Asian Chemical Connections

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.

I can just about remember when Indonesia was talked about in the same breath as China - huge latent demand, lots of foreign direct investment and great natural resources.
Then came the Asian financial crisis and economic ruin. But now, as this article from the Economist indicates, the government had paid off its debt to the IMF, the stockmarket has been booming and the rupiah is strong.
True, the recent floods have hit growth. But the potential is perhaps closer to being realised than at any time since 1997, provided the government spends its money wisely on much-needed new infrastructure and there is more private sector investment.
This is a country with a huge population with per capita polymer consumption at only 17.5kg and an already proven case for more petrochemical investment: Indonesia still only has one cracker and has big monomer deficits.
But perceptions are hard to shake off, even if the government has balanced its budget and is dealing with corruption.

Indonesia before 1997 had three cracker projects and huge demand growth. It was mentioned in the same breath as China. And, of course, then came the crisis.
But this year GDP growth could be the highest since the crisis with the government in sound financial condition.
The case for petrochemical investment is obvious as monomers and polymers are in big deficits. Will anyone take the plunge, though, and build one of the two new crackers that are needed by 2010-11, based on industry association estimates of deficit levels during those years?
The new boss at Titan, the Malaysian buyer of PE producer Peni, says he is interested in a cracker. Let's hope that the cautious optimism over Indonesia is justified.

After all the optimism, all the hype and a lot of investors' money, the industry has shot itself in the foot by failing to build demand ahead of supply.

Plus the negativity caused by food versus fuel and environmental counter-arguments to supporting this current generation of technologies is making some Asian governments hesitate on providing the support needed to bolster demand......

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.

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.

A report by the Hay Group on world pay, surprise surprise, concludes that the Middle East tops the world in terms of disposable income because of the region's economic boom and the absence of income tax.

This has serious implications for the chemicals industry in it's desperate battle for talent in a very tight recruitment market.

For every dollar of guaranteed cash that a senior manager earns in the United Arab Emirates, his counterparts in Singapore and Malaysia earn only 74 and 34 cents respectively In Indonesia, the manager will earn only 17 cents for the same job!

Chemical industry employees have obviously followed the feedstock advantage. But what's going to happen if gas supply for petrochemicals remains constrained in the UAE? Could we see a reversal of the brain drain?

And if the likes of BASF and Dow Chemical are successful in their search for alternative methods of making basic petrochemicals, could we see a realignment of pay rates?

High energy costs and global or regional prices on carbon emissions could also change the renumeration landscape.

Retailers in the West have already started to source more goods from local suppliers because of high transportation costs.

If you can make olefins from the Fischer Tropsch process (and there's a price on carbon) the obvious extension of this is that you could build new chemicals plants in, say, Germany to supply downstream industries benefiting from reverse-gear globalisation.

But you would also have to take into account Europe's ridiculously high tax rates (one of the reasons I quit Britain!)

....You might have to be to be able to afford this lot in a few years time (at least in some inflation-battered and collapsed local currency)

Thanks to Mark Berggren of MMSA for pointing out this wonderful quote: "Foreign aid might be defined as a transfer of money from poor people in rich countries to rich people in poor countries"
Douglas Casey, Classmate of Bill Clinton at Georgetown University

The tremendous economic boom of 2000-2007 in emerging markets might have also left millions more behind than had been previously thought as increased wealth from local prosperity - rather than from stealing foreign aid - has ended up in the hands of the middle classes.

Two new studies - one by the Asian Development Bank and the other by the World Bank - have raised the bar on definitions of poverty, largely as a result of rising food costs.

For example, the ADB believes that there are 20.1% more people in poverty in Indonesia and 15.9% more poor people in the Phillipines than it had previously thought.

The great petrochemical hope in the sky has been India, but how can a country with terrible infrastructure, poor irrigation and very low literacy rates ever give the majority of its people the joyous pleasure of buying plastic bags? The World Bank estimates that 455 million people have to get by in India on $1.35 or less a day.

The point here is that inflation will eat into all the rosy forecasts for petrochemical demand growth that were around as recently as the first quarter of this year.

How long-lasting will the damage be to growth? The answer could be how long oil prices remain elevated which comes back to your view on supply and demand.

Surging oil prices on the well-documented supply problems are big factor behind rising food costs. This is either directly through higher transportation and fertiliser bills or indirectly through the nonsense of first-generation biofuels industry in the West taking away land from food production. Plus you have the problem of all those newly middle class people in countries such as India eating more meat.

I don't think the recent fall in crude prices changes anything. This is just a temporary correction based on weaker demand growth. When there's an economic recovery, the supply shortage could quickly result in another downturn - hence, constant volatility above a high price floor.

I wish had bought shares in agrochemical companies a few years ago.

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!

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.

"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?

Source of picture: wartakota.co.id

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 But does the Pertamina plan really add up?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The EU removed similar safeguard duties in December 2007.

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

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

Restocking and crude oil have been important factors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It's the same story for Indonesia.

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

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

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

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

This is also especially true of China.

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

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

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

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

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

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

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

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

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

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

The implementation of a zero-tariff regime in Asean from 1 Jauary 2010 has raised concerns among polymer producers in Indonesia and the Philippines about intense competition from Singapore and Thailand leading to a erosion in market shares.

Producers from these two countries are lobbying to defer or block implementation of zero tariffs. But a trade lawyer says the going will be difficult.

"I have heard that Indonesia is pushing for a postponement of the new duty structure. Even if the government agrees the customs department is not prepared as [new] forms are not ready," says one Singapore-based exporter.

But Edmund Sim, partner with Appleton Luff, points out that it would be difficult for Indonesia to renegotiate as the agreement has already been ratified. "It is pretty much impossible," he says.

Pic source: Fotopedia

"What is allowed under the free trade agreement (FTA) terms is for a country to suspend tariff concessions if it can be determined that increased imports have caused injury or economic damage to local companies. But in the history of FTAs this has very rarely been implemented. And even if this is put place it would be a temporary measure - say for a period of 3-5 years," says Sim.

The second option is to go for antidumping action.

"If the industry is worried about a flood of imports they can go in for this option by proving that pricing was unfair and that the local industry suffered material injury. This type of action is possible and can be extended for an indefinite period," says Sim.

But this is an expensive option because of high legal fees and it takes time to enforce. Companies also have to wait for a few months before they can initiate action.

"You have to build a record. You cannot say on 2nd January that there is dumping. You need time to build the case; usually 6-8 months is enough to get data to make a claim," he points out.

"The simple option [of raising import duties] ended when the FTA was signed. Now they have the safeguard option, which is untested, or antidumping, he adds.

Besides the Asean FTA, Indonesian media has reported that companies are also asking for a delay in the implementation of the Asean-China FTA, which comes into force from 1 January 2010.

There is a provision in the Asean-China FTA for a temporary delay in tariff reduction by reclassifying goods as 'sensitive' and 'highly sensitive' products. The duty elimination could then be delayed to 1 January 2015.

But the problem for Indonesia is that there are limits on the number of 'sensitive' and 'highly sensitive' products and the deadline for classifying goods was back in 2004, points out Sim.

It is also uncertain whether China and other Asean countries will allow Indonesia to deviate from the FTA.

"Either way, for Indonesia to delay tariff elimination will require some agreement by the other Asean members and China [in the case of the China-Asean FTA] otherwise Indonesia will be in breach of its legal obligations," says Sim.

Still too crowded...

Source of picture:www.tripadvisor.com

By John Richardson

Dear Readers - Welcome Back.

Having spent the last two weeks lying on Western Australian beaches, drinking beer and reading books on European history - while also building sand castles etc with my three-year-old son - I have given little thought to chemicals.

But here's to another year and another dollar - or quite possibly a lot less dollars if the forecasts of excess petrochemicals supply prove to be correct.

On the big-picture macroeconomic front these area few of the things we should also be worrying about:

*Global demand being too tied to government economic stimulus packages (Western governments will have to at some point ease back on stimulus to cut back on deficits in order to avoid credit downgrades leading to higher borrowing costs, or perhaps even defaults on debt; China has dollops more cash to spend on boosting the economy, but needs to worry about inflation)

*Consumer debt levels and unemployment in the developed world will remain high and so a big recovery in consumer spending seems very unlikely

*Restocking has come to an end across many industries including chemicals

The question is whether we will see a sustained V-shaped global recovery or a long period where global demand for everything, including chemicals, will remain much-below 2007 levels for many years to come.

My betting is firmly on the latter scenario.

Cash won't be as tight as early 2009, but some of the hype of H2 last year needs to be put into the context of all that restocking - plus the fact that numerous project delays have postponed the inevitable impact of a flood of new capacity. Even though more delays are likely, the amount of new volumes suggests a tough second half of 2010

The emerging markets story remains exciting, but demand growth in China, India and Indonesia (Indonesia being probably a much under-rated source of demand last year) won't be enough to return us to 2007.

Commodity chemicals companies that have made big-enough shifts to developing markets and/or to where the cheap feedstock is located should be OK - as long as tight inventory management, and therefore cash preservation, continues.

By Malini Hariharan

Eight years after agreeing to the Asean-China FTA (ACFTA) and a few days after its implementation the Indonesian government has succumbed to industry pressure to ask the Asean Council to renegotiate tariff reductions on 228 categories of goods across eight industrial sectors. In return, it has offered to accelerate implementation of tariff cuts on 153 tariff categories.

The 228 tariff categories include steel, iron, textiles, electronics, basic inorganic chemicals, petrochemicals, furniture, footwear, machinery, cosmetics and herbal medicines.

The government has been facing intense pressure from local companies who fear that competitive imports from China will force closure of their businesses.

Last month, a senior official at the Indonesian Employers Association (Apindo), warned that as many as 7.5 million workers (about a quarter of the country's 30m strong formal sector workforce) could lose jobs. He predicted that layoffs would begin gradually in about eight months' time.

But Indonesia had sufficient time to prepare the domestic industry for the rigours of Chinese competition. And if this was impossible the government could have approached the Asean Council much earlier.

"What were you waiting for?" questions the Jakarta Globe in this report and blames the government and industry for failing to anticipate consequences.

Anwar Suprijadi, former chief of the country's customs and excise office is reported to have said that he had warned colleagues in the Trade Ministry as well as those on the House of Representatives budgetary commission two or three years back about the problems the country would face once the Asean-China trade pact was implemented. "I warned that this [pact] should be reviewed," he said.

