Asian Chemical Connections

I am bored to death, sick to my back teeth, of attending conferences where the only view on China is one of almost exponential continued growth. Read this from Will Hutton, a top China sceptic for a sobering reminder that China has some major structural weaknesses. You thought the Asian Financial Crisis was bad? If he's halfway right, this will make 1997 seem like a sunny stroll in the park

Produce too little energy over the next 35 years, says the International Energy Agency in this article from the Guardian Weekly, and there will be price hikes and a financial crash; produce too much and the increased rate of global warming will also result in economic disaster. The rest of the article leaves you with the feeling that we have just gone too far, that nothing will or can be done to reverse the environmental catastrophe we seem to be heading towards. To what extent will the chemical industry be blamed for this disaster?

Please read this excellent piece from my colleague Nigel Davis, who is editor of the Insight section of ICIS news.Some further thoughts: if 46% of existing and 45% of future ethylene production is taken offline by flooding, just think of the impact on food pricing and distribution and the resulting social and economic chaos due to the shortage of food--packaging material. These estimates maybe wrong, but if Lehman Brothers are only halfway right God help us, and I don't just mean the chemicals industry. On a more immediate bottomline level, how many banks, consultants and project proponents are factoring in the increased risks of flooding into feasibility studies? Or does anyone really care enough to look beyond their next promotion or their imminent retirement? If you won't be around in 10 years' time, why bother asking awkward and potentially career-threatening questions?

Paul Cherry of Basell gave an excellent paper at the recent ICIS Olefins Conference - Download file
Paul offers some hints on how to survive the next downturn, and provides some sobering predictions on operating rates.
I bet that after 2009-10, or whenever the next downturn arrives, South Korea, Taiwan and Japan will further restructure. And what about Thailand? Is it building too much capacity based on the mistaken belief that it can become a major finished-goods manufacturing hub?
And as for China, its dominance will grow and returning a profit from China will not become any easier.

Global leaders from the Group of Eight rich nations plus Brazil, China, India, Mexico and South Africa have agreed that developing countries will have to face targets for cutting emissions as well as developed countries.If these noble words are followed by action, prepare to be legislated against.
I wrote yesterday about Rex Tillerson and his belied that cutting hydrocarbons consumption could harm economies. Dr John Holdren, president of the American Association for the Advancement of Science, says "nonsense".

An interesting debate is emerging over the growth of the recycled polymer market in China. Sinodata, the Beijing-based consultancy, estimates that 5.8m tonnes of all types of recycled polymers were imported into China last year, an 800,000 tonnes increase over 2006. Five years ago, recycled imports totalled less than 500,000 tonnes.
With domestic recycling also estimated at 7-8m tonnes/year by Sinodata, this is creating a big dent in virgin resin demand. Demand growth for polyolefins is expected to be as low as 5% this year as against more than 10% in 2002-04.
If your glass is half full you can interpret the rise in recycling as a reflection of high virgin resin prices, meaning that once resin prices fall so will recycling.
But what about China's perrenial push for resource efficiency, given further official backing by Premier Wen Jiabao in a speech this week?What about the margin pressure on the downstreamers?
And, if you've found a cheaper way of doing things, why go back to more expensive raw material?

We heard about this rumour last year, but it's emerged again - Reliance is now said to be in advanced discussions for acquiring Nova Chemicals. Nova's Alberta-based cracker and PE production might be attractive because of pretty competitive, locked-in gas prices, but would Reliance really want its styrenics business - the asset that's officially on the block?
And surely, a tie-up with Dow would be a much better proposition.
At the rate that things are going, India, the Middle, and possibly China, could own nearly all the western petrochemical majors in 10 years time.

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 United Nations report on climate change, released last Friday, warned of 50 million made homeless as a result of global warming by as early as 2010.
Reports such as this will serve to pile even more pressure on the big polluters including, of course, China - the mothership of chemical demand growth.
Any investor who doesn't have a Plan B, factoring in a much harsher regulatory climate in China, is burying their heads in the sand.
China's government will have to introduce new legislation, and more effectively implement existing rules, because of rising international pressure.
This LA Times article provides a neat summary of the scale of the problem.

I was chatting to my good friend and contact Paul Hodges of International eChem yesterday.He believes we've entered globalisation part II, where the impact of higher raw material prices will trigger harmful inflation.
As Ben Bernanke has pointed out, oil prices are 40% higher than would otherwise have been the case without the recent boom in Chinese demand.
The upside of China's export boom has been staggeringly cheap prices of everything from low-end clothing to high-end electronics. This has to some extent offset the impact of job losses as manufacturing has migrated east.
But Paul points out that raw material costs are now a much bigger portion of finished goods prices with wage costs also on the rise in China.
The west could therefore be hit by a combination of higher fuel prices and higher consumer goods prices, while it continues to grapple with the decline of its manufacturing industries.
Cheerful stuff, eh?

The eternal optimists at Nova Chemicals presented a very bullish view of olefins and polyolefins markets at their recent results meeting.Aaron Yap, trader with Integra, was also equally bullish at the ICIS Asian Polymers Conference in Shanghai last week - see Download file
In short, Aaron believed that demand growth would hold up downstream while olefins supply would lengthen in 2008-12. This will mean much better margins for the PE and PP producers.
Needless to say, I think this is all nonsense. I will be buying truckloads of petchem company shares in 2009 when valuations crash. Any bankers who also want to join with me in a few cheap buyouts, you know my phone number.

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

Maybe, if the mystery blogger at the excellent http://www.theoildrum.com/ site knows what he is talking about. I've pasted in his arguments below.
You need to register at this site, which takes only a few minutes, if you want to get into the wider debate about how energy issues will have a critical bearing on all those wonderful demand and supply predictions available at a high premium from petrochemical consultants.
And while we are on that subject, just how many of those predictions take into account a sharp decline in Chinese growth on the failure of its energy policy combined with the inability of the world to meet its crude oil import needs? This could occur as soon as 2010, say some crude oil exports, the year when Peak Oil is forecast to finally arrive.
Once you've registered at the oil drum, go to http://www.theoildrum.com/node/2270 for some miserable reading on this very topic.
Happy 'Depression Economics' - a new concept I think I've just invented.

And also a whole host of other chemicals if this article on the excellent All Roads Lead to China blog is correct and incentives that have encouraged the real estate boom are removed.
This serves of the dangers of overheating. What goes up must come down and, in this case, the real sector has a long way to fall. Lots more PVC for export might be the end-result

There's been a lot of talk about the next wave of Middle East capacity being too great for Asia to absorb all the Asian volumes. Indeed, estimates abound over western growth being satisfied by the M-E over the next 3-5 years.
But here's a thought: what if China's capacity build-up leads producers elsewhere in Asia to increasingly target western markets.
A case in point are these claims from expandable polystyrene producers that they even expanding to serve the European market, never mind just shifting volumes that used to go to China.

Quite possibly, yes, despite my instinctiive pessimism. Perhaps emerging markets such as China and India have reached such a critical mass that no matter how much capacity is brought on stream, it will be easily absorbed.
Or maybe some disaster lies just around the corner.
Who cares if you've made your money in the most extraordinary bull run in history and have already cashed in your chips.

After yesterday's optimism, yet more pessimism. I remember 1997. Don't underestimate the dange of contagion if China's stock market bubble does burst - as the likes of Alan Greenspan are predicting

You maybe relieved, on the day the Chinese government introduces measures to cool stock markets resulting in sharp fall in the Shanghai Exchange, that I am going on leave for a couple of weeks.
Perhaps I'll feel the sun on my back (unlikely as I'll be visiting Scotland), come back with renewed optimism and not worry about the impact of the pork shortage on the Chinese economy. Could this be the new SARS?
Oh, and my wife has just punched me for constantly talking down our investments.
Au Revoir.

"Hello, my name is John Richardson.
I had an accident, and I woke up in 1973.
Am I mad, in a coma, or back in time?
Whatever’s happened, it’s like I’ve landed on a different planet."
Before you think I've been at the methanol again, please follow this link to the fantastic BBC TV series, Life On Mars, where a UK police officer living in 2006 is in a road accident and is transported back in time to 1973. This is definitely not a waste of polycarbonate - buy the DVD.
Like Sam Tyler of the series, it felt like I was back in time this morning when reading of the IEA report on an oil-supply crunch in five years.
It was back in 1973, if you remember, that an oil crisis triggered the US recession of 1973-75.
William Poole, president of the Reserve Bank of St Loius, argues that high oil prices this time around haven't triggered a recession because of factors such as low inflation. This is largely the result of China and the rest of the developing world driving down costs.
But how long will this continue if the IEA is right? And how will the developing world reconcile itself to not having enough raw materials to sustain the huge boom in demand for the things made, ultimately, from oil? What will be the social, political and economic implications of the looming supply crunch on ever-more wealthy populations demanding the same mass-consumption lifestyles that westerners enjoy?

I think it's about time that the developing world stopped saying "you did it, so why can't we?" when the West raises concerns over rising pollution levels in China, India etc.
In the "good" old days my home country, the UK, had lots of dark, gritty and satanic mills, which were almost as ugly as our corporate headquarters. We used to make children work as chimney cleaners and down coal mines and generally life was pretty miserable.
But the point is that we, fortunately, didn't have the technologies to kill people in as greater a number as the Chinese have, and also we didn't have anywhere near as many people. Chemical and other plants are playing a large part in China's environmental tragedy - and it is no exaggeration to call this a a tragedy.
Expect more legislation from China's government, as a result of disturbing reports on China's environment such as this one by the OECD.
The legislation will make it harder and more expensive to build chemical and other plants. At the same time there are huge opportunities for those selling safer processes and for the water-treatment industry.
But will the legislation work? Probably not because it cannot be allowed to work as so much of China's growth is tied up in low quality, very cheap industrial capacity.
The end result is that China will choke a large number of its people, and its economy, to death.

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

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.

I am at logistics conference at the moment where the major theme is a chronically tight global container shipping market because of booming exports from China. Ports are congested, waiting times are increasing, freight rates have in some cases doubled in the last two months(for example, the Middle East-Asia route) and there is no immediate sign of new container freight capacity easing the crisis.
And across the globe there is an imbalance between rapidly growing economies such as China and exports back out of some receiving countries in the same container vessels.
This result is lots of re-positioning or backhaul i.e containers moving out of the receiving countries empty. Countries such as Russia, for example, have small manufacturing industries and therefore need to import far more than they are able to export.
So if you are a polymer producer, there are savings to be made by scouring the globe for supplies of these empty containers.
What you do is you move your polymers to the country where the empty containers are sitting and fill those containers to move back to China, India etc. The shippers are delighted because they earn guaranteed extra revenue and the exporters in China are are dead chuffed because they don't have to haggle with the shippers over re-positioning fees (compensation for moving the containers empty back to China).
Now I cannot name the company I was speaking to fear of losing a good contact, but a polyolefins producer said to me over lunch over how he could be moving his product from his plant in central Asia to St Peterburg in Russia, via rail.
And then from St Petersburg, the polyolefins might move by sea all the way to China!
This is being repeated across the industry because supply chain effiiciency is so important for overall competitiveness.
The point of my headline is this - what will happen if the regulators start clamping down on this in a bid to tackle a producer's overall emissions, from the efficiency of his plant to final delivery to the customer?
Producers may not necessarily have to stop the use of convoluted shippings. If the economics still add up, they might buy carbon credits or find other ways of offsetting their responsibility for these extra emissions.
The producer I was speaking to believes it is possible that legislation to this effect will be introduced over the next two years.

Methanol producers have been enjoying the best of times, but to paraphrase good old Charles Dickens, they may not necessarily be heading for the worst of times.

There is a staggering amount of capacity due on stream by 2012. By that year, global capacity will stand at 66m tonne/year according to
Mark Berggren of consultancy, MMSA. . This compares with his estimate of global demand of only 50m tonne during that year. 10.58m tonne/year of this capacity will be in the Middle East - representing 25% of the current global total - with China accounting for an even bigger slice of the pie. For more a detailed analysis of methanol see the latest ICIS insight Asia Middle East report Download file

But as Mark and the whole of the methanol world concedes, it is hard to estimate what consumption will be from a whole raft of new end-uses. These include direct blending of methanol into gasoline, dimethyl ether and fuel cells for both cars and computers.

But still, if demand growth is insufficient, you have to pity the smaller, higher cost producers .

In the case of the Chinese coal-based producers, they will be towards the bottom of the cost curve because of low feedstock costs and will increasingly be able to compete with the Middle East.

To carry on with the Dickens quote, from A Tale of Two Cities, he talked of the French Revolution as being "the age of foolishness" and "the age of wisdom".

Perhaps the wonderful world of methanol will also represent such divergent fortunes, with the poor foolish US and European producers facing Madame Guillotine.
I

Alan Greenspan refused to categorise conditions in the US housing market as a bubble when he was chairman of the Fed.
But now he's retired and while plugging his memoirs, he admitted in a TV interview the other day that lots of froth in different parts of the US made up what was, in reality, one giant bubble - similar to the one that went pop in 2001 with the collapse of the dot com shares.
Take a look at this article from The Economist which suggests that there are six countries - Belgium, Britain, Denmark, Greece and Spain - where a housing market crash is even more likely than in the US. In these countries, the article suggests, average house price inflation is 47% above what is justified by fundamentals.
And then look at Asia. In Singapore, property prices have doubled - even tripled in some cases - over the last two years. Speculation reached fever pitch until an increase in government taxes and the global credit crunch brought sanity to the market a few weeks ago. Now there is talk is of another property price collapse similar to the 1997 meltdown.
Then there are the property booms in India and China.
You can argue, as the Asian Development Bank does, that Asian fundamentals are so strong that the continent can ride out a US credit-crunch driven recession.
But what goes up has to eventually, surely, come down and bubbles have historically always gone pop.
And so from this calculate how many polymers and chemicals go into the construction industry - from PVC to formaldehyde - and think of a worst-case scenario for your business. This could be the froth being taken out of the market - meaning property prices falling back to where they should be based on the fundamentals. But as is often the case when sentiment turns bearish, prices could collapse below their real value. Fantastic news for bargain hunters with nerves of steel, but not much use if you're operating a PVC plant.
The global property bubble could pop as early as next year, if the Fed 50 basis point cut and any future measures fail to bring the credit crisis under control.

