Asian Chemical Connections

For us lesser mortals further down the slippery career pole, it is easy to stare up with envy and contempt at the CEOs of our own companies and other companies.

Many us at times feel (myself included) that we could do a great deal better than our bosses.

I plan to develop a CEO board game with online and "hard copy" versions complete with chance cards such as "You get caught price-fixing at a major industry event. Do not pass Go and do not collect $2,000. Go straight to jail". The reference to Monopoly wasn't meant to be a dreadful pun.

We could then put our supposed superior skills into practice and prove whether we are really cut out for life at the top. And maybe if the game was accurate enough, it could be used to help assess real applicants for the top jobs. Watch this space for a prototype.

In the meantime, management consultants, as you well know, make a fortune from offering all kinds of advice to companies and their CEOs about how to make it big.

This is not always money well spent, according to Victor Newman - former chief learning officer at Pfizer - who is now what he calls an independent Knowledge Activist.

In his excellent video, 4 Faces of CEO, he talks of how one particular consultancy charged several million dollars for 3-4 months work, only to produce findings that he says could have been reached in a couple of hours through internal discussion.

I digress. This is not meant to be a dig at management consultants whose work I admire and whose salaries I envy almost as much as my CEO's.

It must be lonely and tough at the top, although a massive salary and the guarantee of a huge pay-off even if you turn out to be a load of rubbish are considerable compensations.

Newman's video is the opening to a CEO workshop where he tries to tackle the loneliness attached to making big decisions.

He highlights something we can all relate to no matter what our rank: the feeling of powerlessness to achieve what we want to achieve because we lack the necessary skills, resources or simply the time to get to the "ideal world" (in my case, a CEO board game developed within the next six months which becomes a huge commercial success enabling me to retire, save the world and ban caravans from the roads).

He has developed a diagnostic approach where business leaders identify where they want to get to and measure this against how far away they are from their objectives. Results of these evaluations are then shared in what he admits can be a painful exercise, followed with discussion on how each of the CEOs can get closer to their ideals.

Sounds great stuf not only for CEOs but for anybody who cares about progressing in their job.

And what's fascinating is the reason for the 4 Faces of a CEO title of his video.

These four faces are:

*Creators who don't care about money because they are "intrinsically motivated". In other words there is no point in just waving the big salary cheque, the luxury new car and country club membership at these people. The buzz they get is from new ideas and only new ideas. They find implementing ideas boring because they want to move on to the next thing

*Stabilisers who are loathed by the creators. These are the nerdy spreadsheet and process people who love setting up systems and would rather not take risks than risk failure

*Implementers. They can dress in jeans and bizzarely designed T-shirts - just like the creators - and share with these space cases thoughts about the intellectual beauty and complexity of this world. They are just as comfortable mixing with the stabilisers as they can be equally passionate about the latest delivery of paper clips.

*Newton says that only recently he identified a fourth category of business leader - navigators. These are the people who ask all the right questions of the three types of CEO listed above, can pull these types together, are great communicators both internally and externally and can see the big picture.

Other than having no interest in bizarre T-shirts (my sales manager more than compensates for me in this crucial aspect of innovation) I am too much of a creator. I hate loathe, detest and despise process (but begrudgingly now admit it's occassionally useful), which has got me into a lot of trouble over the years.

The ideal CEO might well be the navigator - the person with the great people skills, the zest for entrepeneurship, the huge capacity for detail and the ability to make processes work for people rather than the other way round.

And so - using these above categorie -, let's all indulge in the spectator sport of assessing how chemical CEOS fit in with Newman's categories.

Watch this space!

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

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

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

He says:

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

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

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

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

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

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

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

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

Click here for some positive thinking - Energy%20Carta%20Conference%20Executive%20Summary_general%20150808.pdf

The Asian Energy Youth Summit - organised by the non-profit organisation Energy Carta - is an example of doing something about the climate-change challenge.

Speakers at the event which takes place in Singapore on 30-31 October (please click the link at the top of this post for the full PDF) include Shai Agassi of Project Better Place and Stefan Mueller, Asia Pacific managing director of Conergy.

What's heartening is that a chemicals engineering undergraduate at the National University of Singapore is one of the founders of Energy Carta. The chemicals industry is part of the problem and can hugely reshape its image for the better by being part of the solution.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Trendwatching.com, an Amsterdam-based consumer trends analysing service, has included something called Econcierge in its outlook for 2009.

This involves a new breed of less conspicuous consumers, straitened by the credit crisis or maybe feeling guilty for the wallops of cash that they made during the boom, who will now be searching for value - and for a conscience-salve in everything that they buy.

What will this mean for chemicals next year? People taking a closer look on the claims on the proverbial tin, expecting whatever they buy to last longer, to be cheaper, and to be made from recycled material - or from chemicals that are proven to be les harmful to the environment, perhaps.

This might be more of a phenomena in the developed rather than the developing world, where wealth affords the luxury of greater concern about the future.

How on earth do you measure this in losses per tonne of sales of good-old bulk commodity chemicals - assuming that these trendspotters are correct?

Do you have a plan, assuming you think you need one?

The US back-to-school buying season

Source of Picture: theglobeandmail.com

As regular readers will remember, last Friday I linked through to this article from the New York Times on the likelihood of a disappointing back-to-school sales season in the US.

I had promised some more thoughts on this article and so here goes....

......This is a sign of the belt-tightening in the US and Europe resulting from the long-term shift in consumer behaviour - as discussed before on this blog - which will lead to:

*Greater dominance of low-priced retailers such as Wal-Mart, which has started selling a Toshiba laptop for just $348. More outsourcing to the developing world seems inevitable as cost pressures increase. The squeeze will work its way up to marginally cost-efficient chemical and polymer producers

*A rise in protectionism: Western manufacturers are likely to respond with more anti-dumping petitions - and perhaps an increase in ex-WTO measures such as complaints over labour and environmental standards. If a cap-and-trade bill is passed in the US we could also see carbon-import taxes for imports from those countries with no comparable systems. Such measures can be politically popular

And what does a 17-inch laptop for $348 mean for innovation in the chemicals industry? Are companies going to bother with expensive R&D?

But to cut back on R&D would show a lack of vision by any company that cannot compete in pure commodities.

More rather than less differentiation is likely to be the key for survival as chemicals and polymers with marginal "added value" will face tougher scrutiny from buyers.

Ben van Beurden of Shell Chemicals

Source of picture: Shell.com

By John Richardson

SINGAPORE looks set to soon make some further announcements on high-value investments downstream of the new Shell Eastern Petrochemical Co (SEPC) cracker.

The complex - which comprises an 800,000 tonne/year mixed-feed cracker and a 750,000 tonne/year OMEGA process monoethylene glycol (MEG) plant - was officially opened yesterday.

SEPC already has a contract in place to supply raffinate 1 and 2, after butadiene has been extracted, to Lanxess's 100,000 tonne/year butyl rubber project, said Ben van Beurden, executive vice president of Shell Chemicals, in an exclusive interview.

SEPC is a wholly-owned subsidiary of Shell Chemicals.

Lanxess, the German speciality chemicals major, is due to hold a groundbreaking ceremony for its project this month.

The start-up date for the planned facility was advanced to Q1 2013 in January this year, after being earlier delayed by the global economic crisis.

Butadiene sales from SEPC (it has a 155,000 tonne/year capacity) were a mixture of over-the-fence and exports, van Beurden added.

And he said: "We also have surplus propylene and ethylene (from the new cracker) and we are in advanced discussions on an array of options to make use of these feedstocks. Announcements will be made in the coming months."

He was unable to disclose any details.

My colleagues at ICIS pricing estimate that Shell has 150,000 tonne/year of ethylene for export at the moment with van Beurden adding that some surplus C2s are being sold to domestic customers.

Some of the propylene produced by the cracker (450,000 tonne/year) is being sold to the Shell Singapore-based styrene monomer/propylene oxide subsidiary, Seraya Chemicals, with exports also taking place, he added.

The cracker also has the capability to produce 230,000 tonne/year of benzene.

(Shell Chemicals' mixed-feed technology gives it the ability to cracker very light to very heavy feedstock, including hydrowax. The hydrowax is being supplied from a modified hydrocracker on Bukom Island in Singapore, where the cracker is located. Shell's MEG plant and the rest of Singapore's petrochemicals industry - and where the new investments will take place - is just across the water in neighbouring Jurong Island)

Van Beurden was keen to stress that SEPC's surplus products are all being sold on long-term contracts.

But Singapore is clearly looking to use the new complex as a basis for much greater and wider value-addition: The SEPC complex was expected to lead to a new wave of high-value downstream investments in Singapore, the country's Prime Minister Lee Hsien Loong said in a speech to mark the official opening.

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A Velozzi plug-in hybrid

Source of picture: www.zerauto.nl.blog

By John Richardson

Doom-mongers are claiming the end is nigh with the world heading for a double-dip recession.

This is happening at the same as the optimists are talking of the world entering a new sunny upland of sustained exceptionally strong emerging-market growth, which will more-than compensate for lingering problems in the West.

At ground level in the chemicals industry the view is equally divided with specific commodity polymer markets showing significant stress, such as a polyolefins in China where the reasons behind price corrections point to problems with the sustainable-boom story.

You can contrast this with strong year-on-year and, more significantly, sequential improvements in financial results, and bullish statements about the medium and long-term outlook from companies such as Dow Chemical.

The truth might be between the two extremes with the confusing picture in the West reflecting a shift in the sources of demand-growth now that economies can no longer be driven by the credit-fuelled consumerism of most of the last decade.

Innovation seems to be the key for chemicals companies to prosper in this changed environment.

As for the emerging world, short-term bubbles aside, it is becoming harder to argue why the rise of China etc will not continue, leading to far greater consumption of both commodity and higher-value chemicals and polymers.

Patrick Thomas, CEO of Bayer Material Science (BMS), in an interview last week, described the nuanced nature of the moderate recovery in the US when he said: "There are two parts to the stimulus programme - the first paying-down debt in the financial system and getting the financial system working again through quantitative easing etc; the second investment in energy efficiency.

"While fiscal stimulus might have to be withdrawn from the financial system, energy-efficiency initiatives continue, which include better-insulating 400,000 government buildings. This is an opportunity for our methyl di-p-phenylene isocyanate (MDI)-based polyurethanes (PU) going into rigid-foam applications for insulation."

