Asian Chemical Connections

No point obviously. As this report from Deutsche Bank Download file notes, the global skills shortage is not just in the west.
In the engineering sector, and perhaps this applies to petrochemicals, Deutsche Bank claims that the huge outpouring of Indian and Chinese graduates is grossly exaggerated; and it adds that the quality of graduates from both India and China can be pretty poor, meaning a great opportunity for western Europe - particularly Germany.
It's other conclusion, that the service industry boom cannot be sustained in India because of the skills shortage, is interesting. The route that India must therefore take, it says, is lots more manufacturing.
This is potentially tremendous news for petrochemical demand, again provided there are enough workers to run the plants.
But if India does embark on a huge build-up in manufacturing capacity, God help the environment.
I am already advising my 11-week-old son to buy a house on high ground. Soon I might need to suggest the Himalayas.

A boring topic to harp on about again I know, but this article from my colleague Nigel Davis from the Insight section of ICIS news supports what I have been saying for the past two years.
The industry has overbuilt, and despite all the optimism engendered by project delays and probably cancellations in Iran of No 11 Olefins and beyond, this is still, as Nigel says, an unprecedented wave of new capacity.
The reasons for this overbuilding are the easy liquidity that Paul Hodges of international eChem talks about in our commentary section, the optimism over sustained strong global growth and a continuing demand boom in China and India.
Nigel's report came out on the same day that Ben Bernanke's remarks sent stockmarkets into decline.
Imagine this: a combination of an unprecented wave of Middle East capacity, greater self sufficiency in China due to the large amount of capacity being built there and a US housing sector-driven recession that Bernanke's comments were interpreted as pointing towards.
This could be a great opportunity to pick up some cheap petrochemical shares and bankrupt companies in 2009 and beyond.

Will China relax the price controls that have led to wallopping great losses for domestic refiners, thereby justifying ExxonMobil's Fujian investment?
As we can see from this Bloomberg article, Exxon is pinning many of its hopes on these controls being relaxed. Does the US giant know something we don't or are they taking a punt?
All very nice to talk about China's demand growth for petrochemicals also being the driver behind the refinery-to-petchem project, but what about growing competition in an ever more crowded market?
Give me a call Exxon and tell me all your demand versus supply growth projections in detail, and give me an inside track on what's happening in Beijing over fuel pricing policy.
If that happens, flotillas of pigs (can a collection of pigs be called a flotilla?) will fly past my window.
Actually, don't call Exxon as that could be very dangerous - I am near Changi Airport in Singapore and so the pigs could get in the way of the flight path. Better to keep on feeding journalists unbacked-up arguments.

The consultants, traders and producers I spoke to last week insist that the current wave of new Chinese ethylene capacity due on stream in the current Five-Year Plan (2006-10), Download file
is more or less on track to be completed on schedule. Also see on these slides the ICIS insight Asia list of crackers after 2010 and the major PE and PP projects.
Unlike the Middle East, where project delays can run into several years, the Chinese have abundant manpower, engineering resources and cash to keep to their petrochemical time table.
There has been a lot of optimism from western CEOs recently, most notably Jeff Lipton of Nova Chemicals, over how delays to Middle East projects could extend the cycle.
But what will be the impact of timely start-ups in China? To what extent will these commissionings further erode the imports that have buoyed exporters for so long?
Sinopec and PetroChina is, apparently, discussing with the government over the next wave of crackers due on stream after 2010. Announcements are expected within the next 12 months.
On paper, the high density polyethylene deficit is due to remain at 2.5m tonnes up until 2012 with the polypropylene shortfall set to rise to 3.5m tonnes by 2011 from the current 2-3m tonnes/year. Will this prompt more investment by China or will the Chinese decide to let the Middle East meet the deficits? The Middle East is no longer just a PE player as the switch to mixed-feed crackers and the increasing use of the PDH process raises PP output.
What could this mean for global balances? Answers, please - and perhaps we can generate the world's first user-generated consultants report. All hail to Web 2.0....

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 the Middle East struggles to find labour and raw material supply with contractors' order books bursting at the seams, the Chinese seem to have no difficulty in executing their projects.
See below for detailed analysis of what's happening with the current wave of Chinese crackers. Suffice to say here that nearly all of China's cracker projects will be on time, unlike the Middle East where the delays are mounting.
Contractor markets are forecast to be tight until 2008--09. Could the Chinese be able to leverage their way into joint ventures in the Middle East before the market slackens by offering a one-stop shop of labour, equipment, contractors and financing?
Technology supply, marketing reach and cash have been the traditional means the foreigners have used to get their hands on highly competitive Middle East gas supply. Perhaps the Chinese might also offer lump-sum turnkey contracts plus a dollop of cash from one of China's state-owned banks with highly attractive lending terms, given that they are weaker on technologies and marketing.
The Middle East project builders would be, of course, happy and so would the Chinese government. Its priority is energy security, whether at the oil and gas or basic petrochemical level.

The collective sigh of relief was almost audible late last week when the Fed cut its discount rate - the rate banks charge each other for lending.

Action from other central banks, including the European Central Bank, could follow this week. Analysts also rate the likelihood of the Fed cutting its formal interest rate at its meeting next month at 50 per cent or more. This is the rate charged to companies and other non-bank borrowers.

But still, this credit crisis is not going to away that easily. See more detailed analysis below, but in short here, the implications could be:

*A weaker Chinese economy. Roughly one-third of China's GDP is dependent on exports and if the US goes into recession, this is serious. Many overseas chemical projects have been justified by estimates of persistently strong demand from China for imported chemicals that will be re-exported as finished goods. Sales of locally made chemicals would, of course, also suffer

*Unfunded projects backed by smaller private companies being shelved.

But a lot of capacity in the Middle East and China is too far advanced to be cancelled. In the Middle East, many of the projects already under construction might come on stream bang on time because the producers there can make money in any market conditions. Projects under construction in China start up on schedule because the government wants to gain greater independence from imports.

Let's hope this crisis goes away, but if it doesn't why on earth didn't the supposedly smart people who run the global financial system realise the dangers? Joseph Stiglitz, a genuinely smart guy, has been warning for years about the risks, which he outlines in this excellent article

Last night I was feeling a little mellow after consuming far too much ethanol (the French variety - a very reasonable bottle of Cotes du Rhone) when the idiots on CNBC began to rant on about this being 2007, which explained why were in the midst of potentially a global financial meltdown.
There was the global financial disaster of 1987 when the Dow Jones Industrial Average fell by 22.5% in just one day.
And, of course, everyone remembers 1997 - the year of the Asian financial crisis.
It occurred to me, in my ethanol-induced haze, that we should sack all the mathematicians, scrap all the complex computer models, drown all the analysts along with the economists, and my mother-in-law because she is an awful cook, for failing to spot something as obvious as the fact that bad luck always comes in threes and this is a third year with a seven in it - hence, the crisis could have been predicted. I could have not bought that bloody house in Australia and not listened to that financial adviser who told me to park my money in equities.
I am sober this morning, but I still think widespread sackings and drownings are in order.
What about the supposedly smart people at Goldman Sachs who fed numbers through their computers and estimated that the likelihood of this crisis occurring was once in 100 millennia? First off the short plank, I'd say, minus their bonuses.
Oh, and the by the way, as sevens are clearly worth avoiding like The Plague, here are some tips if you are a chemicals or oil trader:
*Do not buy naphtha as it's going to fall in price (ICIS pricing placed second-half October contracts at $664-667.50/tonne CFR this morning).
*Brent crude might be worth a punt as it has fallen below the evil $70.33/bbl to $69.49.
*Benzene - go short as it's $960-970/tonne FOB Korea
*And whatever you do, get out of toluene now as it's double trouble - $775/tonne FOB Korea
Now where's my rabbit's foot gone?

As Paul Hodges notes in his Chemicals and the Economy blog http://www.icis.com/blogs/chemicals%2Dand%2Dthe%2Deconomy/, China's Finance Minister quit this morning - either over his role in a sex scandal or because inflation and the stock markets are out of control.
Petrochemical demand growth has been booming in China because, as a bureaucrat put it shortly after WTO entry, "China is like an elephant riding a bicycle".
By that comment he meant that China had to achieve growth of at least 10 per cent year (peddle hard) to avoid a heavyweight crash. High growth has been viewed as essential to maintain social stability through creating sufficient new jobs to replace those lost by WTO accession and the constant drift of migrant workers from the impoverished countryside to the towns and cities.
But perhaps now, with inflation rising alarmingly and the stock market in the midst of an enormous bubble, the government really does want to cool the economy down instead of just paying lip service to this objective - it's current approach. Perhaps the calculation is that high inflation and the potential for a stock market collapse represent a bigger risk to social stability than a moderation of growth.
But if policies are introduced that cut growth by too much, every industry from petrochemicals to the overseas retail and auto giants that have staked so much on China will find their profits trimmed. Make sure you steer well clear of any passing bikes with elephants on board, therefore, the next time you are driving through Beijing.
All should become clearer in six weeks when the Communist Party Congress, which only takes place every five years, is held.

Standing in the queue for Starbucks (not McDonalds - no way, and my son's going nowhere near that place) it's so easy to opt for the half bucket-sized Grande option because, after all, we are all rich these days and anyway it costs hardly anything to "Upsize". Walk around Starbucks and you'll notice numerous Grande Lates have been left only half-drunk.
And why not buy yet another car, an even bigger one, or an even bigger house (maybe one that's been repossessed in the US?).
Also, thanks to the ferocious cost-cutting efforts of the likes of Walmart - made possible by the developing world's hugely competitive textile industry - clothing has become incredibly cheap.
Move upstream from your wrack after wrack of cheap shirts and the feedstocks - crude oil, heavy naphtha. mixed xylenes (MX) and paraxylene (PX) - are becoming tighter and tighter.
Oil is at record highs, new refinery building has been delayed by soaring construction costs and MX is becoming an increasingly attractive blend into gasoline.
The picture for plastics might be slightly different because of all the gas-based capacity being brought on stream over the next few year.
But the polymer still has to be shipped and/or trucked, meaning yet more pressure on crude-oil pricing.
"Governments should try to limit the amount of synthetic fibres and plastics being consumed through taxation because there simply aren't enough raw materials around," said a delegate at the ICIS/International eChem Asian Aromatics Conference which took place in Singapore this summer.
This would be political suicide, of course, and so what seems more likely is that only inflationary pressures can produce the desired moderation in consumption.
But what if inflation gets out of control - perhaps more likely after the recent interest rate cuts in response to the credit crisis?
Back to bell bottoms, Ziggy Stardust And The Spiders From Mars, Ted Heath and the three-day week and football tackles that were really tackles - meaning, greivous bodily harm. God bless you, good Old Norm'.

For three wonderful years, petrochemical producers have had the pricing power thanks to tight supply and demand balances and very strong growth economic growth.

Now with crude close to pushing past the pyschologically important $100 a barrel barrier and construction sectors in the West slowing down on the sub-prime crisis, the polyvinyl chloride industry in Europe has reported a sea change reports Nigel Davis of ICIS news.

Speciality chemical producers Rhodia and Clariant have both annnounced price rises. If they fail to achieve their targeted increases, it will be a further indication of the shift in dynamics.

It is too early to make a call on Asia. Maybe the economic decoupling that everyone talks about will leave producers here with the power to push through increases.

However, with naphtha in Asia at another all-time high yesterday of $888-890/tonne CFR Japan, any naphtha cracker operator would be bleeding money based on current product prices. Cost increases are necessary and so the next few weeks could be critical.

And nobody probaby needs reminding that from the second half next year, supply will begin to lengthen as new capacity is commissioned. We could face the perfect storm of persistently high feedstock costs, lower economic growth and longer supply.

Call me a bitter old cynic, but some of the talk in this ICIS news article about a government lending crackdown might be from a few traders taking positions.

But still, it does seem as if the government is taking some measures to restrict loan growth.

Earlier, it appeared unclear as to whether the restrictions would effect trade finance. Now it seems that quotas will set per quarter next year for total loan growth, whether it's trade credit or capital expenditure.

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 had heard a company saying it was moving up the value chain (or rather a Euro or a British pound these days), I wouldn't be writing this blog entry while smelling the wonderful aroma of pork sausages being cooked for my tea. Brown sauce and mash as well, of course.

Can Dow Chemical make a success of this often-mentioned strategy? See below for extended analysis.

If it cannot, the prospects for the US producer could be bleak in the long run

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.

If the refining industry is the tail that certainly does not wag the dog of oil exploration, where does that leave aromatics? Quite probably, the flea on the coat of the dog.

And it gets ever-more complicated and the risks keep multiplying for the industry

What would be the effect on aromatics if the Goldman Sachs prediction of $200/bbl crude over the next two years becomes true?

Benzene could face the twin squeeze of even higher feedstock costs and a big slug of new capacity.

The waning interest in biodiesel in Europe and ethanol in the US could also have implications for aromatics supply.

Perhaps in the case of the US, mixed xylenes and toluene supply won't end up being as long as had been predicted if there is a retreat from ambitious targets to boost ethanol production.

These are the kind of issues that will be examined during the DeWitt Asian Aromatics Conference in Singapore on 25-26 May.

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.

Now this is old but not widely publicised - Jurgen Hambrecht's comments during the BASF Segment Day Chemicals event which took place in London on 8 July.

Navigate down, click on the webcast, and listen to the Q&A session after Dr Hambrecht's presentation.

You can listen yourself, of course, but here is a summary:

The first question is about BASF's search for alternative basic chemical production.

"We are not only looking at crackers but also syngas leading to olefins," he says. This would give BASF the flexibility to use oil, gas, coal and natural products - i.e. biomass - as raw materials.

The chairman and CEO talks about how the Engelhard acquisition was partly driven by how an increase in catalyst capabilities would give BASF more options on basic chemicals production.

"Catalysts are crucial for the future of the industry," says Hambrecht, adding that they will reduce energy barriers that have hithertoo blocked alternative routes to making olefins and other upstream chemicals.

And in a remarkably strong statement, he states: "This will be very substantial, it will be decisive."

A lot can happen between R&D and commercialisation, but should we read into this that BASF is set to make a breakthrough that will be challenge the dominance of the Middle East in feedstocks?

What's the timescale? "Certainly five years out," says Hambrecht.

A blink of an eye in the great scheme of this things.

But what will happen if the oil price collapses to this research project and others like it?

A very interesting report by McKinsey (you can sign up free for their online newsletter which only takes a minute) expands on the theme of reverse globalisation which I talked about last week.

The cost of shipping a standard 40-foot container has tripled since 2000 and labour cost increases have risen by average of 19% per year in China compared with just 3% in the US.

The consultancy makes the point that you have to do very thorough input-by-input calculations for each product and grade of product before making any decisions. And, of course, you need some reliable forecasts of where the economics of offshoring versus onshoring are heading - including predictions on crude-oil prices. Predicting crude, as I discussed earlier on today, is where I fall short.

You also need to take a view on the direction of environmental legislation - i.e. will there by carbon taxes and/or cap and trade systems introduced globally that penalise producers for extended global supply chains?

If history is anything to go by, McKinsey has worked out that manufacturing a "midrange" product in Asia will cost you an extra $16 today compared with the US when all landed costs are included. In 2003, Asia had a $46 advantage.

Add to this the likelihood that more petrochemical feedstock will become available in the US thanks to declining gasoline demand and perhaps, as again I talked about last week, the industry in the states might be set for a revival. It has been comparatively higher feedstock costs and the drift of downstrean customers overseas that has caused so much damage to the US industry.

For anyone who subscribes to ICIS news, you might find this artice of interest. Allen Kirkley of Shell discusses some of the new emerging feedstock options and converging economics between the West and the Middle East.

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".

As if you needed to reminded, be aware of the conmen who might try and sell you something you don't need in 2009 as everyone tries to find a way through the crisis.

There could be more contradictory methods to manage volatility and financial problems out there than unsold tonnes of benzene.

And perhaps something akin to a Ponzi - or maybe what should from now on be called a Madoff Scheme - will emerge.

I had to laugh at reading of the joke prospectus sent out to London investors during the 1820s stock market boom, involving a plan to rescue gold and other valuables left at the bottom of the Red Sea by the Egyptians.

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.

I only feel slightly smug because it seems obvious that naphtha was a big driver - and that markets were being talked up by producers desperate to recover monumental Q4 losses.

There will be lots more mini bubbles like this before the crisis is over.

In the depths of the Asian financial crisis an American industry executive said, "I don't know why Korea has a petrochemical industry. It should be just shut down."

There were also widespread complaints over "soft" government-directed loans that supported Asian companies through the difficult times of 1997-98.

How the tables have turned, according to another senior executive of a Western company who spoke recently about the current crisis.

"The bedrock of the US economy has been oil, natural gas, refining and petrochemicals," he said.

"A lot of industry people think that if you allow plastics and petrochemicals to go you might as well also let the big automakers collapse."

So could these attitudes be sufficient to win government support for some of the distressed chemicals companies in the US?

Will this impede restructuring that should take in place in order to make assets and businesses globally efficient?

Or will global efficiency matter as much as it used to if trade barriers rise - and if the need to buy locally to preserve cash becomes an entrenched way of doing business?

High leverage is out - surely for many years. When new projects are again being seriously assessed, more equity and less debt will be needed.

What will this mean for the private equity model? Some argue that low asset valuations will lead to a resurgence of private equity. But access to complicated lending markets will likely no longer be an option as these markets have virtually ceased to exist.

The smart chief financial officer with good connections to the finance industry might become of less value than the day-to-day operations managers - including clever chemicals engineers who can maximise the efficient running of plants.

"We also need new ways of assessing demand growth. We will continue to confront the problem of timing capacity additions, but we have to adopt fresh thinking, including a wider range of scenarios to stress-test our assumptions," the second executive added.

"These approaches should involve methods of more effectively anticipating macro-economic shocks."

These are the big issues you can ruminate over while enjoying a beer in the evening. More pressing, though, is how to get through this crisis.

Speciality chemicals players and other end-users of commodity chemicals are in strong purchasing positions after years of being squeezed by tight upstream supply and demand balances.

They are beefing up their business analyst teams to more effectively monitor markets, according to several sources in downstream companies.

Senior executives are also being asked to monitor pricing markets in an effort to spot short-term money-saving opportunities.

All purchasing decisions are going through top people as part of the struggle to preserve credit.

So if you are selling basic chemicals you too need to beef up your business analysis capabilities in order to counter much better customer intelligence. This is no easy task with budgets under so much pressure.

Your sales and marketing teams will also need to have exceptionally convincing stories to tell - as they could be talking to the very-wise who have heard it all before.

Scrambling for every extra dollar will be crucial for the highly leveraged commodity chemicals companies as they struggle to stave-off debt defaults.

This scramble for cash is not being helped by a faltering petrochemical-price recovery. Ethylene, propylene and aromatics prices were on the retreat in Asia during the week ending 20 February, according to ICIS pricing.

Those with new plants in the Middle East will not have any problems in servicing debt. "Even if ethylene fell to $200/tonne they would still make money," said a consultant.

But the Middle East players are facing tough times as new plants on a stand-alone basis will be generating a great deal less earnings than had been forecast.

Higher capital costs and different feedstock mixes were always going to make this round of building less competitive than the last. A further dent to profitability is the collapse in oil prices, eroding the advantage over naphtha-based producers.

The western petrochemicals-only players face an added problem.

Those back-integrated to refiners might have to repeatedly sell petrochemical and polymer inventories at very competitive prices in order to keep big complexes balanced.

The greater your integration the more chances you have of generating decent overall returns.

A bigger percentage of gasoline and diesel consumption is less discretionary than many of the petrochemicals that go into durable goods - hence, one of the advantages of also being in the refinery business.

Lower gasoline prices have also prompted a slight demand recovery in developed markets. Asian demand growth is also likely to remain positive this year.

Distressed sales of petrochemicals and plastics have always happened but could now occur more frequently because of the difficulty in reading markets.

Preserving value in innovation is a further challenge for the solution providers.

"It's about explaining that cheap doesn't always equal value for money. One possibility is that there could be a flight to quality if we can make the right case," the second executive added.

But will premium grades always carry the premiums needed to keep some of the heavy betters on innovation going?

A lot of sophisticated chemicals and polymers - supported by value-added customer service - go into end-use sectors such as electronics and autos.

Here is another big question to ponder over a beer: Will rising protectionism make it easier for Western chemical producers to preserve their share of domestic markets?

The downside is that trade barriers, whether formal or informal, could make it harder to further outsource - and to move whole operations to emerging markets - in the battle to reduce costs and capitalise on stronger growth.

It's incredibly tough out there for those trying to hit sales targets - even if they are being constantly reduced to meet the worsening business environment.

The danger is that if senior people spend too much time focusing on sales and cost targets, strategies to deal with the big issues will never be drawn up or put to adequate test.

This could result in gains from smart short-term management being lost during the next cycle.

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.

To keep you updated on what we believe is happening in petrochemicals, here are some important recent trends:

*Futures markets in China are playing an increasingly important role in influencing pricing in polyolefins, methanol and PTA. Trading volume on the Dalian Commodity Exchange (watch out for Focus piece due out on ICIS today) for LLDPE has hugely increased this year. Traders are playing off micro movements in pricing, and it seems as if all the contradictory government signals on the Chinese economy could be affecting volatility. It would be interesting to also check the correlation between other futures exchanges, local stock markets and the DCE

*There's lots of anecdotal evidence of higher trader physical inventories - the result of easy liquidity

*China polyolefin prices have, a result, of all the above, been higher than in the West. This has attracted increased imports (note the Jan-Feb trade figures). US ethane-based PE production is very competitive because of low natural gas prices relative to naphtha. This is forecast to remain so for the next 1-2 years

*In short, the China market across several chemicals and polymers has become even more speculative than usual

*This might not be true, but watch ICIS to see if rumours have been confirmed of a softening in pricing this week. This would be ahead of the fundamentals that pointed to a correction after June

*This could be followed by a broader fall in crude, equites and global chemicals prices.

*OECD and IEA latest figures point to even higher crude stocks and there are reports of land-based storage being so full that newly commissioned supertankers are being used for storage. The financial speculators seem to be keeping crude at around $50/bbl on the belief that the global economic recovery will arrive by Q2/Q3

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.

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.

Cartoon: Peter Brookes, The Times

Yes, this blog has gone staggeringly quiet over the last few weeks as I gained a life: I went home to the UK and mixed with some people who had no interest in or desire to know anything about polypropylene. Do you realise that there are some people out there who have never even heard of catalytic reformers? Amazing....

Anyway, before I return to my sad little petrochemicals bubble, here are some reflections on the political chaos gripping good old Blighty caused by MPs' expenses.

The pleasure the Brits are deriving from their fuming indignation over some upper-class twit claiming the cost of cleaning out his moat, and other such extraordinary fiddles, almost makes up for the misery inflicted by collapsing house prices.

But as I kept saying over many a pint of wonderful British real ale during my leave: "Corruption? Call this corruption. If you want real, decent corrupt politicians then go to India or the Philippines, to name but two Asian countries affected by this problem.

"The good people there would be delighted if all that their political leaders did was claim the odd household plant or a bit or mortgage tax relief off the State."

It's good fun to have a go at politicians, though - God knows they all deserve it.

And there is never any excuse to fiddle your expenses and quite obviously, all the journalists enjoying the hunt have never, ever over claimed or falsely claimed for anything (you can be probably tell, except if you are American that is, that this is intended to be sarcastic).

I had a friend many years ago who worked on a national newspaper who received a major telling off for not claiming enough fraudulent lunches, dinners and gallons of alcohol, the reason being that if the accountants saw one person managing on less everyone else might have been forced to follow suit.

Most national newspaper journalists, certainly in the 1990s anyway and so this may have changed, could double their salaries by being on the fiddle.

But in the row over MPs' expenses perhaps not enough focus is being placed on a much bigger issue. This is how Britain is going to repair its government finances without creating major inflation problems or interest-rate hikes that will limit inflation but nip the recovery in the bud. The same applies, of course, to the US.

I don't pretend to understand Bond yields etc.

Perhaps nobody understands, nobody has control, nobody has a flipping clue and so in the absence of any clarity the only debate worth having is over why the former Home Secretary's husband, working as a government-paid political assistant, claimed porn movies on his expenses (still my favourite of all the scandals).

Toodle pip. I promise you in my next post that I'll write about polypropylene for all you fellow sad people out there.

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.

"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."

Chemical companies as a whole displayed "dangerously complacent" views about second-half 2009 prospects when they released their Q2 results late last week, argues chemicals analyst Paul Satchell in his blog.

"They believe that demand has bottomed. Although they can't see the upturn yet they believe the worst is definitely behind us," writes Satchell.

"This blog sees this as dangerously complacent, particularly as analysts and investors have returned to a positive stance on the sector."

When you look at the results themselves, the numbers look better but only on a sequential basis (and watch out for some misleading year-on-year numbers in H2 when performances are very likely to be better than the disastrous second half of 2008. A more useful comparison might be with H2 2007).

Most companies reported year-on-year volume declines in the low 20% range - better than reductions of more than 30% in the first quarter of 2009.

Margins were again lower than in the same quarter last year but up on Q1 2009.

In the case of basic upstream petrochemicals, producers have largely been playing catch up with higher crude prices in this year's second quarter.

The overall margin improvements are likely to be the result of stronger returns further down the product chains.

These relatively better downstream performance could well be the result of extraordinary increases in apparent demand for polymers and other commodity chemicals. These have occurred at a time of tight global supply (the result of market-driven deep production cutbacks after the Q4 2008 price collapses and turnarounds).

The true nature of the demand increases is at the heart of the complacency Paul is worried about.

Numbers emerging from China remain counter-intuitive.

In January-May over the same period last year high-density PE (HDPE) general trading was up by more than 130%, even though re-exports were down by 16%.

To repeat yet again, how can this happen while China remains so heavily dependent on exports and the global economy remains weak?

BASF, when it disclosed its Q2 results, said that it expected global chemicals output to fall by 8% this year.

This would mean that by the end of this year, production would be back to 2005 levels.

In other words, the global chemicals industry will have lost three years of growth.

The broad-based chemicals giant is signalled out by Satchell as one of the few companies that has acknowledged the risk of another downturn caused by overcapacities, bankruptcies and growing unemployment.

The end of the bubble in oil and oil-product prices might cause severe problems in H2 this year. This could be before new petrochemical capacities and/or a winding down of speculation in China start directing markets.

"The risk from a potential fall in oil is only being thought about in terms of raw materials pricing. People seem to have already forgotten what triggered the de-stocking from last summer," adds Paul Satchell.

How will this one run?

Source of Picture: chemicals-technology.com

In the 12 years I've been covering the chemicals industry I don't think I have come across a time of such exceptional market muddle.

The traders love it. As a wise man said to me the other day, "When I was a trader I only cared about the price today if I was cashing in and not tomorrow."

But for the producers and buyers there are so many more factors that will shape the outcome of the second half, requiring fortunately for me hopefully some more business for ICIS training (one should always live in hope)

Here is Part 1 of what I plan to try and piece together over the next few months. Let's try and keep cooperating on data and analysis - but at the outset, does this make sense to you?

The Impact of Operating Rates, Plant Closures and New Petrochemical Capacities

Production from existing plants

This will be determined by overconfidence versus realistic confidence in the economy. This comes down to your view on the sustainability of the rebound.

To what extent have operating rate and inventory-management lessons been learnt from the oil collapse of H2 last year?

How are imminent new capacities affecting the behaviour of producers and buyers? In the first half, the tightness in some markets (for example, PP and PE) was partly the result of producers and buyers maintaining low stock levels because they expected new-capacity start-ups that didn't happen. To what degree has this experience made them less cautious?

It might be helpful to analyse Q2 chemical company results to get a feel for what production levels might be for the rest of this year.

Do the numbers add up and do the content and tone of what's been said sufficiently take into account all the risks? (Note: there are some individual company numbers on plans for overall average operating rates in H2).

The pace of permanent shutdowns in the West to reduce domestic oversupply and weaker exports positions also needs to be tracked.

Last year sudden decisions to temporarily or permanently close whole complexes - which were not necessarily entirely loss making - were forced on companies.

This was the result of the collapse in oil, the credit crisis and steep falls in demand.

To use PP as an example again, 500,000 tonne/year of US capacity-closure announcements were made in 2008 to take effect in the first half of this year.

Oversupply is still big: US PP consumption totalled just above 7m tonnes in 2008, 8% lower than the previous year with capacity still at 9.4m tonnes. So far this year (as of July) there have been no further announcements of closures.

Further factors affecting the pace of permanent closures could be divestments.

Trade buyers for distressed Western assets now seem much more likely than further private equity players and so attitudes to running marginal, or clearly uneconomic, plants might be different.

You also have to take into account environmental clean-up costs and regulations - and contractual and labour commitments.

And next: How will petchem operating rates be affected by refinery economics?

Dealing with the US refineries first:

How will refinery economics affect availability of PP and aromatics in H2? In the first half we saw a big increase in shipments from the US to Asia due to the global rate cuts, production problems in the Middle East, the peak of the Asian refinery and petrochemical turnaround seasons between April-June and the unexpectedly strong Chinese demand.

But since May/June, PP arbitrage from the US has closed on lower refinery operating rates resulting from weak gasoline demand. Benzene trade flows seem to have also reversed - in July we have heard of cargoes moving from Asia to the US, whereas in H1 there were record-high shipments the other way.

What's the outlook for gasoline, middle distillate etc demand for the rest of the year? (gasoline and middle distillate stocks are high on speculation and weak demand)

Some of the same questions need to be asked about Europe with a few
important differences, which are:

*Europe is a major exporter of gasoline to the US and so the price and availability of naphtha, and therefore petchem economics, will also be affected by US demand for the fuel

*Fuel demand in Europe is heavily weighted towards diesel and how will the European economies perform in H2 and what affect will this have on demand for gasoline, more importantly diesel, and how the refineries run? (Note: most propylene in Europe is produced from steam crackers because of the lower gasoline demand. But there is still a big link as naphtha is the main steam cracking feedstock in Europe).

I don't follow currency or shipping and other logistics markets, but these are obviously also critical factors.

Next question: How will the new petrochemical capacities run?

It's worth considering that there could be many more start-up delays, and
problems with operating new plants already on-stream, because resources were so stretched when these projects were planned and they remain stretched.

There is a shortage of engineers with the right levels of experience. Many of the projects were also planned when raw material, equipment and other costs were sky-high.

Budgets were stretched and so choices had to be made - for example, "Do I focus on my PE debottlenecking using ethylene from my new cracker or do I prioritise starting up the cracker and its new plants on time?"

Another problem is "project bunching". There seem to have been attempts to start up too many projects at the same time, further stretching already-scarce resources (a few years ago there was a lot of fevered excitement over the global economy. There was a rush to take advantage of financing while it was available in order to cash in on this growth and to maintain economies of scale).

There is, reportedly, a lack of the right kind of experience. Even companies with long track records in petrochemicals are confronting start-ups of projects bigger in scale and more complex than ever before.

Back from less-than-sunny Perth to discover that the prediction from my good friend and colleague Paul Hodges at International eChem has come true: Benzene has headed south because of:

1.) The rise in its pricing seems to have been out-of-kilter with what has happening downstream in styrene

2.) Traders credit might well have stampeded for the exit after building very high stocks in China in July

3.) Overall reformer economics appear to have been much-improved of late, perhaps encouraging over-production of benzene

See this slide from ICIS pricing which illustrates the point.

View image,

The conclusion has to be, again, that apparent chemicals demand is a long way from underlying demand, despite all the macro-economic confidence.

Expect many more mini disruptions like this - if not the dreaded overall collapse.

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......

The views of two Singapore-based chemicals traders explain some of the fundamental shifts in production, logistics and demand since the economic crisis began.

"I have done reasonable business this year and made quite good returns, but volumes are way down," said the first of these two traders, who deals in toluene and mixed xylenes (MX).

"Cracker-based aromatics producers are being exceptionally cautious and are very unwilling to risk building inventory.

"Whereas I used to get, say, 5,000 tonnes a month from a particular company it's a maximum of 2,000-3,000 tonnes and sometimes none at all."

Reformer-based output in China has been heavily influenced by liberalisation of government restictions of fuel prices, he added.

This has led to sudden and sharp increases in output that markets have, at times, found hard to absorb.

"Aromatics pricing has recovered, of course, It's been either firm or rising for most of the last eight months, " he continued.

"But the end-user demand hasn't really responded in the same way. All we've really seen is some re-stocking, the cost-push from higher crude and a lot of speculation by Chinese traders.

"Weaker volumes are making it really hard for the shippers.

"There's a lack of small vessels of below 5,000 and up to 10,000 tonne in capacity. A lot of the ones out there are close to being scrapped because they are old.

"A customer in China, say, might only want less than 5,000 tonne but it's not economic to ship such a small cargo from Southeast Asia to China.

"So even if I can find a supplier it can be difficult to find a ship, despite a big surplus of tonnage.

"A lot of new vessels are being delivered which will keep freight rates down for some time. These are either medium-sized ships at 20,000 tonnes or large vessels between 60,000-80,000 tonnes."

He was worried about recent price corrections and believed that "a lot of unsold inventory in China has yet to work its way into the market."

But the trader was confident that crude would remain at $65-70 a barrel for the rest of the year.

"I don't see a problem with storage," he said, disagreeing with the forecast of $45 a barrel.

"The crude price will obviously set a floor for toluene and MX.

"Even if everything goes into free-fall the crude traders are likely to come in and buy-up surplus aromatics.

"This happened last year when they set a floor for toluene and MX at about $400/tonne.

"I think the floor will be higher this time because crude will remain relatively stable."

The second trader - this time in polyolefins - agreed that oil would stay at $65-70 a barrel for the rest of this year.

"But we are facing a lot of indigestion. China has imported a huge amount of polyethylene (PE) and polypropylene (PP).

"Since September the market has been very quiet. This always happens after a strong buying spree.

"The Dalian Commodity Exchange futures contract in linear-low density PE (LLDPE) has collapsed.

"This is a sign of weak overall sentiment. Traders have also suffered heavy losses and so they have less cash to spend in the physical markets."

Volume and pricing on the exchange have fallen very steeply as this chart from Paul Hodges shows:

September volume was down by 63% from April.

"What we have to wait for is end-November when pricing (in the physical markets) should pick up as manufacturing increases ahead of the next Chinese New Year (February 2010)," the second trader added. 

"If it doesn't this is a sign of some big supply imbalances."

But even if there was a brief rally at the end of November, he predicted that afterwards there would be a prolonged trough on new capacities and a fall in Chinese bank lending.

....what do these environmental issues mean for Thailand as an investment destination?

The Map Ta Phut refinery-petrochemicals complex

Source of picture: Pattaya News

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

Here's yet another unexpected project delay that could prop up markets in the fourth quarter.

The Thai Central Administrative Court decided to halt construction of 76 projects at Map Ta Phut on environmental grounds last week.

The long list of projects includes new crackers and derivative projects by PTT and Siam Cement/Dow Chemical.

PTT was due to have started commissioning a new 1m tonne/year cracker complex in the fourth quarter, while Siam Cement and Dow Chemical's 900,000 tonne/year cracker and downstream plants were scheduled to commence operations next year.

Both of the Thai companies have issued statements that the projects are likely to be delayed, and PTT has even decided to delay a maintenance shutdown at one of its crackers from October to January 2010.

Thailand is already a net exporter of PE and PP and the new projects would have increased the country's export burden.

One local newspaper report said that projects could be delayed by a year, although the two companies have not yet declared revised start-up dates for their projects.

PTT issued a statement that it was working closely with government authorities to resolve the crisis and that it had submitted a petition to a higher court. The prime minister has already asked the industry ministry to appeal against the ruling.

The Bangkok Post reported that the appeal would be made in two parts.

The first section would ask for court permission to allow industrial projects that have no impact on the environment to continue, while the second would seek a temporary halt to projects that had problems with environmental impact assessment (EIA) studies. 

The story did not identify projects that had EIA problems.

There is no doubt that the government will have to act fast. But it faces a tough task of balancing public opinion and expectations while protecting the interests of local and foreign investors.

Public opinion - seen in some of the comments that the Bangkok Post report has drawn - will be difficult to ignore.

It might be even harder to address growing concerns about Map Ta Phut as an investment destination in Southeast Asia.

This latest crisis in Thailand is also a fresh reminder of the growing power of the people in many parts of Asia to influence chemical-project activity.

Protests against construction of mega projects on environmental grounds are getting louder and louder.

"Take it from me, peripheral vision isn't all it's cracked up to be, especially if you want to get a decent annual bonus...."

Source of picture: www.whipnspurs.co.nz

Here's a rant for Tuesday - with thanks to Paul Hodges for informing some of the thinking (I'd like to lay credit to certain parts of this...)

Purchasing managers are professionally required to wear blinkers. All they care about is making sure that they are ahead of the game because of the way their performances are measured.

So up until Q4 2008 they ignored headlines such as "US auto demand slumps on surging gasoline costs and slowing economy" and "western house prices plummet on sub-prime mortgage crisis."

Oil prices seemed to be on the forever-up and liquidity was abundant. The result was purchasing in big volumes ahead of anticipated further price rises until the great unravelling post-Lehman Brothers.

Senior strategists - whose job it was to worry about the big picture - were also wearing blinkers, deluded in the belief that 2006-07 demand levels would go on forever.

Cracker operating rates were going to remain comfortably above 80% during the coming down cycle, was the consensus view in the first half of last year.

Now the industry is going to have to live with global averages of between 60-70% over the next few years.

The chemicals industry has lost three years of demand growth as global production is now back to early 2006 levels. It is unlikely to budge much in a favourable direction until at least 2011.

The reason is that real western growth, minus all the froth of commodity and equity markets, is going to remain weak on unemployment and high personal debt problems.

Another concern is unwinding government subsidies.

Too many people might have been misled by Chinese imports over the last 7-8 months.

The strength of these imports wasn't sustainable and was due to temporary factors that have now come to an end.

Banking on China as the leader of a global recovery is utter nonsense when you look at the country's low per capita chemicals consumption and its heavy export dependency.

Any Northeast or Southeast Asian producer high on the cost curve is likely to find it harder to penetrate western markets in 2010.

How can these producers - when they import crude oil - export, say, PE to Europe at fair market prices in the face of much-stronger Middle East competition?

Trade lawyers should do very well from anti-dumping cases in 2010.

This is a protracted supply-driven U-shaped downturn, and we are only just getting towards the bottom of the U.

Lots of Middle East capacity has been delayed - and the next big wave of Chinese start-ups is only just beginning.

Studying the tone of Q3 results statements will be a good indication to what extent senior execs have taken on board this new reality (actually it's not that new - we've been waffling on about this on this blog for months).

THE MOOD seems to have become a little more upbeat in the Gulf Co-operation Council (GCC) region of the Middle East thanks to the economic recovery.

"The flow of foreign funds into the GCC came to a complete standstill in Q4 and the first quarter of this year, but in Q2-Q3 it reached all-time highs," said a petrochemicals industry source.

"Whilst the mood is still a little depressed, there are signs of hope with the expectation that growth by 2011 will return to normal levels."

The Saudis had budgeted for an average crude price of $40 a barrel for 2009, but $70 a barrel was more likely, creating more leeway for government spending, he added.

"Stimulus measures haven't kicked in yet across the GCC. This should soon be the case in Saudi which will result in lots of money spent on infrastructure and therefore more petrochemicals demand."

This rosy view is reflected in a recent pick-up in project activity in gas processing, refining and petrochemicals.

KBR, for example, won a contract to supply front-end engineering and design work (FEED) and project management services for a natural gas liquids (NGL) plant in Shaybah, Saudi Arabia.

Jacobs Engineering Group has been awarded the FEED contract for Borouge 3 in Abu Dhabi - the polyethylene (PE) and polypropylene (PP) expansion due on-stream at end-2013. This would raise the Borouge joint venture's polyolefin capacity to 4.5m tonne/year.

The monster Ras TaNura project in Saudi Arabia also seems to be moving forward.

It will cost anywhere between $20-27bn and will produce either 8m tonne/year or 11m tonne/year depending on which reports you believe. Start-up is either 2014 or 2015.

Two consultants working on the project for different companies have told the blog that it is progressing.

Dow Chemical is still very much involved after suggestions earlier this year that the US major's financial difficulties might force Saudi Aramco to seek a new partner, they added.

A sign that sentiment has improved was evident from reports about the financing of the Aramco-Total refinery project at Al-Jubail.

Bids from potential lenders left the $12.8bn project 30 times over-subscribed, Reuters said last week.

Technip has won engineering and procurement (EPC) contracts to build a hydrocracker and a fluid catalytic cracker (FCC) at what will be a 400,000 barrels a day full-conversion refinery - due to start commercial production in March 2013.

The project also includes 700,000 tonne/year of paraxylene (PX).

But gas supply remains tight for petrochemicals as this excellent article from my colleague Malini Hariharan explains.

Only one cracker might go ahead in Qatar instead of the scheduled three projects - involving Qatar Petroleum and Honam Petrochemical, ExxonMobil and Shell.

The economic rebound is constraining electricity supply throughout the GCC, resulting in priority being put on supplying gas to the power sector during the summer months.

New associated gas is dwindling with undeveloped non-associated fields containing a high sulphur content of 25-30%.

Processing this extremely sour gas would become economic only at a gas price of $5-7/mBTU, according to Justin Dargin of the Dubai Initiative at Harvard University.

Are the days of cheap gas for petrochemicals in the GCC over for good?

How economic will naphtha-based production be compared with building a new naphtha cracker in Asia?

One feedstock option for the Middle East and Asia could be to make use of liquefied petroleum gas (LPG), which according to a Singapore-based business development executive with a publishing company, will be "as cheap as chips" over the next few years.

This will be the result of a big increase in liquefied natural gas (LNG) output, where LPG is a by or co-product, and refinery expansions.

Indeed, the petrochemical industry source we quoted at the beginning of this post added: "There's going to be lots of propane available in the GCC."

Aramco was also exploring under the Red Sea for the first time for oil and gas after previously concentrating exploration on Saudi's Eastern province, creating the potential for more petrochemical feedstock, he added.

At the moment, though, you can just about count the number of petrochemical on the fingers of one hand, beyond the ones already financed. This is provided you count the 35 or so plants planned for for Ras Tanura as one!

There's another problem that's as long-standing as gas feedstock, which might also be getting worse.

"I know of a refinery in the GCC that's planning a turnaround in three years. It's already worried about a shortage of engineers to execute the turnaround. India has become a much bigger draw," said a refinery industry source.

Source of picture: wartakota.co.id

WESTERNERS can often by unbelievably patronising about Asia's efforts to climb up the economic self-sufficiency ladder.

"South Korea has no business being in petrochemicals," said a very annoying US industry executive many years ago - one of those situations where your correspondent wanted to punch someone's lights out (this wouldn't have been such a good idea as he later informed me, over a couple of beers, that he used to play quarterback for his college Gridiron team).

Similarly, I became defensive on behalf of Indonesia and Pertamina the other week when criticism was levied at a "hybrid" plan to add new refinery and petrochemicals capacity.

I know too well, though, as Indonesia used to be my "patch" in the late 1990s, that corruption has been an issue.

The country's refining and petrochemical industries have repeatedly promised much, but have failed to live up to expectations.

And you could say to Pertamini, "Why bother?" seen as so much refining and petchem capacity is being added in the Middle East.

China might even end up being self-sufficient in refinery products.

But the state-owned oil, gas and refining major recognises this - hence the idea of adding capacity and sourcing from overseas, said Heru Sutrisno, the company's vice-president of strategic development and business development.

He was speaking at last week's Asia Downstream Roundtable event in Kuala Lumpur, Malaysia - organised by the World Refining Association. Click here for a copy of the presentation - 3 Heru Sutrisno.pdf.

Standing still would mean Indonesia would be short of 289,000 barrels per day of refinery capacity by 2012.

The main shortages are forecast to be in Java and Bali where two-thirds of oil-product demand might have to be imported by 2015.

Capacity additions would include building a new 300,000 barrels per day refinery - in two stages of 150,000 barrels per day - at Banten Bay in West Java. National Iranian Oil Co has committed 150,000 barrels a day to the project for 25 years.

Also under study is using condensate to boost petrochemical production and constructing a linear-alkyl benzene (LAB) plant fed by n-paraffin feedstock

Work is progressing on a 250,000 tonne/year polypropylene (PP) project, due on-stream at the Balongan refinery complex in West Java in 2011.

Dow Chemical's UNIPOL technology has been selected for the new facility which will receive feedstock from a residue fluid catalytic cracker.

There have been a lot of positive political and economic changes in Indonesia since the late 1990s, making an investment case for refining and petrochemicals far stronger. 

 But does the Pertamina plan really add up?

By John Richardson

We don't have the actual data yet (hopefully, we'll be able to give you the numbers later this week), but......

......China's commodity chemicals and polymer imports "continued to amaze" in September with monoethylene glycol (MEG) shipments hitting an all-time high, said Jean Sudol, president of US-based International Trader Publications Inc (ITP).

"Imports of most of the commodity polymers we follow continued heavy in September, with relatively small changes, most of them positive from August," added Sudol, whose company provides trade data and analysis on chemicals and polymers.

The commodity polymers ITP tracks showing increases were low-density polyethylene (LDPE), linear-low density PE (LLDPE), high-density PE (HDPE), polypropylene (PP), ethylene vinyl acetate (EVA) and propylene copolymers.

"Polyvinyl chloride (PVC) trended downwards for the third month in row with polystyrene (PS) mixed," she added.

Imports of the engineering polymers acrylonitrile butadiene styrene (ABS), polyacetals and styrene acrylonitrile (SAN) also rose, continuing an upward trend that has lasted several months.

"Among the major organics, imports of ethylene dichloride (EDC), vinyl chloride monomer (VCM), methanol, styrene and propylene were also up from August. MEG reached a new all-time high."

But benzene imports remained low, maintaining a trend that began in June, with ethylene shipments slowing moderately.

Domestic demand is still a relatively low proportion of GDP (gross domestic product) growth and so a lot of this stuff must be going into gains made in re-exports of finished goods.

Commodity chemicals pricing is more affordable than in H1 last year.

A depreciated Yuan versus the currencies of other developing countries, raw-material import tax cuts, increased export tax rebates and very flexible labour markets have also made China's exports more competitive.

There's also a mountain of cheap and plentiful bank lending to make life even easier for the Chinese re-exporter.

The end-result is that - as we discussed yesterday - China has seized market share in export sectors including textiles and garments and electronic goods.

Chemicals companies whose main business is with China might be benefiting, whereas exporters to other countries could be losing out as could chemicals industries in these other countries.

China's finished product exports might be down in value terms. But how much does this matter if you have such big competitive advantages and state-owned banks willing to bail you out if you get into trouble?

In some cases there could have even been export-volume improvements in 2009 over pre-crisis levels. This, along with the lower pricing, could help explain what seem like counter-intuitively high record-high shipments of chemicals and polymers to China.

There are winners and losers in other export-focused countries.

It's fine if you supply, for example, commodities or high-tech components to China to be assembled in to finished electronic goods.

But it's not so rosy if you compete head-on in industries such as textiles and garments and plastic toys.

Chinese manufacturers are likely to have the capacity to discount even deeper thanks to a supportive government. Further discounting might become essential if other areas of the economy falter.

Even with all this backing, margins are likely to become tighter - especially as the widespread perception is that oil prices are heading back to $100 a barrel. Perceptions make the price through the futures market.

This will leave the Middle East, with its increasing capacities, in a very strong position to take advantage of what could be an even longer bull-run in commodity chemical and polymer exports to China.

 Shelf-space to be in short supply again?

Source of picture: www.zrdata.com

ASIAN naphtha prices hit their highest level for more than a year yesterday - reaching $701/tonne CFR Japan for second-half December open-spec material on "improved market conditions".

Earlier this week we picked up more reports of bleak demand in styrenics and fibre intermediates that countered continued optimism in equities and crude markets.

This is also usually the quiet season as petrohemical production declines on weak seasonal demand.

Is the Asian petrochemicals industry ramping up production because it thinks crude is going to get stronger and the real economy is set to improve?

Oil fell to below $77 a barrel yesterday on evidence that US motorists and businesses were cutting back on energy use, according to this Associated Press report.

Have we returned to the demand destruction which caused the economic downturn in the first place?

Despite soaring auto sales in China, there are reports that gasoline consumption is being affected by higher crude, the impact of which is being more keenly felt this year as a result of fuel-price liberalisation.

The Energy Information Administration (EIA) said in its weekly report that US oil and gas supplies grew more than expected last week, even though many oil companies have shuttered refineries as fuel consumption slumps.

US refineries had slowed production to the lowest levels since September 2008 and they were importing nearly 15% less crude than last year, the report added.

This is worying when you think of the state of the economy this time last year. Most other comparative numbers are showing improvements.

What perhaps helps to explain the 15% decline is big new refinery capacities in India and China etc putting pressure the developed-world players.

With refinery runs reduced everywhere in the world except China (where the Chinese refineries are enjoying improved profitability as a result of the fuel-price liberalisation), reduced supply could be another factor behind the rise in naphtha.

But let's take it as read that better demand from petrochemicals is the main driver behind the increase in naphtha.

It would be a very risky business to build inventories right at this moment - given all these uncertainties and the big surge in new petrochemicals capacity.

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

Sumitomo Chemical and Saudi Aramco appear to be in a generous mood. After successfully launching the first phase of their joint venture and starting work on the second phase the two are willing to welcome others to the Rabigh party.

Pic source: Saudi Aramco

Ziad Al-Labban, president and ceo of the joint venture Petro Rabigh, is reported to have said that discussions are underway with companies, including Japanese firms, to invest in production synthetic fibre and other products at Rabigh. He expects a total of 50 companies, including some from Japan, to eventually set up operations at the site.

The product slate for PetroRabigh's second phase, due to be completed in 2013-14 includes aromatics, synthetic rubber, nylon 6 and speciality chemicals. What more can be produced and what makes Rabigh so attractive?

There is of course the feedstock that will be readily available from the PetroRabigh complex and the benefits of shared world class infrastructure. But local markets are small with not very exciting growth prospects, especially for products like synthetic fibres. I certainly can't see a big textile industry developing in Saudi Arabia or the GCC.

I have often heard that the attractiveness of the Middle East fades as you move down the product chain. The closer you are to the cracker the more profitable it is as you then get full advantage of cheap feedstocks.

But Saudi Arabia's plans for a diversified chemical industry are slowly but steadily progressing. And Abu Dhabi is also working on a similar model. What incentives are being offered to make these countries an oasis for downstream chemical production?

Abu Dhabi ahead in the race?

Source of picture: www.gulftrackservices.com

By John Richardson

The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.

"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.

"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.

"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."

The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.

But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.

"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.

"But it is true that we have already seen transfer of very valuable polymer technologies."

SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.

The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.

These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.

But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."

IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.

It also has a 64% of Austria-based polyolefins group Borealis.

"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.

"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."

And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.

Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "

The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.

And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.

With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.

"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.

"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."

Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.

SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.

There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.