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'.

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

Paul Hodges, in his excellent chemicals and the economy blog, talks about the recent Shenhua Energy listing on the Shanghai stock exchange and how it shares jumped by 93% following the IPO.
Now it has ample cash to pursue its ambitions.
Shenhau is just one of numerous companies involved in coal-to-liquids projects in China which will provide transportation fuels and also methanol-to-olefins production through to polymers. Cash will not be an objective for a sector which is expected to see Yuan60bn worth of investment in 2006-10
The US is also looking at making much more use of its coal reserves to boost energy security and reduce carbon dioxide emissions.
But just how environmentally friendly are coal-to-liquids technologies? According to the non-profit organisation, the Natural Resources Defense Council, it makes more CO2 sense to refine oil - Download file
However, in the end will the solutions we seek to the peak oil crisis be driven more by energy security issues than environmental concerns?
And when the Greenland ice sheet has collapsed into the ocean, Shanghai has been submerged and hundreds of millions of people have been displaced by the global rise in sea levels, how secure will we feel?

This was the warning from Bob Bauman of Nexant ChemSystems at last week's 25th Annual Petrochemical Conference in Houston, Texas.

Read below for some rather gloomy predictions of where markets could be heading in 2011-12

The article below, from Sean Milmo of ICB, makes the case that the Middle East will not be able or willing to lead pricing in Europe during the next downturn because of the control that European producers will be able to exert on their home market.

Quite possiby says International e-Chem and Wood Mackenzie in a new study which predicts that by 2015, China could have a deficit of as much as 35m tonnes.

When you consider that total global output is around 300m tonne/year, this is quite staggering.

On paper, China should be balanced on naphtha because of a huge refinery construction wave. However, the consultants argue that the refineries will be run primarily to make gasoline. The importance of gasoline supply to China as a means of stimulating economic growth, thereby maintaining social stability, was illustrated yesterday when the government raised fuel prices by 10%. The hope is that the price hike will end shortages through boosting refinery production as a result of improved refinery margins.

And globally, will there be enough naphtha to supply China? Many of the 700 or so refinery projects being built could be delayed or cancelled because of rising construction costs and tight contractor and raw material markets.

Even if there is enough supply on paper, will refiners want to make the naphtha that China and the rest of the world needs? Quite possibly not as naphtha only accounts for around 5% of total refinery output.

Therefore, globally, as in China, refineries exit primarily to maintain supply and make money from the transportation sector.

I was in India this week as the Times of India carried a front page cartoon of a bull dressed in a Superman outfit with an 'S' on his shirt to mark the Sensex surging past 20,000. All the talk was of the index taking 20 years to reach its first 10,000 with the second 10,000 added in only 20 months.
The belief among just about everybody you talked to at the first Asian Chemical and Petrochemical Conference* in Mumbai was that Asia had decoupled from the US - meaning, even a US recession would not have a major impact on growth in India, China and elsewhere.
Indeed, investors have been pouring cash out of western and into Asian markets in response to the sub-prime mortgage crisis, lower US interest rates, and the prospect of continued strong economic growth in Asia. *The conference was organised by ICIS and the Indian Chemical Council.
As far as petrochemical demand was concerned, delegates and speakers were forecasting double digit growth for the foreseeable future.
Is this just too good to be true?

If anybody can spot the blatant hypocrisy, or disturbing ignorance, which is a prominent feature of the extended entry below, please feel free to comment.

I expect the guy from Hood River will want to have his say.

Hopefully, completely empty if you happen to live in China and can only afford to drink tap water.

However, it's not the environment that this is this week being viewed as the biggest threat to the economy, but rather inflation as this article from ICIS news explains.

Please read this - http://www.nytimes.com/2007/09/28/world/asia/28water.html?_r=1&pagewanted=all&oref=slogin

Don't worry, just keep concentrating on the short term - after all, all you have to do is keep your boss happy and make it through to retirement with loads of money in the bank.

Or let's assume you are worried. What can the chemicals industry do to address this crisis other than promoting PE100 pipes to move ever-tighter water resources around?

Do we have a responsibility to inhibit rather than push the growth of chemicals and how on earth would this ever fit in with any corporate strategy or individual career objective?

And from a purely selfish dollars and cents objective, as the groundswell of public opinion goes could you face more incidents like this? - http://www.youtube.com/watch?v=tyLHwz52wsk

What kind of world is my 10-month-old son going to inherit?

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

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

Asian industry leaders are playing lip service to the environmental crisis the world confronts .
George Monbiot, the excellent author and journalist, argues that what the West needs is a recession to give the planet a breather.Asia also needs a substantial economic slowdown to give policymakers and technology developers more time.

Quite possibly not, according to a Deutsche Bank report.

However, as the report makes the clear, the same types of imbalances are building in the Chinese economy which led to Japan's "Lost Decade" of the 1990s.

Time to take stock and have a contingency plan?

China annnounced on Wednesday that it had shifted its monetary policy stance to "tight" from "prudent" in response to food-price driven inflation, soaring real-estate prices, the surge in local stock markets and continued strong growth in industrial investment.

How this policy shift will be implemented remains unclear, but media reports suggest that total bank-lending growth could be limited to 13% next year from 15% in 2007.

The concern is that this will affect working capital as well as funding for new projects.

The ICIS pricing team is already picking up anecdotal evidence of petrochemical producers and buyers struggling to afford and source working capital in China during this year. This is the result of several interest rate hikes and increased reserve requirements imposed on the banks by China's central bank.

Next year could therefore be even tougher for cash flow. But the greater danger is that if the government doesn't succeed in taking some of the heat out of China's economy, and that some of the froth might end up making one giant bubble - to quote Alan Greenspan.

Loss of working capital is a small price to pay for avoiding the popping of a bubble which would have huge consequences for the global economy.

See below for an extended analysis of why everything is about to go wrong.

Looking forward to picking up some bargain chemical shares over the next two years and some cheap US and UK property!

As the Asian head of M&A and acqusitions for a major bank told me this morning: "Wnen everyone tells me I must buy as the market will definitely keep going up I sell.

"When they tell me to sell, I buy."

Counter-cyclical advice that served the Huntsmans well for a long time, until they became over-leveraged.

Talking about over-leveraging, only interest rate cuts right down to zero will prevent the great unravelling of the paper-bottomed credit-fuelled boom.

There are strong rumours circulating that the hopelessly fragmented Indonesian petrochemical industry might undergo some more restructuring.

This would follow Titan Petrochemical's purchase of troubled polyethylene producer PT Peni, now renamed PT Titan, for a bargain price.

Common ownership between sole cracker operator Chandra Asri and its numerous downstream companies would go a long way to resolving the country's flawed petrochemical economics.

Meanwhile, talk of adding olefins capacity in Indonesia has gone very quiet. This time last year, there were cracker projects reported to be under evaluation.

Yes, if it persists despite the best efforts of the government to cool down the economy.

The point is that this is not just crude oil and food prices, but the pace of underlying inflation is picking.

As the Financial Times reports, inflation is now at an 11-year-high

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.

What Andrew Liveris didn't address when interviewed over the Dow/PIC deal is what the $19bn olefins and polymers deal could mean for Asia, the Middle East and commodities.

All the talk was of specialities with speculation sure to be rife over the next few months over how the US major will use its now substantial war chest to boost its presence in performance products.

But when it comes to commodites, Kuwait is not blessed with abundant supplies of natural gas.

Although the Equate joint venture (the jv between Dow and PIC) has sufficient gas to build and supply a second complex, which is due on stream next year, talk of a third cracker in Kuwait has gone quiet. There were reports late last year of a significant new gas find in the north of the country, but apparently the new field is not ethane-rich.

And so if Dow/PIC can't further expand in Kuwait, where might they build?

Perhaps in Egypt where discussions have been taking place with the Egyptian government for an ethane cracker.

And PIC, through its parent company Kuwait Petroleum Co, has access to crude oul supplies. This could get Dow/PIC into China, where future foreign participation in future integrated refinery and petrochemical projects might only be possible if the foreign partner brings oil supply into the deal. This is a commodity of which China is in desperate shortage.

Dow has also been pursuing a coal-to-chemicals project in China. Will its interest in coal-to-chemicals persist now that it is better able to build oil-based petrochemicals in the world's most-important market?

Finally, though, it's worth noting that there has been a lot of talk, and hints from those in the know, about further pipeline links across the Middle East.

On of the places with lots of gas in the region (excluding Iran, which has too many other issues to worry about than pursuing regional co-operation) is Qatar. Linking Kuwait into future spurs of the Dolphin pipeline might not be beyond the realms of possiblity - thereby, making Kuwait a place for further expansion.

Or what about moving gas from Iraq, if that country ever becomes politically stable enough? Or maybe even Dow/PIC could co-operate on eventually even building a cracker together in Iraq?

Talk of building petrochemicals in Iraq re-emerged a few months ago.

Worth ringing Mr Liveris and asking him these questions. I will ask my colleagues to help out.

India is already being held back in mass manufacturing by restrictive labour practices and poor infrastructure - meaning the answer to the above question is already a resounding no in some sectors.

The rise of the rupee is also a concern, as this article from The Economist highlights .

The problem for India is because it has spent the last 15 years gradually opening its capital account and liberalising its financial market, it cannot do what the Chinese do so effectively - intervene to keep its currency competitive.

Export markets are going to get a great deal tougher next year as the US, and probably Europe, enter recession.

And so how will Indian manufacturers cope in these tougher markets versus their Chinese competitors, given the handicaps of the rupee that could remain high and weak infrastructure etc? The answer is likely to be not particularly well.

Reduced export sales will weaken the stellar petrochemical consumption growth we've seen over the past few years.

It will be interesting to see the effect that this will also have on polypropylene. Reliance Industries is due to commission its 900,000 tonne/year plant in Gujarat in mid-2008.

According to this article from The Economist, total China exports account for less than 10% of China's GDP when "value add" is stripped out - much less than the headline 40% figure for 2007, which includes imported and domestic inputs.

Good news as we enter the New Year, given that a US recession now appears almost certain.

But what about Singapore and the other more export-dependent economies in Asia?

The two big gaps in the US major's Asian presence (and gaping gaps they indeed are) are cracker complexes in India and China.

China could be fixed through the alliance with PIC - meaning, Dow has leverage to get a license to build a naphtha cracker complex by offering crude supply through its new jv.

Atlernatively, it could achieve te same objective by completing its methanol-to-olefins project.

But India remains blocked by Bhopal. One wonders why a company with the wisdom of Down cannot work its way through the ever-in-flux Indian system, but maybe no foreigner can without the support of a strong local partner.

This is not meant to make light of the lingering misery of one of the world's worst chemical disasters, but the motives of some of those petitioning for more money are perhaps a shade dubious.

What's certain is that the issues cannot be as simple as portrayed in this Voice of America article.

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

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

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

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

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

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

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

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

But the power of sentiment should not be underestimated.

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

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

In the good or maybe the bad old days depending on your standpoint, methanol was a fairly straightforward product.

You had chemicals demand and that was more or less it. But as the extended analysis below explains, chemical producers who use methanol as feedstock have to factor in direct blending of gasoline into methanol, DME, biofuels and fuel cells as shapers of demand.

Direct blending of gasoline into methanol and the use of DME as a transportation fuel are the biggest of these two new sources of demand in China. Expect a big increase in consumption from these two applications over the next few years.

Whereas the US has opted for ethanol in order to increase energy security (and for bogus environmental reasons), China has chosen the methanol route based on its big coal reserves.

The $64,0000 question is what this wil mean for the affordability and pricing of methanol for chemical consumers.

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

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

.......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

Recent comments by An Qiyuan, chairman of the Chinese People's Political Consultative Committee for Shaanxi, warned of the environment and social catastrophe facing the northwestern province of China because of a shortage of water.
He was referring to the diversion of water from Shaanxi to Beijing ahead of the Olympics and hydroelectricity plants which he believes should be closed down.
Water is a particularly scare resource in western China - where most of the country's coal gasification projects are located. The technology is arguably a wasteful, heavy consumer of water.
And this raises an interesting dilemma for Dow Chemical - potentially a joint investor with Shenhua Energy in a coal-to-chemicals project in Shaanxi.How do you balance economics with the environment?
Coal gasification could represent the promised land - provided you can solve the logistics problems and provided the long-running doubts over the viability of methanol-to-olefins technologies are unfounded.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Economists refer to externalities as those factors that can influence growth but that are beyond the influence of humans to determine. As ar result, the members of this esteemed profession tend to ignore externalities.

If we've left it too late on the environment, then the environment is clearly such an externality that could limit demand growth in the future.

How will China provide enough water to ensure that growth spreads from east to west?

What happens if the environment has reached a dangerous tipping point where the damage we've inflicted leads to an out-of-control acceleration into catastrophe?

Take, for example, corn-based ethanol.

William Laurance of the Smithsonian Tropical Research Institute in Panama writes in the 12 April issue of the New Scientist that the huge increase in corn planting in the US to feed ethanol has led to less soya being planted.

The resultant rise in soya prices has led to forest destruction in the Amazon as Brazilian farmers clear trees to plant soya. "

The Amazonian forests help to generate their own rainfall, because the dense vegetation quickly recycles moisture and returns it to the atmosphere. As deforestation proceeds, however, less water vapour is recycled, so clouds and rainfall decrease. No one knows how far the Amazon can be pushed before it collapses in rage of droughts and forest fires."

Blimey, if deforestation already accounts - as we are told - for 20% of global emissions, what would this mean for the habitability of our planet?

Never mind - I don't care. I am off to read some wonderful analysis about the endless demand-growth prospects presented by China. Who cares as long as I can get my bonusby building this analysis into a report I can present to my boss?

An overused word - tragedy - but the events of the last week justify the description.

But what a relief that the Chinese government has reacted so promptly and so efficiently, in complete contrast the callous incompetence of the thugs who run Myanmar.

Worth clicking through to ICIS connect - our chemicals industry community forum - for discussion about the disaster and what the chemicals industry can do to help.

Click here also for the latest from ICIS news on the earthquake.

I am beginning to come to the view that something has to give in the medium-term. There is no way that the global economy can support crude prices at current levels, and you can argue, as Lehman Bros does, that speculation is behind a fair slice of the recent rallies.

