrochemical markets, with a few exceptions, will be closing the year on a quiet note.

In polyolefins, buying activity in China has slowed down and sentiment remains weak weighed down by the Chinese government's decision to hike bank reserve requirements. This is despite the recent rally in crude oil prices.

Prices of some grades of linear-low density polyethyelene (lldPE) and high-density PE (hdPE) were assessed slightly lower by ICIS pricing last week while polypropylene (PP) prices were unchanged. However, limited availability helped push up PP prices in South Asia by $30-40/tonne. And unrelenting tight supply of low-density PE (ldPE) also pushed up prices in China by $30/tonne.

The Asian ldPE supply situation is unlikely to improve in the near future with PTT Chemical postponing the restart of its 300,000 tonnes/year plant due to technical problems. The plant was shut in mid-November and was expected to restart on 15 December.

Upstream, ethylene prices improved slightly on buying support from China while propylene prices weakened.

Meanwhile, paraxylene (PX) and purified terephathalic acid (PTA) markets will be ending the year on a strong note. Spot PX prices inched up by about $25/tonne last week fuelled by a higher-than-expected Asian contract price nomination. The PX majors have nominated a $125-155 hike in January contracts.

PTA also moved up by about $20/tonne despite uncertainty in the polyester segment where demand has softened in recent weeks. Chinese textile mills have lowered operating rates and production is expected to improve only after the New Year holidays in February.

But PTA producers are bullish about prospects in 2011. This is evident in Chinese American Petrocemical Co's (Capco) decision to restart one of its two idled lines in early February 2011. The line, with a capacity of 250,000 tonnes/year, was shut in mid-2007 because of squeezed margins.

And polyolefin producers are also optimistic despite current market conditions. They are now pinning their hopes on a revival in demand ahead of the Chinese New Year holidays in February. But the blog believes that implementing price hikes will not be easy. Availability looks set to grow and there is as yet no reason for traders to take a long position.

By Malini Hariharan

The debate on the next petrochemical upcycle is heating up. After confident forecasts of a "supercycle" the blog is increasingly hearing more cautious assessments

Take the recent report from Credit Suisse which stresses that while conditions for a period of bumper margins are favourable there are still many uncertainties.

Pic source: avalonwine.com

On the plus side the analysts highlight that global ethylene capacity growth will slow down to a compounded annual growth rate (CAGR) 2.5% during 2012-15 - the slowest pace in 20 years.

While there is still time for companies to build new capacities for this period the challenge of putting a together a project in such a short period is enormous.

But Credit Suisse expects some plants taken offline after the 2008 economic crisis to restart once margins recover.

Cheap gas in the US has given producers the incentive to resume operations while European capacity would normalize as demand conditions and business confidence improve.

Additionally, they expect a rise in Middle East production which has been constrained for the last couple of years by a cut in oil output and consequently a fall in availability of associated gas.

These developments would boost capacity growth to 3.7% over 2011-15.

But for a megacycle to materialise, world economic growth would have to exceed 4.5% on a sustained basis.

The industry, they point out, has seen three peaks in the last 22 years - 1988, 1995 and 2005-07. "1988 was a super peak, with margins 2x higher than the other two instances. Sustained global GDP of 3.5-3.7% CAGR over four-five years will get us to a 1995/2005 type of peak. A global demand rise of 4.5%+ CAGR will get us to the 1988-type peak".

The bank's economists predict global GDP growth of 4.7% in 2010 and 4.4% in 2011. But growth thereafter is still a question.

Another uncertainty relates to demand multiplier. "Over the last 22 years, demand multipliers - ethylene demand growth to global GDP growth - have averaged 1.3x. However the multipliers in this decade (2000-07) have averaged only 0.9x. The question is what are we going to get going forward. Will multipliers rise as demand growth shifts to emerging markets as some have suggested? Or will it be otherwise?" they asked.

This takes us to China and whether the country's domestic demand will be sufficient to take care of any drop in exports. And here the analysts predict that the demand multiplier in the country is likely to weaken rather than accelerate.

"Using China's exports of plastic-related products, we estimate that in 2009-10, China's exports of product accounted for 45% of total ethylene/propylene demand, or 11% of total world demand. Going forward, as export growth slows, and shifts away from the more manufacturing driven products into higher value added things, the demand for petrochemicals from this segment of China's GDP is likely to slow."

The chances of a megacycle are the highest in the last ten years but it would be good to remember that there are also plenty of uncertainties.

By Malini Hariharan

When it comes to methanol its all about China. Producers are expecting another strong year if Chinese demand remains robust.

China's appetite kept Asian spot prices in the $200-410/tonne range last year and the expectation is for prices to hover between $300-400/tonne this year, writes my colleague Heng Hui, ICIS pricing methanol editor for Asia.

Chinese demand, running at around 18m tonnes, will be the key support factor.
The country already accounts for a little over 30% of global demand and offers the strongest growth potential in the formaldehyde, DME and gasoline blendng sectors.

Demand growth, which is generally estimated at over 20%/year on average, is widely expected to continue at the same pace as in 2010, writes Ross Yeo, ICIS pricing methanol editor for Europe.

China's role will become even more critical once Methanex starts operations at its delayed 1.3m tonnes/year project at Egypt. The plant was originally due to start in Q1 2010 but is now under commissioning with volumes likely to flow in Q1.

Markets will also have to absorb nearly 3m tonnes of new capacity that was brought onstream during 2010. The full impact of this was not felt last year as the new plants were commissioned during shutdowns at other plants.

And China is also adding capacity - estimates for 2011 range from 2m to 6m tonnes. Total capacity last year was 27m tonnes.

However, the average operating rate was less than 50% in 2010 creating room for imports. The big question is whether imports will continue.

Source: CBI

Traditionally, Chinese coal-based methanol plants have run hard when prices are over $300/tonne. But a government move to restrict emissions last year resulted in reduced production even at high prices.

Production was also hampered by the redirection of feedstock natural gas to heating purposes during the winter season in China, as per the government's mandate every year.

But the situation this year is still unclear and a rise in local production can easily put pressure on exporters.

"I think it could be a volatile year - Chinese production has to balance the market," warns one producer.

By Malini Hariharan

With crude oil at around $88/bbl and naphtha hitting $890/tonne cfr Japan on Monday, the pressure is building up along the olefins chain.

Ethylene is trading at around $1200/tonne cfr NEA while propylene is at $1280/tonne cfr NEA. Offers of ethylene at above $1250/tonne and propylene at $1320-1330/tonne have not found any takers.

Further downstream, polyolefin offers have been raised and some business has been transacted at levels higher than December prices.

One trader believes that market fundamentals are quite strong. "Price hikes in January are possible; supply is still short for some grades. I am positive," he says.

He is also confident that Chinese government measures to tighten liquidity this year will not be at the cost of economic growth.

However, others say the outlook is still uncertain. "Chinese demand is not as strong as expected; there is also resistance to high prices," says one source.

Pic source: www.bordbia.ie

The Chinese government's decision in late December to raise interest rates by 25 basis points is likely to dampen buying especially by traders. And supply is rising as new plants in Thailand, India and the Middle East ramp up production.

"This is the downcycle; we are in it now. Operating rates will have to be cut; it is only a matter of time," says one very pessimistic source.

In the short term producers have to contend with naphtha which is being supported by crude oil prices and a cold winter in the northern hemisphere.

Naphtha is predicted to remain firm as supply is set to tighten following refinery turnarounds in the Middle East.

Traders say that Abu Dhabi National Oil Company (ADNOC) is due to shut a 140,000 bbl/day condensate splitter for a month from mid-January. And Saudi Aramco is expected to slash naphtha exports to Asia by half a million tonnes in the first half of 2011 due to refinery maintenance in Rabigh and Jubail.

Prices are likely to ease only in the second quarter once cracker turnarounds start in Asia. If that's the case the pressure on margins is likely to continue.

By Malini Hariharan

The good news for polyolefin producers is that prices in China are inching up supported by an upward movement in the key linear low-density polyethylene (lldPE) futures contract on the Dalian Commodity Exchange (DCE).

The arbitrage window has opened with the Dalian contract for May at CNY12,800/tonne and spot prices at CNY11,100-11,300/tonne. My colleague in Shanghai says that traders were actively booking import cargoes for arrival in February-March and covering these transactions on the futures market. The monthly holding cost is approximately CNY200-300/tonne.

Pic source: Xinhua

Bids for imported lldPE cargoes this week were at $1420-1430/tonne cfr China. There has also been a slight movement in high-density polyethylene (hdPE) with some yarn-grade cargoes said to be sold at $1385/tonne cfr China. Low-density PE prices for film grade were at $1700-1720/tonne cfr China.

But the bad news is that naphtha is still rising. It touched $900/tonne cfr Japan on Thursday before closing at $892.00-896.50/tonne cfr Japan.

The naphtha crack spread hit $186.35/tonne versus Brent crude on Wednesday, the highest in nearly three years

Producers in Northeast Asia are worried. "Naphtha is a big headache for us; we cannot transfer the cost increase especially in high-density polyethylene (hdPE). This is problematic," says one producer.

The producer has yet to adjust operating rates but there were unconfirmed reports yesterday that Formosa Petrochemical Corp (FPC) plans to cut operating rates at its three crackers because of spiraling naphtha prices.

After one round of price hikes, its time for producers to seek more.

By John Richardson

A gaping chasm has opened up over the past 18 months between nameplate capacities and effective operating rates, resulting in much greater focus on the latter.

It isn't easy and it is getting ever-more complicated to assess the actual volumes likely to hit markets.

There is a considerably well-supported school of thought that 2011 will represent a year of capacity absorption. More new plants are set to start up and facilities recently brought on stream should, in theory, run a little better.

But this assumes that the myriad technical problems at new Middle East plants that held back production in 2009 and 2010 will be resolved.

What nobody seems to have a clear perspective on is the extent to which faults have been built into the basic structure and design of plants, making technical fixes hard to achieve. If such fixes are possible, why haven't they already happened?

It has been suggested that corners were cut on construction when project costs were at their highest in 2006-07.

The manpower issue is also not going to be resolved anytime soon.

Petrochemical companies the world over, and particularly in Iran, lack sufficient experienced staff to operate plants and rectify outages in a timely fashion.

"A mechanical problem that would take two weeks to fix in Europe can take several months to sort out in Iran," an industry observer said.

There are rumours of major logistics problems at the container port in Al-Jubail on Saudi Arabia's east coast.

A lack of enough experience in handling bills of lading and letters of credit is a cause of delays in shipments from one particular complex in the Middle East, according to a polyolefins trader.

Insufficient reliable information about the extent of these issues, and when and if they will be resolved, are further complications.

Government policy in China is another major imponderable that will still have to be pondered in 2011.

Sinopec was forced to cut polyolefin production by 10% in December because gas-oil feedstock for crackers had been diverted into diesel production.

Has China already achieved its emissions target under the 11th Five-Year Plan that expires in March, and will this therefore mean no more cuts in coal-derived electricity supply?

It was efforts to achieve these targets that led to a diesel shortage as factories were forced to switch on their diesel-powered back-up generators.

Source of picture: incadventures.com

Once the 12th Five-Year Plan has been announced at the National People's Congress in March, there is the added complication of working out the timing of further cuts in emissions.

The Beijing-based online economic research publication, the China Economic Quarterly, says that China will reduce its total emissions by an additional 17% during the upcoming Five-Year Plan, which will run from March 2011 until March 2015.

Will everyone wait until towards the end of the plan to hit emissions targets, as was the case this time?

Or will the government force quicker compliance in order to avoid the embarrassment of being at risk of missing its own target?

A further imponderable is how global refinery operations will affect feedstock supply for petrochemicals.

Constrained production at European refiners was a factor behind low operating rates at crackers in 2010.

Oil, refining and chemicals analysts have been queuing up of late to claim that refinery margins have bottomed out, meaning higher production in 2011.

But a Singapore-based oil and refining consultant said: "Refinery margins will recover but not by that much. It will be the complex, full-conversion refineries that will benefit and not the simple refineries."

Reading the intentions of OPEC is also going to be critical. If the oil cartel cannot resist political pressure over rising oil prices we might see an increase in production quotas later this year, resulting in more associated gas supply. Lack of associated gas was perhaps the biggest factor of all in restraining Middle East production in 2010.

If there is a delayed oversupply crisis as new plants run better and both naphtha and associated gas feedstock supply increases, how will the petrochemicals industry in the West respond?

The past two years have seen exceptional operating-rate discipline among these producers. This has been the result of mergers and acquisitions that have taken place since the last big downturn and inventory losses suffered in the fourth quarter of 2008.

Without an inventory shock on the same scale (and for goodness sake let's hope that this doesn't happen), will producers be as quick to turn operating rates down?

If producers bring idled plants back on stream just as markets tank, and if under-pressure sales staff are tempted to chase volumes in an effort to hit unrealistic targets, will this make the problem worse?

Perhaps the biggest doubts of all, though, rest around growth.

Global demand growth for chemicals has to a large extent been driven by China's re-export trade. This has involved importing large volumes of chemicals and polymers for re-export to the West and to wealthier parts of Asia.

A recent report by Credit Suisse goes to the heart of the debate over how quickly home-grown domestic demand in China will replace lost exports.

With the West in deep economic funk and the Chinese government eager to wean the country off exports, will growth decline? This question applies to this year and probably much of the rest of the current decade.

"Over the last 22 years, demand multipliers - ethylene demand growth to global GDP growth - have averaged 1.3x. However the multipliers in this decade (2000-07) have averaged only 0.9x," Credit Suisse said in the report.

"The question is what are we going to get going forward? Will multipliers rise as demand growth shifts to emerging markets as some have suggested? Or will it be otherwise?

"Using China's exports of plastic-related products, we estimate that in 2009-10, China's exports of product accounted for 45% of total ethylene/propylene demand, or 11% of total world demand.

"Going forward, as export growth slows, and shifts away from the more manufacturing-driven products into higher value-added things, the demand for petrochemicals from this segment of China's GDP is likely to slow."

By John Richardson

ONE of the many factors behind petrochemicals supply being less than expected during 2010 has been logistics problems in Saudi Arabia.

One trader we spoke to on the sidelines of last month's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai told us that one particular complex was struggling to accurately complete documentation necessary for letters of credit.

"This is down to a lack of experienced staff - a major issue throughout the region," he said.

The trader is now helping the company concerned to complete paperwork in the right way.

An industry observer said that it takes an average of 17 days to clear a container from Saudi Arabia. This compares with an Organisation of Economic Co-operation and Development (OECD) average of ten days.

The container port at Jeddah. Source of picture - Saudi government website.

"Part of the problem is constantly changing rules and regulations leading to confusion over paperwork and lack of system integration for clearance," he added.

Port delays have resulted in on-site storage running out, forcing operators to stack resin in the desert, he added.

Bringing on-stream all the new capacities in the Middle East was always going to be challenge - because of the number and the size of the plants.

But what nobody predicted was the extent of technical problems that have held back production, along with an equally unexpected shortage of feedstock.

Logistics is a further wild card thrown into the pack, making the task of assessing likely volume-flows from the Middle East in 2011 even harder.

By Malini Hariharan

Asian naphtha prices, which were expected to remain firm this quarter, have come under pressure as large volumes of European material are heading towards this region.

Naphtha was trading at around $885/tonne cfr Japan last evening supported only by the strength in crude oil prices with WTI at $91.69/bbl and Brent at $98/bbl.

But with nearly 600,000 tonnes of product on its way from Europe naphtha premiums have slipped and could fall further, traders told Felicia Loo, ICIS pricing editor for naphtha.