Pic Source: Jakarta Globe

Edmund Sim, Singapore-based trade lawyer with Appleton Luff, points out in this excellent analysis that other Asean members may be tempted to follow Indonesia.

"That Indonesia and the Philippines, with active business lobbies and media, reacted so strongly was somewhat predictable. Nevertheless, that business interests in those countries and elsewhere in ASEAN waited until the last minute, months and years after the negotiation, ratification and implementation of the FTAs, reflects fundamental deficiencies within the region's operating system. Clearly ASEAN governments and institutions such as the ASEAN Secretariat did not adequately prepare the business sector for trade liberalization. The corporate sector should have been more involved in the process from the earliest stages," he writes.

It is still early to say if Indonesia will be successful. The Jakarta Globe states that the Asean FTA council has 180 days to make a decision. Meanwhile, the trade deal will be implemented as planned.

A clause in the deal states that the council can reject Indonesia's request if other Asean countries oppose it. However, if the council sees Indonesia's offer as reasonable, it will represent the country in new negotiations with China.

But the Indonesian government has indicated that it will maximise the use of safeguard duties. A senior government official said recently safeguard measures would be used as soon as 30% of the domestic market for any product was controlled by China.

By John Richardson

Polyolefin shipments have been held up in ports by lack of awareness among customs officers at some ports in Southeast Asia over how to implement new free-trade deals, an industry source told us.

It seems highly likely that the same applies to other chemicals and polymer cargoes.

The Association of Southeast Asian Nations Free Trade Area or AFTA agreement came into force on 1 January, as did the China-ASEAN deal or ACFTA deal.

They involve zero import tariffs on shipments of most goods between ASEAN's founding members - Indonesia, Thailand, Singapore, Malaysia the Philippines and Brunei, and between these same six countries and China.

"Lots of containers of polyolefins have been stuck in ports because customs officials are not aware of how the new trade agreements work," claimed the industry source.

"The muddle over how the new trade-agreements are supposed to work does, on the face of it, seem extraordinary when you are consider that they have been many years in the making. For example, the terms of the ACTFA were agreed eight years ago.

But a well-informed source told us: "What is needed is more well-trained staff to help with the implementation, but the budget for the ASEAN Jakarta-based secretariat is only $15m a year.

"The reason it's so low is that contributions are pegged for each country at what can be afforded the poorest members, such as Laos and Cambodia."

Equally strange seems to be the complaints from Indonesia's polymer producers and from the country's manufacturers in general over the impact of the agreements.

"The industrial sectors in Indonesia and the Philippines, and to a lesser extent Malaysia, vehemently objected to greater market access and greater competition - not when the agreements were being negotiated but during the waning days of 2009," wrote Edmund Sim, a Singapore-based trade lawyer, in a recent article.

In an interview, Sim - partner with the Singapore branch of international law firm Appleton Luff - added: "The delays were partly because all the details of the deals are easily available on the internet.

"Government officials therefore assumed that industry executives would be fully across the implications.

"This wasn't the case until the actual effects of the FTAs became more apparent as the implementation date drew near.

"Another problem in Indonesia was that people were distracted by the presidential and legislative elections, which took place last year."

Sim had told us before that those who are complaining will pretty much have to, as we say in Britain, "like it or lump it", because the likelihood of these deals being renegotiated is very low.

And so, as he explains in this ICIS news article from yesterday , we can expect more antidumping cases in 2010 from disadvantaged countries such as Indonesia and the Philippines.

By John Richardson

THE whinging is getting almost unbearable in Southeast Asia over the Asean-China Free-Trade Agreement (ACFTA).

The deal was under discussion for EIGHT years and yet chemicals and polymer producers and customers seem to have left it until after-the-fact to start raising objections.

Indonesian industry association representatives have gone as far as to suggest that 7.5m out of the country's total of 30m manufacturing jobs are under the threat as a result of ACTFA.

And at a conference in Singapore today I had to endure polymer producers from Southeast Asia moaning about not being able to compete with big bad China.

"There's no point in complaining now. What needed to happen was for industry representatives to take an active interest in negotiations for these free-trade deals right from when they first began," said a well-informed source.

"But instead this was pushed to the back of the collective mind. Clearly, China's competitive position has improved greatly since the talks started eight years ago, which is exactly why producers should have been constantly engaged in the debate.

"It will be very, very difficult to change the terms of ACTFA now because of the level of politics involved."

The approach of the Southeast Asian industry players was in stark contrast to that of their counterparts in India who managed to get petrochemicals excluded from an India-South Korea free-trade deal a few years ago, he added.

Have the lessons being learnt? Let's hope so as discussions take place for Singapore-European Union (EU), Thailand-EU, Vietnam-EU, Indonesia-EU and Malaysia-EU free-trade deals.

More on these negotiations later on.

By Malini Hariharan

After a decade of inactivity since the Asian financial crisis, Indonesia is once again drawing attention. Two news reports indicate that companies are evaluating major investments in refining and petrochemicals.

Taiwan's Chinese Petroleum Corp (CPC) is said to be planning a $2.8bn petrochemical complex at Kalimantan in Indonesia.

Indonesia's Coordinating Ministry for the Economy told the Jakarta Globe that Kalimantan was selected because of the availability of raw materials. He added that CPC planned to team up with a local partner, either a private company or a state-owned enterprise such as oil and gas major PT Pertamina. Teaming up with Pertamina would ensure feedstock supply to the project.

The interest in Indonesia comes amidst strong demand growth in the country and the constraints that Taiwanese companies face in executing large refinery and cracker investments in China. Given a choice, Taiwanese companies would rather put their money on the mainland but government restrictions, on both sides, prohibits this.

The Taiwanese have been waiting patiently for a relaxation in the rules but it appears that they are now losing patience.

But whether CPC will actually execute this project remains a question. It had looked at a similar investment in Indonesia back in 1996 but abandoned the plan after the economic crisis.

The second project relates to Chandra Asri, the country's sole cracker operator, and Pertamina joing hands for a refinery project.

Chandra Asri is said to be looking at teaming up with Pertamina for one of the three refinery projects that it has planned.

Pertamina has received a government directive to team up with other companies build three refineries within 10 years, which would reduce the country's dependence on imported naphtha.

Shortage of local naphtha has been one of the biggest problems for the country's petrochemical producers. It has affected their ability to compete with other regional players and made expansion projects unviable.

Each refinery is estimated to cost up to $5 billion, with a total combined capacity of 900,000 bbls/day of naphtha, reports the Jakarta Post.

The first refinery project would commence this year at Cilegon while the other two would be at East Kalimantan's Bontang and East Java's Tuban.

Other Indonesia petrochemical producers, such as Titan Petrochemical, Trans Pacific Petrochemical Industry, Tri Polyta and Polytama Propindo, are also said to looking at investments.

The refinery-petrochemical integration plan looks good on paper and is one that the industry has been lobbying for a very long time. But what is uncertain is whether there is sufficient commitment and if smaller players have the money.

Many of the petrochemical producers have other long-standing projects. For instance, Chandra Asri has been talking of a cracker expansion and an aromatics unit. Polytama is said to be looking at the expanding its polypropylene (PP) capacity from 280,000 tonnes/year to 440,000 tonnes/year.

Indonesia needs more capacities. Inaplas estiamtes that local PP capacity is able to meet only half of the country's demand of about 800,000 tonnes/year.

But any Indonesia project would also need to take into account the recent start of the Asean free trade area which ensures duty free flow of material from neighbouring Singapore and Thailand. Both countries have already built export-oriented capacities.

Additionally, the implementation of the China-Asean FTA is also threatening the health of the downstream sector. Many Indonesian plastics producers have already expressed concerns their future in the face of low cost Chinese competition.

Does it make sense to build in Indonesia given these uncertainties?

It just might. Feedstock availability is becoming an issue in the Middle East and there are not many projects lined up for the next 5-10 years. In such a scenario companies may well have to look at the next best alternative - building projects where markets are located.

The layout of the Pasir Gudang complex

Source of picture: Titan Chemicals

By John Richardson and Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

The consolidation talked about in Indonesia for more than ten years - that between cracker operator and polyethylene (PE) producer Chandra Asri and polypropylene (PP) producer TriPolyta - is finally set to happen by January next year.

Now it will be up to the companies to make the synergies work with the most obvious big question - which we will seek to answer on the blog - how this might bolster plans for new olefins capacity.

Indonesia's ethylene deficit is set to rise from 533,000 tonnes in 2008 to 561,000 tonnes by 2013, according to Japan's Ministry of Economy, Trade and Industry (METI).

The propylene deficit is to rise from 517,000 tonnes in 2008 to 587,000 tonnes in 2013, again according to METI.

                                            Chandra Asri

Source of picture: www.barito-pacific.com

This big import dependence has long been a drag on the economics of the Indonesian industry with an overall lack of integration another big problem.

Lack of integration is still an issue, of course, as PT Titan - the former BP-owned PE plant - is under the ownership of Malaysia's Titan Chemicals.

So if Chandra Asri were to go ahead with a new cracker investment this might well - under the current ownership structures - only benefit the economics of its own PE production and the cost and availability of propylene supplied to TriPolyta.

Titan was recently bought by South Korea's Honam Petrochemical and the South Korean major has told us of its plans to expand cracker capacity at Titan's Pasir Gudang site in Malaysia.

Will this extra ethylene be used to also improve the economics of PT Titan, a big buyer of C2s, or could it be kept at the Pasir Gudang for downstream expansions there?

Could further ownership changes be on the cards?

Watch this space.....

Michael Corleone once told his fiancee, "The old way of doing things is over - even my father knows that. In ten years time, the Corleone family will be entirely legitimitate" and ten years later he was still killing lots of people. So beware of what follows...

Source of picture: www.i-italy.com

By John Richardson

IT has been a remarkable year, one that has exceeded just about all expectations in Europe, the US and Asia as my colleague Nigel Davis wrote in an ICIS news Insight piece yesterday.

Confidence remains high that we could even be though the bottom of the cycle, as we said on Monday.

We have talked at length about the supply issues that continue to keep markets tight in certain grades of polyolefins. While overall profitability, as this Nexant ChemSystems report points out, might have been down very sharply in Q3 over the second quarter, this doesn't reflect persistently strong pockets of profitability.

On Monday we also referred to how excellent demand growth in certain geographies - most obviously, of course, in India and China - might be distorting what on a global basis remains a very shaky outlook.

But the doom-mongers, including us until the first quarter of this year when we started questioning our old assumptions, keep being wrong. What if the old ways of measuring demand growth are no longer good-enough because of an historic shift in the way the emerging-market economies are behaving?

"Look at India, China, Indonesia and Vietnam. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," a Singapore-based oil and gas consultant told the blog yesterday.

This got us thinking that the gizmos that people want today are creating much-greater chemicals and polymer demand than a macro analysis of the fundamentals might indicate.

Clever marketing campaigns and technology innovation are creating more wants that at any other time in history (in the West, though, the focus has switched back to needs).

"The standard approach is you take an estimate of GDP (gross domestic product) growth for a particular country and use that to calculate the rise in consumption of plastics and chemicals," continued the consultant.

"This has been the traditional base method, with varying degrees of further sophistication, that companies, consultants - everybody - and you as journalists have slavishly reported these numbers as if they were the gospel truth - have used in the past."

The blog now wonders whether we need deeper analysis further downstream into different end-use applications to understand the impact of emerging market growth - that stimulation of greater wants - on demand. What, for example, will be the consumption of polymethyl methacrylate into flat-screen TVS and polypropylene (PP) into autos?

"I read recently that Indian auto sales have risen by 30%. This is probably why India is reporting such strong demand-growth numbers for random co-polymer PP as you wrote about in Monday," said the consultant, who agreed with our above point.

One assumption we used to hold was that all investment bubbles had to eventually burst.

But could emerging markets behave differently because of demographic, resource availability and government policy differences with the West?

For example, property prices have increased three -to four fold in Mumbai over the past five years.

The city is short of housing (even the middle classes are being forced to live in poor-quality housing or even slums because of this shortage), and so why shouldn't price rises continue at around the same pace?

In Singapore, the property market is going sideways following government tightening measures - but limited land availability and population pressures might guarantee long-tem inflation, albeit at more moderate rates than recently.

As we said, we need more detail - more granularity - as you go further downstream which requires deeper study into the opportunities and also the risks of the emerging-market boom.

The most obvious risk is the impact on energy costs if this boom continues. Are there enough resources to meet these levels of growth?

How will making better use of resources, through dealing with issues such as water pollution and all the challenges of urbanisation, benefit the chemicals industry?

But returning to the here and now, there seems to be a deep mistrust of the conventional top-down way of looking at things.

As a result, the pessimists are not being believed as they have long been predicting another post Lehman Bros collapse, but it has yet to happen.

This represents a danger in itself in that just because a lot of the commentators have been wrong so far doesn't necessarily mean they will continue to be wrong.

But month after month when sales figures keep exceeding budget targets that have been based on some of the gloomier forecasts, what is the chemicals corporate world supposed to think?

Cloth nappies?....you have to be kidding

Source of picture: babygavin.com

By John Richardson

IT IS the biggest transformation that the global economy has probably ever undergone, resulting in numerous opportunities and challenges for the chemicals industry as emerging markets continue to boom.

The obvious opportunity is for those who can meet voracious demand growth. But where will the supply of affordable commodity chemicals and plastics come from to prevent this remarkable transformation from stalling?

Innovation will be the key at the higher end of the business, as resource constraints create the need for new technologies.

Breakthroughs will be needed, for example, to raise energy efficiency and provide clean and safe water for the tens of millions of people who every year are migrating to ever-more overcrowded cities.

But while the long-term upward trajectory seems assured as the developing world displaces the West as the main global economic driver, medium and short-term dangers abound; the most obvious one right now is a currency war.

"Look at India, China, Indonesia and Vietnam alone. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," said a Singapore-based oil and gas consultant.

"Traditional spreadsheet-based methods of measuring growth are no longer good enough by themselves. Some amazing disruptions are taking place that you need to be aware of in order for your old models to be thrown out so you can start again."

Take India as a good example, where the local polyolefin industry is working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper carriages to bedding made from non-woven polypropylene (PP).

Arguments being used include reducing what must be the enormous laundry bill incurred by the state-owned Indian Railways. And as the non-woven PP sheets and pillowcases are disposed of after one use, passengers would be guaranteed a clean bed.

Furthermore, it makes it very economically viable to recycle PP-made bed clothes, as there is only one collection point: The train's terminus.

An estimated 6bn people travel in India by rail every year. Nobody has calculated how much extra PP demand this could amount to.

But it has been estimated that if India switched entirely from sacks made of jute, a natural material, to those made from raffia-grade PP, this would create the need for an extra 1m tonnes/year of the polymer.

End-users in India and other emerging markets are incredibly cost-sensitive, however.
And in many cases, these disruptive changes are not about sophisticated polymers, as in the case above with efforts to replace sacks made from jute.

The Gulf Cooperation Council (GCC) countries in the Middle East will not supply the huge new volumes required because of a shift in strategy and feedstock availability.

Producers in India, such as Reliance Industries Ltd (RIL), and those in China are in a great position to meet the demand. Sometimes they have both location and feedstock cost advantages.

In the case of RIL, it has a strong raw materials position thanks to its huge refinery capacity at Jamnagar, in India's Gujarat state.

As for China, "the focus has swung back from refinery-based petrochemicals to adding more coal-to-olefins and also coal-to-monoethylene glycol (MEG) capacity, due to the recovery in oil prices", according to a senior source with a US polyolefins major.

"We are spending a lot of time studying the economics of our coal-to-olefins process, while also evaluating the efficiency of competitors."

It might not be too far a stretch to suggest that the US might see expansions to meet the demand for commodity plastics, thanks to shale gas.

But 45-degree straight-line growth was never going to happen.

"In Singapore, Hong Kong and across Asia, the rich investors with money to spare have been pouring too much money into property and equities," continued the above source. "They have been followed by those who are now highly leveraged, who have borrowed at extremely low interest rates."

Property-market restrictions in Singapore and China have already slowed price rises, with some early signs of reductions in China.

Inflation, however, was still a big problem in Asia, the source added.

"Official inflation rates don't always reflect what's really happening because baskets of goods included in measures of inflation haven't been adapted to reflect changes in economies.

"Governments across Asia might have to raise interest rates and if they get the timing and scale of the rate rises wrong, this could cause investor panic. Other policy decisions are possible and these carry equal risk.

"The temptation may instead be to carry on with ultra-loose monetary policy in order to prevent currencies from rising too much, as everyone struggles to deal with the weak US dollar. This will cause bubbles to inflate even more.

"A full-scale currency war is my biggest fear, accompanied by increased trade protectionism - for instance, the recent US House of Representatives vote on the Yuan. This vote sends an important signal, even if it doesn't get past the Senate or a veto by the president."

The dreaded double-dip recession might be almost upon us, unless we are lucky enough to escape for now thanks to an exceptional amount of inter-governmental coordination and compromise.

Whatever the number and the extent of the dips in growth over the coming decades, though, the overall dynamics seem irreversible.

One Singapore-based PP sales executive put it very neatly when he said: "Once you've got used to using stuff made from chemicals and plastics, you are not going to turn back, no matter what your economic problems.

"If you have young children, why on earth would you want to switch back to using cloth diapers from disposal diapers?"

We are deeply ashamed of ourselves....

By John Richardson

AT the risk of boring you completely senseless let us once again return to the subject of liquefied petroleum gas (LPG) and its likely usefulness as a cracker feedstock over the coming years.

The reason why we keep going on and on about this subject is because an extra bit of raw material flexibility could make all the difference for the marginal producers in Asia, such as those in Japan.

Even assuming you subscribe to the sunny uplands theory, if you are far to the right of the cost curve it cannot do any harm at all to look at ways of improving your returns.

Our other big motive for being a little obsessed with LPG is that as gas feedstock is short in the Middle East.

This is helping support the argument for tight supply in 2012-2013, resulting in Asian cracker operators with no current feedstock advantage searching for ways to justify ramping up their capacities.

We know of one cracker project in China which could be 80% dependent on Middle East LPG imports with the remaining 20% comprising naphtha sourced from local refineries.

And putting two and two together and maybe making five, Qatar Petroleum took a stake in Petrochemical Corp of Singapore (PCS) last November and there are plans to build an LPG receiving terminal on Jurong Island.

Qatar is where most of the LPG surplus is supposed to come from and Singapore wants to eventualy raise its ethylene capacity from 4m tonne/year to 6-8m tonne/year. QED a grassroots cracker based on LPG?

LPG markets have been unexpectedly tight this year for a variety of reasons - but as we blogged about on Monday, oil and gas consultancy FACTS Global Energy thinks this will change from 2011 as the great supply flood finally arrives.

But a South Korean industry source we spoke to earlier this week vehemently rejected any notion that LPG would be so oversupplied that it would be a good feedstock choice for green field crackers

"If you look at history the maximum LPG cracking season in any one year has been eight months and this year it's made good sense for about 8-10 days because of all the unexpected demand and supply issues," he said.

"I am convinced that this is not going to change. Supply is going to increase in a big way, sure, but it is going to be easily eaten up by incremental demand from countries such as Indonesia, India and Vietnam."

This is where a little bit of knowledge might be dangerous. What the blog wasn't aware of is the drive to use LPG rather than kerosene and wood for domestic fuel in all the above countries for health reasons.

In Indonesia, the motive behind switching from kerosene to LPG is also to end black-market profiteering from the illegal resale of kerosene. In theory, you could do the same with LPG but this would require a lot more investment in storage and distribution.

"A problem with LPG is you get slightly less propylene and fewer C4s and pygas (propylene and C4s are in tight supply) and so this also weakens the case for it as a cracker feed," our source continued.

Apologies are in order here. We had been told by other contacts that LPG cracking can produce MORE propylene. The blog has donned a dunce's hat and is sitting in the corner in shame.

"LPG will remain a useful alternative feedstock at certain times of the year, but with all the uncertainties over surpluses, why invest in even more flexibility?" our source added.

"In South Korea, Taiwan and Japan, for example, there is the capability of producing around 500,000 tonne/year of ethylene via LPG which hasn't made economic sense in 2010. Why spend money to raise this number any higher?"

Guess who's coming to Christmas dinner

Source of picture: biology.ucf.edu

By John Richardson

THE widespread problem of surging inflation in Asia ex-Japan is a major threat to petrochemicals demand growth in 2011.

Governments need to put the brakes on to prevent economies from overheating.

But the problem is that raising interest rates could cause even more hot money to flow into China, the Indian sub-continent and Southeast Asia as investors seek alternatives to feeble returns in the West.

China seems firmly set on a course of monetary tightening, as we discussed earlier this week, with further rate rises and increases in the bank-reserve requirement on the cards for 2011.

Indonesia, however, has so far refrained from raising the cost of borrowing, which has remained unchanged for 16 months, despite inflation hitting 6.3% in November.

The country's central bank is instead thinking about re-introducing a cap on rupiah accounts held by foreigners.

But, according to this article in the Economist, the reluctance to raise borrowing costs at fast-enough rates has led to private credit growth of more than 20% a year in Bangladesh, India and Vietnam.

Shortcomings in economic policy have resulted in Moody's Investors Service downgrading Vietnam's sovereign debt. This could put more downward pressure on the dong which has lost one-fifth of its value against the US dollar since mid-2008.

The effect on the country's polyolefins market is already very evident. Several traders have told the blog that their business over the last few months as all but ground to a halt.

"Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation," one of these traders, who is based in Singapore, told us.

Vietnamese polypropylene (PP) producer PetroVietman is apparently seeking to export resin, despite the country being in big PP deficit. This is presumably about earning valuable US dollars.

Such is the stagnant nature of the market that there are also reports of a trader re-exporting PP and polyethylene (PE) from Vietnam to China.

There are numerous other risks for petrochemicals in 2011, not least the strong possibility that in polyolefins and mono-ethylene glycol (MEG) new capacities will run better next year, leading to the long-awaited oversupply problem.

But inflation might turn out to be the 10,000lbs bad-tempered rhinoceros sitting in the corner of the proverbial room. No mother-in-law jokes, please.

By Malini Hariharan

Its not just China and India that have posted healthy demand numbers for last year.

Vietnam maintained double-digit growth in polyethylene (PE) and polypropylene (PP) last year, driven mainly by the local food packaging sector, reports ICIS pricing editor Bee Lin. PE consumption increased 27% to 800,000 tonnes while PP demand was up 14% at 650,000 tonnes.

Pic source: toursvietnam.net

These figures do not account for volumes that were re-exported especially in second half of 2010 when Vietnam faced a shortage of US dollars. Import activity also declined during this period.

The official exchange rate was pegged at Vietnamese dong (D) 19,500 to one US dollar for most of last year, but it was very difficult to obtain US dollars at the local banks, said local traders.

US currency was available in the black market, but at a much higher rate (more than D22,000), and that had made imports too costly for local companies, they added.

A local industry source estimated that Vietnam exported around 12,000 tonnes of PP last year.

Vietnam's first PP plant of 150,000 tonnes/year, part of the Dung Quat refinery, started operations last year. But the plant produced only around 50,000 tonnes in 2010.

In Indonesia, PE demand for 2010 was estimated at 750,000 tonnes, up 6% from the previous year, while PP grew by 8% to 850,000 tonnes. Food packaging was again a key driver.

Indonesian PE imports were expected to grow as domestic capacity was only around 750,000 tonnes/year. But PP production volumes were likely to increase from last year's 520,000 tonnes as Tripolyta planned to raise its capacity by 120,000 tonnes to 480,000 tonnes/year.

By Malini Hariharan

South Korea's Lotte Group, parent company of Honam Petrochemical, is making yet another bold move. After acquiring Malaysia's Titan Chemicals last year, Lotte has set its sights on a major petrochemical project in Indonesia.

"We will start the feasibility study to develop a petrochemical project in Merak, Banten province, this year. The investment is estimated to cost between $3 billion to $5 billion," said Shin Dong-bin, chairman of the Lotte Group, after a meeting with the Indonesian president.

Construction of the project is expected to start next year with completion within four to five years.

Lotte already has a presence in the Indonesian polyethylene (PE) market with Honam operating two plants that it obtained via the Titan acquisition.

The Titan acquisition gave Lotte a presence in Indoneisa in the form of a polyethylene (PE). Moving upstream to build a cracker to secure feedstock would appear to be a logical move.

The project appears to be part of a wider Lotte strategy that involves an expansion in the Indonesian retail sector. And Lotte is likely to receive plenty of incentives as the Indonesian government is keen to attract foreign investors.

This will be needed as Indonesia has been a difficult place to justify a petrochemical investment with competition from established players in Southeast Asia and also the Middle East. Chandra Asri, the country's sole cracker operator which relies on imported naphtha, has struggled ever since it commenced operations more than ten years back. The environment has become even more difficult after the implementation of the Asean FTA and the China-Asean FTA this year.

Details of Lotte's planned project are not yet available. It is also not clear if this is in addition to an expansion of Malaysian crackers that Honam had talked about at the time of the Titan acquisition.

And can Indonesia support multiple projects? Chandra Asri is once again talking about expanding its cracker by 400,000 tonnes/year to 1m tonnes/year and debottlenecking its PE and polypropylene (PP) plants. It also plans to diversify its feedstock slate to include liquefied petroleum gas (LPG). The company has tied up with Vopak to start construction of a terminal at the end of this year with operations to being in 2014.

By John Richardson

POLYOLEFIN end-users in China and Southeast Asia began to re-stock in significant numbers last week on anticipation that supply is going to remain tight for the next few weeks at least, the blog has been told.

"There was a feeling among the converters that because of scheduled maintenance work in August and September, prices had the potential to continue increasing,' said a Singapore-based source with a major producer.

Restocking activity has driven further price increases. Polyethylene (PE) rose by $10-50/tonne and polypropylene by $10-70/tonne in Northeast and Southeast Asia for the week ending 29 July, according to our colleagues at ICIS pricing.

The change in the market will come as welcome relief to several traders who started to build stocks during the week ending July 8, in anticipation that the converters would eventually have to bite.

However, one converter in China was reported to have built two months' worth of stocks last week with the intention of withdrawing from the market once he reaches two-and-a-half months of inventory.

"This is quite unusual as processors have only been keeping stocks of about one month for most of this year because of all the uncertainties in the market," the source with the producer added.

Several other end-users had also started building untypically high inventory levels, a Singapore-located trader told the blog.

This suggests to us that a transfer of risk - from the traders to the end-users - might have taken place rather than any fundamental, long-term improvement in the market.

Healthy inter-trade business was also reported to have taken place last week, added ICIS pricing. This suggests that some traders may have added to their exposure.

The demand outlook would have to get a lot better for any fundamental change to occur.

"Re-exporters from China (those who manufacture finished goods from imported resin) have seen a slight improvement in their orders, but you would expect this as we are entering the peak manufacturing season," the trader added.

"But generally speaking, there are no safe havens for export-based converters these days. Demand is weak in the US, Japan and Europe because of all the macroeconomic problems."

At least it looks as if the US politicians are not going to shoot themselves in their collective head. Latest reports indicate that a deal to lift the debt ceiling has a good chance of passing through Congress and be signed by the President before the 2 August.

If not, reports indicate the US might be able to carry on meeting its debt obligations for a few days beyond 2 August - until the negotiations are successfully concluded. This re-affirms what we had been told.

Oil prices and stock markets will inevitably enjoy a relief rally if a deal is reached.

Lifting the debt ceiling might also improve US manufacturing and consumer confidence and therefore the strength of the peak manufacturing.

But dreadful US macroeconomic data that was released late last week - including a downward revision of second-quarter growth - point to a very weak economy.

And even if a debt-ceiling deal is reached all the signs point to S&P stripping the US of its triple-A debt rating. This would increase interest rates and, as a result, further dent US GDP growth with further global consequences.

The head of the world's largest bond investor - Mohamed El-Erian of Pimco - told US broadcaster ABC yesterday: "Things that need to happen are not happening fast enough. If S&P sticks to what it said, it will downgrade."

And so the mood in the polyolefin market remains uncertain, nervous and resiliently pessimistic - especially when you add in the prospect of more monetary tightening in China.

"My gut feeling remains that this price rally will probably not last and that if we push it too hard, we will bring the recovery to a very abrupt halt," added the Singapore-based trader.

"Affordability remains the issue for many of the converters in China because of the increases in interest rates and bank-reserve requirements."

Interestingly, though, converters in Southeast Asia serving local consumer-goods markets are doing considerably better, he added.

"They are not constrained by the same credit issues and local economies are still booming. For example, in Indonesia the converters are working three shifts a day to keep up with local low-end packaging demand."

But no nation is an island and the blog feels that the macroeconomic headwinds are too strong for the polyolefin price recovery to last that much longer.

The question, of course, is how much longer.

"I think we should be alright until September or October because supply will remain tight until then, not only on the scheduled maintenance work but on production problems in the Middle East," added a second trader, who is based in Hong Kong.

By John Richardson

The macroeconomic headwinds are building, making it hard for some of those at the ground level in Asian polyolefin markets to foresee anything but fragile and tough trading conditions.

This is in marked contrast to the fairly optimistic outlook presented by some of the big, well-integrated and differentiated chemicals and polymer companies during the release of their second-quarter results.

Companies remained pretty confident about the second half of the year, even though they acknowledged problems in Q2 resulting from weaker growth in China, sovereign debt issues in the West and higher oil prices.

"I think the crunch time for the big, well-integrated companies won't arrive until the third-quarter results season, as the momentum from earlier this year is still strong," said a sales and marketing office with a major polyolefin producer.

For him pessimism abounds in China on weaker end-use markets for all sorts of chemicals and polymers, not just polyolefins.

The auto sector provides a good example, where sales in the second quarter of this year grew by just 2%. This compares with a 26% increase in the fourth quarter of 2010.

China's Passenger Car Association believes that auto sales could actually decline this year, for the first time since 1992. This would be the result of tighter credit and the removal of one-off subsidies designed to boost sales following the 2008 global financial crisis.

The possibility of a downward correction in property prices is also a concern - although up until June real-estate values were reported to still be on the rise.

Twenty consecutive months of credit tightening, as the government battles against inflation, has led to large volumes of unsold homes.

Supply could be further lengthened by a big building programme to provide affordable homes for average and low-income earners.

Banks are reported to have stopped issuing new mortgages because of better returns from other types of lending.

Purchasing restrictions that had applied to big cities such as Beijing and Shanghai have now also been extended to the smaller cities, where house-price inflation has recently been higher.

"What I am seeing is some of my big customers buying polyethylene (PE) just to get their hands on the credit in order to complete real-estate projects," added the sales and marketing executive with the polyolefin producer.

"They are in a hurry to complete these projects because of new government restrictions. If you don't complete within a certain period of time, you have the land taken away from you.

"There is a lot of anxiety out there about the property market."

The real-estate sector accounts for 12% of China's GDP (gross domestic product), according to the International Monetary Fund.

Polyolefin prices continue to rise, though - in the case of PE by a further $10-50/tonne with polypropylene (PP) higher by $10-70/tonne for the week ending 29 July, according to ICIS pricing. This marked the fourth week in a row that prices had increased.

End-users in both Northeast and Southeast Asia (SEA) were also reported to have returned to the market in significant numbers as they stocked-up on anticipation of further price rises.

This was a step in the right direction as the price recovery had previously been mainly the result of traders taking long positions, said several market sources.

SEA processors are reported to be running flat-out to meet strong domestic demand growth.

"The Indonesian converters I know are working three shifts a day, seven days a week. The economy is growing well and people are becoming wealthier, driving a lot of substitution of natural materials for plastics," said a Singapore-based polyolefin trader.

But the fragility of the demand from end-users in China - constrained by lack of credit and slower growth in consumer-goods sectors such as autos - remains a worry.

"My gut feeling is that if we push price rises too hard then the end-users will start to retreat," said a sales and marketing executive with a second major polyolefin producer.

"We are being helped by tight supply, which should enable us to maintain recent gains until September or October. Beyond that, though, there is little visibility."

Clouding the picture was the long-running political wrangle over raising the US debt ceiling.

The House of Representatives has approved a bill to raise the ceiling, involving a reduction in spending of about $1 trillion over the next decade. Now the Senate is expected to vote on the proposed legislation on Tuesday, US time. Both the Democrat and Republican parties expect it to pass successfully through the Senate.

Some financial analysts and economists believe that the US could still lose its triple-A debt rating, despite the debt deal.

A credit downgrade would drive-up interest rates globally.

"This debt debate is already further entrenching the pressured US consumer," said a US-based chemicals analyst.

"Businesses aren't hiring and consumers aren't spending. The global economy is largely based around the developed world's consumption of goods," he added.

"Asia is seen as the growth market while the developed nations are the foundation.

"You take away more consumer spending, which would happen if there is a default or downgrade, and it is just a ripple-down to Asia."

"Demand for Asian products would drop significantly from US consumers."

This is crucial for polyolefins, and for all sorts of other chemicals and polymers, as we are now in the peak manufacturing season.

Between August and September, Chinese manufacturers of finished goods traditionally ramp-up production in order to export to the West in time for the Christmas sales season.

Buyers of polyolefins returned to the market last week to both hedge against possible further price increases, and to stock-up for the manufacturing season.

Even without any debt default or downgrade, a weak manufacturing season seems likely due to poor US GDP (gross domestic product) growth and high unemployment.

Container freight rates had fallen by 9.3 per cent since the end of April, said Bloomberg in a report last week.

Major shipping lines were reported to be delaying introducing peak season surcharges on the Asia-US route because of weaker demand from US retailers for finished goods.

"There are no safe havens for export-based converters these days. Demand is weak in the US, Japan and Europe because of all the macroeconomic problems," added the Singapore-located polyolefin trader.

Those who buy and sell chemicals and polymers are inevitably focused on the short term, on the next deal.

So it is possible that they might miss the bigger picture.

But exactly how long does a short-term blip in growth have to last before it becomes a longer-term trend? Trading conditions in China have reportedly been weak since March this year.

By Malini Hariharan

Indonesia's sole cracker operator Chandra Asri faces yet another ownership change with Singapore's Temasek Holding reported to be looking at divesting its stake in the company.

The news report in the Wall Street Journal said several companies from Thailand, South Korea and Japan have shown interest in Temasek's stake, including Thailand's PTT Chemical and Siam Cement and South Korea's Honam Petrochemical Corp.

The Thai companies have yet to confirm their interest but a Honam source admitted that Chandra Asri is one among various foreign companies being studied for possible investment.

Acquisitions are an important part of Honam's expansion strategy and company sources have in the past confirmed that opportunities are being studied.

Taking a stake in Chandra Asri makes sense as the cracker already provide some ethylene to its two polyethylene plants in Indonesia. These plants came to Honam via the Titan Chemical acquisition that it completed last year.

It would also strengthen Honam's position in the Indonesian industry. Earlier this year, the chairman of the Lotte Group, parent company of Honam, had announced plans for new $3-5bn cracker project in the country.

But Honam is likely see competition from the Thai players. Speaking to a Thai newspaper the PTT Chem's ceo did not confirm interest in Chandra Asri but acknowledged that Indonesia is an important target market.

In an interview to the blog earlier this year, PTT Chem's ceo had said that the company was keen to expand its regional presence via acquisitions. It had last acquired a 50% stake in Cognis Oleochemicals in 2008.

Replacing a financial investor with an experienced petrochemical producer should help Chandra Asri quickly implement its expansion plans. It operates a 600,000 tonnes/year cracker at Cilegon. Downstream facilities include two PE plants, three polypropylene (PP) plants and two units for styrene mononer.

The company, which merged with Tripolyta in January this year, has announced plans for expanding the cracker to 1m tonnes/year and adding to its PE capacity. It also recently issued a contract for construction of a 100,000 tonnes/year butadiene plant.

Temasek had acquired a 50% share in the Chandra Asri back in 2006 from several shareholders, including trust fund Commerzbank International Trust Singapore. But it has since then diluted its stake to 22.9% and is said to be expecting $400m for this. The rest of Chandra Asri is in the hands of Barito Pacific.

By Malini Hariharan

Confirmation has come in from the Siam Cement Group (SCG) that it is in the race to acquire stakes in two Indonesian companies - Chandra Asri and Sulfindo Adiusaha.

"We are interested in both firms in Indonesia as petrochemicals are SCG's core business. But we cannot disclose anything at the moment because the deals are quite big," said SCG's ceo.

As mentioned by the blog last week, Singapore's Temasek Holding is interested in divesting its 22.9% share in Chandra Asri for $400m. Chlor-alkali and vinyl's producer Sulfindo owners, the Victoria Group, are said to be looking for $700m for the whole company.

SCG's interest in the chemical assets follows its acquisition of an Indonesian ceramics producer and building materials distributor earlier this year. SCG had said at that time that it would utilise cash reserves of $2.5bn for strategic acquisitions in the Asean region.

The Sulfindo asset would significantly expand SCG's share of the Indonesian PVC market which it currently serves from a 120,000 tonnes/year plant operated by subsidiary TPC Indo Plastic & Chemical.

Others interested in Chandra Asri, Indonesia's sole cracker operator, are Thailand's PTT Chem and South Korea's Honam Petrochemical. And Hanwha Chemical is said to be interested in Sulfindo.

By John Richardson

"IF we build polymer capacity in India the demand will come," a very senior industry executive told the blog last year. He amplified this statement by explaining that greater availability of plastics would always stimulate strong demand growth for low-end packaging materials etc in emerging markets in general, as the poor became a little less poor.

Back in May 2010, when he made this statement, India, China and other developing countries such as Indonesia and Vietnam were enjoying soar-away growth. "Decoupling" from troubled Western economies was once again in fashion.

Confidence was high at last May's Asia Petrochemical Industry Conference (APIC) in Mumbai as many of the delegates talked about tight markets by 2014-15.

The search for new locations for new capacity was already on to serve this voracious emerging-market growth, given that Middle East ethane supply is so severely constrained.

The momentum continued into late 2010 as JP Morgan published its famous SuperCycle theory, claiming that it didn't matter what happened in the US and other Western markets. Incremental polyethylene (PE) demand growth would be so strong in China that a decline in US consumption wouldn't even matter on a global basis, the bank claimed.

Investors in commodities and equities etc quite often have very short-term perspectives and so don't really care whether theories, such as the one above, turn out to be true over a period of years. All that matters to these investors is that enough people believe a particular idea over a millisecond (in the case of the high-frequency traders), an hour, a day, a week, a month or a quarter.

But it is the job of senior chemicals industry planners to see through all of this.

Right up until this May's APIC, in Fukuoka, Japan, there was still talk of a peak in the cycle by 2014-15 and the need for lots of new polymer and other plants.

Denial continues in some quarters.

"Even though chemical and industrial stocks have been hammered, 2012 profit estimates still show 20%+ gains across the board for the group. Even second half 2011 estimates show double-digit earnings growth," said an industry observer yesterday.

Emerging markets cannot by themselves provide enough momentum to save the world from a new recession - and quite likely a new Great Depression.

As we highlighted on Wednesday, China faces a debt crisis that could destabilise its financial system and across the developing world, inflation threatens growth.

And as we also point out in Chapter 4 of our e-book, Boom Gloom and the New Normal, what it means to be "middle class" in China and India is radically different from the West.

Low-end packaging sales might benefit from the poor becoming slightly less poor in India and China and other emerging markets.

But average income levels are way below those in the West, meaning that "decoupling' was always a fallacy for manufacturers of mid-range and high-end consumer goods. It will take several decades for emerging-market average earnings to catch up with those in the US and Europe.

Even the alleviation of rural poverty is now under threat, putting into question the argument made by the senior executive we quoted at the beginning of this post - that if polymer capacity is built in countries such as India, demand will come.

The latest issue of the World Bank's Food Price Watch shows that global food prices in July were 33% higher than a year earlier.

Maize was up by 84%, wheat by 50% and live hog prices in China were 50% higher.

In India, the wholesale prices of rice and wheat were 9% higher in the first week of August from the same period last year, says the Australian Financial Review.

Food-price inflation is also a problem in Indonesia, Thailand and Malaysia.

In 2008, during the last big run-up in global food prices, the World Bank estimated that 105 million people were pushed into its definition of extreme poverty. A further 44 million people are now faced with being pushed into extreme poverty, it adds.

Fundamentals are thought to be mainly the cause of this latest rally in food prices, as opposed to the speculators who were blamed for what happened in 2008.

The fundamentals include poor harvests caused by bad weather - and changing diets in the developing world as the relatively small but super-rich upper-classes eat a lot more meat. This is taking land away from cereal production for food, as is the rise in the use of biofuels.

A further problem is that the supply of arable land in China has been reduced due to the surge in real-estate construction since 2008, enabled by the country's huge economic stimulus package.

In the longer-term, how does the world properly feed itself when you also take into account water shortages and climate change, if you believe that climate change is real?

Later chapters in the book will look at megatrends such as food and water. We will discuss the opportunities, as well as the challenges, that these megatrends represent for chemicals companies.

All the problems we now face are highly complex, global in nature and constantly evolving -and so this is very much work in constant and difficult progress.

But what is already crystal clear is that there is no going back to the old approach of simply building a plant on the assumption that demand will inevitably expand to consume its capacity.

By Malini Hariharan

After picking up a 30% stake in Chandra Asri, the Siam Cement Group (SCG) is looking to seal its next Indonesian buy.

Two companies, SCG and Japan's Itochu Corp, are reported to have advanced to the second round of bidding for chlor-alkali and vinyls producer Sulfindo Adisuha. The deal is expected to be worth around $700m.

The two companies are among three or four parties short-listed for the second phase of bidding after the sale process attracted 8-10 parties in the first round.

But SCG stands a good chance of winning the race especially after South Korean major, Hanwha Chemical, decided to drop out.

As reported by the blog earlier, Sulfindo would fit well with SCG's existing product portfolio and help it expand its share in the growing Indonesian market which it currently serves from a a 120,000 tonnes/year plant operated by subsidiary TPC Indo Plastic & Chemical.

Sulfindo produces 262,000 tonnes/year of caustic soda, 295,000 tonnes/year of ethylene dichloride (EDC), 100,000 tonnes/year of vinyl chloride monomer (VCM) and 80,000 tonnes/year of polyvinyl chloride (PVC).

The move also confirms SCG's commitment to expand its position in Indonesia. Earlier this year the Thai conglomerate completed the acquisition of an Indonesian ceramics producer and building materials distributor.

If successful, Sulfindo would be SCG's largest overseas acquisition. The company certainly has the money - it had said earlier this year that it would utilise cash reserves of $2.5bn for strategic acquisitions in the ASEAN region.

 DSM's Dyneema replaces steel in offshore ropes

Source of picture: offshore-technology.com

By John Richardson

THE polyethylene (PE) shopping bags that get thrown away in their millions every day are some considerable distance down the value chain from DSM's Dyneema ultra-high molecular weight PE (UHMWPE for short).

Applications for Dyneema® include stopping bullets (it is used to make bullet-proof vests and protective panels for military vehicles, for example), and manufacturing ropes that moor oil tankers.

Understandably, therefore, the Dutch life sciences and material sciences company is keen to stress the amount of research and development and technical service that goes into Dyneema®, as attempts are made to both grow existing markets and develop new applications.

"It is 15 times stronger than quality steel, and 40% stronger than aramid fibres, on a weight-by-weight basis," said Marco Kleuters, vice president, DSM Dyneema Life Protection, APAC.

Other qualities highlighted by Kleuters include its cost effectiveness compared with steel and synthetic rope, its chemical resistance and, despite Dyneema's strength, the fact that it is light in weight.

How exactly it is manufactured is obviously a closely-guarded secret, given the high value nature of its applications.

Manufacturing involves a proprietary gel-spinning process.

Dyneema® is produced by DSM Dyneema at three locations, namely Heerlen, the Netherlands; Greenville, North Carolina, United States and Flaach, Switzerland. It is also produced in Japan under a joint venture with Toyobo.

DSM Dyneema's production base was recently extended to China following its successful completion, on 30 September, of the acquisition of a 91.75% in Shandong ICD High Performance Fiber Co. Ltd. (ICD), based in Laiwu, Shandong province, China. The takeover was first announced in February.

ICD produces a high-performance fibre for the local Chinese market.

Where the discussion gets more revealing is the development of the existing and new uses for Dyneema® that will take place at DSM's APAC Technical Centre in Singapore. The company announced plans to invest in the centre in early October. It will become fully operational in the fourth quarter of next year.

"The centre will house Singapore's first independent ballistic firing ranges (i.e. not part of a military facility)," added Kleuters.

The technical centre's 2,500 squares meters of floor space includes two ballistic testing ranges, as well as high tech equipment and testing laboratories. This will enable comprehensive testing to be carried out on the full range of Dyneema's personal and vehicle protection applications.

The centre will also be involved in R&D work into fibre applications for Dyneeema® (personal and vehicle protection applications involve UHMWPE tape woven into sheet structures), and fibre solutions in general.

Fibre applications include those in the renewable energy sector - for example, wind propulsion systems for the marine industry, which are based on large, automated towing kites.

DSM Venturing - DSM's corporate venturing unit - made an investment in the German-based manufacturer of these towing kites, SkySails GmbH & Co, in January of this year. The size of the investment wasn't disclosed.

"Under optimal wind conditions, fuel consumption on ships can be reduced by 50% through using these towing kites," Kleuters added.

Other applications for Dyneema® include:

*High Protective Textiles: Lightweight safety gloves and garments containing Dyneema® offer higher levels of cut protection, flexibility and comfort. With high abrasion resistance, gloves and garments can be washed and re-used several times, increasing their shelf-life

*Sports: Dyneema® gives yachting lines, sail cloth and rigging the same strength but up to half the weight of traditional materials such as polyester and aramid fibers. Fishing lines are easier to cast and retain their original shape. Kite lines made with Dyneema® have a higher stiffness combined with low elongation make steering easier.

PE has clearly come an awful long way from the 1930's, when the former UK company ICI brought the first-ever commercial-scale plant on-stream, primarily for only one application area - wire and cable.

And for a thermoplastic that is often derided as "throwaway rubbish" and bad for the environment, DSM can justifiably argue that this is a gross over-simplification.

By Malini Hariharan

There have been no headline-grabbing deals but bit by bit PTT Global Chemical is extending its business beyond Asia and entering new product areas.

Yesterday, PTT Global announced plans for a joint venture with Perstorp Holding France in toluene diisocyanate (TDI), aliphatic isocynates such as hexamethylene diisocyanate (HDI) and derivatives.

PTT Global will have a 51% share in the joint venture, which includes Perstorp's coating additives group with manufacturing sites at Pont-de-Claix in France and Freeport in the US

The transaction, subject to approval, will also give PTT Global access to technology and is part of a strategic move into the 'high volume specialty downstream business'.

The joint venture is likely to invest in new plants as well boost R&D spend to improve operations efficiency to strengthen the competitive position.

It has been a busy year for PTT Global, formed after the merger of PTT Chem and PTT Aromatics.

PTT Global successfully bought a 50% stake in US-based polylactic acid maker NatureWorks from Cargill for $150m. It also invested $60m US-based Myriant Corp which makes bio-based chemicals.

But it lost out to Siam Cement for a stake in Chandra Asri, Indonesia's sole cracker operator.

Meanwhile, Siam Cement and Barito Pacific, the joint owners of Chandra Asri, are planning a public offering on the Indonesian stock market to raise funds for a cracker expansion. A borrowing from the banks is also being considered for the project which will raise ethylene capacity to 800,000-1m tonnes/year from the current 550,000 tonnes/year.

A final decision on the project is due next year.

"Only 5% of CAP's shares have been floated in the Indonesia stock market. We're thinking of increasing that to 20%," said Cholanat Yanaranop, president of SCG Chemicals to a Thai newspaper.

And SCG is still waiting for a decision on its bid to acquire Indonesian vinyls producer Sulfindo Adiusaha.

Its cracker project in Vietnam is still alive with the government offering fresh incentives. The $4.2-billion project has been given a 30-year tax exemption on propane, butane, naphtha, industrial salt and coal, as well as a 3% tax rate products such as polypropylene (PP) and polyethylene (PE) for 10 years.

By Malini Hariharan

Honam Petrochemical's plans for Indonesia appear to be progressing.

Company sources told ICIS news yesterday that a feasibility study is underway for a $4-5bn petrochemical complex in Southeast Asia with Indonesia the most likely location. The study is likely to be completed by early 2013.

Meanwhile, Indonesia media quoted senior managing director of business development, Kim Gyo-hyun, as saying that Honam, part of the Lotte Group, has selected a site at Cilegon in Indonesia. The report also said that the complex would include a 1m tonnes/year naphtha cracker and plants for 600,000 tonnes/year of polyethylene (PE), 600,000 tonnes/year of polypropylene (PP), 700,000 tonnes/year of monoethylene glycol and 140,000 tonnes/year of butadiene. He expected the project to be completed by 2016.

But company sources that ICIS spoke with declined to confirm project details.

Feasibility studies for the project are ongoing and the company has not decided on the configurations of the new complex, which will likely include a cracker and other downstream units, the Honam official said.

"The specifications for the new complex will highly depend on EPC [engineering, procurement and construction] contract costs as well as governmental tax benefits," the official added.

A project in Indonesia makes sense given the country's growing deficit for petrochemicals, especially polymers. But government support, which has been missing in the past for petchems, is important.

By John Richardson

Word for word, see below what an Asian polyolefins trader told us yesterday:

"This year has been absolutely terrible, the worst I can remember in eight years in this business, and even worse than 2008. There is just no demand out there.

"There was supposed to be a recovery after the Chinese New Year, everybody seemed to be banking on that, including us, but it just didn't happen and isn't going to happen, I don't think.

"Any activity that's taking place at the moment is almost entirely between the traders - the end-users in China are just not interested.

"What's worrying is that the negative mood has started to spread from China to Vietnam and Indonesia, which have been better markets so far during 2012. End-users in Vietnam and Indonesia have started to pull back from orders.

"There are a lot of re-exports of polyethylene (PE) from bonded warehouses in China because of the weak demand, which is reflected in the wide gap between import and domestic prices - around $150 a tonne. The re-exports are mainly heading to Indonesia and Vietnam. This is one of the reasons why sentiment there is weakening.

"A lot of re-exported polypropylene (PP) from China is heading to India and South America.

"I think the reasons for end-users in China remaining so cautious include rising labour costs, the lack of availability of labour and credit.

"I heard about bank lending being increased in March by more than the banking analysts had expected, but we are not seeing any evidence of that among our customers. They remain short of credit. I think this is probably because most of our customers are small and medium-sized enterprises and most of the extra lending has gone to the big companies.

"Uncertainty in general is still dominating the mood, whether it's over economic reforms and politics in China, politics in Europe and the US, the Eurozone debt crisis and US economic growth.

"Labour costs have gone up hugely over the past six years. It used to be you could employ a worker in a packaging plant, a low-skilled manual worker, for Rmb800-1,000 a month. Now it costs Rmb3,300.

"What is strange is that there is a real shortage of unskilled workers, but a greater availability of skilled workers - and with a skilled worker, when you take into account greater productivity, you get better value for money.

"I have noticed a change in attitude among the 1990s babies compared with their parents. They expect wages to increase every year, they expect better living and working conditions, and they expect not to have to work as hard.

"Another thing I am noticing among my customers is greater automation, as manual workers are harder to find and a lot more expensive. They would rather invest in machinery than in people."

Martin Brudermüller

Source of picture: BASF

By John Richardson

"THE struggle over China's future direction seems to be harder fought than we had imagined," said BASF vice chairman Martin Brudermüller last Thursday, in a German newspaper interview.

"There are very intensive discussions being held in China about the direction the country should take.

"For investors, the times when a project was unanimously rubber-stamped by politicians are over."

As fellow blogger Paul Hodges points out, when the world's biggest chemical company makes a statement as bold as this, one should sit up and take notice.

And so, here are our thoughts.

BASF might be right to worry about China's uncertain direction because:

*There are no guarantees that the 12th Five-Year-Plan 2011-2015), which involves a radically new economic blueprint, will be effectively implemented. This is a result of all the uncertainty over who will lead China following this year's leadership transition.

*Even if the plan succeeds, GDP (gross domestic product) growth could be a lot lower than many economists assume over the next decade, due to the painful process of weaning China off its addiction to investment.

*And if the plan fails, then China could end up pouring ever-more money into inefficient investments with ever-decreasing benefits as domestic demand remains relatively weak.

His comments on project approvals follow those made by Peter Huntsman, CEO of Huntsman Corp, during an investor call two weeks ago.

In the short term, the uncertainty over who will lead China might be making investors very nervous.

Relationships are important and if you end up building strong connections with the political faction that fails to gain control, then you have problems.

And even if companies choose the right faction, there is a big risk in these highly uncertain economic and political times that investment policies will be in constant flux.

Longer term, China might also become far-more self-sufficient in petrochemicals than some people have assumed.

On India, Brudermüller said: ""India is recording growth but the market is feeling the effects of home-grown problems, such as the backlog of reforms and the caution of foreign investors in reaction to questionable legislation.

"The political paralysis in certain areas does hold things up, and it's sad to see how the country is currently falling short of its potential."

India has muddled through in the past, but cannot afford to do so in the future.

Brudermüller, however, said that Southeast Asia (SEA) continued to perform well.

Indonesia alone, with its 240m people, was averaging stable growth of more than 5% per year, he added.

Meanwhile, Malaysia could become an even stronger export base, Vietnam was gaining in stature through its manufacture of shoes, textiles and printers, and Thailand was becoming increasingly important for international automotive and electronics value chains, Brudermuller said.

"We will also need to look more closely at Myanmar in the next few years, for example in the field of crop protection and the expansion of labour-intensive manufacturing," he added.

Geographical diversification is important at a time when growth so uncertain in India and China.

Even if reform in China is effective, there will be changes in the patterns of demand growth as low-value manufacturing migrates from the southern and eastern provinces either into inland China, or overseas to SEA and elsewhere.

Source: Wang Feng, director of the Brookings-Tsinghua Center for Public Policy in Beijing, from an article published in the China Economic Quarterly.

By John Richardson

ONE of the explanations for China's disappointing petrochemicals demand growth during 2012 is that even where export-focused factories in southern and eastern China can find sufficient orders to run their plants at high operating rates, they are struggling to find enough workers.

Earlier this year, we were told that labour supply had gone beyond a tipping point when millions of migrant workers failed to return to from the countryside to China's cities and towns after the Chinese New Year.

"We have been talking about this type of labour-supply problem for three years, but only now has it become really significant. Workers are remaining in their rural homes because of the success of government efforts to boost income levels in western China," said a senior executive with a global polyolefins producer.

A further factor is the high cost of living in China first-tier cities.

The impact of China's one-child policy is another reason for labour shortages in the south and the east.

And now a survey by the Chinese Manufacturers' Association of Hong Kong, which was released earlier this month, reported that that 90 percent of respondents were struggling to hire workers. Fourteen percent also said that they were short of the number of staff they needed, compared with 11 percent in last year's survey.

"One reason is the Guangdong government's December (2011) decision to suspend a planned increase in the minimum wage," wrote the Financial Times in a post on its Beyond Bricks blog.

"At the time, that decision was cheered by factory owners who were already struggling to cope with a 21.2 per cent rise in minimum wage imposed in 2010," continued the post. 

"The flip side is that even fewer migrant workers now feel it's worth their while to work in the province, where the cost of living is among the highest in the country."

What is China's loss in low-value manufacturing is often said to be the automatic gain of countries such as Indonesia and Vietnam.

But as Stephen Moore, director of the Singapore-based chemicals and plastics consultant Interdecent Asia, points out, "re-shoring" away from China is more complicated for manufacturers than it at first might seem.

"The plastic toy industry is, for instance, pretty much stuck in southern China because the design and manufacturing is also located there," said Moore.

"Most of the design and manufacture of toys is located in Guangdong province, which means that the process of getting toys to market is highly integrated," he added.

"This makes it more difficult to easily shut down production and move to a lower-cost country, even though it now costs $400 a month to employ a manual worker in China, compared with less than $200 in Indonesia. Five years ago, labour costs in China were also less than $200 a month."

He said that many toy manufacturers were family-owned and their founders were reaching retirement age, and so they didn't want the upheaval of relocating production.

"Also, many of their sons and daughters, who are probably wealthy enough never to have to work, are not interested in continuing in the family business, which is adding to the inertia," he continued.

The footwear industry was very different, making it much easier to shift production to other countries such as Indonesia and Vietnam, he added.

"The reason is that when labour costs became too high to manufacture shoes in Taiwan and South Korea during the 1980s-1990s, production was shifted to China, but design remained in Taiwan and South Korea," said Moore.

"As a result, in theory it is pretty easy for the Taiwanese and South Koreans to not renew a contract with a contract manufacturer in China or shut down their own plants there and shift production to, say, Indonesia or Vietnam."

The footwear industry has been the subject of numerous media reports detailing the big shift in manufacturing away from China, but Moore said that it was important to keep the real extent of the manufacturing migration in context.

"In 2010, which is the latest figures we have available, 7.6bn pairs of rubber and plastic shoes alone were made in China (this includes training shoes)," he added.

"This compares with just 380m pairs in Vietnam, 5% of the total in China. Indonesia is the world's second-largest exporter of training shoes, but it probably made around 10% of the total number of plastic and rubber shoes as China in 2010."

The plastic toy and footwear industries in China are major consumers of domestically produced and imported chemicals and polymers.

Source: http://www.economist.com/

 By John Richardson

RISING China labour costs are compounding weakness in the manufacturing sector and thereby, of course, damaging chemicals and polymer markets.

The country's garment exports fell by 0.2 percent in the first seven months of this year, compared with a 24 percent increase in January-July 2011, says the Association of Chinese Textile Exporters.

China's garment exports totalled $250bn in 2011, which could well mark an all-time peak as China tries to move up the manufacturing value chain - a key objective of its 12th Five-Year-Plan (2011-2015).

Meanwhile, the association estimates that Japan's imports of garments from Southeast Asia rose 22 percent in H1 2012. What is China's loss is a gain for countries such as Vietnam, Indonesia and Bangladesh that have lower labour costs.

But, of course, the timing for China could not be worse. The impact of higher labour costs is occurring at a time of weak global growth. This was reflected in the final reading of the HSBC August China purchasing managers' index, which fell to its lowest level in three years.

As China's textiles industry struggles, a great deal of new domestic purified terephthalic acid (PTA) capacity is being brought on-stream. Eleven new plants are due to start-up over the next three years, with a total capacity of 18.5m tonnes/year. The country's total PTA capacity is due to reach 39m tonnes/year in 2015 - double that of 2011, according to ICIS.

These new plants will benefit from low-cost local supply of paraxylene (PX), and are likely to have also benefited from cheap financing.

The outlook for exporters of PTA to China is therefore not good.

Graph prepared by The Economist

By John Richardson

INDONESIA has enjoyed eight consecutive quarters of 6% GDP growth and so - along with several other mainly domestically-demand driven Asian economies - is viewed as a haven of stability in an increasingly uncertain world.

The country's 2012 demand growth for polyethylene (PE), polypropylene (PP), polystyrene (PS), polyvinyl chloride (PVC) and acrylonitrile-butadiene-styrene (ABS) will be 7.5%, according to the Indonesian Olefin & Plastics Industry Association (INAPLAS).

Around 50% of Indonesia's polyolefins demand is covered by imports, with substantial imports of ethylene and naphtha also needed to meet the very steady, and very strong, demand growth, says ICIS.

Hence, notwithstanding problems with bureaucracy and an unclear regulatory environment, Chandra Asri plans to build an $8bn refinery and expand ethylene capacity, while also adding a butadiene extraction unit. Honam Petrochemical, which owns PE assets in Indonesia, has plans for a 1m tonne/year grass-roots cracker, adds ICIS. 

Indonesia has done a fantastic job to recover from the economic misery inflicted by the 1997-1998 Asian Financial Crisis. Along with Thailand and South Korea, it suffered enormously from the collapse of its currency against the US dollar. This led to soaring inflation and unsustainable debts dominated in the greenback.

Since the crisis, the affected countries have switched from dollar debt to investment by foreigners in local equity markets and lending in domestic currencies.

There is also talk of "macro-prudential policies" smoothing out the peaks and troughs of economic cycles.

But, as The Economist writes: "Wise monetary policy was also one of the reasons cited for the Great Moderation enjoyed by the G7 economies.

"Another was the supposed depth and sophistication of the rich world's financial systems, which, it was said, allowed households to smooth their spending, firms to diversify their borrowing and banks to unburden their balance-sheets.

"Both of these pillars of stability proved false comforts. Economists had not quite settled on an explanation for the Great Moderation before it inconveniently ceased to exist."

Hyman Minsky believes that drops in volatility allows firms and households to borrow more of the money they invest, the magazine continues.

"Stability, in Minsky's formulation, eventually becomes destabilising. Over-leverage does not require excessive optimism, merely excessive certitude; not fast growth, merely steady growth," it adds.

According to Fred Neumann of HSBC, Asian leverage is now higher than at any time since the Asian Financial Crisis (see the above chart).

Excessive exuberance might also be driven by possibly misplaced confidence over China's economic future.

The Indonesian manufacturing sector faces the additional problem of very competitive imports from China, including of finished BOPP film, as a result of  overcapacity in China and the Asean-China Free Trade Agreement.

These imports could well increase as China's economy further decelerates and it attempts to unburden itself of huge inventories of finished and semi-finished goods.

By John Richardson

THE global chemicals industry became used to healthy and steady rates of demand growth during the "Great Moderation" in the West, before the 2008 crisis.

As fellow blogger Paul Hodges wrote in January of this year: "Executives could usefully spend time debating whether ethylene growth rates might be 4.2%, or perhaps 4.5%, or only 4%. The history of the past three years teaches us that the margin of uncertainty has greatly increased."

Change "three years" to "almost four years" and this analysis has stood the test of time. 

The "margin of uncertainty" hasn't gone away since January; in fact, if anything, it has increased as, for example, it has become more widely accepted that there are no longer any guarantees that China will carry on booming.

And yet some planning processes still don't adequately take into account the fundamental and deeply-rooted changes in how the world works, according to an Asian-based chemicals industry executive.

"We tend to take constant growth as a given. In the annual planning process it is almost heresy to talk of zero growth, leave alone negative growth," he said.

Chemicals and polymer markets have sometimes underperformed growth in overall GDP (gross domestic product) since 2008, most notably in China, as economic complexity has increased.

And yet, he added: "The general expectation is that growth will (still) be at least in line with GDP if not a multiple of it.

"The other expectation is for growth at a rate above the average for the industry/segment. No time or effort is really spent in trying to understand or plan how this growth is going to be delivered - by grabbing market share, by substituting competing materials, by increasing penetration of the product in an application, by increased usage, etc."

But while this "top down" approach to planning might prevail in some companies, he said that there was a great deal of effort being devoted to being close to chemicals end-use markets. This understanding is being fed into chemicals investment and sales and marketing strategies.

Good people on the ground, in places like China and India where the biggest opportunities still remain, seems to be the key.

The opportunity was defined by the executive as the hundreds of millions of people who have emerged from poverty. In China, for instance, most people now earn less than $10 a day compared with a majority who earned less than $2 a day in 1991, according to the Asian Development Bank.

"This tremendous potential is already being tapped by smart local entrepreneurs," he said.

"Addressing such markets needs a very thorough understanding of the customer, their hierarchy of needs, their thinking process, a high degree of customisation of products and a very different business model."

The route that most big manufacturing companies took to tap into these markets was to acquire the local players and then apply their best practices in procurement, supply chains, logistics and marketing, he added.

"The reason most of them fail is that they simply acquire the franchise and the operations; they never acquire the fundamental knowledge and understanding of the behaviour of consumers, their psyche, their decision drivers and the countless other elements that govern buying decision.

"You then have a situation where the local entrepreneur starts anew under a new name and takes back most of the market."

But he added that were a few companies, such as Unilever, Nestle and Cadbury in India, which had made excellent inroads.

"One reason for their success could be that all of these companies have been around in India for over 50 years, are locally incorporated companies, and have a very distinct local culture and operation style," he said.

"They have learnt their lessons the hard way and have benefited from it."

In India, for example, consumer products companies such as Unilever have taken advantage of the huge boom in demand for single-serve pouches, which contain extrusion-grade low density polyethylene (LDPE).

Many Indians are too poor to afford, say, a full bottle of shampoo - hence, the popularity of the pouches, or sachets.

How demographics will shape future demand patterns also needs to be built into planning processes, said a North American-based chemicals industry executive.

"The business mindset will need to be re-orientated in order to take into account the demographics of Western markets," he said.

"A new value proposition will need to be developed for ageing populations.

"A bigger service sector-focus will be needed to meet the needs of retirees who have longer life spans. We all know the service sector primarily redistributes wealth and does not create new wealth for the economy. So, slower GDP growth has to be the outcome."

India faces a different demographic problem, which is finding enough work for its youthful population. More than 50% of its population is below the age of 25 and more than 65% below the age of 35, according to the Indian government's 2011 census.

This is an opportunity as much as a challenge.

"Young people in India, and other developing countries with youthful populations, now have much-better access to money than used to be the case," added the North American-located industry executives.

"The older generation believed in saving for years in order to accumulate enough money to buy houses and automobiles. This was primarily caused by inadequate financial tools available to the common person."

But, as a further example of just complex and volatile the world has become, the old certainties over India have also disappeared in 2012.

Economic growth and business confidence have declined as a result of infrastructure bottlenecks and growing concerns over corruption and a weak political system.

Income inequality had doubled in India over the previous two decades, making it the worst performer by this measure of all emerging economies, said a December 2011 Organisation for Economic Co-operation and Development report.

The top 10% of wage earners made 12 times more than the bottom 10%, up from a ratio of six in the 1990s, added the same study.

"India's statistics on health, malnutrition and infant mortality are worse than those for some countries in sub-Saharan Africa, with the nation accounting for 20% of the world's infant deaths," said an AFP report on the World Economic Forum India, which took place in Gurgaon, India, on 6-8 November.

It seems almost certain that in November 2013, we will be looking back on another year of even greater economic complexity and uncertainty.

By John Richardson

SOUTHEAST (SEA) polyolefins demand grew by 15-20% last year in some of the region's emerging countries, such as Indonesia, according to a source with a major global producer.

Confidence is high as overseas money pours into super-hot property markets in Indonesia and Thailand. In Indonesia, property prices have risen by as much as 300% in the last few years in US dollar terms (yes, that's not a typo - 300%!), according to the same source and in certain parts of Bangkok, condos have reportedly doubled in value over the past three years.

Several polyolefin industry contacts we spoke to talked about plastic converters who bought land years ago and have since subdivided that land and sold it to property developers at vast profits.

But whilst stronger polyolefin volumes in SEA are good news for producers seeking to compensate for flat or even negative growth in China this year, as a source with a second producer pointed out, "Southeast Asia is no China as its total volumes are relatively small."

And the other concern, of course, is that events in SEA remind many people of the build-up to the 1997-1998 Asian Financial Crisis, when overheated economies suddenly collapsed. Capital flows can so easily be reserved.

This excellent article from the Christian Science Monitor is worth reading on the subject of parallels with the pre-crisis era.

Much of the advances of the 1990s were lost because of failures to tackle corruption, improve education and invest in infrastructure, says the article.

HSBC wrote in a recent report on the Philippines: "The country faces considerable challenges. Infrastructure in much of the country remains poor and corruption is widespread, despite progress under Mr. Aquino's [the president's] administration. Growth has generated pockets of urban prosperity surrounded by vast areas of grinding poverty and few jobs."

An IMF report, released earlier this week, suggested four ways in which Asia's emerging economies, which they  categorise as China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam, can avoid the middle-income trap.

They are:

• Invest in infrastructure. IMF analysis suggests that subpar infrastructure is a key factor that can check an emerging economy's growth. India, the Philippines and Thailand are particularly exposed in this area and should focus on building new and upgrading existing public transit systems, freight channels, ports and energy infrastructure.

• Guard against excessive capital inflows. Money flows from abroad can energise an economy and give domestic consumption a boost, but can send an economy south if investors retreat in a hurry. Policy makers should have macro-prudential controls in place to mitigate potential rapid outflows.

• Boost spending on research and development and post-secondary education. Both are needed to foster the innovation that's a hallmark of advanced economies. Malaysia and Thailand have the highest college enrollment rates among emerging Asian economies, but China is rapidly catching up, according to IMF data. China far outstrips other developing Asian countries on R&D, with 2009 spending at more than 1.5% of GDP.

• Get more women into the workforce and raise the retirement age. Ageing populations are a problem in much of Asia. Governments can take steps to reduce "dependency ratios" by raising the age when workers are eligible for pensions and encouraging girls to enter university and vocational training.

By John Richardson

EVIDENCE that China is no longer acting as the growth engine of the world, because it is too busy dealing with internal adjustments, is mounting.

For example, on Tuesday of this week Taiwan announced that its year-on-year Q1 2013 GDP growth had fallen to just 1.5%. This was less than half of the 3.7% growth recorded in the previous quarter and well below forecasts of 3.1%.

As this Beyondbrics blog post points out: "By global standards, Taiwan is a smallish economy. But with its trade links to the rest of the world, it serves as a useful harbinger. And this is not good news.

"Taiwan's economy is heavily reliant on trade, particularly of electronic goods, leading many economists to worry about the impact of recent disappointing growth in China, where economic growth slowed to 7.7% [again in the first quarter].

"Taiwan's first quarter stumble follows weaker-than-expected production and export figures that show demand for Asia's exported goods is unsteady. Taiwan's export orders, which include orders for goods to be exported from Taiwanese-owned factories in mainland China, fell 6.6% in March."

The chart above illustrates how Taiwan's export-vulnerable economy serves as a very good indicator of changes in global economic growth patterns.

Yesterday, we discussed Southeast Asia. Despite the economic boom in that region, some of its heavily trade-exposed economies, such as Singapore's, are likely suffering from the slowdown in China.

What worries the blog is that many chemicals companies may have assumed much-higher growth rates this year for demand, based on misplaced confidence in China's willingness to sustain its Q4 2012 rebound in growth.

The 2013 Asia Petrochemical Industry Conference (APIC) takes place in Taipei on 9-10 May next week. We will be there and will be keen to observe if a more realistic view of the world now prevails.

Realism isn't the same as pessimism. In the long term, the opportunities in China remain enormous for chemicals companies with the right strategies.

By John Richardson

A MAJOR Southeast Asian polyethylene (PE) producer has reduced its percentage of exports to China from 30-40% in 2012 to just 10% so far this year, a source with the producer told the blog on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Taipei.

This is further confirmation of the huge long-term changes taking place in China's economy as its government forges ahead with rebalancing.

"We have managed to compensate for the drop in business to China by raising our intra-ASEAN [Association of Southeast Asian Nations] exports," said the source.

Demand growth in the ASEAN region remains strong. For example, PE consumption in Thailand is expected to expand by around 5% this year, in line with the growth in overall GDP. In Indonesia, demand is expected to increase by more than the anticipated 6% rise in the country's GDP.

But the question on the minds of several delegates at the event was to what the extent the ASEAN economies would be impacted by the slowdown in China, particularly heavily trade-exposed Singapore.