They also make the case (read more on ICIS news next week) that the supply outlook is not as bad as the bulls on crude pricing - who make up the majority - are making out.

But the problem is that every bit of bad news on crude gets played up by the media, and ends up inflating the crude price, because the majority opinion is that prices have much further to rise.

The Lehman analysis doesn't add the very obvious point that chemical producers and industries all the way down to finished goods will be cutting back production on high oil prices. This will, in itself, serve as a correcting mechanism.

Governments in Asia are also cutting back on fuel subsidies which could moderate consumption growth in emerging markets - the main factor behind the demand surge.

See below for an extended interview with Shell Chemicals vice president, Ben van Beurden, who talks of the search for new feedstock sources. He raises the possiblity of using syngas from the Pearl GTL project in Qatar to make methanol and then olefins. Or perhaps the high paraffinic naphtha and ethane from the same project will be the way to go for Shell in Qatar?

Meanwhile, more investment in China looks likely. Read on......

....that's the case - in the Middle East case because of advantaged feedstock and in China's case because it will be strategic.

In previous downturns, far more capacity was western, or other Asian, and liquids based and so rate cuts brought markets more quickly into balance.

The graphs below from ICIS Plants & Projects data show that while only 14.8% of existing capacites comprises the M-E and China, this will rise to 62.3% of the new capacities being brought onstream in 2008-12.

This will leave M-E and China accounting for around 27% of total gobal ethylene capacity.

ME gas crackers + China.ppt.....

The failure, and quite possibly the death, of the Doha round of trade negotiations earlier this week could create a very confusing and erratic regulatory landscape for the chemicals industry.

This excellent entry in the New Scientist environment blog by Fred Pearce, senior environment correspondent, makes the point that if the world cannot agree on further trade liberalisation, what hope for global climate-change legislation?

As Fred points out, John McCain, if elected, has made it clear that he won't accepted emissions caps if China and India do not follow suit.

Obama. however, is prepared to let the US take the lead ahead of the Asian giants. He warns, though, that if they don't agree to fall in line at some point, import tariffs could be imposed equivalent to the energy content of finished goods.

The European Union is also understood to be considering the same safeguards as it looks to extend its cap-and-trade system. Industry, including at least one of the oil-to-chemicals majors, is lobbying hard for safeguard provisions of taxes on imports if no global agreement is reached.

Chemicals and other producers would obviously shut up shop in the EU and move to countries where there was no price set on emissions or if there was no effective import-tax system or some other kind of economic disincentive.

Despite the few remaining climate-change scepticis - quite rightly derided in the same New Scientist blog - climate change as a result of human acitvity is accepted by most scientists and governments as a reality.

A global agreement on a price mechanism for carbon - whether its a cap-and-trade system and/or a tax - would be the best outcome for the chemicals industry. It would enable producers everywhere to accurately assess the cost of investment in better processes and new technologies.

They could also make reliable and predictable income through trading credits globally and from operating and licensing new technologies.

Piecemeal legislation wouldn't provide the same degree of clarity, leading to equally piecemeal strategies from company to company and region to region.

The lawyers might also make a lot of money out of disputes over carbon import taxes.

And, of course, companies might still look to move their investments elsewhere by searching for loopholes in US and EU carbon import-tariff rules.

Just look at the money being made out of "splash and dash" in the US as an example of how rules can be exploited.

As the effects of climate change accelerate, you could also see knee-jerk nonsensical regulations introduced by governments out of sheer panic. This could make life very difficult, if not impossible, for chemical producers in certain countries.

So let's hope the Doha round can be rescued - and that it serves as a confidence builder towards the much bigger job of a new global agreement on emissions.

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

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

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

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

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

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

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

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

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

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

I couldn't let today pass without including a picture of the Olympic Stadium in Beijing where the opening ceremony is about to take place.

The purpose of this redefined blog is not to look at the short term, though. For expert commentaey on the effects of the Olympics and other macroeconomic factors on the world's chemicals industry over the next 12-18 months, see Paul Hodges' Chemicals & The Economy blog.

Instead I am going to be looking at what chemical companies have to worry about beyond the next 18 months.

In the case of China, the debate is whether the country can remain the main driver of the world economy and the chemicals industry.

The government is clearly dedicated to rebalancing the economy away from export-led growth towards higher domestic consumption.

The China Economic Quarterly believes the government will be successful - leading to lower but more sustainable GDP growth of 9% per year over the long term.

They accept inflation will be higher than in the past, but argue that it can be contained at around 5% per year.

Jurgen Hambrecht, chairman and chief executive officer of BASF, also believes in the long term strength of China - but also a major location for export-based manufacturing.

In the same BASF Segment Day Chemicals event I wrote about yesterday, he was asked whether China would remain a location for export-based low-cost manufacturing. The question related to rising transport, labour and oil costs.

Hambrecht said that increased transportation costs were a global problem and that the effect of recent cuts in subsidies to oil-product prices had yet to become entirely clear. But he pointed out that as car ownership was low in China, the cuts might not be that big a deal. A great deal of the country's energy needs are also met by coal.

Manufacturing investment was already drifting to the west, he added, and he cited Sichuan as a "great location".

Labour costs in the west are a great deal lower, but logistics costs could be an awful lot higher to get goods to western markets.

And the bigger issue that Hambrecht and the CEQ did not address is that China might not have enough natural resources to sustain growth anywhere close to levels we have become used to.

Take the water crisis as an example and this link through to the economatters blog.

I could have included thousands of similar links, but here's one more - to good or bad old Wikepedia, depending on your view.

I was driving to work this morning when I heard, for the first time, the re-broadcast of a BBC World Service from April. Reporter Mukul Devichand interviewed environmental activists in Beijing who quite understandably claimed not to understand his questions when he uttered the dreaded "D" word (democracy).

You can click on this link and read the full transcript, but unfortunately the Podcast seems to have been removed.

What struck me most of all about this programme, though, were some closing comments from the famous enviironmental campaigner, Ma Jun.

He says:

"You know when you sit there in a Western country blaming China every
day - you know the Chinese Government, Chinese court - blaming them every
day for this and that, the result will be very very limited. Legal responsibility
is on our side but it's also in the meantime, you know people in the Western
countries enjoy cheaper clothing products from China. Why? Probably you
know the cost is on our rivers. You know the rivers have been turning to you
know black, yellow and all kinds of colours sometimes several times a day. I
think you know we got to recognise you know the cheaper products have its
own impact. We recognise there are gaps in our governance, in our
enforcement structure and we try to improve that. But in the meantime, do we all want to allow this multinational companies to take advantage of the loophole?

We've pushed for strengthening the enforcement, we push for the use of market incentives to deal with our problems, but in the meantime I think all the citizens who care about the environmental issues should also think about what we can do to deal with
this problem. Otherwise when China has strengthened its enforcement, these
companies when they sit across this table, they literally say we're going to
move to Vietnam if you keep doing this."

Note the paragraphs in bold. It's easy to criticise China from a Western standpoint, but how much are western shoppers - who are used to cheap, cheap and more cheap from China - to blame for the multi-coloured rivers, poisoned water supply and unbreathable air that are causing hundreds of thousands of premature deaths a year?

And how many chemicals companies, hands on their hearts, can really say that they check the environmental standards all the way down the line to the finished-goods manufacturers in any product chain?

You can make sure your chemical plant has state-of-the-art technologies and adheres fully to Responsible Care requirements, but you will still want to build that plant where the competitive advantage lies.

So if China has become too expensive because of higher environmental and labour costs, the choice might be Vietnam.

What hope is there for a new global climate change deal when corporate interests are allowed to override the bigger picture?

Enough of a rant. I am going home to play with my 19-month-old son and make sure he doesn't suck too hard on any of his plastic toys that are made in China. (likely nearly all of them!)

China and the environment might not be only about rivers changing colour several times a day and factories belching out air pollution that kills hundreds of thousands of people prematurely every year.

Elizabeth Economy outlined the extent of China's environmental problems in her book, The River Runs Black.

In what could turn out to be the ultimate irony of ironies, the very economic system which has caused the crisis in the first place could end up resulting in China becoming the world's leader in clean technologies.

Ample evidence already exists to this effect, according to the Climate Group - a London-based non-profit organisation, the members of which include BP and Dow Chemical.

The group's latest report - China's Clean Revolution - claims that China's transition to a low carbon economy is already well underway. This is the result of supportive government policies which are driving innovation in low carbon technologies and diverting billions of dollars into energy efficiency and renewable technologies.

The huge energy that was poured into industrialisation, once Deng Xiaoping declared that getting rich was glorious, seems to have now been turned to wind, solar and other forms of renewable energy - along with conservation.

China now ranks fifth behind Germany, the US, Spain and India with six gigawatts of wind turbine capacity, says the Climate Group. Some experts believe that this could climb to 100 gigawatts by 2020.

As was the case with industrialisation, State backing might overcome that nasty burden of capitalism - the need to return short-term profits, or even any kind of profits at all.

Lending from China's big banks is still largely directed by the government and the banking system is awash with liquidity - a drastic contrast with the Western credit blight.

Incentives are in place to boost wind power, but have yet to be introduced for solar energy. China. however, is second only to Japan in the global solar photovaltaic market.

Research is taking place in to carbon capture and storage and integrated gasification combined cycle technology.

China is also introducing fuel efficiency standards for cars which are 40 per cent higher than those in the US. Twenty one million electric bicycles and 1.64 million energy efficient compact cars were sold in 2007, the report adds. Clearly, the Chinese are doing a great deal more than just praying for lower gasoline prices.

This all sounds fantastic, but the old story about China is that what works at a central government level might not necessarily be implemented evenly across the country.

Arthur Kroeber of the China Economic Quarterly, however, believes that this old tale about China is total nonsense when the central government decides to take something seriously. The environment is one problem that Beijing is taking exceptionally seriously as it tries to build a more "harmonious society", he says.

But the task remains huge. According to The New Scientist magazine, if China's emissions continue to increase at 8 per cent per year, its per capita CO2 emissions will be double those of the European Union by 2020. While China's emissions keep on rising, EU member countries are making big reductions. For example, Germany reduced its greenhouse gas output by more than 19% between 1990 and 2003.

The problem for China is that it still has to create lots of new jobs of a rapidly urbanising society, whereas many of the rich people in the EU are desperate to return to the rural life.

But, of course, the Europeans are hardly likely to return serfdom. Instead it's all about four-wheel drive gas guzzlers, centrally-heated converted barns, and conveniently located supermarkets stocked with food and booze from the four corners of the Earth.

What planet are we all really on? We rich-world people are all desperately trying to get rid of that tiresome leftover venison as we insist on Afghan melon, to quote the Big Yin.

When I looked in the fridge the other day, my wife had bought Sicilian lemon juice. For pity's sake...

Another great article in The New Scientist talks about a new system for mapping much more precisely the impact of climate change on eco-systems.

Designed by The Nature Conservancy, the system - linked with Google Maps - will enable conservationists to work out expected changes in precipitation and sea levels in areas as small as four kilometres across. Previous technology only provided forecasts for areas ranging in size from 350-600 kilometres.

Why this breakthrough could be essential is that scientists believe that the impact of global warming will create millions of micro climates. Some of these climates will be arid and others subject to heavy rainfall. Areas very close together might also either be flooded or safe from the effects of rising sea levels.

The new technology is designed to protect endangered species such as the Bangladeshi Tiger.

But as the effects of global warming become obvious - even to the most short-sighted and goldish-brained members of the chemicals community - this or similar technologies might become essential when seeking finance for a new project.

Legislators will surely also demand that a planned coastal cracker in Guangdong won't end up as a cracker off the coast and under water, thereby creating an environmental disaster.

Lehman Brothers had a first stab at assessing how much ethylene capacity might be at risk from flooding brought about by climate change in a report published early last year.

It estimated that 46% of existing and 45% of planned ethylene capacity globally was at high risk from such flooding. The bank said that the world have 173m tonne/year of ethylene capacity by 2012.

As climate change accelerates, it might even be necessary to use these technologies to identify safe land where plants can be relocated.

....said the joker to the thief..

I much prefer the Hendrix version. As I get older, Dylan's voice just gets more and more grating - although a wonderful song writer.

Ben Bernanke has brought cheer to the world by claiming that inflationary pressures are easing as a result of the fall oil and other commodity prices.

I suppose any good news in the current climate is better than another kick in the teeth, but the big questions are: how far can crude fall and what's the long-term price of oil that can be afforded chemical producers with no access to advantaged feedstock?

Some of the froth has been taken out of the speculation in commodities as a result of the stronger dollar and a fall in demand for the filthy black stuff in the West. For example, Goldman Sachs estimates that developed countries will use 500,000 fewer barrels a day this year than in 2007.

But emerging market demand will grow by 1.3m barrels a day in 2008 with a 5% increase in consumption in China, the same bank adds. This has led Goldman Sachs to conclude that crude prices will rebound to $149/bbl by the end of the year.

Demand destruction in the West might be occurring. For example, the US could have as many as 12 million fewer motorists by 2015 as those earning $25,000 a year or less get by on one rather than two cars per family.

But for every American that is forced to make do with only one set of wheels there will be hundreds of people in developing countries earning enough to buy their first car.

On a global basis it's therefore more accurate to talk about demand relocation rather than demand destruction.

During the heady days of 2006 everybody in the chemicals industry was making money, even those who are seriously feedstock-impaired. Profitability remained strong for the better-integrated liquids-based producers up until Q4 of last year.

The last couple of quarters have been so dismal that it's understandable that the recent fall in crude has raised expectations the worst might be over.

But you will be hard-pressed to find many energy experts willing to take a punt on prices returning to their levels of a couple of years.

The fundamentals of tight supply haven't changed over the last few weeks as oil prices have retreated - just as much of developing world demand growth will more than compensate for less consumptiion in West.

Rising capital costs mean a lack of sufficient investment in new supply.

Whether or not you believe that Peak Oil is upon is almost irrelevant for the next few years because the lack of investment - also the result of increased resource nationalism - means that the reserves that do exist are not being adequately tapped.

And the irony of the slightly lower oil prices of the last few weeks is that exploiting tar sands and other marginal oil reserves, which require very high capital costs and great technical skills, will seem less attractive. Perhaps this is what the Middle East wants.....