Europe has been able to move large volumes because of poor demand as some crackers switched to liquefied petroleum gas. Poor economics for gasoline blending have added to the problem.

In petrochemicals, ethylene and propylene prices have been stable this week but benzene has moved up, led by price hikes in the US and Europe and supported by crude oil.

Prices have hit a 28-month high of $1,120-1,130/tonne fob Korea, a level last seen in early September 2008.

By Malini Hariharan

As Asian markets head towards a quiet week, producers are probably hoping that developments in other regions will support their efforts to raise prices once trading resumes after the Chinese New Year holidays in the first week of February.

European producers successfully raised February ethylene contract price by Euro25/tonne while propylene moved up by Euro35/tonne just when outages tightened supply in the region.

Pic source: Axizon.com

Sabic's 660,000 tonnes/year cracker at Geleen in the Nethernlands was taken offline on Thursday because of technical problems. The company expects to restart the plant at the end of next week. And Dow Chemical's 590,000 tonnes/year cracker at Terneuzen in the Netherlands will be taken offline on 28 January for two weeks.

These cracker outages as well as, potentially, some possible problems at a couple of other sites, notably in Germany, were expected to exacerbate an already tighter-than-expected olefins supply situation, notes ICIS news.

Major polyethylene (PE) producers were targeting hikes in February with Dow looking at Euro100/tonne. PE prices had risen by €100-130/tonne in January.

In the US, two propylene producers have nominated a 3cents/lb ($66/tonne) increase in February contracts although a softening spot prices could fuel resistance from the polypropylene (PP) segment, which has seen margins disappear as monomer prices rose by 30% in January.

By Malini Hariharan

Pic source: www.brandft.co.uk

The blog is in undertaking the difficult task of collecting demand numbers for polyolefins across major Asian markets. Preliminary estimates show that demand growth has been quite healthy in the two major markets - China and India.

Chinese polyethylene (PE) demand (measured as local production plus imports minus exports) rose 13% to 17.4m tonnes while polypropylene (PP) demand increased by 6% to 13.9m tonnes cementing the country's position as the largest polyolefin consumer and importer in the world.

Data from the Chinese customs showed that the country imported 1.384m tonnes of low-density PE (LDPE), 2.478m tonnes of linear-low density PE (LLDPE), 3.495m tonnes of high-density PE (HDPE) and 4.8m tonnes of PP in 2010.

Imports of LDPE and LLDPE increased by 3% and 13% respectively while inflows of HDPE dropped by 9% and PP by 6% as local producers expanded their market share following commissioning of new plants.

In India PP continued to shine with demand (measured as local sales plus imports minus exports) rising 18% to around 2m tonnes during April-December 2010, according to local industry estimates.

Demand for the fiscal year 2010-11 was expected to touch 2.6m tonnes, up from 2.2m tonnes in 2009-10.

"Raffia and biaxally oriented PP (BOPP) film were the key drivers. PP consumption in each of these two sectors has gone up by over 20% in 2010. New BOPP lines were commissioned; additionally polyester film prices doubled during the year helping BOPP film makers," explained a source from an Indian produce

The auto and appliances segment also supported demand for PP copolymer, he added.

The rapid expansion of the Indian PP market and the introduction of anti-dumping measures on product from Saudi Arabia, Singapore and Oman resulted in a decline in exports and imports.

PP exports for April-December 2010 were down 2% to 475,000 tonnes while imports dropped by about 18% to 250,000 tonnes.

The year saw also saw an expansion in Indian PE consumption HDPE demand up by about 7% at 1.1m tonnes while LLDPE rose 9% to 760,000 tonnes, estimated a source from a local PE producer.

But LDPE was the only exception as high prices and tight supply resulted in demand declining by about 5% to around 250,000 tonnes during April-December 2010.
"For the full year [2010-11] we expect HDPE and LLDPE to show 15% growth while LDPE will remain flat," the source added.

By Malini Hariharan

Its not just China and India that have posted healthy demand numbers for last year.

Vietnam maintained double-digit growth in polyethylene (PE) and polypropylene (PP) last year, driven mainly by the local food packaging sector, reports ICIS pricing editor Bee Lin. PE consumption increased 27% to 800,000 tonnes while PP demand was up 14% at 650,000 tonnes.

Pic source: toursvietnam.net

These figures do not account for volumes that were re-exported especially in second half of 2010 when Vietnam faced a shortage of US dollars. Import activity also declined during this period.

The official exchange rate was pegged at Vietnamese dong (D) 19,500 to one US dollar for most of last year, but it was very difficult to obtain US dollars at the local banks, said local traders.

US currency was available in the black market, but at a much higher rate (more than D22,000), and that had made imports too costly for local companies, they added.

A local industry source estimated that Vietnam exported around 12,000 tonnes of PP last year.

Vietnam's first PP plant of 150,000 tonnes/year, part of the Dung Quat refinery, started operations last year. But the plant produced only around 50,000 tonnes in 2010.

In Indonesia, PE demand for 2010 was estimated at 750,000 tonnes, up 6% from the previous year, while PP grew by 8% to 850,000 tonnes. Food packaging was again a key driver.

Indonesian PE imports were expected to grow as domestic capacity was only around 750,000 tonnes/year. But PP production volumes were likely to increase from last year's 520,000 tonnes as Tripolyta planned to raise its capacity by 120,000 tonnes to 480,000 tonnes/year.

By John Richardson

THE signs are ominous as they have been since the beginning of the crisis.

Intuitively, it still feels as if we are heading for some major macroeconomic problems. As Andrew Liveris, CEO of Dow Chemical, put it last week: "Overall, the world continues to recover to pre-recession levels. However, with inflation concerns in emerging geographies, lingering unemployment issues in the US and sovereign debt issues in Europe, we remain prepared for a reversal of momentum."

Call a crisis for long enough you will eventually be proved right, based on the maxim that what goes up must eventually come down,.

But rising oil prices, along with overall inflation, do seem to pose the most immediate threats for 2011 over what was a fantastic 2010.

ExxonMobil Chemicals lower sequential quarter-to-quarter segment earnings in Q4 last year reflected an inability to fully pass on rising feedstock costs and new petrochemical capacity, my colleague Nigel Davis wrote last week."The closing quarter of 2010 was a disappointing end to the year for many petrochemical producers," wrote chemicals consultancy ChemSystems in a report published last week.

"Renewed pressure on feedstock costs depressed profitability of petrochemicals in many markets, eroding strong gains in margins achieved in the first half of the year," added the consultancy.

Not surprisingly it was the European producers who were hammered the hardest because of their reliance on liquid feeds. Naphtha costs surged on crude and the severe northern hemisphere winter made liquefied petroleum gas (LPG unaffordable. The end-result was cracking margins being squeezed by Euros160/tonne, according to ChemSystems.

The US did much better because of its natural gas advantage with average polyethylene margins down just 5%.

Cash margins for Middle East producers were in contrast 14% higher.

So where do we go from here?

A key measure will be how Asian petrochemical markets respond as they return from the Chinese New Year Holidays this week, provided one can separate the usual nonsense talked by the huge trading community from what is really happening.

This could obviously be a very tough year for the higher-cost Northeast Asian cracker players as a result of further erosion of market share in China and the pressure from higher crude. As fellow blogger Paul Hodges pointed out last week, 2010 polyolefin import data showed a substantial gain for the Middle East in China at the expense of Japan, South Korea - and also Southeast Asia.

"The considerable cumulative excess capacity built since 2008 will take many years (to absorb) and operating rates will remain heavily depressed in the near term," ChemSystems added.

It is likely, as we have said before, that more of this cumulative excess capacity will hit the market in 2011 than in 2010.

By Malini Hariharan

Spot ethylene prices in the US have moved up following a fire at Enterprise Products natural gas liquids (NGL) complex at Mont Belvieu, Texas, on 8th February.

The complex is said to be among the world's largest underground storage centres for NGLs.

Pic source: ICIS

Spot ethylene offers rose to 49cents/lb, up from 45.50cents/lb, as market participants expected the fire to disrupt ethane supplies to crackers.

LyondellBasell said that it had reduced the operating rate of its cracker at La Porte, Texas. But the fire had caused only minimal disruptions at the company's two crackers in Channelview, Texas.

Other companies relying on ethane supplies from Enterprise have yet to cofirm if their operations have been affected.

But Asian ethylene markets saw limited impact from the fire, said ICIS pricing editor Soo Hwee Peh. Prices were holding steady at $1,290-1,320/tonne cfr NEA on limited spot availability from the Middle East amid talk of delays in term shipments from the region.
Upcoming cracker turnarounds were also supporting prices.

By John Richardson

IS China's polyethylene (PE) market going through a temporary lull or are we seeing a sea change in conditions that could spell problems for the rest of this year? This was the question, to paraphrase Hamlet, facing the global industry late last week as lacklustre post Chinese New Year (CNY) demand continued.

As we wrote about last week, trader inventories in bonded warehouses are high as a result of imports before the New Year proving to be excessive.

We wrote in that same post that job-hopping after the holidays was restricting the ability of converters and finished-goods manufacturers to run at high operating rate.

But a much more important reason for the weak demand is bank-lending restrictions, according to Rainy Ma, our polyolefins expert in Shanghai, who works for ICIS Chemease.

"Converters and finished-goods producers have the orders, they just cannot get the working capital," she told the blog.

China has increased bank-reserve requirements twice this year with the latest announcement made last week. It has raised reserve requirements eight times since the start of 2010 in an attempt to cool the economy down.

A further factor behind moribund pricing - which as this ICIS pricing graph showed either remained flat or only edged up slightly last week - was the wide gap between offer prices from overseas producers and domestic bids.

The overseas producers we have spoken to continued to claim tight supply across several grades and, of course, higher raw material costs, as reasons not to budge on their pricing (see below for some analysis for producer margins).

Whereas import prices were more or less flat, there were some reports of declines in domestic pricing.

This was the result of traders off-loading cargoes from those overfull bonded warehouses in order to repay 90 day letters of credit due in March-April, the blog was told.

The traders were also continuing to re-export resin to South America and Vietnam in an attempt to tighten the market and to, of course, make some money.

High US ethylene prices have recently made exports difficult for the country's PE producers, including backyard shipments to South America.

Margins for Asian integrated low-density PE (LDPE) and high-density PE (HDPE) producers improved last week, according to the ICIS weekly Asian PE Margin Report.

LDPE margins rose by $48/tonne to their highest level since February 2010 with HDPE margins $65/tonne higher.

Improvements were the result of better co-product credits, particularly butadiene - which has been the case for several weeks now - while naphtha costs remained flat.

But it is polyethylene that over the long-run is the main economic driver of any steam cracker and so what is happening in China will remain a big source of concern.

By Malini Hariharan

Paraxylene (PX) markets are on a roll. Prices have risen by 20% since the beginning of the year and were assessed at around $1,620/tonne cfr Asia late last week by ICIS pricing.

One contract nomination for March was out yesterday with JX Nippon Oil proposing a $110/tonne increase to $1,730/tonne cfr Asia.

The opening of the East-West arbitrage window has fuelled Asian markets. Plant problems in the US and Europe could create room for as much as 50,000 tonnes of Asian product.

European spot PX prices moved towards record levels last week despite a number of force majeure declarations in the downstream purifited terephthalic acid (PTA) industry. Buyers were said to be willing to pay as much as $1800/tonne for spot PX.

Besides the arbitrage factor, Asian markets were also propped up by unconfirmed reports of a possible delay in the start up of S-Oil's new 900,000 tonnes/year plant. The plant was expected to start at end-March but this could be delayed by two months, said market players.

However, action in the Asian PTA market was muted last week as a fall in futures prices on the Zhengzhou Commodity Exchange dampened sentiment. There were also concerns about the impact of the Chinese government's efforts to tighten liquidity. Labour shortages in the coastal regions had also affected the textile sector and polyester margins were under pressure from high input costs.

Additionally, around 1.5m tonnes/year of Chinese polyester capacity scheduled for maintenance shutdown from 10 February to 10 March which would further hit PTA demand.

But these could be temporary factors as cotton prices continue to remain firm.

In a recent report, analysts at UBS Investment Research noted that cotton prices have risen by 30% so far this year and were expected to remain strong at least until the next harvest season in late Q3 2011.

The analysts were bullish for the entire polyester chain and have revised their spread forecasts for the year.

The average PX-naphtha spread has been raised to $550/tonne from the earlier estimate of $370/tonne. The PTA-naphtha spread has been raised by nearly $100/tonne to $605/tonne while the ethylene-monoethylene glycol (MEG) spread was expected to reach to $350/tonne in 2011, up from the previous estimate of $190/tonne.

"We see limited new capacity coming on stream in 2011-12 for PX and MEG. And with the strong downstream demand, spreads are likely to remain robust in the next one to two years," they noted.

By Malini Hariharan

Asian polyolefin producers face a difficult time with markets being pulled in different directions. Feedstock costs have steadily moved up at a time when downstream demand and price direction remains uncertain.

Political upheaval in Libya and Bahrain pushed WTI crude oil to over $94/bbl yesterday while Brent hit $107/bbl. Naphtha soared to $927/tonne CFR Japan, a level last seen in August 2008.

These developments coupled with tight supply due to upcoming cracker turnarounds raised ethylene price expectations to around $1,350/tonne CFR Northeast Asia while propylene was stable $1,460/tonne CFR Northeast Asia respectively.

However, polyolefin markets in China did not keep pace. Burdened by weak demand and oversupply Chinese traders were looking at re-exporting polypropylene (PP) to southeast Asia, reports my colleague Bee Lin Chow. Yarn and injection moulding grades were on offer at $1,650/tonne CFR Indonesia from China, about $50-90/tonne lower than offers from other sources in Southeast Asia.

In polyethylene (PE), the key linear low density PE (LLDPE) futures contract on the Dalian Commodity Exchange dropped 1.6% yesterday on profit taking. Traders were said to be locking their profits by taking a sell position on the Dalian.

Indian demand was also lacklustre as buyers were unsure of price direction, said one local industry source. The sharp rise in oil prices had not resulted in a spurt in buying as many players viewed this as a temporary situation which would be corrected with an easing of the Middle East crisis, he added.

In addition to this, moves by various Indian states to restrict the use of plastics bags also dampened sentiment. The Delhi government was said to be considering closing down over 400 plastic-bag manufacturing units to ensure effective implementation of its 2009 ban on use of these bags.

The country's Supreme Court also confirmed last week a ban on sale of tobacco products in plastic pouches from 1 March. This segment was estimated to consume over 50,000 tonnes of PE.

A second source pointed out that trading had been hit by the wide difference between international and domestic prices. Local producers have pegged PE prices below import parity levels for the last few months to restrict import volumes into the country. "Fundamental demand is not bad; but the price delta is so high that traders are not risking imports," he added.

By Malini Hariharan

With naphtha crossing $1000/tonne yesterday Asian petrochemical producers reliant on this feedstock remain caught in a tight spot. Costs are continuously rising while market direction for key derivatives is uncertain.

Ethylene and propylene prices are holding firm at around $1,350/tonne CFR Northeast Asia and $1,500/tonne CFR Northeast Asia respectively, supported by a cracker outages and upcoming turnarounds in South Korea and Japan. And aromatic prices are tracking developments in upstream markets with benzene at around $1,180/tonne FOB Korea.

But the Chinese polymer market continues to trouble producers. As explained by the blog earlier, demand is weak as credit tightening has affected traders and end-users.

