Asian Chemical Connections

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

As everyone focuses on when the next downturn might arrive, macro issues such as the implications of a likely US withdrawal from Iraq are rarely publicly discussed.
But if I were on the board of any company making investment decisions, I'd be worried.
If the US withdrawal from Iraq is well managed then fears such as those expressed in this article will come to nought. Sadly, "Iraq" "the US" and "well managed" are words and phrases that rarely share the same sentence and so the future looks a little shaky to say the least.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As oil prices keep on falling, it might be tempting to forget the big picture. I had another frustrating conversation yesterday with a contact who believes that there's nothing to worry about on crude (it was all downs to speculators, he said) and so we could carry on as normal once the economic crisis is over.

Nonsense. If his views are prevalent in his company, his company will eventually be out of business.

Just as an example of how the nature of demand could change, see this article from the Economist about green buildings.

Formaldehyde demand could fall as could demand for the chemicals used in sealants ad adhesives.

But opportunities for increased sales of plastics could exist in "vacuum" windows.

A sustained spell of low oil prices might damage the push towards a sensible energy future.

The crisis will also make it harder to find the money for research and development of new products to provide for this future.

Is my colleague in London a cat lover? I am, but did not take offence at the analogy.

If I knew when chemicals prices were going to rebound, I would tell you - but only for some hefty fees.

By Nigel Davis
LONDON (ICIS news)--Beware the 'dead cat bounce'. Global chemical market intelligence service ICIS pricing editors are seeing some spot prices in Asia moving up from recent lows although contract prices remain severely depressed.
Are these the first signs that feedstock-to-product price differentials are recovering?
A dead cat bounce is a "figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals in the stock," according to Wickipedia. It is derived from the notion that "even a dead cat will bounce if it falls from a great height".
As with the world's stock markets, it is too early to call the upturn with anything approaching a degree of certainty. Chemical prices globally are falling because of much weakened feedstock costs.
Oil prices this week have dipped below $50/bbl which is hardly a position from which chemicals prices might be expected to recover.
But looking beyond that, it is the global demand slowdown that is giving the worlds' chemicals markets the jitters.
Industry economists work with real data and they have little visibility. Their forecasts make salutary reading.
The American Chemistry Council's (ACC's) chief economist, Kevin Swift, for instance this week told the New York Society of Security Analysts (NYSSA) that chemicals production in the US could fall by as much as 5.7% next year. This is a forecast for the sector excluding pharmaceuticals.
In the ACC's 2008-year end analysis and outlook Swift notes that forecasting now involves considerable uncertainty.
The general consensus, however, is that recession is spreading across the globe and this is affecting the business of chemistry worldwide.
"Global business of chemistry growth has essentially stalled since earlier in the year, with outright decline in the developed nations and slowing growth in most developing nations," the ACC's report says.
"As a result, global output will moderate significantly in 2008 and will further slow in 2009 before a recovery emerges in 2010. For the business of chemistry in the US the recession will adversely affect demand into 2009, resulting in lower production volumes."
Other sector economists point to slowed growth in the US and a sharp slowdown in Europe, Japan and elsewhere. The outlook is hardly bright, whichever way you look at it.
Analysts have continued to talk about the lack of visibility for the sector which is battling the demand slowdown, or rather consumer disinterest, against the backdrop of lower feedstock and product prices.
Demand has all but ground to a halt in December across great swathes of the sector. The (multi) million dollar question is when will it return.
Producers widely believe that demand will return once price/feedstock cost ratios have stabilised. There will be a new floor from which producer might expect to see greater interest in their products and from which they could hope to drive prices higher.
But we have yet to find the floor in relation to feedstock costs. And the chemical industry's customers themselves are not exactly overwhelmed with new orders.
The situation could change but is unlikely to do so rapidly and certainly not before the start of the New Year.
Swift suggests that the indicators for the US economy will become more negative as consumers retrench, sales fall, inventories rise, and production falls, which is hardly good news for chemicals.
A similar patter of reduced payrolls, mderating incomes and a "viscoious self-reionforcing cycle" is seen across other major global economies.
It pays to look forward, certainly, but it is too early yet to be overly optimistic. "Things will get worse before they get better," Swift says in his latest ACC report, "but eventually they will get better when confidence returns".

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

"Bob, I think I we should give this up as I can't get a wireless connection and I couldn't be bothered to talk to anyone."
Source of Picture: Faculty.SMU.Edu

.
......and the effect on the quality of data and analysis is one of my big concerns - particularly at a time like this when petrochemical markets are becoming harder to fathom (many thanks to Andrew Keen and his excellent book, The Cult Of The Amateur).

The overwhelming volume of information on the Internet has led to the emergence of a new breed of journalist/company researcher/data gatherer.

No longer is it necessary to speak to people on the telephone and/or to interview them face-to-face.

Instead it is possible for the clever writer/researcher to compile an article from an Internet search. You can cobble together a convincing story (on the surface at least) by lifting data, analysis - and even quotes - without checking the accuracy for yourself.

The benefit of direct contact with multiple sources is that with experience and over time you get to work out who is reliable and who isn't from your assessment of character and motives etc; in other words, intuition.

There is no substitute for getting out of your comfy chair and travelling through the Chinese hinterland in search of the Holy Grail - real inventory levels (that's unless, of course, you are frightened of someone finding out that you are fraud with very little sincere knowledge of and interest in what you do).

Yahoo Messenger etc have further eroded the need for direct contact - again, taking away the human interaction which I believe is essential to get good quality information.

Now we have a generation of journalists/researchers who are spoilt - and I am sure overwhelmed also - by all the free information out there. Because you've never had to get off your proverbial rear end to tell a convincing story to your boss, you quite probably don't even know how to.

And more recently we have seen the emergence of an army of amateur and totally untrained citizen journalists, researchers and "experts" who can witness the riots in Burma from the comfort of their armchairs and nobody will be able to tell the difference (in other words, they make it up).

I was talking to a corporate relations officer of a certain International Oil Company the other week. He told me how one of his senior executives was so disgusted by the banality of the questions being asked that he gave the interviewer his business card back and said, "I think you should recycle this."

I once suggested to someone that while the Internet was of course essential (who would want to go back to parchment after William Caxton came along?), an experiment should be tried with young journalists/researchers/analysts etc.

I suggested that we should switch off the Internet, give them only a telephone, a travel budget and a list of contacts, along with some hard-copy resources, and assess whether they were able to assemble original and accurate information.

We could then offer training for those who fell below the mark. He accused me of being an "Old Fart".

But I am not sure how much of this was motivated by the fear of telling the Emperor he really had no clothes as opposed to a genuine belief that I was wrong.

"China, please please do what we did and spend what you might not be able to afford..."

Source of picture: The Daily Maily

Whether or not China's pace of economic recovery will be maintained would have become an intensely boring topic of discussion if it wasn't so important for all our livelihoods.

More data specific to polymers and chemicals has emerged as to just how staggering the rebound has been: Imports of un-compounded polyvinyl chloride (PVC) were up by 100% in the year to June compared with 2008, according to International Trader Publications Inc.

Benzene, vinyl-chloride monomer (VCM), methanol and propylene imports were up by 100-550-% during the same period, the publishing company added.

"During the last recession, when prices bottomed around December 2001-February 2002 period, there were also spikes in imports of some products into China," said Jean Sudol, the company's president.

"What was different then versus now is that fewer products were involved, the spikes were nothing like the magnitude we are seeing now, and the surge only lasted 1-3 months. This time it's endured for 7-8 months."

Evidence of weaker demand has emerged over the last few weeks.

At the risk of boring you yet again (if you are not too worried about your job), is this demand-decline partly the result of too-much of inventory re-building of chemicals, polymers and of semi - and finished-goods?

All will hopefully become a little clearer after the very-long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of this break, overstocking and bleaker economic prospects.