If you don't an advantaged feedstock, either through a position in the Middle East and/or being very smart at refinery/petrochemical integration, you've got big problems.

Maybe there is no way out of here....

Great stuff from the big boss of Dow Chemical in this article from USA Today.

Gems from the interview include "corn-based ethanol, one of the dumbest ideas of all time" and "the whole hydrogen (fuel cell) approach is dumb."

He adds: "Frankly, when free markets prevail, we have to shut down factories and replace overseas in places like Saudi Arabia, Kuwait, Russia, Brazil, Thailand, China and Oman, where governments lock in energy availability, guarantee prices and de-risk our investment."

These are all countries in which Dow has already or plans to invest with the proposed PIC deal the biggest breakthrough for tackling its feedstock disadvantages. Whereas the jury might still be out on whether the US major will win in specialities, it does seem as if it has gone a long way to avoiding being one of the companies I wrote about yesterday.

Liveris makes the much wider point that without an energy policy which makes sense, the US faces a pretty bleak economic future. He quite rightly points out that unless there are some major breakthroughs in renewables, hydrocarbons have to be a major part of a workable policy.

But I don't agree with Liveris when he says "We aren't occupying Iraq for the resources".

I've just started reading David Strahan's The Last Oil Shock, which makes a pretty convincing argument over the real thinking behind the hugely bundled invasion.

Then again, though, perhaps what Liveris means is that the intention of the occupation might have been for resources, but that's not what the occupation is about now because of the hopeless failure of politicans such as Rumsfeld, Cheney etc.

Next stop Iran? At least Bush is on the way out, but the energy stakes are so high perhaps any administration will need to dress up further military action as something else to secure America's economic future.

But surely, this must be less politically acceptable than tackling all the greenies who are blocking offshore drilling and coal gasification and the farmers making a packet out of ethanol?

Maybe not if it's about distribution of votes in those key marginal States - meaning more fat subsidies one of the dumbest ideas of all time.

This article, by David Strahan, author of The Last Oil Shock, says that it would take three million coconuts to power one flight from London to Amsterdam on 100% biofuels.

Some of the comments posted at the end of this excellent article, first published in the New Scientists, agree with Strahan that we have reached "Peak Aviation" - no matter what the developments in second-generation biofuels.

The first generation nonsense of corn-based ethanol (as Andrew Liveris pointed in my post yesterday) and palm-based biodiesel have been thoroughly discredited.

But what the Strahan research also contends is that even the much-touted next wave of technologies will never realistically be able to 100% replace hydrocarbon-based fuels for aviation, transportation and power generation. The argument can also easily be extended to the chemicals industry, which, of course, is so tied into the production of transportation fuels.

Strahan supports this view with another startling calculation: an area bigger than China (10 million kilometres squared) would be needed to provide enough biomass to completely replace the world's current demand for fossil fuels for all forms of transportation.

Then you need to contemplate the likelihood that we have reached, or are very close to reaching, Peak Oil. The huge growth in crude demand from developing countries is pushing us much closer to Peak Oil, if it hasn't already arrived.

In The Last Oil Shock, Strahan quotes Dick Cheney in 2001 as characterising Republican energy policy thus: "Conservation may be a sign of personal virtue, but it cannot be the basis of sound energy policy."

But just a few years later, shortly after hurricanes Rita and Katrina had exposed the fine balance between crude supply, refinery capacity and demand, President Bush said: "We can all pitch in by being better conservers of energy."

Winston Churchill saved Britain, and the world, from the Nazis. He was, though, widely viewed as mad - even by many prominent Americans such as Joseph Kennedy - for sticking it out during the dark days of the Blitz.

The parellel here is that we need politicians and business leaders with the courage not just to react to temporary crises, as Bush did by telling people to conserve after the 2005 hurricanes.

We need the next president of the US to persuade the public to accept one-car ownership, greater use of public transport and recycling. A visionary leader has to emerge who will, in the long term, be willing to dismantle the whole structure of our current consumer economy through persuasion backed up by tough legislation.

The short election cycles in the US - when as soon as you are elected, virtually, you need to start worrying about the mid-terms and then your own re-election bid - might prevent any such leader emerging.

Equally, oil and chemical company CEOs don't last that long. Even the current generation of leaders might be well into comfortable retirement by the time our modern way of life collapses as energy runs out.

There's a marvellous line in Ian McEwan's great novel, Saturday, where the main character enjoys a shower after a game of squash and reflects that his could be last generation to enjoy luxuries such as limitless hot water.

Our supposed betters, the politicians and the business leaders, need to have the courage to tell us, to make us, consume less - and American has to take the lead (as it eventually did, albeit a little belatedly, in the Second World War). Only if America takes the lead on conversion, and on climate change, will the result of the world follow.

We need the CEO of a plastics company to, for example, to come out and say "please use less of our products, for the good of humanity". You can just imagine the reaction of his or her fellow Board members, however,

In this era of short attention spans fed by soundbites, spin, Google and YouTube - leading to erratic voters and equally erratic and fickle investors - visionaries of this nature are unlikely to emerge.

We are living on borrowed time

A full list of all those whose deaths were reported prematurely is included here in this A-Z of journalistic blunders from Wikipedia.

The same could be said of the US commodity chemicals industry. Until very recently, just about everyone was predicting that the States would fairly soon shift from a net export to a net import position due to higher gas prices, the build-up of very competitive capacity elsewhere and the constant drift of manufacturing overseas. The country's chemicals industry has lost 120,000 jobs with 3 million jobs lost in manufacturing over the last five years.

But what's changed over the last few months is gas prices which have become relatively cheap compared with crude and the weak dollar. This has created what consultants predict will be the "last hurrah" for the US styrene industry ahead of the big slew of new Middle East capacity due on stream soon.

Further consolidation is expected once the Middle East wipes out the advantage US styrene producers currently enjoy over competitors supplied by naphtha-based C2s.

From a carbon footprint point of view, it does seem ridiculous that oil is shipped from the Middle East to make benzene in South Korea and the C8s are then shipped to the US. The US combines the benzene with its competitive gas-based ethylene to make styrene which is then shipped to Europe - already a net importer of commodity chemicals.

But the carbon footprint argument, along with rising freight costs, could offer a lifeline to the US chemicals industry in general. There has been much talk of "reverse globalisation" recently. This might lead to the economic justification for building new commodity chemicals capacity in the US and elsewhere in the West.

The long-contemplated attempt to build integrated petchem hubs in India, complete with shared utilities and strong investment incentives - aka China and Singapore - now seems even more of a hopeless pipe dream.

This follows the decision by Tata Motors to halt work on its Nano car plant in West Bengal following protests over land ownership.

Late last week Mukesh Ambani and other business leaders rallied to Tata's support as they realised that the protests threatened other investments.

At stake are Reliance's retail ambitions - and here goes, the government's plans for petroleum, chemicals and petrochemicals investment regions (PCPIRs). How Asians love their acronyms.

I remember back in 2000 I had a meeting at the first APIC conference in Yokohama, Japan, with representatives from the Indian government who were very keen on establishing these hubs.

There has been almost no progress since and the land dispute at West Bengal is further evidence of just how difficult life can be in a thriving and open democracy where there are more vested interests than servings of yellow dahl.

China occasionally lifts the lid off the proverbial pot to release a little pressure - for example, the government's decision earlier this year to give into protests over plans for a paraxylene plant at Xiamen in Fujian province.

But if protests seriously threatened China's economic growth model, individual business interests with sufficiently good connections or China's international image, the perpetrators would be marched straight off to re-education camps. You only have to look at the Olympics as an example.

So it looks likely to remain a do-it-yourself game in India when it comes to maximising integration and site-efficiency with Reliance the dominant practitioners.

From a national perspective also, maybe no PCPIRs in India would be a good thing.

"I spoke to the Indian government about these suggested sites at length," said an industry source a few months ago.

"They at first talked about supplying the local market but when I produced numbers to point out that the scale of what was being planned was far too big for India, they conceded that a lot of the volume would be for export. Where's the competitive advantage given India's comparatively high logistics and feedstock costs?"

Anybody who has had the misfortune to have to listen to me ranting on about Peak Oil of late might have heard - if they managed to stay awake long enough - that I predicted crude could not fall below $100 a barrel because of the fundamentals.

I must admit my first reaction when I heard on the radio this morning that Brent crude had slipped to $99.30 a barrel was "damn".

A calmer, more measured and sensible reaction came later - that this might be good news for my battered, bruised and badly depleted shares, most of which are on Asian markets.

Weaker crude might also help us all keep our jobs. Falling oil prices are occurring as reports of project delays, or even cancellations, in the Middle East and China keep emerging - meaning that the chemicals industry might get some relief from the twin squeeze of higher feedstock costs and oversupply. I'll be dealing with these reports on this blog in the next few days.

"Here's some news for you - you're often wrong and so get used to the idea," said my wife. She's very direct, being Scottish.

But still - and here goes the rant again - I still feel that the long-term fundamentals are of a tight market as we accelerate towards Peak Oil, possibly by as early as the middle of the next decade.

Maybe a persistent bout of lower oil prices would be bad news as this would make us conserve less and lower investment in renewables (which, admittedly, are only ever likely to provide a small percentage of our total energy needs. Hence, we need to conserve!)

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Back in the heady days of 2006, I asked a group of five like-minded nerds what their favourite business book was.

They unanimously voted for The World Is Flat: A Brief History of the 21st Century by Thomas Friedman.

I rushed out and bought a copy. It has sold by the truck load and was quoted by Mohamed Al-Mady of SABIC during his speech at the Asia Petrochemical Industry Conference in Thailand in 2006.

Back then everybody was talking about a new paradigm of growth, driven by the relentless rise of emerging market consumption. Nobody mentioned that other book, The Limits To Growth, published in 1972 by the Club of Rome, during those heady days of the economic boom.

I ploughed my way through most of The World Is Flat (it is overwritten - all the points worth making could have been made in considerably less than 488 pages) and was profoundly irritated by Friedman's relentless enthusiasm for globalisation.

At that time I must confess I hadn't heard of the Club of Rome book, nor did I give any consideration to the idea that Friedman might be dead wrong for any reason other than a gut reaction to his seemingly boundless optimism.

Now he has woken up to the fact, 36 years after The Limits To Growth was published, that indeed this might be the case with his new book Hot, Flat And Crowded.

In a review in the Financial Times, Rahul Jacob makes the point that we should have all seen the weaknesses behind Friedman's flat earth theory.

Friedman was entranced in his earlier tome by the rise of India, particularly the booming IT hub of Bangalore.

"I have lost count of the times friends or relatives in India have forwarded by email Mr Friedman's comment that, while his parents told him to finish his dinner because there were people starving in India and China, he told his daughters to finish their homework because there were people there eager and willing to take their jobs," writes Jacob in his review.

As Jacob points out, the very roads that Friedman travelled along to get to the headquarters of the IT giants point to the limits to India's particular form of middle class, elitist growth; they are pockmarked and hugely congested with ancient patched-up vehicles pumping all sorts of foul fumes into the air.

India suffers from a self-inflicted limit to how far it can grow without creating unsustainable social and environment pressures - because of a political system that has created virtual development paralysis.

How can a country with terrible infrastructure, poor irrigation and very low literacy rates ever hope to create sustainable economic growth?

According to the CIA Factbook, India's female literacy rate was only 47.8% in 2001. This compares with 86.5% in China, based on the country's 2000 census, adds the Factbook.

The speed limit on Indian and, of course, also global growth is resources - so presciently highlighted by the Club of Rome back in the 1970s.

I've only just woken up to this reality. Back in the dim and distant 2006, all I cared about was riding the global property and share boom while consuming immense amounts of carbon in pursuit of my career. This involved writing my own much-shorter tomes that encouraged others to do likewise.

Many of us became so enamoured by globalisation that we ignored the fact that there are simply not enough resources available to allow all of us to consume as much as the typical Texan, or more latterly a middle class Indian in Mumbai.

Friedman gets excited in his new book, according to Jacob, about China's potential to lead the way in solving the environment crisis.

I agree that China has potential, but some huge challenges lie ahead.

Idealistic enthusiasm (the ungenerous might use the phrase "gormless enthusiasm", which has applied to many of us over the last few years) might have its place in generating the individual energy to make a difference: Each of us need to find new ways of individual and corporate behaviour if we are to prosper in a world threatened by Peak Oil and catastrophic climate change.

This type of enthusiasm needs to result in more than just further consumption of trees through higher book sales (and when do we have the time to read books like The World is Flat? When we're flying, that well-known environmentally friendly form of travel).

We need to radically change the way we lead our lives.

The smarty pants at BASF seem to have got it right again with their $6.1bn bid for Ciba Specialty Chemicals and rumours that they might also be after Clariant.

Talking about counter-cyclical investment is one thing, but doing it is quite another. You need to have built up the cash reserves to execute the obvious - and, of course, need the right product portfolio already in place to earn the money in the first instance.

BASF has made and continues to make a packet from its oil and gas business. It's oft-repeated focus on integration and on getting out of the more cyclical commodities is also paying dividends. It was walking the talk about reducing exposure to such commodities long before a certain US-headquartered company jumped on the bandwagon.

Talking about stating the obvious of buying low and selling high, McKinsey does this - but with some useful numbers - in its report, M&A Strategies In A Down Market. Again this is from the consultancy's excellent monthly newsletter, which is free once you have signed up.

The report's authors have also written a book, The Granularity of Growth. It includes a database of 200 global companies that decomposes the most important sources of growth (market momentum, mergers and share gains). Sectors that suffered big upturns or downturns were then analysed in order to rank the importance of these growth sources - with the study also extending to individual companies strategies.

"Two sets of results stuck out," write the authors.

"First, (I wish consultants would learn to write shorter sentences - my comments in italics) of the potential strategic moves companies can take to grow in a downturn - divest acquire, invest to gain a share - an effective acquisition strategy (defined as growth through M&A at a rate higher than 75 percent of a company's pears) created significant value for shareholders (you can pause for breath now).

"During an upturn, on the other hand (surprise, surpirse), divestments created slightly more value that acquisitions did (this presupposes you can find some mug to buy your business at some ridiculously inflated price on the belief that the economic boom will last forever).

"Second, companies often behave in counterproductive ways. Fewer than half as many companies in the segments we studied made acquisitions in downturns rather than in periods of economic growth. Significantly more divested businesses in those market segments in downturns than in upturns."