"It is a difficult market. Looking at crude oil and naphtha, we need a price increase of over $100/tonne for polypropylene (PP) in April; but we will probably have to start with $30 and if successful, ask for more. The big constraint is weak Chinese demand," explained one South Korean producer.

As for polyethylene (PE), he thinks it is better to forget exports and instead focus on the Korean domestic market.

His only hope is that turnarounds in Q2 will keep supply tight. Additionally, spiraling naphtha prices should force at least some Asian producers to cut output. And eventually, the sentiment of rising crude oil prices should trickle down to the polymer markets.

Crude oil prices declined by a few dollars yesterday after news emerged of a possible peace plan for Libya. However, the situation is still very fluid and there is every possibility for a rebound.

Not surprisingly then, some cracker operators are looking at propane/butane as an alternative to naphtha. The Saudi Aramco March contract price for propane is at $820/tonne FOB Arabian Gulf while butane is priced at $860/tonne FOB Arabian Gulf.

The premium on spot propane is now $15-20/tonne but the delta is still lucrative, pointed out one industry source.

While Asian naphtha-based producers are struggling, their counterparts in the US are well placed.

In a recent report Alembic Global Advisors sees a scenario beneficial to US ethane-based producers.

"US ethane based producers would continue to enjoy very healthy margins benefiting from the pricing umbrella provided by high cost naphtha based producers. It is worth noting that if crude oil prices continue their ascent the US ethane based cost advantage may widen further."

As a rule of thumb if natural gas prices remain flat while crude oil prices rise by $10/bbl, US ethane based ethylene margins should expand by around $120 per tonne, the analysts estimated. And the key beneficiaries would be Dow Chemical, LyondellBasell and Westlake Chemical.

By Malini Hariharan

C4 buyers are a troubled lot. Availabilty of the product is tight and will remain so for the foreseeable future.

So it was not surprising to hear that concerns about C4 supply dominated discussions at the recent 6th ICIS World Olefins Conference in Brussels.

From a surplus in 2010, Europe is predicted to be short in 2011. The region is also expected to emerge as a net importer with demand growing by 20,000-40,000 tonnes/year.

The weakness of the European raffinate 1 market relative to its feedstock, crude C4, and its co-product butadiene (BD) will have a negative impact on butadiene extraction utilisation rates if it persists, INEOS market manager for C4s David Cartwright said at the conference.

He pointed out that raffinate 1 pricing had fallen into a negative €45/tonne ($62/tonne) spread on average in the 2010-2011 period, having previously averaged a premium of €48/tonne in the pre-crisis 2006-2007 period, and that this was not sustainable.

If BD extraction rates were to be limited by poor raffinate market performance, it would be another nail in the coffin for European BD consumers already facing the prospect of tightening BD supplies and soaring prices, reported ICIS pricing editor Nel Weddle from the conference.

And the supply outlook in the US is equally grim as the crackers were expected to continue using ethane as feedstock.

Ethane presently accounts for around 65% of US cracker feedstocks, but the Barry, Dow Chemical's co-monomer and global C4s business director, estimated that number would rise to 70% by 2015.

Buyers are now hoping that high BD prices would push some end-users out and help demand and supply return to a more balanced position.

"There is a natural cap to future BD price increases, some will be forced to exit," said Christof Krogmann, vice president petrochemical projects of major BD consumer LANXESS.

The high prices could also make alternative on-purpose routes viable. This includes butane/butene dehydrogenation and bio routes to C4.

By Malini Hariharan

News is slowly trickling in on the status of Japanese petrochemical plants. Only four of the country's 14 crackers have shut down while a few are running at reduced rates, reports ICIS news.

JX Nippon Oil & Energy has shut its 460,000 tonnes/year cracker at Kawasaki while Maruzen Petrochemical has shut its 520,000 tonnes/year cracker at Chiba. And Mitsubishi Chemical has shut two crackers, with a total capacity of 828,000 tonnes/year at Kashima after a power outage. Mitsubishi has also shut its phenol plant at the same site.

And Japan Polypropylene has had to stop operations at its two polypropylene (PP) plants with a total capacity of 669, 000 tonnes/year.

Nearly 22% of the country's refining capacity of 4.52m bbl/day is estimated to have shut down. This includes JX Nippon's refineries in Sendai, Kashima and Negishi, as well as the Chiba refineries of Cosmo Oil and Kyokuto Petroleum.

A fire at JX Nippon's storage tanks at Sendai has yet to be put out and storage tanks at Cosmo Oil's in Chiba, were also still ablaze.

JX Nippon has also shut its benzene plants and is likely to declare force majeure on paraxylene (PX) supply

Shutdowns extend beyond petrochemicals across a wide range of sectors. For instance, Suzuki Motors is reported to have halted production at six of its factories while Toyota Motor has halted operations at all its 12 plants.

But Asian petchem markets were largely stable on Monday with players still assessing the impact of the shutdowns.

By Malini Hariharan

Japan's benzene supply is expected to drop by 10% following plant shutdowns and diversion of product for gasoline blending, reports my colleague Mahua Chakravarty.

This works out to about 40,000 tonnes/month, which is lower than the initial estimate of 100,000 tonnes/month made immediately after the earthquake.

Traders have started booking cargoes from South Korea to meet the shortfall. But this has not had an impact on benzene prices which have eased slightly this week on poor styrene markets.

Five benzene plants with a total capacity of 1.13m tonnes/year remain shut while some plants are running at reduced rates.

In polyolefins, Japan is likely to import product as plants continue to remain shut.

A Taiwanese producer sold around 2,000 tonnes of linear low density polyethylene (LLDPE) at $1,530-1,535/tonne CFR Japan this week for April shipment, reports my colleague Bee Lin Chow.

Chinese re-export offers to Japan have also surfaced although a gap in price ideas appears to be hindering business.

But it is unlikely that Japanese buying will prop up the current weak Asian market.

Meanwhile, Mitsubishi Chemical has confirmed that it will take a few more weeks to restart its plants at Kashima. Plants at the site include two crackers with a total capacity of 828,000 tonnes/year.

"We are doing all in our power to rebuild, but we calculate it will take at least two months for the plants to go back on line," said the company.

Mitsubishi has started inspecting the plants and also commenced some rebuilding activities. But infrastructure at the site has been badly damaged and that is likely to constrain resumption of operations.

This shutdown is likely to affect operations of other companies at Kashima that rely on feedstocks from Mitsubishi.

Shin-Etsu Chemical said that all operations at Kashima, where it make polyvinyl chloride (PVC), have been halted and inspection has yet to be completed.

Besides damage to facilities that power and water supply at the site has been hit.

"At present, it is still unclear how long it takes to re-start the operations at the Kashima plant," said Shin-Etsu

Kashima Vinyl Chloride Monomer's 600,000 tonnes/year vinyl chloride monomer (VCM) remains shut.

"The plant is likely to remain shut for two to three months as it was quite badly damaged by the earthquake," said a source from the company, which is a subsidiary of Shin-Etsu.

By Malini Hariharan

The blog has been reading some more interesting reports filed by ICIS colleagues from the International Petrochemical Conference at San Antonio, US. The conference, hosted by the National Petrochemical and Refiners Association (NPRA) concluded yesterday.

* Chevron Philip Chemical's announcement of a a feasibility study on a ethane cracker at an existing US site helped keep up the optimism at the conference.

The cracker could have a capacity of as much as 1m tonnes/year of ethylene, estimated a market source.

The company said that the project would utilise advantaged feed sources expected from development of shale gas reserves in the country. The study is due to be completed in 2011.

"We are finalising our evaluation of potential sites and advancing discussions with... contractors," said chief operating officer, Tim Taylor.

Chevron Philip's announcement follows other planned expansions in the US that the blog listed recently.

* Nova Chemicals will upgrade its Corunna cracker in Canada this year to take 100% light feedstock to take advantage of the increased ethane from Marcellus Shale reserves in the US via pipeline, reported Brian Ford.

* Sabic is progressing on its move downstream into value added products. It plans to commission a world-scale isocynate complex in Saudi Arabia by 2015, the first in the Kingdom. This will be a joint-venture project but the company has yet to disclose who the partner will be.

Sabic affiliate, Saudi Kayan will be commissioning its 100,000 tonne/year ethanolamines in H2 2012.

Sabic's joint venture methyl methacrylate (MMA) and polymethyl methacrylate (PMMA) projects is on track to start up by 2014.

* The industry is looking at a major shortage of monoethylene glycol (MEG). Growth in polyester would require 1.5m tonnes of annual addition to capacity but companies are being constrained by lack of feedstock options.

"You would need to build two world-scale plants every year and a world-scale plant is 700,000-800,000 tonnes, so you need 1.5m tonnes a year of glycol and nothing is coming. That's scary," said MEGlobal vice president for commercial operations Frank Hanraets in an interview with Pearl Bantillo.

"We are looking at all options [to expand]. It's a matter of where you can find the feedstock," Hanraets added.

The supply tightness is expected to continue for the next 3-5 years with global demand expanding by 7%/year and growth in China and India running at double digits.

Hanraets thinks the solution is to look at technologies such as MTO [methanol-to-olefins] and coal-to-olefins. MEGlobal, he said, is looking at these options and also the bio-route which involves using sugarcane to get to ethanol, ethylene and MEG.

By Malini Hariharan

The blog was at the Vinyls India - 2011 conference in Mumbai which has attracted over 400 delegates interested in hearing about the Indian market.

The country has emerged as a major importer of polyvinyl chloride (PVC) with nearly 650,000 tonnes of suspension grade imported in 2009-10.

But no PVC conference can ignore China where demand grew by around 15% in 2010 to reach 12m tonnes.

Demand is expected to reach 13m tonnes this year, estimated Chi Junqing, head of marketing at Shandong Xinfa Huayu Co.

Demand will be supported by China's construction sector, as the government this year plans to start building 10m low-cost housing units, said

"This will provide a reliable guarantee for PVC building materials' construction growth," he added.

The Chinese government plans to build 36m units of subsidised apartments over the next five years.

Chi estimated Chinese PVC capacity at 20m tonnes/year while production was only about 11m tonnes in 2010.

Overall, the country has more than 90 PVC producers, with carbide-based PVC accounting for 81% of the total capacity, he said.

There are three carbide-based producers that have capacities that are more then 600,000 tonnes/year: Xinjiang Tianye, Xinjiang ZhongTai and Shandong Xinfa Huayu Co, according to Chi.

"After 2004, capacity has developed in provinces which have abundant raw material. Nearly 40% of the total capacity is now in the now in the northwest, southwest regions and in Inner Mongolia," he said.

He pointed out that the quality of carbide-based PVC has consistently improved in the last few years because of changes to technology and use of large reactors.

"Carbide-based PVC can meet the quality criteria of ethylene method. The product has already got the approval from many global customers and was exported to more than 100 countries," he said.

As for the Indian market, the blog will cover this tomorrow.

By Malini Hariharan

The outlook for polyvinyl chloride (PVC) in India is bright was the conclusion at the end of last week's Vinyls-India 2011 conference in Mumbai.

Plenty of indicators were put up to justify this conclusion. India's per-capita consumption of PVC is only 1.7kg as against 13.4 kg in the US, 9.2kg in China, 6.5kg in Malaysia and 4.5kg in Brazil, pointed out S Gopal, managing director of Chemplast Sanmar in his presentation.

The key drivers will be agriculture, healthcare, housing and water management.

The infrastructure sector is estimated to draw in nearly $100bn in investment in 2011. Additionally, the government plans to spend $16bn in the agricultural sector in 2011 while $15bn has been allocated for rural and urban housing development, he said.

Pipes and fittings, which accounts for 71% of India's PVC consumption of 1.87m tonnes, will continue to be the major end-user for this polymer. The Indian pipe market is estimated at 4.7m tonnes of which plastics accounts for 1.7m tonnes with the rest being steel, cement and iron.

Among the different plastic pipes, PVC has a dominant share of 86%, followed by PE (12%).

But India's PVC pipes sector is cluttered with a number of small processors many of whom are not particulary quality conscious. But Gopal believed that the sector will see changes in the coming years.

"I see consolidation; large players are growing faster than small players. I see advanced high productivity machinese being installed," he said.

So what does this mean for PVC demand which grew by 5% in 2010-11.

Gopal estimated that the country will need 200,000-250,000 tonnes of new capacity every year to keep pace with demand.

However, new projects have yet to announced.

Companies that are working on new ethylene capacity have not shortlisted PVC either because profitability for other ethylene derivatives has been stronger or an investment in chlor-alkali unit has been difficult to justify given India's high power costs. Other companies that are building new chlor-alkali plants have found it difficult to integrate to PVC in the absence of a secured source of ethylene. The only alternative is to import ethylene dichloride (EDC) or vinyl chloride monomer (VCM).

So it looks like India will continue to import large volumes of PVC for the next few years. Nearly 650,000 tonnes of suspension grade was imported during 2010-11; about 35% of total demand.

And Gopal predicted that the share of imports would rise to more than 50% of the local market.

By John Richardson

WHILE ethylene prices rose to a 14-month high last week on very expensive oil and the Shell Chemicals outage in Singapore, the ICIS pricing C2 margin report calculated a staggering $134/tonne fall in Northeast Asian margins. Rising naphtha is clearly not being passed on down the chain.

Meanwhile, low-density polyethylene (LDPE) margins in Northeast Asia plunged by $163/tonne to the lowest since November 2009, according to ICIS.

Northeast Asian integrated margins plummeted by $142/tonne.

This reflected a persistently weak China PE market that we have been writing about since the Chinese New Year. Pricing had been mainly flat-lining since the holidays up until last week, but last Friday was assessed lower - by $10-30/tonne.

One of the problems in China is that while efforts are still being made to re-balance supply and demand by re-exporting material from China, arbitrage appears to be closing.

"Pricing in Europe, Southeast Asia, Turkey and Latin America is coming more into line with that of China," a polyolefins trader told the blog last week during our latest visit to Singapore

"At the moment some cargoes are still moving, but I am worried these could be the last for a while. Inventory levels in the China bonded warehouses are still too-high."

One of the causes of the bad market since the New Year seems to be that traders bought too much material in January because they thought prices had a lot further to rise.

Polypropylene (PP) had fared slightly better up until last Friday.

"The positive thing from the perspective of the producers is that PP remains tight. Propylene affordability and availability is a big issue and there have been yet-more technical problems at a propane de-hydrogenation-to-PP complex in Saudi Arabia," the trader added.

"I don't think PE is as quite as tight as PP, although there is a lot of Asian capacity down right now because of the cracker turnaround season," added a source with a major producer.

"The shutdown season comes to an end in May. So potentially, unless there are some tough decisions made to extend maintenance work and/or resume production at low rates, a big extra slug of supply is heading our way."

The market has yet to see any evidence of more PE heading out of Saudi Arabia as a result of greater associated gas availability.

But it seems only a question of a few weeks before the extra volumes arrive. Saudi Arabia always runs at the maximum rate that feedstock availability and technical issues allow.

More output from other Middle East OPEC members seems logical also.

The demand outlook in China looks grim as everyone continues to search for an explanation as to exactly why it is so grim.

"It could be simply the case that we imported too much resin and the end-users know that so they are sitting on their hands," the trader added.

"Our ability to make the situation any better - and make some very nice money in the process - is about to disappear because, as I said, I think re-export arbitrage is about to close."

Or is it more because there is something wrong with the fundamentals of demand? The end-users would surely be unwilling to sit on their hands for such a long period if orders from their customers were good.

We have been picking up reports that credit is tight among the converters and fabricators for five weeks now.

The 'shadow banking system' theory challenges this view. But perhaps because converters are mainly small -and medium-sized companies, they cannot afford the higher interest rates that going through the shadow system entails.

Plus with resin prices so high it is a big risk to borrow money at, say, nine or ten percent with a significant price fall possibly just around the corner (last week's price declines might indicate it has already started).

This risk aversion also applies to the speculators in the physical market and the Dalian Commodity Exchange who have been a major force behind strong demand growth since H2 2009.

"To me it feels like 2008 all over again. I wish I had realised this before overbuying in January," continued the trader.

"Prices, in retrospect, have gone up by too much to quickly and we were all gambling on the rally continuing after the Chinese New Year. But this hasn't happened because inflation is now the big issue in China. The end-users cannot pass on any further cost increases."

If credit keeps expanding through the shadow banking system, inflationary pressures might get worse.

One of the big global threats is that oil prices fall quite sharply in H2 on the end of quantitative easing and interest-rate increases in the US.

There are also so many other uncertainties out there, including, for example, unrest in the Middle East, the longer-term implications of the Japanese earthquake and tsunami and sovereign debt risk in Europe

China seems to be more closely watching the world right now as well as the world watching China.

This is the result of the Dalian becoming the price setter for all domestic grades of PE.

Speculators, if they want to make excellent money, are playing on every available shift in sentiment, including those that occur both locally and overseas.

And as the bigger converters play on the Dalian, this means they have become much more attuned to international events.

"Overall I remain bearish. I made my money in Q1 and plan to be cashed-up in the second quarter and quite possibly into the second half if what you say about the Fed and oil prices comes true," said the trader.

The blog thinks that this is a very wise approach for all of us.

By Malini Hariharan

A question that every butadiene buyer has been asking for a long time is when will prices ease?

There are no signs yet although buyers are threatening to cut production.

Butadiene rose by more than $200/tonne last week to $3,080-3,120/tonne CFR Northeast Asia, reports my colleague Helen Yan on ICIS news.

Prices have been driven up by a number of cracker outages and turnarounds in Asia, Europe and the US. Butadiene supplies have tightened over the last year and the more recent shutdowns at two Iranian plants (Jam Petrochemical and Amir Kabir) and Shell's cracker in Singapore have not helped matters.

Butadiene prices have risen by around 50% since January.

But buyer resistance is on the rise and some are planning cuts in production.

Kumho Petrochemical, Asia's largest synthetic rubber producer, will shut a 70,000 tonnes/year styrene butadiene rubber (SBR) plant and cut operating rates at a second 100,000 tonnes/year plant in May.

Other SBR producers in Asia too are reportedly contemplating production cuts. Additionally, a few SBR producers have planned maintenance shutdowns in the coming weeks.

However, the production cuts may not materialise if high butadiene costs can be passed on. And there are signs that this is happening.

SBR prices in India have crossed $4000/tonne and are likely to remain firm in May, reports ICIS news.

Tyre producers are willing to pay high prices as they expect SBR availability to remain constrained because of production disruptions in Japan.

"We have received enquiries from some tyre producers in Japan. Their suppliers in Japan were not able to deliver their contract cargoes because of power outages and extensive damage to infrastructure after the earthquake," said a Korean SBR producer.

If this continues, SBR and butadiene can continue their upward march and provide much -needed relief to Asian cracker operators who have been hit by weak pricing for other derivatives.

By Malini Hariharan

All is not well in the Asian polyester chain. Demand has slowed down exerting a steady downward pressure on prices.

Purified terephthalic acid (PTA) spot prices have dropped by $100/tonne in the last week to $1,290-1,300/tonne CFR China Main Port and the outlook for the coming months is bearish, reports ICIS news.

The price slide shocked many market players but the indications were there - futures prices on the Zhengzhou Commodity Exchange have fallen 14% since early March.

Monoethylene glycol (MEG) spot prices have also slipped, dropping by $30/tonne last week to around $1100/tonne CFR China. Earlier in the month, major producers decided to lower their contract nominations for May because of weak market fundamentals.

And paraxylene (PX) too has come under pressure with spot cargoes trading at a discount last week for the first time in six months.

The shift in markets follows changes in cotton, which had supported much of the prices gains seen in polyester and its raw materials since last year.

Futures prices for cotton on the Intercontinental Exchange have been falling since early April after hitting an all-time high of $2.179/lb on 7 March.

The fall is partly because production is expected to rise as record high prices last year have given farmers the right incentive to raise acreage.

This is likely to happen in the US and India but Chinese acreage may not grow as farmers have turned to other crops that offer better returns.

China would then have to import larger volumes of cotton which could reignite a rally in cotton prices and support a recovery in pricing of fibre intermediates.

By Malini Hariharan

The problems for Chinese manufacturers are multiplying. Besides having to worry about rising input costs, inflationary pressures and tightening of credit, companies now have to contend with unexpected power cuts.

This is usually the low season for power consumption in the country but supply to industrial units is being rationed in some provinces as power production has been affected by a dip in coal supplies. Affected provinces include Zhejiang, Hunan, Jiangxi and Chongqing with Zhejiang said to be experiencing its worst shortage in seven years.

Small and medium-sized enterprises have been hit the most. For instance, in Zhejiang province's Taizhou city, small enterprises that have an annual output value of less than Yuan 5m are not allowed to use electricity between 7 am and 5:30 pm, while medium-sized enterprises that have an annual output value of more than Yuan 5m are being asked to cut their use of power every two days.

Companies are turning to generators but this is an expensive option.

Besides supply side issues, the power situation is also being aggravated by increased demand from projects that were stopped last year to enable China to meet its carbon emissions reduction target for the 11th Five Year Plan.

It is not clear if things will improve before summer. The
National Development and Reform Commission (NDRC) has already warned that power supply will not be adequate in most places in 2011, and especially in eastern China, northern China and the southern regions of China.

The China Southern Power Grid has said that the country's five southern provinces will face power shortages of up to six gigawatts in the second quarter. And a power supply shortfall of 11.7 gigawatts, or 6% of peak power demand, is also being forecast in eastern China this summer.

Power costs could also go up as coal prices are projected to remain high. Demand for coal has been growing faster than supply which has been constrained by consolidation in the coal industry as provincial governments have been closing small and unsafe mines.

Some analysts expect the government to step in with measures to ease the situation. If that does not happen soon power shortages could be another factor depressing the region's petrochemicals market.

By Malini Hariharan

Styrene butadiene rubber (SBR) prices, which have nearly doubled over the last year, may be heading for a much needed correction.

The strength in feedstock butadiene markets and strong demand from the automotive sector have so far helped support the high numbers. But a key concern is that China's tightened monetary policy will dampen sentiment and slow down SBR demand in Asia, writes Helen Yan, ICIS pricing editor for synthetic rubber.

Traders have started complaining about difficulties in accessing funds from banks and with credit expected to remain tight through the rest of the year restocking activity will be affected.

Growth in Chinese auto sales is also slowing down as the government's massive auto-subsidy program has ended. Additionally, rising fuel prices, implementation of anti-congestion programmes in some cities and new fuel-efficiency standards has also affected sales.

Chinese auto makers have projected 10-15% increase in car sales for the full year, down from 32% growth last year while foreign auto makers are projecting even slower growth of 5-10%.

Falling natural rubber prices are also expected to put pressure on SBR.

Chinese SBR imports dropped 20% in the first quarter to 79,000 tonnes and volumes in this quarter are likely to be lower if current market conditions continue.

A correction in SBR prices seems likely. The blog is waiting to see if this will drag down butadiene prices

By Malini Hariharan

Tension is building up in the Indian polyolefin market with buying activity slowing down in recent weeks.

"The market is really dull; trading activity is very flat and end-users are taking minimum quantities. We are worried that the situation will worsen if we offer more discounts," says a concerned producer.

The slow down in the polyolefins market is being attributed to expectations of a big price correction across all commodities including crude oil and weakness in the wider Asian polymer market, especially China.

Increased local competition with heavy discounting by some producers is aggravating the situation. Volumes from Indian Oil Co (IOC), the latest entrant to the Indian polyolefins market, have increased as its plants are running at around 60% although all its problems have yet to be sorted out.

In polypropylene (PP), all major end-use segments are said to be facing problems. Orders for raffia bags from cement companies have slowed down following an easing in demand due to reduced spending on infrastructure projects.

A drop in auto sales plus a 50-70% cut in operations at the Indian plants of Japanese companies Toyota and Honda has affected sales of PP copolymer.

And the hefty $300 plus price differential between PP and high-density polyethylene (HDPE) is prompting processors to turn to the cheaper polymer for non-critical applications.

"The switch to HDPE is not very difficult as some processors still have the old moulds and for some end-products they only need to change the temperature profiles," says a second producer.

Not surprisingly, producers' inventory levels are rising with nearly 160,000 tonnes of polyethylene (PE) reported to be in stock, more than double the usual volumes.

A shifting of inventory is taking place; it is time for producers to hold product, says a trader.

The near term outlook remains bleak as cues from the international market are not strong. China's tight credit policy is unlikely to ease in the second quarter and the Indian government too is waging its own war against inflation by hiking interest rates which is likely to affect economic growth.

Any delay in a recovery in polyolefin demand and prices will put further pressure on naphtha-based producers who are already in a tight spot with negative margins on PE. Operations are being maintained only because of positive contributions from the C3 and C4 chains. Producers have resorted to exports in the last few months but even this is getting difficult as markets across the world are slowing down.

The weakness in the Indian market comes after a healthy 2010-11 which saw PE demand expanding by around 12% and PP by 17%. A repeat performance looks very difficult.

By Malini Hariharan and John Richardson

The power crisis in China, highlighted in this post last month and yesterday, has worsened and is likely to affect economic output in the second quarter.

More than 10 provinces, including Zhejiang, Hunan, Anhui, Jiangsu, Hubei, Sichuan and Henan, have been affected.

Small and medium-sized petrochemical producers in the affected regions have had to cut operating rates or shut down operations because of the power restrictions, reports the blog's colleague Judith Wang on ICIS news.

"Downstream plastic plants in Ningbo were ordered to shut down for one day a week from March," said a Chinese polypropylene (PP) trader.

In Zhejiang province, some polyvinyl chloride (PVC) facilities have had to reduce their operating rates by 10-20% from March.

"It looks like the power shortage will be [of] unprecedented intensity this year," an industry source said.

The shortage has been attributed to a a drop in coal supplies that has affected output at the country's many thermal power plants. Additionally, a drought in the south has curtailed hydro-electric output.

The China Electricity Council has estimated around 30 gigawatts of power shortfall in summer, about 3 percent of China's generating capacity

Experts point out that this year's power crisis is different from the ones that China has experienced in the past. The country has enough capacity but many power plants are not running at full rates as power prices are fixed while coal prices are rising.

To sort out the problem power costs will have to go up, but this will only fuel inflation which the Chinese government is struggling to control.

Some polyester producers have turned to diesel generators but the availability of diesel is becoming an issue, as again we discussed yesterday. The situation could improve in the coming months as the government has suspended diesel exports indefinitely to meet domestic demand.

Yesterday's post also talked about how refiners, under pressure from rising crude prices, had reportedly cut back on production of both gasoline and diesel. Gasoline and diesel price rises - as with coal - are limited by government pricing policy, making it impossible for the refiners to fully pass-on increases in oil prices.

Sinopec been ordered to cut back on ethylene output - by 4% in April and 10% in May - in order to divert more naphtha to gasoline production and gasoil for making more diesel.

It will be interesting to see whether the measures taken so far will be sufficient to meet transportation-fuel demand and provide sufficient diesel for electricity generators.

Further ethylene production cuts by Sinopec to meet fuel requirements might help support weak polyolefins markets.

The power shortages we just detailed come, however, at the worst possible time for petrochemicals demand as China's peak manufacturing season for finished goods is about to begin.

Failure to fully solve the extensive power problems will therefore be another reason - along with all the inflation-tackling measures and the harm done to the economy by inflation - to expect lower petchem exports to China.

By Malini Hariharan

The fight for the metallocene market is heating up with South Korean producers increasingly looking at getting a share of this attractive market.

SK Corp confirmed plans to build a new metallocene linear-low density polyethylene (MLLDPE) plant outside Asia once a new plant in South Korea starts operations, writes the blog's colleague Bee Lin from the Chinaplas exhibition at Guangzshou.

Possible locations for the new plant include the Middle East or South America where the company is involved in upstream projects in Peru and Colombia.

A plant in the Middle East would target Europe while a South American plant would be geared to meet US demand.

SK's new swing plant in South Korea, due to start operations by 2013, will have the capacity to produce 230,000 tonne/year of C8 MLLDPE or 150,000-200,000 tonnes/year of elastomers.

And the company is looking to ship product out of Asia from this plant. A company source made it clear that buyers in European and US markets frustrated by high prices being charged by existing suppliers would welcome a new entrant.

Meanwhile, ExxonMobil confirmed its focus on MLLDPE and LLDPE at its Singapore operations. This includes an existing 600,000 tonnes/year plant and two new plants with a total capacity of 1.3m tonnes/year.

"All our reactors in Singapore will be capable of making metallocene products in the future, and so as our business grows, then we won't be constrained to one reactor for metallocene and other reactors for other things," said ExxonMobil polyolefins business unit vice president John Verity in an interview.

The company, however, would not give a precise date for start up and would only say that the new complex which includes a cracker the PE plants would be commissioned in phases.

By Malini Hariharan

One view on the purified terephthalic acid (PTA) market, highlighted by the blog last week, is that operating rates in the next few years will be constrained by a shortage of feedstock of paraxylene (PX).

A rapid buildup in PTA capacity is taking place in China where new plants with a total capacity of 2.8m tones/year are due to start up in the third quarter of this year.

But some analysts are optimistic that earnings for PTA manufacturers will remain robust until 2012.

Polyester capacity continues to be added in China and plants are expected to maintain healthy operating rates.

Analysts at Woori Investment & Securities are predicting a continued 8%/year growth in Chinese demand until 2015 based on increased spending on apparel by urban Chinese and an increase in the use of synthetic fibres as cotton will remain relatively more expensive.

PTA supply is projected to grow by 11.3% in 2012. But the analysts point out that some new PTA producers in China with very large plants of more than 1m tones/year capacity will take time to achieve normal operations.

This includes the Zhjiang Hengyi Group which has a 1.5m tones/year PTA project lined up.

A slow down in the PTA industry is therefore expected only after 2013 when utilization rates start rising.

In the near term, the analysts are predicting a recovery in PTA markets in the third quarter of 2011.

"As the PTA-PX spread has fallen below zero in May on a plunge in PTA prices, concern is increasing the recovery in the PTA industry will weaken. The PTA price decline in 2Q11 is attributed to a rapid demand fall in China, which consumes 64% of global polyester fiber output. We attribute the weak demand to: 1) falling demand for polyester fiber stemming from a drop in cotton prices; 2) liquidity contraction stemming from China's monetary tightening; and 3) reduced power supply to textile producers following power consumption surges in March. Of note, due to the sluggish demand, the inventory cycle has risen sharply from less than ten days in 4Q10 to 4-5 weeks in May," they said in a recent note.

But prices are expected to rebound from September as power restrictions ease after the peak production season ends in August and PTA inventory is depleted. And cotton could once again extend support as abnormal weather conditions such as the flooding of the Mississippi in the US and drought in Hubei province in China are likely to once again curtail production.

By Malini Hariharan

Spot monoethylene glycol (MEG) markets have quickly reacted to news that Nan Ya Plastics, an affiliate of the Formosa Plastics Group, has been ordered by the Taiwanese government to shut down two plants.

Prices surged by $15-30/tonne to $1,140-1,160/tonne CFR China, reports the blog's colleague Becky Zhang on ICIS news.

Nan Ya has been asked to shut its 360,000 tonne/year No 3 and 820,000 tonne/year No 4 MEG plants. The company's two other MEG plants with a combined capacity of 720,000 tonnes/year have been shut since 12 May after a fire at the Mailiao complex damaged the pipelines that supply ethylene. The company had earlier announced that production would resume only in July after receiving approval from the local government.

The four plants account for about 10% of Asian MEG capacity.

As mentioned by the blog yesterday, the Formosa Plastics Group has attracted government scrutiny after a fire at its Mailiao site on 12 May. The Yunlin provincial government has ordered a shutdown of six plants until safety checks are carried out.

Besides the two MEG plants, Nan Ya has also been asked to shut a 130,000 tonnes/year bisphenol A line, a butanediol plant and an isononyl alcohol unit.

Formosa Plastics Corp (FPC) has been asked to shut a vinyl chloride monomer (VCM) plant and has also been fined New Taiwan dollar (NT$) 1m ($34,662) for above-normal pollution at the unit.

The plant was affected by the 12 May fire which brought down a system that diffuses pollution, a company source told ICIS news.

FPC hopes to negotiate with the Yunlin government to explain the reason for the pollution after the fire, the source said.

By Malini Hariharan

Government measures across Asia to ease inflationary pressure are finally yielding results. The latest economic indicators from China and India confirm a loss in manufacturing growth momentum which is likely to put further pressure on troubled polyolefin markets.

In China, the official Purchasing Managers Index (PMI), from the China Federation of Logistics, declined to 52.0 in May from 52.9 in April, the second consecutive month of decline.

An alternate index from HSBC and Markit fell to a 10-month low of 51.6 from 51.8.

Although a reading over 50 indicates economic expansion it is worth noting that the PMI is at a 9-month low.

The PMI's input-prices subindex, an indicator of inflation pressures, declined to 60.3 from 66.2 but this is unlikely to push the government to relax its monetary policy.

The news from India is also not promising as GDP growth in January-March slowed to 7.8%, down from 8.3% recorded in the previous quarter.

The HSBC Markit PMI fell to 57.5 in May from 58.0 in April, weighed down by a slower expansion rate for new orders and a labour shortage.

And South Korean manufacturing growth also slowed to its slowest pace in six months, with HSBC's PMI falling to 51.2 from 51.7.

Economists are optimistic that China will see a gradual correction rather than a hard landing. But credit policies across the region are likely to remain tight as inflation is still a concern for many countries.

This is of course bad news for polyolefin producers. Demand has been weak since the start of the year and chances of an early recovery are receding.

"The China market situation has worsened after Chinaplas; buyers in other Asian markets have also take a wait and watch position," explained a producer from Northeast Asia. He was particularly pessimistic about the polypropylene (PP) market as buying ideas have steadily declined.

"The Middle East, Singapore and Thailand are supplying more but the critical factor is the demand slowdown in China," he added.

By Malini Hariharan

There is a lot of free price information and advice available to Indian polymer buyers via emails and SMSs. The gist of the messages these days is that the Chinese market is weak, international and domestic prices will fall and buying should be in limited volumes.

An email that landed in the blog's inbox today advises buyers to wait till 15th June to review international prices and then take a decision on buying additional volumes.

There is nothing wrong with the advice - in a falling market it make sense for buyers to hold back purchases. But are these messages also shaping sentiment and speeding up price corrections?

A source from a local polymer producer points out that the price information in the messages are usually incorrect. "But sentiment is affected; people think why should they buy when the expectation is for a further fall in prices."

"They are a mood spoiler; the market is being driven because of rumours," complains a source from a second producer.

The complaints are justified but the blog is confident that they will disappear once markets recover as the advice then would be for buyers to buy before the next price hike.

But the million-dollar question is when will markets recover.

"At APIC producers were saying that this has gone on for too long; the price fall has to stop. But we do not know whether this will happen in 15 days or two months," says the first source who is now pinning his hopes on the start of the Chinese manufacturing season and agricultural film season in July-August.

But a meaningful recovery might be difficult given the slowdown in manufacturing activity. And as highlighted by the blog earlier this week many others in the industry have already written off 2011.

By Malini Hariharan

The messenger's prediction has turned out to be correct. Indian polymer producers have been forced to reduce domestic prices to match levels seen in the wider Asian market.

The week started with a downward revision to polypropylene (PP) prices followed by cuts in prices of low density polyethylene (LDPE), linear low density polyethylene (LLDPE) and also polyvinyl chloride (PVC). LDPE and PP faced the highest price reduction of around $80/tonne.

But will these price revisions be sufficient to revive markets?

Producers are confident that high prices seen earlier this year has not resulted in demand destruction and buying will return once sentiment improves.

However, negative cues from the global market means that the sentiment is unlikely to change.

Crude oil has softened in the last few days and so has naphtha. More importantly, the Chinese polymer market is still weak and prices are expected to fall further.

As mentioned on the blog earlier, a combination of factors including the government's credit tightening measures and power shortages have severely affected demand and speculative activity. Earlier this week, the People's Bank of China raised the bank reserve requirements by 50 basis points, its sixth upward revision this year, as consumer price inflation in May hit a 34-month high of 5.5%.

India too is battling inflation and the central bank raised interest rates yesterday, the tenth time since the start of 2010.

In the midst of this pessimistic macro economic news, producers are hoping that the third quarter will offer some respite once the peak production season starts in China and scheduled plant shutdowns in Asia tightens supply.

But restricted credit availability, power issues and rising labour costs could well dampen this year's production season resulting in weaker demand for polymers.

What happens next is partly in the hands of producers. Will they be willing to cut operating rates?

"We are heading to a crucial point now," says a trader who believes that production cuts at naphtha-based producers are long overdue. The sharp fall in PP prices in the last few weeks should force some producers to make the move.

His prediction is that prices will bottom out in June and there should be some stability in July unless there are major swings in crude oil and naphtha prices.

By Malini Hariharan

The doom and gloom affecting many segments of the petrochemical industry has yet to reach methanol. Asian spot prices have been stable since January and have hovered in the $340-350/tonne range during the last three months.

Methanol traditionally tracks crude oil prices but the product has been unaffected by the recent slide in crude. Producers have successfully held on to contract prices with Methanex recently listing its July contract price as a rollover of June's $420/tonne. In the US, Methanex has maintained a contract price of 128 cents/gal for the last six months.

Buyers are hoping for a price correction in the coming weeks, writes Heng Hui, ICIS pricing editor for methanol in Asia in this week's pricing report.

First, they expect supply to improve following the restart of Brunei Methanol's 850,000 tonnes/year plant and Petronas' 1.7m tonnes/year plant this week. However, the Petronas plant may not run at full capacity after restart. Some pipelines that supply natural gas to the plant have reportedly been affected by the massive Japanese earthquake in March and may need to be replaced.

Buyers also expect recent declines in Chinese domestic prices to trigger methanol exports. Prices and demand from key sectors such as formaldehyde and MTBE have been easing since May. Power shortages, documented by the blog earlier, have also hit operations of formaldehyde plants in some provinces.

Discussions for exports have started with talks centred around re-exporting imported product as shipping out locally produced methanol is not viable because of high logistic costs.

But these developments could be shortlived.

China, which accounts for around 40% of the global market, saw demand in April drop by around 3% month on month to 2.15m tonnes, estimated Ken Yin, the China methanol editor, in the Chemease China Methanol Monthly for June.

However, demand was up 25% compared with April 2010 and China appears to be on track to post an impressive 18% growth in methanol demand this year driven primarily by the dimethyl ether (DME) and gasoline blending segments. These two sectors currently account for around 33% of Chinese methanol demand and are poised to grow by 30% this year.

If that materializes methanol could stay firm for the rest of the year. The blog will be discussing the future for methanol, especially in China, in another post later this week.

By Malini Hariharan

The impending oversupply in purified terephthalic acid (PTA) and likely problems in securing feedstock paraxylene (PX) does not seem to have dampened enthusiasm for new investments,

Around 10m tonnes of PTA capacity is expected to come on stream from the third quarter of 2011 to late 2012, while another 12.9m tonnes of capacity is due to start during 2013-15, according to a recent estimate by ICIS.

China is of course leading the way with nearly 7m tonnes of new PTA capacities due in 2012. By the end of that year, Chinese PTA capacity would total to 32m tonnes/year as against a demand forecast of 23m tonnes. This could result in Chinese PTA exports provided new plants are able to source sufficient PX as capacity additions for the feedstock are taking place at a slower pace.

PX is likely to remain short in Asia until 2013 when five new plants are due to start. But the respite could be shortlived as new PTA projects are once again being lined up post 2013.

The recent entrants to a long list of companies planning new plants includes Ningbo Mitsubishi Chemical which is mulling a 1m tonne/year facility at Ningbo, China. The company has yet to set a start-up date.

Thailand's Indorama Ventures is also studying PTA projects in the Middle East and India, the company's chief executive said recently. These are part of the company's plans to raise its global production capacity, for PTA, polyethylene terphthalate (PET) and fibers, to at least 10m tonnes/year by 2014, from approximately 5.5m tonnes/year today.

Indorama has yet to disclose the location of its proposed Middle East facility but it could be Saudi Arabia where attempts are being made to draw in PTA investments that would offtake PX from a new refinery.

Lotte Pakistan is planning to triple its PTA capacity to 1.5m tonnes/year by late 2014 while Indian major Reliance Industries is working on two new PTA plants with a total capacity of 2.2m tonnes/year for start up in 2013-14. A third plant is also likely although details have yet to be firmed up.

At an industry conference earlier this week, a Saudi Aramco executive confirmed plans for a PTA plant at Al-Jubail based on 700,000 tonnes/year of PX supplied for the new Sartorp refinery. The refinery, a joint venture between Aramco and Total, is due to start operations in H2 2013.

"We've had two players coming forward previously but the negotiations have stopped. We are still looking for people to invest in the PTA unit," said the official, who did not disclose the names of the parties.

Oman and Kuwait, which currently export PX, are also interested in venturing downstream.

India's JBF had announced last year plans for a 1.2m tonnes/year joint-venture PTA plant with Oman Oil in Oman with PX to be supplied by Aromatics Oman. However, the blog understands that JBF has abandoned Oman and is now looking at building a plant in India.

This is likely to be a temporary setback for the Oman Oil which recently integrated its three subsidiaries Aromatics Oman, Oman Polypropylene and Oman Refineries and Petrochemicals into Oman Oil Refineries and Petroleum Industries Co (Orpic). The newly structured Orpic should be in a better position to pursue a PTA project on its own.

The investment wave is no doubt being driven by optimistic projections for polyester and PET and many of the projects probably have sound economics. But the risk of overinvestment needs to be carefully assessed.

By Malini Hariharan

China is well set to take on an even larger role in the global methanol industry. The country already accounts for a little over 40% of demand and its share is set to expand rapidly in the coming years.

The blog recently caught up with Ken Yin, the China methanol markets editor at Chemease for an update on future prospects.

Ken expects Chinese demand to touch 24m tonnes this year as against 20m in 2010. There is plenty of local capacity - estimated at 42m in 2010 which is likely to reach 50m by the end of this year.

Companies are rushing to start up new plants in anticipation of demand for from the dimethyl ether (DME), gasoline blending and methanol-to-olefin (MTO) sectors.

These three end-uses will be the key drivers to Chinese methanol demand in the future with only moderate growth coming from the traditional end-user sectors of formaldehyde and acetic acid.

DME has seen some hiccups this year as the Chinese government clamped down on its use in LPG blending because of safety issues. But it has started drawing up national standards for DME use with LPG and also specs for the gas cylinders. These are likely to be ready by June 2012.

And DME could emerge as a much bigger play if producers are successful in their trials of using pure DME as a household fuel, points out Ken.

Methanol use in gasoline blending is also ready to take off once the government introduced national standards. These were due last year but were delayed as trials were not completed.

The government is widely expected to introduce a M15 national standard this year which will allow 15% blending of methanol with gasoline. Some provinces have carried trials of 85% blends but The M15 blend is the most favoured as it does not require retrofitting of engines.

Methanol use in gasoline blending and DME is projected to grow by 30%/year. The figure could be higher if government speeds up implementation of new standards.

But the industry is likely to see resistance for state-owned refining companies such as Sinopec as increased use of methanol in gasoline blending or blending DME with LPG would affect its sales.

China's methanol economy is gradually taking shape and no doubt providing ideas to other countries around the world.

By Malini Hariharan

Styrene's addition by the US to a list of 'anticipated carcinogens' does not seem to have affected producers demand growth expectations for the product or for its key feedstock benzene.

Speaking at the 5th ICIS Asian Aromatics and Derivatives Conference in Singapore earlier this week, Alexander Farina, Shell Chemical's general manager for chemicals strategy development, drew out an optimistic picture for both benzene and styrene. (Full speech available here)

Styrene is projected to see global demand growth of 3%/year to 2020 supported by expandable polystyrene (EPS) and its application in the construction sector (average annual growth rate of 8% in Northeast Asia). EPS it offers good insulation properties helping countries achieve their objective of lowering carbon dioxide emissions.

Inter-polymer competition between polystyrene (PS) and polypropylene (PP) is also expected to ease as propylene and PP have been getting more expensive.

On the capacity side, a fall in ethane costs has improved export competitiveness of US styrene producers enabling an improvement in capacity utilization. While global styrene is still long with average industry operating rate at around 86%, the good news is just around the corner. With only 1.0-1.5m tonnes/year of new capacity due in the near future operating rates, said Farina, would swiftly recover in 2011.

Benzene is also expected to benefit from developments in the phenolic chain. Global polycarbonate (PC) demand is growing at 6%/year as its use in automobiles and electronics is being ramped up.

Farina did refer to some of the challenges facing benzene, the first being the slow addition to capacity - only 2%/year as against demand growth of 3%. There has also been a shrinking in on-purpose benzene capacity which now account for just 4% of global capacity, down from 20% before 2005.

This loss of swing capacity has made benzene more volatile with rapid fluctuations in prices with prices rapidly fluctuating to account for movements in crude oil or changes to demand.

Farina emphasised Shell's strategy of remaining an integrated low-cost aromatics producer. New technologies are being developed to retain this status. This includes a gas-to-aromatics route, he said, without giving further details.

"Gas-to-aromatics could be viable by the end of the decade... It is a strategic fit to our upstream gas business, which is where the growth is," Farina added.

The only other similar technology is the UOP/BP Cyclar process that makes aromatics from butane and propane. The technology has been implemented by Sabic in Saudi Arabia but the blog has been told that it has not been a commercial success.

Meanwhile, the US styrene industry is preparing for a legal fight to remove the 'carcinogen' tag. The US federal health regulators had declared in June that styrene is 'reasonably anticipated to be a human carcinogen'. Industry groups subsequently went to court to block the listing by asking for a preliminary injunction. They claimed that government researchers had relied on manipulated data and on information that had not been reviewed. But a US court rejected last week a plea for preliminary injunction but has still to consider the request for permanent injunction.

By Malini Hariharan

After last year's stunning rise, cotton prices have plunged 53% in the last four months from a 140-year peak of $2.15/lb on 4 March.

Prices have fallen 38% in July with cotton for December delivery quoted at 98.63 cents/lb on the Intercontinental Exchange.

The swift correction in prices is based on expected increase in acreage across the world. Global production for 2011 is forecast at nearly 123.2m bales, up 7.5% from 2010.

The US department of agriculture (USDA) recently estimated that cotton acreage in the country was up 25% from last year. China is forecast to produce 33.0m bales, an 8% rise from a year ago.

In India, the world's second largest exporter of cotton, cotton sowing has seen unprecedented growth and acreage is expected to rise 8% in the current season. And barring any flooding Pakistan too is likely to see production expand 17% this year.

This increase in global acreage should be sufficient to take care of weather disruptions such as the flooding in the Mississippi cotton belt and drought in Texas. The USDA has estimated 42% of the crop in the top 15 cotton producing states as very poor or poor and only 28% as good or excellent.

But any more disruptions could easily trigger a rise in prices as this report in the Financial Times suggests.

"The world has planted enough acreage to handle a disaster of one of the greatest proportions it has seen, in Texas. But it cannot handle a second one," warned Joe Nicosia, chief executive of Allenberg Cotton, the world's biggest cotton merchant.

Meanwhile, there have been problems on the demand side as well with Chinese imports from January to June falling 32%. Lower-priced polyester has expanded its market share at the expense of cotton. And now with prices correcting buyers are unlikely to be interested in building cotton stocks.

However, Nicosia suggested that cotton does not have much further to decline. Although he warned the industry to be prepared for another year of huge swings.

Meanwhile, polyester has yet to react to developments in cotton. Prices have remained firm based on the strength in raw material purified terephthalic acid (PTA) and monoethylene glycol (MEG) markets.

But some polyester producers have started expressing concern and expect polyester prices to also fall in the coming months. Cotton pulled up polyester last year and there is nothing to suggest that the reverse cannot happen.

By Malini Hariharan

Optimism has returned to the Indian polymer market fuelled by a sharp recovery in prices and buying sentiment over the last few weeks across Asia.

The talk these days is mainly about tightness in availability of polyethylene (PE) and polypropylene (PP) and when producers will announce the next price hike.

Supply is tight because of a shutdown at Haldia Petrochemicals and continued low operating rates at Indian Oil Corp (IOC). IOC is running its cracker at only 60-70% beause of technical issues. As a result, operations at the PE and PP plants have also been affected. The company is widely expected to shut its cracker in September although an IOC source says the exact schedule has yet to confirmed.

In polyvinyl chloride (PVC), a good monsoon has triggered hopes of resurgence in buying from September.

More than 70% of PVC is used for manufacturing pipes that are mainly used in for irrigation in the agriculture sector. A good monsoon should boost farmer incomes and demand for pipes.

The swift rise in polymer prices has come as a pleasant surprise to sellers but some are already wondering if prices have moved up too fast. One trader predicts that prices will continue to rise for another 2-3 weeks before the market once again slows down.

Macro-economic conditions continue to point towards a difficult year. The Indian government has yet to win its war on inflation, currently running at around 9%. Interest rates have been increased 11 times over the last 15 months with the most recent increase of 50 basis points announced earlier this week.

Analysts have been quick to predict a further slowing down of industrial activity with sectors such as auto and construction likely to be hit the hardest. This will surely have an impact on the petrochemicals industry.

Meanwhile, the dismal state of the polymer market in the last quarter is evident in the results of Reliance Industries for the April-June quarter.

The Indian refining and petrochemical major was able to post increases in sales and profits but this was mainly due to the strong performance of its refining business.

Petrochemical sales volumes increased but the company was forced to export higher volumes on persistent weakness in the domestic market. For instance, polypropylene (PP) exports by Reliance were up 81% year on year at 248,000 tonnes.

In a presentation to the financial community (available here), the company estimated that Indian demand for PP contracted by 4% in the last quarter while polyethylene (PE) was down 1% and PVC declined 2%.

Producers are still holding on to positive demand growth forecasts for the full year. But for this to materialize the current momentum in markets will have to be maintained for another few quarters which in turn would require positive developments on the economic front.

By Malini Hariharan

The latest accident at Formosa Petrochemical Corp's (FPCC) refinery at Mailiao, Taiwan, on Sunday is adding to the bullish sentiment in markets for key petrochemicals. A fire in the propylene recovery unit has forced the company to close its 540,000 bbls/day refinery and related facilities, including two residual fluid catalytic cracking units (RFCC) and an olefins conversion unit, for a safety inspection. FPCC has also declared force majeure on all petroleum products.

Styrene hit a 3-year high of $1,600/tonne CFR China yesterday amid concerns that the government would ask sister company Formosa Chemical and Fibres Corp (FCFC) to shut a 600,000 tonnes/year plant, reports ICIS news. Two other styrene plans operated by FCFC have been shut since May following a fire at Formosa Petrochemical's No1 cracker.

Paraxylene (PX) prices rose initially by around $60/tonne with selling indications crossing $1,650/tonne. But prices corrected yesterday by $5-10/tonne on weaker crude futures.

FCFC continues to run its No2 and No3 PX plants but may have to close them for government mandated safety checks. The No1 aromatics facility has been shut since 13 May.

Sentiment in the polypropylene (PP) market strengthened further with confident Chinese distributors raising their offer levels in anticipation of a disruption in supplies from Taiwan, reports ICIS news.

Formosa Plastics Corp (FPC) and FCFC have suspended offers for PP and polyethylene (PE) from their plants in Taiwan. The two companies have a total capacity for 854,000 tonnes/year of PE and 350,000 tonnes/year of PP.

FPCC has also decided to hold to its planned maintenance shutdown schedule of its 1.1m tonnes/year cracker for 45 days from 15 August. It has also not set a date for the restart of its No1 cracker.

"There is mad scramble in Taiwan to import cargoes. Before the Formosa accident there were questions on whether the rise can be sustained through August but now things have changed," said one trader. He now expects markets to remain firm until September as closures by Formosa coupled with maintenance shutdowns are likely to keep markets tight.

The Formosa group of companies are in deep trouble with the government asking for a shutdown of all plants at the huge Mailiao complex in stages to carry out safety checks. The inspections will have to be monitored by local or international experts.

There have been seven accidents in the last twelve months and two fires have taken place at the Mailiao complex at less than a week's interval in July.

The company plans to negotiate with the government as a shutdown of the complex will have implications for the entire Taiwanese economy.

But it is not clear if the government will be in any mood to listen. The country's Industrial Development Bureau (IDB) has ordered the Formosa Plastics Group to provide a detailed report within a week on safety measures that the company plans to take at its plants.

"Unless FPG makes an overhaul of its operations and is able to convince the taskforce that it is ready to resume operations, the suspension will continue," he said," warned IDB's director general.

A second official from the IDB blamed the accidents on poor maintenance as a result of cost cutting by the group over the last one year.

And although FPCC's chairman and president have resigned, this is unlikely to satisfy angry residents in the Mailiao area. They are now planning a rally on 4 August to reiterate their demand for an immediate halt to all operations at the Mailiao complex.

By Malini Hariharan

The margin pain experienced in Asia in the last quarter is clearly evident in the recently released results by South Korean majors Honam Petrochemical and LG Chem.

Honam's operating profit for Q2 declined 36.8% from the previous quarter to Won36.1bn. LG Chem's operating profit was down 7.2% at Won775.4bn while its petrochemical segment saw a 11.9% decline in profit to Won642bn.

High butadiene and acrylontirile prices and weak demand from the information technology industry hit LG's key acrylonitrile butadiene styrene (ABS) business which accounted for 30% of the petrochemical division's operating profit in the second quarter. Contribution from the naphtha cracker and polyolefins business remained stable at 26% despite weak product prices and LG attributed this to the special grades that it offers.

Honam's results were dragged down by the poor performance of affiliate companies KP Chemical and the recently acquired Titan Chemicals.

Analysts at Woori Investment & Securities estimate that earnings at KP declined 50% due to a sharp narrowing of the spread between purified terephthalic acid (PTA) and mixed xylenes (MX). KP is a standalone PX, PTA and polyethylene terephthalte (PET) producer and has to buy MX feedstock for its operations.

Earnings at Titan also declined mainly because of inventory valuation losses.

Honam was saved by the strength in butadiene and monoethylene glycol (MEG) markets. Butadiene prices have been in the $2,750-4,150/tonne range because of a structural shortage of the product globally.

Woori estimates that Honam's per tonne EBITDA from butadiene was ten times the average EBITDA for polyethylene (PE), polypropylene (PP) and MEG. With butadiene projected to remain short for the next couple of years Honam will continue to benefit and butadiene's contribution to the company's EBITDA is likely to touch 50% in 2012.

Both LG and Honam have predicted a stronger Q3. The price increases seen since the beginning of July certainly point in this direction and many market players are fairly confident that markets will remain firm in August and September supported by plant turnarounds and shutdowns like the one at Formosa Petrochemical in Taiwan.

But the consensus for the fourth quarter is that there is still too much macroeconomic uncertainty to make a prediction.

by Paul Hodges

The blog is a great believer in the predictive power of the retail sector.

Wal-Mart and Tesco were the first to spot the downturn in the summer of 2007, a year before it became obvious to everyone else.

Now Wal-Mart's problems are providing some important messages about how companies need to adjust their strategies to survive as we transition to the New Normal:

• Financially-driven strategies are a dead end
• Focusing on Gross Margin loses sales

As the chart from the Wall Street Journal shows, Wal-Mart has increased Gross Margin consistently since the Great Recession began. But it has also suffered 9 quarters of declining US same-store sales. This is the key metric for any retailer.

As Wal-Mart's COO, Bill Simon has told analysts, "I think the gross margin could be an impediment to sales growth." The financial focus meant less attention was paid to customers' changing needs:

• Wall Street loved Wal-Mart's removal of low-priced, low-margin items
• But customers simply went elsewhere for their bargains

In turn, this has led to a bigger problem.

Many consumers are now living from pay-check to pay-check. They simply can't afford to buy large sizes, even though these offer better value. As a result, they prefer the 'Dollar Stores', where they can cover their basic needs for the week ahead.

Wal-Mart is still the world's largest retailer. But it will now have to move quickly, to catch up. Chemical company boards need to review their own strategies, to ensure they are not making the same mistake.

by Paul Hodges

Today's 419 point fall on the Dow Jones Average, and $6/bbl fall in WTI crude oil prices, may not be just another example of the wild volatility that has come to seem normal in financial markets.

It may also mark the end of an era.

Since 1994, the US Federal Reserve has used all its resources to support the stock market in times of strain. This took it well beyond its official mandate of fighting inflation and supporting employment.

Instead, it meant interest rates were lowered, and liquidity provided, any time the market experienced a major sell-off. It created the dot-com bubble in 1999-2000; the subprime housing disaster; and more recently the bubble in energy and commodity markets.

Today, for the very first time in 15 years, 2 senior US Federal Reserve Governors have spoken out against this policy:

• Philadelphia Fed chief Charles Plosser said taking action after stocks tumbled "signalled that we are in the business of supporting the stock market."
• Richard Fisher, the Dallas Fed chief, said the Fed "should never enact such asymmetric policies to protect stock market traders and investors."

It remains to be seen whether this change of policy becomes permanent. There are very powerful forces, not only on Wall Street, ranged against it. Will the Fed really do nothing, if today's falls continue next week?

But if it does, then financial markets will be quite different in 5 years time:

• Markets will not be protected from their own follies
• Investors who cannot evaluate credit risk will lose money
• Commodity prices will be driven by fundamentals of supply and demand
• Computerised high frequency trading will disappear

Unfortunately, it is almost certain that the path back to reality will be extremely painful. 15 years of Fed 'bubble-blowing' will take a long time to put right. But if Plosser and Fisher really mean what they say, then Fed policy is indeed headed Back to the Future.

GDP growth figures in Europe and the USA have shown virtually no growth in Q2, whilst China is clearly also slowing fast.

It is hard to believe that even today, some analysts are still arguing that a new Supercycle is now underway.

The blog remains convinced that we are in transition to a New Normal, not a new Supercycle.

Next week sees the publication of chapter 4 of its new eBook, 'Boom, Gloom and the New Normal', co-authored with Paul Hodges.

This Chapter is titled 'Where we are Headed'. It offers 10 predictions about how the world will look in 2021. We believe it will become essential reading for anybody who is concerned about where we are headed in the next few years.

By Malini Hariharan

Asian petrochemical markets continue to face downward pressure on concerns about the health of the global economy. Market sentiment for most products remains poor with buyers in no rush to resume purchases.

Polyolefin markets closed last week on a weak note. Prices of low-density polyethylene (LDPE) and polypropylene (PP) dropped $10-40/tonne last week across the region, reports ICIS pricing. Linear-low density PE (LLDPE) and high-density PE (HDPE) prices were stable but buying sentiment for the products was weak.

There was little support coming from ethylene and propylene markets. Propylene prices were assessed higher for the week on tight regional supply but buyers stepped back on Friday after a sharp fall in equities and crude oil. Ethylene dropped $10-40/tonne in Southeast Asia with buyers unwilling to enter markets at a time of great uncertainty.

Benzene and styrene markets were also similarly affected with prices of both proudcts sliding $20-40/tonne.

The only exceptions to the trend were paraxylene (PX) and purified terephthalic acid (PTA) as news of an impending shutdown of Fujia Dahua's 700,000 tonnes/year PX plant spread in the market. The company is at the centre of widespread public protests after a typhoon hit a wall at the plant site. This raised fears of a PX spill prompting local residents to demand closure and relocation of the plant.

However, the strength in the PX and PTA markets is under question given the global economic uncertainty. The news today from the Asian stocks markets is bleak with declines recorded at all major bourses today. Brent crude dropped by more than $3/bbl on news of Libyan rebels capturing Tripoli raising hopes of an end to the country's civil war and a resumption of Libyan oil exports.

If the trend continues, optimism will be a scarce commodity in petchem markets this week.

By Malini Hariharan

Asian polyolefin producers confront yet another challenging week.

The macro environment suggests that implementing price hikes for September cargoes will be difficult. Stock markets around the world continue to be jittery with concerns about a US recession and debt problems in Europe still in the forefront.

Support from oil also appears uncertain. Prices softened yesterday in reaction to developments in Libya where rebels have finally captured Tripoli. The expectation is that Libya will quickly resume oil exports although this may take months to materialize as damaged infrastructure will first need to be repaired.

China's manufacturing story continues to disappoint. The preliminary HSBC China Manufacturing Purchasing Managers Index for August at 49.8 is higher than analyst expectations and above the July figure but is below 50 indicating a contraction in activity.

The country's vice commerce minister has acknowledged that China's foreign trade is facing slow external demand and pressure from surging costs.

Polymer plant turnarounds in Northeast Asia are expected to keep product availability under check and producers will probably be banking on this factor to drive price stability. In polypropylene (PP), producers will also be looking at the strength in propylene prices which were up $20-40/tonne last week.

But what matters in current markets is sentiment which is still very weak. Polymer buyers are understandably in no rush to make large volume purchases. And only the very brave traders will be willing to take a long position.

"Buyers are very hesitant; crude is down and there will be more price corrections if crude continues to fall," admits one producer.

Polyolefin prices have fallen by $30-50/tonne in the last two weeks, a swift correction to the five weeks of gains recorded since early July. Producers will be very lucky if prices can be maintained at current levels.

By Malini Hariharan

The Chinese government's efforts to control inflation are showing no signs of yielding results.

The National Development and Reform Commission (NDRC) admitted yesterday that the government was finding it difficult to achieve its full-year inflation target of below 4%. It cited high global commodity prices as a major factor driving up local production costs.

This added to earlier official warnings that the annual inflation target would likely be missed.

Consumer price inflation in July hit a 3-year high of 6.5% while the producer price index jumped 7.5%. Food costs soared 14.6% as the price of pork, a staple food, increased by nearly 57%.

Although some analysts expect a slight easing in inflation from August the government does not seem to share these expectations.

Late last week the People's Bank of China reportedly took fresh measures to tighten liquidity, asking banks to include their margin deposits (collateral deposited in banks against LCs and letters of guarantee) in the reserves required to be kept at the central bank. Analysts expected this move to reduce liquidity by about Yuan 800-900bn ($125-141bn).

This could further hamper chemicals trade. As we have discussed before on the blog, chemicals traders have struggled since late last year to source credit.

New reserve requirements would also put more pressure on small and medium-sized enterprises (SMEs) which make up the bulk of China's chemicals and polymer buyers.

The deputy director of the China Association of Small and Medium Enterprises warned in this interview that if inflation and power shortages continue, 40% of SMEs in Zhenjiang would go bankrupt next year.

This places the government in a difficult position. On the one hand liquidity controls have become a must to tackle inflation and on the other hand SMEs, the lifeline of the country, need to be supported.

Some economists think that the government may take measures to ease credit to SMEs, as has been rumoured in chemicals markets for several weeks.

But any such measures would have to be carefully targeted and well-policed, a sales and marketing executive with a global polyolefins producer told the blog in July.

It is often the case in China that lending intended for one purpose gets diverted elsewhere. For example, LCs opened to ostensibly buy polyethylene (PE) are being used to complete property deals because of restrictions on lending to the property sector, the senior source added.

Deutsche Bank's economist believes that the government may start loosening monetary policy in the fourth quarter as growth in the US and Europe slows and global commodity prices start easing.

But not everyone is convinced and recent developments suggest that a loosening of the country's monetary policy is unlikely to take place soon.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

By Malini Hariharan

On a day when Asian stock markets tumbled on fresh worries about Europe's debt problems and a wider economic slowdown, it was not surprising to read about the downbeat mood at this year's European Petrochemical Association's (EPCA) meeting in Berlin.

Reports by the blog's colleagues on ICIS news indicate that economic concerns and its impact on demand were a common element across many petrochemical markets.

In acrylonitrile, one trader described the current European market as "one of the worst periods for producers as they keep losing volume and money". Offtake from the ABS sector has been low as there is lack of clarity on when things will pick up in the current economic climate.

The views were echoed in a nervous polyoelfins market where players were hoping for stability despite falling prices in Asia.

Producers and consumers across the phenol chain said economic uncertainty was making it almost impossible to predict volumes and prices for 2012.

"Asia is weak and Europe is swimming in phenol, in fact producers are having difficulty getting rid of it," said one buyer.

The ethanolamines market was characterised by an over cautious atmosphere with customer purchasing the bare minimum leading to concerns this could turn into a self-fulfilling prophecy.

"If players stop buying, anticipating a decrease, it will come," said one ethanolamines producer on the sidelines of EPCA meeting.

The president of Huntsman's performance products division, which includes agrochemicals, coatings and polymers including epoxy curatives, cosmetic items and polyurethanes (PU), acknowledged that demand growth was slowing down.

"The customers all have apprehension about what is going to happen through the balance of the year and when it [the economy] is predicted to come back.

"I think everybody is recognising that it is going to be weak through the balance of the year," he said.

But others were more optimistic and played down the current market turmoil.

Tom Crotty, INEOS board director, was of the opinion that the slowdown in demand and fall in margins over the last few months was a "fairly natural adjustment" to mid-cycle conditions.

"Basic demand is pretty steady," driven by major western economies that have recovered following the 2008-2009 crisis and are "just ticking over", said Crotty.

Current petrochemicals demand is more solidly based, he said, adding: "I think 2012 will be a pretty good year".

A senior executive at Eni's monomers, aromatics and intermediates division was positive that were no elements to point to a crash but companies preferred to remain cautious.

Companies are wary of being left with too-high inventories at the year-end, he added. "What is missing is the visibility for the next part of the year."

He was optimistic that there would be less product in petrochemical supply chains at the start of 2012 when demand would be at a "more normal level".

Its good to meet challenging times with optimism but expecting demand to return to 'normal' in just a few months may be stretching things too far.

By Malini Hariharan and John Richardson

The spread between high-density polyethylene (HDPE) film grade and linear-low density PE (LLDPE) prices in Asia has steadily widened over the last five months to hit a high of $110/tonne, raising questions on how long this can continue.

LLDPE has been consistently cheaper than HDPE since May, a reversal of a trend seen since August 2009 when LLDPE turned expensive.

The main reason for the fall in LLDPE prices is ample availability from new plants and also older swing plants, which maximised LLDPE output to take advantage of the high prices seen through 2010. Improved availability of co-monomer butene-1, which was a major constraint in 2009-10, also helped producers ramp up LLDPE production.

The increased availability has come at a time of weak demand. Additionally, prices in China have also been negatively influenced by the persistent fall in futures prices on the Dalian Commodity Exchange as a result of the global economic turmoil.

The situation in China has worsened to a point where local producers have been pricing LLDPE below import parity levels to keep imports under control. The country had imported around 274,000 tonnes of LLDPE in August, 59% higher than in July.

Another reason for the surge in LLDPE imports - along with greater availability from Middle East plants - is reportedly because material stored in bonded warehouses for several months was cleared from those warehouses in August. This was due to traders cutting their losses as a result of the declines in pricing.

According to the blog's colleagues on ICIS pricing, LLDPE domestic prices were at CNY 9,500-9,750/tonne yesterday. LLDPE prices into China were assessed at around $1,235/tonne cfr China main port last Friday, which works out to a landed price of approximately CNY9,960/tonne.

Swing producers have already started contemplating shifting their production focus to HDPE, but it is likely to take a few weeks or months for the impact of such a move to influence markets.

Until then, ample availability and negative sentiment will continue to exert downward pressure on prices of LLDPE and also other polymers.

The news from China remains depressing with reports circulating this week about fresh difficulties in issuing letters of credit (LC).

In a policy introduced last month as part of the government's credit tightening measures to curb inflation, five state-owned commercial banks were forbidden to issue LCs with 30-90 days credit from 20-30 September in Ningbo. There has been no official confirmation yet on whether this regulation will be relaxed in October. If it continues, it is likely to further squeeze small and medium-sized enterprises (SMEs) as deals can only be settled in cash or LC on sight.

The blog heard last night how the restrictions on LCs are also affecting the Shanghai region.

The reason for the reduction in the availability of LCs is apparently because the banks have to include LCs on their register of loans. As a result, trade finance is for the first time being used to calculate their reserve requirements. The minimum reserve requirement - a percentage against the total loan book - has been constantly increased over the last 12 months as China fights inflation.

Developments in Wenzhou, Zhejiang, where debt-burdened owners of small factories have fled and factories shut, have caught national attention. The city council has estimated that one fifth of the 360,000 SMEs in the city have stopped operations due to financial difficulties. The hope now is that the central government will intervene to step up support to troubled SMEs, following the limited help already provided in Zhejiang province and Shanghai city.

By Malini Hariharan

The going has been good for the refining industry this year but analysts are predicting a weaker 2012 and 2013.

UBS for instance, expects complex refining margin in Asia to fall 20% in 2012 from the average $8/bbl forecast for 2011. And it expects 2013 to be even weaker with average margin of $6/bbl. The key reasons for the downtrend in margins are:

* Addition of new capacities mainly in China and India. UBS expects nearly 1.1m bbls/day of capacity to be brought onstream in 2012-13

* Full recovery in operating rates in Japan after the March earthquake and tsunami. UBS estimates that around 470,000 bbls/day of refining capacity was lost in Japan in 2011 which is around 10% of the country's total refining capacity. Most of the affected refineries have restarted but two (Cosmo Oil in Chiba and JX Nippon at Sendai) are expected to resume operations only in the first quarter of 2012.

* Depressed demand growth as a result of a weaker global economy. UBS projects that Asian demand is likely to increase only by 900 000 bbls/day during 2012-13.

The average operating rate in this region is projected to decline yo 85.9% in 2012 and 85.3% in 2013 from 86.6% in 2011.

The last quarter was an unexpectedly strong period with complex refining margins at $9.2/bbl as firm demand from China and Japan coincided with unplanned shutdowns like the one by Formosa Petrochemical in Taiwan. The company was forced to shut its refinery in early August after an accident. It has since restarted production but operating rate is still below 100%.

The good times for Asian refiners are not expected to last very long. But the only consolation is that margins are not expected to fall to the bottom of the refining cycle experienced in 2009. This was the year when the average industry operating rate dropped below 82% and complex margins touched a low of $3.7/bbl.

By Malini Hariharan

In yesterday's post the blog made a reference to the difficulty in settling the October Asian contract price (ACP) for paraxylene (PX).

Wide differences in price expectations have held up negotiations with buyers rejecting producers' initial efforts to implement a steep $105-145/tonne hike in October contracts to $1,760-$1,800/tonne cfr Asia.

Buyers, citing weak purified terephthalic acid (PTA) markets and the fall in spot PX prices, have instead pushed for $1,500-1,550/tonne cfr Asia. PTA prices have fallen 7% since September with tight credit in China and volatile global economy dampening buying interest.

The lack of consensus has resulted in problems in settling business as the ACP is widely used in contracts across the region, explains Bohan Loh, the ICIS pricing editor for PX.

CBI Consulting estimates that around 20% of PX contract sales in Asia are 100% based on ACP while about 60% of contracts use a 50:50 mix of the ACP and spot prices.

The impasse in Asia has had a wider impact with players in Europe and the US unable to agree on October contracts in the absence of a clear price direction from Asia.

Asian buyers and sellers are now scrambling to find an alternative number to use in their October contracts. The crisis has also prompted critics of the ACP to call for a better mechanism - one that will also take into account feedstock costs and profitability of derivative purified terephthalic acid (PTA makers.

This demand has been made before but with both sides keen to emerge as winners it is hard to see a profit-sharing arrangement in this business.

Controversies are not new to the ACP mechanism and its demise has been predicted a number of times. The mechanism has survived and remains one of the few negotiated contract price for petrochemicals in Asia.

But with PX supply projected to remain tight in the foreseeable future this status is likely to be repeatedly tested in the coming years.

By Malini Hariharan

Asian spot prices for polyester raw materials continued to fall last week as concern on lack of buying support from the China market where concerns about the health of the global economy dampened sentiment.

Purified terephthalic acid (PTA) prices declined to a 11-month low dragged down by weak demand and falling values for paraxylene (PX), writes Judith Wang on ICIS news. Spot prices were at around $1,100 cfr China late last week.

Developments in the PTA futures market have also not helped as prices on the Zhengzhou Commodity Exchange dropped by 6% last Thursday on concerns about the Euozone debt crisis and the weak US economy.

In the physical market, buyers took a backseat nervously watching developments. The textile industry is reported to have seen a decline in export orders and the sales to output ratio at polyester plants has fallen to 50-70% in the last month from around 100% in early September.

China's credit tightening measures also affected trading activity and some traders expected the situation to worsen in the fourth quarter.

Asia's other big market, India, has also failed to lend support to producers. PTA demand in the country has slowed down ahead of the Diwali holidays this week and some polyester producers have reduced production.

Meanwhile, spot PX prices softened by over $50/tonne to around $1,560/tonne cfr China last week while the October contract price remained undecided. Buyers, worried about the squeeze in margins, are looking for further reductions although producers are resisting as supplies are tight. But this may well be temporary as some PTA producers are reportedly eyeing operating rate cuts.

By Malini Hariharan

A spurt in polyethylene (PE) and polypropylene (PP) buying in China over the last few days has raised hopes among sellers that the market has bottomed out and prices should rise in the coming weeks.

After hand-to-mouth buying for the last three months buyers are said to be replenishing stocks which should enable producers to tide through November and December.

However, sustainability of a recovery is still doubtful given rising polyolefin exports from the West and macroeconomic developments.

The latest data from Asian countries indicate weak manufacturing activity with exports hit by poor demand from the West.

China's official purchasing managers' index (PMI) for October fell to 50.4, its lowest level since February 2009 although the HSBC index came in at 51, up from 49.9 in September.

The new export orders index dropped by 2.3 percentage points from September to 48.6 in October. The new orders index fell by 0.8 percentage points to 50.5, while the production index dropped by 0.4 percentage points to 52.3.

The PMI, which is a measurement of the monthly performance of China's factories, is based on a survey of 820 manufacturers across 20 industries. A reading below 50 indicates contraction in manufacturing activity while a reading above that level indicates an expansion.

Analysts interpreted the data as yet another sign of moderation in China's economic growth. But some also predicted that the government would not hike interest rates further as it attempts to balance conflicting objectives of controlling inflation and maintaining growth.

Among the other Asian countries, Taiwan was the worst performer with the October PMI touching 43.7, the lowest level since January 2009. South Korea's PMI for October was at 48, the third straight month of contraction although at a slower pace than September.

Restocking activity is likely to provide some respite to producers for the rest of this quarter but it is probably too early to predict that prices have hit the floor.

By Malini Hariharan

News of operating rate cuts is pouring in. Crackers in Japan, Taiwan and parts of southeast Asia have been running at reduced rates of 80-90% in October. But now there is also talk of rate cuts at crackers in South Korea.

More importantly, a Sinopec source confirmed yesterday that the Chinese major would be running its crackers at around 90% in November, down from an average 95% in October, writes the Peh Soo Hwee on ICIS news.

The company operates 13 crackers either on its own or through joint ventures.

Besides weak markets the rate cuts are also because Sinopec is under pressure to increase production of diesel which is running short in China. The company will be producing more diesel at its refineries which would result in lower production of naphtha and other middle distillates.

The cuts come at a time when naphtha-based ethylene margins in northeast Asia entered into negative territory for the first time since October 2009.

And the rate cuts are also extending to polymer plants.

Korea Petrochemical Industry Co has already decided to cut production at its polyethylene (PE) and polypropylene (PP) plants because of squeezed margins.

In Thailand, PTT Global Chemical is said to be considering shutting a 400,000 tonnes/year linear low density PE (LLDPE) plant for two weeks because of weak domestic demand.

Producers in Europe too are on the same road.

Ineos will be joining Dow Chemical to run all its low density PE (LDPE) and LLDPE plants at minimum rates for the rest of the year, reports Linda Naylor on ICIS news. Production of high-density PE (HDPE) will also be cut to 'meet the reality of demand', said a company source.

Whether these operating rate cuts in Asia and Europe will be sufficient to push markets into balance remains to to be seen.

By Malini Hariharan

It is not surprising to read that at a time when many producers around the world are cutting production, cost-advantaged producers in the Middle East will be maintaining operations at their polyethylene (PE) and polypropylene (PP) plants.

Producers in the region with access to cheap feedstockts are expected to run their plants at full for the rest of the year, writes Ong Sheau Ling on ICIS news.

Producers are instead cutting prices to move volumes, especially for polyethylene (PE), posing a big problem for high-cost producers in Asia.

Linear low density polyethylene (LLDPE) film of Saudi origin is reportedly being sold at $1,140-1,160/tonne CFR China, $20-40/tonne cheaper than South Korean product.

A weak home market has also not dampened producers' enthusiasm. November polypropylene (PP) prices have fallen by around 7% in the Gulf Cooperation Council (GCC) market to match those in China.

This move on part of Middle East producers raises question on how quickly markets will return to balance. Unless there is a significant recovery in buying, especially in China, deeper cuts might be needed in Asia and elsewhere in the world.

By Malini Hariharan

Polyolefins prices in the key China markets inched up last week thanks to an uptick in buying activity.

Prices of high-density polyethylene (HDPE) blow moulding and film grades moved up $20/tonne while linear-low density PE prices were up $30/tonne, reports ICIS pricing. Polypropylene prices were also up $10-20/tonne

However, opinion continues to remain divided on future market prospects. Some players are confident that the upturn in China will boost sentiment and buying across other markets in Asia and the also the Middle East. They also believe that increased production in the Middle East will be more than compensated by turnarounds and operating rate cuts in Asia which should tighten inventories. PP prices, for instance, are expected to move up further in the coming weeks because of limited availability from China, Japan and South Korea.

But not everyone is convinced given the Eurozone debt crisis. Falling prices in the Europe and the US are also likely to spur exports into Asia. In the US, PE contract prices for October have fallen by 5 cents/lb ($110/tonne).

There is already concern of downward pressure on LDPE and LLDPE as a result of increased offers from Europe.

Support from feedstocks also appears uncertain. Propylene prices inched up last week but there was no consensus of further upward movement. Ethylene prices continue to fall in Northeast Asia with the fob Korea hovering at around the $1000/tonne level.

It's a chicken and egg situation, with ethylene market players looking at derivative markets to point to future price direction while PE players are hoping that cracker operating rate cuts will push up ethylene and PE prices.

By Malini Hariharan

The blog has been listening to some interesting presentations on the polyester chain at the Indian Petrochem - 2011 conference in Mumbai.

The global economic slowdown does not appear to have dampened prospects for polyester demand.

"Demand for polyester grew by 5.6m tonnes last year which was atypical; we all thought that growth in 2011 would be modest but we are again looking at a figure of over 4m tonnes," said Philip Gibbs, chairman of PCI Xylenes & Polyesters.

Global polyester production is likely to touch 60m tonnes this year and grow to around 80m in 2015, he estimated.

However, a rapid addition to capacity, especially in China, would drag down operating rates from around 80% to 70% during this period.

The industry will have to cope with oversupply for the next two to three years, he added.

Asia, led by China, India and Indonesia, will drive global growth.

Gibbs highlighted that Asia is moving away from the traditional polyester consumption pattern of relying on textile exports to the Americas and Europe for growth.

"Seventy five percent of what China produces stays within the country; the domestic market is a driver for polyester. China is only now getting going and has another five to eight years of growth. It still has to get the wider population buying polyester," he said.

Polyester is also expected to expand its share at the cost of cotton.

"Globally, fibre consumption is growing around 1.5times GDP; so if GDP expands by around 6% the world will need about 5m tonnes of additional fibre every year," estimated Rajen Udeshi, president of the polyester chain at Reliance Industries.

But cotton availability is unlikely to grow significantly as competing crops offered better value to farmers and also because food security is more critical for governments.

"So global cotton production is likely to remain in the 23-24m tonnes range and the incremental requirement will have to come from polyester. For this the world will need an additional 3.5m tonnes of purified terephthalic acid [PTA], almost 1.0-1.5m tonnes of paraxylene [PX] and 1.5m tonnes of monoethylene glycol [MEG] every year," he added.

However, an mentioned by the blog earlier what is worrying for players along this chain is the emerging imbalance as capacity additions in PX and MEG are lagging behind polyester and PTA.

PX availability is likely to be the biggest constraint.

"There are so many new PTA plants coming up in China; I have asked many of the companies if they are covered for PX and the normal answer is that everything is available for a price. But the answer is no as PX is sold on [long term] contractual basis," pointed out Udeshi.

What this means is that there is unlikely to be enough PX to run all the new PTA plants.

For MEG, all eyes are now on whether China's new coal-based projects based either on the methanol-to-olefins (MTO) or coal-oxalic acid-MEG routes are commercially successful.

By Malini Hariharan

Indian exports of benzene are set to rise over the next few years as new plants start up.

"India will remain in a net surplus position over the next five years and exports will continue, with [benzene] from western India moving to the Middle East, the US and Europe, and benzene from eastern India shipped to southeast and northeast Asia," said S B Dutta, Haldia Petrochemicals' senior general manager marketing, at the Indian Petrochem - 2011 conference.

India exported around 455,000 tonnes of benzene in 2010, up from 330,000 tonnes in 2008. Capacity during this period moved up from 1.1m tonnes/year to 1.25m tonnes/year, while demand in the country grew from 600,000 tonnes/year to 625,000 tonnes/year.

Nearly 475,000 tonnes/year of capacity is due to be added over the next three years, with new plants set to be commissioned by ONGC Mangalore Petrochemicals Ltd (OMPL), ONGC Petro-Additions Ltd (OpAL) and Reliance Industries.

Demand for major derivatives is growing at 5-10%/year, led by overall economic growth, but no major projects are on the horizon.

For instance, styrene demand is projected to grow from 470,000 tonnes in 2010 to 585,000 tonnes in 2012, and the entire volume will be serviced by imports as no styrene projects are in the pipeline in the country.

Demand for linear alkyl benzene (LAB), which accounts for 28% of Indian benzene consumption, is projected to grow at 5-6%/year in the next five years, but with no new capacity planned, imports are set to rise.

Phenol demand is expected to rise from 150,000 tonnes this year to more than 200,000 tonnes in 2015-2016. With local production running at around 70,000 tonnes/year, imports will account for about 60% of demand.

By Malini Hariharan

The last two weeks has seen a recovery in Indian polyolefins demand led by developments in China.

Prices of PE and PP have risen sharply and traders expect the uptrend to continue for the next couple of weeks as converters need to rebuild depleted inventories.

But unless buying can be sustained in the coming months producers face a year of zero or negative growth in consumption.

Take the case of polypropylene (PP). After two years of double-digit growth PP demand is projected to contract for the year ending 31 March 2012.

Estimates for 2011-12 are in the 2.3m to 2.4m tonnes range, well below the 2.6m tonnes demand recorded in 2010-11.

Demand from every major end-use segment has been affected, explains a local industry player. Raffia, the largest end-user, has been hit by a drop in cement production which is a result of a slowdown in construction industry.

Deceleration in the auto industry has hit PP copolymer sales. Car sales in October dropped 24%, the biggest fall since December 2000, with expensive loans and high fuel costs deterring buyers. Analysts are predicting that the situation is unlikely to change over the next few months.

Industrial growth is down to a two-year low and a recovery is likely to set in only when interest rates, which have been raised 13 times since March 2010, are brought down to reasonable levels.

When this will happen is still unclear as inflation is still a matter of concern.

By Malini Hariharan

The US is looking to introduce fresh measures targeted at the petrochemicals industry.

The specifics of the new sanctions are not yet available but the goal, says this report, is to bar foreign companies from doing business with Iran's petrochemical industry by threatening them with being banned from U.S. markets. US companies are already banned from doing business with Iran.

The sanctions are expected to be announced today and would build on measures that were introduced against Iran's oil and gas industry.

Europe too is likely to introduce similar measures at a later date.

The US move comes after an International Atomic Energy Agency (IAEA) resolution late last week expressing "deep and increasing concern about the unresolved issues regarding the Iranian nuclear program."

The new sanctions promises to create another round of problems for Iranian petrochemical producers who have successfully managed to do business around existing measures. The exception has been aromatic producers who have had to cut production to divert reformate for gasoline production after US sanctions on gasoline imports was introduced in 2010.

But other petrochemicals, including methanol and polyethylene, continue to be exported in large volumes with the help of Dubai-based traders. Countries like China also do not have any problem taking in Iranian product and it remains to be seen if China will accommodate to any new US measures.

Take the case of methanol. Iran overtook Saudi Arabia to emerge as the largest methanol exporter to China last year, exporting 2.1m tonnes. The trend has continued this year with exports of 1.7m during Jan-Sep 2011.

Iraninan companies had told the blog previously that they have adjusted to a life of sanctions with innovative ways of doing business. But with pressure from the US set to rise, a disruption in trade and further delays to new projects is very likely.

By Malini Hariharan

Asian butadiene prices are once again on their way up, rising over 20% in the last two weeks.

Prices last week were at $1,900/tonne cfr Northeast Asia, up from a low of $1,500-1,600/tonne cfr Northeast Asia in the week ending 11 November, reports ICIS news. And offers have crossed the $2,000 mark this week with producers confident of pushing through price hikes.

Market players had expected butadiene prices to rebound on the back of cuts in cracker operating rates in the region. The reduction in production was driven by weak markets for ethylene and propylene derivatives.

But affordability is a question as key butadiene derivatives are also performing poorly.

Spot styrene butadiene rubber (SBR) prices in China dropped this week on lack of buying support. Chinese tyre makers are said to be running at 80% as the auto sales have fallen in recent months.

SBR prices are retreating after rising by nearly 18% in the last two weeks.

Acrylonitrile butadiene styrene (ABS) too is under pressure with end-users showing no interst in resuming purchases. Exports of finished goods to the West has fallen and is unlikely to recover give the current economic climate.

So where does this leave butadiene? Buyers are no doubt hoping that the price rise will soon be arrested. But restricted availability could once again well help producers boost prices and profitability of naphtha cracking operations.

By Malini Hariharan

Economic data from India continues to disappoint. The economy grew at only 6.9% for the quarter ended September, the weakest pace in more than two years and below forecasts. Activity in the manufacturing sector slowed sharply as a result of high interest rates. The segment, which accounts for around 16% of the GDP, expanded by only 2.7%, well below the 7.2% growth recorded in the previous quarter.

Interest rates have been raised 13 times in the last 20 months to control inflation but it is stubbornly running at over 9%. A looser monetary policy would help stimulate growth but the move is unlikely until inflation falls to a manageable level.

The weak economy has already had an impact on domestic demand for polymers.

The rupee's steady slide against the dollar, nearly 7% in November, has also become a big problem for importers. This is the rupee's worst fall in the last 16 years.

In the diammonium phosphate (DAP) market, international suppliers have agreed on substantial discounts to Indian buyers to offset the devaluation of the rupee, reports ICIS news. While some market players are concerned that the move could set a precedent, suppliers probably have no choice as India represents about 50% of the DAP market.

But depreciation of the rupee is helping local producers giving them an opportunity to raise prices. Companies such as Reliance Industries have managed to push through three price hikes for polyethylene (PE) and polypropylene (PP) in the last three weeks.

The government is targeting GDP growth of 7.3% for the full year but even this could be difficult to achieve given the level of internal and external risks.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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 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 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 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

The last year has been rough for Indian polyvinyl chloride (PVC) and polystyrene (PS) producers with demand for their products showing almost no growth.

PVC consumption is likely to increase by only 1-2% year on year in the fiscal year ending on 31 March 2012, said S Gopal, managing director of Chemplast Sanmar at the PlastIndia exhibition and conference last week.

And if things don't go well in February-March, growth could slip in the negative zone, he cautioned. He expects demand to settle at around 1.9m tonnes for 2011-12

In polystyrene (PS), one producer expects demand to shrink by 3.5% to around 250,000 tonnes in 2011-12.

The economic slowdown, rising interest rates and depressed buying sentiment are some of the factors responsible for the slide in fortunes of both PS and PVC.

But producers are also blaming the unseasonal rains experienced in 2011.

"The low demand growth is mostly the result of an unusually heavy monsoon season," said Gopal.

The monsoon season in India is typically a time of low demand for PVC, as pipe-laying activity comes to a halt during this period. The pipes and fittings sector currently accounts for more than 70% of PVC demand in India, in contrast to the global situation, where this sector contributes only 40% to PVC consumption.

In PS, the rains affected the appliances segment, which accounts for about 40% of demand.

"It was a bad year for the industry. India had only 45 days of summer in 2011 as against the usual 145 days. Unseasonal rains affected demand for appliances such as coolers and refrigerators," explains a source from the local producer.

Another crucial factor for PVC was the fluctuation in the value of the Indian rupee. The rupee depreciated steeply against the US dollar in the last quarter of 2011, dampening buying interest, as imports became very expensive. India imports nearly 600,000 tonnes of PVC annually.

The setback for PVC and PS comes after a robust 2010-11 when demand growth was over 10%.

By Malini Hariharan

After years of waiting truck movement of petrochemicals from India to Pakistan has started paving the way for Indian companies to boost their exports.

Indian Oil Corp (IOC), which regularly exports polyethylene (PE) and polypropylene (PP) by rail to Pakistan, successfully sent its first consignment to Lahore last week from its petrochemical complex at Panipat, Haryana. Panipat is only about 400km from Lahore, a key polymer market in Pakistan.

IOC hopes to increase export volumes to 8,000-8,500 tonnes/month from 5,000-6,000 tonnes/month at present.

"Exporting via road is more cost-effective. Movement by rail is limited by the availability of wagons; we will now be able to send larger volumes," says a company source.

The start of road trade represents a big opportunity for Indian producers based in the north. Pakistan's polyolefins demand, estimated at around 300,000/year for PE and 300,000/year for PP, is entirely met by imports, mainly from the Middle East.

And given India's surplus in PP, Middle East producers are likely to face a challenge.

India is expected to export around 1m tonnes of PP in fiscal 2011-12. And the surplus will increase further after the commissioning of HPCL Mittal Energy Ltd's (HMEL) 440,000 tonnes/year plant in March or April 2012. HMEL's plant is located at Bhatinda, Punjab, near the border and Pakistan will be a main export market, says a source close to the company.

Besides polymers, IOC is also eyeing exports of other petrochemicals to Pakistan. The next product is likely to be purified terphthalic acid (PTA). Pakistan consumes about 500,000 of PTA of which 30% is met by imports.

By Malini Hariharan

Analysts are predicting a quick recovery for South Korean petrochemical companies after a dismal performance in the last quarter.

Honam Petrochemical's Q4 2011 sales were down 14.7% quarter on quarter at Won3,488 bn. Operating profit declined 59.8% to Won158.4bn.

LG Chem's sales dipped 4.8% at Won5,602bn while operating profit slipped 30% to Won506bn.

Among the other South Korean companies, S-Oil saw sales decline 18.7% in Q4 2011 to Won9,264bn while operating profit was 11.6% at Won411.8bn. SK Innovation saw sales decline 1.6% while operating profit was down 60.2% at Won 343.1bn

But analysts at Woori are predicting a sharp correction in earnings in profits in Q1 2012. Honam is expect to post a 78% quarter on quarter growth in operating profit to Won282.2bn thanks to strong butadiene prices.

Butadiene prices have crossed $3,500/tonne cfr Asia in response to maintenance shutdowns at Asian crackers.

LG Chem's 2012 sales and operating profit are projected to rise as the company is due to add volumes from new plants for acrylic acid (190,000 tonnes/year), superabsorbent polymer (72,000 tonnes/year) and bisphenol A (150,000 tonnes/year).

And they are also confident of a continued recovery in fortunes as petrochemical prices are likely to steadily improve through 2014 on tight supply conditions.

"We anticipate Honam enjoying long-term growth potential from both domestic cracker capacity expansion and its planned overseas business ventures in Indonesia and Uzbekistan," they said.

Honam has a stake in a joint-venture cracker project in Uzbekistan that is due to be completed in 2013.

S-Oil's operating profit is projected to climb 18.0% to Won485.8bn in Q1 2012 on strong oil prices and refining margins.

"With the Dubai crude oil price remaining strong in response to Middle
Eastern geopolitical risks, high oil prices have spurred petroleum product demand--the Asian complex margin now stands at around $12/bbl versus $8.2/bbl in Q4 2011," they said.

The strength in refining margins should also benefit SK Innovation. The company's operating profit is expected to rise 113% quarter on quarter to Won730.6bn.

Current market conditions support the positive view taken by analysts. But whether the conditions will last for the rest of the year is still open to debate.

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.