On the surface, a lot of the macro-economic numbers look terrific: Retail sales grew by 16.6% in the first half of this year and by 15.4% up until the end of August.

But scratch the surface and you find that retail sales include government purchases and shipments to shopkeepers before any sales to consumers are recorded.

"This makes them a very bad proxy for consumption," writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University's Guanghua School of Management.

Retail sales-growth was in excess of the expansion in GDP (gross domestic product) over the last six years, he adds.

"Consumption (real consumption and not the retail-sales numbers) has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year," he argues

"Not surprisingly, this implies arithmetically that consumption is declining as a share of GDP."

The China Economic Quarterly (CEQ), an online research publication, agrees that the retail sales numbers aren't much use in tracking genuine consumption. Even government officials don't attach much credence to them, it adds.

But, unlike the more-pessimistic Pettis, the CEQ believes it's well within China's capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).

The reason is that there is still plenty of money in China's state-owned banks to support high levels of lending with equal oodles of cash around to maintain investment in public infrastructure.

As to asset bubbles which might lead to drastic government slowdown measures, the "hysteria is premature", writes the publication in its third-quarter issue.

"Price-earnings ratios are well under half their truly speculative October 2007 peaks.

"Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading -and investment buyers is so large that the market can continue to rally for another year or so."

But it warns: "Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms."

"We are pretty optimistic about financial sector liberalisation; less so about service-sector reform."

China has finally created a bond market, meaning capital is being more accurately priced rather than always handed out virtually free to state-owned enterprises (SOEs).

A new stock market for small -and medium-sized enterprises will probably begin trading in Shenzhen in the fourth quarter this year.

These measures should help shift the economy away from dominance by the SOEs towards what in theory are more-efficient private companies.

Extra credit mechanisms are also being created to increase the availability of consumer finance.

"But we have yet to see much evidence of a serious effort to deregulate service sectors, notably distribution and logistics, that remain sink-holes of state-dominated inefficiency," the publication adds.

Liberalisation and deregulation are crucial in re-balancing the economy away from exports and towards a genuine growth in consumption as a share of GDP.

"Don't trust the government, any doctor or any lawyer," I was once told by a drunken tour-guide in Greece before he started reciting poetry.

In this case we have to trust the Chinese government in the hope that it can do a better job than certain White House administrations.

You could argue that wouldn't be particularly difficult.

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

The Indian government has announced 17 November as the date for a public hearing to discuss the provisional anti dumping duties that it had imposed in June on imports of polypropylene (PP) from Saudi Arabia, Singapore and Oman.

The hearing will give a chance to all affected parties to present their case. Such hearings are usually a formality and do affect the end result which is a confirmation of the provisional duties.

But I have been told that it may be different this time as the Saudis, led by Sabic, are likely to put up a spirited defense. The Saudis have been busy pulling lots of government strings for the duties to be revoked.

Sabic and Advanced Polypropylene were hit the hardest - duties on their PP exports range from $440-$820/tonne. I was told that one of the reasons for the high level of duties was 'the lack of cooperation in sharing data' when the Indian government had sent its questionnaire earlier in the year. However, this attitude appears to have changed.

There's a lot at stake here and this is why the 17 November hearing is crucial. India is already in surplus and looks likely to be in this position for the next couple of years. So there's every reason for Indian PP producers, Reliance Industries and Haldia Petrochemicals, to check competition. On the other hand, many Indian processors are unhappy as the duties would force them to rely on local supply.

For the Saudis, and also other Middle Eastern producers, India is not such a big market for PP. But the ADD threat is a worrying global trend that they want to ensure does not take off.

Besides India, China is investigating methanol and 1,4-butanediol (BDO) imports from Saudi Arabia. And the European Union (EU) is investigating on polyethylene terephthalate (PET) imports from United Arab Emirates (UAE) and Iran.

The growing protectionist measures have provoked a long chain of protests with the most recent one being in October by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA Secretary General Dr. Abdulwahab Al-Sadoun has said that the association will strengthen coordination with Gulf Cooperation Council (GCC) Governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by anti-dumping regulations and other trade restrictions
"The GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules," he said.
The investigations may not sound fair to GCC producers but they face an uphill task in convincing the Indian and Chinese governments to ease protection to local producers. A lot will depend on what the GCC governments can offer or withhold.

By John Richardson

SINGAPORE (ICIS news)--Multiple production issues are likely to keep Asian methanol markets tight until at least May after which new supply might give struggling buyers more leverage, said Mark Berggren, managing director of Singapore-based consultancy, Methanol Market Services Asia (MMSA).

"There are many operating issues keeping supply tight in Asia at the moment including those in Iran, Malaysia, Indonesia and China," said Berggren late on Wednesday.

"Many of the outages in China are related to coal and natural gas feedstock and logistics constraints and problems in running coal gasifiers. This is the result of the exceptionally cold weather."

Supply could ease after May with the start-up of new plants in Brunei, then Oman and Egypt, and the return of production in Malaysia , he added.

"Sometime in the second half, assuming that there are no further unexpected operational issues, buyers' options will increase and this will limit the margins of the Chinese coal-based producers."

Global methanol production will rise by approximately 2.7m tonnes in 2010 from 2009, estimates MMSA. Production by 2014 is forecast to reach almost 54.0m tonnes.

Good news on the demand side of the equation is, as usual, from China.

The country would consume 18.1m tonnes in 2010 and would become the biggest consumer of any region in the MMSA global supply and demand balance, said Berggren.

The biggest driver of this robust growth in China is energy applications, resulting in a reversal of the usual dynamics of affordability.

"Under normal circumstances end-uses requiring the most amounts of methanol to make each unit of product would typically be able to pay the least," he said.

"But those using methanol for gasoline blending and for producing dimethyl ether (DME) in China - which have become two of the biggest single overall uses for the product - can afford to pay much more than the formaldehyde, acetic acid methyl methacrylate producers."

The outlook for the West is nowhere near as rosy as a result of weak consumer spending in the US and the malaise affecting European economies, according to Berggren.

A further problem is that demand in the West is limited to traditional end-uses such as acetic and formaldehyde where the upside is less than in energy.

The big question remains whether the rally in crude, which began in H1 last year, will be maintained.

"We don't expect any major changes in energy prices this year on the assumption that the flight of money to commodities, supported by the fiscal policy of Western governments, doesn't dry-up," added Berggren.

He predicted that firm crude could squeeze China's methanol producers as their feedstock suppliers, the coal producers, are in a stronger position in 2010.

The coal industry will be better able to raise prices in line with firm or higher oil, he said.

The annual MMSA Methanol and Derivative Analysis is published in March 2010. It offers a globally integrated analysis of methanol, formaldehyde, acetic acid, MMA, methylamines, methyl tert-butyl ether (MTBE) - and all other major methanol end uses, with additional attention to the developing energy applications.

By John Richardson

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

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

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

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

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

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

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

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

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

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

By John Richardson

The chairman of China Construction Bank has spoken about the dangers created by China's GDP (gross domestic product) expanding by more than 9.5% in 2010, which, according to many analysts, seems highly likely: GDP is estimated to have risen by 11-12% in Q1.

"It (too-rapid growth) will mean more duplication of construction, more excess capacity and higher waste of capital," the bank's chairman, Guo Shuqing, is reported to have added.

Oversupply of money and increased liquidity leading to inflation and asset-price bubbles were further problems he identified.

New bank lending amounted to one-third of China's GDP in 2009 - and at Yuan9,600bn ($1,400bn) was double the amount leant the previous year.

This latest official warning about overheating - a concern long-expressed by this blog - might indicate that further economic tightening measures are being considered.

Basic chemicals and plastics exporters to China, as we also keep repeating, are therefore going to need to budget for the possibility of a sharp dip in business during the rest of 2010.

We keep saying these things because we continue to be fed the same bland public-relations speak from chemical company officials.

They keep insisting that China will continue to deliver stellar growth, both in the short and long-term (we'll revisit the longer-term issues later this week).

If this vacuous nonsense is just for the consumption of the odd gullible journalist perhaps that's fine, as maybe beyond our view some sensible scenario planning is taking place.

But at the very least what journalists write about is being read by investors, meaning over-expectations could be followed by a sharp drop in share prices.

A Chinese coalminer

Source: www.guardian.co.uk

Over the next week, as well as keeping track of more immediat events, we will be reviewing and analysing what was said in and around last week's Asia Petrochemical Industry Conference (APIC) in Mumbai.

One of the most-interesting stories to emerge was a clear message from close to Total Petrochemicals, the French producer, that it's forging ahead with methanol-to-olefins (MTO) see below.

Here's the story:

By Joseph Chang, John Richardson and Malini Hariharan

Total Petrochemicals aims to fully prove its methanol-to-olefins (MTO) technology this year, leading to a potential $5bn-7bn (€4bn-5.6bn) worldscale project in China in the coming years, a source close to the company said on Friday.

"The economics of our MTO technology will be very competitive. We would look to partner with anyone with access to stranded coal," said the source on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Mumbai.

"This project would be very capital intensive at a cost of around $5bn-7bn," he added.
Total Petrochemicals is actively developing its MTO technology, having completed a pilot plant at Feluy in Belgium in October 2008.

The technology, jointly developed with UOP, converts methanol into light olefins (ethylene and propylene) and heavier olefins. The heavy olefins are then converted into light olefins using the UOP/Total Petrochemicals Olefins Cracking Process (OCP).

"It is a combination of UOP's process and Total's OCP technology; the olefin yield is higher than other MTO technologies," the source said.

The company plans to prove commercialisation of its technology this year, said the source.

And Total's MTO technology could provide an entry into large-scale petrochemical and plastics production in China, as foreign companies must bring more to the table compared with a decade ago, the source said.

"China has less and less need for IOCs [international oil companies] to come in and invest in projects in the conventional way. They have to bring more to the table, whether it's technology or feedstocks," said the source.

A big concern over the coal-gasification route to methanol is high water consumption. China's stranded coal reserves are in western and northern China, where water is in short supply.

Total believes it has a solution to the water issue; it is working to reduce water consumption during coal-gasification of methanol, the step before conversion of methanol to olefins, the source added.

Coal gasification plants also generate more carbon dioxide (CO2) emissions than refining, according to some estimates.

The Total process would employ carbon capture and sequestration technology to minimise CO2 emissions, the source noted.

The economics of MTO plants have been questioned because of high logistics costs.
This is because a large proportion of the polyolefins produced downstream of these facilities would have to be shipped from western or northern China, where demand is weak, to the big consumption markets in eastern and southern China.

"But a study has been done and compared to naphtha crackers it would be economic," said the source.

As part of Total's strategy of growing in Asia and the Middle East, "it would be nice to have production in China - nice, but not necessary", the source said.

Total currently supplies the growing Asian market through major production sites in Ras Laffan, Qatar, and Daesan, South Korea.

The company on 4 May inaugurated its 1.3m tonne/year joint venture Ras Laffan Olefins Cracker (LROC) in Qatar. The facility will supply its Qatofin joint-venture linear low density polyethylene (LLDPE) plant, which was inaugurated in November 2009.

Around 40% of the LLDPE would go to the Asia market, with the rest going to Europe and Africa, said the source.

Total owns 22.2% of LROC through its joint ventures Qapco and Qatofin with partner Qatar Petroleum.

Petronas seeks to scale new heights

Source of picture: www.mir.com

By John Richardson

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

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

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

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

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

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

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

Source of picture: irantrip1wordpress.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

It's a question that has puzzled many - why has Petronas, the state-owned Malaysian oil and gas major, not made any effort to scale up its petrochemicals business in the last five years.

But there are signs that this is changing. Petronas has spun off the petrochemicals operations into a new company called Petronas Chemicals which is due to be listed on the Malaysian stock exchange by the end of this year. In August Petronas Chemicals acquired BP's stake in Ethylene Malaysia and Polyethylene Malaysia. And it bought Dow Chemical's holding in Optimal Olefins, Optimal Chemicals and Optimal Glycol last year.

In a prospectus released yesterday Petronas Chemicals provided details about its business strategy and future plans.

* All petrochemical activities will to be consolidated into a single entity to maximize efficiency. This includes centralized production management to better coordinate allocation of feedstocks. The two crackers at Kerteh (total capacity of 1m tonnes/year) will be managed as a single resource.

Source: Petronas Chemicals

* All marketing and sales functions will be by handled by MITCO, a wholly-owned subsidiary
* Product portfolio will be enhanced in the medium to long term. New grades are being developed such as pipe grade high-density polyethylene (hdPE)
* Production capacities will be expanded. Operational improvements would be made at the two crackers. In addition to this the company is reviewing debottlenecking projects for certain upstream products which should enable it to increase production of value-added deriviatives.
* An expansion of its operations in East Malaysia is being evaluated to take advantage of natural gas available in that region. A greenfield ammonia and urea complex is being studied.
* And an integrated refinery and petrochemicals complex is being studied in Peninsular Malaysia with international partners. The project is being evaluated by parent Petronas.
* The company will continue to look at acquisitions both in Malaysia and overseas.

Petronas Chemicals also revealed that reliable supply of attractively priced feedstocks is one of its key competitive strengths. Ethane prices vary by facility but are low enough to position the company at par with the average Middle East ethylene producer. Propane and butane are priced lower than the published Saudi Aramco contract prices. Methane is supplied at an "attractive discount to the average of a basket of global urea prices".

The company said consultancy Nexant Chemystems has evaluated it as among the lowest cost producers of ethylene and polyethylene globally.

With such a strong position it would be imprudent to not expand in Malaysia. But the question is whether the parent has enough gas to support new worldscale petrochemical projects and if it would be willing to part with it at 'attractive' prices.

There is plenty in the prospectus to draw prospective investors to Petronas Chemicals but it remains to be seen how fast the company can implement its plans.

A-Jubail in Saudi Arabia

Source of picture: www.chemicals-technology.com

By John Richardson

SOME of the privately-owned Saudi Arabian petrochemical producers could well be forced to consolidate as a result of lack of feedstock for expansions, an industry source told the blog yesterday.

The private players in Saudi Arabia are listed on the local stock exchange, but the majority of ownership is in the hands of private individuals or companies as opposed to state-owned SABIC and Saudi Aramco.

"Mergers are on the cards, but don't ask me to guess on the time-scale. What is likely to hold things up is that some of these companies are controlled by very proud owners," said the source.

The dilemma faced by a number of the private players, which by definition are therefore small, is the Kingdom's well-documented shortage of further supplies of stranded or cheap natural-gas feedstock.

The commodity petrochemicals business is all about running faster to stand still - meaning a constant need to improve economies of scale to match similar efforts elsewhere as the volume of demand, particularly in Asia, grows ever-larger.

Absent the raw materials for new capacity and the logic is that companies could be compelled to merge, thereby gaining greater market muscle and synergies.

But cost savings would be fairly minimal, perhaps about 1-2% of the combined companies' overall expenditure, the source added.

"Even if, say, two companies are co-located at Al-Jubail they might still be a considerable distance apart, making it difficult to share utilities. You are therefore left with just a small saving on marketing, sales and distribution.

"Nevertheless, the pressure will be there to merge in order to better-compete with the big producers."

The good news for these small players was that they were likely to continue to generate strong earnings, he added.

"Polyolefin margins are a lot better than people had expected at this stage in the cycle - and there could be a supply shortage post-2011.

"And so these companies are unlikely to be short of cash - making overseas acquisitions another option.

"A third way would be to go downstream into the plastics processing industry. But I see the processing sector as growing very slowly in Saudi Arabia because of poor economics. This is the least attractive route to growth."

By Malini Hariharan

Shenhua Ningxia has finally produced onspec propylene at its new 470,000 tonnes/year methanol-to-propylene (MTP) plant after starting trial operations last month.

This marks the successful start of China's first MTP project, which is also the world's largest. There is one more due by the end of the year -Datang Power's 450,000 tonnes/year MTP plant.

Pic source: CCPECO

Shenhua Ningxia plans to start trial operations at the downstream 500,000 tonnes/year polypropylene (PP) plant in the next two months with commercial operations scheduled for early 2011.

Meanwhile, the country's first methanol-to-olefins (MTO) plant operated by Shenhua Baotou has been taken offline and is likely to restart at the end of the month.

A company source said the shutdown of the whole complex, including utilities, was to prepare the site for the winter months. It would also allow the company to assess operating problems discovered since commissioning in xxx.

A second maintenance shutdown has also been planned for next April.

The Shenhua Baotou complex includes 1.8m tonnes/year methanol unit, 600,000 tonnes/year MTO facility and plants for 300,000 tonnes/year of polyethylene (PE) and 300,000 tonnes/year of polypropylene (PP),

There is a great deal of interest in China on developing coal-to-chemical projects. And as highlighted by the blog earlier, successful commissioning of the first few projects is likely to trigger a new construction wave.

By Malini Hariharan

When it comes to methanol its all about China. Producers are expecting another strong year if Chinese demand remains robust.

China's appetite kept Asian spot prices in the $200-410/tonne range last year and the expectation is for prices to hover between $300-400/tonne this year, writes my colleague Heng Hui, ICIS pricing methanol editor for Asia.

Chinese demand, running at around 18m tonnes, will be the key support factor.
The country already accounts for a little over 30% of global demand and offers the strongest growth potential in the formaldehyde, DME and gasoline blendng sectors.

Demand growth, which is generally estimated at over 20%/year on average, is widely expected to continue at the same pace as in 2010, writes Ross Yeo, ICIS pricing methanol editor for Europe.

China's role will become even more critical once Methanex starts operations at its delayed 1.3m tonnes/year project at Egypt. The plant was originally due to start in Q1 2010 but is now under commissioning with volumes likely to flow in Q1.

Markets will also have to absorb nearly 3m tonnes of new capacity that was brought onstream during 2010. The full impact of this was not felt last year as the new plants were commissioned during shutdowns at other plants.

And China is also adding capacity - estimates for 2011 range from 2m to 6m tonnes. Total capacity last year was 27m tonnes.

However, the average operating rate was less than 50% in 2010 creating room for imports. The big question is whether imports will continue.

Source: CBI

Traditionally, Chinese coal-based methanol plants have run hard when prices are over $300/tonne. But a government move to restrict emissions last year resulted in reduced production even at high prices.

Production was also hampered by the redirection of feedstock natural gas to heating purposes during the winter season in China, as per the government's mandate every year.

But the situation this year is still unclear and a rise in local production can easily put pressure on exporters.

"I think it could be a volatile year - Chinese production has to balance the market," warns one producer.

By John Richardson

SAUDI Arabia's crude-oil reserves may have been overstated by as much as 40% or 300bn barrels, according to this article on February 8 in the Guardian, based on cables between Saudi and US diplomats obtained by Wikileaks.

The blog the Oil Drum used the occasion of the article to recap its many posts on the Saudi, and the Middle East in general's, overstatement of crude reserves.

Unreliability of reserve figures dates all the way back to the 1980s when OPEC said it would base quotas on reserve levels and hey presto, many of the members increased their reserve levels. Independent auditing of these new levels hasn't taken place, it is claimed.

The immediate implication of the Wikileaks cables is that Saudi Arabia might well not have enough spare capacity to prevent crude prices from rising in the future.

This is a separate issue from the oil price right now which has been pumped-up by rising political unrest in the Middle East and speculation. As this recent article in the Financial Times points out, supporting the long-held view of the blog, there is plenty of slack all the way along the supply chain to create the substantial change of a sharp price correction. This decline would be exacerbated by the speculative money pouring out of the market.

As far as the long term goes the latest Wikileaks scoop will delight followers of the Peak Oil theory.

We remain unconvinced whether the ancient theory is now at last about to be proved right. There is an awful lot of natural gas oversupply at the moment and the potential for a great deal more thanks to shale gas and growth in liquefied natural gas (LNG) capacity.

This other Oil Drum post points to an example of another technological breakthrough, like shale gas, that could raise US oil production by at least 20%.

But what Wikileaks has re-emphasised is that, surprise, surprise, Middle East reserve figures are not to be trusted. And in the case of Saudi Arabia, it may see a decline in its role as the world's most-important swing producer.

Great uncertainty also surrounds how much natural gas the Kingdom will produce in the future, according to an industry observer who spoke to the blog earlier this week.

This has big implications for availability of gas feedstock for petrochemicals and for the future price of the feedstock.

"Saudi Aramco is making lots of investments in onshore and offshore gas exploration," he said (see the link above for details of these investments).

"We have yet to see any production from these investments. In the Empty Quarter in Saudi Arabia, two of the foreign investors in gas exploration have not renewed their licenses to carry on exploring.

"And even if many of the new wells start producing gas nobody has a firm idea on how wet or dry the resulting output will be."

By Malini Hariharan

The blog has been reading some more interesting reports filed by ICIS colleagues from the International Petrochemical Conference at San Antonio, US. The conference, hosted by the National Petrochemical and Refiners Association (NPRA) concluded yesterday.

* Chevron Philip Chemical's announcement of a a feasibility study on a ethane cracker at an existing US site helped keep up the optimism at the conference.

The cracker could have a capacity of as much as 1m tonnes/year of ethylene, estimated a market source.

The company said that the project would utilise advantaged feed sources expected from development of shale gas reserves in the country. The study is due to be completed in 2011.

"We are finalising our evaluation of potential sites and advancing discussions with... contractors," said chief operating officer, Tim Taylor.

Chevron Philip's announcement follows other planned expansions in the US that the blog listed recently.

* Nova Chemicals will upgrade its Corunna cracker in Canada this year to take 100% light feedstock to take advantage of the increased ethane from Marcellus Shale reserves in the US via pipeline, reported Brian Ford.

* Sabic is progressing on its move downstream into value added products. It plans to commission a world-scale isocynate complex in Saudi Arabia by 2015, the first in the Kingdom. This will be a joint-venture project but the company has yet to disclose who the partner will be.

Sabic affiliate, Saudi Kayan will be commissioning its 100,000 tonne/year ethanolamines in H2 2012.

Sabic's joint venture methyl methacrylate (MMA) and polymethyl methacrylate (PMMA) projects is on track to start up by 2014.

* The industry is looking at a major shortage of monoethylene glycol (MEG). Growth in polyester would require 1.5m tonnes of annual addition to capacity but companies are being constrained by lack of feedstock options.

"You would need to build two world-scale plants every year and a world-scale plant is 700,000-800,000 tonnes, so you need 1.5m tonnes a year of glycol and nothing is coming. That's scary," said MEGlobal vice president for commercial operations Frank Hanraets in an interview with Pearl Bantillo.

"We are looking at all options [to expand]. It's a matter of where you can find the feedstock," Hanraets added.

The supply tightness is expected to continue for the next 3-5 years with global demand expanding by 7%/year and growth in China and India running at double digits.

Hanraets thinks the solution is to look at technologies such as MTO [methanol-to-olefins] and coal-to-olefins. MEGlobal, he said, is looking at these options and also the bio-route which involves using sugarcane to get to ethanol, ethylene and MEG.

By John Richardson

THE article of faith publicly expressed at last week's Asia Petrochemical Industry Conference (APIC) in Fukuoka, Japan, was that the current problems with demand in China and India were only temporary.

Discussions the blog held were packed with the conventional wisdom that not enough capacity would be built over the next few years. For example, one estimatewe heard was that there was the need for 35 crackers to be built to meet global ethylene equivalent demand growth over the next decade; so far only 24 had been announced.

But as we mentioned last week, Singapore-based PNB Parabis chemicals analyst Kunal Agrawal estimates that 11m tonne/year of yet-to-be-disclosed ethylene capacity could be built by 2015, based on available refinery feedstock. This could be on addition to the 16-17m tonne/year of capacity already announced fed by these same refineries.

One has to also worry about Sinopec's propensity to add capacity for self-sufficiency reasons, regardless of the economics.

A lot of talk at the conference was about China's potential to make use of coal for this purpose.

But the blog feels that because the environmental and economic problems of the coal-to-mono-ethylene glycol (MEG) and methanol-to-olefins (MTO) processes are so huge, the advent of a large amount of coal-based capacity will not happen during the next wave of overbuilding. If Sinopec announces firm new projects for start-up during the upcoming cycle, they will be based on refining.

We will discuss the environmental issue surrounding coal-to-chemicakls in more detail later on, but here is a rather worrying statistic: According to the consultancy Tecnon Orbichem it takes seven tonnes of coal and 2.5 tonnes of methanol to produce one tonne of olefins. When the blog asked a senior chemicals industry executive where all this carbon disappeared to, he pointed his finger upwards.

If we had $50 every time we heard mention of shale gas during the conference the blog would be very rich. Sadly we are not, which is why we have written this post.

Sufficient ethane would be available for an additional 8m tonne/year of ethylene capacity in the US over the next 20 years, according to IHS director Russell Heinen in a paper he gave during the event.

In an interview with the blog, two senior executives of Shell Chemicals said that their company was studying North American expansions based on low-cost ethane.

"We have 700,000 acres of shale gas assets in the US and Canada and so we feel we are in a good position," said Iain Lo, Shell's vice president, business development and ventures.

The focus would initially be on additions to existing plants in Louisiana and Texas, but Sven Royall, Shell's vice president for global intermediates, said that "everything was on the table" - when asked about the possibility of a greenfield cracker.

Mention of Canada was interesting. With all the focus on US shale gas the blog had missed the possibility that shale assets in Alberta might also be exploited for petrochemicals.

Shell's comments come after a raft of announcements over the last few months of studies into new crackers and debottleneckings of existing facilities by other US majors, such as Dow Chemical, ChevronPhillips Chemicals and LyondellBasell.

One of the ethylene derivatives anticipated to be in tight supply over the next few years is MEG, given feedstock shortages in the Middle East.

Saudi Arabia in particular has met most of the demand growth over the six or so years. Now, though, it seems unlikely that it would be allowed to add more capacity in the Kingdom for strategic reasons, even if it could get its hands on more gas allocations.

Returning to coal-to-chemicals in China, there has therefore been a lot of excitement over the syngas (made from coal) to oxalic acid and then on to MEG process, bypassing the need for ethylene.

It takes 4-5 tonnes of coal to make one tonne of MEG via this route, said an industry observer. While not as bad as MTO this is still pretty grim.

So the conventional ethylene route seems the likely means of meeting perceived future demand over the next 5-6 years.

Shell, in the same interview with the blog, disclosed plans to add two OMEGA process MEG plants in Qatar (each 750,000 tonne/year) by 2016-2017.

The industry observer also told us: "It makes sense to build MEG capacity in the US to serve the local purified terephthalic acid (PET) and textiles industries, which are mainly based in South and North Carolina.

"The US is a significant net importer of MEG and so this new capacity would be backing-out exports.

"As far as ethane supply goes, it is not rocket science to reverse the flow of pipelines that currently go from the south to the north. Ethane could be made to flow from the Marcellus shale-gas fields to new crackers that may be built in Texas and Louisiana. These facilities would then supply the MEG to the Carolinas."

This entire post has talked about capacity. We have not discussed why the industry believes in the doctrine of a continued global economic boom.

The reason for this is that we are journalists and so always endeavour to faithfully report what people tell us.

What APIC told us was that the delegates we spoke to, and listened to during presentations, were either unaware - or didn't want to publicly discuss - profound changes in the global economy.

These are detailed in our new e-book - 'Boom, Gloom and the New Normal: how Western BabyBoomers are changing global chemical demand patterns, again.'

Changes in demographics in the West - and a major shift in both demographics and government policy in China - need to at the very least be discussed openly by the industry.

There may be good reasons to discount what we argue in our book, but we have yet to hear them.

By Malini Hariharan

The doom and gloom affecting many segments of the petrochemical industry has yet to reach methanol. Asian spot prices have been stable since January and have hovered in the $340-350/tonne range during the last three months.

Methanol traditionally tracks crude oil prices but the product has been unaffected by the recent slide in crude. Producers have successfully held on to contract prices with Methanex recently listing its July contract price as a rollover of June's $420/tonne. In the US, Methanex has maintained a contract price of 128 cents/gal for the last six months.

Buyers are hoping for a price correction in the coming weeks, writes Heng Hui, ICIS pricing editor for methanol in Asia in this week's pricing report.

First, they expect supply to improve following the restart of Brunei Methanol's 850,000 tonnes/year plant and Petronas' 1.7m tonnes/year plant this week. However, the Petronas plant may not run at full capacity after restart. Some pipelines that supply natural gas to the plant have reportedly been affected by the massive Japanese earthquake in March and may need to be replaced.

Buyers also expect recent declines in Chinese domestic prices to trigger methanol exports. Prices and demand from key sectors such as formaldehyde and MTBE have been easing since May. Power shortages, documented by the blog earlier, have also hit operations of formaldehyde plants in some provinces.

Discussions for exports have started with talks centred around re-exporting imported product as shipping out locally produced methanol is not viable because of high logistic costs.

But these developments could be shortlived.

China, which accounts for around 40% of the global market, saw demand in April drop by around 3% month on month to 2.15m tonnes, estimated Ken Yin, the China methanol editor, in the Chemease China Methanol Monthly for June.

However, demand was up 25% compared with April 2010 and China appears to be on track to post an impressive 18% growth in methanol demand this year driven primarily by the dimethyl ether (DME) and gasoline blending segments. These two sectors currently account for around 33% of Chinese methanol demand and are poised to grow by 30% this year.

If that materializes methanol could stay firm for the rest of the year. The blog will be discussing the future for methanol, especially in China, in another post later this week.

By Malini Hariharan

China is well set to take on an even larger role in the global methanol industry. The country already accounts for a little over 40% of demand and its share is set to expand rapidly in the coming years.

The blog recently caught up with Ken Yin, the China methanol markets editor at Chemease for an update on future prospects.

Ken expects Chinese demand to touch 24m tonnes this year as against 20m in 2010. There is plenty of local capacity - estimated at 42m in 2010 which is likely to reach 50m by the end of this year.

Companies are rushing to start up new plants in anticipation of demand for from the dimethyl ether (DME), gasoline blending and methanol-to-olefin (MTO) sectors.

These three end-uses will be the key drivers to Chinese methanol demand in the future with only moderate growth coming from the traditional end-user sectors of formaldehyde and acetic acid.

DME has seen some hiccups this year as the Chinese government clamped down on its use in LPG blending because of safety issues. But it has started drawing up national standards for DME use with LPG and also specs for the gas cylinders. These are likely to be ready by June 2012.

And DME could emerge as a much bigger play if producers are successful in their trials of using pure DME as a household fuel, points out Ken.

Methanol use in gasoline blending is also ready to take off once the government introduced national standards. These were due last year but were delayed as trials were not completed.

The government is widely expected to introduce a M15 national standard this year which will allow 15% blending of methanol with gasoline. Some provinces have carried trials of 85% blends but The M15 blend is the most favoured as it does not require retrofitting of engines.

Methanol use in gasoline blending and DME is projected to grow by 30%/year. The figure could be higher if government speeds up implementation of new standards.

But the industry is likely to see resistance for state-owned refining companies such as Sinopec as increased use of methanol in gasoline blending or blending DME with LPG would affect its sales.

China's methanol economy is gradually taking shape and no doubt providing ideas to other countries around the world.

By Malini Hariharan

Methanol continues to be an exception to the general weakness seen in Asian petrochemical markets.

Spot prices have crossed $410/tonne in the important China market and could remain firm for the rest of the year. Prices have risen by 11% in the last month.

Chinese speculators have been driving up prices as they expect the Zhenzhou Futures Exchange to introduce a methanol contract in October or November, explained Ken Yin, China methanol editor at Chemease.

Financial companies have started to gamble, buying Middle East cargoes which will take 3-4 weeks to arrive in China, Yin added. Stocks in shore tanks along the coast of China are now around 500,000 tonnes.

The strong buying interest has come at a time when spot methanol markets are tight as a result of plant turnarounds and outages globally. End-users of methanol such formaldehyde or acetic acid producers have so far been able to absorb the price hikes, but purchase volumes are said to be limited.

This is not the first time that expectations of an imminent launch of the futures contract have fuelled markets. The contract was due in March and then in June when markets experienced similar rallies.

But if the contract is introduced in the next couple of months there is a very good chance of prices climbing even higher until the realities of the health of the global economy dampens the speculative fever.

By Malini Hariharan

The blog has been trying to get more information on what's driving Chinese interest in liquefied petroleum gas (LPG)-based petrochemical projects.

Plans for eight propane dehydrogenation (PDH) plants have already been announced and more could be in the pipeline as Chinese companies believe the country's propylene deficit will expand in the coming years.

"Globally, LPG is in surplus and propane is abundantly available. There is a huge differential between propane and polypropylene (PP) prices which is driving these projects. Plus given the shortage in propylene companies believe that prices will remain firm," explains the C1 (an ICIS service) LPG analyst at Shanghai.

But although some of the companies have already tied up with international PDH technology providers they have yet to finalise sourcing arrangements for propane.

Most of the projects are in the coastal provinces and companies will be looking to import propane. Some are trying to contact Middle East suppliers for long-term contracts.

The scenario sounds similar to coastal methanol-to-olefins (MTO) and methanol-to-propylene (MTP) projects where companies are looking at importing huge volumes of methanol.

Economics of projects based on imported propane is a big question given the poor track record of many of Asia's PDH plants. But the blog was told a familiar story - Chinese companies are not evaluating profitability or doing a balanced analysis. What they are keen on is riding the latest wave.

By Malini Hariharan

The US is looking to introduce fresh measures targeted at the petrochemicals industry.

The specifics of the new sanctions are not yet available but the goal, says this report, is to bar foreign companies from doing business with Iran's petrochemical industry by threatening them with being banned from U.S. markets. US companies are already banned from doing business with Iran.

The sanctions are expected to be announced today and would build on measures that were introduced against Iran's oil and gas industry.

Europe too is likely to introduce similar measures at a later date.

The US move comes after an International Atomic Energy Agency (IAEA) resolution late last week expressing "deep and increasing concern about the unresolved issues regarding the Iranian nuclear program."

The new sanctions promises to create another round of problems for Iranian petrochemical producers who have successfully managed to do business around existing measures. The exception has been aromatic producers who have had to cut production to divert reformate for gasoline production after US sanctions on gasoline imports was introduced in 2010.

But other petrochemicals, including methanol and polyethylene, continue to be exported in large volumes with the help of Dubai-based traders. Countries like China also do not have any problem taking in Iranian product and it remains to be seen if China will accommodate to any new US measures.

Take the case of methanol. Iran overtook Saudi Arabia to emerge as the largest methanol exporter to China last year, exporting 2.1m tonnes. The trend has continued this year with exports of 1.7m during Jan-Sep 2011.

Iraninan companies had told the blog previously that they have adjusted to a life of sanctions with innovative ways of doing business. But with pressure from the US set to rise, a disruption in trade and further delays to new projects is very likely.

By Malini Hariharan

Chinese methanol demand growth in 2011 has beaten expectations thanks to rising requirement from the gasoline blending and methanol-to-olefins (MTO)/methanol-to-propylene (MTP) segments.

Demand last year is estimated to have expanded by an impressive 30% to reach 26m tonnes, well above earlier forecasts of 19% growth, according to Ken Yin, the methanol editor for China.

Most of the growth was captured by increased local production with import volumes holding steady at around 5.7m tonnes.

The outlook for 2012 is robust with demand projected to hit 31m tonnes driven once again by gasoline blending, start of new MTO/MTP plants and also dimethyl ether (DME)

The strength in Chinese demand should support higher product prices across Asia, writes Heng Hui, ICIS pricing editor covering the Asian methanol market.

Market participants expect prices to hover in the range of $350-450/tonne CFR Asia this year - higher than the $300-415/tonne CFR Asia range seen in 2011.

But spot prices are likely to be volatile during the year. Asian buyers have been reluctant to sign contracts with Iran after the latest round of sanctions by the US and this is likely to force Iranian producers to sell on spot basis.

Additionally, the introduction of futures trading on the Zhengzhou Commodity Exchange (ZCE) is also expected to contribute to spot market volatility.

Another factor that is likely to support higher numbers in 2012 is the lack of capacity additions outside of China. New plants continue to be built in China and total Chinese capacity is estimated to hit 55m tonnes at end-2012, up from 50m at end-2011. But luckily for global producers, the country will still need to import more than 6m tonnes this year.

By Malini Hariharan

The blog continues with a review of Indian projects.

State-owned refinery major Indian Oil Corp (IOC) has deferred its paraxylene (PX) and purified terephthalic acid (PTA) projects at Vadodara in Gujarat state, to post 2015.

"The project is on hold because of commercial issues; we are looking at the total PX/PTA picture and deciding when it would be right to start this project," says a company source.

The 370,000 tonnes/year PX and 560,000 tonnes/year PTA project, near the IOC's refinery at Koyali, had earlier been planned for completion in 2013.

IOC has also shelved plans for a PX plant at Haldia, on the east coast of India, as it could not obtain an offtake commitment from Mitsubishi Chemical which operates a PTA plant at the same location, said the source.

Meanwhile, Reliance Industries is in the midst of executing an ambitious expansion programme in polyester and PTA. This includes two new PTA plants, each of 1.1m tonnes/year, with the first plant due in 2013 and the second in 2014.

The company's cracker project at Jamnagar is inching forward, but with contracts yet to be awarded the blog understands that start-up is likely to be delayed by a year to 2015.

JBF Industries has also planned a 1.12m tonnes/year PTA plant at Mangalore in south India. This unit will be downstream of a 920,000 tonnes/year PX plant that is due to be brought onstream by ONGC Mangalore Petrochemicals Ltd (OMPL) in 2013.

These expansions should feed the requirement of India's rapidly expanding polyester industry. Polyester capacity is set grow by 27% this year to 8m tonnes/year and as a result PTA imports are likely to touch 980,000 tonnes in 2012, up from a little over 500,000 tonnes in 2011.

IOC may have deferred its PX/PTA project, but the company is working on a few others. It has started a feasibility study on a 1m tonnes/year acetic acid plant at Vadodara. The target date for this project, a joint venture with BP Chemical, is 2016, said the source.

The project will be based on the 1m tonnes/year of petroleum coke generated at the Koyali refinery.

Besides the acetic acid facility, the project also includes petroleum coke gasification and syngas production.

IOC is also working on a 20,000 tonnes/year butene-1 plant at its cracker complex in Panipat, Haryana.

"We are looking at the ethylene dimerisation route with technology from Axens. Negotiations are ongoing; completion of the plant is targeted for 2014," the source added.

The butene-1 will be used captively at IOC's 650,000 tonnes/year polyethylene (PE) facility at Panipat.

By Malini Hariharan

Recent moves by methanol majors to boost their capacities have caught the blog's attention.

Sabic's chief financial officer Mutlaq al-Morished disclosed at a press conference yesterday in Dubai that the company is in talks for a methanol project in Trinidad and Tobago.

Morished declined to provide details as the talks were being conducted under a confidentiality agreement.

But the Trinidad media has reported that the $5.3bn project includes a methanol-to-olefins (MTO) plant. And there is controversy on the price at which natural gas will be supplied to the project.

Sabic's latest move underscores the difficulty that the Saudi major faces in obtaining gas in the Kingdom for future expansions. The company has no new cracker lined up and most of its projects are for value-added derivatives. At the recent GPCA conference Sabic had also revealed that it would consider investing in a cracker in the US to take advantage of the shale-gas led boost in ethane supplies.

Meanwhile, Methanex is also moving to raise its methanol capacity by relocating a closed plant from Chile to the US.

The company had said in January that it was operating only one of its four plants in Chile, and that it had also had considerable problems maintaining a supply of natural gas for operations.

Jacobs has been awarded a contract to handle the relocation, estimated to cost $400m. The plant is likely to be operational in H2 2014.

By Malini Hariharan

More news has emerged on the Trinidad methanol and methanol-to-olefins (MTO) project covered by the blog last week. Chinese major Sinopec is likely to be SABIC's partner for the $5.3bn project. The two companies are in negotiations with the Trinidad government, said SABIC.

With Sinopec as a partner, SABIC would gain access to the former's MTO technology. The technology has been developed by Sinopec's Shanghai Research Institute of Petrochemical Technology (SRIPT) and was commercialised by subsidiary Zhongyuan Petrochemical last year at a 600,000 tonnes/year facility in China. SRIPT has also developed a methanol-to-propylene technology.

Sinopec is also independently pursuing MTO projects in China using coal as the starting point. It has set up a joint venture with the Henan government for a $3.3bn project. Analysts see the move as part of a strategy to diversify its investment portfolio and reduce its heavy dependence on crude oil imports during China's 12th Five-Year Plan (2011-2015).

The Trinidad venture also takes forward a Protocol of Cooperation signed by the two companies last month to explore new business opportunities. It includes a new polycarbonate (PC) plant at Tianjin, China, using SABIC's rechnology.

The proposed project fits with Sinopec's strategy of becoming a global player. It has made significant progress in the upstream business by acquiring stakes in various oil and gas exploration projects around the world. In refining, it will be partnering with Saudi Aramco to build a new refinery at Yanbu, Saudi Arabia. The Trinidad project would be the company's first major petrochemical venture overseas.

But the project is attracting plenty of criticism in Trinidad. The price at which natural gas will be made available has become a controversial point. Questions have also been raised on whether gas should be diverted to this project at Port Lisas at a time when there is not enough being given to other plants at that location. Natural gas supplies to methanol plants at the Point Lisas complex were cut by 15-30% each month for most of 2011, reports ICIS news.

And the Trinidad Guardian reports that the US embassy has objected that US companies were not given a chance to participate in the bidding process.

The US objection makes sense as Trinidad supplies 70 pecent of US methanol imports and 60 percent of American ammonia imports.

By John Richardson

CHINA's coal reserves will last only another 38 years at their present rate of extraction, according to Kai Pflug, CEO of Shanghai-based consultancy, Management Consulting - Chemicals, in this article from ICIS Chemical Business.

This suggests that the current enthusiasm for coal-based chemicals, as coal supplies become constrained, might wane among China's policymakers.

He also suggests that many of the numerous coal-to-chemicals projects being planned in China, including Sinopec's first foray into the sector, may not go ahead because of technology issues.

But for the time being at least, his scepticism isn't denting enthusiasm for investment in the sector. This includes not only the now more conventional coal-to-methanol-to-olefins process, but also the coal-to-monoethylene glycol (MEG) process - via dimethyl oxalate produced from syngas. One coal-to-MEG project is already on-stream in China, with a second due to start-up in the second half of 2012.

Interestingly, also, PetroChina claims to have developed a technology to make paraxylene (PX) via coal, with plans to commission a 600,000 tonne/year plant somewhere in east China in 2016.

From an overseas importer's perspective, this is very probably of only minor relevance over the long term. What matters more is assessing China's appetite for raising petrochemicals self-sufficiency. If the commitment is there, targets will be met - whether it is mainly via coal, oil, or perhaps eventually even via shale gas-derived feedstock.

By Malini Hariharan

The Indian government is being asked to give a fresh boost to the chemicals industry in the 12th Five Year Plan beginning from 1 April.

A working group for the chemicals industry has detailed key measures that the government must take to ensure growth of 12% during the plan period (2012-2017).

Top of the list are improvement in infrastructure and feedstock availability. The group has recommended that the government encourage 'consortium cracker' projects to be built at Petroleum, Chemicals and Petrochemicals Investment Regions (PCPIRs) across the country.

The government can also help in securing feedstock from gas and oil rich countries, such as in Middle East and Russia.

Export of surplus naphtha from the country should be disincentivized and made available as feedstock for new petrochemical units.

New technologies such as coal-to-methanol/olefins/acetic acid and coal gasification need to be encouraged and incentives should also be given for use of bio-based raw materials.

The recommendations come after a weak performance by the chemicals industry (except the specialities chemicals sector) during the last five years. Production of basic organic chemicals declined by 6% on due to stiff competition from imports and low availability of feedstock which constrained operating rates at Indian plants.

The working group is quite clear that the industry can grow only if the government follows a clearly defined strategic road map. The alternative is to see Indian demand being served by overseas suppliers.

India has a tough task ahead. Many of the recommendations by the working group are not new but government action so far has been consistently slow.

Foreign investors have already starting building plants elsewhere in Southeast Asia or the Middle East with an eye on servicing the Indian market at least for the next decade. Luring them to India will be difficult unless there is some real action on the ground.

By John Richardson

THE economics of China's coal-based olefins industry are favourable when measured on a cash cost basis in a high oil-price environment, as the slide above from the Singapore-based consultancy Methanol Market Services Asia (MMSA) illustrates.

But even when oil prices decline, which occurred in May this year, swinging cash costs back in favour of the naphtha-based producers, there are other factors which underpin the economic strength of the coal-based industry, said Mark Berggren, managing director of MMSA.

"One of the advantages from a coal producer's perspective is that you are taking coal, which sells at around $100/tonne and converting it into polyolefins that sell at well over a $1,000/tonne," said Berggren.

(The industry involves firstly gasifying coal into synthesis gas (syngas), which is then turned into methanol, next olefins and then polyethylene (PE) and polypropylene (PP). The methanol-to-olefins (MTO) process produces both ethylene and propylene. There is also a separate propylene-only process - methanol-to-propylene (MTP). )

"China's railways also have limited bandwidth. It therefore makes much more sense, from a national perspective, to transport plastic pellets rather than coal, as the pellets deliver greater economic and energy value per railcar-load than coal."

Berggren believes that a considerable amount of planned new MTO capacity will go ahead because of sound economics, and for strategic and political reasons.

"By 2030, our base case, to which we attach a 65% probability, is that 28m tonnes/year of methanol will be converted into olefins in China. This will yield around 10m tonnes/year of olefins," he said.

Other estimates are that this amount of capacity will be on-stream by 2020, but Berggren argues that there are insufficient engineering and procurement contractors in China for this to happen.

"China was supposed to have 100m tonnes/year of methanol on-stream by now, but only 42m tonnes/year has so far been commissioned because of a lack of engineering resources," he added.

But he stresses that the government is committed to MTO because it represents a demonstration of national pride, and is part of the drive to raise self-sufficiency in basic raw materials.

Under China's 12th Five-Year-Plan (2011-105), for example, Beijing wants to raise ethylene self-sufficiency to 64% in 2015 from 48% in 2010. The target for propylene is an increase to 77% from 63%.

"Coal-to-olefins projects are also big in scale which fits in with another government objective - improving the economies of scale of its industries," Berggren said.

"In addition, realising MTO projects will involve the successful implementation of technologies that have ostensibly been developed domestically."

But he said that environmental issues would remain a background concern for MTO. Question marks have been raised over the sustainability of the industry as a result of high levels of carbon dioxide (CO2) emissions and heavy water consumption. Existing and proposed plants are located in Western China, where water is in short supply.

"The coal gasification step is where large amounts of water are consumed," he added.

"But this water can be recycled following treatment. And when you make olefins, which involves converting methanol via dimethyl ether over catalysts, water is left over from the process which again can be treated and re-used.

"On the issue of CO2 emissions, which are again high during the gasification step, the coal companies argue that you need to compare life-cycle emissions between coal and oil.

"More energy is required to get oil out of the ground than is the case with coal, especially in the case of deep-sea oil drilling, the companies point out.

"You can also sequester the CO2, and, if it has the right purity, it has a commercial value for re-injecting into oil wells to advance oil recovery."

Berggren said that not all MTO projects are based on domestically-produced methanol, via coal. Some project proponents are instead planning to import methanol.

This latter category includes Skyford Chemical. The company is due to start-up 600,000 tonne/year of MTO capacity (200,000 tonnes/year of ethylene and 400,000 tonnes/year of propylene) at Zhenhai, Zhejiang province, in Q4 this year (see the table below for a full list of projects).

"The problem with this approach is that the gas resources, for the moment at least, are under separate ownership to that of the MTO players in China," said Berggren.

"As a result, there is an issue for MTO players in that the owners of the gas reserves often see a stronger value into other uses for their hydrocarbons, such as liquefied natural gas.

"But I wouldn't be surprised that at some point, the Chinese go overseas and acquire their own natural gas reserves to make methanol in, say, the Middle East to ship the methanol back to China to make olefins."

By John Richardson

IF China's decade-long focus on coal-fuelled heavy industry is really coming to an end, as this article in The Sydney Morning Herald suggests, then the prospects for further approvals of coal-to-olefins (CTO) projects seem very bleak indeed.

"In the first 12 years of this millennium, China increased annual coal use by a staggering 2.4 billion tonnes, or 163%, accounting for more than four-fifths of global coal consumption growth," wrote The Sydney Morning Herald.

China now, however, plans to cap coal production at 4bn tonnes per year by 2015, just slightly above the 3.9bn tonnes that it consumed last year (see chart below).

CTO projects, as they are less of an economic priority than new coal-fired power plants, seem likely to face the administrative chop by local officials.

Previously, local officials were measured by their ability to deliver growth for growth's sake at huge environmental cost.

But now, Beijing is giving indications that regional administrators will be evaluated on their ability to deliver better quality growth, including, perhaps, helping to meet the ambitious coal-capping target.

Cynics will rightly say that they have heard it all before: China issuing bold promises about dealing with its atrocious air and water quality, only for policies to flounder on vested interests and corruption.

This time seems different as the attempt to cap coal consumption has backing from the State Council - China's highest administrative.

And the blog gets the impression that China's new leaders are serious about dealing with the environmental crisis. They have to be as political pressure is building.

This is further evidence of what we discussed yesterday: A redefining of what represents social good in China, and therefore a political priority. This, we think, will have implications for all chemicals projects in China - and for existing chemicals production.

As for coal-to-chemicals in general, the Tianji Coal Chemical Industry Group pollution incident will have done it no favours.

Tianji Coal officials, reportedly, delayed letting local authorities know about an aniline spill for five days.

"After sending a team to Handan in January, Greenpeace East Asia issued a report on the spill. It said that there were about 100 coal-to-chemical factories on the upper reaches of the Zhuozhang River," wrote the New York Times in this article.

"'There is a history of clashes between heavily water-consuming coal-to-chemical factories and citizens downstream who are trying to compete for water to drink,' the report said.

"Larger factories like those of Tianji use 2,000 to 3,000 tons of water per hour, equivalent to the amount of water that more than 300,000 people use in a year "

By John Richardson

Coal-to-chemicals is one of nine major industrial sectors that the China Banking Regulatory Commission has warned is blighted with overcapacity and other risks related to what it calls, rather disingenuously, "the economic cycle".

Thus, the commission has advised the state-owned banks to exercise greater caution in extending further funding to these sectors.

The other sectors are real estate, engineering machinery, steel, nonferrous metals, cement, shipbuilding, wind-power equipment and photovoltaics.

China's new leaders have to deal with imbalances in the real-estate sector and so the commission's announcement seems to be part of their plan.

The collapse of China's solar-panel maker Suntech points to problems in photovoltaics.

Suntech's failure also llustrates massive over-investment across many industries, and the wider financial risk that central and local government-directed lending now poses to China's financial system (this is a subject we shall look at in detail in a later post).

As for the decision on coal-to-chemicals, it could be argued that some of the bigger coal-to-olefins projects, backed by the politically well-connected large-scale coalminers, will be fine.

It might also be argued that job creation still remains the priority in China's inland regions, where many of the coal-to-olefins projects are located. This pressing need might trump both financial and environmental concerns.

We don't agree.

We think that very few of the numerous coal-to-olefins and methanol-to-olefins projects (those based on purchased methanol) will go ahead, given current political priorities.

The environment is one the top concerns of China's new Politburo. This is a nationwide concern.

And the self-inflicted banking-sector crisis that China now faces, which has little do with "economic cycles" beyond its control, means that, as we have already said, funding for all sorts of industrial projects will become much-harder to come by.

We think that coastal-based methanol-to-olefins projects, based on imported feedstock, will be particularly vulnerable as there are major doubts over their viability. 

One wonders what all of this means for conventional refinery-to-petrochemicals investments in China.

By John Richardson

A HOPE being expressed by chemicals and polymer traders and producers the blog has spoken to this week is that the surge in lending in China during the first quarter will result in stronger GDP growth later this year.

Total new financing, which includes both official bank loans and lending via the shadow-banking system, increased by 58% in the first quarter of this year over the same period in 2012.

This kind of thinking is also being applied to the resources sector.

The idea is flawed, we believe, because a great deal of the new money sloshing around the economy is likely to have found its way into servicing existing debts, as this Reuters article points out.

Equally flawed is the notion, being put forward by some South Korean cracker operators, that a big new stimulus programme will be launched in H2. Instead, rebalancing is the priority, as we discussed on Tuesday.

And returning to the perhaps rather perverse view that surging credit growth in Q1 is actually good news, the rise in lending is producing diminishing returns, as we again discussed on Tuesday, and has created a major bad-debt problem.

A further reason to doubt that the rest of this year will see better growth than in Q1 is the continued depressed mood amongst manufacturers, resulting from major overcapacity problems.

"As the structural adjustment in the economy goes on, overcapacity in a number of industrial sectors remains overwhelming, restraining the pace of cyclical recovery," said JPMorgan chief China economist Haibin Zhu in a research note.

Chen Letian, an economist at Rising Securities in Beijing, estimated that the average factory capacity utilisation rate in China was just 57% in 2012.

Overcapacity is a problem in several petrochemicals. Polyvinyl chloride (PVC) is one of the most prominent examples. Operating rates were just 55% in 2012, according to ICIS China.

Methanol, too, is affected by oversupply with butadiene also facing a potential big surge in capacity during 2012 which could leave the market very long. We shall look at both of these products in detail in later posts.

Many industries are oversupplied because of the investment-led growth model that has resulted in excessive spending on not only new factories, but also infrastructure.

It is not only overcapacity that will continue to exert margin pressure on manufacturers. Wage costs are set to remain on an upward trajectory.