The global credit crisis and volatility in stock markets "could temporarily disrupt M&A activity and add risk to existing deals," said Scott Anderson, senior economist at Wells Fargo - the US financial services company. He was speaking at the ICIS Chemical Purchasing Summit, which is taking place in Boston, Massachussets.

He added, however, that conditions were right for further consolidation in the chemicals industry as manufacturing customers become larger.

The Middle East has the cash, of course - as do the Chinese if they can be bothered. Sovereign wealth funds could be the vehicles, as well as the petrochemical companies themselves, for a wholesale shake-up of industry ownership.

And as I've already said, those clever people at BASF look likely to be involved. Being right and having senior executives with brains the size of a small planets is very annoying for those of less able (especially if they are also nice to children and animals, actively care about the environment, give a large proportion of their incomes to charity and are good at football when World Cups come round).

For the first time, quite probably, since the Chinese economy opened some producers are predicting that polyolefin demand growth could be flat or even negative this year. In the case of PE, reports are emerging of sales declines above 20% over the last two months.

This compares with 8 per cent growth for PP and 5-6% growth for PE in 2007.

This blog focuses on the long term and there is a long term danger here.

The depth of the economic problems in the West is the main cause of the fall in polyolefin volumes due to the the collapse of the re-export of finished goods.

Let's hope this only a temporary problem and the global recovery arrives fairly quickly. But it seems likely that we haven't even reached the bottom of the current crisis and there is a danger of a deep global recession, or even depression, lasting several years.

The fact that Chinese growth has taken such an historic blow from the collapse of finished-goods exports exposes the corporate flannel about tremendous domestic market growth as being exactly that - corporate flannel of the worst kind designed to hoodwink dumb investors and lazy journalists.

In the short term, as described, the re-export sector remains hugely important for the Chinese economy.

There is also a shift by the government away from an export and fixed asset investment-led growth model. This means a lot less growth from the re-export sector over the long term for anyone shipping basic commmodity chemicals to China.

Volatility in crude is a problem that might last for a while, given the fundamentals of tight supply and the potential for the re-emergence of strong demand growth.

In the case of polyolefins, this is leading to sudden surges in resin buying when converters think crude will continue to rise and running down of inventories when the reverse occurs.

This might, to some extent, have masked the depth of fundamental weaknesses in the market up until mid-June. If you recall, oil was on a bull run until then.

The last few days have, of course, seen crude enter one of its most volatile periods in history - making it even harder to read the direction of oil and therefore naphtha, olefins and polyolefins pricing.

Who'd want to be a purchasing manager for a plastic processing company in this current climate?

The reach of the credit crisis is such that liquidity is even becoming hard to come by in the hugely wealthy Middle East, according to this report.

With so few petrochemical projects officially announced for the region post-2012 (although I am hearing rumours of numerous plans kept from public view, but feedstock is the issue for all of them in the GCC), could we see a big slowdown in the growth of the region's industry?

The irony, of course, is that many of the Middle East and emerging market countries have huge government surpluses and high individual savings rates.

When I was trying to cheer up a downbeat member of staff today, I said that the financial rescue package being proposed by the deadly duo of Paulson and Bernanke might get overseas support from these solvent administrations.

"It's in everyone's interests to keep the US afloat because it is so crucial to the global economy. If this had been 10 or 15 years from now, the Chinese might have done the economic equvalent of flipping the states fhe finger because by then they will be the biggest economy. But the US has got off the hook because of the timing of this crisis."

I sounded so optimistic I almost believed this flannel myself.

More evidence is also emerging of project delay, including the Aramco/Dow Ras Tanura mega-investment. The sheer scale of the thing seems to be the issue here.

The old saying "there's no such thing as a free lunch" has at last been proved true with the virtual collapse of the global financial system - and with it, quite possibly, the world's economy.

But for the last decade or more, the chemicals industry, like every other industry, gorged itself on an easy credit-fuelled property boom that's swept the globe.

In Singapore until very recently, real estate was red hot. Surprise, surprise, oversupply beckons, the market is flat and a pricing collapse cannot be ruled out.

Property bubbles come and go and so cyclical downturns were inevitable in Singapore, Thailand, India, China and Australia.

But perhaps the long-term fallout of the crisis - a much more prudently managed banking sector - might have negative implications for chemical demand-growth multiples over GDP.

As the problem rests mainly with US lenders, though, it's hard to say whether credit will also become much harder to obtain for good in Asia and other emerging markets.

But the appetite to lend money to average and below-average earners at high multiples of annual incomes - and with incredibly low "teaser" interest rates - will at the very least take a few years to recover.

Mohamed El-Erian, co-CEO and co-chief investment officer for Pimco, analyses the implications of this tighter credit climate in today's Financial Times.

It is worth asking your friendly neighbourhood consultant or in-house researcher whether any of their growth scenarios take into account the possibility of much tighter lending conditions for many years to come.

As the American Chemistry Council points out, $16,000 of chemicals are consumed when an average home is built in the states.

On a global basis, this alone means an awful lot of demand without counting consumption by real estate in other countries.

As delegates gather for this year's European Petrochemical Association meeting in the unreal world of Monaco (unreal for the 99.9 per cent recurring of us who don't own Ferraris), I thought it was worth summarising some of the issues discussed on this blog over the last few months.

We've dealt with:

*Oil-price volatility and the likelihood that high and volatile crude is here to stay. Crude at or around $100 a barrel seems to be a new long-term level with the strong possibility that geopolitical shocks could send costs much higher. Supply and demand balances remain tight and as soon as global economic growth recovers we will see much higher prices - meaning that the recovery could be nipped in the bud. Are we heading for a new economic climate where recoveries are constantly set back by rising energy costs? For every one barrel we are discovering, we are consuming three.

*The new credit environment that might well emerge from tougher banking regulations. No longer will it be possible for a truck driver from Iowa earning $20,000 a year to borrow at ridiculous multiples of his salary and at "teaser" interest rates. How these regulations will effect emerging markets his harder to read as Asian governments and consumers are in far better financial shape than those in the West. Many of the banks in Asia have been more prudent. But the events in the US will surely lower the appetite for risk globally - and there is no guarantee that the financial-rescue package will work. Ask your consultants or inhouse researchers you use whether their demand-growth predictions factor in the possiblility of lower growth because consumers no longer have access to as much credit.

*Innovation will be the key as the environment becomes a bigger and bigger issue for the chemicals industry. You need right technologies and the right kind of staff. As there is a possibility of a global carbon tax or carbon cap-and-trade system, do estimates of what this might cost need to be factored into feasibility studies? How feasible will it therefore be - given both high energy costs and the possibility of a price on emissions - to continue building plants long distances from major consumption markets?

*One of the big areas of innovation will be attempts to break the link between the refinery and petrochemical industries. BASF is claiming it could be as little as five years away from breakthroughs in catalyst technology that could change the industry forever, enabling highly competitive petchems to be produced from biogass, natural gas or coal.

And finally, other theme I haven't blogged on yet but will do are plant and energy efficiency. Some very interesting research projects are taking place at the National University of Singapore chemical engineering department into monitoring the exact output of plants in differennt climate conditions and a model that might enable producers to much more accurately predict changes in yields from switching feedstocks. Much more later...

Meanwhile, have a great meeting - and let's hope the economic conditions improve.

As if the problems confronting China's polyolefin markets were not enough, sales have apparently been further hit by the tainted food scares which began with baby's milk.

A wide range of products are now affected with Cadbury becoming the latest global confectionary brand to withdraw some of its products.

The China market was already facing the potential for negative or even flat polyethylene and polypropylene growth in 2008 because of the collapse in export trade to the West due to the global financial crisis.

The problem now, according to a leading Western PE producer, is that just about every exported Chinese food product is being subject to closer scrutiny by regulatory authorities - along with the negative impact on sales of all the product withdrawals. This is making China's converters even less willing to buy resin.

Long term, lower growth in China means it will of course take longer to absorb the new capacities.

The Chinese government also faces the task of rebuilding confidence in its food industries - not only for the sake of export trade but to also tackle local anger. Civil unrest over health concerns surrounding air and water pollution is already a major threat to social stability.

But for those focusing on immediate prospects, the good news is that there are strong rumours of substantial delays to the start-up of two major PE plant sin the Middle East.

The longer that late equipment delivery and technical (or maybe market?) issues push back start-up, the more likely it is that the global economic downturn will at least have reached the bottom of the trough before the big flood of volumes hits supply.

The industry has been very lucky. First came the Iranian delays, which in effect mount to the cancellation of 3-4 crackers all due on stream in 2010-12.

Then we have seen up to three crackers in Qatar delayed to beyond 2012.

And for those projects where building work is almost complete, continued technical and equipment delivery issues have left buyers with the same feeling that Manchester Utd fans had during the 1980s and early 1990s, which was: "Maybe we'll win the championship next year." Sadly, or rather tragically, things changed.

This year was supposed to mark the big ramp-up in PP production, but it hasn't happened.

I've just returned from a wonderful few days in Perth, Western Australia, where the motorists don't as a rule try to kill you (unlike in most of Asia) and if you are a tourist at least, you can come away with the false impression that the cork-hatted people have got the balance between work and other things that matter more sorted out.

Anyway, to the point after that ridiculously long sentence. I failed the Koala Bear test in the gift shop in Yanchep National Park .

On sale was a stuffed Koala Bear toy made in Australia at $11.80 in Australian dollars. You could also opt for an "Inspired in Australia" version (I tried to establish what this meant with the shopkeeper, but she hadn't a clue. What Koala Bear is not inspired by the Antipodese, for goodness sake?) at $5.50.

Or you could for the Chinese version at a staggeringly cheap - and no doubt nasty in some horribly chemically polluting and toxic way - $2.50.

We all might want to save the planet by lessening our carbon footprint (blah, blah, blah) but in these straitened times with my investments plummeting in value, I went for the Chinese version on the grounds that my 21-month-old son would very quicky lose the thing anyway (sorry, another long sentence).

Ten minutes out of the shop Mr Koala Bear ended up face down in a puddle.

This was the wisest investment decision I've made for the last two years.

Globalisation is an attitude of mind as what might now be a slightly descredited economic doctrine.

Many companies are international but few - from talking to friends and contacts - are truly global in the sense that they recruit senior managers from all regions (not just the country in which their head office is located) and display a consistent bottom-up sensitivity to cultural differences.

I mean by this a recognition that business practices vary hugely country by country and culture by culture.

At every level of a company from administration support right up to the CEO, there should be an awareness that "one size fits all" approaches don't always work.

As the world economy implodes, addressing such issues for companies that have fallen behind in efforts to become truly global will be of far less immediate importance than survlval.

Survival might only be possible for those companies that already genuinely think and act globally.

I'll give you an example. One European-located trading company launched a major polymer additives sales push in Indonesia the week before Hari Raya Aidilfitri. Pouring money down the drain in this fashion is the last thing anyone can afford to do in the current climate.

Talking the walk is one thing which Lenova clearly does in this article from The Economist where the Chinese computer manufacturer makes all the right noises about being genuinely global.

Any Lenovo employees out there who would like to comment about how genuine these comments are?

And what about other companies?

Yes, I know this blog has gone very quiet - but as the world has imploded, a few more pressing issues have come to the fore.

On a business trip last week the extent of the crisis became apparent when a Middle East producer told me that travel and entertainment budgets are being ferociously cut for 2009 (many companies are busy at the moment preparing their budgets for next year with deadlines for submission due n November).

Everyone asks "how bad is it going to get?" with the hope that someone will offer at least some degree of optimism that will - just for a few fleeting seconds perhaps - relieve the anxiety.

But despite yesterday's stock market bounce, the real economy seems likely to get much worse before it gets better, even if most of the bad news from the financial sector is out of the way.

The trouble is I keep hearing that much more bad news might yet emerge - for example, the enormous size of credit-default swap commitments.

The Middle East producers face:

*Much lower oil prices than just about anyone had forecast, meaning lower margins between their fixed feedstock prices costs current global petrochemical prices, which are set by the oil-based players

*Plants coming on stream in 2008-11 with far higher capital costs than during the last building spree. This is due to soaring raw material, equipment and labour costs and much more complicated project configurations due to diversification downstream away from basic ethylene derivatives

*The decimation of demand. Polyethylene and polypropylene demand could be zero or even negative in China this year. I talked to one industry source who also expects the same for polyester As recently as July, he was forecasting growth of 12% with the market expanding by 17.2% last year

How long will it be before the Middle East producers begin to cut capital expenditure programmes and how will this influence the fate of projects yet to reach the financing stage?

Of course, everything is relative and although the Middle East players may be earning far more thann they anticipated, they have huge cash reserves.

Wouldn't these reserves be better employed buying existing capacity rather than adding new plants?

There will surely be no shortage of suitors, especially those with high leverage who expanded through acquisitions at the wrong time.

Mr Obscenely Rich Got Out In Tiime Banker, please look into these eyes, see the pain from the last Great Depression and maybe you will give some of your obscenely huge bonus towards poverty relief.

And perhaps also you'll be willing to pay for all the counselling that the children of this new Great Depression will need when they grow up into adults. As a rich an educated breed, you should be aware that the first few years of a child's life, how secure and encouraged they feel, determines their entire future.

Anyway, see below for my take on the state of the crisis and its implication for chemicals, written for a good friend and contact.

Chemicals demand is being affected by frozen credit markets and the fall in export trade of finished goods to the West.

The credit markets are showing signs of easing thanks to all the government intervention.

But as you can see from this article, the feedback effect on the consumer, and therefore, manufacturing companies, could get a great deal worse before it gets better. Bad corporate results caused the declines in stock markets yesterday (Wednesday 23 October) and as more consumer loans turn soar and unemployment rises globally, corporate earnings will deteriorate even further - at least for the 12 months, I think.

The good news from the financial is that the much-feared credit-default crisis may not be severe as people had expected.

However, the chemicals industry will remain under severe strain for at least the next year, even if the credit crisis eases enabling letters of credit to be more easily obtained (a global shortage of LC's has left commodity shipments, including chemicals, stranded).