He accepted that the collapse in home starts - and negative equity that's preventing people from moving house - were significant problems for toluene diisocyanate (TDI)-based PU used for flexible foams in mattresses, furniture and chairs etc.

"We have seen somewhat of a recovery, though, thanks to people who are not moving home upgrading their existing properties.

"This has helped boost the sales of, for example, composite wood panels - using BMS PU adhesives - which are used to help build home extensions.

"On the polycarbonate (PC) side, we have benefited from an increase in sales in office automation machines.

"These machines, which are replacing people, combine functions such as photocopying, faxing and emailing into one unit - and the casing for these units is made from BMS acrylontrile butadiene styrene (ABS)/PC composite."

But he added that "people who are unemployed staying unemployed" would obviously hinder the recovery.

BMS is also working with Velozzi, the US, California-based new technology car company, which is developing a plug-in hybrid SUV-sized vehicle.

"In the US, people like to drive their giant SUVs and so one challenge is to make big all-electric cars with energy efficiency boosted by increasing use of light-weight plastics. The fuel-efficiency theory, through the use of these light-weight plastics, also applies to gasoline and diesel vehicles.

"The Velozzi car will use our PC glazing material and our open-cell carbon fibres with a PU skin which is moulded into body-work components."

As for China, he repeated the well-known, but still startling, statistic that China produced more cars in 2009 than the US.

"In the future, most of the new cars China produces will stay there as domestic growth accelerates - and these autos are of great value.

"I was picked up from Shanghai airport in a really good family car recently, that didn't rattle or anything, costing just 8,000 Euros."

China's auto manufacturers face far fewer regulations than their European counterparts, who have to comply with a plethora of rules governing, for example, the geometry of vehicles and minimum amounts of illumination, he added.

Lack of red tape is encouraging greater substitution of natural materials by plastics in China.

"The Chinese industry is also much more open to replacing steel and glass with plastics and composites made from plastics because there isn't the legacy issue of existing capacity you get in the US and Europe.

"In the West, a bigger amount of auto components are steel and glass-based as the attitude is "we have the production so we might as well make use of it' ".

But he qualified this by saying that higher EU emissions standards were encouraging greater use of PC glazing.

In China, too, he sees a big opportunity for use for rigid PU foams in insulation, where office buildings tend to heat the outdoors in winter and cool it down in summer as employees either shiver or sweat inside.

As with the other chemicals majors focusing on innovation, Thomas talked of the big global trends driving future growth. These include ageing populations, food and water.

BMS has developed PU-based lubricious coatings for use in catheters and other medical products.

"Globally, 50% of all the food produced is wasted and so there is a huge opportunity for rigid foams used in insulation for refrigeration in food transportation, storage in shops and finally in refrigerators in homes," he added.

"Thirty per cent of water in old cities leaks because of faulty piping. We have a PU material which you can spray inside a ruptured ceramic or metal pipe without having to dig the pipe up. This forms a whole new pipe within the old one."

It seems clear that the growth story is not straightforward - and not one that can be told only by looking at key economic indicators and relating these back to chemicals.

New sources of value for the chemicals industry will continue to develop, requiring a great deal of R&D investment, talent - and failures as well as successes.

BMS spent Euro207m on R&D in 2009, not including joint development activities with customers. This was from sales of Euro7,520m.

"Forty per cent of our products didn't exist five years ago. Some of this involves minor modifications along with new products," said Thomas.

In the final analysis, and in a nutshell: Anybody without overwhelming feedstock-cost advantages - or support from non-profit motivated state ownership - has little choice but to go down this route.

By Malini Hariharan

The first of China's major coal-based chemical projects has finally started trial operations.

ICIS news reports that methanol has been fed at Shenhua Baotou's 600,000 tonnes/year methanol-to-olefins (MTO) plant at Baotou, in inner Mongolia. The unit can produce 300,000 tonnes/year each of ethylene and propylene. But the downstream polyethylene (PE) and polypropylene (PP) units have to start and the company is said to have set a September target for achieving on-spec PE and PP production.

Pic Source: National Research Center for Coal and Energy

The Shenhua Baotou unit is said to be the first large-scale demonstration plant for the MTO technology that has been developed by the Dalian Institute of Chemistry and Physics.

There are two more projects that are likely to start later this year - Datang Power's 450,000 tonnes/year methanol-to-propylene (MTP) and PP project and Shenhua Ningxia's 500,000 tonnes/year MTP/PP project.

Successful operations at these plants is likely to trigger a fresh wave of coal-to-chemical projects.

Consultants AsiaChem expect 2010 to be a critical year for the development of China's coal-based chemicals industry.

The three MTO/MTP projects are likely to be finally completed and evaluation of coal-to-liquids (CTL) plants that started last year would be possible.

Additionally, a demonstration plant for the new coal to monoethylene glycol (MEG) technology is also likely to be completed this year. The plant, which is being built by Tongliao GEM Chemical, will produce 150,000 tonnes/year of MEG and also 100,000 tonnes/year of oxalic acid.

And Anhui Huaihua Group is cooperating with Shanghai Pujing Chemical Technology to build a 1000 tonnes/year syngas-to-MEG demonstration plant. The unit is likely to enter testing stage in September this year and preparation for a scaled-up plant is expected to be complete before the year end.

The consultancy estimates that China has nearly 20 other coal-based MEG projects at the preliminary planning stage.

Nexant Chemsystems estimates that plans for nearly 1.8m tonnes/year of MEG capacity have been announced with four projects, each of 200,000 tonnes/year, already under construction and schedule to start operations in Q3 2011.

The interest in MEG and the new production route makes sense as China imported around 5m tonnes last year and the government has a clearly stated objective of reducing the country's dependence on petrochemical imports.

Its early days yet especially as we don't know the cost competitiveness of the new coal-based technologies but they could well pose a threat to companies relying heavily on exports to the Chinese market

 Tokyo at nightSource of picture: liveworldtours.com

By Malini Hariharan

it is easy to write off the Japanese petrochemicals industry which has for long struggled to find a solution to the dual pressure of rising global competition and an anaemic home market.

Japanese companies, once at the forefront of the Asian industry, have already given way to newer players from countries such as China, India and Thailand. Product portfolios have been trimmed and alliances formed to ensure profitable operations.

"The names of the companies may have not changed but their product mix has changed remarkably," says senior executive adviser at consultancy Accenture Japan, Ryota Hamamoto.

"Some companies have relocated their production facilities overseas and reassigned their Japanese employees to new smaller but sophisticated high-end specialities business without laying them off as their counterparts in Western countries usually do."

And more restructuring appears inevitable.

"The new ethylene capacities in the Middle East and China will result in Japanese producers losing market share. It is possible that 1.5-2.0m tonnes/year of Japanese ethylene capacity, or 3-5 less competitive plants, will be dismantled in the coming 5-6 years, " Hamamoto predicts.

The remaining crackers will need to operate as companies need hydrocarbon feedstocks to maintain their lucrative speciality chemicals businesses.

However, companies can delay the inevitable as long as markets such as China remain robust.

Hamamoto points out that Japanese ethylene production nosedived to 6.8m tonnes in 2008 from 7.8m tonnes in 2007.

"At that time some pessimistic analysts had forecast that output would fall further to 6.1m tonnes in 2009 as a fall in domestic demand seemed inevitable. But to our surprise, production hit 7.1m tonnes mainly as a result of strong demand from China and other Asian countries," he explains.

Hamamoto cautions that it would be unwise to dismiss all Japanese crackers as being uncompetitive.

"Most of the crackers are 30-40 years old and rather small; so one would think that their cost competitiveness is poor. However, the major producers are quite competitive as their plants are fully depreciated and are run at high operating rates with minimum accidents.

"Additionally, the plants are fully automated and companies have invested in energy saving technologies to compensate for the small size, old design and high cost of feedstock.," he says.

One example is Showa Denko.

A Showa Denko source explains that the company has attempted to raise its competitiveness to a higher level by making changes to its 695,000 tonnes/year Oita cracker.

Earlier this year, Showa Denko recently replaced seven small furnaces at the cracker with two high-efficiency furnaces; improved the waste heat recovery system and renovated the pre-distillation system.

The new furnaces give greater feedstock flexibility as they can crack liquefied petroleum gas (LPG), natural gas liquids (NGL), kerosene and light oil. The company says that the changes will improve energy efficiency by 5.3% and reduce carbon dioxide emissions by 6%.

Showa Denko, says the source, is looking at further improvement in production efficiency with an aim to reduce costs and does not have plans for further plant shutdowns other than those announced.

Japanese companies are also investing time and money to develop alternative production routes and make value-added products.

Mitsubishi Chemical has built a pilot plant to make propylene using methanol/dimethyl ether (DME) and other olefins from a naphtha cracker. It has also tested a new butadiene technology that uses butene as a feedstock although a decision to commercialise the technology has yet to be taken, says a company source.

Idemitsu has successfully developed metallocene polypropylene (m-PP) and is constructing a 40,000 tonnes/year plant at Chiba scheduled for completion in Q4 2011.

Prime Polymer, a joint venture between Mitsui Chemicals and Idemitu Kosan, is also strengthening its presence in metallocenes.

A 240,000 tonnes/year metallocene linear low density polyethylene (m-lldPE) plant at Ichihara will be expanded by 60,000 tonnes/year by November 2011.

And there are plans for a new 200,000-300,000 tonnes/year m-lldPE plant overseas for start up in 2014. Possible locations include Singapore and China with a final decision due to be made in H2 2011.

Random copolymer m-PP is currently being test marketed for food packaging and there are plans to start produce around 50,000 tonnes/year at an existing PP plant at Osaka by end of fiscal 2010, says a company source.

Homopolymer m-PP and block m-PP are also being developed at a pilot plant although a decision has yet to be made on commercialising these grades.

These efforts show that while Japanese companies no longer dominate the Asian petrochemicals landscape they still have the capacity to teach a few lessons to other regional players.

By Malini Hariharan

Nearly two years after SABIC and ExxonMobil signed an agreement for a multi-billion dollar 50:50 joint-venture elastomers complex iin Saudi Arabia, the two majors have yet to take a final decision on the project.

At last year's GPCA forum in December, Mohamed Al-Mady, SABIC's CEO, had indicated that the two companies were waiting approval from their respective management boards while work was on with contractors for detailed engineering and cost estimation.

And there has not been much progress since then.

Pic source: www. tv.ae

Talking to reporters on Sunday after announcing the company's results for the third quarter, Al-Mady confirmed that a final decision has yet to be taken.

