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.

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

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

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

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

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

*PTT Polyethylene's 1m tonne/year ethane gas cracker, which was due onstream by the end of this year, according to a Thai industry contact who spoke to this blog. Downstream of the cracker will be 400,000 tonne/year of linear-low density polyethylene (LLDPE), 300,000 tonne/year of low-density polyethylene (LDPE) and 400,000 tonne/year of high-density polyethylene (HDPE), according to ICIS Plants & Projects

*The new Siam Cement/Dow Chemical complex centred on a cracker that will produce 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene). Also at the site will be a big new metathesis unit downstream of which will be a PP unit (currently checking the capacity). In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects

*The PTT and LyondellBassel joint venture, HMC Polymer, which comprises a 310,000 tonne/year propane dehydrogenation (PDH) unit and a 300,000 tonne/year polypropylene (PP) plant. This plant had been due to start-up by August this year, the blog was told.

*The PTT/Asahi Kasei Chemicals joint-venture 250,000 tonne/year acrylonitrile project, due on-stream in Q4 next year, according to ICIS Plants & Projects. This will involve Asahi Kasei's propane route to PP. This would be the first commercial plant in the world to use propane rather than propylene as feedstock

News reports list chlor-alkali and vnyl chloride monomer (VCM) projects by Vinythai and a polyvinyl chloride (PVC) project by Thail Plastic & Chemicals as also being delayed. We are checking the details.  

According to The Nation newspaper, these are the 11 projects which were given permission to continue by the Supreme Court:

. Clean energy and product quality enhancement/Rayong Refinery
2. Gas recycling enhancement/HMC Polymers
3. Clean energy, oil vapour controlling unit installation/Star Petroleum Refining
4. Oil vapour controlling unit installation/PTT Aromatics and Refining
5. Air pollution improvement/Indorama Petroleum
6. Wastewater treatment improvement/PTT
7. Chlorine vaporiser and wet scrubber installation/Aditya Berla Chemicals (Thailand)
8. Tank relocation/Map t Tank Terminal
9. LPG/Brutene Depot-Wharf/PTT Chemical
10. Loading Arm Installation/Star Petroleum Refining
11. Petrochemical Depot-Wharf/Map Ta Phut Tank Terminal

By Malini Hariharan

After experiencing steep price hikes over the last few weeks should seller start preparing for a fall? Signs of resistance and a slowdown in buying are being seen across a few products suggesting that price corrections may be imminent.

ICIS news reports today that the price rally in PE and PP in South Asia and the Midle East may reverse as buyer resistance is building up. The supply situation is also improving as plants in the Middle East have started ramping up operating rates.

Buyers in these markets are also taking cues from the Chinese market where buying is slowing down ahead of the Chinese new year holidays in mid-February.

And another ICIS news report yesterday talked of paraxylene (PX) markets turning bearish in the short-term as supply has lengthened following an easing of demand.

A Sinopec source is reported to have said that despite production issues in the Middle East and China and the heavy turnaround schedule in Japan, end-users were not buying as they did not have any immediate requirement to cover.

But the one factor that could halt or ease price corrections is naphtha which is running strong at around $750/tonne cfr Japan on tight supply.

By John Richardson

CHINA'S decision to temporarily halt lending by some banks - which was announced yesterday - as it attempts to further cool the economy will likely have a significant effect on chemicals demand and pricing.

This follows last week's decision to raise bank reserve requirements and two increases in the inter-bank lending rate in the space of just one week earlier this month.

"The last time China tightened liquidity in 2007 we saw a dip in polyethylene (PE) imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006," said Mazlan Razak, Kulua Lumpur-based petrochemicals consultant with DeWitt & Co.

Traders have used easy lending conditions to speculate in polyolefins, other commodities and real estate, boosting sentiment, adding to overall consumption, he added.

China's huge increase in bank lending has led to traders in chemicals and polymers sometimes only buying a particular cargo in order to get their hands on credit so they can speculate elsewhere, a Singapore-based polyolefins trader told us late last week.

"This has led to some chemicals and polymers cargoes being sold at below cost because sufficient profits have been made in other commodities," he added.

"It's also worked the other way round - i.e. somebody raising credit through buying another commodity because his main objective has been to speculate in chemicals and polymers."

This is a view shared by the Shanghai-based chemicals information service, CBI China.

The fall in local equity markets in response to the latest tightening announcement will - if sustained - have a negative wealth effect, leading to less consumption of finished goods.

And yesterday's announcement of a moratorium on some new lending could affect the overheated property sector.

Stronger chemicals and polymers demand has been partly the result of people buying homes - sometimes for speculation or just to get in before costs have gone higher.

The improved demand was through the pick-up in construction and furnishing new homes - for example, kitchen utensils.

Credit to sustain last year's huge improvement in auto sales may also become more limited.

But with China needing to sustain strong consumption growth as it attempts to rebalance its economy, and for reasons of social stability, the government might need to take some steps to sustain consumption - particularly in the property sector.

On other hand, if inflationary pressures get worse necessitating a deposit and/or lending rate rise, a dip in final demand for chemicals seems unavoidable.

Rate rises would likely be accompanied by a strengthening of the Yuan - a further disincentive to the speculation in chemicals and other commodities that's been drive by the desire to maximise local currency earnings. The motive has been to generate as many Yuan as possible in order to switch to US dollars once an appreciation occurs.

A gradual appreciation seems likely from the current rate of around Yuan6.8 to the US dollar with the betting on a final medium-term target of Yuan4.8.

Morgan Stanley has predicted a possible 3 per cent increase in the value of the Yuan this year so you can imagine some investors cashing in on their speculative earnings when and if this occurs. Others might hold on for further increases.

A stronger Yuan would also weaken export competitiveness and possibly import volumes of chemicals and polymers for re-export as finished goods.

Chemicals and polymer pricing (see chart below as an example) has been driven up tight supply and higher feedstock costs in the early weeks of this year.

The outlook for supply remains exceptionally uncertain with production problems likely to continue. On the supply side, therefore, a strong argument has been made for continued tightness.

But with crude already weakening on China's credit tightening, the growth in US stockpiles and warmer weather in the northern hemisphere, this could well give chemicals and polymers end-users a bit more leverage.

Last week's dip in crude, and therefore naphtha, has already resulted in a fall in benzene by $30/tonne to tonne to $1,020-1035/tonne FOB Korea, according to the ICIS pricing assessment for the week ending 15 January.

While naphtha and benzene spreads and therefore margins have been spectacular and overall cracker margins excellent - with cracker-polyolefin margins also very good - the end-users we've spoken to have complained about their own contrasting poor profitability.

Sentiment was already pointing to possible price corrections in Middle East polyolefins with oversupply creating short-term bearishness in paraxylene, my fellow Asian Chemicals Connections blogger Malini Hariharan wrote in a post earlier this week.

And as one senior polyolefin industry source commented following last week's announcement of an increase in the bank reserve requirement, prices had "paused for breath" after their strong New Year rally.

By John Richardson

CHINA'S soaring fourth-quarter GDP (gross domestic product) growth - and the release of the latest inflation statistic - has heightened fears among economists that interest-rate rises will be necessary, risking collapse in house prices if it's not managed skilfully.

Inflation rose to 1.9% in December last year from 0.6% in November, according to this same article in today's Financial Times.

As we've mentioned before on this blog it was higher deposit rates in late 2007 that caused the country's last economic contraction as property values and the stock market fell.

On this occasion an inflationary head-of-steam is being built up through not only rising real-estate prices (they were up in Shenzhen by 90% last year, for example, indicating that much more moderate nationwide statistics don't reflect localised inflation hot spots), but also higher food and utilities costs.

Just a few weeks ago the betting seemed to be on no rate rises before the second half of this year.

Now with the release of this latest GDP growth number, as we had suggested might happen earlier this week when we quoted the Lex column in the Financial Times, some pundits now think a rate rise before then is likely.

Higher deposit and/or borrowing rates - to follow fiscal tightening measures that have already been taken - would have another negative consequence for China: A stronger Yuan, denting export competitiveness for an economy that still remains around one-third dependent an overseas trade, despite all the talk about booming local demand.

A growing view seems to be that the Yuan will arise by around 3% against the US dollar. This would also dampen some of the speculation that has boosted petrochemicas demand (see details in link in paragraph above).

Yesterday we quoted Mazlan Razak, petrochemicals consultant with DeWitt & Co in Kuala Lumpur, as saying: "The last time China tightened liquidity in 2007 we saw a dip in PE imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006."

This is obviously the impact on only one polymer, and so tread with great caution when making plans for this year.

"Any Old Iron?"

Source of picture: http://www.investorfsbo.com/refinery.html

By John Richardson

A LONG-TERM shift in refinery economics is posing a major threat to petrochemical margins - along with the delayed supply crisis that's likely to hit the industry at some point over the next year.

"Refiners, when the global economy was booming and particularly after the Hurricane Katrina gasoline supply shock, were pushing out naphtha to achieve balance across the barrel," said Paul Hodges, chemicals consultant with the UK-based International eChem.

"But now you have worldwide oversupply in refining with US gasoline demand peaking in 2007.

"You have ethanol as a percentage of total fuel consumption in the States already having doubled from 5% to around 10% and likely to go to 15%.

"The new auto fuel-efficiency regulations, announced last year, require big improvements in vehicle efficiency - another drag on demand."

And then there is the US economy, which, as we've said before on this blog, faces deep-seated long-term problems, including a far-from-complete deleveraging process.

US refineries ran at 78.4% of capacity in the week ended 22 January, steady with the prior week but down from 82.5% a year earlier, according to data from the Energy Information Administration (EIA), which was reported by ICIS news yesterday.

In the US, naphtha supply is unlikely to be the main issue for petrochemical producers as the big natural gas advantage over naphtha has led to a heavy switch to gas cracking. Instead, it's the availability of propylene from Fluid Catalytic Crackers (FCC) that's the big issue

Proof of this pudding came yesterday when US propylene producers nominated increases of up to 14% for February contracts on lack of availability from refineries, according to the same report already linked to above from ICIS news.

"In Asia, where gasoline demand growth is stronger, refiners outside China are being squeezed by the Chinese who have added so much capacity that they have swung into a gasoline export position," continued Hodges - a fellow blogger.

N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz, agrees.

Low refinery operating rates on poor gasoline and middle distillate markets - along with high Asian cracker operating rates - were likely to increase the East of Suez naphtha deficit in March and April, he recently predicted.

"A couple of recent, seemingly incongruous, headlines caught our eye," wrote the authors of the daily energy and shipping report, The Schork Report, yesterday.

They were referring to the Bloomberg story on January 24 - headlined "Morgan Stanley Expects Oil to Rise to $95 (in 2010) on Demand" and one the next day on the same wire service, which was titled: "Refining Profit Stays Weak on Overcapacity, Ernst & Young says".

"Ninety-five dollars on 'strong demand'....huh? Did anyone on Wall Street see Valero's earnings yesterday," continued yesterday's Schork Report.

But as we pointed earlier this week, you have to be aware of why someone might be making bullish growth forecasts.

"Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446mbbl/d of European and North American refining capacity was closed permanently in the fourth quarter (2009) and why another 663m bbl/d was shut down indefinitely and 560m bb/d partially shut down," the report added.

This amounted to lost oil demand of 1.7m bbl/d by the end of last year, the Schork Report calculates.

But this doesn't mean it's ruling out the possibility of $95/bbl by the end of this year.

If the financial speculators continue to spin their "sustained global economy recovery" story successfully while credit remains cheap and plentiful on continued strong worldwide government stimulus and China doesn't come off the rails, conceivably, yes. Why not?

But this would mean more pressure on refiners margins because even crude around $70/bbl is too expensive given the current economic fundamentals, never mind $95/bbl.

Petrochemicals would be squeezed from both ends of the product chain as refiners cut back even further, thereby reducing feedstock availability - with the firmer crude setting a higher floor for raw material costs.

Producers could also soon face, as we've already said, the long-awaited petrochemicals supply surge and damage to economic growth caused by the higher crude.

I am often accused of being overly pessimistic, but I really do believe petrochemical and chemical companies in general need to plan for a very difficult few years. It would be in everyone's best interests to plan prudently. 

"Hello everybody - welcome to the island of Sodor. Time to flip your positions'

Source of picture: www.dragoart.com

By John Richardson

MY three-year-old son has, quite rightly, an incredibly short attention span. A child of that age should be overwhelmed with the excitement of lots of wonderful experiences and possibilities.

But I would argue that some of those who write about and analyse financial and commodity markets should be able to retain a consistent thread of thought for slightly longer than it takes my son to switch from wanting to play Thomas The Tank Engine train tracks to screaming, stamping his foot and demanding a splash-around in the swimming pool.

There's a lot more money riding on effectively playing the deception game these days, though - for example, $20bn was invested in the oil futures markets in the first half of last year compared with $8bn in H1 2008, according to a commodities consultant.

So the motive to talk up good news or amplify bad news from one day to the next is incredibly strong, thanks to a ludicrous waste of government money that should have gone into creating real jobs in real and worthwhile industries.

To give you an example, the world was all doom and gloom late last week on tightening credit in China, poor economic news out of the US and the wider implications of Greece's government-debt crisis. Commodities prices across-the-board had been softening for several weeks.

And then on Tuesday of this week, whoosh - we had been saved by bullish global manufacturing data and manufacturers' sentiment indices.

Oil prices, as a result, had bounced back by earlier today to $76-77/bbl from around $73/bbl late last week.

Benzene bids for March loading were at $965/tonne FOB Korea and offers for April material at $980/tonne FOB Korea at noon today, according to ICIS news.

Benzene had been assessed at $910-935/tonne FOB Korea by ICIS pricing on 29 January, $115/tonne lower than the week before.

This is not a criticism, by the way, of my colleagues at ICIS pricing as their job - and it's a very difficult one - is to reflect the day-to-day shifts in sentiment in highly liquid markets such as benzene.

Short-term benzene price direction is increasingly being driven by erratic intra-day movements in crude - reflecting the huge capacity to gamble in oil futures. Every scrap of contradictory macroeconomic news and trade data is being seized upon to make a fast buck.

Perspective is what's needed and a big, deep proverbial breath, provided by journalists such as those who write the excellent Lex column in the Financial Times.

In Tuesday's column - on the release of all that bullish trade data etc - Lex wrote: "Surveys can be disconnected from reality. In the US, for example, the Institute of Supply Manager's survey (the latest figures from which were very strong) excludes small companies and therefore half the workforce."

If only all the front-page headlines on that same day had read something like "Surveys Can Be Disconnected From Reality".

One can but dream....

A Ring of Truth?

Source of picture: http://web.pdx.edu/~nathanh/benzene/benzene2.gif

By John Richardson

TUMBLING Asian benzene prices are being blamed on weaker crude, itself a reflection of macro-economic worries over higher-than-expected US jobless figures, government debt problems in the Euro zone and tighter credit in China.

"It's not a question of whether, but when the secon dip in this duuble-dip recession occurs. We are going through a transition period of lower global growth but the financial markets don't reflect this," said a lawyer friend of mine this morning.

"So you have crude overvalued thanks to all the free government money being used for speculation, along with other unrealistic pricing of other commodities and equities."

Hear, hear.

But as we said on Wednesday, financial-market players have big incentives to feed gullible journalists with constantly shifting economic outlooks. 

The muddle in newspaper headlines is quite extraordinary at the moment as only on Tuesday of this week, crude rallied on strong manufacturing data and rising manufacturers' sentiment indices.

So benzene could be back up again by Monday lunchtime.

But while the benzene traders are blaming the collapse of C6s on crude, overproduction on over-confidence in downstream chemicals demand that might not be there post-Chinese New Year has to also be a factor.

This suggest that there is a lot more to do this can merely volatile crude.

The fantastic spreads between naphtha and benzene of late must have also been a factor in higher operating rates.(click on link below with data from ICIS pricing ). Spreads were boosted in late December and early January on naphtha-delivery issues and benzene plant operating problems which tightened supply.

Naphtha-benzenespreads.xls

A separate point is that the benzene traders might have been playing their usual games - a further reason for the price declines.

"One particular trader recently sold large quantities of benzene in order to drive down the price of paraxylene (PX), as it needed to cover short positions on PX," alleged a source earlier this week.

A benzene cargo can change hands as much as six times before it's even loaded, and so it's devilishly difficult to separate the underlying fundamentals from the speculative claims.

But this gets away from the main point: The recent declines in benzene might just be an indication of the begining of the double-dip in this recession.

Mind you, I have said this many times before over the last 12 months 

By Malini Hariharan

With start-up delays, commissioning issues and operating troubles becoming increasingly common across the Middle East and many parts of Asia, I have been asking industry players on what they think are the major issues that companies are facing.

At the top of the list is the shortage of skilled manpower. We have been hearing a lot about this for the last five years. The shortage during the engineering and construction phase of petrochemical projects during 2005-08 is well documented.

But starting-up huge cracker complexes with a number of derivative units (PE,PP, MEG etc) also requires experience and skills - both of which are in short supply. Given this, they say, the problems are inevitable.

"A start-up [of a cracker] is (always) a tricky situation. Almost everyone faces problems; you have to be lucky to cut-in feed and get on-spec product in 48-72 hours," said a source at a leading petrochemicals company.

"A few have achieved if basic engineering has been done well and the commissioning staff is good.

A second factor is lack of familiarity with some of the newer technologies.

A source at a regional polyolefins producer says design and construction issues have also affected operations.

"Many of the plants were built at a time when raw-material costs were at their peak and some compromises were probably made," he said.

"I have been hearing of vessels and pipes corroding within a few months of start-up while older plants have been running for years without any issues."

A source at an engineering company thinks this is very much possible.

"Compromises could have been made in projects that were awarded on a lump sum turnkey (LSTK) basis just prior to the economic boom period of 2005-07."

And there is yet another reason for start up delays.

"Contractors can achieve mechanical completion of a plant on time but the client has to be prepared for start-up," says the source from the engineering company.

"He has to arrange for utilities and raw materials. If the client is not prepared or inexperienced then delays happen."

Even after a plant has successfully been commissioned, there are other issues that often affect operations.

This second source cited difficulties in coordinating work between sub-contractors and cultural issues as more locals from the Middle East countries have entered the work force.

"Many of the locals do not have experience in operating plants; their culture is also different from expats who have traditionally managed plants," he added.