The reasons are:

1.) The export dependency of some economies. China's GDP growth will be around 9% this year compared with 11.9% last year, for example, largely due to the slowdown in export trade. Delegates at the APPEC conference in Singapore this week were talking about very quiet demand for fuel products and chemicals at a time when China should be ramping up manufacturing for exports to the West in time for Christmas. Economies such as Singapore are even more vulnerable
2.) The volatility in energy and chemicals pricing. You could probably produce a graph these days linking crude-oil price movements with the equity markets. So until everyone reaches a consensus that the bottom has been reached, we are going to see constant dramatic day-to-day fluctuations in equities and therefore crude. OPEC might cut production at its next meeting, but this will just mean the volatility is within a higher band ($70-90 a barrel is the prediction instead of the current $60-80 a barrel. You cannot rule out the possibility, even if OPEC does make cuts, of a lower range than today - $40-60 a barrel. This would indicate that the real economy has become a great deal worse). Volatility creates the danger of being caught on the wrong side of the deal for sellers, buyers and traders (e.g. high cost raw materials purchased one day that cannot be passed on in higher-cost finished product because of a sudden fall in crude). For resin buying patterns, the uncertainty over the direction of crude is a crucial factor - in a bull market they stock up and in a bear market they de-stock. Crude is in no-man's land and so, combined with LC issues, worries about the overall economy and cancelled orders from customers buyers are remaining firmly on the sidelines.
3.) Last but certainly not least, is the huge wave of new capacity. Polypropylene was supposed to lead the downturn this year but didn't because of start-up delays. Equipment-delivery problems are being blamed, but market reasons seem likely to be another factor. The problem is that with markets showing no signs of turning, producers with heavy debt commitments can only hold back for so long and so will have to commission capacity soon - even if at operating rates lower than planned. For the Middle East producers, now that there is no immediate sign of markets turning, start-ups might as well take place because at the very least on a cash-cost basis contributions will still be achieved on a cash-cost basis (because of low and fixed feedstock costs), just about no matter how low crude goes - and with it petrochemical pricing.

Conditions could get dramatically worse very quickly. One factor not included above is the run on Asian currencies, and possibly even some banking systems, because of the dollar ironically being used as a "safe haven investment".

In the medium term, (the next 12-18 months) the only upside I can see is short-term recoveries in chemicals buying on signs that government interventions are working (with more likely to happen). But these recoveries, as I said, could be short-lived as more evidence emerges of the delayed effect on the real economy (e.g. further falls in corporate earnings).

To be frank, all bets are off on demand-growth forecasts - (so I am sorry this is not going to help you much in coming up with firm numbers!).

Everyone has been wrong and so it's best to err on the side of extreme caution and with a bit of luck we might be pleasantly surprised.

To give you an example of how quickly things can change, a Chinese PTA producer had been forecasting overall polyester growth in China at 12% are recently as July; now it thinks the market will be lucky to get away with zero.

I'd suggest looking at your forecast numbers, going back to those who have supplied the numbers, and asking them if these take into account their worst-case scenarios. Any forecast that predates September cannot be trusted at all.

Hope this helps!

Best Regards
John

Chemicals demand still exists, believe it or not, but the new economic order -one that could last as long as six years - requires new approaches.

Purchasing managers need to start acting locally as well as globally.

Who would want to be a financial controller if you work for a big company or the jack-of-all-trades managing directors of a small or medium-sized enterprise? Every purchase order and every invoice, literally every single transaction, needs to be reviewed by whoever understands overall credit availability.

One small step out of line, one tiny error by an over-enthusiastic purchasing manager or sales executive and bang, you've exceeded your credit limit. Even if you have a sound business model, your bank might have no option but to say "sorry, but that's it - we are withdrawing all your credit". But is there really such a thing as a sound business model these days?

This new economic order could have major implications for how chemical pricing behaves. Old understandings on how to read the direction of markets might need to be revised.

"There have always been two kinds of demand in the confectionary industry - long and short term," said a plastics-wrapping manufacturer on the sidelines of the ICIS World Polymers Conference, which took place in Bangkok, Thailand, earlier this week.

For the next few paragraphs, the confectionary industry and upstream to polyolefins will be used as an example of how purchasing managers need to act differently. The same rules could also apply to other product chains.

"Nothing has changed when it comes to your big 1b bar of chocolates. You can still ship large volumes of packaging material economically from, say, China to the US as these slow-moving items will sit on the shelf for months," the manufacturer added.

But for your fast-moving confectionary - for example, discounted big bags of miniature chocolate bars placed in toddler-reach on shelves near supermarket checkouts - shipping wrapping material from China no longer makes sense.

"A big percentage of a confectionary manufacturers' revenue comes from fast-moving and short-term promotional offers. The trouble is that these promotional offers are no longer as fast-moving because consumers are cutting back on spending."

Much smaller quantities of wrapping material are needed and so for logistics reasons, buying locally adds up. If you make chocolate in a developed markets, these small suppliers might have previously been ruled out because of their high labour costs and low capacity.

"It's not economic to half-fill a container and ship it all the way from China. Local suppliers can also much more quickly respond to small day-by-day changes in demand," the manufacturer added.

There are other reasons to buy in small quantities (and therefore locally).

Oil prices move in an almost perfect relationship with equity markets these days. Stock markets rebound as investors clutch on to some fleeting good news and crude rallies by a few dollars a barrel, only for the reverse to occur the following day.

So nobody at any point in any product chain wants to sell or buy big in case they end up on the wrong side of a shift in highly erratic energy prices. For example, why buy a big quantity of resin today only to see the WTI price tumble the next?

Your equally hard-pressed customers, even the ones you've worked with for years, will not be able to do you any favours if you plead that you made a mistake on crude.

Shortage of credit is a further reason to keep orders at a minimum.

"My MD is signing off every purchase order. You need to make your credit stretch. The other problem is that you need to very carefully monitor the credit situation of your suppliers and your customers. Make sure you have enough of each in every region where you operate in case some of them go bust," said the manufacturer.

Buying locally also extends up this chain to polyolefins.

"Polyethylene (PE) and polypropylene (PP) exports from the States have declined because of the weaker dollar and the collapse in pricing that closed-off arbitrage," said a polyolefins producer on the sidelines of the same conference.

"Another factor is that end-users prefer to buy local because retailers are placing smaller orders."

A further reason to keep inventories low is the huge economic uncertainty out there. Nobody knows how deep this recession will be and how long-lasting.

"We keep looking further and further back into history for parallels," said Matthew Sullivan, Director of Energy Structuring and Origination for Standard Chartered Bank, in a speech during the conference.

First it was the dot-com bubble crash of 2001, then the Asian financial crisis and next the global economy downturn of 1980-82. Now all the talk is of the Great Depression.

"Vehicle sales in the US, on a population-adjusted basis, have fallen to their lowest level since World War II," he added.

"I hate to give you the bad news, but I think it could take 5-6 years to get through this. Most of the iceberg is still beneath the water."

The dreaded consumer confidence feedback mechanism may have only just begun.

Banks might, theoretically, be in a better position to lend thanks to all the rescue packages - but at ground level in the chemicals industry trade finance remains desperately hard to obtain.

Inventory write downs are huge because of raw materials bought before the crash in demand and pricing. This will affect financial results in Q1 next year.

This will in turn lead to more job cuts in chemical and other companies. When you are worried about losing your job, if you haven't lost is already, you don't spend; and as Japan found out during the 1990s, consumers are even less likely to spend if they think that prices will be lower tomorrow.

As consumers make even deeper cuts into their spending, this leads to even worse corporate results, more business failures and more job losses and so on and so on....

"People are reviewing their retirement plans (because of the collapse in equity markets). They feel a lot poorer, which is another disincentive to spend - and they will have to add 5-6 years to their working horizons," Sullivan added.

The next big banking scare just around the corner might be further write downs on credit-card losses

In the midst of economic calamity and the resulting shift in buying patterns, what does this mean for how chemical pricing will behave?

Chinese buyers used to periodically withdraw from markets en-masse, in the case of polyolefins.

This would lead to big price declines because the volume of lost trade was big.

The guessing game would then begin over inventory levels and demand - meaning when they would need to re-stock.

When they did return, of course, volumes on the positive side were equally big, resulting in big price rallies.

Bu increments are these days as low as $20 or $30 a tonne a time because of small-volume sales. Prices then quickly fall back.

When prices retreat, even more ground can be lost than had been gained because of worsening economic news.

Nobody can be sure when chemical-pricing markets will bottom out for good in this current cycle - just as nobody has any clue when the economic recovery will arrive.

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

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

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

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

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

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

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

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

What's your strategy to survive this?

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

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

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

Such destocking accelerated in the fourth quarter, Trautz said.

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

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

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

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

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

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

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

($1 = €0.79)

By: Al Greenwood
+1 713 525 2653

For many years, many an Asian country has wanted a petrochemical industry as much as car or a textile industry.

Some of those countries have pursued investment even though their competitive advantages in petrochemicals have been somewhat dubious.

Singapore can argue that - because of its very efficient ports and corrupt-free politics - it is a good location for petrochemicals.

Shared and efficient utilities and feedstock advantages tied to mixed-feed cracker technologies by ExxonMobil, and soon Shell Chemicals, add to the argument. In the past, the case has been won by very strong profitability.

But what kind of growth will lift the West out of recession? Will it be the new-energy New Deal proposed by Obama?

Is this the only kind of growth possible, given that US and the UK consumers are leveraged up to their eyeballs and bankers will remain exceptionally cautious in lending?

In other words, no matter how many tax breaks are thrown at consumers, they might well be unable or unwilling to rush out and buy yet more junk that they do not need - made from petrochemicals shipped from Singapore to China to be manufactured into finished goods for re-export to the West.

The other danger, if the International Energy Authority is right, is that we run the risk of another crude-oil price surge if growth in the conventional economy returns to previous levels.

It seems unlikely, therefore, that we will see further crackers in the foreseeable future (beyond those already under construction) in an Asian country without a home market for petrochemicals big enough to result in only marginal export volumes.

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.

It's all about hoarding cash over the next few years, but survival might not even be possible for even the best managed of companies if Martin Wolf's worst-case scenario comes true. The Financial Times columnist writes of the unravelling of globalisation into the protectionism that characterised the Great Depression years if the Obama stimulus package fails.

There is a good chance it will fail, fears the Federal Reserve in the notes released from its December meeting.

At a chemicals company level, leverage is obviously out and the private equity model thoroughly discredited - perhaps for good.

You can argue that the biggest mistake of the biggest casualty so far, LyondellBasell, was timing as the acquisition of Lyondell Chemicals took place in December 2007. Asset prices were then at their peak with many believing that the boom would continue forever, despite the already rapidly deflating US housing bubble. As recently as March last year, The Economist was talking of Asia's decoupling as the potential saviour of the global economy.

But leverage is itself the problem because of how the extraordinary multiples over tangibe, realisable assets were generated through the shadow banking system, creating the climate for deals such as the Basell takeover of Lyondell to occur. It is this badly regulated, free-for-all system that's brought the global economy down.

Maybe we will never again see the break up chemical companies for sale to private, or public, companies burdened by enormous amounts of debt.

Perhaps the well-integrated chemicals company with sufficient diversification to provide compensating cash flows when a particular subsidiary is struggling is the way forward. Is this yet another case of back to the future?

In an even better position are the state-owned giants in the Middle East and China. They are in the enviable position of cash in hand, and government ownership structures that guarantee funding if that cash was to ever run scarce. These are the only companies I can see able to make the acquisitions the industry now needs.

I am reading Charles R Morris's The Triillion Dollar Meltdown at the moment, having also recently cheered myself up with Paul Krugman's update of his classic, The Return Of Depression Economics.

As the private equity model implodes, Morris's following words ring so wonderfully true:

"The leveraged-buyout business, after a highbrow restyling as private equity, came roaring back. A typical deal: Put up $1 billion, borrow $4 billiion more, snap up a healthy company for $5 billion (after making a rich deal with its executives), vote yourselves a "special dividend" of $1 billion, all the while taking no risk. 'People talk about a wall of money,' one banker said. Private equity funds didn't have to raise capital; it was chasing them."

I am sure, of course, that such unscrupulous and whollly dishonourable practices have never, ever applied to any private equity deal involving our great and wonderful, wise and so superbly well-run chemicals industry that has always taken a long term and measured view of how to run its operations in the most financially-optimal way and for the benefit of humanity as a whole in its caring and compassionate pursuit of higher and principled ideas for a sustainable, warm and cuddly future where everyone sits around the campfire and sings "Well be coming round the mountain" (enough waffle, stop - please!).

As a very wise man once said, everything goes in and out of fashion like long skirts and short skirts.

Hence, my very capable colleague Malini Hariharan has offered some analysis of South Korea. Its companies, having being brutally hammered by the West post Asian Financial Crisis (which I had pointed out at the time ignored their strengths) are now at the front of the proverbial cat walk because they have low levels of debt.

Of course they have significant competitive disadvantages, but they might at least survive the crisis.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A recent briefing by The Economist Intelligence Unit warned that because of the mess the West has made of the world economy, managers in Asia might face unrealistic targets.

Does this sound familiar? All answers will be treated in the strictest of confidence.

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.

Is it just me or is sentiment in chemicals markets even more erratic than usual? Only two weeks ago people were talking about an imminent supply glut in polypropylene, but now the talk is of tightness and stable prices.

Perhaps those with more time on their hands have more time to talk.

This lack of visibility must be making planning very difficult indeed.

China appears to be pumping money into ailing companies for social stability reasons, resulting in a build-up in inventory of unsold finished goods.

Anecdotal evidence from ICIS pricing, and analysis by JP Morgan Asset Management and the China Economic Quarterly supports this view.

Comparatively stronger exports to China, as my fellow blogger Paul Hodges points out on his Chemicals & Economy blog, is also evidence that this is happening.

This is understandable given that by some estimates as many as 30m migrant workers have lost their jobs.

But there is a threat of deflation being exported if all these finished goods end up flooding overseas markets. In such an event, petrochemical pricing can surely only head in one direction.

It is time to think hard about your business, plan for the worst and hope for something slightly better.

There are reports, confirmed by one consultant, of a flood of US polyolefin exports from the US to Asia, China in particular.

Staggering polyolefin import figures for China in January-February show big percentage increases both year-on-year and month-on-month. The March data is due out shortly.