"We are moving to the detailed feasibility study ... we have not reached final decision ... (It is expected) some time early next year," he said.

The blog has already written about weak economics for derivative projects in the Middle East. Could this be a reason for the hesitation on part of the two majors to quickly implement this project?

Another downstream project being pursued independently by SABIC's fully owned affiliate Petrokemya is also moving slowly.

Following SABIC's acquisition of GE Plastics, Petrokemya had revealed in early 2008 plans for the Kingdom's first acrylonitrile butadiene styrene (ABS) plant with a capacity of 200,000 tonnes/year.

Al-Mady said on Sunday that the project has not been cancelled. But it appears that the capacity of the project is being reviewed.

Meanwhile, Ibn Rushd, another Sabic affiliate, is expected to finalise bids for expansion of capacities for purified terephthalic acid (PTA) and polyethylene terephthalate (PET).

Progress may be slow but with gas in short supply SABIC has no alternative but to persist in its efforts move downstream and this was confirmed by Al-Mady.

"We have to be realistic. The investment cycle takes time to find the gas ... SABIC is a global company we cannot wait for the gas to come we have to do business either in downstream, in innovation ... until the gas is available."

Far more choices now...

Source of picture: www.mhhe.com/business

By John Richardson

THE nature of demand growth in emerging markets is a subject the blog has paid some attention to over the last few weeks.

Taking advantage of this growth will require the ability to innovate in order to tap into the huge opportunities presented by the hundreds of millions of people entering the consumer economy.

This innovation will have to be accompanied by a ferocious attention to cost-efficiency, as many of these millions are earning very low incomes. It takes imagination and flexibility to turn the wants of the rural and urban poor into needs.

In a fascinating conversation with a business development manager with a leading polyolefins company late last week, the blog gained a further glimpse into how these challenges and opportunities are being worked.

The subject was again India and in this case how the polyolefins industry is working with consumer-products manufacturers.

In his own words:

"As a manufacturer of consumer goods, you need to get strategy right - creating a need through marketing for luxuries and then packaging and pricing those luxuries in such a way that the poor can afford to indulge themselves.

"A problem with the chemicals industry in general is that it is often managed by scientists who make it the main boards and not the sales and marketing people - and so innovations are inside out rather than outside in, when a lot of the most-profitable changes can come from what I've just described above."

Fascinating stuff - and again it shows how the old top-down approach to measuring supply and demand has become a very blunt tool of measurement. 

Source of picture: chemindustry.org.sg

By John Richardson

NEW plants could be built in Singapore downstream of Shell Chemicals plans for optimising high-purity ethylene oxide (EO) production in the city state, the blog was told recently by a senior Shell Chemicals executive.

We assume that the new facilities are likely to produce high-value ethoxylates and perhaps ethanolamines. This would fit-in with the Singapore Economic Development Board strategy of going further down the petrochemicals value-chain.

Shell Chemicals acquired complete ownership of Ethylene Glycols Singapore (EGS) in November through buying-out the 30% stake held by a Mitsubishi Chemical-led Japanese consortium.

Following the deal there were media reports that the company planned to both optimise high-purity EO production at the Jurong Island petrochemicals complex and expand EO capacity, including possibly building a new plant.

Our colleagues at ICIS news had reported back in May last year that Shell Chemicals was in the advanced stage of planning for a new high-purity EO plant in Singapore.

But Iain Lo, the company's Vice-President New Business Development and Ventures, told us: "I would rather use the term optimisation than expansion because it's all about looking at the best balance between EO and mono-ethylene glycol (MEG) production."

This balancing-out would involve both the older EGS plant and the Omega-process EO/MEG plant, which was brought on-stream in November last year, he added.

"Our high-purity EO could be consumed by new 'over-the-fence' customers in Singapore. This would fit with the Singapore government's objective of adding value downstream.

"It is a developing story and we expect some announcements in H2 next year."

Patrick Thomas

Source of picture: Bayer Material Science

By John Richardson

SUCCESS in chemicals - whether you are into commodities or specialities - is largely about eking out maximum value from every single molecule in all the important markets.

The almost obsessive focus on China and other emerging markets might give the impression that "all the important markets" relegates the economically ailing West to the second or third division.

But any truly global chemicals company worth its salt needs to balance investment across each of the big consuming regions.

And so, after all the fanfare of last month's announcements by Bayer Material Science (BMS) of a further $1bn of capital spending in China, the company has also been keen to stress what it is doing in Germany and the US.

The chemicals major plans to invest a total of €3.5bn ($4.5bn) in these three countries over the next five years. This will involve commercialising a new technology, upgrading existing plants, building new production facilities and a lot more work on research and development (R&D).

"Our further expansion plans in Germany include growing our coatings facility in Leverkusen that produces aliphatic isocyanate, hexamethylene di-isocyanate (HDI) and isophorone di-isocyanate (IPDI) coatings," said the company's chief executive officer, Patrick Thomas, in an interview.

"This investment should be sanctioned by the board in the next 12 months and completed in two years."

Next he detailed an example of molecule-value stretching: plans to build a commercial-scale demonstration plant that will use the company's oxygen depolarised-cathode technology for producing chlorine. Start-up is scheduled for later in 2011 or the beginning of 2012.

This will involve the conversion of BMS's last remaining mercury cell chlor-alkali process unit in the world, which is located at Uerdingen in Germany, and result in big savings on electricity costs and reduced CO2 emissions.

In effect, hydrogen fuel cells are integrated in the chlorine cell as part of this new process, lowering electricity consumption (the main cost component in chlor-alkali production) by 50% compared with mercury or diaphragm cells.

Thirty per cent less electricity is required when facilities are converted from the membrane technologies.

The company will eventually convert all of its plants to this new breakthrough process, Thomas added.

And he said: "We have signed a memorandum of understanding (MOU) with China BlueStar (the mainly state-owned Chinese speciality chemicals giant).

"BlueStar, which is the technology supplier and builder of just about all the chlor-alkali units in China, plans to use our new technology across the country. The first step is to build a pilot unit in Caojing."

BMS will also invest in Baytown, which is near Houston, Texas, and the site of company's largest US production facility.

Polycarbonate, methyl di p-phenylene isocyanate (MDI) and toluene di-isocyanate (TDI) facilities will be upgraded at the site, involving debottlenecking and technical improvements to boost reliability.

Work will also be carried out on improving logistics, such as building a chlorine pipeline from feedstock supplier Oxyvinyl, which is 20km away. This will take chlorine transportation off roads and railways.

"These investments in both the US and Germany illustrate that they are still very important markets for us," said Thomas.

In volume terms, the US and Germany remain as big as China for BMS - even if they are eclipsed in terms of percentage growth-rates.

So, of course, because growth is booming in China, the big investments in new plants are taking place in that country.

Thomas provided a great deal more detail about what BMS wants to build at its big production site in Caojing, Shanghai, compared with what was reported last month.

"Our plan for MDI is to reach 1m tonne/year of capacity between now and 2016," he said
"This will involve a debottlenecking of our existing plant to 500,000 tonne/year from 350,000 tonne/year and building a new unit of 500,000 tonne/year."

The new polycarbonate plant being evaluated for Caojing will be an "economic copy paste" of the existing 200,000 tonne/year facility at the same site.

So it will initially also be 200,000 tonne/year and then the company wants to debottleneck both the old and new plants by 50,000 tonne/year to get to a total capacity at the site of 500,000 tonne/year.

"Capital equipment for the new plant has already been pre-ordered and our target is to bring the new plant on-stream in 2013. The debottleneckings will then take place 12-18 months after that."

Thomas stressed that the decision to move the BMS polycarbonate global headquarters to Shanghai from Germany would not mean any redundancies.

The company also wants to build a new coatings plant in Shanghai. Like the coatings investment in Germany, this new facility will produce solvent-free, water-based aliphatic coatings.

Capacity of this new plant would be 50,000 tonne/year with start-up scheduled for 2013-2014.

The existing 30,000 tonne/.year plant at Caojing is to also be debottlenecked.
"All our projects at Caojing have reached the Memorandum of Cooperation (MOC) phase," said Thomas.

"The MOC phase is a step along from an MOU and means that the local Shanghai authorities will now move on to studying our proposals.

BMS is to begin environmental impact assessments and feasibility studies as part of a local approvals process that involves about 20 different steps.

"Once these steps have been completed, some aspects of our overall plan for Shanghai will need to be submitted to the central government's National Development and Reform Commission (NDRC) for final approval.

"Other elements of the expansions can go ahead with only local government backing."
Further product development work in China includes building a large-scale PC automobile-glass demonstration hall in Shanghai.

R&D development work in the auto and appliances industries mainly occurs in China, as does manufacturing.

But the electronics industry is slightly different.

"The know-how is in the US, Japan, South Korea and Taiwan with the manufacturing - because of the low labour costs - in China," said Thomas.

This is why BMS opened a functional films research centre in Singapore in June last year as the city state is "an international hub for the development of technology, drawing on expertise for the whole region".

The functional films centre focuses on research into coated high-tech films and nanotechnology for electronics.

Stand still in this business and you end up being overtaken, and, quite probably, kicked off the running track altogether.

The opportunities are huge, but as the BMS announcements indicate, so are the difficulties in making sure you both keep pace with competitors in China while not losing focus on all the important markets.

Davos 2011 

Source of picture: eacci.net

By John Richardson

THE edginess and nervousness of Asian polyolefin markets we talked about last week is likely to be part of the mindset of any chemicals company CEO right now.

As my colleague Nigel Davis wrote about last week, the industry's financial results for 2010 are set to exceed all expectations. INEOS, Lanxess and Clariant will see their profits double over 2009, according to S&P analysts. Profits at the world's biggest chemicals company by sales, BASF, are forecast to hit a new record high.

But to what extent will better results be due strong emerging markets while Western demand remains below pre-crisis levels?

To what degree will improved returns reflect inventory building down production chains after a de-stocking overreaction? A classic example and extreme example is the re-stocking which supported US chemicals and other industries throughout 2010 after the great 2008 collapse.

A further factor behind good results will be manufacturing-rate discipline. We saw this in the chemicals industry in 2009-2010 when it became much better at matching production to what, on a global basis, was depleted demand versus before the crisis.

This was the result of plant closures and constantly adjusted operating rates at facilities that continued to run.

All of this can be hard to calculate in the frenzy and noise of any reporting season. Even in quieter periods, numbers can be notoriously hard to analyse correctly.