But companies are working hard to resolve problems. Experienced engineers are being recruited to run the plants.

Another source from a petrochemical company said that Indian engineers over the age of 50 were being offered jobs to manage petrochemical plants in the Middle East.

"Earlier, only engineers in the 30s used to go. Age is no longer a bar," he added

It may take a while but companies should eventually get it right. That's when we will see the full flow of material - an event the industry has been fearing for a long time

A roar or a whimper?

Source of picture: http://break4fun.zarke.net

By John Richardson

THE ASIAN aromatics market has had "both its legs chopped off below the knees, and has also had its proverbial hands broken," said an Asian-based petrochemicals consultant today.

"As a result, we are crawling in a great deal of pain towards what should be a better outlook for supply and demand after the Chinese New Year (CNY) holidays."

The holidays officially this Friday, but buyers are not expected to return in big numbers to any petrochemicals market until the first week of March.

"In benzene, it's largely about China (surprise, surprise), which went from being a major net exporter in September and October to being on the verge of balanced in November and December," the consultant added.

"In September and October exports were 40,000-55,000 tonnes for each of these monthd. This swung to exports of only 7,000-8,000 tonnes in November and the same quantity in December."

Ahead of this steep decline, RMB prices increased by enough above US dollar values to open arbitrage - leading to a ramp-up in reformer and cracker-based production elsewhere in Asia.

But now with RMB and dollar prices at parity, China could soon swing back to big export volumes.

High inventory levels also point to this happening. Sinopec, for example, had 24,000-25,000 tonnes in storage compared with the usual 17,000-21,000 tonne with stocks likely to be at elevated levels elsewhere in China, the consultant added.

"Benzene inventories are a bit worrying, but toluene is positively scary. Normal total stocks in China are approximately 70,000 tonnes, but know there is around 150,000 tonnes in the tanks," he said.

Mixed xylenes (MX) inventories in China totalled around 100,000 tonnes this month as against the normal 50,000 tonnes, he added.

Toluene and MX production peaked at the same time as benzene - in November and December last year, he said.

"The good news for toluene is that when seasonal gasoline demand picks up, this surplus should easily be absorbed for blending.

"But there's a great deal of uncertainty around the strength of post-CNY demand for benzene derivatives and down the fibres chain."

Overproduction of BTX in general was the result of the market paying too much attention to a bullish macroeconomic outlook and strong crude, with oil prices reflecting this outlook, he continued.

An aromatics trader added: "OK, accepted that benzene also faced production problems on weather-related delays to naphtha shipments in November-December and naphtha-benzene spreads were excellent, but this still didn't justify levels of production.

"This was a time of weak end-user demand, which everyone realised. Too much attention was being paid to the forward curves, with traders easily able to take positions because of ample bank lending in China."

This was what we had earlier been told had driven the rise in C6 production.

As with polyolefins, therefore, the strength of real post-CNY demand will be critical to whether these high stock levels will be easily absorbed.

An awful lot is going to hinge on the effects of recent credit tightening.

By John Richardson

"IF YOU want to develop a good memory, you should learn to stop xxxxxxx forgetting, you brain-dead idiot" a former editor of mine often said, in his charming Glaswegian accent, after I had made the same mistake yet again.

The same might apply to petrochemicals where maybe, just maybe, shutting down capacity with so few new projects being planned post-2011 could end up being the wrong decision - prompted by the mistaken belief that history won't repeat itself.

This chart, drawn up by my colleague and fellow Asian Chemicals Connection blogger Malini Hariharan, lists the paucity of announced investments in the Middle East. (It's hard to think of that many projects elsewhere.)

The chart shows announced new ethylene additions for the region: 

Source: ICIS

"I noticed that 2015 was the date identified by KPMG by which time 14 of the 43 crackers in Europe should have shut down," said a senior industry source yesterday - referring to a recent study by the management consultancy.

"But by 2015-16 I think we could be in the midst of the next up-cycle and so anybody who exits this business, no matter how uncompetitive they seem to look right now, might end up regretting it."

I wasn't entirely sure, having only met this particular source once before, whether he was having a little fun with a gullible journalist by suggesting that old European crackers really have a future in a world dominated by the Chinese and the Middle East.

His broader point, though, was as old as the hills and might still have validity: Companies overbuild when they have money and markets are tight, suffer when supply lengthens and so hardly invest at all; they once again find themselves in very tight markets and so on and so on.

In the midst of all the talk of a new and permanently-changed competitive landscape, this reminds me of how the Japanese government back in the early 2000s warned that around 2m tonne/year of the country's uncompetitive ethylene capacity would have to close dow within a couple of years.

All of that capacity is still running and has made good money from the China boom.

The above scenario - of an upswing by 2015-16 - presupposes, though, that the world economy won't suffer any further cataclysmic setbacks.

Put yourself in the position of a European cracker operator with all the above uncertaintie. Unless you are absolutely forced to shut down why bother?

It would be pretty damned annoying to be the first to shutter your plant - only to later find out that you were also the last due to a strong market recovery!

By Malini Hariharan

Many Asian aromatics producers are optimistic that the worst is over and a gradual improvement in global demand coupled with firm Chinese demand will help them through 2009.

There is also the expectation that a pressure on refining margins will lead to more plant closures which would also help the aromatics business.

A source at an integrated refinery and aromatics producer points out that nearly 2m bbls/day of refining capacity addition took place last year and another 800,000 bbls/day of capacity is due by next year.

"This will be offset by reduction in capacity in Europe and the US. We have seen reports that suggest that nearly 7m bbls/day of capacity will have to close," he says.

"In the future the refining industry needs more investment to meet environmental regulations. Investment at old plants this investment is not justified and they will have to close," he adds.

An industry analyst says that every refiner talks of closures but wants another company to implement them.

Refiners with high cost facilities in the West are the ones under greatest pressure but pushing through a capacity reduction programme is not always easy as Total's experience in France shows.

The company confirmed on 8 March that it would permanently shut down its Dunkirk operations due to a collapse in demand. The refinery had been idled in September last year.

Despite assurances of zero job losses unions were quick to call for a new strike.

The first source says that some refineries may limp along for a year or two. But eventually poor profitability will force a shutdown although governments may have to step in to help companies close plants.

Out of the investment deep-freeze?

Source: tehrandaily.wordpress.com

By John Richardson

A VERY interesting story from my colleague Bee Lin Chow on ICIS news today reports the signing of a memorandum of understanding (MOU) between Sinopec and Iran's National Petrochemical Co (NPC).

The agreement will explore joint- venture opportunities in petrochemicals and related businesses in the two countries.

China needs oil and has the political muscle and pragmatic mindset to in some cases place energy security above geopolitical concerns such as alleged nuclear proliferation and human-rights abuses.

Hence, it is now talking to Iran about petchem and associated investments.

And it has done energy deals in the past with Sudan and other countries with dubious human-rights records.

Iran, as we reported on the blog last October, is finding it increasingly difficult to get the foreign investment it needs to develop iits refining, gas-processing and petrochemicals industries. Even obtaining catalysts to run plants has reportedly become difficult.

New investment is sorely needed to shore up the economy. Value is, for example, being given away as Iran exports crude and imports gasoline with domestic pricing of the fuel heavily subsidised.

And in petrochemicals, limitations on gas extraction can cause erratic operations at existing crackers.

Lack of feedstock supply and an inability to source foreign investment and technologies have also stymied growth in petrochemicals capacity.

The scope of the MOU between Sinopec and NPC also involves joint marketing of products.

This might help Sinopec limit price disruptions in the Chinese market that might occur at times of sudden influx of Iranian petrochemical products.

Source of picture: http://www.andrewgriffithsblog.com/

By John Richardson

DOOM-MONGERS are scratching their heads as to why the global petrochemicals industry has remained in such a healthy state over the past 18 months.

Old assumptions are, as a result, being challenged. It would be a painful irony if these assumptions are changed just as a new global economic crisis creates yet another set of realities.

Right now, it is far too early to say that the end is nigh.

Sure, we have seen Asian ethylene margins take a hammering over the last couple of weeks - but all that seems to have happened is that they have gone from obscenely good to still pretty good in historic terms.

The correction was always going to take place as the full impact of Shell Chemicals in Singapore switching from a major net buyer to a net seller of ethylene was felt by a thinly-traded spot market.

The fall in oil, polyethylene (PE) and mono-ethylene glycol (MEG) prices on the escalation of the euro crisis for the week ending 21 May were obvious other factors.

Last Friday (28 May), ICIS pricing reported no further reductions in PE values, whereas ethylene had tumbled a further $160/tonne to $980-1020/tonne FOB Korea.

But the decline in ethylene came before the end-of-the-week rebound in crude to around $75/bbl.

This reaffirmed that the weakness in petrochemicals pricing is all about the euro crisis, China's economy, geopolitical tensions in Korea and their impact on confidence across many economies and industries.

To get back the original point of this article, just why therefore have the doom-mongers been proved wrong - and why do the optimists believe that this will continue to be the case?

"I think it could be because petrochemicals demand-growth in the four biggest emerging economies in Asia - China, India, Indonesia and Vietnam - is much-higher than many of us had expected," said a former doom-merchant.

"I think we need to go back and re-examine our assumptions and re-crunch our data. Maybe, for example, we are no longer looking at growth multiples of 1.2 times GDP (gross domestic product); perhaps they should be more like 1.5 times."

The other big factor we've well-documented on this blog is delays in project start-ups.

These look set to continue because of a myriad of issues including manpower, technologies and the use of inferior equipment when building costs were at their peak.

The iron operating-rate discipline of Western producers also looks likely to persist.

Highly-nervous shareholders will accept nothing less and for private equity companies such as LyondellBasell and Ineos, cash-flow remains King.

My London-based colleague Nigel Davis, editor of the Insight section of ICIS news, reports that inventory management in Europe remains exceptionally rigid down all the value chains.

"European crackers are running at an average operating rate of around 80%", added a source with a North American PE producer.

So if the euro crisis does escalate, resulting in damage to strong Asian economic fundamentals and the moderate improvement in the US, production is likely to be cut even further. This might be enough to bring markets back into balance, provided this new economic crisis isn't worse than the last one.

And if the oil price was to fall to the low $60s/bbl and stay there, a further output cut by OPEC is likely to happen in attempt to get the crude price back up to the target range of $70-80/bbl.

This would mean even less associated gas for Saudi Arabia's crackers. They are already operating at below 100% because of feedstock supply reductions resulting from the current OPEC production quotas. 

A further factor behind strong margins has been the steep drop in ethane-gas prices in the US thanks to the rise in overall gas supply.

We all knew that butadiene, and C4s in general, would become tight because most of the new cracking capacity is gas-based. What nobody had predicted was the big switch to lighter feeds in the US by existing cracker operators.

So anybody operating a liquids cracker with butadiene extraction is enjoying excellent returns.

As we said, it is still very possible that we will get through this current crisis intact with margins remaining very strong.

And with so little new capacity planned for post-2011, what are the odds against another fly-up sooner than is expected by the pessimists?

By Malini Hariharan

Asian aromatics markets are getting increasingly hard to read not merely because of volatile crude prices.

Demand, usually strong at this time of the year, has so far failed to materialise. The US gasoline season has started on a slow note. In Asia, benzene demand has been hit by maintenance shutdowns and operating troubles at styrene plants. And Chinese refiners have preferred to use MTBE instead of toluene for gasoline blending.

On the supply side, operating rates at reformers and pygas-based units have been kept high in anticipation of demand. And even now, producers are hesitating to cut output as they do not want to be caught with low stocks once demand kicks in.

"Though the market is long now, the volumes can be easily consumed when demand comes," says Leonard de Guzman of Dewitt & Co.

But when that will happen is still uncertain. The US is said to be awash with gasoline and summer driving is predicted to remain much lower than what it was two years ago.

The US Energy Information Administration's (EIA) Gasoline Summer Consumption and Supply report predicted an increase of just 0.9% in gasoline consumption this summer, but gasoline stocks were about 7m bbl (3%) higher than the start of the 2009 driving season.

Source: ICIS pricing

The net result is an oversupplied market that pushed benzene prices down by 18% in May and toluene by 17%.

Prices rose last week on stronger crude prices but fell again in the last few days.

Producers are struggling with high stocks. It is estimated that Sinopec is holding a benzene inventory of around 40,000 tonnes, double the normal level.

De Guzman predicts that Asian benzene will be slow to recover as the global inventory situation has still to be resolved.

The key, he says, is operating rates at reformers - will they be cut or will producers keep them running in expectation of the summer gasoline demand and also a recovery in styrene demand.

By Malini Hariharan

A merger of PTT Aromatics and Refinery (PTTAR) and IRPC has once again been postponed to early next year due to concerns about legal issues and the business outlook, reports to Bangkok Post.

The legal concerns relate to the country's competition law and outstanding lawsuits filed by Prachai Leophairatana, the founder of Thai Petrochemical Industry, which was taken over by PTT and renamed as IRPC.

And when in doubt it is best to ask for a fresh study.

So an unnamed consultancy company has been hired to once again examine the pros and cons of a merger, the global petrochemical business outlook and future performance of the two companies.

The proposed merger has been delayed fairly regularly since it was first mooted in early 2009. It was first planned as a merger between all subsidiaries of PTT Plc but was then narrowed to PTTAR and IRPC in the first phase.

Meanwhile, Thailand's new minister for industry, Chaiwuti Bannawatis, has been assuring companies that he will find a quick solution to the legal impasse that has stalled projects at Map Ta Phut.

As a first step the minister will isit companies at the industrial estate to restore confidence. He has also suggested road shows to boost confidence of international investors.

But investors are looking for action and not words. Confidence will quickly return if Thailand can get a few projects going.

Petronas seeks to scale new heights

Source of picture: www.mir.com

By John Richardson

MORE details have emerged concerning the major restructuring taking place at Petronas, the Malaysian state-owned oil, gas, refining and petrochemicals major.

Vice-presidents have being appointed to head new downstream (refining and petrochemicals), upstream (exploration and production) and finance divisions, a source familiar with the company told the blog.

"An executive committee of the new vice-presidents and our overall president has also been established. This will help speed-up the decision-making process which has to date been hindered by over-centralisation," he added.

And within the new downstream division, petrochemicals - as earlier media reports indicated - will undergo an initial public offering (IPO), the current schedule for which is the second-half of this year.

"This listing is going to be a huge deal for boosting liquidity on the Kuala Lumpur Stock Exchange (KLSE)," the source continued.

"We don't have the big companies, such as those on the Dow and the Footsie, which can boost liquidity and the value of our exchange."

Perhaps then after the petrochemicals listing, institutional investors such as pension funds could be attracted into the IPOd Petronas petrochemicals division. Its gas-based operations should, in most market conditions, deliver strong profitability.

Source of picture: irantrip1wordpress.com

By John Richardson

IRAN'S ability to further develop its oil, gas and petrochemicals sectors has received further major blows from new rounds of United Nations and US sanctions.

One June 9, the UN approved a fourth round of sanctions on the country, including restrictions on financial transactions, a tighter arms embargo and authority to seize cargo suspected of being used for Iranian nuclear or missile programmes.

Then on the 24th of the same month Congress voted for yet-more sanctions, which according to this Economist article, will force "banks, insurers, energy firms and others to choose: trade with Iran and you will be barred from business with the United States."

Reliance Industries, Petronas, BP, Total and Lukoil have, according to the same article, already voted with their feet by stopping gasoline sales to Iran (the country, despite its big oil reserves, is forced to import 30-40% of its gasoline needs because of lack of development of refining).

The Economist and Bloomberg also point out that Dubai is reducing its links with Iran. The Emirate has been an important third-port route for getting Iranian goods, including polymers, into markets that would otherwise have been closed.

Tougher sanctions mean trade finance is even harder to obtain when dealing with Iran, forcing the country to seek more difficult and innovative ways to bypass the sanctions or demand cash upfront.

"It is getting an awful lot harder to justify doing any business with Iran," a senior executive with a major petrochemicals logistics provider told the blog earlier this week.

"If, say, I was to rent tank-storage space to an Iranian company and then a Western major also rented space off me, that Western company could face penalties because it had dealt with a third party that had done business with Iran."

So as trade dries up, Iran will have less money to fund oil, gas and petrochemicals growth. As we wrote last year, the previous sanctions regime was already making it extremely difficult for the country to get the technology and expertise it needed to better exploit its abundant resources.

Commenting on the Bloomberg article we linked to above, the New-York-based chemicals equity research firm Alembic Global Advisors said in a research note: "This is consistent with our view that we will see continued delays and lower utilisation rates from the Iranian crackers expected to come online during the next few years.

"As a reminder, consensus is forecasting that as much as 11% of all new capacity builds from 2010 through 2014 will be in Iran.

"Iran (has) had five large scale ethylene crackers start-ups since 2005, with an average delay of 18-24 months and average utilisation rates in the first two years of production of 50-60%."

This is good news for global supply and demand balances as the Iranian capacity wild card seems to have been removed from the pack.

But it is a crying shame for Iran and all the good people who work in its petrochemicals industry.

The layout of the Pasir Gudang complex

Source of picture: Titan Chemicals

By John Richardson and Malini Hariharan

HONAM Petrochemical's plan to buy Malaysia's Titan Chemicals  for $1.5bn - which was announced today - is likely to be followed by further buys, including a refiner, an industry observer has told the blog.

"I am neutral on this deal because Titan, like Honam, has to buy in its naphtha feedstock so integration isn't good at the moment," he added.

"But the Lotte Group (Honam's parent company) is looking at a refinery acquisition which would solve the integration problem. They are also looking at more downstream chemicals companies.

"Lotte is very aggressive and wants to raise turnover to Won40 trillion by 2018. Turnover, if you include Titan, will only be Won12 trillion this year and so they have a lot further to go in their acquisitions strategy."

The price for Titan is an average of 5-6 times Titan's EBITDA over the last seven years, he added.

Honam has bought 73% of Titan for major shareholders, which included Taiwan's Chao Group.

"The last seven years were exceptionally good for the industry. Will the next seven years be as good? Possibly not, and Honam might have been able to get a better price by waiting until later this year, when we are likely to be into a severe petrochemicals down cycle," said the observer.

But Honam gets, through Titan, better access to the Association of Southeast Asian Nations (ASEAN) market through the ASEAN Free Trade Agreement. It is also set to benefit from the ASEAN-China free-trade deal.

The acquisition is the first by a South Korean petrochemical company overseas and the biggest so far by Honam. Its previous buys were in South Korea and were of Hyundai Petrochemical and KP Chemicals.

Honam's products include polyethylene (PE), polypropylene (PP), polyethylene terephthalate (PET), polycarbonate (PC) and ethylene oxide/ethylene glycol (EO/EG).

The deal comprises the Titan cracker complex in Pasir Gudang, Malaysia, which sells benzene, toluene, polyethylene (PE), polypropylene (PP) and butadiene and PT Titan - the Indonesian PE producer.

PT Titan, formerly called PT Peni and originally under BP ownership, had been bedevilled by lack of captive ethylene supply until Titan took over and began shipping feedstock from its Malaysian complex.

By John Richardson

ASIAN aromatics producers are struggling from an oversupply driven both by weak demand for their products and strong overall reformer economics, the blog has been told.

As this chart below illustrates for benzene, toluene and xylenes (BTX), the price declines for these base chemicals mirror those we have reported on extensively in the olefins chain.

The weaker demand outlook in China is impacting BTX and its derivatives after the strong growth seen in 2009.

Additionally, weaker naphtha pricing and higher octane differentials between the 92 and 97 grades of gasoline point to strong reformer operating rates over the next few weeks, says N Raviventatesh, Singapore based consultant with Purvin & Gertz in his latest Asian petrochemicals feedstock report.

This report from ICIS news points to a moribund naphtha market dogged by increased supply and weaker demand due to the Formosa Petrochemicals cracker outage, with crack spreads the weakest for all the refinery products.

China has also added a lot of refinery capacity of late and has become a more significant exporter of gasoline as it runs its refineries hard for what my fellow blogger Paul Hodges describes as "social stability and job-creation reasons".

BTX values could therefore suffer further, as has so often been the case in the past, from factors beyond the control of the chemicals industry.

But as Ravivenkatesh points out, his assumption of high reformer operating rates depends on no significant cutbacks in naphtha production.

And with cracker margins still on the decline in Asia, we seem to be getting close to the point of cracker rate cuts - by possibly as early as August. This would further help to rebalance BTX markets through less availability via pygas.

Jurong Island

Source of picture: www.pcs.com.sg

By John Richardson

SINGAPORE plans to eventually raise its ethylene capacity to 6-8m tonne/year from the 4m tonne/year which will be reached when ExxonMobil's second cracker complex at Jurong Island is on-stream, Liang Ting Wee, Director of Energy and Chemicals at the Economic Development Board (EDB), has told the blog.

This confirms what industry sources have been telling us for several weeks now - that the country could build several new cracker complexes after the ExxonMobil start-up, which is expected by 2012.

Speculation is intense as to whom the investors might be and we are attempting to confirm various rumours. We will keep you posted.

Feedstock options being assessed for the new ethylene capacity include more use of refinery bottoms - refinery products from the bottom of distillation columns which can have low alternative value in fuels markets.

The Shell Chemicals and ExxonMobil existing crackers - and the second ExxonMobil plant - already make use of these refinery products, thanks to the companies' mixed-feed cracker technologies.

Another option being evaluated is liquefied petroleum gas (LPG) as Singapore continues with its evaluation of an LPG terminal.

Qatar Petroleum might end up being a key LPG, and also condensate, supplier to Singapore following its acquisition of stakes in Petrochemical Corp of Singapore and The Polyolefins Co last November.

Source of picture: anirudhsethireport.com

By John Richardson

WE reported earlier this week that cautious confidence is being expressed that the worst might be over in polyolefin markets with prices having reached the bottom.

"The market seems to be improving and my view there is no much room for further price corrections from a cost standpoint despite the oversupply," said a source with a major global producer in response to earlier our story about the 30% increase in Chinese production in H1.

"If demand recovers or even holds, prices should stabilise at slightly higher levels to where they are today,"

I hate to be pessimistic yet again, though, but sadly I think that any recovery could be a dead-count bounce - an edging-up by producers of prices $10-20/tonne every week or so because of a moderate re-stocking and the cost factor mentioned above.

This is barring major operating-rate cuts - or even some quick decisions on further permanent plant closures which we also talked about earlier this week.

"We haven't seen the worst of things yet and without some permanent shutdowns by higher-cost Japanese and other producers, we will remain in a down cycle throughout 2011 with no recovery until the following year," a senior industry source told the blog.

His view is that the moderate price-recovery currently being talked-up might actually be bad news as it will delay painful decisions on scrapping capacity.

"What we actually need are price reductions of around $50-100/tonne a month rather than any increases," he added.

On the demand, side, as we've said before, China's economy is clearly slowing and problems in the West are mounting - meaning that a rebalancing is needed, even if in the longer-term the outlook for Asia remains amazingly good (the tantalising prospect of shortages beyond 2012 might well put paid to the rationalisation our industry source would like to see, forcing everyone to muddle through).

A very interesting, well-written and extremely thorough article from my colleague Mark Victory at ICIS news earlier this week said that summer demand in Europe across a range of chemicals and polymers was stronger than had been expected.

Here we are broadening the perspective out. The blog doesn't have the resources to, on the whole, cover anything more than the olefins and polyolefins markets, but we from time ot time we are able to point out parallels with what's happening elsewhere in the chemicals industry.

Mark's article points out, though, that factors other than fundamentally strong demand can be used to explain this brighter picture.

I can't also help feeling that there is a lag-effect here - e.g. European sellers of chemicals and polymers into the auto market have yet to be hit by the slowdown in demand from China.

The American Chemistry Council (ACC) late last week also reported a global slowdown in chemicals production, according to an article by another of my ICIS news colleagues, Nigel Davis.

He wrote: "The 'V'-shaped recovery in Asia Pacific has stalled, or "dissipated" in the ACC's words. European output growth has continued to show strong gains but there has been individual national output weakness.

"Production in the UK, for instance, has dropped for the past three months compared with the year-ago periods. UK chemicals output is slewed considerably towards pharmaceuticals, a segment facing tough times, but the country's more basic chemicals output has not recovered strongly.

"The situation across Western Europe is generally different, with a strong rebound apparent from the sharp fall in output in 2008-2009 in countries such as Germany and France.

The pace of growth, however, eased off slightly in June and prospects for the second half do not look good."

Singapore's Marina Bay Sands complex

Source of picture: Washington Pos

By John Richardson

"SUCCESS in this business, whether you are tracking price direction or planning new investments, is 95% about feedstock," says a senior European-based sales manager with a global polyolefin producer.

So perhaps it shouldn't be a great surprise that a considerable amount of the planning and thinking going into Singapore's next wave of petrochemicals capacity relates to raw materials.

To say that this business is 95% about raw-material advantage, however, may, in some instances at least, be an overstatement.

Energy efficiency, the environment and logistics matter a great deal, too, which is also reflected in the discussions taking place in Singapore as the Jurong Island Version 2.0 strategy is compiled.

Working committees have been established involving the government and the private sector to help formulate the new direction in these areas.

Singapore is already a major regional supply source with sufficient competitive advantages and so where it goes from here will be the focus of keen interest from Houston to Beijing.

Despite having no oil or gas reserves to draw on, the country has still managed to build cost-efficient capacity.

This is partly the result of the mixed-feed cracker technologies employed by ExxonMobil and Shell Chemicals enabling the use of refinery products that can have low alternative values in fuels markets.

Shell Chemicals brought on-stream its 800,000 tonne/year cracker in Singapore in March. It can crack a full range of feedstock from very light to very heavy, including hydrowax from a revamped hydrocracker.

And ExxonMobil is expected to have commissioned its second cracker on Jurong Island by 2012, which, like its first cracker in Singapore, will be closely integrated with the company's refinery.

These two investments will see the country's ethylene capacity rise from 2m tonne/year to 4m tonne/year.

"This puts us on path to increase our ethylene capacity to 6-8m tonne/year in the long term," said Liang Ting Wee, Director of Energy and Chemicals at the Economic Development Board (EDB) in an emailed response to questions. The EDB is part of the Singapore government.

The eventual ethylene target suggests that several more crackers might be built in Singapore, leading to considerable industry speculation about likely investment candidates.

Further use of refinery bottoms is a feedstock option for additional crackers.
"There is a global trend towards cleaner and low-sulphur transportation fuels," Liang added.

"The implication of these stricter fuel standards and policies is that there will be more refinery bottoms (available), which can either be upgraded to cleaner fuels, or used as a feedstock for chemicals.

"We are currently studying this closely with the refineries in Singapore to understand the economics of the various options."

He added that Singapore was also keen to diversify the range of petrochemical raw materials.

To this end, he said that "in partnership with the industry, we are studying the feasibility of an LPG [liquefied petroleum gas] terminal to enable companies on the island to import LPG in more significant volumes.

"LPG could be used as an alternative feedstock to naphtha for crackers, as well as other industrial users."

One obvious potential supplier of LPG is Qatar Petroleum, which in November last year acquired equity stakes in two local Shell Chemicals/Sumitomo Chemical joint ventures - cracker operator Petrochemical Corp of Singapore and the downstream company, The Polyolefin Co.

"I'm hopeful that condensates and LPG would flow from Qatar to Singapore as a result of Qatar Petroleum taking an investment in these joint ventures," said Ben van Beurden, executive vice- president of Shell Chemicals when the deal was announced.

Biomass is another option being evaluated.

"In the area of biomass, we are keen to position Singapore as a leading location for biomass-to-chemicals conversion technologies," said Liang

"Our geographical position in the middle of a region rich in biomass, and strong logistics connectivity, coupled with integration opportunities to our chemical industry, will present interesting new opportunities for companies.

"Examples of biomass available in this region include palm-based materials such as palm oil, palm kernel oil and empty fruit bunches, sugar cane, starch-based materials such as cassava and sago palm, as well as cellulosic biomass materials."

As for energy efficiency and the environment, Liang added: "We are also looking to enhance the sustainability of the chemical industry through R&D in emerging areas such as carbon capture and utilisation. The availability of concentrated streams of CO2 on Jurong Island can present exciting opportunities for companies."

Work is also underway to create a comprehensive master-plan to meet the long-term water needs of Jurong Island, while reducing dependence on supplies from the Singapore mainland, continued Liang.

This could include use of seawater for cooling towers and recycling waste heat for applications such as water desalination, he said.

Logistics improvements being considered included the feasibility of a second road link between Jurong Island and the mainland, a new container barging terminal and an island-wide pipeline grid system, he added.

All of this gives a useful insight into not only how the future could shape-up for Singapore, but also for the petrochemicals industry as a whole.

Beyond the current down cycle, significant new capacities will be needed to meet emerging market demand.

The debate taking place in Singapore shows that meeting this demand has become a lot more complicated, thanks to factors such as a greater need for logistics efficiency and energy efficiency and environmental challenges.

And to finish as we started on feedstock, ethane gas shortages in the Middle East could mean that this next wave of capacity is built largely outside the region.

By Malini Hariharan

Formosa Petrochemical Corp's problems are mounting after two accidents in less than a month at its refinery and petrochemical site in Mailiao, Taiwan.

Wu Den-yih, the country's premier was at the site last week and ordered an investigation report to be submitted on 6 August.

And in a bid to reassure residents he declared that the company's No 6 naphtha cracker "will not be allowed to re-open unless the cause of the fire is discovered and operating safety is fully guaranteed".

Pic source: Focus Taiwan

It was not clear if he was referring to all the plants at the No 6 naphtha cracker site or only parts of the refinery that were damaged by the fire and the No 1 cracker that was hit by a blast in early July.

The No 6 site includes the refinery, two crackers, an aromatics unit and a number of derivative plants operated by affiliates of Formosa Petrochemical.

Formosa Petrochemical restarted one of its three 180,000 bbl/day crude units in Mailiao last week, with plans to put another unit back on stream this week.

Meanwhile, local residents have started asking for extensive compensation. They want Formosa to pay their health insurance premium, subsidise their electricity bills and even offer jobs to the local young people at the company. Practical considerations appear to have outweighed concerns about health and safety.

Residents have also been seeking a suspension of all operations at the site so that all plants can be inspected. They are also asking for a termination of Formosa Petrochemical's expansion projects.

ICIS news reports that the company has plans to beef up its ethylene capacity by 300,000 tonnes/year and increase the capacity of its refinery to 580,000 bbl/day under the fifth phase of Mailiao complex expansion.

The planned Taiwan Dollar (NT$) 280bn ($8.75bn) expansion - which would involve 43 new projects, including petrochemical intermediates such as methyl methacrylate (MMA) and phenol - is currently being assessed by Taiwan's Environmental Protection Administration (EPA), said Jack Shieh of the Petrochemical Industry Association of Taiwan (PIAT).

"The expansion permit was supposed to be given to them [Formosa] by the end of the third quarter (of 2010) but because of the fires last month this could be pushed back by half a year, said Danny Ho, a Taipei-based petrochemical analyst at brokerage Yuanta Securities.

But the company remains optimistic of obtaining an approval by the end of the year.

Formosa is not the only Taiwanese company facing project-related problems. Kuokuang Petrochemical is still struggling to get approval for its cracker and derivatives project which was first mooted in 2006.

The latest news is the withdrawal of one of its investors.

"I'm not investing. No investment project in the world can defer for so long," said Preston Chen, chairman of the Chinese National Federation of Industries.

He complained that major investment projects in Taiwan did not receive enough support and pointed out that a similar project proposed in Singapore half a year later than the Kuokuang project had started commercial production.

Given a bleak environment for petrochemical projects in Taiwan and also Thailand it is perhaps not surprising that Singapore is gearing up to attract more investments.

By Malini Hariharan

Excess availability of product continues to trouble Asian aromatics markets. Commissioning of new plants and reluctance to cut operating rates has resulted in a steady build up of stocks over the last few months.

Take the case of paraxylene (PX). The spread between naphtha and PX prices has been running below $250-300/tonne, which is usually needed to cover operational costs. But margins for producers integrated to purified terephthalic acid (PTA) have been positive. And it has made sense to operate PX units linked to refineries because of strong reformer economics.

At today's ICIS Asian Aromatics webinar, Bohan Loh, ICIS pricing editor for PX and mixed xylenes, estimated that South Korean PX plants ran at 95-100% in July. Elsewhere in the region operating rates were in the 80-95% range with minor cutbacks only at some plants in China and Southeast Asia.

The market is also seeing volumes flow from 4.52m tonnes/year of new PX capacity commissioned in 2009 (2.9m tonnes/year in China and 1.62m tonnes/year in the Middle East).

In benzene, growing supply in the China market is a key concern, pointed out Mahua Chakravarty, ICIS pricing editor for BTX.

China's dual role as an importer and exporter is further complicating the market. China imported about 621,839 tonnes of benzene last year and exported 278,111 tonnes. Imports in H1 2010 have amounted to 119,051 tonnes while it exported 55,489 tonnes.

Demand has not been too bad. But there is simply too much being produced.

Cuts in operating rates will be needed. The question is who will move first and when.

In the words of one market analyst: "No one wants to be first as they don't want to give their competitor an advantage."

Petro Rabigh

Source of picture: arabianoilandgas.com

By John Richardson

Petro Rabigh's attempt to move further down the value chain raises interesting questions over exactly how successful the Saudi joint venture will be in attracting the necessary investment.

As my fellow blogger Malini Hariharan wrote earlier this week, plans for the second phase of Petro Rabigh include paraxylene (PX) to be consumed locally in downstream purified terephthalic acid (PTA) and polyethylene terephthalate (PET) plants.

Other proposed investments include a methyl tertiary butyl ether(MTBE)/isobutylene facility.

Another project in Saudi Arabia was also originally scheduled to include an MTBE/isobutylene plant as part of an integrated C4s derivatives complex. However, the prospective investor in the complex withdrew when it calculated a rate of return of below 10%, the blog was recently told.

"A leading management consultancy recently conducted a study which showed that rates of return decline progressively the further you move downstream from the cracker in all of the Gulf Co-operation Council (GCC) countries," an industry source told us yesterday.

"It still makes a lot of sense to build basic polyethylene (PE) and mono-ethylene glycol (MEG) facilities in the region, if - and this is a big IF - you can get access to attractively-priced ethane," he added.

GCC governments might be able to lavish generous investment incentives on companies in order to encourage the kind of downstream petrochemicals investment (all the way down to the processor level) that helps to alleviate high levels of unemployment.

But as we've mentioned before investment incentives are one thing and efficiency of operations are entirely another. Investors face the choice of building in the GCC or in Asia - which is much-closer to final consumption markets where labour costs are also a lot lower.

Iran's South Pars gas field

Source of picture: www.petropars.com

By John Richardson

THE ability of Iran to further exploit its huge natural gas reserves - and in so doing maintain ethylene exports at constant levels throughout the year - now appears to hinge on Chinese investment (Western companies have withdrawn from the Iranian energy sector due to the tougher sanctions regime).

As we wrote on Friday last week there are big doubts in the short term over the truth behind official claims that gas extraction and processing issues have already been resolved.

What happens every winter and summer is that ethylene exports from Iran dip as gas supply is diverted from crackers to power stations, in order to meet a rise in demand for electricity.

But in the longer term, China could transform the picture. In 2009, China National Petroleum Corp (CNPC) replaced Total in a contract to develop a major portion of Iran's giant South Pars gas field.

China National Offshore Oil Co (CNOOC) is also involved in developing the North Pars field and in building liquefaction facilities.

There are much bigger issues at stake here, though, than ethylene trade-flows - as this article from the Wall Street Journal, co-authored by a former Central Intelligence Agency officer, indicates.

If Obama has the mettle - along with taking on the Republican Party and those unusual people in the Tea Party movement - Chinese and Russian companies investing in Iran could face US sanctions (Russia has also stepped-up its involvement in the Iranian energy sector). 

China and Russia appear to have become the last-chance saloon for the Iranians as they seek to develop their natural gas and oil reserves - and also the under-invested refining sector: Sinopec is developing oil fields and upgrading refineries at Tabriz, Arak and Abadan.

In July, Iran's Oil Ministry announced it had reached a $40bn dollar deal with China to revitalise its refining industry.

Further - both Russian and Chinese companies are stepping in where Westerners fear to tread by exporting gasoline to Iran.

The Iranians, as we also reported in last week's post on the ethylene trade, have closed-down styrene capacity to divert benzene feedstock into gasoline blending (this resulted in the spike in ethylene exports last month as the C2s were not needed for styrene production).

A total of six petrochemicals plants have been shut, we have read - including also paraxylene (PX) facilities.

Whether the Chinese and Russians can now fill the gasoline import gap created by Western embargoes will be important to monitor - as it will determine whether these six petrochemical plants will be able to re-start.

Source of picture: tycoonreport.com

By John Richardson

This is a very dangerous time for petrochemicals producers as they attempt to separate real, sustainable demand from feedstock-cost related price rises and speculation.

A bubble - as we discussed yesterday - seems to have formed in purified terephthalic (PTA) and, according to ICIS news, in caprolactam.

The surge in cotton prices is a factor behind the price rallies in both these production.

You need to ask yourself: To what the extent is the rise in the price of cotton driven by fundamentals versus speculation on the cotton futures markets, and so what's the risk of a collapse?

PTA also has its own future market in China - the Zhejiang Commodity Exchange, where, as we have also reported, trading was suspended this Tuesday because prices rose beyond their daily limit.

And as we also blogged about earlier this week, another inventory-related crisis could hit the chemicals industry if oil prices retreat - along with other commodities and equities - if there is a sudden change in the overall macroeconomic mood.

A few extra servings of scepticism about what chemicals and polymers traders are saying about demand and supply are therefore necessary in order to prevent inventory overbuilding. And my, as we shall detail later on, there are some nonsense stories out there.

This is the fourth quarter when chemicals and polymer demand in Asia usually slows down, and yet price rises in the polyethylene (PE) market continue, as my colleagues on ICIS pricing have been reporting. Click here for a slide illustrating this point:

ChinaImportPEPrices12November.ppt

Last Friday's price increases seem to have been mainly driven by crude and what was happening on the all-important Dalian Commodity Exchange. This points to the very-strong likelihood that recent price rises have been mainly feedstock-cost and sentiment driven.

And yet, in conversations with traders this week the blog has heard a couple of curious stories to support the notion that the rallies are about real supply and demand.

For instance, one Hong Kong-based trader told of us of further production cutbacks in the Middle East as a result of more reductions in feedstock supply to crackers that are dependent on associated gas.

He justified this by claiming that OPEC has further reduced Saudi Arabia's oil quota on weaker global crude demand.

But as we will post next week, the reverse is likely to soon be the case as global oil demand is on the up (there is still a strong argument, though, that the more-bullish forecasts on crude demand do not entirely justify the recent spikes in crude. These appear to have been mainly driven by QE2 and, as a result, what's happening with the US dollar).

The same trader cited further outages in the Middle East, whereas other sources tell us of no major new production problems - and of output being ramped-up at the recently commissioned Borouge complex in Abu Dhabi. There is also more output from Thailand following the recent start-up of linear-low density PE (LLDPE) plant.

(Also watch out next week for a post on how financial analysts may have got ahead of themselves in predicting market-tightening from next year. There is a strong argument to be made that as rising production in the Middle East will make 2011 a more difficult year as extra output is absorbed).

Now let us look about what is being said about demand in the fourth quarter in China.

As my colleague Nigel Davis wrote earlier this week in an ICIS news Insight article, linear LLDPE and low-density PE (LDPE) are benefiting from this being an agricultural film-buying season.

I was highly amused a couple of weeks when a trader told me of how exceptionally cold weather in China had already added a further boost to agricultural film demand as farmers sought to better-protect their crops.

At that time, though, it was the expectation of very cold weather that had driven-up all sorts of commodity prices, including steel - indicating yet again the speculative influences on PE.

Since that time there have been a few days of very cold weather, but now forecasters are expecting milder-than-expected conditions across the south and east of the country. This has led to a slight retreat in oil futures pricing.

The key thing to remember here - as we said before - is that this the fourth quarter when demand traditionally slows down in Asia.

In China we are also well-beyond the peak manufacturing season for finished goods for Christmas.

There are claims out there that PE end-users in China are already ramping-up production of packaging material ahead of next year's Chinese New Year (CNY).

But as CNY 2011 doesn't fall until 3 February this seems exceptionally early to the blog - and any increase in packaging-related demand will not be enough to compensate for the end of the manufacturing season.

Further, it will be interesting to see if overall industrial production in China dips in Q4 as the government continues to strive to meet its 2011 emissions targets.

There are reports that electricity-supply reductions that have already taken place - aimed at achieving the emissions target - have led to a shortage in diesel fuel due to industrial users switching to diesel-powered generators.

This could exert further margin pressure on converters who might be already struggling to cope with higher resin prices.

A question the blog will attempt to explore is to what extent the converters have been able to pass-on these recent resin price increases. This might give us a firmer indication about the real state of demand.

By John Richardson

AS the blog had anticipated would happen, there were sharp retreats in some chemicals and polymers pricing late last week on the steep declines in equity and crude prices.

Polyethylene (PE) fell by $70-130/tonne, according to our colleagues at ICIS pricing, as the Dalian Commodity Exchange once again demonstrated that it has become a major influence.

Many industry sources now tell us that PE in general (the Dalian has an influence across several different grades) has almost become a financial instrument; in other words, its day-by-day and week-by-week price in China moves in line with the Dalian as the Dalian moves in line with crude oil and equities.

Therefore, you could draw a neat line between last week's dip in PE pricing and the retreats in crude and equities as investors took flight.

Towards the end of the week equities and oil regained ground as confidence reportedly grew that Beijing's measures to tackle rising consumer-price inflation would have a limited impact on the broad economy.

The recoveries were also said to be the result of greater confidence that a rescue package would be successfully agreed for Irish banks.

In parallel, Dalian saw four consecutive days where the futures contract fell beyond the maximum allowed in one day's trading, forcing trading to be suspended, before a recovery on Thursday.

Source of picture: Inoldlasvegas.com

Polypropylene (PP), too, retreated on the influence of Dalian but by a more modest $10-20/tonne as traders seemed to be in a comfortable position to try and ride out the negative sentiment.

Propylene was more steeply down, by $20-70/tonne, as it reacted to the dip in crude futures.

But there seem to be factors specific to the C2s markets sufficient to override the overall sentiment which kept ethylene stable.

Click here for these numbers in graph form -

ICISprices19Nov.ppt

This reaffirms our view that this market has become very hard to read because of more extreme shifts in spot cargo availability.

Benzene, perhaps the mother of all chemicals, was down $15-50/tonne but interestingly, paraxylene (PX) staged a rally later in the week as market participants had time to react to the recovery in equities and crude.

One of the big macro questions is whether China will, indeed, get it right by taking targeted measures that are sufficient to bring inflation under control.

This article from the Wall Street Journal suggests, rather worryingly, that China is now running out of ammunition to fight the hot money flowing into its economy - which at risk of continuing as long as quantitative easing lasts.

Every mood swing in equity and commodity markets is bound to find a reflection in chemicals and polymer markets over the coming weeks as the prospects for next year seem exceptionally uncertain.

By Malini Hariharan

If sourcing PTA has been challenging this year, the bad news is that the situation is unlikely to improve for the next couple of years.

Rapid polyester capacity expansion, especially in China and India, is already outpacing growth in PTA capacities and the situation is set to worsen.

PTA producers, on the other hand, can look forward to healthy margins.

At the Indian Petrochem conference last week, YJ Kim, managing director of PCI Xylenes & Polyesters, Malaysia, predicted: "We are seeing historical high margins this year and this will probably continue next year."

He expected a PTA margin of over $200/tonne until early 2012.

Strong demand would result in plants being run harder. Average global plant utilization rate is forecast to rise to 90% in 2011, up from 87% this year.

Kim pointed out that the average utilization rate in China is 91% this year and plants would have to run at 95% next year to meet demand.

"Industry players say this is not possible and the maximum that plants can run at is 92%. So China will need to import more, but everyone is sold out," said Kim.

Chinese PTA demand is expected to grow by 2m tonnes next year and finding these volumes could be a problem.

Indian PTA buyers too face a similar situation, especially if Mitsubishi Chemical continues to face operating issues at its second PTA unit. Average utilisation in India is only around 75% this year and plants would have to run at a 'challenging' 95% next year to meet local demand.

The situation is likely to reverse only in late 2012 or 2013 once new plants are fully operational. Over 14m tonnes of new capacity is scheduled to come onstream during 2011-2013, mostly in China.

The polyester chain has seen plenty of action this year. And it looks like the excitement will continue.

By Malini Hariharan

Qatar Petroleum seems to be in no rush to sign up a foreign partner for its next cracker project. With doubts about ExxonMobil's participation, the field has narrowed to Total Petrochemicals and Shell.

Total's proposal for a mixed-feed cracker 'was still in the very early stages,' said Graeme Burnett, the company's senior vice president for Asia and the Middle East, in an interview with my colleague Anna Jagger.

"We hope to have some clarification by early next year," he said.

Burnett also disclosed that the company was looking "to develop projects [in the Middle East] that add something to a particular country's current product portfolio". For instance in Qatar Total would consider investing in products in the C3 chain such as polypropylene (PP) or even styrenics.

"I'm not saying that's in our scope right now. But those are the kind of developments we're looking at," he added.

And he confirmed that the Ras Laffan Olefins Co cracker would reach full operating rates only early next year because of "mechanical" constraints. The 1.3m tonnes/year cracker started in April and has gradually raised operating rate to 60%.

As for Asia, Total's South Korean joint venture with Samsung has started looking at a new worldscale aromatics facility. But details of the project have yet to be finalized.

By Malini Hariharan

Asian naphtha prices, which were expected to remain firm this quarter, have come under pressure as large volumes of European material are heading towards this region.

Naphtha was trading at around $885/tonne cfr Japan last evening supported only by the strength in crude oil prices with WTI at $91.69/bbl and Brent at $98/bbl.

But with nearly 600,000 tonnes of product on its way from Europe naphtha premiums have slipped and could fall further, traders told Felicia Loo, ICIS pricing editor for naphtha.

Europe has been able to move large volumes because of poor demand as some crackers switched to liquefied petroleum gas. Poor economics for gasoline blending have added to the problem.

In petrochemicals, ethylene and propylene prices have been stable this week but benzene has moved up, led by price hikes in the US and Europe and supported by crude oil.

Prices have hit a 28-month high of $1,120-1,130/tonne fob Korea, a level last seen in early September 2008.

By Malini Hariharan

Paraxylene (PX) markets are on a roll. Prices have risen by 20% since the beginning of the year and were assessed at around $1,620/tonne cfr Asia late last week by ICIS pricing.

One contract nomination for March was out yesterday with JX Nippon Oil proposing a $110/tonne increase to $1,730/tonne cfr Asia.

The opening of the East-West arbitrage window has fuelled Asian markets. Plant problems in the US and Europe could create room for as much as 50,000 tonnes of Asian product.

European spot PX prices moved towards record levels last week despite a number of force majeure declarations in the downstream purifited terephthalic acid (PTA) industry. Buyers were said to be willing to pay as much as $1800/tonne for spot PX.

Besides the arbitrage factor, Asian markets were also propped up by unconfirmed reports of a possible delay in the start up of S-Oil's new 900,000 tonnes/year plant. The plant was expected to start at end-March but this could be delayed by two months, said market players.

However, action in the Asian PTA market was muted last week as a fall in futures prices on the Zhengzhou Commodity Exchange dampened sentiment. There were also concerns about the impact of the Chinese government's efforts to tighten liquidity. Labour shortages in the coastal regions had also affected the textile sector and polyester margins were under pressure from high input costs.

Additionally, around 1.5m tonnes/year of Chinese polyester capacity scheduled for maintenance shutdown from 10 February to 10 March which would further hit PTA demand.

But these could be temporary factors as cotton prices continue to remain firm.

In a recent report, analysts at UBS Investment Research noted that cotton prices have risen by 30% so far this year and were expected to remain strong at least until the next harvest season in late Q3 2011.

The analysts were bullish for the entire polyester chain and have revised their spread forecasts for the year.

The average PX-naphtha spread has been raised to $550/tonne from the earlier estimate of $370/tonne. The PTA-naphtha spread has been raised by nearly $100/tonne to $605/tonne while the ethylene-monoethylene glycol (MEG) spread was expected to reach to $350/tonne in 2011, up from the previous estimate of $190/tonne.

"We see limited new capacity coming on stream in 2011-12 for PX and MEG. And with the strong downstream demand, spreads are likely to remain robust in the next one to two years," they noted.

By Malini Hariharan

The blog has been updating the status of Indian petrochemical projects and has found that many are running behind schedule.

Reliance Industries' mega cracker at Jamnagar has yet to get off the starting block. The company is holding on to an end-2014 start schedule for the 1.4m-1.6m tonnes/year cracker which will be based on offgases and other refinery feedstocks. Sources close to the company said that preliminary work related to technology selection has been completed and the projects team is only waiting for the green signal. Given Reliance's project implementation record it should be able to keep the schedule if a decision is taken soon.

Meanwhile, Reliance has started work on a 1.1m tonnes/year purified terephthalic acid (PTA) project at Dahej on the west coast of India. The project is scheduled to be completed in the second quarter of 2013. Reliance has also planned a second PTA plant of a similar capacity at the same site. Technology has yet to be selected but the target date for completion is end-2013. A new paraxylene (PX) of 1.3m-1.5m m tonnes/year at Jamnagar has also been planned for completion at the same time.

The other big PX/PTA project in Baroda, Gujarat, by Indian Oil Corp (IOC) is unlikely to be completed before Q4 2013 as the company has yet to make a final investment decision.

"A decision should come through in 1-2 months; the company would then need 30-32 months to execute the project," said a source close to developments.

This 370,000 tonnes/year PX and 560,000 tonnes/year PTA project was earlier scheduled for completion at end-2012/early 2013.

IOC is also looking at putting up a PX plant at its refinery in Haldia, West Bengal. A decision on this project is dependent on an offtake commitment by Mitsubishi Chemical which operates two PTA plants at Haldia.

"They have to agree on legal and commercial issues; if they arrive at an agreement this year then we are looking at start up in 2015," he added.

One project that has been progressing is state-owned GAIL's 450,000 tonnes/year expansion of its gas cracker at Pata, Uttar Pradesh. The expansion will feed a new 400,000 tonnes/year swing linear low density polyethylene (LLDPE)/high density polyethylene (HDPE) plant. The blog has heard that Univation is likely to provide technology for this unit and startup is scheduled for 2014.

However, Gail's joint-venture cracker project in Assam in Northeast India has been delayed to beyond 2015, said a source close to the company. The sub worldscale project (cracker capacity of only 220,000 tonnes/year) has been facing many problems including a steep escalation in costs.

Local media reports have estimated that the project cost has nearly doubled to Rs 100bn ($2.2bn).

The government is now examining how to make the project viable; more subsidies will have to be offered, the source added.

The project makes no sense but GAIL has no choice but to implement it as the government is keen to develop this part of India.
And lastly, ONGC Petro-Additions Ltd's (OPaL) 1.1m tonnes/year cracker project at Dahej has seen another setback. A source close to the project have told the blog that Daelim and Chevron Philips Chemical who had bagged the contract for a 340,000 tonnes/year HDPE project have parted ways. As a result OPaL will have to reissue tenders and this could mean a delay of 6 months; the Q1 2013 target looks impossible, said the source.

As reported earlier the company faces a situation where its cracker would be completed at least six months ahead of the derivative units. The blog would like to know if olefin traders have started knocking on OPaL's doors.

By Malini Hariharan

The long-awaited merger between PTT Chem and PTT Aromatics (PTTAR) was finally announced last week.

A presentation made to financial analysts gave details on what the merged entity will look like, planned synergies and opportunities for growth.

The new company with a total petrochemical capacity of 8.261m tonnes/year and petroleum products capacity of 228,000 bbls/day will be a clear leader in Thailand (ahead of Siam Cement Chemical) and also in Southeast Asia. It will be second to Petronas Chemical in terms of enterprise value but number one on revenue and assets.

Source: PTTAR

Synergy projects have already been identified which would require an investment of $92m. These include tapping the offgases, C3/C4, heavy aromatics and other streams from the PTTAR's refinery as feedstocks for PTT Chem's existing crackers and optimisation of facilities such as oil tanks, jetties, and steam and gas turbines, Once completed by 2015, these projects would yield annual benefits ranging from $80.2m to $154.1m.

The merged entity sees opportunities for expansion in value-added products/ differentiated products such as polyurethane, propylene oxide (PO), polycarbonate, polymethyl methacrylate and caprolactam.

In a statement to the Stock Exchange of Thailand (SET) the two companies also talked about improvement to the refining process that would result in increased production of hydrowax which will be used as feedstock for a new cracker project. No further details were available about this project.

The merger of PTT Chem and PTTAR is the first stage in the full consolidation of all the PTT affiliates. The next stage will see a merger of IRPC with the new company.

"This is our future plan, to combine all the petrochemical units in order to gain market capital, add value to our assets and improve cost efficiency," said PTT president and chief executive Prasert Bunsumpun at a press conference last week.

By Malini Hariharan

With naphtha crossing $1000/tonne yesterday Asian petrochemical producers reliant on this feedstock remain caught in a tight spot. Costs are continuously rising while market direction for key derivatives is uncertain.

Ethylene and propylene prices are holding firm at around $1,350/tonne CFR Northeast Asia and $1,500/tonne CFR Northeast Asia respectively, supported by a cracker outages and upcoming turnarounds in South Korea and Japan. And aromatic prices are tracking developments in upstream markets with benzene at around $1,180/tonne FOB Korea.

But the Chinese polymer market continues to trouble producers. As explained by the blog earlier, demand is weak as credit tightening has affected traders and end-users.

"It is a difficult market. Looking at crude oil and naphtha, we need a price increase of over $100/tonne for polypropylene (PP) in April; but we will probably have to start with $30 and if successful, ask for more. The big constraint is weak Chinese demand," explained one South Korean producer.

As for polyethylene (PE), he thinks it is better to forget exports and instead focus on the Korean domestic market.

His only hope is that turnarounds in Q2 will keep supply tight. Additionally, spiraling naphtha prices should force at least some Asian producers to cut output. And eventually, the sentiment of rising crude oil prices should trickle down to the polymer markets.

Crude oil prices declined by a few dollars yesterday after news emerged of a possible peace plan for Libya. However, the situation is still very fluid and there is every possibility for a rebound.

Not surprisingly then, some cracker operators are looking at propane/butane as an alternative to naphtha. The Saudi Aramco March contract price for propane is at $820/tonne FOB Arabian Gulf while butane is priced at $860/tonne FOB Arabian Gulf.

The premium on spot propane is now $15-20/tonne but the delta is still lucrative, pointed out one industry source.

While Asian naphtha-based producers are struggling, their counterparts in the US are well placed.

In a recent report Alembic Global Advisors sees a scenario beneficial to US ethane-based producers.

"US ethane based producers would continue to enjoy very healthy margins benefiting from the pricing umbrella provided by high cost naphtha based producers. It is worth noting that if crude oil prices continue their ascent the US ethane based cost advantage may widen further."

As a rule of thumb if natural gas prices remain flat while crude oil prices rise by $10/bbl, US ethane based ethylene margins should expand by around $120 per tonne, the analysts estimated. And the key beneficiaries would be Dow Chemical, LyondellBasell and Westlake Chemical.

By John Richardson

OUR sympathies again go to the people of Japan. The main focus should be on providing as much support as possible to the rescue efforts and let's hope that petrochemical companies globally step forward.

But as we said yesterday, life goes on. The Japanese stock market was down around 5% this morning in early trading, suggesting fears about serious damage to the economy. There is anxiety that another earthquake could occur over the next few days.

Here is a research note from UBS, which as you can see, estimates that 20% of Japan's refining capacity and 27% of its ethylene capacity and 30% of its aromatics production is shut down.

As we said in our post on Sunday, Japan is a major importer of naphtha and so some refiners will struggle to place their volumes. However, UBS sees an upside for Asian refining margins.

In the immediate term Formosa Plastics Corp, Formosa Chemicals & Fibre and LG Chem are expected to benefit the most from the outages as a result of their product mix, adds UBS. They should be able to gain market share in China.

The lost production might also help to rebalance what has been a weak polyolefins market in China.

The supply disruptions, which seem very likely indeed to be long-term .In the confused situation at the moment seems possible that major structural damage has been caused to refineries and petrochemical plants.

This is the UBS note in full:

Impact on Japan refining industry
The devastating earthquake and tsunami in Japan that took place on 11 March has resulted in 20% of refining capacity loss in Japan (900-950K bpd) or 3.5% and 1%of Asia and global refining capacity respectively. While some refineries are shut for safety concerns, Cosmo Oil has shut its 220K bpd refinery in Chiba due to fire

.

Implications for Asia refining market
Singapore complex refining margin jumped from US$7-8/bbl to US$15/bbl after
Hurricane Katrina hit the US Gulf coast in late Aug 2005, which resulted in 1.4mn bpd refining capacity loss. We believe Asia refining margin should see more upside in the near-term and major refiners in the region such as GS Holdings, SOi and Thai Oil are best-positioned in Asia.

Impact on Japan petrochemical industry
Around 2mn tpa ethylene capacity in Japan have been affected by the earthquake,
which translates to 27% of total ethylene capacity in Japan or 4% and 1.4% of Asia
and world ethylene capacity respectively. It has been reported that total aromatics
capacity being affected should be around 5.7mn tpa, or 30% of Japan production.

Implications for Asia petrochemical market

We believe any supply disruption in Japan could potentially impact South Korea and
Taiwan as these two are the main competition in China petrochemical market.
Looking at Japan's major export products, we believe FPC and FCFC in Taiwan and
LG Chem in South Korea are best-positioned to gain market share in Asia.

By Malini Hariharan

News is slowly trickling in on the status of Japanese petrochemical plants. Only four of the country's 14 crackers have shut down while a few are running at reduced rates, reports ICIS news.

JX Nippon Oil & Energy has shut its 460,000 tonnes/year cracker at Kawasaki while Maruzen Petrochemical has shut its 520,000 tonnes/year cracker at Chiba. And Mitsubishi Chemical has shut two crackers, with a total capacity of 828,000 tonnes/year at Kashima after a power outage. Mitsubishi has also shut its phenol plant at the same site.

And Japan Polypropylene has had to stop operations at its two polypropylene (PP) plants with a total capacity of 669, 000 tonnes/year.

Nearly 22% of the country's refining capacity of 4.52m bbl/day is estimated to have shut down. This includes JX Nippon's refineries in Sendai, Kashima and Negishi, as well as the Chiba refineries of Cosmo Oil and Kyokuto Petroleum.

A fire at JX Nippon's storage tanks at Sendai has yet to be put out and storage tanks at Cosmo Oil's in Chiba, were also still ablaze.

JX Nippon has also shut its benzene plants and is likely to declare force majeure on paraxylene (PX) supply

Shutdowns extend beyond petrochemicals across a wide range of sectors. For instance, Suzuki Motors is reported to have halted production at six of its factories while Toyota Motor has halted operations at all its 12 plants.

But Asian petchem markets were largely stable on Monday with players still assessing the impact of the shutdowns.

By Nigel Davis

For some, life goes on. For others, everything is lost.

An email to the BBC on Tuesday from a resident in Mie, Japan, 350 miles from the stricken nuclear power plants on the east coast of the country, described a relatively normal day.

Utilities are available but people are feeling nervous and there is some stockpiling. "It feels as if there are two Japans at the moment," the correspondent, John Stephenson, said.

So, one question among so many at this particularly difficult time is: how are the two Japans coping, indeed surviving, in the face of such adversity?

The impact of the earthquake and tsunami on Friday 11 March, and now the aftershocks, can still only slowly be pieced together.

The world's eyes are on the damaged nuclear reactors. But the Nikkei stock market index had crashed by 10% at the close on Tuesday, reflecting the sharply negative economic outlook. Oil prices plunged.

Assessing the impact of the disaster on the petrochemical industry, and on regional markets, so far is difficult to say the least, although some headway is being made.

Reports suggest that important crackers and other production units are not operating.

We know for certain that ethylene and aromatics production is hit. ICIS has reported the closure of ethylene, benzene, paraxylene (PX), propylene oxide, propylene glycol, polyvinyl chloride, titanium dioxide and polyether polyols plants, and reduced output at others. It could take weeks or months for these units to come back on stream.

Paraxylene prices have climbed following a supply force majeure announcement by the world's largest PX exporter, JX Nippon Oil.

Three of its PX plants, with a combined capacity of 950,000 tonnes a year, located in the devastated Miyagi prefecture, are shut down.

Five refineries have shut down in Japan - a Cosmo oil refinery continues to burn - and port activities have been disrupted, putting further strain on foreign trade.

But many plants are operating normally, and others that shut down automatically as a precaution might be expected to restart soon.

However, the damage caused by the disaster is unimaginable, as is the hardship being suffered by so many people.

Production plants have closed automatically, while chemical company offices have been closed, giving staff time to come to terms with recent events.

According to reports, all of Japan's 12 automobile makers closed their assembly lines, for the first time ever. Some of them will not reopen until Wednesday.

Japan's chemical industry has been dealt a severe blow from which it will no doubt recover, but that recovery will take time.

For some in this business, life goes on as normal, but for others the disruptions to production capability and to trade will take time to come to terms with.

By John Richardson

Dear Reader

Below we take a break from our own coverage and focus on another topic - some thoughts on the future competitiveness of the European petrochemicals industry.
A widely-held assumption has been that a lot of European petrochemicals capacity will have to shut down as a result of lower-cost capacity elsewhere, particularly in the Middle East.

But the European industry enjoyed tremendous profitability in 2010 as a result of production being carefully aligned to demand.

More important reasons for these stellar results were probably the age of the plants and lack of investment in maintenance as a result of the 2008 global economic crisis. This led to a high number of force majeures.

Perhaps the biggest reason of all, though, was lack of naphtha from refineries. The collapse of demand in 2008, a long-term decline in US gasoline demand and the start-up of state-of-the-art "full conversion" refineries in Asia put the older European refineries under a lot of pressure.

Plant reliability should now improve as a result of the strong 2010 earnings.

But these earnings will give the Europeans a greater capacity to hunker down and wait for another fly-up in margins if the next 2-3 years prove difficulty because a weaker macro-economic environment.

Barring another major global recession that effects demand for all petrochemical products, Europe's use of naphtha as its main feedstock could continue to deliver very strong co-product credits.

The lightening of feeds in the US, as a result of the shale-gas bonanza, has helped tighten butadiene, benzene and propylene markets.

So has the most recent wave of new capacity which was predominantly in the Middle East and gas-based.

A further factor behind the C3s tightness has been polypropylene (PP) demand growth above the expansion in global GDP and in excess of that for other competing polymers.

This is the result of PP gaining market share from these other competing polymers, such as polystyrene (PS), and a lot of focus on application development.

Producers have therefore been lured into adding substantial amounts of PP capacity, in excess of feedstock availability.

Another even bigger bonus for European petrochemicals could be greater, rather than less, availability of naphtha over the next few years.

More than 50% of new vehicle registrations in Europe are of diesel vehicles.

European refiners might have to run harder to make diesel which will result in greater naphtha production. Exporting naphtha and gasoline to the US is going to get even harder because of the country's continuing decline in gasoline consumption.

Refining capacity in Europe might, in theory, be shut down in if the losses on naphtha and gasoline exceed the money to be made from diesel.

But the same mentality applies to refining as petrochemicals: Why be the first, and maybe the last, company to close capacity when there could be another fly-up just around the corner? (The global refining industry fairly recently made tremendous amounts of money as a result of the Hurricane Katrina disaster. The disaster left the gasoline market very under-supplied).

Environmental clean-up costs and contract obligations with customers may also continue to act as barriers to closure (as is again also the case with petrochemicals).

And if more overseas companies such as PetroChina - which recently acquired Ineos refinery assets - buy into the European industry they are unlikely to want to shut down.

The big oil companies are divesting refining assets in order to concentrate on more profitable exploration and production (E&P). A good example was Chevron's sale last week of a refinery in Wales, the UK, to Valero Energy.

Smaller companies such as Valero seem unlikely to want to buy-in and close-down assets.

A further factor preventing capacity being scrapped could be the intervention of governments anxious to maintain national fuel supplies.

If European petrochemical producers, therefore, do not shut capacity down as expected who might be the losers if there is another major economic crisis?

We are going to explore this theme in later posts, but the losers could be the South Koreans and other Northeast Asian producers.

They are facing much-tougher competition for import volumes into China from the Middle East. China's import growth could also slow down due to structural shifts in the economy and greater petrochemicals self-sufficiency.

South Korea, Japan and Taiwan are also entirely dependent on imported oil and heavily dependent on imported naphtha.

Like all scenarios there are a few caveats. Here are a few:

1.) The European economic crisis deepens, forcing further closure of manufacturing industry
2.) The Japanese earthquake and tsunami leads to major changes in the global economy, the scenarios for which are laid out in the post from Paul Hodges - which have linked to above
3.) The high price of propylene results in strong growth of on-purpose production, thereby reducing co-product credits for the liquids cracker players
4.) Continued tightness in C3s leads to PP demand destruction and, as a result, eventual weaker demand for propylene
5.) Co-product credits remain so good that the US makes a major switch to heavier feeds (This won't be naphtha as "heavier" in the US means moving from ethane to propane and butane). This weakens the competitive position of the Europeans

By Malini Hariharan

The paraxylene (PX)-purified terephthalic acid (PTA) market appears to be bearing the brunt of the Japanese earthquake and tsunami. Spot supplies of PX have dried up following the shutdown of three Japanese plants with a total capacity of 950,000 tonnes/year.

Spot PX prices surged to a record high $1,815/tonne CFR Taiwan last week as JX Nippon Oil & Energy declared a force majeure on supplies. PTA prices also rose to a 16-year high of $1,500-1,517/tonne CFR China main port, reports ICIS news.

And further price hikes are likely as a number of PTA plants in China and Taiwan are due to shut down for maintenance in the coming weeks. Additionally, some Chinese companies are planning to bring forward turnarounds following a tightening of PX availability from Japan.

Meanwhile, PTA demand is expected to strengthen in the coming months with around 2m tonnes/year of new downstream polyester capacities starting up in China, writes my colleague Becky Zhang.

She estimates that 1.9m tonnes/year of PTA capacity in Northeast Asia is due to shut down in March and 5.35m tonnes/year of capacity in April.

With cotton prices still running at record highs there appears to be room for polyester to digest the latest price increases. And with peak textile production season approaching, transaction volumes at the China Textile City in Shaoxing rose to 5.1m-5.2m metres/day early last week.

The only concern appears to be the slow buying in the Chinese polyester market as inventories have yet to be depleted.

By John Richardson and Nigel Davis

THE humanitarian side of this disaster is foremost in everyone's minds with more than 18,000 people now estimated to have died in the Japanese earthquake and tsunami.

Of equal concern is the crisis at the country's stricken nuclear power plants which the International Atomic Agency describes as "very serious".

And the relief efforts following the 11 March disaster have been hindered by bad weather with around 350,000 people in northern and eastern Japan in shelters, according to media reports. Water supplies are still cut to almost 900,000 homes.

But economic effects are, of course, also at the front of everyone's minds with one of the most immediate consequences of tragedy being the tightening of some of the major petrochemicals markets.

As we wrote about yesterday, supplies of spot paraxylene (PX) have dried up following the closure of 950,000 tonnes of Japan's capacity. Spot PX prices last week hit $1,815/tonne (€1,271/tonne) CFR (cost and freight) Taiwan. Purified terephthalic acid (PTA) prices rose to a 16-year high of $1,500-$1,517 CFR CMP (China Main Port).

The polyester chain is being supported by all-time high cotton prices, but going back upstream again to PX and PTA these were already very tight markets before the disaster occurred.

How much longer can the polyester producers down to the manufacturers of apparel and non-apparel keep on absorbing these cost increases? When do we begin to enter demand destruction territory?

Of equal concern is what is not happening in polyethylene (PE) where pricing has remained flat since the Chinese New Year.

This is despite more than of Japan's linear low-density PE (LLDPE) capacity being closed down, with 38% of its low-density PE (LDPE) capacity shuttered and 26% of high-density PE (HDPE) off line, according to ICIS pricing.

Markets were already tight as a result of an extensive Asian cracker turnaround season and so the failure of PE to move up in China is a major worry.

We will examine varying opinions on reasons why PE remains so weak in a post later this week.

But to return to Japan, UBS provided a good summary of production losses in a report issued over the weekend.

Four major crackers remain closed, representing lost ethylene capacity of 31% - number that should decline to 25% by the end of the week, according to UBS.

Propylene capacity has been reduced by 37%.

Forty six per cent of polyvinyl chloride (PVC) capacity is down, 24% of PX and 20% of styrene.

Reuters on Monday listed some stark facts: 1.4m bbl/day of Japan's 4.5m bbl/day refining capacity and 1.7m tonnes of naphtha cracking capacity remain off line. Port facilities had been severely disrupted by the disaster.

With Tokyo Electric Power Co warning of rolling blackouts well into April, even if plants are soon brought back on-stream, there seems a possibility that production will be disrupted again.

How badly plants have been damaged is impossible to gauge at this moment.

Japan has been struggling to restructure uncompetitive parts of its industry for many years and so uncompetitive plants that have been badly damaged may not be rebuilt.Apologies if this sounds a little cold-blooded, but we are trying to think through all the economic consequences of these awful events.

But Japan also makes a lot of high-value chemicals that go into electronics supply chains. This area of its chemicals industry is highly competitive.

Disruption of production here could have a global impact as electronics assembly plants outside Japan are forced to shut down.

For example, The Economist magazine estimates that Japan makes 90% of the epoxy resins used the manufacturing of all the world's printed circuit boards.

By Malini Hariharan

Japan's benzene supply is expected to drop by 10% following plant shutdowns and diversion of product for gasoline blending, reports my colleague Mahua Chakravarty.

This works out to about 40,000 tonnes/month, which is lower than the initial estimate of 100,000 tonnes/month made immediately after the earthquake.

Traders have started booking cargoes from South Korea to meet the shortfall. But this has not had an impact on benzene prices which have eased slightly this week on poor styrene markets.

Five benzene plants with a total capacity of 1.13m tonnes/year remain shut while some plants are running at reduced rates.

In polyolefins, Japan is likely to import product as plants continue to remain shut.

A Taiwanese producer sold around 2,000 tonnes of linear low density polyethylene (LLDPE) at $1,530-1,535/tonne CFR Japan this week for April shipment, reports my colleague Bee Lin Chow.

Chinese re-export offers to Japan have also surfaced although a gap in price ideas appears to be hindering business.

But it is unlikely that Japanese buying will prop up the current weak Asian market.

Meanwhile, Mitsubishi Chemical has confirmed that it will take a few more weeks to restart its plants at Kashima. Plants at the site include two crackers with a total capacity of 828,000 tonnes/year.

"We are doing all in our power to rebuild, but we calculate it will take at least two months for the plants to go back on line," said the company.

Mitsubishi has started inspecting the plants and also commenced some rebuilding activities. But infrastructure at the site has been badly damaged and that is likely to constrain resumption of operations.

This shutdown is likely to affect operations of other companies at Kashima that rely on feedstocks from Mitsubishi.

Shin-Etsu Chemical said that all operations at Kashima, where it make polyvinyl chloride (PVC), have been halted and inspection has yet to be completed.

Besides damage to facilities that power and water supply at the site has been hit.

"At present, it is still unclear how long it takes to re-start the operations at the Kashima plant," said Shin-Etsu

Kashima Vinyl Chloride Monomer's 600,000 tonnes/year vinyl chloride monomer (VCM) remains shut.

"The plant is likely to remain shut for two to three months as it was quite badly damaged by the earthquake," said a source from the company, which is a subsidiary of Shin-Etsu.

By John Richardson

THE global growth outlook grows ever murkier as a result of credit tightening in China (or is the problem instead continued strong growth in lending?), inflation problems throughout Asia, possible monetary tightening in the West, the direction of oil prices and the Japanese tsunami-earthquake.

We feel that this is making the rest of 2011 and next year perilously hard to forecast.

What follows is a brief summary of these key challenges, which we will examine in more details over the coming days and weeks.

As always we are working closely with fellow blogger Paul Hodges in an attempt to provide valuable support to chemical industry planners.

We don't want to get above ourselves here - this particular blog is run by journalists. But we hope that what follows helps you to challenge any blithe comments you come across about guaranteed continued strong expansion of the world's economy.

Here goes:

1.) We have picked up anecdotal reports from polyolefin traders and producers that credit tightening in China is making it harder for small -and medium-sized businesses, including the plastic converters, to access working capital. But does China's shadow banking system mean that, in fact, credit continues to expand? How does one then explain what appears to be flat polyolefins demand in China right now? Is this just a temporary lull due to overstocking? If Beijing cannot control credit growth, and thereby inflation, what does this mean for the battle against inflation and the long-term health of the economy? If property values continue to increase because of easy lending what will this mean for social stability and the struggle to create a more equitable society?

2.) Inflation, mainly driven by higher wages and oil and food prices, is a problem across Asia. Central banks are being criticised for being too slow to lift interest rates and allow currencies to appreciate. A repeat of the 1997 Asian Financial Crisis seems unlikely because of big foreign currency reserves. But Richard Martin, the managing director of strategic consultancy IMA Asia, was recently quoted in this article in the Australian Financial Review as saying: "Everything you buy is increasing 20 per cent year-on-year - labour, materials. Margins are down. In the second quarter companies will need to lift prices that will lead to a significant shift to inflation. The pace will step up each quarter to 2012. At that point inflation pressures within the production system will be strong enough for central banks to lift rates for a mid-cycle slowdown." His comment on weaker margins is interesting and could well be one of the reasons why Asian cracker operators are struggling compared with their western competitors

3.) Inflation in the West is also an issue, though more muted than in Asia. The Fed may decide on no further major boost to liquidity - i.e. it will complete QE2 but there will be no QE3. There are also indications that US interest rates could be increased by the end of the year. The European Central Bank is talking about rate rises while maintaining funding support for banks. Austerity programmes across Europe represent another danger to growth

4.) Once there are definite indications that there will be no QE3 this will likely result in some unwinding of the oil price, provided problems in the Middle East do not escalate. Speculators have indulged in a one-way bet on the Fed maintaining exceptionally high levels of liquidity. This has helped drive the oil price up and the dollar down. The reverse could now occur. What should this danger mean for chemical company raw-material purchasing strategies?

5.) Paul Hodges' excellent posts on the effects of the Japanese tsunami-earthquake are well worth reading. We would add that in the short term rolling electricity blackouts, as a result of the nuclear crisis, will continue to disrupt chemicals and downstream production for the next few month. New suppliers may, as a result, be sought for some of the chemicals that Japan makes for high-end goods such as printed circuit boards. An estimated 70% of one particular grade of epoxy resins for all the world's circuit boards is made in Japan, for example, with around 90% of Japanese production reported to be down two weeks ago. It might not be, of course, that easy to replace highly specialised chemicals technology at such short notice, leading to economic problems that will linger and continue to spread beyond Japan. This could mean further disruption for the rest of this year, for instance, in auto production in the US and final assembly of electronic goods in China. In the longer term, will procurement managers seek to move away from such a heavy reliance on one Japanese supplier because of the risk, however statistically remote, of another major earthquake in the next 5-10 years?

By John Richardson

THE refining industry enjoyed a golden era before the global economic crisis thanks to a booming economy and gasoline shortages caused by Hurricane Katrina. Inevitably, therefore, as is so often the case with commodity industries, too much new capacity was planned that came on-stream at the worst possible time.

But recently some financial analysts have been arguing that the worst is over for the industry. This is based on the premise that the world's economic recovery is on solid ground - which we strongly dispute - and less capacity additions over the next few years.

A recent report by Kunal Agrawal, Singapore-based energy and chemicals analyst with BNP Paribas, suggests a more negative longer-term view for the industry.

"We expect global utilisation rates and benchmark refining margins to improve steadily over 2011-12 owing to incremental refined products demand outstripping refining capacity additions, which we believe will result in a sweet spot for refiners and Asian refiners in particular," he writes.

"In our view, it is a good time to have exposure to refining, but a longer-term return to the 'golden period' of impressive refining margins of 2004- 08 is unlikely, as refining supply growth should exceed demand growth beyond 2012.

"We do not foresee global utilisations increasing beyond 85%. The utilisation outlook is healthy - but is unlikely to support a robust recovery in refining margins.

"We believe a longer-term positive sentiment on the sector is being a bit optimistic. Beyond 2012, we expect an excess of 1.8 mbd capacity to be commissioned annually, which would mean that supply will likely be ahead of demand growth. This is an unfavourable situation for a robust refining environment improvement, in our opinion.

"We also anticipate a significant amount of heavy-fuel processing capacities being commissioned over 2010-15, which will increase demand for heavy oil, and pressure the light-heavy spreads to contract. We believe this is negative for highly-complex refiners in the region that had enjoyed superior refining earnings during the refining supercycle of the middle part of the previous decade (owing to extremely strong light-heavy spreads).

"In the next refining cycle, we believe the ability of complex refiners to lock in the incremental dollar margin per barrel will be compromised."

This could have major implications for the availability and affordability of petrochemical feedstocks in different regions.

We can speculate that while older European refineries might be pressured by the overall problem of supply being in excess of demand, they might find themselves in a relatively strong position because of the greater strain on the newer, more complex refiners.

Last month we argued that the push by European refiners to meet strong diesel demand might make light ends, including naphtha, cheap for local petrochemical players.

The BNP Paribas report provides further reasons to believe that these European refiners could run relatively hard, providing advantaged raw materials to highly experienced and fully-depriciated domestic petrochemical industries.

The complex refiners, some of whom are integrated with new or fairly new petrochemicals capacity, might find their competitive positions challenged. They could be forced further to the right of the cost curve.

And overall with a significant oversupply of refining capacity being predicted, there might be plenty of spare naphtha to be traded globally, assuming there is no major consolidation.

What might this spare naphtha mean for the competitiveness of naphtha-based crackers versus the gas-based players?

By John Richardson

IT has been a fantastic party. Nobody expected that the drinks would last for so long, thanks to Wen Jiabao and Ben Bernanke working overtime to man the 24/7 off-licence (it is called "liquor store" in the States and a "bottle shop" in Australia).

But now the market has clearly reached the top with China facing the unenviable task of tackling deep-rooted, systemic inflation that has placed Beijing in an exceptionally difficult situation.

It will have to clampdown much harder on the cost and availability of money if it wants to bring food prices under control. The risk of failing to do so is major social unrest. As my fellow blogger Paul Hodges said the other day "how can any government expect to survive food inflation at 11.7%?" (its level in March).

But crackdown too hard on the extraordinary growth in liquidity post-2009 and the risk is a severe correction in house prices. All the millions of Chinese who would then find themselves in negative equity could then instead exert pressure on the government.

S&P's decision to put the US's AAA debt review on reviews is, as Hodges says in this post, a potential game changer.

"It means that policymakers can no longer pretend the $5trn they have spent over the past 2 years on stimulus measures somehow "doesn't count" in terms of needing to be repaid. Oil markets will be first in the line of fire.

"The S&P move makes it much less likely that the US Federal Reserve will be able to follow QE2 with QE3. And QE2 has been the prime reason why oil prices have risen from $75/bbl to $125/bbl since August, when it was first announced."

Even Barack Obama has said that he believes the rise in oil prices has been driven by speculation and not supply shortages.

Chemicals prices rose following the announcement last August that QE2 was going to take place with confidence further bolstered by the continuing boom in China.

But since the Chinese New Year, the world's most-important chemicals market has stalled as the realisation has sunk-in that there is something deeply wrong with China's economy.

It has happened before as Patrick Chovanec, professor at Tsinghua University's School of Economics and Management in Beijing, says in this blog post we also linked to on Tuesday. He quoted a book called Red Capitalism, where the authors - Carl Walter and Fraser Howie - write of how there was a surge in bank lending and inflation ahead of the Tiananmen Square crisis in 1989.

In an attempt to confirm what we fear, the blog spoke to four chemicals and polymers traders yesterday to assess the current mood in China. They said that while some markets had seen slight rallies early last week on mild recoveries in confidence, volumes remained exceptionally subdued.

"All the end-users are buying hand-to-mouth. There is no visibility anymore over the economic outlook. We have done incredibly well since Q1 2009, but it is now time to reduce our exposure," said a polyolefins and polyvinyl chloride (PVC) trader.

This repeats what we heard from another trader on our recent trip to Singapore  

By Malini Hariharan

All is not well in the Asian polyester chain. Demand has slowed down exerting a steady downward pressure on prices.

Purified terephthalic acid (PTA) spot prices have dropped by $100/tonne in the last week to $1,290-1,300/tonne CFR China Main Port and the outlook for the coming months is bearish, reports ICIS news.

The price slide shocked many market players but the indications were there - futures prices on the Zhengzhou Commodity Exchange have fallen 14% since early March.

Monoethylene glycol (MEG) spot prices have also slipped, dropping by $30/tonne last week to around $1100/tonne CFR China. Earlier in the month, major producers decided to lower their contract nominations for May because of weak market fundamentals.

And paraxylene (PX) too has come under pressure with spot cargoes trading at a discount last week for the first time in six months.

The shift in markets follows changes in cotton, which had supported much of the prices gains seen in polyester and its raw materials since last year.

Futures prices for cotton on the Intercontinental Exchange have been falling since early April after hitting an all-time high of $2.179/lb on 7 March.

The fall is partly because production is expected to rise as record high prices last year have given farmers the right incentive to raise acreage.

This is likely to happen in the US and India but Chinese acreage may not grow as farmers have turned to other crops that offer better returns.

China would then have to import larger volumes of cotton which could reignite a rally in cotton prices and support a recovery in pricing of fibre intermediates.

By Malini Hariharan

One view on the purified terephthalic acid (PTA) market, highlighted by the blog last week, is that operating rates in the next few years will be constrained by a shortage of feedstock of paraxylene (PX).

A rapid buildup in PTA capacity is taking place in China where new plants with a total capacity of 2.8m tones/year are due to start up in the third quarter of this year.

But some analysts are optimistic that earnings for PTA manufacturers will remain robust until 2012.

Polyester capacity continues to be added in China and plants are expected to maintain healthy operating rates.

Analysts at Woori Investment & Securities are predicting a continued 8%/year growth in Chinese demand until 2015 based on increased spending on apparel by urban Chinese and an increase in the use of synthetic fibres as cotton will remain relatively more expensive.

PTA supply is projected to grow by 11.3% in 2012. But the analysts point out that some new PTA producers in China with very large plants of more than 1m tones/year capacity will take time to achieve normal operations.

This includes the Zhjiang Hengyi Group which has a 1.5m tones/year PTA project lined up.

A slow down in the PTA industry is therefore expected only after 2013 when utilization rates start rising.

In the near term, the analysts are predicting a recovery in PTA markets in the third quarter of 2011.

"As the PTA-PX spread has fallen below zero in May on a plunge in PTA prices, concern is increasing the recovery in the PTA industry will weaken. The PTA price decline in 2Q11 is attributed to a rapid demand fall in China, which consumes 64% of global polyester fiber output. We attribute the weak demand to: 1) falling demand for polyester fiber stemming from a drop in cotton prices; 2) liquidity contraction stemming from China's monetary tightening; and 3) reduced power supply to textile producers following power consumption surges in March. Of note, due to the sluggish demand, the inventory cycle has risen sharply from less than ten days in 4Q10 to 4-5 weeks in May," they said in a recent note.

But prices are expected to rebound from September as power restrictions ease after the peak production season ends in August and PTA inventory is depleted. And cotton could once again extend support as abnormal weather conditions such as the flooding of the Mississippi in the US and drought in Hubei province in China are likely to once again curtail production.

By Malini Hariharan

Petro Rabigh, the Saudi Aramco and Sumitomo Chemical joint venture, has moved to the next round of its ambitious phase 2 expansion which includes a new aromatics facility and a number of value-added derivatives.

Construction tenders for seven packages have been issued and bidding is due to close on 1 October. Tenders for three more packages have yet to be issued.

A final investment decision will be made by the end of this year and contracts are likely to be awarded early next year.

Completion of the project, estimated to cost $6-8bn, is expected in Q1 2015.

The project involves expanding the 1.3m tonnes/year cracker by 300,000 tonnes/year, thanks to an additional 30m scf/day ethane allocation from Saudi Aramco. The aromatics complex, based on 3m tonnes/year of naphtha, will house a paraxylene (PX) plant of 800,000-850,000 tonnes/year and a benzene unit with a capacity of 200,000-400,000 tonnes/year.

Derviative units listed in a memorandum of understanding signed in 2009 included MMA, PMMA, low density polyethylene (LDPE), ethylene vinyl acetate (EVA), caprolactam, polyols, cumene, phenol, acrylic acid, superabsorbent polymers (SAP) and nylon 6. It is not yet clear if Petro Rabigh will pursue all these projects given questions about the viability of downstream investments in the Kingdom.

Meanwhile, Aramco remains focused on expanding its petrochemical reach through Petro Rabigh and its other planned projects with Dow Chemical and Total.

In a speech yesterday, the company's senior vice president of finance, highlighted the economic potential of the Dow joint venture which is expected to enter approval stage in July.

The project is expected to create about 3,000 value-adding direct-hire jobs at the facility, with an equal number of direct jobs likely to be created in the chemicals and plastics value parks associated with the venture, he said.

This is what the Saudi government is looking for as it is under pressure to generate employment opportunities for the country's rapidly growing population. The Saudi labour force is projected to hit 10m by 2030, more than double the number in 2009.

Unemployment is running high at around 10.5%. The number of unemployed Saudis is currently estimated at 500,000 as against 416,000 in 2008.

Aramco's grand vision is to rapidly climb the chemical ranking charts.

"Within the next decade, we aim to launch into the top tiers of the global chemicals business," said.

Investments in new projects are a step in the right direction but a few acquisitions will certainly help achieve this goal faster.

By Malini Hariharan

Styrene's addition by the US to a list of 'anticipated carcinogens' does not seem to have affected producers demand growth expectations for the product or for its key feedstock benzene.

Speaking at the 5th ICIS Asian Aromatics and Derivatives Conference in Singapore earlier this week, Alexander Farina, Shell Chemical's general manager for chemicals strategy development, drew out an optimistic picture for both benzene and styrene. (Full speech available here)

Styrene is projected to see global demand growth of 3%/year to 2020 supported by expandable polystyrene (EPS) and its application in the construction sector (average annual growth rate of 8% in Northeast Asia). EPS it offers good insulation properties helping countries achieve their objective of lowering carbon dioxide emissions.

Inter-polymer competition between polystyrene (PS) and polypropylene (PP) is also expected to ease as propylene and PP have been getting more expensive.

On the capacity side, a fall in ethane costs has improved export competitiveness of US styrene producers enabling an improvement in capacity utilization. While global styrene is still long with average industry operating rate at around 86%, the good news is just around the corner. With only 1.0-1.5m tonnes/year of new capacity due in the near future operating rates, said Farina, would swiftly recover in 2011.

Benzene is also expected to benefit from developments in the phenolic chain. Global polycarbonate (PC) demand is growing at 6%/year as its use in automobiles and electronics is being ramped up.

Farina did refer to some of the challenges facing benzene, the first being the slow addition to capacity - only 2%/year as against demand growth of 3%. There has also been a shrinking in on-purpose benzene capacity which now account for just 4% of global capacity, down from 20% before 2005.

This loss of swing capacity has made benzene more volatile with rapid fluctuations in prices with prices rapidly fluctuating to account for movements in crude oil or changes to demand.

Farina emphasised Shell's strategy of remaining an integrated low-cost aromatics producer. New technologies are being developed to retain this status. This includes a gas-to-aromatics route, he said, without giving further details.

"Gas-to-aromatics could be viable by the end of the decade... It is a strategic fit to our upstream gas business, which is where the growth is," Farina added.

The only other similar technology is the UOP/BP Cyclar process that makes aromatics from butane and propane. The technology has been implemented by Sabic in Saudi Arabia but the blog has been told that it has not been a commercial success.

Meanwhile, the US styrene industry is preparing for a legal fight to remove the 'carcinogen' tag. The US federal health regulators had declared in June that styrene is 'reasonably anticipated to be a human carcinogen'. Industry groups subsequently went to court to block the listing by asking for a preliminary injunction. They claimed that government researchers had relied on manipulated data and on information that had not been reviewed. But a US court rejected last week a plea for preliminary injunction but has still to consider the request for permanent injunction.

By John Richardson

SHELL Chemicals put an argument forward last week that polystyrene (PS) had regained ground from polypropylene (PP) as a result of expensive propylene.

And the petrochemicals major forecast a bright future for both PS and expandable polystyrene (EPS).

The blog pretty much always enjoys playing the devil's advocate and so later on in this post we will suggest some challenges to the Shell view.

First of all, though, here is a bit of background and some of the details of the case put forward by Shell.

From Feast to Famine

As we have discussed before on the blog, C3s have become very costly as a result of the switch to lighter cracker feeds in the US, the predominance of gas as a feedstock in recent steam-cracker capacity additions and above GDP demand-growth for PP.

So expensive has propylene become that since the global economic crisis, PS has regained its cost position against PP, said Alexander Farina, Shell's General Manager, Chemicals Strategy Development.

"Equally encouraging is that substitution of PS by PP seems to have reached a plateau, and estimates suggest global styrene demand will grow around 3% per annum to 2020," added Farina in a speech to the 5th ICIS Asian Aromatics and Derivatives Conference, which took place in Singapore last week.

"Reports from Asia confirm that further PS substitution is no longer an issue.

"There are ongoing challenges for PS in North America and Europe, where perhaps up to one-third of each market could be vulnerable to PP, but only with increased investment in production capacity for the latter."

"Substitution is not a threat to construction market-focused PS products - particularly insulation - where long-term demand outlook is good in both new build and refurbishment. There are other uses - such as snap-off multipacks for foods like yoghurts - where PS is clearly the material of choice."

Farina, however, earlier in his speech painted a challenging picture for benzene pricing.

Benzene went from a feast of oversupply in the 1990s to a famine of an over-tight markets in the 2000s, he recounted.

The last decade marked the introduction of tougher regulations on benzene content in gasoline, leading to the closure of on-purpose hydro de-alkylation (HDA) capacity.

"Before 2005, on-purpose swing capacity could add 20% to other (global) benzene production," he added

"Today, it is nominally about 4%, but practically non-existent.

"Back in 2005, a Shell colleague speculated on whether the severe reduction in swing capacity would - at some point - create the need for new, on-purpose benzene supply if incremental fatal supply remained unavailable.

"Well, to-date, it has not, and the jury is still out on if and when that may happen."

This had left benzene supply very-heavily dependent on how reformers and steam crackers run, he added. C6 pricing is therefore often driven by the demand for gasoline and olefins rather than the demand for benzene derivatives.

"In combination with high and fluctuating crude prices, the knock-on effect has been to make benzene prices much more volatile," he said.

And he added that current estimates were for benzene demand to grow by just over 3% per year with supply only increasing by about 2% per annum.

But despite these challenges, Farina said that the price of the feedstock would remain competitive.

His speech also pointed out the excellent insulating properties of EPS and how it could help reduce energy consumption. Better-insulated buildings had the potential to reduce global energy consumption by 20%, he said.

But just for sake of being miserable....

1.) What if new ethane-based crackers in the US 'crowd out" liquids-based cracker investments elsewhere? Might this sharply reduce the projected growth in benzene availability?
2.) What if the legal wrangle over styrene being declared a carcinogen by the US Department of Health and Human Services leads to consumer goods made from PS being banned?
3.) What if the propylene supply issues that have caused the surge in C3 costs are resolved? Unlike in benzene, on-purpose production of propylene is becoming ever-more popular. For example, several propane dehydrogenation (PDH)-to-propylene projects have recently been announced in the US and China
4.) And most importantly of all, what if crude oil pricing becomes even-more volatile, causing problems for more than just benzene? As we will argue in Chapter 3 of our e-book, 'Boom, gloom and the new normal - how Western baby boomers are changing global chemical demand patterns, again', oil markets have become dysfunctional and represent a major risk to the global economy.

By John Richardson

China's petrochemical imports continued to decline in June on tight credit conditions and price rises that deterred consumers, according to our colleagues at ICIS news.

Linear-low density polyethylene (LLDPE) imports fell by 18% month-on-month and 3% year-on-year, for example. High-density PE (HDPE) shipments slipped by 4% month-on-month and 8% year-on-year.

Benzene shipments halved both compared with May 2011 and with June last year, indicating the broad-based nature of the affordability issue that we have discussed before on the blog.

The June numbers provide further support to the argument that recent price increases are going to be hard to sustain, unless the government is able to introduce effective measures to ease the plight of chemicals and polymer buyers.

By Malini Hariharan

The latest accident at Formosa Petrochemical Corp's (FPCC) refinery at Mailiao, Taiwan, on Sunday is adding to the bullish sentiment in markets for key petrochemicals. A fire in the propylene recovery unit has forced the company to close its 540,000 bbls/day refinery and related facilities, including two residual fluid catalytic cracking units (RFCC) and an olefins conversion unit, for a safety inspection. FPCC has also declared force majeure on all petroleum products.

Styrene hit a 3-year high of $1,600/tonne CFR China yesterday amid concerns that the government would ask sister company Formosa Chemical and Fibres Corp (FCFC) to shut a 600,000 tonnes/year plant, reports ICIS news. Two other styrene plans operated by FCFC have been shut since May following a fire at Formosa Petrochemical's No1 cracker.

Paraxylene (PX) prices rose initially by around $60/tonne with selling indications crossing $1,650/tonne. But prices corrected yesterday by $5-10/tonne on weaker crude futures.

FCFC continues to run its No2 and No3 PX plants but may have to close them for government mandated safety checks. The No1 aromatics facility has been shut since 13 May.

Sentiment in the polypropylene (PP) market strengthened further with confident Chinese distributors raising their offer levels in anticipation of a disruption in supplies from Taiwan, reports ICIS news.

Formosa Plastics Corp (FPC) and FCFC have suspended offers for PP and polyethylene (PE) from their plants in Taiwan. The two companies have a total capacity for 854,000 tonnes/year of PE and 350,000 tonnes/year of PP.

FPCC has also decided to hold to its planned maintenance shutdown schedule of its 1.1m tonnes/year cracker for 45 days from 15 August. It has also not set a date for the restart of its No1 cracker.

"There is mad scramble in Taiwan to import cargoes. Before the Formosa accident there were questions on whether the rise can be sustained through August but now things have changed," said one trader. He now expects markets to remain firm until September as closures by Formosa coupled with maintenance shutdowns are likely to keep markets tight.

The Formosa group of companies are in deep trouble with the government asking for a shutdown of all plants at the huge Mailiao complex in stages to carry out safety checks. The inspections will have to be monitored by local or international experts.

There have been seven accidents in the last twelve months and two fires have taken place at the Mailiao complex at less than a week's interval in July.

The company plans to negotiate with the government as a shutdown of the complex will have implications for the entire Taiwanese economy.

But it is not clear if the government will be in any mood to listen. The country's Industrial Development Bureau (IDB) has ordered the Formosa Plastics Group to provide a detailed report within a week on safety measures that the company plans to take at its plants.

"Unless FPG makes an overhaul of its operations and is able to convince the taskforce that it is ready to resume operations, the suspension will continue," he said," warned IDB's director general.

A second official from the IDB blamed the accidents on poor maintenance as a result of cost cutting by the group over the last one year.

And although FPCC's chairman and president have resigned, this is unlikely to satisfy angry residents in the Mailiao area. They are now planning a rally on 4 August to reiterate their demand for an immediate halt to all operations at the Mailiao complex.

By Malini Hariharan

India's major petrochemical projects are inching forward very slowly and the blog will not be surprised if there are more delays along the way.

Reliance has yet to kick start its 1.4-1.6m tonnes/year cracker project adjacent to two refineries at Jamnagar, on the west coast of India. The cracker will be based on offgases from the refineries. The blog has heard that all is well with the project and final details are being worked out. But then, it has been hearing this for a few months now.

Among the other cracker projects, ONGC Petro-Additions (OPaL), a joint venture between ONGC, GAIL (India) and Gujarat State Petroleum Corp, has finally awarded all major contracts for its 1.1m tonnes/year mixed-feed cracker and derivatives complex at Dahej, Gujarat.

OPaL recently selected technology from Mitsui Chemicals for a 340,000 tonnes/year high-density polyethylene (HDPE) unit, going back on its earlier decision to take technology from Chevron Philips.

And it also selected Marie Technimont as the engineering, procurement and construction (EPC) contractor for HDPE plant, a 340,000 tonnes/year polypropylene (PP) unit and two swing HDPE/linear-low density PE (LLDPE) plants each of 360,000 tonnes/year capacity.

A source close to developments says work on the cracker is 50-60% complete and the company is aiming for mechanical completion in January 2013 while the polymer plants will be ready in the second quarter of 2013.

However, this is an ambitious target and 2014 for full start up of the complex looks more realistic.

Meanwhile, GAIL is confident of completing an expansion of its Pata complex in December 2013. A source close to the company says work on the project, which includes a new cracker of 450,000 tonnes/year, a swing 400,000 tonnes/year HDPE/linear-low density PE (LLDPE) plant and a 20,000 tonnes/year butene-1 unit is progressing well and the company should have no problems in meeting the targeted date for completion.

However, GAIL's second project, a small cracker and derivatives complex at Assam, on the east coast of India will be delayed.

"Work on the project has currently stopped because of the monsoon season and will resume in a couple of months. Completion will be delayed from April 2012 to July 2013," he adds.

On the aromatics side, Indian Oil Corp (IOC) is still waiting for board approval for 600,000 tonnes/year of paraxylene (PX) and 370,000 tonnes/year of purified terephthaic acid (PTA) project at Vadodara, Gujarat. The company hopes to get approval over the next few months and would then look to complete the project during 2014-15, a delay from the earlier target of 2012-13.

Among the projects under implementation, expansion of a fluid catalytic cracking (FCC) unit at IOC's refinery in Mathura, Uttar Pradesh is due for completion in January 2013. The extra propylene will be moved to Panipat where it will be used at an existing PP plant.

And work on a 138,000 tonnes/year butadiene extraction unit at the Panipat complex has started and it is likely to commence production in Q1 2013 along with a joint-venture styrene butadiene rubber (SBR) plant.

Meanwhile, the blog has also heard of Sabic evaluating a polycarbonate (PC) investment on the east coast of India. The company has been eying Indian projects for a few years now and finally seems to have narrowed down on one. However, the fate of this project is uncertain given the tensions between India and Saudi Arabia over the anti-dumping duty that India has imposed on Saudi PP exports. A removal of this duty is likely to be a precondition for any major investment by a Saudi company in India.

By Malini Hariharan

Asian petrochemical markets continue to face downward pressure on concerns about the health of the global economy. Market sentiment for most products remains poor with buyers in no rush to resume purchases.

Polyolefin markets closed last week on a weak note. Prices of low-density polyethylene (LDPE) and polypropylene (PP) dropped $10-40/tonne last week across the region, reports ICIS pricing. Linear-low density PE (LLDPE) and high-density PE (HDPE) prices were stable but buying sentiment for the products was weak.

There was little support coming from ethylene and propylene markets. Propylene prices were assessed higher for the week on tight regional supply but buyers stepped back on Friday after a sharp fall in equities and crude oil. Ethylene dropped $10-40/tonne in Southeast Asia with buyers unwilling to enter markets at a time of great uncertainty.

Benzene and styrene markets were also similarly affected with prices of both proudcts sliding $20-40/tonne.

The only exceptions to the trend were paraxylene (PX) and purified terephthalic acid (PTA) as news of an impending shutdown of Fujia Dahua's 700,000 tonnes/year PX plant spread in the market. The company is at the centre of widespread public protests after a typhoon hit a wall at the plant site. This raised fears of a PX spill prompting local residents to demand closure and relocation of the plant.

However, the strength in the PX and PTA markets is under question given the global economic uncertainty. The news today from the Asian stocks markets is bleak with declines recorded at all major bourses today. Brent crude dropped by more than $3/bbl on news of Libyan rebels capturing Tripoli raising hopes of an end to the country's civil war and a resumption of Libyan oil exports.

If the trend continues, optimism will be a scarce commodity in petchem markets this week.

By Malini Hariharan

There are some exceptions to the generally weak petrochemical markets seen in Asia these days and monoethylene glycol (MEG) is one such product.

Spot prices have hit a 44-month high of $1,275-1,280/tonne CFR China and are expected to soon cross $1,300/tonne, close to levels last seen in January 2008, reports Judith Wang, ICIS pricing editor for MEG in Asia.

The price spiral was attributed to speculators who were banking on tight supplies, as a result of plant turnaround in Asia and the Middle East during September-October, to keep markets firm.

Sellers were said to be in no rush to offload cargoes, while end-users were anxiously snapping up available volumes ahead of the National Day holiday in China from 1-7 October.

Purified terephthalic acid (PTA) too has risen driven by tight supplies for its feedstock paraxylene (PX). Spot PX prices were assessed $45/tonne last Friday with a delay in the start up of CNOOC -Kings Group's 840,000 tonnes/year plant at Huizhou, China and other turnarounds influencing market sentiment.

Everyone in the polyester chain is banking on strong demand during the peak manufacturing seasons for the textile sector over the next couple of months.

But there are few signs yet that demand will be as robust as last year given the uncertain economic outlook in Europe and the US.

The average operating rate at Chinese polyester plants is hovering at around 80%, the same level as August. High raw material prices have put pressure on polyester margins and any increase in operating rates will only lead to higher MEG and PTA prices and worsen the squeeze.

By Malini Hariharan

In yesterday's post the blog made a reference to the difficulty in settling the October Asian contract price (ACP) for paraxylene (PX).

Wide differences in price expectations have held up negotiations with buyers rejecting producers' initial efforts to implement a steep $105-145/tonne hike in October contracts to $1,760-$1,800/tonne cfr Asia.

Buyers, citing weak purified terephthalic acid (PTA) markets and the fall in spot PX prices, have instead pushed for $1,500-1,550/tonne cfr Asia. PTA prices have fallen 7% since September with tight credit in China and volatile global economy dampening buying interest.

The lack of consensus has resulted in problems in settling business as the ACP is widely used in contracts across the region, explains Bohan Loh, the ICIS pricing editor for PX.

CBI Consulting estimates that around 20% of PX contract sales in Asia are 100% based on ACP while about 60% of contracts use a 50:50 mix of the ACP and spot prices.

The impasse in Asia has had a wider impact with players in Europe and the US unable to agree on October contracts in the absence of a clear price direction from Asia.

Asian buyers and sellers are now scrambling to find an alternative number to use in their October contracts. The crisis has also prompted critics of the ACP to call for a better mechanism - one that will also take into account feedstock costs and profitability of derivative purified terephthalic acid (PTA makers.

This demand has been made before but with both sides keen to emerge as winners it is hard to see a profit-sharing arrangement in this business.

Controversies are not new to the ACP mechanism and its demise has been predicted a number of times. The mechanism has survived and remains one of the few negotiated contract price for petrochemicals in Asia.

But with PX supply projected to remain tight in the foreseeable future this status is likely to be repeatedly tested in the coming years.

By Malini Hariharan

Asian spot prices for polyester raw materials continued to fall last week as concern on lack of buying support from the China market where concerns about the health of the global economy dampened sentiment.

Purified terephthalic acid (PTA) prices declined to a 11-month low dragged down by weak demand and falling values for paraxylene (PX), writes Judith Wang on ICIS news. Spot prices were at around $1,100 cfr China late last week.

Developments in the PTA futures market have also not helped as prices on the Zhengzhou Commodity Exchange dropped by 6% last Thursday on concerns about the Euozone debt crisis and the weak US economy.

In the physical market, buyers took a backseat nervously watching developments. The textile industry is reported to have seen a decline in export orders and the sales to output ratio at polyester plants has fallen to 50-70% in the last month from around 100% in early September.

China's credit tightening measures also affected trading activity and some traders expected the situation to worsen in the fourth quarter.

Asia's other big market, India, has also failed to lend support to producers. PTA demand in the country has slowed down ahead of the Diwali holidays this week and some polyester producers have reduced production.

Meanwhile, spot PX prices softened by over $50/tonne to around $1,560/tonne cfr China last week while the October contract price remained undecided. Buyers, worried about the squeeze in margins, are looking for further reductions although producers are resisting as supplies are tight. But this may well be temporary as some PTA producers are reportedly eyeing operating rate cuts.

By Malini Hariharan

The blog has been scanning ICIS news reports from the 31th Latin American Petrochemical Association (APLA) conference in Buenos Aires to gauge the mood at the event.

Participants appear to be sanguine despite the global economic turmoil with talk focused on upcoming investments.

Braskem is the forefront. Its joint-venture project with Idesa, Ethylene XXI, in Mexico is on track to start up in mid-2015.

Site preparation began last month, and the FEED (front-end engineering and design) work has nearly been completed, revealed Jose Luis Uriegas, CEO of Idesa.

Financing for the project is likely to be secured by Q1 2012.

The size of the project has increased slightly and cracker will now have a capacity of 1.05m tonnes/year, instead of the originally announced 1m tonnes/year.

Downstream production will comprise two high density polyethylene (HDPE) plants with capacities of 350,000 and 400,000 tonnes/year and one 300,000 tonne/year low density polyethylene (LDPE) plant.

In Brazil, Braskem has invited bids for technology and engineering work for a project at the Comperj refinery and petrochemicals complex in Rio de Janeiro.

The project includes a cracker and plants for PE, PP, styrene, ethylene glycol and paraxylene (PX). The plants are expected to start up between 2016 and 2018.

Braskem is also considering investing in a greenfield polyvinyl chloride (PVC) facility besides an ongoing expansion of an existing plant at Alagoas by 200,000 tonnes/year to 460,000 tonnes/year.

Companies are probably banking on continued economic growth in Latin America to absorb volumes. The International Monetary Fund (IMF) has predicted that Brazil, Mexico, Argentina and Venezuela will see growth of around 3.6% next year and that the region as a while will grow faster than the US and Europe.

Low per capita consumption of polymers also promises strong growth prospects. However, capacity build might be outpacing demand growth especially if new investments in neighbouring US are also taken into account.

By Malini Hariharan

The blog has been listening to some interesting presentations on the polyester chain at the Indian Petrochem - 2011 conference in Mumbai.

The global economic slowdown does not appear to have dampened prospects for polyester demand.

"Demand for polyester grew by 5.6m tonnes last year which was atypical; we all thought that growth in 2011 would be modest but we are again looking at a figure of over 4m tonnes," said Philip Gibbs, chairman of PCI Xylenes & Polyesters.

Global polyester production is likely to touch 60m tonnes this year and grow to around 80m in 2015, he estimated.

However, a rapid addition to capacity, especially in China, would drag down operating rates from around 80% to 70% during this period.

The industry will have to cope with oversupply for the next two to three years, he added.

Asia, led by China, India and Indonesia, will drive global growth.

Gibbs highlighted that Asia is moving away from the traditional polyester consumption pattern of relying on textile exports to the Americas and Europe for growth.

"Seventy five percent of what China produces stays within the country; the domestic market is a driver for polyester. China is only now getting going and has another five to eight years of growth. It still has to get the wider population buying polyester," he said.

Polyester is also expected to expand its share at the cost of cotton.

"Globally, fibre consumption is growing around 1.5times GDP; so if GDP expands by around 6% the world will need about 5m tonnes of additional fibre every year," estimated Rajen Udeshi, president of the polyester chain at Reliance Industries.

But cotton availability is unlikely to grow significantly as competing crops offered better value to farmers and also because food security is more critical for governments.

"So global cotton production is likely to remain in the 23-24m tonnes range and the incremental requirement will have to come from polyester. For this the world will need an additional 3.5m tonnes of purified terephthalic acid [PTA], almost 1.0-1.5m tonnes of paraxylene [PX] and 1.5m tonnes of monoethylene glycol [MEG] every year," he added.

However, an mentioned by the blog earlier what is worrying for players along this chain is the emerging imbalance as capacity additions in PX and MEG are lagging behind polyester and PTA.

PX availability is likely to be the biggest constraint.

"There are so many new PTA plants coming up in China; I have asked many of the companies if they are covered for PX and the normal answer is that everything is available for a price. But the answer is no as PX is sold on [long term] contractual basis," pointed out Udeshi.

What this means is that there is unlikely to be enough PX to run all the new PTA plants.

For MEG, all eyes are now on whether China's new coal-based projects based either on the methanol-to-olefins (MTO) or coal-oxalic acid-MEG routes are commercially successful.

By Malini Hariharan

Indian exports of benzene are set to rise over the next few years as new plants start up.

"India will remain in a net surplus position over the next five years and exports will continue, with [benzene] from western India moving to the Middle East, the US and Europe, and benzene from eastern India shipped to southeast and northeast Asia," said S B Dutta, Haldia Petrochemicals' senior general manager marketing, at the Indian Petrochem - 2011 conference.

India exported around 455,000 tonnes of benzene in 2010, up from 330,000 tonnes in 2008. Capacity during this period moved up from 1.1m tonnes/year to 1.25m tonnes/year, while demand in the country grew from 600,000 tonnes/year to 625,000 tonnes/year.

Nearly 475,000 tonnes/year of capacity is due to be added over the next three years, with new plants set to be commissioned by ONGC Mangalore Petrochemicals Ltd (OMPL), ONGC Petro-Additions Ltd (OpAL) and Reliance Industries.

Demand for major derivatives is growing at 5-10%/year, led by overall economic growth, but no major projects are on the horizon.

For instance, styrene demand is projected to grow from 470,000 tonnes in 2010 to 585,000 tonnes in 2012, and the entire volume will be serviced by imports as no styrene projects are in the pipeline in the country.

Demand for linear alkyl benzene (LAB), which accounts for 28% of Indian benzene consumption, is projected to grow at 5-6%/year in the next five years, but with no new capacity planned, imports are set to rise.

Phenol demand is expected to rise from 150,000 tonnes this year to more than 200,000 tonnes in 2015-2016. With local production running at around 70,000 tonnes/year, imports will account for about 60% of demand.

By Malini Hariharan

The US is looking to introduce fresh measures targeted at the petrochemicals industry.

The specifics of the new sanctions are not yet available but the goal, says this report, is to bar foreign companies from doing business with Iran's petrochemical industry by threatening them with being banned from U.S. markets. US companies are already banned from doing business with Iran.

The sanctions are expected to be announced today and would build on measures that were introduced against Iran's oil and gas industry.

Europe too is likely to introduce similar measures at a later date.

The US move comes after an International Atomic Energy Agency (IAEA) resolution late last week expressing "deep and increasing concern about the unresolved issues regarding the Iranian nuclear program."

The new sanctions promises to create another round of problems for Iranian petrochemical producers who have successfully managed to do business around existing measures. The exception has been aromatic producers who have had to cut production to divert reformate for gasoline production after US sanctions on gasoline imports was introduced in 2010.

But other petrochemicals, including methanol and polyethylene, continue to be exported in large volumes with the help of Dubai-based traders. Countries like China also do not have any problem taking in Iranian product and it remains to be seen if China will accommodate to any new US measures.

Take the case of methanol. Iran overtook Saudi Arabia to emerge as the largest methanol exporter to China last year, exporting 2.1m tonnes. The trend has continued this year with exports of 1.7m during Jan-Sep 2011.

Iraninan companies had told the blog previously that they have adjusted to a life of sanctions with innovative ways of doing business. But with pressure from the US set to rise, a disruption in trade and further delays to new projects is very likely.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

By John Richardson

THE majority of chemicals analysts have yet to wake up and smell the coffee, according to an industry observer.

"South Korean stocks have come off by 15-30% since their big recovery in January, but it is only the timing rather than the overall sentiment that has changed," said the observer.

"The theory had been, and this is clearly not going to happen, that there would be strong restocking immediately after the Lunar New Year.

"Now the expectation is instead for a strong second half of the year. This sentiment, ironically, improved when the Q1 GDP number was released. Because this was the lowest growth that China had seen in nearly three years, everyone is assuming that more economic stimulus, through interest rate and bank-reserve requirement cuts, and more bank lending, is on the way.

"They have also interpreted the rise in March bank lending as an indication that more stimulus is already happening.

"But I think there is more downside yet, before any potential upside.

"If you look at a lot of the chemicals analysts, their earnings forecasts for a lot of the Northeast Asian stocks remain very bullish despite a disappointing first quarter and what seems likely to be a fairly weak Q2.

"The assumption among these analysts is that there will be a very strong pick-up in earnings during the second half that I just don't see happening.

"All the upbeat earnings estimates for Northeast Asia are based on synthetic resins demand growth in China of 8-12 percent for 2012.

"But up until end-February, the latest figures I have, growth was only 3 percent. This was a slight improvement on the 2% growth in January-February 2011, but still a long way short."

An indication of just how bad economic conditions have become came with the release of LG Chem's first-quarter results yesterday.

The South Korean company reported a 42 percent decline in net income. Operating profit, or sales minus the cost of goods sold and administrative expenses, dropped 45 percent to Won459.5 billion The petrochemical division, which accounts for 78 percent of sales, had an operating profit of Won369 billion, half that of a year earlier.

LG, which is major acrylonitrile butadiene styrene (ABS) and polyvinyl chloride (PVC) producer, has been hurt by what's happening in the China market.

The blog believes that some analysts, and companies, have yet to factor in the major structural changes taking place in the Chinese economy, which will dampen growth for the rest of this year at least.

There is also the political challenge, and the weakness of the export environment for manufactured goods.  

By John Richardson

OIL prices could fall to as low as $35-40 a barrel or might slip no further than $60-70 a barrel, depending on which analyst you belief.

And we know of one global polyolefins company that is working on the assumption that crude, both West Texas Intermediate and Brent, will trade between $40-80 a barrel in the second half of this year.

What a difference a few months have made. If you remember, back in early Q1 the consensus was that crude, and commodity prices in general, had only one direction to go - and that was up.

Now, though, even Morgan Stanley, of all people, are admitting that the high cost of oil has caused demand destruction, as fellow blogger Paul Hodges has been pointing out for well over a year.

And we have consistently warned that China was at risk of severely slowing down because of structural changes in its economy and we've been proved right. What we didn't predict was the escalation of the Eurozone crisis.

So, if you're a purchasing manager for a chemicals and polymer consumer, why on earth would you want to do anything other than keep your acquisitions to absolute minimum?

As Hodges points out in the slide above, a virtuous circle of buying forward on the risk higher crude has become a vicious circle for the chemicals industry.

The risks to the global economy are also escalating, meaning that any chief financial officer with her or his salt needs to horde cash. 

Soe small and medium-sized companies are also likely to face a funding crisis.

This is all being reflected in numerous ICIS news stories that talk of falling prices down the value chains from crude, resulting in weaker demand.

Here just a few examples:

*Yesterday, Asia's isopropanol (IPA) prices had fallen to their lowest level in nearly six months amid persistently low demand in the key Chinese market and weak feedstock acetone and propylene prices.

*Last week, Asian ethylene prices fell to a two-year low as crude, and of course, naphtha declined, resulting in ample supply.

*And earlier this month in Europe, polyethylene (PE) buyers put their purchases on hold in anticipation of lower July ethylene contract prices.

               LDPE margins in 2012     

By John Richardson

NORTHEAST Asian integrated low-density polyethylene (LDPE) margins keep plunging new depths.

The margins were at their most negative since ICIS records began in 2000, according to the ICIS Asian PE Margin Report for the week ending 10 August.

And the report for the week ending 17 August said that they had fallen even further - by $17/tonne.

Integrated high-density PE (HDPE) margins were also down, by $16/tonne - their lowest since early March of this year.

"The declines were on a 1.3 percent rise in naphtha feedstock costs as naphtha prices increased by $13/tonne, which outweighed a $15/tonne rise in PE prices," said the 17 August report.

LDPE has been under pressure from increased low-cost shipments to China from Iran. In January-June this year, Iran saw its exports surge by 40 percent compared with the same period in 2011, according to Global Trade Information Services (GTIS).

HDPE exports from Iran to China were also up - by 55 percent - when the same two six months periods are again compared using GTIS data.

Iran is reportedly being forced to produce more PE because tougher sanctions have made it much-harder for it to ship ethylene.

And, of course, with Iran facing an overall tougher sanctions regime, making it difficult for it sell just about anything to many countries in the world, Chinese PE buyers have the upper hand.

LDPE is also being affected by new capacity.

Qatar Petrochemical Co (QAPCO) brought its 300,000 tonne/year plant on-stream in June.

Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE plant is scheduled to start-up in Saudi Arabia in Q3, but some reports suggest that commissioning might be delayed until the fourth quarter.

But maybe we are overcomplicating things.

The overall story seems very simple. LDPE is merely the canary in the coalmine because of specific issues that have made its margin depletion the worst for Northeast Asia, which, because it is naphtha-based, is always going to suffer the most in a weak market.

What matters most for the polymer is that overall PE apparent demand in China fell by 1 percent in H1 2011 over the first half last year, and by 3 percent over H1 2010.

This compares with a 53 percent demand increase in 2008-2010 on a huge economic stimulus package by the Chinese government.

This brought demand forward as an army of new traders entered synthetic resins trading in general. They hoarded speculative volumes on the hope that the 53 percent growth in 2008-2010 would be sustained.

But it wasn't. Growth could never, realistically, be sustained at such a level.

Demand declined in 2011 as government stimulus was withdrawn.

And in an important report released by HSBC in June, the bank underlined what the blog has been hearing since early 2011 when it wrote: "Polyethylene, polypropylene (PP), polyvinyl chloride (PVC), polyethylene terephthate (PET) and acrylontrile butadiene styrene (ABS) demand growth has averaged just 2.7 percent since the first quarter of last year, compared with a 9.1 percent increase in GDP."

The reason is that inventories from polymers down to finished goods are still at high levels following the 2008-2010 increase in speculation.

Demand has also taken a big hit from the economic slowdown in China, the severity of which has taken many people by surprise.

Source of graph: Reuters

By John Richardson

THE Federal Reserve has got it badly wrong, and could compound its mistake by launching a third round of quantitative easing (QE3), warns Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley.

"The first two rounds of quantitative easing fuelled a commodity bubble, increased income inequality and set a bad example for the rest of the world," wrote Sharma, in this article in the Financial Times.

"During the 16 months of round one, up to March 2010, the CRB (Commodity Research Bureau) commodity price index rose 36 percent, while food prices rose 20 percent and oil prices surged 59 percent.

"During round two, in the eight months up to June last year, the CRB rose 10 percent, the CRB rose 10 percent, with food up 15 percent, while oil prices rose 30 percent."

And now stock and commodity markets have responded in anticipation of QE3. They have also reacted positively to the European Central Bank bond-buying decision, which, in effect, amounts to quantitative easing.

For example, as crude went higher, by last Friday the September ICIS Petrochemical Index (IPEX) had rebounded 2.6% from the year-low in August to 307.77, driven mainly by an almost 10% gain in Europe. The US component edged up by 1.6%, while Asia experienced stagnant growth.

Out of the sub-indices, olefins gained the most by 5.7%, followed by aromatics at 5.2% and then polymers at 3.9%.

Sharma identifies exchange traded funds, and other financial products, as being at the core of the problem. Commodity prices tend to now move in lock-step with equities. This is the point we made in chapter 3 of our e-book, Boom, Gloom & The New Normal, when we explained the dysfunctional nature of oil markets.

For most people, especially those in emerging markets who are very poor by Western standards, higher oil and food prices act as an effective extra tax on their spending.

As Sharma points out:

*When the price of oil hits $120 a barrel, consumer spending on oil reaches 6 percent of total worldwide income and starts to cut into spending on other goods.

*Estimates suggest that in the US, every $10 a barrel increase in the price of oil shaves 0.3 percent from GDP, and adds 0.3 percent to inflation.

*Illustrating the point about the poor getting poorer, in the US again he adds that families in the bottom 20 percent of income earners spend 8 percent of incomes on petrol and 30 percent on food, while the top 20 percent spend just 2 percent on petrol and 5 percent on food.

Fellow blogger Paul Hodges, and co-author of our e-book, also argues in this post that quantitative easing has failed.

He makes the point that in China, a very poor country by Western standards, oil prices are close to record-high levels.

Inflation in China rebounded in August as a result of more expensive food and fuel. This is limiting economic stimulus options.

And because demand is so weak in China, the polyethylene (PE) industry is struggling to fully pass-on higher raw-material costs to the converters and fabricators. Northeast Asian integrated PE margins are in deep negative territory.

One group of people that have benefited from quantitative easing are those who are lucky enough to own equities (Sharma adds that 75 percent of all stocks in the US are owned by the top 10 percent of income earners).

And the other beneficiaries are the bankers who got us into this mess in the first place.

The ability of these few people to buy extra yachts, Gucci handbags and luxury Manhattan apartments, isn't going to get the world economy going again.

Next month's World Aromatics conference is a must-attend event for anyone involved with the industry.

It features an impressive line-up of major players, including Saudi Aramco, the world's largest oil company, as well as Dow, Shell and the International Energy Agency. Jointly organised with ICIS, it takes place on 13 - 14 November:

Saudi Aramco aim to become 'the world's leading petrochemical company'. In Berlin, Ted Randall - Global Business Manager - will for the first time set out their plans for the aromatics business.

Dow are already a major player in the market, and are now finalising the $20bn Sadara petrochemicals complex with Aramco in Saudi Arabia. Craig Barry - Global Business Director - will update on their view of the market.

Shell, of course, have also been a major player for decades. Stephen Kinder - New Business Development Manager - will focus on the C6 and C8 value chains. He will outline their views on how companies can best position their products for future growth.

The International Energy Agency are the world's most authoritative energy agency. Capella Festa - Senior Energy Analyst - will present their insight on energy trends, with a particular focus on how these will impact aromatics.

Please click here to see the full Conference agenda and registration details.

By John Richardson

CHEMICALS and polymer markets have enjoyed a very strong recovery in Asia since November/December, according to many of the traders we have spoken to.

"We are getting $150-200/tonne more for benzene and toluene in January compared with early November. There has been a strong recovery in confidences," said a Dubai-based trader.

But a second Dubai-based trader, in this case in polyolefins, cautioned that the recovery was at least in part a relief rally.

"People were so sick of feeling depressed that all the good economic news has given them an excuse to feel good again," he told us.

"I am far from convinced that it will last."

The psychology of commodity markets is fascinating, but potentially very toxic for those who get taken in by the hype - either on the downside or the upside. For instance, earlier this month iron prices had more than doubled compared with early September. None of the commodity analysts the blog has spoken to in Perth, Australia, believe that the rally is justified and therefore sustainable.

But the optimism is so intense right now that chemicals analysts, referring to the cracker-polyolefins side of petrochemicals, are saying that the current recovery will at the very least be sustained throughout this year.

"I don't believe that product spreads will weaken much during the rest of 2013, despite all the new capacity due on-stream in polyethylene (PE) and polypropylene (PP) from March-April, but they probably won't improve," one analyst told us.

"The reason is that demand will be good enough to absorb supply."

He added that we are in a "news sweet spot" resulting from the Republicans agreeing to kick the US budget deficit crisis down the road and all the positive data emerging from China.

But what the blog cannot fathom is why, if the recovery is strong, why high-density variable cost margins in both Northeast Asia and Southeast Asia (see above chart) were so weak up until the second week of January.

Something is amiss...

Be careful out there.

By John Richardson

EVERYWHERE you look across China's petrochemical markets the story is the same as in polyethylene (PE): Exceptionally weak demand during a time of the year when demand should be good.

Take purified terephthalic acid (PTA) as an example.

"Asia's purified PTA spot prices fell in the week ended 15 March on reflection of lower discussion and transaction prices," wrote ICIS pricing's Asia fibre intermediates, Becky Zhang, in her 15 March report.

"A 1.6% fall in PTA futures on 12 March weighed on buying and selling indications to a 15-week low. Mild upward corrections in PTA futures on 13-14 March stabilised buying sentiment, but were not able to drive up prices back to the levels seen in the previous week because of weak demand."

High inventories were reported up and down the value chain.

Earlier this week, Asia's spot benzene prices fell to a 23-week low as a result of lower prices in both the US and China, according to Asia aromatics editor, Ong Sheau Ling.

Demand for overseas benzene in China was low because domestic prices were lower than those on international markets, added Ong Sheau. This pattern is common across many products.

Asia's toluene prices have also fallen to an eight-and-a-half month low on high stock levels in China.

Petrochemicals markets might take heart from the improvement in the HSBC Purchasing Manager's Flash Index for China. The March index rose to 51.7 in March from 50.4 in February. However, it remained below a two-year high of 52.3 in January.

But one should be very cautious about reading too much into this.

The blog had six discussions with chemicals traders yesterday, who trade in products ranging from speciality polymers to benzene, and they all said that demand was exceptionally weak. Commodities demand in general remains poor, according to this Reuters report.

Weak January and February electricity output figures mean that first quarter GDP growth is likely to be slower than the fourth quarter's 7.9%, said Capital Economics economists Mark Williams and Qinwei Wang.

"They also looked at a drop in domestic freight volumes, but conceded construction activity and port volumes have improved," the Reuters article added.

"Taken together, the signs are that 'economic growth is slowing in the current quarter, much sooner than most had expected,' " Williams and Wang concluded.

Capital Economics added that growth in (quarter-on-quarter) terms has dropped back to the pace seen in mid-2012, before the policy-driven rebound took effect.

This is consistent with evidence that China is withdrawing economic stimulus as it tries to deal with inflation and excessive credit growth.

"China's got a head cold, and it's going to take awhile to get going but it will," Stephen Pryor, CEO of ExxonMobil Chemical, said during a panel discussion at the IHS World Petrochemical Conference in Houston earlier this week.

We wish we could share his unequivocal confidence.

By John Richardson

THE blog held a full day of discussions with our ICIS China price reporting team in Shanghai (we will provide a lot more details next week) and the story was consistent:

*Government policy to rein-in liquidity, most notably new restrictions on the housing market, has driven demand down.

*Traders expected a post-Chinese New Year demand bounce that hasn't happened.

*Anxiety amongst producers and traders is growing over the long-term direction of the economic policies of China's new leaders.

For example in the toluene market, eastern coastal China inventories are at 100,000 tonnes compared with 30,000 tonnes in the second half of last year. This the result of traders taking aggressive positions on the assumption that demand for toluene into paint would continue to boom. However, demand for paint has fallen because of the construction slowdown.

"The animal spirits have gone out of markets and there is a great deal of caution about, but demand is there and demand will continue to grow very well," said a polyolefins industry source."

We think major structural changes mean that the problems extend way beyond just an absence of animal spirits - i.e. the speculation that add so much froth to markets in 2009-2010.