The big worry remains how much of this is going into inventories because of the easy credit in China, which, according to some unconfirmed reports will not last much longer. Others, however, predict that the lending binge will support China's economy for the rest of this year.

Alot of the froth in the China market could also be the result of a big up-tick in activity on the Dalian Commodity Exchange.

But to go back to the main point of this blog entry, there are predictions that US ethane versus naphtha costs could remain very competitive for the next two years because of the fall in natural-gas demand.

And with Brazil also rumoured to be an increasingly important polyolefin exporter to Asia, US/Americas-Asia trade flows may be about to enjoy one last hurrah before the Middle East and growing China self-sufficiency slam the door shut - perhaps for good.

Another thought: Could the recent apparent rise in US-Asia exports be the result of producers making hay while an anaemic sun shines (comparatively higher prices in Asia compared with the West) ahead of a possible General Motors bankruptcy?

That's the beauty of blogging - you can raise the questions and ask others to provide the answers!

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

See the piece below.

I suspect polyolefin pricing will fall a lot further:

A Singapore-based polyolefin trader took a telephone call during a lunch meeting a few weeks ago from his counterpart on China's Dalian Commodity Exchange (DCE).

"Sell, sell, sell," advised his colleague from the other side of the restaurant table.

But he decided to hold the linear-low density polyethylene (LLDPE) contract - a wise decision at the time, as prices subsequently rose beyond $1,000/tonne (€750/tonne).

Last week, though, prices on the exchange started to fall.

In the physical market, domestic prices of most polypropylene (PP) and PE grades fell by CNY50-600/tonne ($7.30-87.80/tonne) on 14 April in northern, southern and eastern China, compared with 10 April, according to China chemical market intelligence service ICIS chemease.

"The DCE has contributed to a rise in volatility across the whole of polyolefins as traders in all the different grades are playing the market," said the trader who took the telephone call.

"China's domestic prices have fluctuated by $50-100/tonne in 2009 as against $50-40/tonne in 2007. It's not worth comparing this year with 2008 because 2008 was such a freak year."

Last year saw huge inventory building ahead of further crude oil price hikes in the first half of the year followed by the second-half price collapse.

Contracts on the exchange are bought and sold every day with the amount of physical deliveries thought to be only a tiny fraction of paper deals, the trader added.

The bulk of activity must be paper trades because of the quite staggering increase in volume versus consumption.

"Almost 24m tonnes of linear-low density polyethylene (LLDPE) was traded on the exchange in the first two weeks of April, more than forecast global demand in 2009," wrote UK-based chemicals consultant Paul Hodges on his blog, Chemicals and the Economy.

"By comparison, just 150,000 tonnes was traded in the same period last year."

The surge in the DCE is being much-discussed as is the big rise in China's polyolefin imports.

LDPE shipments to China rose by 181.47% in February this year over the same month in 2008, according to data from China Customs.

The increase in high-density PE (HDPE) was 120.94% with linear-low density (LLDPE) registering a 162.17% increase.

Polypropylene imports rose between 82.15% and 140.10%, depending on the grade.

But a direct link between the DCE and increased imports seems unlikely "as it would be too expensive to import and then trade on the exchange. Local material makes more sense," said a second polyolefins trader, who is also based in Singapore.

Higher prices in China compared with the West was behind the big jump in imports, said several market participants and observers.

Aggressive Asian petrochemical operating rate cuts late last year which were maintained in January, restocking by end-users since February and higher crude and naphtha costs have driven prices higher, they added.

Another factor behind the price surge could have been the huge boost in lending by China's state-controlled banks on very easy terms.

Traders might have used the cheap loans to buy physical cargoes of polyolefins, speculate on the DCE and quite probably on local stock markets as well.

"Speculation is in our blood, but it's the amount of gambling that's taking place at the moment that's making everyone a little jittery," said the second trader, who is ethnic Chinese.

"Everyone is scrambling to take advantage of what could be a bear-market rally in chemicals and other commodity prices and in equities."

This raises the usual question over trader versus end-user polyolefin inventory levels.

"I think a lot is in the hands of the traders who have found it very easy to borrow money," he added.

"I used to sell 80% of my material to end-users and 20% to other traders in China. These percentages have reversed."

The guessing game over inventory levels is creating even more anxiety than normal because the stakes are so high.

"Business has been good. I wish I could have produced more and exported more to China," said a source with an Americas-based polyolefin producer.

Large volumes of PE have been sold by US Gulf coast producers to China, he added.

"Shipments have risen because of ethane being cheap relative to naphtha and strong prices in China. (Most US PE production is ethane-based).

"I believe US ethane will remain a very competitive feedstock over naphtha for the next two years because of falling natural gas demand and greater availability."

The DCE had become an important factor in influencing local pricing, he added.

"I think petrochemical pricing in general was in any event heading for a downward correction after June on cheaper crude, greater naphtha availability, the end of the Asian petrochemical turnaround season and new capacity.

"We might see a sharp correction before then if the DCE dips very sharply and if traders have taken too many risks in the physical market. The trouble is nobody really knows."

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.

Referring to the famous story about how Joseph Kennedy sold his shares on the eve of the Wall Street Crash after being given investment tips by a shoe-shine boy, my answer to the above is a definitive YES.

Over the course of rest of this week I am going to detail why I think reports of China's economic recovery have been greatly exaggerated.

Petrochemical producers talk about a significant and perhaps sustainable demand recovery, but I am even more firmly of the view now - having read some more worrying economic analysis - that we are in the middle of a mini commodity-price bubble (this applies to crude as well as chemicals) that's not supported by the fundamentals.

And as mentioned in this article, (apologies for the laziness of using the same intro twice!) the bubble has yet to significantly deflate.

Chinese domestic polypropylene (PP) and polyethylene (PE) prices slipped slightly last week by around CNY400-500/tonne, but import prices remained unchanged.

The sentiment, though, seems to have become more bearish on the feeling that prices have gone up by too much too quickly.

Trading volume in linear-low density PE (LLDPE) on the Dalian Commodity Exchange continues to post staggering increases.

If you take the number of contracts traded to date in April and multiply this by the size of each contract (5 tonnes), 48.65m tonnes have been traded. This about twice the annual global demand for the polyolefin.

This compares with just 166,330 tonnes during the same period last year, representing at 29,157% increase.

What's interesting to note is that the year-to-date increase over the same four-and-a-bit months in 2008 is far less dramatic: to 149.85m tonnes from 132.5m tonnes - a modest 13.06% rise.

Have the shoe-shine boys started punting on the exchange in a commodity that they don't have a clue about?

Could the chemicals industry be in danger of wanting to believe something so much that ignores overwhelming evidence to the contrary?

The widespread perception is that China's economy has reached a turning point.

"The worst of the crisis is over and the world is entering the time when things will gradually get better," wrote former US presidential adviser John Rutledge in an article on the Chinese news service, Xinhua.

According to The Economist, it wasn't the collapse in exports that triggered slower growth in China.

It traces the origins of the downturn to tightening of credit in 2007 that led to a collapse in property prices in China's first-tier cities and a decline in construction.

"If the collapse in domestic demand led China's economy down, it can also help lead it up again. Not only is China's fiscal stimulus one of the biggest in the world this year, but the government's ability to 'ask' state-owned banks to spend and state banks to lend more means that the government's measures are being implemented more rapidly than elsewhere," writes the magazine.

The huge spending on infrastructure will hugely benefit rural communities as two-fifths of villages lack a paved road to the nearest market, it adds.

A large increase bank lending also appears to be behind a 36% rise in housing sales by value in the year to March after sharp falls in 2008.

If construction picks up this should help reduce unemployment as half the job losses among migrant workers have been in the building industry, the magazine continues.

But The Economist concedes that a misallocation of capital is a concern.

However, the article continues: "China is one of the few countries in the world where bank credit has fallen relative to GDP over the past five years. Banks have an average loan-to-deposit ratio of only 67%, low by international standards, and less than 5% of banks' loans are non-performing, down from 40% in 1998."

So in other words because the Chinese banks are awash with cash a major Western-style financial crisis seems unlikely, no matter how much money is wasted.

But if money is being misallocated, the boost to growth might be less than some people are forecasting.

There are strong rumours that easy bank loans have fuelled speculation.

"When we are selling to a trader in China they have no interest in our letters of credit because they can borrow so cheaply and so easily from their local banks. They are even prepared to pay 20% up front by telegraphic transfer," said a Singapore-based polyolefins trader.

"I used to sell 80% to end-users and 20% to other traders in China, but now those percentages have been reversed.

"I think a lot of traders in China have taken risky long positions because lending terms were so easy."

Money has even been borrowed and then made or lost on domestic stock markets, some sources claim.

The same might apply to the Dalian Commodity Exchange, which has seen a huge increase in trading in linear-low density polyethylene (LLDPE) over the last few weeks.

Large of inventories of steel, aluminium and concrete are being built as a result of speculation and perhaps an anticipation that demand will get better in H2. The same might apply to chemicals and polymers.

But Michael Pettis, a professor at Peking University's Guanghau School of Management, makes some worrying observations about the economy in his blog.

It is worth reading the lengthy posts for 20 April and 13 April.

In summary, he talks about:

*Private companies - the main engine of economic growth - struggling to get financing as the state-owned enterprises receive a flood of loans

*A poor return on money spent versus jobs creation - for example, CNY1trillion which is being spent in Henan province to create 650,000 jobs. He has calculated that if this same sum had been spent on giving workers salaries of CNY3,000 a month (more than twice the average salary of migrant workers) this would have been enough to pay the wages of 650,000 people for 43 years

*A boost in industrial production, "leaving the unresolved question of who is going to absorb the excess capacity if the US is no longer willing to play the role"

*Signs that China is trying to export its way out of oversupply. The trade surplus was $62.6bbn in Q1 this year, up from $41.7bn for the same period in 2008. "Although lower than the astonishing heights of January and late last year, the trade surplus is still much higher than this time last year. That means China's export of overcapacity is increasing," he writes

*A much larger vulnerability of GDP (gross domestic product) to exports than some economists have calculated. He quotes a Wall Street Journal article, quoting a working paper prepared for the International Monetary Fund. The paper estimates that for every 10% fall in exports, GDP will decline by 2.5%. Exports fell by 20% in the first quarter

*Government subsidies and tax distorting demand - for example, state-owned enterprises bringing forward vehicle purchases which was of the major reasons why auto sales rose by 10% in March. JD Power, the car consultancy, is forecasting flat Chinese passenger car sales in 2009

It would be nice to start the weekend with a little cheer, but I'm afraid no amount of gormless optimism would work.

DuPont, as you can see from this excellent piece from my colleague Nigel Davis at ICIS, has revised its forecast for 2009 global growth down to minus 2.5% from minus 0.6%.

Every chemicals end-use segment you can think off from automobiles to construction to electronics looks a lot weaker than in H1 2008.

We need a new way of thinking to get through this, but as I head for a weekend with my family where the plan is to avoid reading any financial news, I am short of any ideas - other than maybe working for an NGO and accepting a much-reduced standard of material liviing.

Making money in this climate remains extremely hard - although from a business journalist's perspective, it is of course a fascinating time.

The first stage of the 105th Canton Trade Fair - which involves electronic and electrical appliances, hardware and tools, machinery, vehicles and spare parts, building materials, lighting equipment and chemical products - concluded this week. Sales totalled $13.03bn - a 20.8% fall on the same stage last year.

I also read this other report about a surge in job creation in China's cities in Q1 over the the fourth quarter last year. What are all these extra workers doing?

Are they building dangerously high inventories of semi-finished and finished goods?

China's economy is showing signs of recovery, but not enough to replace the 20% fall in exports during the first quarter.

My current favourite blogger is Michael Pettis, professor at Peking University's Guanghua School of Management, who, in his latest post, makes a very worrying point below.

As an aside, and without wanting to take the 1930s analogy too far, this debate in China is a little like the split in the 1930s between the internationalists in the US who favored hard money (incorrectly, I think) and a rapid liquidation of overcapacity (painful but probably correct), and who vehemently opposed measures, including tariffs and competitive devaluations, to boost employment via boosting the export of overcapacity, versus the large and powerful constituencies, dominated by local congressmen, miners, farmers and many industrialists, who stressed immediate moves to weaken the currency, boost production, and resolve US unemployment even at the expense of the global system. In part because the 1929 stock market collapse thoroughly discredited bankers and economists, and in part because politicians are always more likely to be influenced by large domestic constituencies than by internationalists, the latter group pretty resoundingly won the debate, at least in the early part of the crisis, and clearly not to the US's obvious benefit.

Economic stimululs packages the world over seem to be attempting to turn the clock back to 2007 - thus adding to the imbalances that caused the crisis in the first place.

In the case of China, short-term political expediency might be causing more damage to the global economy as the country tries overproduce its way to higher growth.

Overproduction in China might be the reason why polyolefin prices continue to defy reason.

Despite a fall in naphtha prices on what we earlier predicted on this blog - a big increase in naphtha supply in Asia - polyolefin prices continued rising last week.

Naphtha had fallen by $13/tonne to $437.25-438.25/tonne CFR Japan while polyethylene prices rose by $20-70/tonne in Northeast and Southeast Asia and polypropylene by $30-60/tonne.

......all the right reasons than to be wrong altogether?

Sounds a dumb question, perhaps - unless you take particular pride in being one of those know-it-alls.