If all of these factors turn out to be very significant in last year's stellar performances, it will not take the shine off what has been achieved. The industry has clearly been very smart in managing extremely volatile economic conditions.

However, talking about our first point, a lot of companies still depend on the West for a high percentage of their sales.

The blog, along with Paul Hodges at International eChem, believes that many of the policies adopted by Western governments have failed to address to the underlying causes of sub-par growth. This is the ageing of the Babyboomers.

Watch out for much more on this subject over the coming year as we prepare a book on this subject.

Persistently high US unemployment and the state of the country's housing market reflect policy failures.

To what degree has emerging-market growth depended on importing chemicals and polymers for re-export as finished goods to the West? Policy weaknesses of Western governments and a deliberate change of course by the Chinese government are threats to this growth.

And finally and most immediately, the threat of inflation must rank very high in any CEOs concerns.

As we shall discuss later this week there is an argument to be made that hidden inflationary pressures in China indicate that Beijing has lost control of the problem.

We also believe that the crude-oil market is dysfunctional and is firmly in the hands of speculators. Both short and long-term pricing do not reflect demand and supply fundamentals.

As a result, we could well be in the middle of a mini repeat of 2008. Crude seems to have risen to unsustainable levels due to the demand destruction it is causing the ultimate consumers - the motorists, the shoppers etc.

It is always very hard for chemicals-company purchasing managers to assess the extent of this demand destruction and inevitably, as crude continues on a bull run, they will have to buy forward.

"Even if raw-material purchases are only 10% more than normal in any one month, add all those ten per cents together in any product chain and this represents a big risk," said Paul Hodges.

Chemicals companies face inventory losses if there is a crude-oil price correction. We believe such a correction will happen in H2.

But the chemicals companies who innovate for the future can attempt to look well beyond any one set of financial results, provided their investors have patience.

Such innovation needs to be around products that deal with the consequences of demographic changes in the West and surging consumption in emerging markets.

All the above are the big issues confronting not only the chemicals industry, of course, but the world economy as a whole. They should be at the forefront of discussions at this week's World Economic Forum in Davos.

By John Richardson

INTELLECTUAL property right protection has long been a nightmare in China thanks to the ability of government research institutions to rapidly and very effectively copy technologies. Blueprints for these technologies have to be handed over to local authorities by foreign joint-venture partners.

The constant challenge is balancing this risk against the enormous opportunities.

And now a former Dow Chemical scientist, Lui Wen, has been found guilty of conspiring to steal company secrets and sell them to firms in China by a jury in Baton Rouge, Louisiana, the US.

Lui, who worked for the company from 1965 until he retired in 1992, also paid another company employee a $50,000 bribe to gain information about how the company made a polymer used in automotive hoses, jackets for electrical cables and vinyl siding. He worked with the polymer, Tyrin CPE.

A DuPont scientist is also reported to have been found guilty of stealing company secrets in order to pass them on to China.

This problem could get worse as China attempts to produce not only ever-greater volumes of commodity petrochemicals, but also the smarter stuff.

At least in the West, though, legal systems are usually pretty effective at enforcing intellectual property rights - as the Louisiana case illustrates.

What hope that China, too, might one day develop a similarly effective legal system?

By John Richardson

"Just when you think it is the right time to make an investment case to a board of directors, the particular opportunity you have been studying has an annoying habit of disappearing," said a business development manager for a global polyolefins producer.

His comments reflect the increasingly complex world in which we live. Interactions between environmental pressures, shifts in government policy and changes in consumer behaviour are just some of the factors that can rapidly result in an opportunity becoming yesterday's news.

A product might very simply also get too expensive, resulting in demand destruction.

A classic case in point about how opportunities can suddenly vanish is the ban by India's Supreme Court from 1 March this year on gutkha - a mix of tobacco, betel and other ingredients - when it is packaged in single-serve polyethylene (PE) pouches.

This sector accounts for about 50,000 tonnes/year of PE demand in India.

The moral case for pushing sales of gutkha, a chewing tobacco, is pretty dubious to say the least.

"Apart from the obvious health risks, what is really sad is that very low-paid workers chew this stuff in order to suppress their appetites. It is cheaper than food," added the business development manager.

So the idea behind banning plastic packaging is to reduce the nationwide scale of the industry, making supply more local and therefore harder to access, he said. PE is used to preserve the shelf-life of the tobacco, increasing availability across the country.

One might think that this is an opportunity well worth losing for the wider good.

The danger now, though, is that the tobacco test case could be used by local non-governmental organisations (NGOs) to attack more defensible areas of India's plastic-pouch industry.

"Today it is gutkha. But there are hundreds of products packed in pouches. Tomorrow an NGO can give reference to this case and say shampoos should not be packed in pouches," said an India-based industry source.

Pouches or sachets have grown to overtake other forms of packaging in many product segments.

Market research firm AC Nielsen estimates that sachets accounted for 74.5% of the 104,000-kilolitre Indian shampoo market in 2008, up from 71% in 2006 and 73% in 2007.

India faces a huge plastic waste-management problem, hence the concern that the NGOs will go after the wider industry.

"True, there is a big waste issue. But these sachets cost just a few cents each and with incomes still very low for most Indians, this pushes a little luxury into hundreds of millions of lives," said a second India-based industry source.

"For the women factory workers who cannot even afford a whole bottle of shampoo, the odd sachet at the weekend with a picture of a Bollywood star on the sleeve makes them feel a little bit like that Bollywood star for a few seconds."

If this is tugging at your heart strings, also think about the economic potential: giving India's vast army of low earners a taste of being middle class raises aspirations, encouraging consumption growth for all manner of products made from chemicals and polymers.

India's polyolefins industry will therefore need to battle hard and battle smart to protect the segment.

This is a good example of how rising public awareness about chemicals and polymers in general makes engagement with governments and NGOs ever-more important.

At a much more prosaic level, a product can quickly become too expensive before an investment opportunity can be pursued.

Low density PE (LDPE) is a case in point, where demand in the Indian market fell by 6% last year due its high cost, according to a local industry estimate.

The cost has soared because of lack of investment in LDPE capacity, once seen as a sunset product because of the development of linear low density PE (LLDPE) - a substitute for film applications.

LDPE has remained popular because it can be very easily processed on what is often very far from state-of-the-art machinery in Asia.

Boosting extrusion- or coatings-grade LDPE consumption has been seen in the growth in the plastic pouches we have just been talking about.

Pouches for food and non-food items are often made from multi-layer structures, including LDPE, LLDPE, metallocene LLDPE and metallised polyethylene terephthalate (PET) film.

Despite this strong source of demand, many LDPE producers have switched their plants to ethylene vinyl acetate (EVA) production, where margins have been better. A booming end-use sector for EVA is to make encapsulants for solar panels.

"Another problem is that you can only make extrusion- or coatings-grade LDPE via the autoclave process," the business development manager added.

"The autoclave process is expensive in energy costs and is difficult to operate. Nobody, as a result, has invested in autoclave capacity for many years."

This might logically lead to full-scale and costly research into new production processes for LDPE extrusion grade - or into other polymers that can do the same job.

But the danger is that an overall ban on plastic pouches in India drives a 500-tonne freight train through demand growth.

Such uncertainties could make incremental changes in technologies and product mixes, rather than any major research and development initiatives, the way forward.

In this ever-more complex and changing world, you would then run the risk of losing the biggest opportunities of all.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

"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 John Richardson

THE big difference in the mood at the ground level of certain parts of the petrochemicals industry compared with that of company board members and investors was thrown into further stark relief earlier this week.

As we discussed on Tuesday, the big polyolefins sector of this industry continues to struggle in China. Growth forecasts for 2011 have proved way off-the-mark as it becomes more and more apparent that demand was, in effect, brought forward by China's huge economic stimulus package. Bringing demand forward amounted to speculation in lots of stuff - from polyethylene (PE) down to finished goods - which is sitting in warehouses unsold, dragging down fresh consumption.

Contrast this with a Credit Suisse client note released on Monday, based on presentations at the bank's Global Chemical and Agricultural Science Conference in New York last week.

"Demand is resilient across most markets; order books and activity levels are resilient, except in construction and southern Europe," wrote Credit Suisse.

Most companies were quietly confident that current demand levels would be sustained throughout the second half of this year - and customer inventories were reported to be lower than in 2008/2009, continued the bank.

My colleague Nigel Davis took this Credit Suisse note as evidence that companies focused on innovation are in a much better place than those which are in pure commodities.

"Time was when the innovation had more to do with process technology (hence costs) than product technology," he wrote in this Insight article. 

"The world has turned, however, and today a constant flow of product improvements, made alongside the process technology changes, are the true drivers of differentiated corporate growth."

Companies that fall into this innovation category include BASF, Dow Chemical, DuPont and Bayer Material Science.

These companies seem well-attuned to the megatrends that will shape global chemicals growth over the next few decades, which we discuss in our e-book Boom, Gloom & the New Normal. The trends include ageing populations in the West, climate change everywhere and water shortages and food security in emerging markets.

And maybe also the companies are well down the track in tailoring their product portfolios to meet the biggest change in China's economic direction in at least a generation.

The central government, as part of its 12th Five-Year-Plan (2011-2015), is focusing on energy efficiency, renewable technologies and environmental protection as it appears to have recognised that the quality of growth is as important as the quantity.

Whether these policies will be effectively implemented is the big question that we will examine in Chapter 6 of our book, which is released in early October. But evidence of Beijing's resolve has already emerged in the auto market, where calls for the re-instatement of the old subsidy system have so far been ignored. 

Further reasons for the dramatic difference in mood between those at ground level - and board members of and investors in these differentiated companies - might include:

1.) The fact that sales and marketing executives of pure commodity companies were probably set unrealistic targets in late 2010, as it wasn't fully understood that demand had been brought forward in China. One of these executives told us last week how he was receiving only one or two calls a day with orders from converters and traders. Last year, his phone virtually never stopped ringing
2.) Traders who made a lot of money during the great China credit binge in 2008-2010 are now either struggling or in bankruptcy

BUT even predominantly speciality chemical companies such as BASF, BMS etc cannot escape the fact that all chemical businesses depend on one very important factor: DEMAND.

Specialities might not feel the pain as immediately as commodities from a renewed global recession, but will eventually have to suffer.

And so the blog is still a bit confused by the confidence of companies, expressed during the Credit Suisse conference in New York last week.

Wouldn't it have been more prudent to fully own-up to the scale of the economic risks ahead?

By John Richardson

THE lack of depth and thought behind "analysis" of the economic challenges facing developing economies has worried the blog for some time.

It is undoubtedly the case that as hundreds of millions more people in countries such as India and China emerge from poverty, the opportunities for the chemicals industry are enormous.

For the first time in their lives these people will have a small amount of money to spend on a few basic luxuries such as a single-serve portion of shampoo, or maybe if they are exceptionally lucky a motor scooter.

These are some of the themes we explore in Chapter 6 of our e-book, Boom, Gloom & the New Normal.

They will not be middle class in the Western sense of the word. In fact as the chart below shows, by Western standards many of the richest people in India would qualify for social welfare problems.

Constant talk about the rise of the Asian "middle classes", without qualification of what exactly this means, is highly misleading. This is not a sudden enormous army of BMW-buying Western-style consumers.

And so it is up to chemical companies, prompted by more-informed investors, to start describing exactly how they are going to innovate down the value chain - i.e. how they are going to keep costs low-enough to help manufacture a refrigerator that, say, retails for less than $50.

By John Richardson

FURTHER relief rallies in petrochemical markets that occur over the next few weeks and months will not change the overall direction.

Buyers will inevitably run short of stocks down all the value chains and we thus will see some more brief flurries of price rises.

Another driver of inventory rebuilding will be recoveries in the oil price and stock markets. But such recoveries will merely reflect investors pouring money into more risky assets on an improvement in sentiment. It will, as we said, not change the direction of the underlying fundamentals.

Many investors in oil, other commodities, including petrochemicals, and shares have, of course, a very short-term perspective. All they care about is making money out of these "relief rallies" and getting out before markets tank again. The best analogy I have heard came from fellow blogger Paul Hodges when he described what we are going through at the moment as equivalent to a squash ball bouncing down a flight of stares: The overall direction is down, but there will be mini peaks and troughs on the way.

China's willingness and ability to buy when it's cheap and then quit will drive many of these bouts of restocking.

Take paraxylene (PX) and mono-ethylene glycol (MEG) as current examples.

PX shipments to China from the US and Europe were approximately 75 percent higher in November alone compared with the first ten months of this year, according to ICIS news.

Nearly 60,000 tonnes of November and December MEG cargoes from the US are heading for China, about 80% of the 75,417 tonnes that were shipped during January-October.

Given that PX and MEG prices are sharply lower, this is hardly surprising (see slide below):

Last week's decision by China to cut bank-reserve requirements by 50 basis points, and likely further measures to ease liquidity, will make it easier for buyers to stock-up.

Global markets might be so weak for certain products that a return of Chinese buyers might not be sufficient to even cause a modest and brief recovery in prices.

In the case above, an essential question to ask is the extent of lost sales in the US and Europe along the synthetic fibre chains. According to data from consultants PCI, 1.85m tonnes/year of PTA capacity in Europe was shut for between 2 and 10 days in September to November, while 1.59m tonnes/year of US PTA capacity will be shut for a total of 15 days in December because of poor margins.

Another factor behind increasing fibre intermediates shipments from the West to China is the desire by US and European companies to, as always, monetise inventory before they close their books at the end of December. This will help boost financial results and thereby, of course, share prices.

There is a rapidly closing window of opportunity for booking cargoes to China that will arrive sufficiently ahead of the 2012 Chinese New Year, which falls on 23 January. Nobody in China, as is always the case, wants to be in the position of cargoes arriving just as customs and logistics companies start winding-down their operations for the Lunar New Year.

US polyethylene (PE) producers are also trying to shift as much volume as possible to China in order to beautify their end-year financial results, an industry source told the blog.

"But right now this is proving difficult as firstly, the delivery window ahead of the Lunar New Year is closing and secondly, container shipping space is limited."

Some chemicals analysts will argue that the odd price recovery, and these bouts of re-stocking, will mean that their flawed analysis is, after all, right - i.e. that we are heading for an up-cycle in global operating rates on strong overall global demand. For example, ethylene capacity utilisation is still being forecast to reach 90 per cent by 2014.

It is not going to happen. As we began to describe in our posts on Monday, Tuesday and Wednesday this week, and will continue to outline over the coming weeks, with what we hope will be useful summaries of our key conclusions as we go along, we are entering a new a global recession - quite possibly a Depression.

The winning chemicals companies will be those which adapt their businesses to the New Normal.

By Malini Hariharan

After years of making money in basic petrochemicals the Middle East focus has firmly shifted to downstream chemicals, a topic that is being discussed in great detail at this year's GPCA forum being held in Dubai on 13-15 December.

As highlighted by the blog in previous posts a combination of factors including lack of ethane, the pressure from governments to diversify and add value are behind the drive to invest downstream.

Sadara, the joint venture between Saudi Aramco and Dow Chemical, is representative of the transformation that the region hopes to achieve. The $20bn project with 26 manufacturing units includes a wide range of value-added derivatives such glycol ethers and amines downstream of a cracker. But the project, which has been in the pipeline since 2007, also illustrates the difficulties in venturing downstream.

A partnership with Dow has given Aramco access to technology but for many other smaller companies this is likely to be a key hurdle.

In a report released at the forum consulting firm AT Kearney pointed out that specialty product technologies are controlled by a limited number of players, demanding dedicated marketing and licensing fees and specialist technical services.

One way to increase access for regional companies is to participate in JV partnerships although technology owners might be reluctant to enter joint ventures given the diminishing feedstock advantage in the Gulf Cooperation Council (GCC) countries.

Middle East players could instead look for potential acquisition of chemical companies with specialist knowledge and this might be an easier option as a weakening global company is likely to result in interesting opportunities.

But Paul Harnick, chief operating officer of KPMG's chemicals and performance technologies practice, pointed out that political issues may prevent transactions if governments decide technology ownership is sensitive.

Also the Middle East faces competition as companies from China and Brazil, which are seeking to build downstream chemicals industry.

"There is evidently a limited number of Western and Japanese partners so Middle East players need to make sure their proposition is more attractive."

Other challenges include marketing expertise, innovation capacity and investment, and logistics as much production will have to be exported in the medium term.

THE global economy is moving into a difficult period, as it transitions to the New Normal. Debt levels are high, and incomes are under pressure, particularly for the large numbers of people moving into retirement.

Cost must be the key criteria when examining the opportunities for new product development and research. Chapter 8 of our free 'Boom, Gloom and the New Normal' ebook examines the application of this philosophy to the four megatrends that we have identified as being key to the future of the chemical industry, which are:

• Improving water availability
• Improving food production
• Increasing life expectancy
• Reducing carbon footprint

It suggests that the key need is to be practical. Companies should focus:

• In the fields of water/food, on reducing the amount of waste, and the output that is lost when product is moving to market
• In developing new products and services for the over 55s, on core needs such as food, water, health, shelter and mobility
•In turn, this will enable them to 'do more with less'. Carbon footprint will be reduced, and products will be more affordable

This philosophy is quite different from that seen during the 1982 - 2007 economic SuperCycle. Then, companies competed for the middle ground, as we saw in chapter 7. They added features, and pursued the concept of adding value in order to boost profits. Over time, they focused more and more on the wealthier parts of the global population, and became increasingly disinterested in those outside this privileged group.

Today, however, it is no longer viable to focus in this way.

The Western BabyBoomers are joining the New Old generation of those aged 55+, and they face the prospect of much lower incomes as they transition from salaries to pensions.

Similarly, incomes in emerging economies are dramatically lower than those in the West. It is wishful thinking to imagine that these regions can therefore somehow replace the demand for added value products that is disappearing in the West.

Doing more with less is therefore our motto for future success. The chapter contains, as always, a wide range of practical examples to help stimulate ideas within your own business. We are convinced that those who accept its challenges will benefit for many years to come.

FREE DOWNLOAD OPTIONS FOR CHAPTER 8
Click here to download a two page summary of the Chapter
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Click here to view a four minute video with co-author, Paul Hodges

By John Richardson

Access to cheap feedstock, access to cheap feedstock and access to cheap feedstock might seem like the three most-important elements to any petrochemicals strategy.

Thus, for many in the US, adding capacity based on abundant and therefore low-cost ethane, thanks to the shale-gas revolution, adds up. US ethylene capacity could be increased by as much as 29 percent by 2017.

But, assuming that a fairly high percentage of ethylene derivatives capacity will have to be exported, another equally important consideration, next to low-cost raw material, has to be whether overseas markets will be able to absorb these volumes.

Petrochemicals capacity in emerging countries can be added for strategic and nation-building reasons, rather than for profit, and so proposed new US capacity has to also be evaluated on this basis.

Coal-to-chemicals is strategic in China, as it will boost the country's energy independence, even though the process is expensive and causes significant damage to the environment. Thus, many of the China coal-based projects detailed here, in this article from ICIS Chemical Business, could still go ahead even though they may not stack-up in terms of dollars and cents. Sinopec, the state-owned energy, refining and chemicals major, is now also involved in coal-to-chemicals, which suggests an acceleration in investment.

Further, we believe that the global economy, in its transition to the New Normal, is undergoing major changes. The type of growth we saw during the early 1990s to 2007 "golden era" can no longer be re-assured.

And turning our focus to the US economy, a multi-year plan is needed to revive US manufacturing in order to create the domestic demand sufficient to absorb all of these new local crackers and downstream plants.

But, as Jeffrey Sachs, in his excellent book, The Price of Civilisation, points out, the US is in the midst of a 30-year revolt against taxes and government. There is a great deal of pressure for lower taxes, especially for the rich, and for less government spending - in the belief that these measures will, by themselves, by sufficient to bring the budget deficit under control.

Where, however, are the jobs going to come from for America's working and middle classes - the 99 percent represented by the Occupy Wall Street movement - without more government involvement in the economy?

Manufacturing industry need to be reconfigured to supply "the products of the future" for the following three customer groups:

*The increasing size of the New Old 55+ generation in the West.
*The number of young Westerners struggling with higher unemployment.
*The increasing number of people moving out of poverty in the developing world.

Peter Spitz, who founded the consultancy ChemSystems, and who worked in the chemicals industry in research and engineering roles, warns, in this excellent blog post, that the US is falling behind on innovation.

Apart from shale gas and shale oil technologies, which have created a significant number of new jobs, Spitz warns that there are "no comparable 'breakthroughs' in other areas of domestic manufacture, as far as I can tell, and a lot of concern continues to be expressed about the loss of manufacturing jobs to countries in the developing world."

He uses as an example from history, where US innovation helped to create jobs, when he writes:

"Innovations in the application of car paints and finishes were made in the US, as well as in Europe, in response to the need to reduce or eliminate the smog-producing solvents used for spraying paint resins on cars.

This led to the development of powder coatings that could be applied electro-statically and then cured under heat to form a 'skin' that is tougher than conventional paint.

This technology is now used worldwide, undoubtedly including the manufacture of Buicks by General Motors in China and by VW in Mexico. But Honda, BMW, Volkswagen, Toyota and other 'foreign' firms are also using it to build cars in the U.S. That's how the system works."

Spitz stresses that the US still has huge potential in manufacturing because of its history of innovation and good intellectual property-right protection.

These are all themes we explore in more detail in chapter 8 of our e-book, Boom, Gloom & The New Normal, and the forthcoming chapters 9 and 10.

US petrochemical companies, as they eye all that abundant shale-gas based ethane, might well have a long-term outlook for US employment prospects that puts some of these doubts to rest. It would be fascinating to hear the details.....

By John Richardson

A NEW report by the World Bank on China, summarised on the slide below, supports what we argued in chapter 6 our e-book, Boom, Gloom & The New Normal: That without the success of efforts to reform the economy, the country risks a significant slowdown.

Those reform efforts, detailed in the 12th Five-Year-Plan (2011-2015), involve tackling vested interests, such as local government officials and executives of the state-owned enterprises (SOEs), who could fight tooth and nail to keep the current system in place.

A further problem is that as global economic problems jolt China, the temptation is to revert to the tried-and-tested method of guaranteeing social stability in the short term, which is state-funded investment in infrastructure and in new industrial investment, which we saw on an enormous scale in 2009-2010. The problem is that this worsens China's imbalances by widening the gap between those with access to capital during these stimulus packages - the SOEs and the speculators who drive-up assets prices - and those without access: The 96 percent of Chinese who are forced to live on 20 dollars a day.

Pouring money at the problem also places more strain on the banking system, due to misallocation of capital as political connections can be more important in lending decisions than proper due diligence.

The World Bank also cites the need to foster greater commercialism and entrepreneurship in China, which would involve reducing the influence of the SOEs.

These are some of the themes chapter 10 of our e-book, published in March. The chapter also looks at government policy challenges in the West, as well as China.

Part of the 12th Five-Year-Plan is raising minimum wages while making huge investments in "higher-value" industries, such as electric battery-driven cars.

The aim is to justify these higher wages, and thus avoid the "middle-income track" mentioned by the World Bank, in the way that South Korea has managed.

But can this be achieved through central-planning alone in the case of China? Or is more openness required? Is a bigger role for private industry needed at the expense of the SOEs?

South Korea's history suggests that the answer to all of these questions is "yes".

China, however, has to date been hugely successful thanks to an economic model that is often compared favourably with that of the US. In the US, lack of government involvement in developing new industries is part of the problem.

The New Normal involves three major transformations in the nature of consumer markets, which are:

• The increasing size of the New Old 55+ age group in the West.

• Too many young people struggling with higher unemployment.

• Large number of people moving out of poverty in the developing world.

These are the great opportunities for future growth, if our economy can be adapted to serve their needs. Chapter 9 of our new 'Boom, Gloom and the New Normal' e-book looks at the implications for chemical manufacturing.

Today, and in the future, we need to focus on the megatrends which will drive future demand growth.

In the fields of water and food, we should focus on reducing the amount of waste, and the output that is lost when product is moving to market.

In developing new products and services for the over 55s, we should focus on core needs, such as food, water, health, shelter and mobility.

This will enable us to 'do more with less'. We will reduce carbon footprint, and enable output to be afforded by the maximum number of people.

These changes in market drivers will have a profound impact on how, and where, products are manufactured.

Manufacturing processes will need to change in many companies as we transition to the New Normal. Quality will matter more and more as we move away from the 'throwaway society' of the past couple of decades.

So will approaches such as Process Intensification. This involves reducing the size of chemical and plant equipment, and can often enable companies to lower capital and operating costs whilst reducing waste.

The chemical industry has long been an enthusiastic champion of the importance of Quality management. It was one of the first to appreciate the importance of the concept of the 'learning organisation' that was originally brought to the West from Japan.

But in the early 2000s, the Quality movement seemed to stall. Many of the people who had launched this revolution retired. More worryingly, some companies began to forget that Quality was a process, and had to be reinforced by senior management at every possible opportunity.

Now, we need to relearn that having the right corporate philosophy is the critical starting point. This includes a focus on benefiting wider society, good leadership, and on rooting out inefficiencies through getting everybody involved in processes and problem solving.

Chapter 9 will hopefully help companies to ensure that manufacturing delivers the competitive advantage that is required as we transition to the New Normal.

FREE DOWNLOAD OPTIONS FOR CHAPTER 9

Click here to download a 2 page summary of the Chapter.

Click here to download the full Chapter.

Click here to view the 6 minute video with Paul Hodges.

By Malini Hariharan

Work on commercialising a green route to paraxylene (PX) purified terphthalic acid (PTA) and other aromatics is speeding up.

US companies are at the forefront of recent developments. Virent is looking to produce a sugar-based ­aromatics stream containing benzene, toluene and xylenes using traditional chemical ­catalytic processing, writes fellow blogger Doris de Guzman in the latest issue of ICIS Chemical Business.

The company expects to have its first ­commercial-scale bio-PX plant on line by 2015.

Gevo plans to produce bio-based PX by converting fermentation-derived isobutanol to PX and is targeting commercial production by 2014. The company has already tied-up with Coca-Cola and Toray Industries, which claimed in November last year that it was able to develop the world's first 100% bio-PET fiber in a laboratory scale using Gevo's bio-PX.

Another US company, Avantium, is developing a new sugar-based monomer called furan dicarboxylic acid (FDCA), which can be reacted with monoethylene glycol (MEG) to make polyethylene furanoate (PEF), an alternative to PET resin.

Even SABIC is not ignoring the green wave, and has filed a patent claiming PX production via use of terpenes such as limonene found in citrus fruits.

However, the new routes come with many disadvantages and work still needs to be done on oensuring commercial viability.

Eric Bober of Nexant ChemSystems points out that capital expenditures for the initial commercial plants will be high, as these are first-of-a-kind plants as opposed to the 'nth' plant status of petrochemical facilities. A world-scale conventional PX plant is now 1m tonnes/year and likely four times as large as a bio-PX line.

Bio-derived products will likely locate near the available renewable feedstocks, which could increase logistics costs relative to the conventional supply chain.

Despite these issues, the enthusiasm for these new routes is still strong given the support from consumer product companies that are willing to pay a premium for these 'green' products. But will this continue in the changing economic climate where the focus is clearly on cutting costs?

By John Richardson

Wen Jiabao has been at it again. His extraordinarily strong comments on Tuesday follow those he made last month about the risks of a return to the economic chaos of the Cultural Revolution.

On this latest occasion, he has taken aim at the state-owned banks. China's premier, who is to relinquish power later this year, believes the banks make money "far too easily", and that their monopoly control of lending is starving private enterprise of financing.

We saw this last year as small and medium-sized enterprises (SMEs), which make up the bulk of chemicals and polymer buyers, struggled to obtain official lending. They were forced to increasingly turn to the "shadow bank system," thus paying exorbitantly high interest rates, as the central government reduced the amount of money the state-owned banks could lend in order to tackle inflation.

A tight rein on official bank lending has continued into 2012. This is one of the main reasons why chemicals and polymer buying continues to be "hand to mouth".

Wen's comments follow the announcement in March of a trial scheme in Wenzhou. Private investors in the eastern city will be encouraged to buy into local banks and to set up financial institutions, such as loan companies and rural community banks, said the State Council.

But resistance to further reforms is inevitable because of strong "vested interests", which we discuss in chapters 6 and 10 of our e-book, Boom Gloom & The New Normal.

The misappropriation of funds flowing from the state-owned banks to the state-owned enterprises (SOEs) has made some individuals very, very rich. Between 16,000-18,000 government officials and executives from the SOEs stole $123bn of public funds between the mid-1990s and 2008, says The Economist, quoting data from the People's Bank of China.

Successful financial-sector reforms are essential if China is to escape the "middle income trap".

SOEs need to be made to work harder to obtain financing. No longer should they be allowed to add industrial capacity, easily funded through their cosy relationships with the state-owned banks, that fails to add sufficient value to the economy.

Private companies must also have greater access to finance. It is this sector of the economy that has the potential to be the main driver of the innovation necessary for China to escape the middle income trap.

But can any of this realistically happen given that politics in China, like everywhere else, is the art of the possible?

And even if China's new leaders are as reform-minded as Wen has attempted to be during his decade in office, they will take time to settle in. They might need several years to build-up the confidence, and the political muscle, to take on the vested interests.

Can China afford to wait that long? 

By John Richardson

SOME commodity chemicals companies still assume that, if they build new supply, demand will always eventually catch up with supply.

The risks of not building new capacities, at times of easy financing and feedstock availability, are also viewed as too great. These include deteriorating economies of scale and loss of market share.

Thus in the US, for instance, the American Chemistry Council estimates that around $25bn (€20bn) is being invested in about 30 expanded or new US production facilities.

Companies are often also at the mercy of events because of their failure to predict major shifts in supply and demand dynamics. For instance, the current global tightness in butadiene appears to have caught producers by surprise.

A lot of money can be made or lost through sheer luck, therefore. To again use butadiene as an example, $10bn in earnings before interest, taxes, depreciation and amortisation (EBITDA) were transferred from the world's butadiene consumers to its suppliers during 2011, estimates Rafael Cayuela, butadiene commercial manager for Styron, the global plastics, latex and rubber producer.

Because the industry has always been run in this way and because, as the example above illustrates, this reactive approach can deliver outstanding profitability, the risk of inertia is substantial.

Speciality chemicals companies such as BASF and Bayer Material Science (BMS) are very different. For several years, they have been developing new processes and products to serve what they predict will be the major demand drivers over the next 30 years or more.

These new demand drivers are the megatrends: ensuring there is enough food and water to sustain global growth, the impact on economies and societies of changing demographics, such as ageing populations in the West and the impact of China's one-child policy, and the need to reduce carbon footprints.

Commodity chemicals companies argue that this only applies to the likes of BASF and BMS because they are "innovation" companies and so must constantly develop new products for new markets.

BASF and BMS also benefit from the somewhat more patient and longer-term approach of European investors compared with those in the US.

Further, neither of these two European majors have access to low-cost feedstock. Basic commodities, therefore, make no strategic sense for them and for other speciality players in a similar position.

And unlike the constant innovation that is taking place in specialities, the last commodity polymer to be invented was linear low-density PE (LLDPE) in the late 1950s (LLDPE didn't gain widespread commercial acceptance until the early 1980s). Old, well-established products encourage adherence to old and well-established ways of running businesses.

But the megatrends are reshaping the global economy and so have huge implications for chemicals companies in both the commodity and speciality sectors.

For example, 272m Westerners are now over 55 years (29 percent of the population), according to UN population data. Further GDP growth will be limited by reduced spending as people save for their retirements.

And the one-child policy in China will result in the ratio of workers to retirees (presuming workers continue to retire at 60) dropping from roughly 5:1 today to just 2:1 over the next 20 years, says Wang Feng, director of the Brookings-Tsinghua Center for Public Policy in Beijing. Between 15-25 percent of the country's 1980-2010 GDP growth was the result of a favourable age structure, he adds.

Commodity chemicals companies need to accept that building capacity on the assumption that demand will always catch up with supply no longer works.

In our Monday blog post we will discuss these megatrends further and provide examples of how companies can proactively develop new markets using polymers that were invented many decades ago. New applications do not necessarily require new products.

Instead of being reactive to market fluctuations in demand beyond their control, companies will thus be able to create and virtually dictate levels of demand.

Dupont's Ellen Kullman

By John Richardson

Dow Chemical's decision to cut 2,400 jobs, as it posted a 32% drop in earnings per share, was the result of what CEO Andrew Liveris said was difficult conditions that "may have extended staying power, as the new reality is that we are operating in a slow-growth and volatile world."

DuPont is to shed 1,500 jobs. CEO Ellen Kullman said: "Current uncertainties in the global economic outlook, softer demand in certain markets and strength in others require realigning business resources to match current growth opportunities and increase responsiveness to rapidly changing market realities."

The blog thinks that more redundancies across the chemicals industry are likely as companies respond to the New Normal, which involves a VUCA world. 

The good news is that, as Kullman points out, there are rapidly changing market realities that represent tremendous opportunities for chemicals companies.

Don't follow the herd... 

By John Richardson

ISN'T it amazing how we keep getting caught out by the unexpected, from the global financial crisis to  China is entering a period of much-lower growth?

No, not really. As long as we keep being driven by the short attention-span of financial markets and the demands of quarterly financial reporting, we will keep being shocked by supposedly unexpected events. If we gave ourselves the freedom to think outside the box, we could make more accurate predictions.

The other problem is the understandable desire to run with the herd.

For example, "in those early days (in 2010) almost no one wanted to hear about problems with the shale gas boom - the need for enormous amounts of water for fracking, the high climate impacts from fugitive methane, the threats to groundwater from bad well casings or leaking containment ponds, as well as the unrealistic supply and price forecasts being issued by the industry," writes Richard Heinberg, in this article from oilprice.com.

"I recall attempting to describe the situation at the 2010 Aspen Environment Forum, in a session on the future of natural gas. I might as well have been claiming that Martians speak to me via my tooth fillings. After all, the Authorities were all in agreement: The game has changed! Natural gas will be cheap and abundant from now on! Gas is better than coal! End of story!"

It is far from being the end of the story as Heinberg neatly outlines.

Innovation in shale gas only happened because US natural-gas prices were at historic highs.

The recent collapse in prices to record lows led Rex Tillerson, CEO of ExxonMobil, to commen recently: We are all losing our shirts today. . . . We're making no money. It's all in the red."

Natural-gas producers do not operate as charities. They are already consolidating, and further consolidation is inevitable, which will drive prices higher.

The shale gas process has also proved to be a lot more expensive process than people realised, requiring lots of holes to be drilled to reach the gas "sweet spots".

As Heinberg adds: "No, shale gas won't entirely go away anytime soon. But expectations of continuing low prices (which drive business plans in the power generation industry and climate strategies in mainstream environmental organisations) are about to be dashed. And notions that the US will become a major gas exporter, or that we will convert millions of cars and trucks to run on gas, now ring hollow.

"One matter remains unclear: what's the energy return on the energy invested (EROEI) in producing "fracked" shale gas? There's still no reliable study. If the figure turns out to be anything like that of tight "fracked" oil from the North Dakota Bakken (6:1 or less, according to one estimate), then shale gas production will continue only as long as it can be subsidised by higher-EROEI conventional gas and oil."

The blog therefore thinks that quite a few of the US shale gas-based petrochemicals projects should not happen. This is the result of not only the uncertain economics of shale gas, but also because of the demand outlook.

But at least the financial sector, as the New York Times points out, has made a fortune from hyping up the shale-gas Ponzi scheme.

Now isn't that a nice thought to warm our hearts as we approach the weekend?

By John Richardson

ALL of yesterday's excitement about the US overtaking Saudi Arabia and Russia by 2017 to become the world's biggest oil producer - and exceeding Russia to become the world's biggest gas producer by 2015 - needs to be taken with a very large pinch of salt.

The release of the International Energy Agency (IEA) report, which made the above predictions, made fantastic headlines. But, as Fatih Birhol, the IEA's chief economist concedes, the geology of shale and tight oil and gas in the US is "poorly known".

Further, the American Petroleum Institute is careful to talk about the "opportunity" that hydraulic fracturing represents for America, rather that it being a sure thing.

Perception is crucial and so science can sometimes not matter. So, even if there is no significant risk to aquifers from the fracking process, as gas-industry experts have assured the blog, fears about pollution could still lead to regulation that holds-back production.

The large volumes of water consumed in the process might also lead to restrictions, even though, as we have also been assured, the problem can be resolved through investment in water purification and recycling.

Another unknown is how other energy producers might respond to the possible loss of their market influence.

Russia, if it can get its act together, has the reserves to prevent the US from becoming the world's biggest gas producer.

Saudi Arabia might also (but this is as big a stretch as Russia tackling its corruption issues) find a solution to its electricity-generation conundrum. Exports of crude are forecast to decline on the increasing demand for fuel oil for power stations.

Cheap electricity is crucial for social stability in the Kingdom, hence soaring demand, poor conservation and therefore the predictions of declining crude shipments.

But Saudi Arabia has plenty of non-associated inland gas fields, and Saudi Aramco is heavily focused at the moment on raising gas production for power plants - although these gas reserves are sour and, as a result, will be expensive to process.

Perhaps Saudi Arabia could also end up importing liquefied natural gas (LNG), from countries including the US, given that supply is forecast to be abundant.

The Middle East, and many other regins of the world, might also successfully exploit their own shale-gas reserves. 

To return to the issue of shale gas in the US, it has turned out to be a giant Ponzi scheme, as we discussed earlier this month 

As Birhol said, the geology is unknown, leading to higher-than-anticipated production costs.

But as production costs have soared, so has output from the shale-gas fields, leading to US gas prices falling to a record low - thanks to the investment frenzy.

There is sure to be a consolidation in the US shale-gas industry, driving up long-term prices.

The US petrochemicals industry, despite all of these uncertainties, is surging ahead with new cracker investments. US-based vinyls producer Georgia Gulf is the latest producer to express interest in adding ethylene capacity.

The biggest other uncertainty is the health of the global economy. Where exactly, will all this new US resin and mono-ethylene glycol (MEG) be sold?

The IEA, in the same report that was released yesterday, made a confident prediction over one of the global economic uncertainties - China's economic future.

"The report assumes a huge expansion in the Chinese economy, which it saw overtaking the US in purchasing power parity soon after 2015 and by 2020 using market exchange rates," writes Reuters.

"Chinese real gross domestic product is expected to increase by 5.7% annually between 2011 and 2035."

This assumption needs to be rigorously challenged in the scenario-planning process.

A lot more than just the standard Model T.,,,

Source of picture: cCSU Archv/Everett/Rex Features

By John Richardson

THE question on my exam paper this Monday morning is what this outstanding article by the author, Charles Fishman, in The Atlantic magazine, means for the petrochemical industry.

We have all become used to the idea of the constant "hollowing out" of manufacturing in the Western world - a theme that the blog has discussed on many occasions during ICIS training's Petrochemicals I - An In-depth Introduction course.

Our slides are being adapted. What's clear from Fishman's article, and from plenty of earlier evidence about the recovery in US manufacturing, is that the old outsourcing model is changing.

Innovation in finished products will enable US companies to re-discover the lost skills of constantly improving the design of products made impossible by the tyranny of geographic distance - a big fault with outsourcing.

It will also become much easier to create niche products to serve ever-smaller groups of customers, as a result of the absence of long supply chains and the advent of 3D manufacturing.

For components suppliers, such as plastic processors, this will require an equal amount of innovation.

They, too, will take increasing advantage of 3D manufacturing to help with constantly improving the design of products, and to make much-smaller batches of products to suit niche groups of customers.

If the mass-manufacturing model for plastic processing is now under threat, what does this mean for petrochemical producers in the US?

Will they also need to also re-consider the current model of building huge million tonne-plus petrochemical complexes to serve homogenous "plain villa" manufacturing industries?

The enticement for all the cracker projects in the US - which is also helping to drive the overall recovery in the country's manufacturing industry - is of course the shale-gas boom.

But will building big, based on cheap feedstock, be of less importance in this new environment than providing speciality grades of polymers in order to serve constant innovation in manufacturing? By their nature, the profitability of such grades is driven as much, if not more, by technology rather than feedstock advantage.

Or are we oversimplifying this? Perhaps we shouldn't get too carried away into thinking that the revival of US manufacturing signals an end to the whole outsourcing model.

Low-value manufactured goods will likely continue to be made in the developing world, increasingly maybe in South America, even if China has become too expensive. The US manufacturing revival will probably only be in mid and high-level products where labour costs are less of an important element of overall costs.

Thus, there could be plenty of room for lots of feedstock-advantaged new US crackers that can export their surpluses of basic polyethylene (PE) around the world, while making a few speciality grades to serve local markets.

But what about the total demand picture? We still worry about demographics and what this means for the US, and many other economies. We are concerned that there will simply not be enough demand to absorb all of these new crackers.

And further - the Chinese might build a lot more capacity than some people think, in order to boost their self-sufficiency in petrochemicals, and take advantage of their own cheap feedstocks. The Middle East could also find a great deal more ethane.

Where will the US place of all it surplus perrochemicals? 

Let's finish on a really positive note, though: The return to innovation in local manufacturing in the US could help make all the products that don't even exist today, that will be needed by the Babyboomers as they get older.

This should also provide lots of meaningful work for young people in manufacturing industry.

Please let us know our grade for our answer to this morning's exam question.

Source of picture: Rex Features

By John Richardson

PETROCHEMICALS companies have traditionally concentrated primarily on feedstock advantage, cost efficiencies and location in order to achieve success because demand during the Supercycle largely took care of itself. This is no longer good enough.

In the first of a series of blog posts on ways that companies can create their own sustainable sources of demand, we look at healthcare.

"More than 100 years after the first heart surgery, less than 10% of the world's population can afford it. India requires over 2 million heart surgeries a year, but all its heart hospitals put together perform operations on fewer than 110,000 people," writes Devi Shetty, the Indian philanthropist and cardiac surgeon, in The Economist's 'The World in 2013' supplement.

"It is thought that less than 10% of the world's population can afford any major intervention on the heart, brain, kidney joints," adds.

He blames this on a lack of innovation in financing healthcare as a result of too much focus on developing "a magic pill, a new vaccine or a faster scanner rather than delivering what is already available".

In the developed world, health funding was devised when people retired at 60 and died at 65. But now, as we discussed yesterday, they are retiring at 60 and are living into their eighties, thanks to a health explosion.

"With the rise in life expectancy in emerging economies as well as developed ones (thanks to better living conditions, technology and social-support systems), taxpayers' money will no longer be enough," he continues.

In India, 450 million people do not pay taxes and so have no state healthcare cover. Only 50 million in India have state healthcare cover.

His solution is micro-financing through mobile phones.

"India has over 925 million mobile-phone subscribers, who spend about 150 rupees ($2.80) a month just to speak on a mobile phone," he says.

"If every mobile-phone subscriber had to pay 20 rupees a month towards health insurance, the money collected would be two-thirds of the government's total budget for healthcare."

India has a tremendous opportunity to introduce universal health care through such innovations because it has the largest number of doctors, nurses and medical institutions in the world, he adds.

Petrochemicals companies also have a huge opportunity to work with governments, with NGOs and with companies in other industrial sectors in order to help solve the health financing crisis.

Just imagine if your company introduced a successful micro-financing scheme in India.

It would be helping to create demand for its products by ensuring that many more people lived healthy and therefore economically successful lives.

And such a company would be generating tremendous goodwill for its business while doing something immensely worthwhile.

 Source of picture: http://whyfiles.org/ 

By John Richardson

MY colleague Nigel Davis has written an excellent Insight article which highlights how some chemicals companies are seeking to respond to changing patterns.

As we have discussed before, Bayer Material Science is adapting its portfolio of products in response to the megatrends - demographics, energy conservation, climate change and the challenges of providing enough food and water to sustain emerging-markets growth.

"There are many ways you can grow in chemicals but achieving anything like the growth rates of the past has become increasingly difficult," writes Nigel.

"In the short term {and in the long term, we think], chemical companies face the prospect of slower demand from China, lacklustre growth in the US and extreme weakness in Europe."

He uses the example of BASF and how the Germany-headquartered chemicals giant is working with Harvard University, MIT (the Massachusetts Institute of Technology) and the University of Massachusetts (UMass) Amherst.

The aim is to jointly develop new materials for the automotive, building and construction, and energy industries.

The research collaboration will involve chemists, physicists, biologists and engineers with know-how in different industries, BASF says. The trick will be to turn academic research into technically feasible products and processes.

"Topics already identified include micro- and nano-structured polymers with new properties, as well as biomimetic materials that emulate nature," BASF said.

"The scientists are working on lightweight construction materials for wind turbines and automotive construction and on new colour effects for cosmetic applications," it added.

"We need the creative spirit of the widest possible range of sciences to develop solutions to meet the needs of a growing world population for clean drinking water, secure energy supply and improved quality of life," president of BASF's Advanced Materials and Systems Research, Christian Fischer, said.

Such creative spirits will only prosper in companies that have top-line executives who both understand that the "rising tide lifts all boats" growth model of the past is over for good, and crucially, are prepared to act on that understanding.

Close collaboration with countries and local companies, as growth models evolve, is essential if companies are to adapt to the New Normal - as, of course, is the willingness to invest in R&D that will not always reap immediate share-market and quarterly profits-boosting results.

Carefully nurtured relationships with customers will also be a key ingredient for success.

"I have watched my customers grow for more than 10 years now, and as a result, have been able to grow with them," said a source with a global polyolefins producer.

"Many of my customers in China have gone from being commodity converters of standard-grade polyethylene (PE) to highly sophisticated producers of value-added film with, for example, high moisture protection."

If you haven't done the groundwork already, it is going be extremely difficult to play catch-up.

BASF, for instance, is already collaborating with 600 research institutions.

There is no more time left to lose.

Source of picture: Luxepost.com 

By John Richardson

CHINA'S industrial output has had the weakest start to a year since 2009 and retail sales growth has slowed, according to this article from Bloomberg.

New local-currency loans for February were also lower than the estimates of 27 out of 28 analysts in a Bloomberg News survey.

China's leaders are trying to undo the damage of 2012 by reducing liquidity in the financial system - hence, last month's lower-than-expected new lending.

Industrial output is likely down because credit is tighter - and because demand has been weakened by rising inflationary pressures.

And as for weaker retail sales growth this, of course, also reflects higher inflation.

Standard Chartered estimates inflation will average 4% this year, above the government's target of 3.5%. This suggests that more credit tightening is on the way, with an interest rate rise now expected in Q4 (we think possibly earlier).

Weaker retail sales growth is also probably the result of a dip in demand for luxury goods.

Luxury goods sales are down because China's new leadership is anxious to show that it is serious about dealing with government officials showing-off their ill-gotten wealth.

One wonders how many sales-growth estimates have been based on the assumption that China's elite would be able to carry on buying huge volumes of luxury handbags and Kweichow Moutai Co (600519) white spirit etc.

We think that that the clampdown on corruption - part of which is the pressure on government officials to cut back on "bling" - is here to stay.

Why? Because it will help make the majority of Chinese who still earn less than $10 a day a little happier.

Plus, it gives the new Politburo Standing Committee a chance to visibly take on the "vested interests" who are keen to maintain the old growth model, as these have been the people benefiting from graft whilst stocking-up on luxury goods.

Equally likely is that the air around major cities, such as Beijing and Shanghai, will be cleaned-up by closing-down highly-polluting chemicals and other factories (perhaps this is already also a factor in lower industrial output?) and limiting the growth in car ownership.

A healthier environment will help make China's middle-income netizens more content.

The renewed battle against inflation, the corruption crackdown and efforts to deal with air pollution are just three of the many reasons why 2013 will play out very much like 2012: Another year where the commodity end of the chemicals industry will have to deal with demand growth lower than during the previous decade's "economic miracle".

But innovative chemicals companies are a different matter entirely. They could see growth rates at healthy multiples over increases in GDP as they help China deal with water shortages, wasteful use of energy and pollution.

Being part of China's solution is infinitely better than being part of its problem.

By John Richardson

CHINA has to improve innovation if it is to avoid the middle-income trap.

Some people assume that success is a given because of China's great achievement of lifting hundreds of millions of people out of absolute poverty over the last two decades.

But rapid industrialisation and infrastructure spending, which were the methods of achieving the above, are perfectly suited to a heavily-controlled political system. Resources can be easily mobilised on a huge scale when the state controls both finance (the state-owned banks), and, to quote Marx, "the means of production" (the state-owned enterprises).

Now the challenge is to foster the right degree of creativity essential for innovation within what some people warn are the "confines" of the political system.

One of Xi Jinping's tasks is to ensure that the system is flexible enough to allow small, start-up companies to spring from nowhere and become producers of world-beating brands, while  ensuring that reforms don't undermine the political system.

South Korea became a democracy before successfully escaping the middle-income trap, as we discussed in chapter 10 or our e-book, Boom, Gloom & The New Normal.

Bill Dodson, author of China Fast Forward: The Technologies, Green Industries and Innovations Driving The Mainland's Future*, provides a bleak analysis of China's current innovation environment.

"As Thomas Kuhn wrote in his seminal study of the work of scientists, 'The Structure of Scientific Revolutions', most often discoveries are resisted by peers who have vested interests, yet eventually 'the community of scientists adapts - typically in nonviolent ways - as the discovery becomes a fact that expands on previous understanding," he wrote.

"The scientific method is supposed to weed out wrong or misleading results and researchers to contribute to a base of standing knowledge upon which others may continue to build. The court systems in a civil society function similarly, with judgments passed based on a body of evidence that is indisputable in its objectivity and certainty.

"Both science and society in China are based on patronage, though. Patrons are typically political appointees with ties to the Chinese Communist Party. They are made department heads, school directors and research presidents.

"Often, political appointees have little or no experience in the fields they are charged to manage. Subsequently, patrons themselves dole out positions of responsibility to scientists, funding for projects, even living quarters for the families of researchers. Consequently, researchers learn not to 'bite the hand that feeds' if one wants to advance his or her career."

This "network of patronage" means that China is ill-equipped to develop the innovation necessary to deal with its huge environmental problems, said Dodson. 

China's economy has become increasingly dominated by the state-owned enterprises, which, according to Dodson, is bad news for innovation.

"The larger the enterprise and more closely aligned with national industrial policy, the fewer degrees of freedom of research & development interests and commercial viability the entity has," he added,

Yigong Shi and Yi Rao, deans of Life Sciences at Tsinghua and Peking Universities said in an editorial in Sciences Magazine: "It is an open secret that doing good research is not as important as schmoozing with powerful bureaucrats and their favourite experts. China's current research culture wastes resources, corrupts the spirit, and stymies innovation."

The Chinese themselves, according to a survey by the design agency, frog, think it will take some time for China to catch-up on innovation.

"Companies like Apple, Microsoft, Google and Samsung were regarded as more innovative than local businesses such as HTC, Huawei, Tencent and ZTE," wrote the marketing news and analysis service, Warc, in its report on the frog study.

"A third of respondents thought it would take more than ten years for Chinese companies to become as innovative as those in the West, while a further 25% felt it would take between six and ten years."

Is it, though, just a question of time?