The point I am trying to make (and assuming that chemicals pricing doesn't collapse beforehand on a broader retreat in crude and equites on maybe panic over swine flu or the realisation that a global economic recovery is a long way off) is that I have thought for a while that the fundamentals point to a major price correction from June-July onwards because of:

*New supply from the Middle East. Surely, yes surely, there will be more capacity hitting the market in H2 as PetroRabigh ramps up output - even if YanSab, Sharq and perhaps even the new cracker in Qatar - are effectively pushed into next year

*A lot of new supply in China. My colleagues at CBI Research & Consulting are working on an update of the subtantial amount of additional capacity due on stream in H2, including Fujian Petrochemical & Refining (the latest world on the start-up of which is July)

*The end of the May-June petrochemical turnaround season in Asia

*An increase in naphtha supply (as much as 20-30% in Asia, according to Purvin & Gertz) as a result of higher production from two new condensate splittlers in the Middle East and greater naphtha exports from India

*A I said, my belief that everyone will have to wake up to the fact that the global economy, including China, will not enter recovery in 2009 or perhaps even in 2010. I remain worried about the quality of China's growth (is it too production rather consumption-driven?), how much stimulus-package money has been wasted on speculation, including in building chemicals inventory, and the possiblity that China - directly or indirectly - might start exporting deflation

But today I spoke to some goods contacts and friends at a leading petrochemicals trading company who gave the following additional reasons for their long-held view that prices would tank in July:

*US and European producers upping operating rates in response to strong arbitrage opportunities. The Europeans have already raised rates, apparently, and the US more recently. In the case of propylene, though, stronger demand for refinery-based C3s from several derivative producers might, perhaps, make further US PP shipments unworkable

*Strong interest in shipping petrochemicals from the US and Europe to Asia for arrival after May (all May business was concluded around 20 April). Cargoes could be at sea and uncommitted just as the shift in fundamentals listed earlier starts to take effect. Big quantities have already been shipped from the West to East during Q1, including very large amounts of BTX and polyolefins. Around 200,000 tonnes of US and European benzene is heading for Asia for March and April arrival, according to DeWitt & Co. China imported 114,000 tonnes of benzene in March alone, which compares with just 328,000 tonnes for the whole of 2008 - an average of 2,733 tonnes per month. The surge in toluene shipments from the West to China is equally dramatic: China received 66,000 tonnes in January, 77,000 tonnes in February and 94,000 tonnes in March compared with a 2008 total of 273,000 tonnes.

Inventory pressures in the West have been relieved and some of the big losses suffered in Q4 have been recouped (and some of the traders seem to have done very well indeed).

So batten down the hatches once again.

Any excuse to make a reference to the late, great and wonderful Ian Dury.

I sent the following email to my friend in response to the stock market rallies and the green shoots of optimism seemingly turning into beautiful May flowers:

"I take it nothing can has fundamentally changed? The confidence couldn't possibly be so self-fulfilling that all the consumer and corporate debt somehow vanishes into a great big black hole?"

His response, justifiably caustic, was:

"Of course, that's the answer. We wake up on May 1, and its all been a nightmare.

"Suddenly houses are still worth what they were there years ago, and are still increasing in price on a monthly basis.

"None of the banks have been nationalised, and the shadow banking systems is still the same size as the normal banking system.

All is fine with the world, and neither Chrysler nor GM are close to bankruptcy."

Quite. Enjoy it while it lasts.

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

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

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

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

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

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

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

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

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

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

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

And did you fiddle your expenses during the good times?

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

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

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

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

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

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

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

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

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

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

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

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

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

Net lending falls 70%mom to RMB592bn in April

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

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

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

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

Yoy inflation falls further in April

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source of picture: The Nymex

To continue the same theme of earlier this week, I agree with my fellow blogger Paul Hodges when he warns that OPEC's price target for $75-80/bbl could nip the nascent economic recovery in the bud.

As he quite rightly argues, inventory building ahead of further crude rises in 2007-08 occurred despite evidence of slowing end-use demand for chemicals.

A recent Lex piece in the Financial Times calculated that crude prices averaged around $100/bbl last year. With the world consuming a total of $88m bb/day this therefore cost the world economy $3.200bn.

When the article was written earlier this month, prices were averaging around $50/bbl which would for the whole of 2009 represent a saving of $1,600bn.

This is more than the total of all the government bailouts - $1,600bn - and the bailouts are one-offs rather than the constant savings resulting from cheaper crude.

This year's crude bill looks likely to be more expensive that had seem the case in early May, though, as a result of oil around $60/bbl, assuming it stays around this level (one hell of a big assumption but hey, why not, the rest of the media has become adept at turning a short-term trends into a long term outlook).

As the excellent Schork daily oil and gas report points out, oil and gas inventories remain at record highs.

But traders are ignoring the underlying long term trend in favour of putting a positive spin on recent relatively minor reductions in stock levels.

As the report points out, it's all about market psychology:

What started out as a bear market rally in equities
back in March is now in the process of morphing
into a full fledged rally. Sidelined money,
disgruntled and dismayed that it has missed the
bull's party of the last two months, is now
reluctantly piling back into the market. Some of
this money is finding its way onto the NYMEX.
The Street has convinced itself the recession is
over. Two months ago traders were buying
because they wanted to "participate" in the
equities rally before the bear market resumed.
Today these same traders are spinning a dubious
fundamental case because dour economic
headlines, which the market receives nearly daily,
are less bad. Thus, the crude oil bulls have
hitched their wagon to the equities. And, they are
going to continue to do so until it stops working
for them.

I remain convinced this is just about market psychology and the economic news is going to get worse before it gets better - so prepare for a lot more volatilty in energy pricing.

A sharp dip in crude would help inject some more much-needed cash into the world economy.

But - again as Paul Hodges points out - if crude does reach the OPEC target of $75-80/bbl this will at least encourage some of the investment necessary to lessen the supply crunch when the economic recovery has conclusively arrived.

Source:Amazon.com

I remain perplexed by the direction of chemicals, oil and commodity markets over the last few months - and now I understand the reason why.

It's not about feedstock, it's not about inventory levels or what end-use demand is really like, it's all to do with affairs of the heart.

Thanks again to my fellow blogger Paul Hodge who writes:

The Illicit Encounters website has a major increase in traffic when either the market collapses, or has a sudden rise. Apparently, when markets are up, traders "think they can have an affair because they feel they can get away with anything. When the market hits the bottom, they are looking for a way to relieve the pressure."

The site first came to the blog's attention in December, when the Financial Times reported on its rather lucrative business model - a male membership fee of £119/month ($190). Now it appears to have forecasting potential too.

As with financial markets, surely with c hemicals pricing. All we need to do is to produce an index, on a confidential basis,of course, which tracks this particular form of intra-industry activity.

It's easy to get caught up in the excitement over the rebound in the Chinese economy and miss underlying weaknesses which point to some major problems ahead.

To some extent, in a desperate effort to compensate for collapsing export trade, China might have borrowed from the future in order to achieve a swift recovery.

"The (Chinese government's economic) stimulus programme borrows from a future investment cycle," writes the online research publication, the China Economic Quarterly (CEQ), in its Q2 report.

"Since 1978 China has run relatively regular five-year investment cycles followed by five years of retrenchment."

Spending by the State on infrastructure and industry boomed in 2003-07 and so the following five years were supposed to involve the reductions in expenditure necessary to repair a big hole in the national balance sheet.

But, of course, the reverse has happened with infrastructure and industrial projects scheduled for the next 5-10 years now set to be completed over the next 3-4 years. This includes speeding up investments in the refinery and petrochemical industries.

"China could be in for some rough times after the stimulus money runs out in 2011," the CEQ adds.

Repair work to the national budget might not be the only reason why longer-term prospects could be a lot bleaker than many expect.

China might also fail to boost domestic demand sufficiently to compensate for export trade which might take many years to recover.

"For the first time in the 30-year reform era, China faces an extended period - five years or perhaps longer - in which exports will provide no significant contribution to growth," says the CEQ.

The reason is the well-documented collapse in the West's debt-financed consumption binge.

On the surface, it looks as if China is making great headway towards realising more of its enormous domestic-growth potential: retail sales grew by 16% in Q1 this year, up from 15% in the first quarter of 2008.

If you dig deeper, though, as the CEQ again does, you discover that retail sales include many "institutional" purchases, meaning those by state-owned enterprises (SOEs).

The government has increased military salaries by 50% and is providing rebates of 13% and 10% respectively off rural purchases of household appliances and automobiles.

Despite all this cash sloshing about, however, when you take away the institutional purchases from the retail sales figures, the CEQ concludes that there is little evidence of a pick-up in consumption.

Longer term, this can be fixed if efforts to create much better pension and healthcare systems lead to more spending and lower savings levels.

Compared with the West, and particularly the US, the Chinese keep an awful lot more of their money bank deposits.

But here's another potential pitfall: all that money sloshing around (the CEQ estimates the total stimulus will be worth Yuan5-6 trillion, or 15-18% - much bigger than the originally announced Yuan4 trillion) could end up creating another non-performing loans crisis similar to that of the early 1990s.

This could force China's banks to lower interest rates on deposits in order to repair their balance sheets, warns Peking University finance professor Michael Pettis on his blog, China Financial Markets.As bank deposits are such an important method of saving money in China, lower interest rates could lead to more money being saved as compensation, leading to damaged consumer growth, he adds.

Numerous economists are also warning that too much of the stimulus is in the form of loans to the SOEs, which can be less efficient in boosting the economy than private companies.

The private sector, hammered by the collapse in export trade, is in contrast reported to be struggling for finance.

An inevitable slow down in bank lending, the result of the huge rise in loan growth during Q1, could also be put yet another brake on the economy.

"RMB (Yuan) net lending fell sharply to YuanB592bn in April from YuanMB1.9tn in March, broadly consistent with our expectation," writes Jun Ma, Chief Economist Greater China for Deutsche Bank, in a report.

"We believe this reflects the success of the window guidance by the PBOC (People's Bank of China) and the CBRC (China Banking Regulatory Commission) that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget.

"Going forward, the continuation of these factors will likely lead to a further decline in net lending to about Yuan300-400bn per month in the remainder of this year."

A further worry remains the potential global deflationary effect in H2 of China stockpiling raw materials, including perhaps chemicals and polymers.

Imports of polyethylene (PE) and polypropylene (PP) have, for example, been at record levels in Q1.

However, it's impossible at this stage to say whether this involves major stockpiling or is more the result of better demand and big production cutbacks by Sinopec and PetroChina earlier this year.

In the case of iron ore and copper, though, the steep rise in Q1 imports (iron ore was up by 33% and copper by 62%) are being widely attributed to state-backed inventory building and strong investment demand.

"China is stock piling commodities - everything from metals to oil," said a chemicals industry source.

"The argument is that it's better to store financial reserves in commodities rather than US dollars."

"There has also been some stock piling of gasoline and diesel in anticipation of price increases by the government."

Gasoline and diesel prices were indeed increased from early June - the first time since March.

But if you put five economists in a room, goes the old adapted saying, you are likely to get at least ten different opinions.

It can be just easy to interpret some of the recent data in a much more positive way, and it might just be possible that the current euphoria will create a self-fulfilling prophecy of a sustained recovery.

It's worth being aware, though, that a 50% rise in the local stock markets since the start of the year and lots of positive macro-economic news might not tell the full story.

Source: The Guardian newspaper

Apologies for letting this bog slip again. I am on leave, but still pondering where on earth we are heading. This makes a welcome relief from staring up at the grey skies and thinking "summer? What summer?" Yes, I am on leave in the UK and Wimbledon is about to start. I would recommend moving the tournament to drought-affected areas of the world, maybe on an annual rotation basis, to guarantee rainfall.

Anyway, back to the business of oil prices.

If you succeed in making acrylic acid from enzymes and microbes, as the company Novozymes is attempting to do, then maybe you can worry slightly less about the long-term likelihood of very high crude prices.

But as oil hits $70/bbl again, the old concern about boom and bust cycles driven by energy costs has to be very much in the forefront of everyone's minds - whether or not they are trying to break the direct link between oil and chemicals.

As the excellent Buttonwood column in The Economist points out, we are back in a commodities supercycle.

The 45 cents a gallon rise in gasoline prices over the last month is costing the American consumer an extra $60 billion.

As confidence in the economic recovery increases, might we soon be back to square one?

What are the solutions for the chemicals industry?

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

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

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

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

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

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

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

Have you ever been away on holiday and have cut yourself off from from work, only to return and find that nothing has changed?

So it seems in polyolefin markets. As this blog has been writing about for several months, the recovery in pricing seems to have been mainly feedstock-driven as this article from ICIS news points out.

Demand from converters in south China is reported to be weak; hardly surprising given the chart below from The Wall Street Journal which indicates that China's economy is 36.5% dependent on exports with south China the heartland of China's export sector.

No matter what the wisdom of the Chinese government's huge fiscal stimulus aimed at boosting local demand, a sustained recovery in Western consumer spending remains crucial for China's economic health over the next few years.

You have to doubt the wisdom of the stimulus packages because China could well be borrowing from the future to pay for growth today. And secondly, as we discussed earlier this week on this blog, the enormous increase in loan growth will put China's banking system under pressure.

Chemical prices have risen in tandem with crude prices and with the broader sense of optimism - reflected in equity markets - that the worst of global economic crisis might be over.

True, the rate of declines in the real economy might have slowed down but as Mohamed El-Erian, chief executive and chief investment office of Pimco, argues in this Financial Times article "it is going to take time to restructure an economy (the US) that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers."

This could mean US unemployment will only peak at 10.5-11% and not until 2010. Yesterday saw the release of jobless figures for June which indicated a 467,000 drop in employment, raising the current jobless rate to 9.5% from 9.4%,.

I am sticking to my belief that a sharp correction in polyolefins pricing is likely very soon with markets set to get a dreal longer when the Asian turnaround peak season ends - and when new capacity comes online in China and the Middle East

Evidence of this is clear from the monthly ICIS Ethylene Worldwide Report, which was relaunched in May.

As this slide shows detailing China alone (and the picture looks equally disturbing for the rest of the world, also of course including the Middle East), available capacity is set to increase sharply as maintenance work tapers off and some of the new plants are commissioned.

View image

But there might be more start-up delays and of course we don't know the maintenance schedules for next year.

Clearly the risks are high, though, for any petrochemicals producer or buyer (I think what I've said for olefins and polyolefins applies to many other products) that has swung from the fear of Q4-Q1 last year to over-optimism.

If production or buying have been ramped up by too much and inventory levels have once again been badly managed, the risk of heavy losses from the bursting of this mini-price bubble remain high.

For the cautious and prudent company - and for the likes of Ineos and Dow Chemical that have taken opportunities to refinance during the current stockmarket boom - though, the prospects might not be that bad.

But for everyone, evidence of a real improvement based on stronger global consumer spending has yet to emerge.

Indeed, if El-Erian's analysis is correct overall consumer spending on the things made from chemicals might get worse in H2 this year and throughout 2010.

And as foor beyond the end of next year, again, since I've been away nothing has really changed.

This comment from the economist Nouriel Roubini - although a bit dated as it's from May - still rings true:

"We cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures."