Asian Chemical Connections

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

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

Quota cheating, lack of investment in oil infrastructure and incredibly low domestic gasoline and other oil-product prices mean that Iran could be forced to exit oil export markets by as early as 2015, according to Roger Stern of John Hopkins University.
The government would be under threat if local prices were jacked up. Cutting back on oil exports would make it hard for Iran to balance its books.
If Stern is right, this makes investments in Iran''s gas-based petrochemicals seem even more risky.
Oh and by the way, there's the slight problem of the affect on global prices if Iran is forced to quit exports.

The news that Iran is accelerating its uranium enrichment process brings the country closer to United Nations sanctions and quite possibly a military strike by the US or Israel.
The No 9 and No 10 Olefins projects are far too progressed to be cancelled - the plants are virtually complete and the only issues remaining are achieving a smooth commissioning process (no straightforward task in Iran) and sorting out utilities problems.
But what of Olefins, No 11, No 12 and No 13 etc? Will any foreign engineering and construction company and technology supplier be prepared to sign on the dotted line as the prospect of sanctions or military action becomes increasingly likely?
If you take these crackers out of olefins and polyolefins balances what will this mean or the timing of the next downturn? Answers, please. No 11-No 13 were supposed to be on stream in 2008.

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

A boring topic to harp on about again I know, but this article from my colleague Nigel Davis from the Insight section of ICIS news supports what I have been saying for the past two years.
The industry has overbuilt, and despite all the optimism engendered by project delays and probably cancellations in Iran of No 11 Olefins and beyond, this is still, as Nigel says, an unprecedented wave of new capacity.
The reasons for this overbuilding are the easy liquidity that Paul Hodges of international eChem talks about in our commentary section, the optimism over sustained strong global growth and a continuing demand boom in China and India.
Nigel's report came out on the same day that Ben Bernanke's remarks sent stockmarkets into decline.
Imagine this: a combination of an unprecented wave of Middle East capacity, greater self sufficiency in China due to the large amount of capacity being built there and a US housing sector-driven recession that Bernanke's comments were interpreted as pointing towards.
This could be a great opportunity to pick up some cheap petrochemical shares and bankrupt companies in 2009 and beyond.

Reliance is building the world's first cracker that will be entirely fed by off-gas from its huge refinery expansion at Jamnagar. This technology has been used before, but never on this scale because nobody has had enough refinery capacity to run a cracker 100% on very cheap off-gas.
The Dow strategy includes looking for cheaper sources of ethylene and for "asset light" investments, ie, where it doesn't have to spend a bundle of cash to get its hands on cheap raw material. This has proved a highly effective strategy in Kuwait through the Equate joint venture.
In addition, Dow would get access to the Indian market where the growth potential is huge.
As for Reliance, it wants technologies - Dow's great strength - and also access to the US chemicals market. The US, despite low growth, is still the world's biggest market.
And so, I think, a Dow-Reliance tie-up makes a lot of sense.
As for a leveraged buyout of Dow, the complexities of which are made so simple even I can understand them in this excellent article from my colleague Joe Chang, what about the politics?
Middle East companies would very probably have to be part of such an historically massive to deal; they have the cash and don't have pressure from nervous shareholders. I am not sure whether Sinopec or PetroChina would be interested as their focus is on securing overseas oil and gas assets.
After the Dubai Ports controversy last year, an LBO involving the Middle East would surely be blocked by Congress.

In the old days all you had to do was propose an ethane cracker with PE and MEG downstream and you were away.
But these days if you want to get feedstock, especially in Saudi, you need to offer something a bit different because of the drive to diversify to create jobs.
This is a big opportunity for medium-sized players such as Lucite with the right technologies, hence their methyl methacrylate project with Sipchem.

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

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.

The collective sigh of relief was almost audible late last week when the Fed cut its discount rate - the rate banks charge each other for lending.

Action from other central banks, including the European Central Bank, could follow this week. Analysts also rate the likelihood of the Fed cutting its formal interest rate at its meeting next month at 50 per cent or more. This is the rate charged to companies and other non-bank borrowers.

But still, this credit crisis is not going to away that easily. See more detailed analysis below, but in short here, the implications could be:

*A weaker Chinese economy. Roughly one-third of China's GDP is dependent on exports and if the US goes into recession, this is serious. Many overseas chemical projects have been justified by estimates of persistently strong demand from China for imported chemicals that will be re-exported as finished goods. Sales of locally made chemicals would, of course, also suffer

*Unfunded projects backed by smaller private companies being shelved.

But a lot of capacity in the Middle East and China is too far advanced to be cancelled. In the Middle East, many of the projects already under construction might come on stream bang on time because the producers there can make money in any market conditions. Projects under construction in China start up on schedule because the government wants to gain greater independence from imports.

Let's hope this crisis goes away, but if it doesn't why on earth didn't the supposedly smart people who run the global financial system realise the dangers? Joseph Stiglitz, a genuinely smart guy, has been warning for years about the risks, which he outlines in this excellent article

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

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

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

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

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

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

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

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

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

But the power of sentiment should not be underestimated.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Back in the 1980s, before Japan's "Lost Decade" of stagnant growth, management gurus lined up to praise the country's collective spirit as the basis of a sustainable economic miracle.

Since then, of course, the West has been consistently espoused as the best.

And even the Japanese wish they could break free of their consensus shackles, according to this week's issue of The Economist -- hence, the huge popularity of management hero Kosaku Shima of conglomerate Hatsubishi Goya Holdings.

He thinks outside the box, acts decisely, is not scared of telling people what he thinks and has been successful even though he has always sat outside political factions within his company.

And in June, Shima (see picture above) truly broke the mould when he was promoted to shacho (president) of his company at the tender age of just 60 - very young by Japanese standards.

There is one slight problem: he is a manga or cartoon character.

"Shima is influential - business people want to be like him but can't," says Yuko Kawamoto, management professor at Waseda Uniiversity in Tokyo.

"Maybe there is hope for Japanese society. We want to change, but do not have the courage."

The grim reality for the average salaryman, according to The Economist, remains a life of drudgery and of stifled opinions because of the dreaded fear of causing a superior to lose face. As a result, bad decisions go unchallenged and become ingrained policy.

Japan's chemical companies have often broken the mould through innovative technologies - and were talkiing about and acting on energy efficiency long before the current oil and environmental crises.

Sumitomo Chemical is also about to start-up a huge petrochemical complex in Saudi Arabia - along with Saudi Aramco - and is talking about a major second wave of investment at the same site. This also involves breaking the mould as it's the first occasion that a Japanese chemicals company has invested on its own in a big overseas cracker project.

But the perception remains, fair or otherwise, that the chemicals industry could and should have undergone more restructuring.

Fair or unfair?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I sounded so optimistic I almost believed this flannel myself.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Middle East producers face:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The reasons are:

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

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

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

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

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

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

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

Hope this helps!

Best Regards
John

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

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

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

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

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

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

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

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

It's easy to take pot shots at the boss, and everyone of course feels they have been underpromoted and could do the job better themselves. Andrew Liveris is just the latest in a long line of CEOs to experience both envy - and at the moment perhaps a little pleasure at their failures. The gloating reaches extroardinary heights in the comments posted on this Wall Street Journal blog entry.

Sure, he should have seen the crisis coming and not agreed to pay such a high price for Rohm & Haas.

And sure, a man being paid such massive sums of money perhaps should have had sources inside Kuwait who would have forewarned him that the commodities merger was going to collapse.

Perhaps we should also expect him to secure world peace, reverse global warming and prevent Manchester Utd from ever winning a Premiership championship again.

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.

India has launched a petition for PP anti-dumping action against Saudi Arabia, Singapore and Oman. This is the first case of this type in India.

Producers, as we predicted on this blog earlier on, will be increasingly attempting to protect their home markets as everyone searches farther and farther afield to place distressed volumes.

Expect also that countries such as India - which much more lower applied than bound tariff rates under its WTO agreement,- will seek to raise tariffs to maximum levels predicted by the international trade body.

,

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

So batten down the hatches once again.

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

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

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

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

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

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

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

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

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

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

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

And did you fiddle your expenses during the good times?

How will this one run?

Source of Picture: chemicals-technology.com

In the 12 years I've been covering the chemicals industry I don't think I have come across a time of such exceptional market muddle.

The traders love it. As a wise man said to me the other day, "When I was a trader I only cared about the price today if I was cashing in and not tomorrow."

But for the producers and buyers there are so many more factors that will shape the outcome of the second half, requiring fortunately for me hopefully some more business for ICIS training (one should always live in hope)

Here is Part 1 of what I plan to try and piece together over the next few months. Let's try and keep cooperating on data and analysis - but at the outset, does this make sense to you?

The Impact of Operating Rates, Plant Closures and New Petrochemical Capacities

Production from existing plants

This will be determined by overconfidence versus realistic confidence in the economy. This comes down to your view on the sustainability of the rebound.

To what extent have operating rate and inventory-management lessons been learnt from the oil collapse of H2 last year?

How are imminent new capacities affecting the behaviour of producers and buyers? In the first half, the tightness in some markets (for example, PP and PE) was partly the result of producers and buyers maintaining low stock levels because they expected new-capacity start-ups that didn't happen. To what degree has this experience made them less cautious?

It might be helpful to analyse Q2 chemical company results to get a feel for what production levels might be for the rest of this year.

Do the numbers add up and do the content and tone of what's been said sufficiently take into account all the risks? (Note: there are some individual company numbers on plans for overall average operating rates in H2).

The pace of permanent shutdowns in the West to reduce domestic oversupply and weaker exports positions also needs to be tracked.

Last year sudden decisions to temporarily or permanently close whole complexes - which were not necessarily entirely loss making - were forced on companies.

This was the result of the collapse in oil, the credit crisis and steep falls in demand.

To use PP as an example again, 500,000 tonne/year of US capacity-closure announcements were made in 2008 to take effect in the first half of this year.

Oversupply is still big: US PP consumption totalled just above 7m tonnes in 2008, 8% lower than the previous year with capacity still at 9.4m tonnes. So far this year (as of July) there have been no further announcements of closures.

Further factors affecting the pace of permanent closures could be divestments.

Trade buyers for distressed Western assets now seem much more likely than further private equity players and so attitudes to running marginal, or clearly uneconomic, plants might be different.

You also have to take into account environmental clean-up costs and regulations - and contractual and labour commitments.

And next: How will petchem operating rates be affected by refinery economics?

Dealing with the US refineries first:

How will refinery economics affect availability of PP and aromatics in H2? In the first half we saw a big increase in shipments from the US to Asia due to the global rate cuts, production problems in the Middle East, the peak of the Asian refinery and petrochemical turnaround seasons between April-June and the unexpectedly strong Chinese demand.

But since May/June, PP arbitrage from the US has closed on lower refinery operating rates resulting from weak gasoline demand. Benzene trade flows seem to have also reversed - in July we have heard of cargoes moving from Asia to the US, whereas in H1 there were record-high shipments the other way.

What's the outlook for gasoline, middle distillate etc demand for the rest of the year? (gasoline and middle distillate stocks are high on speculation and weak demand)

Some of the same questions need to be asked about Europe with a few
important differences, which are:

*Europe is a major exporter of gasoline to the US and so the price and availability of naphtha, and therefore petchem economics, will also be affected by US demand for the fuel

*Fuel demand in Europe is heavily weighted towards diesel and how will the European economies perform in H2 and what affect will this have on demand for gasoline, more importantly diesel, and how the refineries run? (Note: most propylene in Europe is produced from steam crackers because of the lower gasoline demand. But there is still a big link as naphtha is the main steam cracking feedstock in Europe).

I don't follow currency or shipping and other logistics markets, but these are obviously also critical factors.

Next question: How will the new petrochemical capacities run?

It's worth considering that there could be many more start-up delays, and
problems with operating new plants already on-stream, because resources were so stretched when these projects were planned and they remain stretched.

There is a shortage of engineers with the right levels of experience. Many of the projects were also planned when raw material, equipment and other costs were sky-high.

Budgets were stretched and so choices had to be made - for example, "Do I focus on my PE debottlenecking using ethylene from my new cracker or do I prioritise starting up the cracker and its new plants on time?"

Another problem is "project bunching". There seem to have been attempts to start up too many projects at the same time, further stretching already-scarce resources (a few years ago there was a lot of fevered excitement over the global economy. There was a rush to take advantage of financing while it was available in order to cash in on this growth and to maintain economies of scale).

There is, reportedly, a lack of the right kind of experience. Even companies with long track records in petrochemicals are confronting start-ups of projects bigger in scale and more complex than ever before.

"Here's your entire allocation for this month"

Source of Picture: Adammakwright.wordpress

In the words of a plastics converter from the Philippines: "Markets are so tight at the moment that we are left to pick up the crumbs. Suppliers are concentrating almost entirely on China."

The converters have been waiting for so long for the great supply surge to tip markets in their favour that forecasting is becoming a joke.

"You told me last year that by now I'd be in heaven," added the same converter.

But surely sometime soon it must change.

This converter and many thousands more like him will then enjoy the sweet taste of revenge (that's, of course, as long as China doesn't go belly up. In such an event the last company left standing wiill need to swtich out the lights on the way out of the proverbial room.

Source of Picture: www.autospies.com

Not an easy answer and not one much suited to a few paragraphs of blogging.

But here's one thought as the competitive environment becomes a great deal more difficult due to new Middle East capacity and the potential for China to move towards self-sufficiency in polyethylene and polypropylene: Have a chat with one of those poor old European refiners facing big naphtha surpluses.

Perhaps the refiners will be willing to do deals on long-term offtake deals at very preferential rates in order to keep operating. While gasoline might be falling in value in Europe for both local consumption and exports, diesel certainly isn't.

SWIMMING IN OIL?

Source of Picture: fashionfunky.com

The threat posed by Iran test-firing its Shahab-3 missiles and a rally in US equities on increased M& activity in the drug and technology industries pushed crude slightly higher yesterday after last week's steep declines.

This is yet further evidence that the oil market is why out of sync with real demand for the black stuff and just about all its derivatives.

"July's Vehicle Miles Travelled (VMT) figures were released last week, with total miles driven clocking in at 263.4 billion miles, up 2.3% from July 2008," writes today's Schork Report, the daily online data and analysis service for energy and shipping markets.

"That is a solid increase but keep in mind: Gasoline prices have decreased by 38% since last year.

"Further, July 2008's VMT figure was 3.5% lower than July 2007. Therefore, this year's 'increase' was 1.3% below 2007 and 0.5% below the 2003-07 time-step, thereby continuing a steady VMT decline."

This is more evidence that we are miles away (excuse the pun) from the credit-fuelled demand levels of 2003-07 for everything from barrels of oil and gigajoules of natural gas to synthetic dog coats.

Chemicals demand in the UK might not return to pre-recession levels until as late as 2020, Oxford Economics has warned.

But don't bet against speculators pushing crude prices back up again, especially if conflict breaks out with Iran over the missile testing and the alleged development of nuclear-weapons capability.

This is despite weak demand, as the Schork Report has pointed out, and deeply oversupplied crude and crude products markets.

Such is the oversupply that even a disruption in Iranian production (Iran is the world's fourth-largest producer) might not make much of a difference, assuming that the conflict doesn't spread to elsewhere in the Middle East.

"Saudi Arabia was running just about flat out in 2007. Now it has 6m barrels a day of spare capacity," said an oil industry observer last week. 

Recent falls in gasoline mean that its pricing could be close to "meltdown", according to this report from Bloomberg.

And as my fellow blogger Paul Hodges pointed out last week, the historically high amount of oil in floating storage is now being delivered to refiners due to a narrowing of the contango.

So I am with those who believe we are heading for $45 a barrel before the end of this year. 

Still, a two-way bet might be advisable - just in case there is another rally.

"Take it from me, peripheral vision isn't all it's cracked up to be, especially if you want to get a decent annual bonus...."

Source of picture: www.whipnspurs.co.nz

Here's a rant for Tuesday - with thanks to Paul Hodges for informing some of the thinking (I'd like to lay credit to certain parts of this...)

Purchasing managers are professionally required to wear blinkers. All they care about is making sure that they are ahead of the game because of the way their performances are measured.

So up until Q4 2008 they ignored headlines such as "US auto demand slumps on surging gasoline costs and slowing economy" and "western house prices plummet on sub-prime mortgage crisis."

Oil prices seemed to be on the forever-up and liquidity was abundant. The result was purchasing in big volumes ahead of anticipated further price rises until the great unravelling post-Lehman Brothers.

Senior strategists - whose job it was to worry about the big picture - were also wearing blinkers, deluded in the belief that 2006-07 demand levels would go on forever.

Cracker operating rates were going to remain comfortably above 80% during the coming down cycle, was the consensus view in the first half of last year.

Now the industry is going to have to live with global averages of between 60-70% over the next few years.

The chemicals industry has lost three years of demand growth as global production is now back to early 2006 levels. It is unlikely to budge much in a favourable direction until at least 2011.

The reason is that real western growth, minus all the froth of commodity and equity markets, is going to remain weak on unemployment and high personal debt problems.

Another concern is unwinding government subsidies.

Too many people might have been misled by Chinese imports over the last 7-8 months.

The strength of these imports wasn't sustainable and was due to temporary factors that have now come to an end.

Banking on China as the leader of a global recovery is utter nonsense when you look at the country's low per capita chemicals consumption and its heavy export dependency.

Any Northeast or Southeast Asian producer high on the cost curve is likely to find it harder to penetrate western markets in 2010.

How can these producers - when they import crude oil - export, say, PE to Europe at fair market prices in the face of much-stronger Middle East competition?

Trade lawyers should do very well from anti-dumping cases in 2010.

This is a protracted supply-driven U-shaped downturn, and we are only just getting towards the bottom of the U.

Lots of Middle East capacity has been delayed - and the next big wave of Chinese start-ups is only just beginning.

Studying the tone of Q3 results statements will be a good indication to what extent senior execs have taken on board this new reality (actually it's not that new - we've been waffling on about this on this blog for months).

Source of picture: www.textually.org

The political sensitivity surrounding Iran is so great that US-based companies are not even allowed to attend presentations by Iranian officials at conferences, a source said.

"I witnessed a recent walk-out during a presentation by the National Iranian Oil & Distribution Company (NIODC)," he said.

But a European office of a US company is able to do business with the Middle Eastern country, provided an entire technology and project is developed by that office.

"If as much as one email passes Europe and the US headquarters, that's enough for an investment to become technically in breach of sanctions," the source continued.

These nightmarishly difficult restrictions come as Iran attempts to build no less than seven grassroots refineries in a attempt to rectify deficits in fuel products - one each at Shahriar, Anahita, Caspian, Khuzestan and Pars and two at Hormuz.

Numerous other expansions at existing refineries are being planned with the likely investment costs running into many billions of Euros.

Scepticism is easy following big delays in previous natural grass processing, refining and petrochemical investments due to sanctions that limit financing and technology and skills transfer.

Doubts have also been raised over the level of investment in maintaining output from the oil fields that would supply this new refinery capacity.

In the case of the two crackers finally brought on-stream at Assaluyeh, the slow pace of growth in gas-processing means that they suffer operating rate cuts and even shutdowns during the winter.  

All the gas being processed during the winter months has to be diverted to domestic use because of a big shortfall in supply.

Honest and hardworking company officials on both sides of the political divide deserve solutions.

THE MOOD seems to have become a little more upbeat in the Gulf Co-operation Council (GCC) region of the Middle East thanks to the economic recovery.

"The flow of foreign funds into the GCC came to a complete standstill in Q4 and the first quarter of this year, but in Q2-Q3 it reached all-time highs," said a petrochemicals industry source.

"Whilst the mood is still a little depressed, there are signs of hope with the expectation that growth by 2011 will return to normal levels."

The Saudis had budgeted for an average crude price of $40 a barrel for 2009, but $70 a barrel was more likely, creating more leeway for government spending, he added.

"Stimulus measures haven't kicked in yet across the GCC. This should soon be the case in Saudi which will result in lots of money spent on infrastructure and therefore more petrochemicals demand."

This rosy view is reflected in a recent pick-up in project activity in gas processing, refining and petrochemicals.

KBR, for example, won a contract to supply front-end engineering and design work (FEED) and project management services for a natural gas liquids (NGL) plant in Shaybah, Saudi Arabia.

Jacobs Engineering Group has been awarded the FEED contract for Borouge 3 in Abu Dhabi - the polyethylene (PE) and polypropylene (PP) expansion due on-stream at end-2013. This would raise the Borouge joint venture's polyolefin capacity to 4.5m tonne/year.

The monster Ras TaNura project in Saudi Arabia also seems to be moving forward.

It will cost anywhere between $20-27bn and will produce either 8m tonne/year or 11m tonne/year depending on which reports you believe. Start-up is either 2014 or 2015.

Two consultants working on the project for different companies have told the blog that it is progressing.

Dow Chemical is still very much involved after suggestions earlier this year that the US major's financial difficulties might force Saudi Aramco to seek a new partner, they added.

A sign that sentiment has improved was evident from reports about the financing of the Aramco-Total refinery project at Al-Jubail.

Bids from potential lenders left the $12.8bn project 30 times over-subscribed, Reuters said last week.

Technip has won engineering and procurement (EPC) contracts to build a hydrocracker and a fluid catalytic cracker (FCC) at what will be a 400,000 barrels a day full-conversion refinery - due to start commercial production in March 2013.

The project also includes 700,000 tonne/year of paraxylene (PX).

But gas supply remains tight for petrochemicals as this excellent article from my colleague Malini Hariharan explains.

Only one cracker might go ahead in Qatar instead of the scheduled three projects - involving Qatar Petroleum and Honam Petrochemical, ExxonMobil and Shell.

The economic rebound is constraining electricity supply throughout the GCC, resulting in priority being put on supplying gas to the power sector during the summer months.

New associated gas is dwindling with undeveloped non-associated fields containing a high sulphur content of 25-30%.

Processing this extremely sour gas would become economic only at a gas price of $5-7/mBTU, according to Justin Dargin of the Dubai Initiative at Harvard University.

Are the days of cheap gas for petrochemicals in the GCC over for good?

How economic will naphtha-based production be compared with building a new naphtha cracker in Asia?

One feedstock option for the Middle East and Asia could be to make use of liquefied petroleum gas (LPG), which according to a Singapore-based business development executive with a publishing company, will be "as cheap as chips" over the next few years.

This will be the result of a big increase in liquefied natural gas (LNG) output, where LPG is a by or co-product, and refinery expansions.

Indeed, the petrochemical industry source we quoted at the beginning of this post added: "There's going to be lots of propane available in the GCC."

Aramco was also exploring under the Red Sea for the first time for oil and gas after previously concentrating exploration on Saudi's Eastern province, creating the potential for more petrochemical feedstock, he added.

At the moment, though, you can just about count the number of petrochemical on the fingers of one hand, beyond the ones already financed. This is provided you count the 35 or so plants planned for for Ras Tanura as one!

There's another problem that's as long-standing as gas feedstock, which might also be getting worse.

"I know of a refinery in the GCC that's planning a turnaround in three years. It's already worried about a shortage of engineers to execute the turnaround. India has become a much bigger draw," said a refinery industry source.

"YES, I HEAR YOU - I'M LISTENING...."

Source of picture: New York Daily News

How ridiculous does crude-oil pricing have to become before regulatory reforms occur that limit the role of financial speculation in a helpful way?

This was the question being asked by a refining industry source today after he had read this story from the Financial Times.

Call options are about to kick in which could drive the price of oil even higher even though the fundamentals are "mildly bearish", according to the FT.

Put options, when they take effect in significant numbers, have the opposite effect.

Real demand is still a long way from catching up with oil markets so heavily influenced by the financial or non-commercial players.

"Whatever too ridiculous is, and I'd argue last year was a stupid as it can get, the Saudis are likely to get on the Bat Phone to the White House at some point and demand some changes. The US government will be obliged to listen," added the source.

Inability to plan an economy because oil is so out-of-sync with the fundamentals is playing havoc with the Saudi budget-planning process, he continued.

The same applies to every government. If the other major oil producers backed Saudi Arabia, we might seem some useful changes.

This year is a positive for the world's biggest crude producer - as we discussed on Monday. The Saudi government had budgeted for an average oil price in 2009 of $40 a barrel, but this is likely to be closer to $70 a barrel, giving more leeway for infrastructure spending.

But the unpredictability of a market skewed by short-term financial sector interests could just as easily work against the Saudis.

They are pursuing a hugely important economic and social agenda which requires constant and steady funding.

At a chemicals industry level, tracking activity on the Nymex, the International Continental Exchange and the Dubai Mercantile Exchange is critically important if you want to make meaningful financial forecasts.

These forecasts should influence chemicals pricing decisions. Why push for an increase that isn't in line with the fundamentals in your markets if you believe that a spike is entirely paper-trade driven and won't last?

The danger is that if you ignore what might be underlying weaknesses in your markets, you will suffer on the downslide as customers attempt to recover their losses.

I am still thinking, as we've also mentioned before, that this rally will continue until the New Year at least - when all the fund managers' bonuses will be in the bank.

Profit taking could take place in Q1. Positions could then be rebuilt when another bottom has been reached in crude and equities ahead of the 2010 bonus payouts!

Source of picture: wartakota.co.id

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 But does the Pertamina plan really add up?

As this updated table from my colleagues at CBI in China illustrates, cracker-complex delays in China have the potential to further stagger the arrival of new volumes into the market.

Chinanewcapacitytable.doc

This follows the widespread problems in starting up new capacity in the Middle East.

The 800,000 tonne/year Fujian Petrochemical/ExxonMobil/Saudi Aramco cracker is on-stream, but there have been operating issues with downstream PE.

The 1m tonne/year Sinopec/SABIC Tianjin cracker will undergo trial runs from 28 December and so commercial production won't be until H1 2010.

But the Dunshanzi complex, centred on a 1m tonne/year, was commissioned on schedule in September. The operating rate is reported to be 85% with product being sold across China.

2.56m tonne/year of capacity is due to start-up this year compared with the original 3.56m tonnne/year.

In Thailand, the new  400,000 tonne/year PTT linear-low density polyethylene (LLDPE) plant is due to start next week, but the 1m tonne/year cracker won't be on-stream until the end of the year/Q1 2010.

A new 300,000 tonne/year low-density polyethylene (LDPE) project is not due to be commissioned until Q3 next year, according to ICIS Plants and Projects.  

The start-up is being fed by ethylene from existing crackers, but it's not clear whether this will be sufficient to quickly achieve optimal rates

Further out, there appears to be some more good news for existing producers from China.

The 800,000 tonne/year Fushun cracker, originally scheduled for 2011, has been delayed to 2102. An associated refinery has already started up, but only preliminary work has taken place on the petrochemicals complex.

Wuhan - a Sinopec and SK Energy joint venture - has been pushed back from 2011 to 2012-13, as has the PetroChina-owned Daqing project.

There are also unconfirmed reports of operating problems at several Middle East complexes brought on-stream this year.

"I think an on-going problem in the Gulf Co-operation Council (GCC) region is going to be the shortage of natural-gas supply," said an industry source.

"Every summer, until this problem is resolved, you are going to see a big pull of gas into the power sector at the expense of petrochemicals."

He suggested that there might also be issues with stabilising production at several new gas-phased polyethylene (PE)  plants due to their scale.

Existing crackers in Iran are expected to continue to experience deep rate cuts in winter as gas is diverted for domestic and power-generation consumption. Iran has plenty of natural-gas reserves, but political difficulties have slowed down investment in extraction.

A Famous Ditherer

Source of picture: sarafinewordpress.com

Chasing higher oil prices and/or a response to the now long-running recovery in Chinese demand that's become sustainable?

Not wanting to sound too much like the start of a famous Shakespeare soliloquy, these are the questions that should be wracking everyone's brains as they try to figure out price rises, which continued last week.

Ethylene rose again and low-density polyethylene (LDPE) was up by $50 a tonne to $1,235-1,300 tonne CFR China, according to ICIS pricing.

The polyolefin was at $1,130-1,180/tonne CFR China four week. Click here for a graph showing the price history for all the PE grades since January last year - Olefin-PEprices.ppt.

But interestingly, while the sentiment in the China market was described as bullish due to stronger crude and second and third tier traders and distributors were stocking up, actual end-user demand was characterised by market players contacted by ICIS as weak.

This suggests stocking up ahead of the assumption that oil prices will go higher, even though the outlook for the next few weeks is mixed given recent negative reports over the US economy. 

It then comes down to the sustainability of the eight-month long rebound in demand from China. Head-scratching continues as to where all this stuff is going, more of which later this week.

Asian cracker operators, according to my colleague Peh Soo Hwee, ICIS pricing's ethylene editor in Asia, seem to believe its worth running hard for the time being at least.

"Some of the cracker operators, notably in Japan, had reduced production to below 90% in September-October, partly due to turnarounds at derivative plants," she said in a recent note to one of our customers.

"Most of them now expect to increase rates to close to 100% next month (November)."

"So far, with the exception of a few crackers in the region running at lower rates - Chandra Asri in Indonesia at 75% and South Korea's YNCC at 90% - the bulk of producers aim to keep ethylene production at 90-100% in November."

Supporting these decisions were improvements in margins last week. Ethylene margins rose for the second week in a row as a result of the pace of C2 price increases outpacing those for naphtha, according to the ICIS weekly Asian Ethylene Margin Report.

But still, October ended up as the worst month for ethylene margins since June.

PE margins also rose on a better spread between C2s and the polymer and improved co-product credits, according to our Asian PE Marging Report - also weekly. 

Again, though, overall margins were down in October over the previous month. Stand-alone players did better than integrated operators.

Plan cutbacks and/or sell November stocks early and you miss the potential of better returns. Some polyolefin producers sold October volumes earlier than they should have done because they expected prices to fall.

The flipside of the risk is being left holding overpriced inventory as oil prices fall and more new polyolefin capacities hit the market.

Nothing new in having to make these decisions, of course; the difference is the absence of any consistent and reliable patterns from all the data to support planning.

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

Japanese chemical majors have raised their sales and profit forecasts for the second half of the fiscal year ending 31 March 2010, but the revisions are marginal and companies are still holding a conservative outlook.

Earnings in the first half of this fiscal year have been better than expected but the stock market is not impressed. It appears investors are being guided by the cloudy outlook for H2.

A Tokyo-based analyst highlighted three major risks that Japanese companies foresee:

• Inventory adjustments in China for petrochemicals and globally in the auto and LCD sectors
• A rise in naphtha prices led by higher crude oil prices
• Rising availability of product from new petrochemical capacities in the Middle East.

Mitsui Chemicals has forecast sales of Yen1,210bn as compared to Yen1,487.6bn in 2008-09. Operating loss is expected to narrow to Yen15bn from Yen 45.5bn last year.

Sumitomo Chemical expects to post petrochemical sales of Yen500bn in 2009-10, down 9.6% from the previous year. Total sales are projected at Yen1,620bn, down 9.4%.

At an analyst meeting yesterday Sumitomo Chemical disclosed that operating rates at its joint-venture PetroRabigh complex in Saudi Arabia are still quite low, especially for polyethylene (PE). Although the situation is improving the company expects full operations only at the end of this year.

PetroRabigh has posted losses yet again. Third quarter losses had widened to Riyals844.7m from Riyals155.9m in the same period last year.

Japanese companies are continuing their efforts to widen their footprint in China. Mitsui Chemicals and Sinopec have agreed to proceed with a joint venture for production of phenol and ethylene, propylene diene terpolymer (EPT). At a recent analyst meet, Mitsui's ceo disclosed that the project would be a 50:50 joint venture. Asked if the jv would be expanded to include ethylene and propylene production, the ceo said there was no immediate plan but there was some potential.

Mitsui's ceo is also reported to have said that the company was interested in acquisitions in agro-chemicals or speciality chemicals. Among the Japanese majors, Mitsui is most exposed to commodity chemicals and is under greater pressure to diversify if product portfolio.

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.

Just picked up on the interesting news (not sure how big a deal this is) after attending one of those long interminably-long internal planning meetings. But on this occasion we at least were discussing something useful - not just the new colour for the carpet in reception.

So why has Qatar Petroluem bought into Petrochemical Corp of Singapore (PCS) and The Polyolefins Co (TPC).

Interesting that the PetroRabigh marketing arm - the joint venture betweeen Saudi Aramco and Sumitomo for the new plant in Saudi Arabia - is run from Singapore by Sumitomo.

This Dow Jones report, from a former colleague of mine, quotes Ben Van Beurden, executive vice president of Shell, as saying the following: "One of the critical success factors of any petrochemical venture...is access to competitive feedstock.

"I'm hopeful that condensate and liquefied petroleum gas (LPG) will flow from Qatar to Singapore as a result of QPI taking an interest in these joint ventures."

That makes a lot of sense as feedstock advantage is going to be crucial for an older and smaller cracker-derivatives complex such as PCS-TPC to compete in the and far more difficult environment.

The giant new Middle East crackers have big scale and raw material advantages.

One of the responses to date from the very experienced and very capable guys at TPC has been to work the trade advantages within the Asean region, concentrate on relationships and higher value-added grades.

Shell Eastern Petroleum operates a 500,000-bbl/day refinery on Pulau Bukom.

The company is building a petrochemical complex comprising an 800,000-tonne/year steam cracker and MEG unit, using Shell's Omega technology, due on-stream in Q2 2010.

This cracker will be fed by hydrowax from an updgraded hydrocracker at the same site and so it is not clear whether feedstock from Qatar will also be an option for this facility.

In Qatar, Shell and Qatar Petroleum are building the $18bn Pearl gas-to-liquids (GTL) plant scheduled for completion by the end of 2010.

Condensate will be be produced from the GTL plant, which has been entirely funded by Shell. This condendate has been evaluated for producing petrochemicals in Qatar.

Shell has a cracker project in Qatar likely to start-up only after 2012.

The Anglo-Dutch major has also talked about more petrochemicals in China to build on its existing CNOOC joint-venture Nanhai cracker and derivatives project.

Again, whether the closer relationship with Qatar will have any implications for these plans remains to be seen. The Chinese want mainly one of two things from any potential new petrochemical JV partner - energy supplies (oil or gas) and/or technology.

"If we contemplate new ­investments in chemicals, they only make sense if we can continue to build integrated positions and they rank favourably with our overall capital investment programme," van Beurden told me in an interview last year.

"Everything we want to do in chemicals must be integrated with the rest of Shell. Capital goes first to upstream projects and so chemical investments have to make a lot of sense and clear very high hurdles."

Sumitomo retains its interest in PCS and TPC and so - as often is the case in deals like these - the internal parent-company competitive landscape has shifted.

The Sumitomo part of TPC, now with Qatar Petroleum as a partner, is competing with the Sumitomo share in a new Middle East producer - PetroRabigh!

Singapore's Jurong Island

Source of picture: www.pcs.com

Qatar Petroleum International (QPI) sees Singapore as a good base for expanding in to the Far East, said CEO Nasser Al-Jaidah yesterday after the announcement of the new partnership with Shell.

QPI and Shell signed a series of agreements on Wednesday to jointly own 50% of Petrochemical Corporation of Singapore (PCS) and 30% of The Polyolefin Company (Singapore) Pte Ltd (TPC), to be held through a joint venture company called QPI and Shell Petrochemicals (Singapore) Pte Ltd.

Sumitomo Chemical's 70% stake in PCS and 50% share of TPC remain unchanged.

Singapore is becoming an increasingly important energy-storage and trading hub. QPI's closer relationship with the island state - through the Shell deal - could be key in helping to market and sell big new volumes of liquefied natural gas (LNG) and liquefied petroleum gas (LPG).

Qatar's enormous LNG ambitions, through joint ventures with the likes of Shell and ExxonMobil, also leave the issue of getting maximum value out of co or by-product LPG.

There are several options for LPG.

The LPG (propane and butane) can be extracted during natural gas and LNG processing.

It could be used by Qatar for petrochemicals in Qatar itself or elsewhere in the Gulf Co-operation Council (GCC) region.

Another option is to ship the LPG to petrochemical and other customers overseas.

"One of the critical success factors of any petrochemicals facility, whether it is in the Middle East or here in Singapore, is access to competitive feedstock," said Ben van Beurden, executive vice-president of Shell Chemicals, when the deal was announced.

"I'm hopeful that condensates and liquefied petroleum gas (LPG) would flow from Qatar to Singapore as a result of [Qatar Petroleum] taking an investment in these joint ventures."

As we discussed yesterday, this would enable the PCS-TPC joint ventures to better compete against the new wave of bigger feedstock-advantaged Middle East crackers.

Singapore is building an LNG terminal due for completion in mid - to late 2012.

Another probably very unlikely option is to ship "wet" LNG and then extract LPG on arrival. This extraction also involves removing ethane - and so again there's a petrochemical option here.

And finally, some LNG customers - such as power generators - prefer their gas delivered as "wet", creating competing economics for extracting LPG and ethane for petrochemicals.

The QPI-Shell deal raises several more questions which this blog is seeking to answer:

*Will this give extra feedstock flexibility to the new Singapore cracker, due on-stream next year? We understand it will be run mainly on hydrowax from an up-graded hydrocracker. But will an option now be to use condensate/naphtha feedstock via Qatar? How would this work as, if at all, as Shell Eastern - which operates the cracker project - is a separate subsidiary?

*The Pearl gas-to-liquids project (another joint venture between Shell and Qatar Petroleum) will produce condensate as well as ultra-low sulphur diesel. Will this condensate, split into naphtha, be sold directly into the merchant market or used for producing petrochemicals in Qatar? Is this still a possible feed for the Shell cracker project in Qatar and/or are other petrochemical options in Qatar? The background to this we understand that there's a shortage of new gas allocations available from the North Shelf due to an extended moratorium, making it difficult for all the cracker projects in Qatar to go ahead.

*Could the condensate/naphtha from Pearl be supplied to Singapore instead?

*Is developing a new project in China now a priority with QPI over petrochemicals in Qatar?

In China, QPI has a joint venture with PetroChina and Shell (China) Ltd to build a refinery and petrochemical complex at Taizhou in Zhejiang province.

"We are hoping to get approval [for the project] by the end next year," said Al-Jaidah.

Perhaps the biggest of all the priorities might be this joint venture.

But whether or how the closer relationship between QPI and Shell will accelerate this project is not clear.

China is on the whole looking for one of two things from future petrochemical joint-venture partners: Energy supplies (oil and gas) and technology.

The existing QPI and Shell relationship already firmly ticked both of these boxes.

 Shelf-space to be in short supply again?

Source of picture: www.zrdata.com

ASIAN naphtha prices hit their highest level for more than a year yesterday - reaching $701/tonne CFR Japan for second-half December open-spec material on "improved market conditions".

Earlier this week we picked up more reports of bleak demand in styrenics and fibre intermediates that countered continued optimism in equities and crude markets.

This is also usually the quiet season as petrohemical production declines on weak seasonal demand.

Is the Asian petrochemicals industry ramping up production because it thinks crude is going to get stronger and the real economy is set to improve?

Oil fell to below $77 a barrel yesterday on evidence that US motorists and businesses were cutting back on energy use, according to this Associated Press report.

Have we returned to the demand destruction which caused the economic downturn in the first place?

Despite soaring auto sales in China, there are reports that gasoline consumption is being affected by higher crude, the impact of which is being more keenly felt this year as a result of fuel-price liberalisation.

The Energy Information Administration (EIA) said in its weekly report that US oil and gas supplies grew more than expected last week, even though many oil companies have shuttered refineries as fuel consumption slumps.

US refineries had slowed production to the lowest levels since September 2008 and they were importing nearly 15% less crude than last year, the report added.

This is worying when you think of the state of the economy this time last year. Most other comparative numbers are showing improvements.

What perhaps helps to explain the 15% decline is big new refinery capacities in India and China etc putting pressure the developed-world players.

With refinery runs reduced everywhere in the world except China (where the Chinese refineries are enjoying improved profitability as a result of the fuel-price liberalisation), reduced supply could be another factor behind the rise in naphtha.

But let's take it as read that better demand from petrochemicals is the main driver behind the increase in naphtha.

It would be a very risky business to build inventories right at this moment - given all these uncertainties and the big surge in new petrochemicals capacity.

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

Sumitomo Chemical and Saudi Aramco appear to be in a generous mood. After successfully launching the first phase of their joint venture and starting work on the second phase the two are willing to welcome others to the Rabigh party.

Pic source: Saudi Aramco

Ziad Al-Labban, president and ceo of the joint venture Petro Rabigh, is reported to have said that discussions are underway with companies, including Japanese firms, to invest in production synthetic fibre and other products at Rabigh. He expects a total of 50 companies, including some from Japan, to eventually set up operations at the site.

The product slate for PetroRabigh's second phase, due to be completed in 2013-14 includes aromatics, synthetic rubber, nylon 6 and speciality chemicals. What more can be produced and what makes Rabigh so attractive?

There is of course the feedstock that will be readily available from the PetroRabigh complex and the benefits of shared world class infrastructure. But local markets are small with not very exciting growth prospects, especially for products like synthetic fibres. I certainly can't see a big textile industry developing in Saudi Arabia or the GCC.

I have often heard that the attractiveness of the Middle East fades as you move down the product chain. The closer you are to the cracker the more profitable it is as you then get full advantage of cheap feedstocks.

But Saudi Arabia's plans for a diversified chemical industry are slowly but steadily progressing. And Abu Dhabi is also working on a similar model. What incentives are being offered to make these countries an oasis for downstream chemical production?

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

The 17 Nov public hearing arranged by the Indian government at Delhi to discuss provisional anti dumping duties levied on PP imports from Saudi Arabia, Singapore and Oman was postponed at the very last minute causing a great deal frustration among lawyers and industry executives who had flown in from out of the country.

The hearing was postponed because of bereavement in the family of the government bureaucrat heading the hearing. Efforts to get another bureaucrat proved to be futile. A new date has yet to be set but I am told it should be soon.

And I have received some information from Japan on the likely candidates for the Rabigh party. One of the products being considered by Petro Rabigh for its second phase is superabsorbent polymers (SAP). As Sumitomo Chemical does not have technology for this product, it is rumoured that Nippon Shokubai or Sumitomo Seika could be joining Petro Rabigh for this project.

Abu Dhabi ahead in the race?

Source of picture: www.gulftrackservices.com

By John Richardson

The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.

"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.

"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.

"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."

The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.

But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.

"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.

"But it is true that we have already seen transfer of very valuable polymer technologies."

SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.

The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.

These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.

But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."

IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.

It also has a 64% of Austria-based polyolefins group Borealis.

"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.

"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."

And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.

Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "

The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.

And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.

With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.

"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.

"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."

Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.

SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.

There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.

Reliance Industries has made an offer for LyondellBasell says an official statement released yesterday on the LyondellBasell website:

"LyondellBasell has received a preliminary non-binding offer from Reliance Industries Limited to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter 11 reorganization.

"This offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganization previously filed by the company."

This confirms months of rumours to this effect. According to an unnamed merchant banker quoted by the Times of India, Reliance would have to pay at least $12bn - double an earlier estimate by the Economic Times.

India could be playing a major role in the shift of basis chemicals ownership from West to East - along with the Middle East

After failing in its efforts to capture Innovene and then Dow Chemical's commodity petchems unit, this is Reliance's fresh attempt to move into the global top league. The ICIS top 100 places LyondellBasell at the No 4 slot of top chemical companies globally.

A marriage of the two companies would result in a formidable giant with an annual turnover in excess of $75bn, including Reliance's earnings from its growing oil, gas and refining portfolio. It would also create the largest PP producer and also a top player in PE and give Reliance access to LyondellBasell's profitable technology portfolio.

Reliance's offer is subject to due diligence and sufficient credit support. The company issued a very cautious statement: "This review is ongoing and there can be assurance of the outcome with respect to any of the opportunities under review."

Reliance, it appears, is evaluating other opportunities too in its core businesses.

LyondellBasell's statement confirms that Reliance had earlier placed non-binding equity financial proposals and the latest offer represented was a 'potential alternative to the initial plan of reorganization'.

LyondellBasell was the first petrochemical giant to stumble at the start of the crisis last year. And it looks like it could well be the first big ticket M&A deal in what promises to be a busy season ahead.

We have already heard of IPIC on the prowl for European and US chemical assets and then Mitsubishi Chemical confirmed that it is looking to acquire Mitsubishi Rayon for $2.5bn.

An investment banker said last week that it was only in the last few months that he has seen an interest in boards and ceos. Capital market conditions have improved substantially and money will not be a deterrent, especially for companies like Reliance which are already sitting on huge piles of cash.

Relaince's biggest problem in the past has been its conservative valuations which have seen the company lose out to other global bidders, except in a few instances (Trevira and Hualon). There are already reports of rival bids emerging for LyondellBasell from Chinese companies and private equity investors. And ICIS news reported last week that analysts believe that LyondellBasell would also be a good fit for IPIC.

So will Reliance change its mindset and be bolder this time?

He's not bad at making money
Source of picture: www.dealbreaker.com

SOME of the logic behind Reliance Industries' bid for LyondellBasell could be a recognition that the globalisation of petrochemicals markets may have gone into partial reverse.

A climate bill passed by the House of Representatives has a provision for taxing imports from countries where emissions standards are more lax than the US.

This defensive measure, no doubt the result of pressure from heavily polluting industries such as refining and chemicals, recognises that the business-as-usual scenario outlined by the International Energy Agency in its World Energy Report 2009 won't come true.

The scenario involves no significant improvements in energy conservation and no great shift to renewables, leading to a rise in global temperatures of 6 C.

Even if an international carbon tax and/or cap-and-trade system isn't established, individual countries seem likely to step up their efforts to lower hydrocarbons consumption.

Whether or not global warming is man-made, energy security is by itself a big enough reason to boost energy efficiency and develop green technologies.

Then there is what Nubuo Tanaka, Executive Director of the IEA, calls "the silent revolution" since 2007 of increasing US gas supply.

Breakthroughs in shale-gas technology and very long global liquefied natural gas (LNG) supply are contributing to what the IEA describes as a worldwide supply glut that could have "far-reaching consequences for the structure of gas markets".

This will put LyondellBasell's US polyethylene (PE) assets in a strong position in the medium and possibly even the long term.

It has long been assumed that when the US polyolefin market is eventually in deficit, the shortfalls will be supplied by the Middle East and Latin America - notwithstanding extra logistics costs that amount to effective trade barriers.

But a sufficiently high price on carbon would undermine this assumption, along with cheap US natural gas.

This is still the world's biggest economy and therefore the world's biggest chemicals and polymer market when all the hot air about China has been expelled.  

What was right for Warren Buffett could prove to be right for Reliance.

On A Very Sticky Wicket

www.theage.com.au

By John Richardson

As one my colleagues said - it's a good job the US stock markets were closed for Thanksgiving.

Lots of efforts are being made to talk the Dubai World crisis and down - and despite drops in Middle East market equities - Asian markets rallied today.

But the next few days could still be important with a lot depending on how neighbouring governments respond.

Oil markets have been pretty much out-of-sync with real demand since 2003.

But with the rise in the US dollar carry trade and Western growth so fragile, the risk of another sharp correction is higher now than when the world economy was in good shape. Such a collapse would be a mini version of what happened in Q4 last year.

I did a very unscientific survey of 30 traders, producers, buyers and logistics people at the APPEC oil and gas conference in Singapore a few weeks ago.

Twenty three said oil prices, based on fundamentals, should be $40-50 a barrel (three of those who disagreed and thought should be where they are now were financial analysts!).

So perhaps the biggest immediate risk from Dubai is a big strengthening of the dollar and a connected drop in equities and crude. 

As I mentioned in my previoust post, I was in Shanghai last week. The local linear-low density polyethylene (LLDPE) polyvinyl chloride (PVC) and purified terephthalic acid (PTA) futures contracts all dipped sharply when the Dubai news broke.

My colleagues at CBI China said that because of the dip in these contracts, very few buyers were willing to acquire physical cargoes on Thursday and Friday.

This could continue as long as the markets worry that this might be another Lehman Bros (fortunately, this seems very unlikely at the moment).

Looking pretty - the new Shell plant at night:

Sourceof picture: Shell Chemicals

By John Richardson

WHEN Shell Chemicals officially opened its OMEGA process 750,000 tonne/year monoethylene glycol (MEG) plant in Singapore today, it mentioned how its global production share of the fibre intermediate was only 7%.

One might wonder how effective this is against the dominance of SABIC and MEGlobal in what is a highly commoditised game where final success could hinge on market muscle and economies of scale.

But the new plant at Jurong Island in Singapore is one of the biggest - if not the biggest - in the world.

Plus, Shell claims that its OMEGA process is cheaper on capital and running costs and produces far less diethylene glycol (DEG and triethylene glycol (TEG) by or co-products than conventional processes (in fact, virtually none).

Another advantage will be from the new Shell cracker under construction on neighbouring island Pulau Bukom, from which ethylene will be fed by an undersea pipeline.

"It (the cracker) will run on a full range of feedstocks from heavy paraffin wax to liquefied petroleum gas (LPG) supplied by our existing refinery," said Peter Eijsberg, Deputy Venture Director for Shell Eastern Petrochemicals Complex (SEPC).

SEPC is the wholly-owned Shell subsidiary operating the MEG plant which came on-stream last month.

It will run the 800,000 tonne/year cracker and a 175,000 tonne/year butadiene plant due on-stream in Q1 next year.

The existing refinery is being upgraded to meet the cracker's feedstock needs,

It would be possible in certain market conditions for 100% of the cracker's feedstock needs to be met by the refinery, Eijsberg added.

"We can crack vacuum-gas oil (VGO) from our vacuum distillation column, hydrowax from our hydrocracker, naphtha, of course, and LPG from various units in the refinery," he added.

So how does this compare with an ethane-based cracker and worldscale MEG plant in the Middle East?

"When your gas is practically free, the Middle East is very competitive indeed, but we do have the logistics advantage of being closer to the biggest customers in China. We can also move cargoes smaller than the 50,000 tonnes which typically come from the Middle East."

Shell, though, has made the decision to licence OMEGA. By so doing, is it in danger of undermining its competitiveness?

"I believe this isn't a challenge to our competitive position," said Iain Lo, Vice-President, New Business Development Ventures, for Shell.

Five licenses have been granted for OMEGA, - but only two officially announced, which are to Lotte Daesan in South Korea and PetroRabigh in Saudi Arabia. Both companies are already operating OMEGA plants.

Success in petrochemicals has to eventually always be about being big or getting out if you are at the commodity end of the game, is one argument.

But there is an awful lot of money to be made out of licensing.

And licensing doesn't mean you give away all the your advantages, especially if you are a company like Shell with its refinery-cracker integration and its experience in running plants.

By John Richardson

An ethane shortage is slowing Shell Chemicals' ambitions for building at least one cracker complex in Qatar, Ben van Beurden, executive vice-president of the company said last week.

"Ideally, we'd like to build two crackers and two OMEGA process plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane," he added.

"There are only so many allocations of ethane available from Qatar at the moment and plenty of interested parties."

Van Beurden was speaking on the sidelines of the official opening of Shell's 750,000 tonne//year OMEGA process MEG plant at Singapore's Jurong Island, which came on-stream last month.

Shell, ExxonMobil and Honam Petrochemical are three foreign companies known to be pursuing cracker projects in Qatar as joint ventures with Qatar Petroleum.

Both the Shell project - said to be delayed beyond 2015 - and that of ExxonMobil would run 100% on gas, whereas Homan's proposed plant would be mixed liquids and gas feed.

Qatar recently extended a moratorium on development of all types of new gas-fed industrial projects from 2012 to 2014 in order to further study the reservoir behaviour of its North Field gas reserves.

Van Beurden also said that using naphtha from the Pearl Gas-to-Liquids (GTL) project in Qatar wasn't a viable economic alternative as feedstock for a Shell cracker complex in the country.

"The numbers don't work compared to the economics of gas cracking, and to the alternative value from shipping the naphtha to where the demand is strong - for example, to Asia."

The Pearl GTL project - a joint venture between Qatar Petroleum and Shell - will produce high-paraffinic naphtha, along with gasoil, base oils, kerosene and normal paraffin.

Mechanical completion is due in Q4 next year with production ramp-up expected to take place from late 2010 into 2011, according to a Shell statement.

Last month, Shell further cemented its relationship with Qatar when it sold some its shares in cracker operator Petrochemical Corp of Singapore (PCS) and polyolefin producer The Polyolefin Co (Singapore) PTE Ltd to Qatar Petroleum.

"We have a long relationship with Qatar and this was one of several options we have been pursuing with them, both in Qatar itself and overseas.

"We are continuing to look at a cracker project on the eastern seaboard of China with Qatar Petroleum."

Shell, PetroChina and Qatar Petroleum announced in August that they were planning to build a refinery and petrochemical complex in Zheijiang province.

By John Richardson

ExxonMobil's purchase of XTO Energy for US$41bn seems to support the widely-held view that natural gas is the fuel for the future.

XTO specialises in the technology necessary to exploit shale gas and other hard-to-get-at unconventional gas reserves, including the large amounts of shale gas in the US - one of the reasons why the States has gone from natural gas feast to famine.

ExxonMobil will establish a separate division to manage production of both oil and gas from unconventional reserves.

This suggests, perhaps, that the focus and incentives created by setting up such a division will lead to XTO Energy and other breakthrough technologies being employed throughout the world.

Europe has unconventional reserves, which perhaps if successfully exploited could provide an alternative - a long with liquefied natural gas (LNG) - to sometimes politically-fraught pipeline reserves.

Easy-to-get-at gas in the Gulf Cooperation Council region of the Middle East is also becoming increasingly scarce, leading to evaluation of exploiting shale and tight gas.

The energy of the future argument rests both on concerns over Peak Oil and gas's lower carbon footprint.

The International Energy Authority (IEA), in its World Energy Outlook 2009 report launched last month, described natural gas as a "bridging fuel" until even greener alternatives become viable.

By Malini Hariharan

Qatar has reconfirmed its commitment to build more petrochemical plants including a new worldscale cracker.

At a ceremony to mark the start of construction of Qapco's new ldPE project, the deputy premier and minister of energy and industry said Qatar was launching an aggressive plan to achieve optimal utilization of the country's natural resources.

Pic source: The Peninsula

"We are working very hard to expand our petrochemical industry. Every year we are trying to add a project. We have now several projects under discussion to expand our petrochemicals and develop another world scale ethylene cracker," he said.

However, as reported by this blog, Qatar is facing a shortage of ethane which has affected Shell's plans for a cracker.

Other cracker projects that have been under study/discussion for a few years include one by ExxonMobil and the other by Honam Petrochemical.

All the three projects have been planned as joint ventures with Qatar Petroleum.

I have heard that Qatar has enough ethane to support one worldscale cracker project of at least 1.3m tonnes/year capacity. This project could be onstream in 2013-14. There is no confirmation yet on who will be the lucky recipient of this ethane but it could be ExxonMobil as its project is the most advanced.

By John Richardson

The tight supply olefin-polyolefin supply that has characterised markets since the first quarter of last year continues with no sign of relief for resin buyers until at least early April.

But whereas production problems and start-up delays are likely to remain aplenty, the argument for further price hikes has been undermined by falling feedstock costs resulting in a big boost to integrated polyolefin margins.

This will offer some relief to plastics processors who have been complaining of exceptionally squeezed profitability.

The demand outlook received a blow last week when China announced its first major fiscal tightening steps since the beginning of the global economic crisis. But while sentiment was affected by the decision, it seems too early to call a tangible dip in China's spectacular recovery.

The legion of production issues includes lost output from the Yanbu site in Saudi Arabia as a result of a power outage in late December.

"Yansab and Yanpet had to close down as water entered the plants due to heavy rains which resulted in a power failure," said a source.

"Yanpet has restarted but Yansab is expected only by end-January."

This hasn't been confirmed by SABIC, although the Saudi major's customers told ICIS news earlier this month that polyethylene (PE) and polypropylene (PP) allocations to Asia had been cut, which seems likely to extend into February cargoes.

ExxonMobil is due to shut its 900,000 tonne/year cracker in Singapore in mid-February for two weeks to change some parts, ICIS news was told by a source familiar with the matter.

The energy giant's customers in Southeast Asia and China said their February linear-low density PE (LLDPE allocations from the producer would be cut by 20-30%.

And our source added about the Middle East: ""Material from the new Sharq complex at Al-Jubail in Saudi Arabia, which came on-stream earlier this month, is unlikely to hit the Indian market until end-January."

He also claimed that long-running problems at another major Saudi Arabia complex -which came on-stream last year - still haven't been resolved.

The Al-Waha 450,000 tonne/year PP plant, also at Al-Jubail, was due to re-start by 7 December following an outage. However, another source said early last week that it had yet come back on-stream

All these tightening factors have been further compounded by an outage at Fujian Petrochemical in China in December, a reported outage at Petlin Malaysia - also in December - and the recent extremely cold weather that restricted plant operations and distribution in northern China.

"The general view is that supply will remain tight and demand good until early April, after which there's more uncertainty," said a Shanghai-based source with a major Asian polyolefin producer.

Markets were slightly spooked by last week's decision by China to raise the reserve requirement for banks following two inter-bank interest rate rises in the space of a week, the source added.

"These were really the first credit-tightening steps taken since the start of the economic crisis and so it has given everyone cause to pause for breath.

"But nobody is expecting the government to do much more to adjust the economy over the next few months.

"We did see, however, some downward pressure on Yuan prices in the second week of January - a week earlier than we had expected - because of the government steps.

"The focus now is on inventory management ahead of the Chinese New Year (the official holidays this year are from 13-19 February) as nobody wants to get caught with high stocks going into the New Year.

"As for current inventory levels, it's tight at the first level of distribution (the bonded warehouses) but a bit longer, although not alarmingly high, at the second local level.

"There's going to be an inevitable slowing down ahead of the New Year, of course, and some softening in prices but nobody is expecting a drastic collapse."

ICIS pricing assessed PE and PP US dollar prices as stable last week after the early New Year rallies (see graphbelow), supporting the belief that there's been a pause for breath.

But PE producers were still pushing for higher prices on the grounds that feedstock ethylene and energy costs had increased, again according to ICIS pricing.

Not so according to the 15 January issue of the ICIS Weekly Asian PE Margin Report.

"Integrated low-density PE (LDPE) margins in Northeast Asia rose by $51/tonne (10%), their highest level since May last year," said the report.

And it added that integrated high-density PE (HDPE) margins also increased by $51/tonne, or 16%, to their best position since September 2009.

Both increases were attributed to a 2% dip in the price of naphtha outweighing a slight decrease in co-product credits and the flat polymer prices we've already mentioned.

By Malini Hariharan

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

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

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

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

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

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

I have been reading a transcript of Dow Chemical's Q4 2009 earnings call and here are some interesting comments made by Andrew Liveris, the company's ceo.

Despite recording revenue and volume growth in 2009 Liveris was cautious on the outlook for 2010 citing an uncertain economic environment.

But constraints in Middle East supplies could lead to an early recovery.

"Even though there will be capacity adds, it won't come on when people think it will come on. We are one of the best operators out there and we had a slow start up of our Kuwait assets and we are very good at this. So I would tell you, you have not as much supply coming on as people think."

On the demand side, if global GDP expands at around 3% this year it would result in polyethylene (PE) demand growth of 4.5%. As global inventories are low across the chain restocking would push growth above this level, he said

Add to this 6-9m tonnes of high cost liquids cracking capacity rationalisation, 3m of which is already permanently down, gas not as freely available in the Middle East as people think and ethane cost advantage in the US which is now the second lowest cost producer on ethane.

Pic source: ICIS

"So when you put all that together, I think there is a case for a trough-like environment in 2010 with the excess capacity, a recovery in 2011 and a peak environment in the 2013 timeframe," he said.

He pointed out that Dow had effectively capitalised on its flexi-feed crackers and 20% of its US production in Q4 2009 was exported to China.

On implementing the asset-light strategy for basic chemicals, Liveris stressed that he was "not in a hurry to get it done at the wrong valuation" especially as the business generated an EBITDA of 1.7 last year.

"That is in a trough, demand led trough and great recession of all time. So we know we have a very high performing asset. The partners we are talking to are all strategic. There is three of them," he said.

And Dow was keen to implement the asset-light strategy for its chlorine business after completing ethylene-PE and styrenics.

"Today a good chunk of our chlorine capacity in Louisiana and Texas will feed our downstream chlorine envelope for performance businesses and be advantaged because it is integrated. You can expect us though to continue to find meaningful partnerships with people who want to be in PVC. So in essence, we will use our competitive advantage to partner with others because you have to have scale in the chlorine side. That should help us create an asset-light strategy for chlorine. We are determined to do that."

ICIS news also reports that Dow still plans to start up the first units at its Ras Tanura joint venture with Saudi Aramco in 2014 or 2015.

Prices have fallen for Middle Eastern engineering, procurement and construction (EPC) contracts and this has given a reason for Dow to delay releasing contracts.

But Liveris said Ras Tanura was moving ahead 'nicely on its milestones" and Dow would have more to say on the project by the middle of the year.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

And there is yet another reason for start up delays.

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

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

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

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

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

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

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

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

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

By Malini Hariharan

A few weeks back I had written about robust demand growth figures emerging from the Indian polymer market. I will be posting some numbers over the next few days but ahead of that I would like to highlight what industry players have been saying on the major growth drivers and also developments in the BOPP sector where huge capacity additions are underway.

Polyethylene (PE), polyvinyl chloride (PVC) and polypropylene (PP) posted double-digit growth in 2009 and even polystyrene (PS), a laggard in the best of times, also reported a positive story.

Restocking has contributed to the numbers but producers also report a fundamental increase in demand. It must be remembered that India was one of the few countries to post growth during the meltdown of 2008.

Packaging and infrastructure continue to remain the key drivers with healthy contribution also from the automobile and electronics sectors.

A strike called by jute workers in December has helped increase sales of PP and hdPE in the raffia sector. India's Jute Packaging Materials Act mandates that jute should be used for most foodgrain packaging. But the strike has curtailed jute supply and prompted government departments to issue orders for raffia bags.

Orders amounting to 20,000-25,000 tonnes of PP have already been issued, says one industry source. And as the strike is still on, a second source estimates that the figure is likely to hit 50,000 tonnes by 31 March 2010. This figure includes hdPE but PP will have a bigger share.

"If the strike continues there is going to be tremendous pressure on raffia grade," says the first source.

And the second source adds that many processors who have received government orders for raffia bags are facing problems in securing material.

The raffia sector accounts for around 32% of PP demand and 16% of hdPE.
PP volumes in this segment are estimated to have grown by nearly 20% during April-December 2009.

Moving to BOPP, this segment continues to show good growth but processors expressed concern about the overcapacity that is building up in the country.

India's installed capacity for BOPP film during fiscal 2009-10 is estimated at around 258,000 tonnes/year during 2009-10. This is projected to rise to 336,000 tonnes/year in 2010-11. Demand in 2009-10 was around 195,000 tonnes and is expected to reach 250,000 in 2010-11.

Indian manufacturers of BOPP film will have to export but face competition from China.

"There are three places in world where demand growth is growing - India, Middle East and China," says Indrajit Ghosh, general manager business development, at Uflex.

But the problem is that capacity additions are taking place at all three locations.

He estimates that global BOPP capacity last year was around 5.7m tonnes last year as against demand of 5.3-5.4m. Global demand growth is expected to be in the 7-8%/year range.

"There are huge capacity increases taking place in the Middle East and Africa - Rowad International will add a 3000 tonnes/month line in Saudi Arabia; Gulf Packaging will start a 2500 tonnes/month line in Saudi Arabia; Flex will commission a 3000 tonnes/month line in Egypt and two plants with a total capacity of 6000 tonnes/month will start in Nigeria," says Ghosh.

Uflex will also be starting a line in Egypt in the next three months.

"There are lots of plants in China and the country is continuing to expand. Every year 8-10 new lines are coming up," he adds.

And the problem is that China too will be aggressively targeting the export market.

By John Richardson

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

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

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

The chart shows announced new ethylene additions for the region: 

Source: ICIS

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

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

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

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

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

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

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

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

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

By Malini Hariharan

Just when Asian propylene prices started easing comes news of disruptions in production and price hikes in the West.

Propylene availability in Europe was hit after a strike by Total's refinery workers early in the week resulted in the closure of 36% of France's C3 capacity. This forced Total to declare force majeure on propylene supplies. Then Shell Chemicals declared force majeure on ethylene and propylene supplies from its Moerdijk cracker in the Netherlands due to reduced operating rates.

The strike at Total has been called off and production at the refineries will be restarting soon but the developments helped tighten an already short European market and supported an increase in the March propylene contract price, reports ICIS news.

The US too is expected to see increases in propylene prices with one producer nominating a $110 increase for March.

Asian propylene prices have yet to react strongly to these developments although sellers are trying to raise prices. They will of course be supported in this endeavour by upcoming cracker turnarounds.

"Some traders are also trying to take Asian propylene to the West; we had an offer. But the arbitrage window is not big. Asia appears to be adequately supplied," says a source from a major Asian cracker operator.

Meanwhile, the propylene situation has started to impact PP markets. European buyers are bracing for PP price hikes in March while offers in the Middle East have already risen by $30/tonne, reports ICIS news. Availability from this region is likely to be constrained in March as Oman Polypropylene and Advanced Polypropylene will be carrying out maintenance shutdowns in March.

"Polymer markets opened with a bang after the Lunar New Year; prices went up yesterday. There are the Asian turnarounds and people are still struggling with new plants," the source points out. This is certainly creating room for optimism, he adds.

By Malini Hariharan

And Sumitomo Chemical has discovered this.

The company recently said that PetroRabigh, its joint venture with Saudi Aramco in Saudi Arabia, has managed to secure fresh ethane allocation of 30m scf of ethane for a second phase of projects.

Ethane is running short in Saudi Arabia and getting an allocation, even a small one, is an achievement. But the second phase will need to use naphtha - about 3m tonnes. This will come from PetroRabigh's phase one which includes a refinery.

For phase one PetroRabigh had received an allocation of 95m scf of ethane sufficient to support a 1.25m tonnes/year cracker.

Details about the second phase are still sketchy. A feasibility study is due to be completed in the third quarter of this year and if viability is confirmed the projects will start up in Q3 2014, says Sumitomo

Pic source: PetroRabigh

The products being studied include ethylene propylene rubber, thermo plastic olefin, methyl methacrylate monomer (MMA) and poly methacrylate (PMMA), low-density polyethylene (ldPE), ethylene vinyl acetate (EVA), caprolactam, polyols, cumene, phenol, acetone, acrylic acid (AA), superabsorbent polymer and nylon 6.

But PetroRabigh phase two does not figure in Sumitomo's three-year plan, unveiled recently, as the plan runs only till fiscal 2012.

The plan does not have any surprises in terms of company strategy but Sumitomo has set some very tall sales and profit targets which might be difficult to achieve.

Despite an uncertain global economic outlook the company has set a sales target of Yen2,400bn and operating income of Yen190bn in fiscal 2012. This would mean a return of equity of 20%, up from the 1.8% projected for 2009-10.

"The numbers are too aggressive. Sumitomo has large exposure to cyclical businesses such as petrochemicals and information technology (IT); it will be quite difficult to achieve [the targets] if the recent price trend continues. The price assumptions for ethylene and polyethylene are very optimistic. A recovery in domestic petrochemicals is a dream story," says a Tokyo-based analyst.

To achieve its overall targets Sumitomo has said that it will quickly maximize profits and cash flows from major investments including its PetroRabigh cracker and derivatives joint venture with Saudi Aramco.

In petrochemicals, the company's policy is to ensure sustained profitability by establishing global operations. To achieve this Sumitomo plans to establish a worldwide marketing operation built on globally standardized products.

Profitability of operations in Japan would be strengthened, says the company without giving specific details on how this will be achieved.

"The issue of [improving] petrochemical competitiveness in Japan has been discussed for a decade; many people are sick of the discussion. The product mix is important. There should be more high performance chemical products. Sumitomo and Mitsui Chemicals have to change its business structure and not rely on ethylene derivatives," says a second analyst.

Sumitomo too is thinking along the same lines.

"We will increase the proportion of value-added petrochemical products we produce domestically from the current 70-80%," says a company spokesman. All options are being explored including new technologies and feedstocks and alliances.

A recent example of activity in this area is the new 150,000 tonnes/year propylene demonstration facility, a 50:25:25 joint venture by Idemitsu Kosan, Sumitmo and Mitsui.

Each company will contribute C4 fractions to the new unit and offtake propylene in proportion to their investment.

Sumitomo is unwilling to give details on what it plans to do with the extra propylene and would only say that it would be used for downstream production.

These and other initiatives are expected to help Sumitomo achieve petrochemical sales of Yen785bn and operating profit of Yen30bn in fiscal 2012, up from forecasted sales of Yen500bn and an operating loss of Yen9bn in the current financial year.

But the share of petrochemicals and basic chemicals in total sales is projected to shrink in the future from 43% in 2009-10 to 30% in fiscal 2020 as Sumitomo's priority is to achieve a balanced business portfolio.

Pharmaceutical and agrochemicals would contribute about 30% of total sales in 2020 almost unchanged from the current level, while the share of information and communications technology (ICT), battery and fine chemicals portfolio would expand to 30%, up from 21%.

Investments will be made to ensure this balance. The petrochemicals and basic chemicals segment would draw only about 20% of the company's investment dollars through 2020 while the other two segments would each draw 40%.

By John Richardson

PROPYLENE pricing is heading for "a crash" in Asia as a result of spot supply increasing by around 20,000 tonne/month, a senior industry source has told the blog.

Shell Chemicals will have a surplus 440,000 tonne/year of C3s from its Singapore cracker - in the process of starting up right now - as the oil-to-chemicals major failed to attract propylene derivatives investors, he added.

"There will also be a substantial surplus from the Map Ta Phut complex when the Dow Chemical/Siam Cement cracker is on-stream."

The Dow/Siam cracker is again in the process of being commissioned.

A second industry source added: "The market is bracing itself for huge C3s surplus once Shell is fully operational.

"You can add to the Singapore and Thailand surpluses, 150,000 tonne/year from Vietnam (the PetroVietnam fluid catalytic cracker) and 100-150,000 tonne/year of additional supply from Saudi Arabia."

Olefins supply has been pretty tight in Asia of late, helping to support the sustained rally in polyolefins (see graph below)Source of graph: ICIS pricing

With a lot more polypropylene (PP) capacity due on-stream this year, it's easy to forecast that this greater supply will combine with weaker support from feedstocks to bring about the long-awaited trough in PP pricing.

"We are talking about an awful lot of extra spot C3s into what is a very thinly-traded spot market. I can see propylene going from being a co-product back to by-product status," added the first industry source.

More liquefied petroleum gas (LPG) cracking and changes in cracker severity will probably be methods producers use to reduce the propylene surplus.

PP producers might benefit. They should have greater ability to discount as they battle for market share against their polyethylene (PE) competitors.

(Ethylene markets will also become longer, with new merchant-market supply including 115,000 tonne/year from Shell in Singapore However, the total surpluses don't look as if they will be as disruptive as those in C3s)  

And the stand-alone PP producers - some of whom have had to shut down recently as a result of high C3 costs - may be able to resume production.

By Malini Hariharan

A new problem is brewing for Iranian petrochemical producers. It appears that the government is quite keen on raising feedstock ethane prices and this issue is now under 'hot negotiations'.

"The National Iranian Oil Co (NIOC) and the petroleum ministry would like to rationalise the price of ethane according to the international trend and not subsidise it; different formulas are being considered," he says.

The price could either be based on heat value or linked to that of propane and butane which have international prices. The formula could also have a mix of these two elements.

The source was confident that an agreement would be reached by the end of the year. The net result would be higher ethane prices. The cost is now less than $75/tonne, he says.

The rationale for price hikes is easy to understand. Like many other governments in that region, Iran too sees gas as a national resource that is for all generations.

"If they sell it cheap now then they will be questioned in the future," points out the source.

Another important factor is Iran's privatisation drive that is part of the country's fourth Five Year Economic Development Plan (2005-2010).

"Previously all plants belonged to the government. So the value was transferred from one pocket to the other. But now plants are being built by the private sector," says the source.

Pic source: Tehran Times

But he was optimistic that the price hike would be moderate as the government would not want to jeopardise petrochemical investments. A compromise is likely to be reached that would give the government better returns on the national asset and keep Iranian producers competitive.

The source was also critical of the privatisation drive as it had resulted in confusion in the market place.

Each Iranian petrochemical company is now free to set up its own sales and marketing operations and not necessarily sell its products through Iran Petrochemical Commercial Co (IPCC). In addition to this, independent sales and marketing companies can also be established that can act on behalf of local petrochemical companies.

And if that is not sufficiently confusing, every company also has the option of continuing to use IPCC to sell part or all of their production.

IPCC has been partially privatised and it is possible that it would eventually be fully privatised.

"The Iranian petrochemical industry is passing through a transition sage where the state-owned companies are being separated into many small private companies, as happened in the former Soviet Union.

"The customer does not come know whether to go to IPCC or the plant operator. The decentralisation has created confusion.

"The passage will be expensive as the country will loose some opportunities. We now have small producers with no brand; we are lost in the market; who will remember us?" he asks.

Smaller companies are likely to consolidate over time although this would not be a state directed effort, he adds.

What's the gas?

Source of picture: wwww.arabianoilandgas.com

By John Richardson

SAUDI Arabian feedstock pricing arrangements for ethane, liquefied natural gas (LPG) and naphtha could change in 2011 - affecting the competitiveness of existing and future investments, two well-placed sources have told this blog.

Ethane is currently still priced at around 75 cents/mBTU and there is a formula for LPG, based on a discount from prevailing CFR Japan naphtha prices, we have been told.

It wasn't immediately clear whether any change in how ethane is priced would affect existing or only future plants.

But the LPG discount available to Saudi Arabia's mixed-feed crackers and its propane dehydrogenation (PDH)-to-polypropylene plants has been reduced by one percentage point per year since 2003, one of the sources said.

"It now stands at a net discount of 20% (we've also been told it is still 28%) with a lack of clarity on what's going to happen next year, as is the case with ethane and naphtha - it's up to the government," he added.

The current formula for naphtha pricing wasn't immediately available, but naphtha use for petrochemicals is minimal in Saudi Arabia.

Perhaps not so in the future as the Kingdom continues to deal with an ethane gas shortage due to dwindling additional supplies via associated gas.

Rising demand for natural gas for power generation is also an issue for Saudi petrochemicals, as is the case across the Gulf Cooperation Council (GCC) region.

The economics of cracking naphtha in Saudi compared with natural gas is being questioned compared with the alternative of shipping the feedstock out to naphtha crackers in Asia. This might now change in either direction.

The second source made the point that even if ethane and LPG prices are adjusted, Saudi's gas cracker and PDH competitiveness - especially in a high oil price environment - will remain very strong.

"A change to how ethane is priced might actually be a good thing as it will mean an even closer look at the viability of future investments," he said.

By Malini Hariharan

The blog has recently written about gas availability in the Middle East and upcoming changes to pricing which have big implications for the petrochemicals business.

But the global gas market is seeing wider changes and these have been excellently summarised by The Economist.

The key development has been the rise of shale gas in the US which now meets about half of the country's demand.

The fall in gas prices has already improved the competitiveness of US petrochemical producers. And analysts are predicting that this advantage will continue.

There is plenty of shale gas around the world. According to the Economist article, the International Energy Agency (IEA) has estimated the global total to be 921 tcf ,more than five times proven conventional reserves. But a clearer picture will emerge only after exploration and drilling starts.

Source: The Economist

Meanwhile, rising production in the US coupled with a drop in demand, as a result of the economic slowdown, has already resulted in a global gas glut. And the situation has been exacerbated by greater availability of liquefied natural gas (LNG).

The rise of shale gas has implications for countries like Qatar that has developed its LNG industry to meet US demand.

"That now looks like a blunder. America is still taking some of this LNG, but the exporters' bonanza is over before it ever really began," says The Economist.

LNG prices are likely to come under downward pressure as new projects scheduled to come on stream this year would add another 80m tonnes to annual supply, almost 50% more than in 2008.

Qatar would still make money because of its low production costs but there are many others who would not as they are extracting gas from remote fields.

A question worth asking is whether Qatar turn to petrochemicals if returns on LNG diminish?

The developments in the US market also has implications for Canada. The ceo of Nova Chemicals recently said that the growth of US natural gas capacity may make natural gas production in Canada less economical, which in turn could lead to a feedstock shortage for Canadian petrochemicals producers.

"We are clearly seeing some degree of decline in the west [Canada], and as a result of that, overall ethane supply is down. There is definitely a real structural concern for producers and consumers over the short-to-medium term," he said.

NOVA has expressed its concerns to the Alberta government authorities and is seeking additional incentives for investments in ethane extraction.

The Economist says that while an age of plenty appears to be on its way there are two factors that could reverse the picture.

The first is the uncertainty about how the success of shale gas exploration outside North America. And the second is the concerns voiced by environmentalists about spoiling landscapes and contaminating water supplies.

The US government recently announced that it would begin a two-year study to determine if hydraulic fracturing, a technique used to produce shale gas, threatens water quality and water health.

There are differing views on how long the surplus situation will continue.

Companies that have invested in LNG believe that there is room for both shale gas and LNG in the US market.

Sceptics point out that shale gas is expensive to produce. With gas futures prices stuck below $5/MMBtu - and breakeven prices anywhere from $3-6/MMBtu - they are questioning how long shale producers will run rigs.

The Economist quotes predictions by experts that the LNG glut is likely to ease by 2014 as low prices would force some projects to be abandoned. France's Total is of the opinion that demand recovery would require more LNG projects while the Energy Information Administration (EIA) predicts decades of relatively weak prices.

A complicated picture but certainly one that needs to be unravelled.

.....but time to party for some thanks to re-exports to Brazil

Source of picture: edgsgonesouth.com

By John Richardson

It's a funny old world - or so it seems in poylolefins at the moment as traders re-export resin from China to Latin America and elsewhere.

"I phoned up a trader in China the other day and asked if he wanted to buy some consignments of polyethylene (PE)," said another trader, based outside China.

"He asked me whether I would instead like to buy material for re-export."

And yet another trader - who is based in Singapore - added yesterday: "A lot of the re-exports have gone to Latin America, but I have also sold material to Bangladesh and Israel.

"Some of the shipments have made money. For example, I bought Linear-low Density PE (LLDPE) from Brazil at $1,170 CFR China a few months ago. Last week, I sold the same cargo back to Brazil at $1,450. With freight at $170/tonne I made a decent profit.

"Other re-exports have lost money, though, as traders have cut their losses due to high inventory levels in China.

"I estimate around a total of 10,000 tonnes has been re-exported over the last few weeks.

"This is a very small amount when measured against the huge volumes traded, but it seems to have helped sentiment a little. Confidence has slightly picked up in the Chinese trading community as a result of the re-exports easing inventory pressures."

Bonded warehouses in the south, the east and the north of China were, however, still close to full, he added.

"The problem is that traders purchased a lot of material in November and December because confidence at that time was high.

"They underestimated the risks of weakening monomer prices undermining support for both PE and polypropylene (PP) pricing, and measures the Chinese government has taken to slow the economy down."

Successful start-up of the new 800,000 tonne/year Shell cracker in Singapore took place on 22 March, according to an official announcement.

And in Thailand, Mab Ta Phut Olefins was heard to have achieved on-spec production at its 900,000 tonne/year naphtha cracker, ICIS news reported yesterday.

Shell was expected to export around 150,000 tonnes of ethylene and 250,000 tonnes of propylene on an annual basis, while Mab Ta Phut Olefins would ship out more than 100,000 tonnes of propylene a year, the same news report added.

But the blog has been told that much more than 100,000 tonne/year of extra propylene will be available for export from Thailand over the next 12 months.

And returning to ethylene, exports are expected to increase from Qatar and Saudi Arabia.

The mood among poylolefins buyers has shifted in China towards one of much-greater caution, added the Singapore-based trader.

"I recently visited five factories where all the factory owners knew that resin was long and didn't feel in a hurry to buy beyond their immediate needs.

"They can smell blood in the air as new capacities are coming on-stream and plants that have already started up are ramping-up production.

"The buyers also know that the traders are coming to the end of their 90-day credit terms and so are desperate to sell stuff out of the bonded warehouses.

"End-users are also becoming much more cautious because of the uncertainty over government economic policy and a potential Yuan revaluation. And they are struggling with the labour shortages."

The good news, though, seems to be that overseas producers are in comfortable positions due to their low stock levels.

"We are in no hurry to sell as we continue to manage our production very prudently," said a Singapore-based source with a global polyolefin producer.

The trader said that this was a comment that had been made by many of the big Asian ex-China and Western producers

"One of these producers has been offering PP homopolymer grade at $1,350 CFR China, which is completely unworkable as the current China price is $1,310, suggesting a comfortable position."

But the longer-term issue remains the strength of growth in China this year (to repeat, we think it's bound to be lower than 2009) as all the new capacities start-up.

Ras Tanura in Saudi - private companies bunkered by feedstock shortage?

By John Richardson

The gas feedstock shortages in Saudi Arabia - which we have commented on before - are such that no private company will receive any allocations in the future, claimed an industry source.

"It's only going to be for Saudi Aramco and SABIC from now on," he added.

Several privately-owned propane de-hydrogenation (PDH)-polypropylene (PP) plants have recently been commissioned in the Kingdom, whereas private ownership of crackers has never really got off the ground.

Saudi Arabia's Minister of Petroleum and Mineral Resources, Ali Al-Naimi, was reported to have said last December that the Kingdom was working on making more ethane available for petrochemicals.

But several well-placed sources we have spoken to have said that this was unlikely to happen anytime soon.

Al-Naimi pledged that investments in the sector would be maintained as Saudi Arabia tries to raise its petrochemicals capacity from approximately 60m tonne/year at the moment to 80m tonne/year by 2015.

This suggests that the way forward to more petrochemicals could well be naphtha - making the decision on how the feedstock will be priced into petrochemicals in the future crucial. An announcement is expected next year. 

Of the $120bn that Aramco has pledged to spend in the Kingdom over the next five years, half will be invested in petrochemicals including the naphtha crackers that are part of the huge Ras Tanura project with Dow Chemical.

Media reports say that plans to expand the refinery at Ras Tanura - which would provide the feedstock for the crackers - has been shelved indefinitely. 

Reports earlier in the week suggested that the petrochemicals portion of the project could be moved due to issues surrounding terrain at the current site, which is on Saudi Arabia's west coast.

Aramco and Dow have not made any comment.

A high chance of more showers

Source of picture: www.stuff.co.zn

By John Richardson

A closer look at last year's polyolefin trade flows illustrates just how vulnerable European producers will be over the next few years to rising pressure from Middle East imports.

"The volume of trade in Western Europe (intra-regional plus imports) for all the grades of polyolefins and polyvinyl chloride (PVC) fell by between 3% and 18%  in 2009," said Jean Sudol, president of International Trader, the New York-based trade-data analysis service.

"But at the same time imports from the Middle East actually increased."

A slowdown of imports into China seems inevitable this year after the staggering increases seen in 2009. For example, low-density polyethylene (LDPE) imports rose by 90% over the previous year to 1.34m tonnes and polypropylene shipments were up by 49% at 4.2m tonnes.

"A reduction in government stimulus, new capacity in China and the difficulty in repeating the sheer size of imports in 2009 points to a slowdown in 2010," added Sudol.

"My guess is that imports won't fall back to 2007/2008 levels and will still be high in 2010, but not as high as in 2009."

So the Middle East producers, as they ramp-up capacity this year and in 2011, will be searching for other destinations to compensate for a dip in demand from China. Europe is an obvious port of call.

ICIS pricing's Worldwide ethylene plant report shows that in the five years from 2008 to 2012, around 29m tonnes/year of new ethylene capacity will be added.

Nearly 16m tonnes/year will be added in the Middle East and around 14m tonnes/year in Asia, of which China accounts for nearly 7m tonnes/year, says the report.

This has partly been offset by the 2m tonnes/year that has closed in North America.

However, some 16m tonnes/year of this capacity growth was still to become operational as of the end of February 2010, the report adds.

"Ethylene demand actually fell in 2008, as economies crashed and extensive de-stocking took place throughout the value chains," wrote my colleagues Paul Ray and Peter Taffe in a recent article on our magazine, ICIS Chemical Business.

"In 2009, demand recovery has been weak. In normal market conditions, a rule of thumb indicates that ethylene demand globally grows at 5m tonnes/year. "

Paul Hodges, UK-based consultant with International e-Chem, added: "These new Middle East plants are going to run at close to the optimum rate of 93%, regardless of market conditions, because of their feedstock advantages,"

A painful reckoning is clearly at hand with restructuring likely to be given some extra impetus by problems in the European refinery industry.

           Riyadh

Source of picture: help.berberber.com

By John Richardson

PRIVATE Saudi Arabian petrochemical companies need not fret about the ethane-gas shortage that two sources had last week told us would hold up their development, according a third industry source we spoke to today, who is based in the Middle East.

"The private companies I've spoken to recently, all see a bright future for themselves in investing in more differentiated downstream products," this third source added.

"The objective is to broaden the range of petrochemicals produced in the Kingdom order to create more downstream jobs. This doesn't necessarily mean having to build a cracker.

"More differentiated petrochemicals, such as acetyls, tend to be smaller in scale than your standardised polyethylene (PE) and mono-ethylene glycol (MEG) plants and there is plenty of spare ethylene within the Saudi system."

The private company Sipchem, for example, decided to cancel its proposed cracker because of mounting costs and the availability of spare C2s, he added.

"It only needs around 250,000 tonne/year of ethylene for its acetyls projects, which are in the process of being brought on-stream right now at Al-Jubail.

And interestingly, more spare propylene might become available if any of Saudi Arabia's four propane dehydrogenation-polypropylene (PP) producers decide to expand.

"Each of the plants has the feedstock allocation to raise C3s output by 20%, but they might not also increase PP capacity.

"And we could be talking about cross share-ownership by feedstock suppliers in some of these downstream projects. If not, discount or transfer pricing arrangements for feedstock off-take are still likely."

As for the Saudi Aramco strategy of potentially cracking naphtha, the source said: "Aramco is losing huge amounts of money on its refinery operations when it sells products locally because of subsidised pricing for gasoline, diesel etc.

"So adding naphtha-based petrochemicals will result in better returns, even if they are weaker than cracking ethane."

Singapore's container port

Source of picture: www.gcaptain.com

By Malini Hariharan and John Richardson

A big challenge facing many companies that have built large polymer plants that are located far from key markets is how to move product most efficiently.

These facilities have been built to take advantage of competitive feedstocks in regions such as the Middle East, rather than proximity to customers, which are mainly in the Asia-Pacific region.

Companies have approached this problem in different ways. Some have stuck to the traditional model of producing, packaging and storing product at site and shipping it to the market once orders have been received.

The problem with this is the delivery time, as it can take up to two months to ship product from the Middle East to Asia, by which time prices could have changed two or three times.

Other companies have developed distribution hubs at strategic locations, or hired warehouses at multiple locations to minimise shipment times to customers.

But more innovative solutions are now being adopted. An example is the model that Borouge has developed.

Polyolefins that are produced at Borouge's plants in Abu Dhabi, United Arab Emirates, and destined for the Asia-Pacific region will not be packed at site, but instead shipped in sea-bulk containers to hubs at Singapore and the Chinese cities of Guangzhou and Shanghai, where third-party service providers will handle packaging, warehousing and onward shipment based on sales orders.

All three hubs will become officially operational in mid-2010 and will handle material from the Borouge 1 and Borouge 2 facilities, which have a total polyolefins capacity of 2m tonnes/year. Borouge 2 will be commissioned over the next few months.

"Other petrochemical companies are looking at what Borouge is doing, which is unique, and trying to decide whether to take this type of visionary concept or gamble their existing supply chain models will keep them competitive in the changing environment," says Eric Herman, CEO of CWT Logistics, which is handling Borouge's southeast Asian logistics hub in Singapore.

This is the first time that CWT is going beyond traditional logistics services.

For the Borouge project, it has built an integrated solution, including packaging lines, a container yard and a warehouse designed to handle 330,000 tonnes of polyolefins annually.

The Singapore facility has no silos and will instead rely on gravity to discharge product from the sea-bulk containers - which are regular 20-foot or 40-foot containers lined with polyethylene (PE) or polypropylene (PP) film - to the packaging line.

This gravity system reduces product handling as well as the chances of contamination, Herman points out.

CWT's overall model allows for shorter delivery time, and there are potential savings of up to 30% on ocean-freight costs from shipping product in bulk containers rather than as packaged goods in containers, he adds.

The decision on how to package products can be decided closer to the point of the order from the final customer, avoiding the need for costly repackaging as is often seen in European logistics centres, he says.

In addition, having a packaging and distribution hub in a location such as Singapore means a Middle East-based company can deliver to China or other Asian markets in shorter lead times, enabling it to compete with South Korean and southeast Asian companies that have always had a delivery-time advantage.

"The strategy is to position products closer to the main markets and reduce the overall time it takes to deliver to the end-users," says Herman.

This is possible from Singapore, which is one of the busiest container ports in the world. The heavy traffic also means there is less pressure to return containers and the free time offered by shipping companies before containers must be returned can be maximised.

"It can be seen as expensive to outsource the supply chain. But, firstly, you are only talking about a fraction of overall product costs," he adds.

Secondly and much more importantly, in increasingly volatile markets a shorter lead time preserves cash flow and hedges your bet on product price fluctuations, Herman says.

"You can say that it is cheaper to pack product at the plant itself, but customers are demanding a shorter lead time, similar to the just-in-time concepts developed in the auto industry by the Japanese."

A source from a polyolefins company with joint ventures in the Middle East thinks the model will work.

"Outsourcing of packaging and warehousing reduces capital costs and improves the project's return on investment, which is important when you are fighting with other divisions within the company for investment dollars," says the source.

CWT's Herman adds that outsourcing of packaging and warehousing also allows companies to save land for future plant expansions.

However, another Middle East producer thinks the model will work only for companies that manufacture huge volumes.

To make this model more accessible, CWT is also establishing a multi-user packaging and distribution centre in Singapore, where a company can experiment with, say, 50,000 tonnes/year, says Herman.

He is convinced that now is the time for the petrochemicals industry to learn to outsource.

"You look at Nike - it has outsourced its entire logistics. Most industries have learnt to outsource. The petrochemicals industry is changing fast, and logistics is going to be a key component as more products need to be moved closer to the market," says Herman.

Logistics could well become the next platform for companies to differentiate themselves in the market.

Here's a post from a guest blogger, my good colleague Prema Viswanathan - Deputy Managing Editor of ICIS pricing in Asia.

Ras Tanura and Al-Jubail

Source of picture: www.absoluteastastronomy.com

By Prema Viswanathan

A Saudi Aramco official has confirmed a Reuters report earlier this week that a change of location for the giant Ras Tanura petrochemicals project is under consideration. The project would be a joint venture between Aramco and Dow Chemical.

Al-Jubail is one alternative location being evaluated, which, like Ras Tanura, is a port city on the Saudi east coast (see map above). Other media reports suggest that Ras al-Zour is also being looked into, which is 80km north of Al-Jubai. 

The Aramco official told us that the review into where to build the complex would only result in a slight delay to the start-up - currently targeted for 2014 - and not five years, as was suggested by the Reuters report. He added that this review would lead to the project being improved.

Sources we spoke to in Saudi Arabia this week nevertheless claim that it won't be easy to sort out either keeping the planned complex at Ras Tanura or shifting it elsewhere.

"The project would have to be reconfigured if they shift it to Al-Jubail or any other destination, as it would be very expensive to bring refinery feeds to the facility via pipeline from Ras Tanura," said one source.

But the dilemma is that if the project stays at Ras Tanura heavy investment would also be needed in infrastructure, he added.

"The proposed shift of location makes no sense, as the integration with Saudi Aramco's Ras Tanura refinery is the main impetus behind the project," said a second source.

"This would be negated if they shift it to Al Jubail, which is already clogged with projects."

Upon completion, the complex is projected to produce 8m tonne/year of petrochemicals and gasoline products.

The current plan is for feedstock to be at least partly provided by the expansion of Aramco's existing Ras Tanura refinery, which will add 400,000 bbl/day of capacity.

The blog also understands that the project may have received an ethane gas allocation.

The refinery and petrochemical projects are expected to cost around $25bn and Dow's involvement would be the biggest foreign investment ever to take place in the Kingdom.

By John Richardson

IT IS always dangerous to assume that the future will be exactly the same as the past - a big lesson from the recent financial crisis.

But so seems to have been the assumption amongst China's polyolefin traders late last year as a close look at import statistics for December and January, supplied to us by the New York-based International Trader magazine, reveal.

In December 2007, for example, 251,600 tonnes of high-density (HDPE) arrived at Chinese ports compared with 292,664 tonnes in December 2009.

January 2010 arrivals totalled 363,129 tonnes against 223,456 tonnes in January 2008 (a "normal" year as there was no economic crisis) and 227,818 tonnes in January 2009.

December 2009 polypropylene (PP) shipments totalled 373,669 tonnes as against 251,179 tonnes in December 2007 (again a more valid comparison than Dec '08 - just about the high-point of the recent crisis, when arrivals were 266,463 tonnes).

 "We all thought that credit in China would remain as ample as before, supporting demand and polyolefin pricing," a Shanghai-based trader said today, echoing comments made by a Singapore competitor last week.

Polyolefin pricing has since slipped in Asia (see chart below) because of reduced lending by local banks, labour shortages in Guangdong province and new capacities.

Source of graph: ICIS pricing 

"Interestingly, the new restrictions in local credit might actually provide some support for imports over the next few months as the overseas traders can more easily lay their hands on LCs from international banks," said an industry observer.

"But on a net basis imports are still likely to be down this year over 2009 on slower growth in China and new capacities."

Consultancy Nexant ChemSystems wrote in a Q1 review released earlier this week: "At least five new crackers (in China), with a combined capacity totalling more than four million tons per year of ethylene achieved commercial production in the first quarter. Most crackers are integrated with further new derivative capacity on site."

By Malini Hariharan

Has the steady increase in crude oil prices last week prompted Chinese buyers to resume purchases? That is what a Shanghai-based distributor of Middle East product is hoping. And it is the only explanation that he can find for concluding a sale of nearly 10,000 tonnes of polyethylene (PE) yesterday.

After weeks of carrying stocks at his three warehouses in the country the trader was pleasantly surprised to transact this business. Buyers are probably looking at crude and thinking that it is the right time to buy, he said.

But whether this will continue is uncertain especially as crude oil prices slipped yesterday after the US reported an increase in inventories.

The trader is finding it extremely difficult to decipher the Chinese PE market. He is quite sure that the massive volumes imported in 2009 have not been digested. Some amount has probably been re-exported but quite a lot is still in the hands of speculators who flocked to the market following a huge increase in bank lending last year.

Like almost all participants in the Chinese market he also has interesting anecdotes to tell.

"A young man, probably in his twenties, approached me last year wanting to buy 300,000 tonnes of PE. It turned out that he knew nothing about the business. But he had access to money thanks to his father who was an important government official with the right connections. And he believed that investing in polymers would give a good return.

"There are many like him. I do not sell to speculators but I have found that they still get hold of my product. I discovered how only after I received a quality complaint from a company that I had not heard of. I traced the flow of material using the lot number and I found that end-users have sold to speculators, sometimes even at a discount. They did this as they were paid immediately which kept their cash flow positive," he explained.

He is convinced that speculators will eventually exit the market causing a huge price correction. But this will happen only when banks demand repayment of the loans made last year.

Heading West,,Jeddah's container port

Source of picture: http://ofwngayon.com/home/?p=257

By John Richardson

SABIC has increased its exports of PE to the US in response to high pricing and what could be weaker demand in China, a source with a North American producer told the blog earlier this week.

"I have heard of more linear-low density PE (LLDPE) cargoes in particular being shipped from Saudi Arabia, the source added.

The graph attached - View image shows the surge in US PE on the back of more expensive ethylene during Q1.

What does this trade - apparenly via both bulk containers to the bigger inland US converters and in bags to the smaller, coastal processors - also tell us about the China market?

PE indigestion in China seems high as a result of overstocking late last year and in early 2010.

"I remember that you had asked me where all the heavy imports in Q4 and January this year were going," added the source with the North American PE producer.

"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."

China's PE buyers have appeared to be standing on the sidelines over the last few weeks at a time when Saudi capacity is ramping. YanSab is apparently back at 100% after electrictiy-supply problems caused an outage earlier this year and the the second Sharq complex has just come on-stream.

But as we heard yesterday, a rise in oil prices might have brought China's PE buyers back into the market in significant numbers.

By John Richardson

THE betting remains on trough conditions arriving for polyolefins at some point later this year with new supply expected to begin to severely lengthen markets towards the end of Q2.

A temporary buying strike in China that dragged on for too long - following overbuilding of local resin inventories - has helped create a fairly bullish mood as the huge ChinaPlas exhibition in Shanghai begins today.

As we discussed last Friday, in linear-low density polyethylene (LLDPE) there's just too much due on-stream by the end of 2010 to in theory prevent major market indigestion, regardless of the strength of demand.

A recent UBS report estimates that 8.6m tonne/year of ethylene capacity is due on-stream globally this year with demand growth likely to be only 2.6m tonne/year. This is set to be the biggest annual increase in C2 capacity in a decade.

But the unknown unknowns are too great, in the view of this blog, to be confident in predicting a trough by the end of this year - and there is a chance that the low-point in this current cycle could be pushed into 2011.

LLDPE is tighter than high-density PE (HDPE) because of what appears to be a global shortage of the co-monomer butene-1 with octene also reported to be in tight supply - as again we discussed in last Friday's post.

Other reasons include OPEC's decision to maintain production quotas at levels reflecting post-crisis oil demand, suggesting continued constraints on associated gas and therefore operating rates of existing Middle East crackers. However, quota compliance has reportedly slipped dramatically, to just 53% in March.

The ongoing long-term problem of increasing alternative demand for gas in the Gulf Co-operation Council region will continue to place limits on both existing and new production.

We understand that these days, new crackers in the region can only operate at 90% of their nameplate capacities because of feedstock allocations.

And remarkably, a senior company executive from a leading Middle East producer confirmed to a colleague of mine recently what we had been hearing for several months from contractors: Cost savings were made in buying raw materials and equipment for plant construction when project-financing costs were at their peak in 2005-07, resulting in technical difficulties in starting-up new complexes.

The shortage of senior start-up engineers is another problem, a long with the scale of the plants being built in this current round of capacity additions. These plants are the biggest of their kind in the history of the industry, meaning that smooth start-ups were always going to be a problem.

But one factor that might lead to the cycle low-point arriving this year is that according to the same UBS report we quoted earlier, 46% of this year's ethylene start-ups are in China versus only 17% in the Middle East. Last year around 80% of start-ups were in the Middle East.

General labour shortages, including not only senior engineers but also construction workers, don't appear to be as acute in China as elsewhere.

Infrastructure outside the battery limits of plants, another factor which is rumoured to have slowed capacity additions in the Middle East, are less likely to be a problem in China.

But 15% of Asian current Asian ethylene capacity will be closed down this year for turnarounds compared with 10% in 2009, again according to the UBS report.

And operating-rate discipline among Western producers remains high, with more rationalisation of capacity, especially in Europe, possible.

The scale of recent closures has been big. For example, Shell Chemicals recently disclosed that it had shut 22% of its US ethylene capacity over the past two years or so as it shifted to greater use of ethane feedstock.

By Malini Hariharan

If you are moving a project to a new location then why not take some time to re-examine its configuration?

That appears to be the thinking at Saudi Aramco and Dow Chemical for their proposed cracker and derivatives complex in Saudi Arabia. As reported on this blog recently, the mega petrochemical project is likely to be moved to Al Jubail from Ras Tanura.

But along with this shift the two companies are now said to be re-examining the product slate. Zawaya reports that the sponsors are trying to decide if it would be better to source some intermediate products from other companies located at Jubail. This would mean fewer units and therefore lower costs for a project that was initially estimated at over $20bn.

The news report also states that while a final decision on the move to Jubail has yet to be made the companies are in discussions with the Royal Commission for Jubail and Yanbu. The project is likely to be based in Jubail II as all plots in Jubail I are occupied. It would be housed next to a joint-venture refinery being built by Aramco and Total which can supply feedstocks to the cracker.

Pic source: Kentz

By locating the project at Al-Jubail, Dow and Aramco would also save on infrastructure development costs as this location is better developed than Ras Tanura. And sources close to the project have also said that contrary to expectations the relocation would help speed up project execution.

But with contracts yet to be awarded completion of the project could easily take another 4-5 years.

By Malini Hariharan

Chinaplas has just concluded and my colleagues have filed some great reports from Shanghai.

Worries about a margin squeeze in the second half of the year persist but polymer producers seem to be increasingly confident about long-term growth prospects.

The chairman of the China Plastics Processing Industry Association (CPPIA) talked of the endless potential of China's domestic market and confidently predicted that the country would have no problems in delivering a 10% growth in demand for polymers and rubber.

"Last year, people were uncertain about what the long term market outlook would be. But the situation looks very positive now," said William Yau, chief executive officer (CEO) for Borouge's marketing arm (see video interview below*).

But in the short term, although demand and supply were normal, there could be ups and down, he admitted.

Yau also said that Borouge II would start up in mid-2010 but the full polyolefins output of 2m was likely to be achieved only by the end of the year or early next year.

The PP industry should be able to escape from another round of restructuring, said Anton de Vries, senior vice president for Europe, Asia and international olefins and polyolefins at LyondellBasell.

"I personally don't expect to see major consolidation in the PP sector. I may be wrong, but I think it's going to be limited, more limited than what we saw in the downturn (in early 2000s)," he said.

The PP sector had gone through a major rationalisation process in the previous downturn in the early 2000s, and further consolidation would be "more difficult," he said.

He also expected LyondellBasell to exit Chapter 11 bankruptcy protection as early as next month and list on the New York Stock Exchange (NYSE) in Q3.

Jamail Malaikah, president and chief operating officer of National Petrochemical Industrial Co (Natpet), the Saudi PP producer described the outlook for the PP industry as excellent.

Not surprisingly, he was not worried about the overcapacity that has been built up in PP and expected Middle East plants to run at full rates.

"We believe most of these plants will be running at a good operating rate in the second half [of] 2010. But I think the impact of the overcapacity on price will not be of high magnitude," he said.

He was also optimistic that the upcoming propane price revision in the Kingdom would turn out to be favourable for producers.

And he also talked about the reasons for the frequent operating problems in the Middle East.

Malaikah said the quality of engineering materials used in building petrochemical facilities may have deteriorated due to mass production necessitated during the plant construction boom in 2005.

"There was a lot of pressure on services, EPC (engineering, procurement and construction) contractors, on vendors, on engineering manpower. The pressure caused some vendors to produce more than their capacity, at the expense of quality," he said.

In other production news, Qatofin is likely to achieve commercial production at its new 450,000 tonnes/year lldPE plant in May or June.

Siam Polyethylene, the Dow Chemical and Siam Cement lldPE joint venture, expects to start operations at its delayed 350,000 tonnes/year plant in the H2 2010.

"We have been given clearance to resume construction which is excellent news as this product is much-needed by the market," said Peter Wong, Commercial Vice-President, Asia-Pacific Basic Plastics, at Dow.

The project had been due on-stream in the first half of year, but work was temporarily halted by a court injunction that have affected numerous other projects at the Mab Ta Phut site in Thailand.

And Siam Cement's president also revealed that the company is looking for acquisition opportunities in Asia.

"We believe that [Asia's petrochemical sector] will go through more acquisitions and we're now looking for acquisition opportunities as well," said Cholanat Yanaranop.

(More videos from Chinaplas are available here)

By Malini Hariharan

A turnaround in petrochemical fortunes in the US, as a result of falling gas prices, means that Dow Chemical is willing to wait to get the best value for its basic chemicals business.

At an earnings call last week, the company's ceo, Andrew Liveris, was clear that while Dow was committed to its asset light strategy it was also in no rush to form a joint venture.

"The fact that this business is earning this much money has made the business more valuable and we are definitely taking our time in structuring the right deal.

"Even though these are trough like conditions, the business is earning four to five times what is earned in the '01 and '02 trough, which is a spectacular statement," he said.

Dow's basic plastics unit reported $718m in first-quarter earnings before interest, tax, depreciation and amortisation (EBITDA). That was up substantially from $122m reported for the same time last year.

Dow was now intent on making the most money from a basic plastics joint venture, Liveris said.

Liveris was also optimistic that the rise in shale gas production would allow US petrochemical producers to retain their competitive position in the future.

"If you go into the next several years and you take the shale gas production that will come online in this country, then that in our view is a sustainable advantage for some years. The consequence of that is that US natural gas will start to stabilise, be less volatile as will indeed natural gas liquids (NGL),"

Another advantage was the flexibility of US crackers to take a variety of feedstocks.

"Ours is the most flexible in the industry. It has made the business and the assets more valuable for the foreseeable future," he added.

By Malini Hariharan

Ras Laffan Olefins Co (RLOC) is studying an expansion of its new cracker by using propane as a feedstock.

At a recent news conference, Mohammed Yousef Al Mulla, general manager of Qatofin, the Qatar Petroleum-Total joint venture downstream of the 1.3m tonnes/year cracker, said that while the cracker was currently running at 100% ethane a change of feedstocks was possible in the future.

"There is a study going on, maybe in the future we will use propane with mix feed of ethane, but we don't know how much it will produce. We may reach 1.6m, but for the time being we will produce 1.3m, there is a study to increase to 1.6m utilising propane in the future," he is reported to have said.

Propane is probably the only route available in the near term for RLOC to boost capacity as Qatar is running short of ethane.

Also at the news conference, Qatar's minister of energy and industry reiterated the country's commitment to petrochemicals and using propane as a feedstock.

"In this business you always try to be innovative and bring new ideas. Mix feed of propane. All these assumptions are in our agenda," he said.

And Qatar should have plenty of propane available as it is poised to become one of the world's largest producer of liquefied petroleum gas (LPG) by 2010/11 with production of around 14m tonnes.

Goodbye to all of that

Source of picture: www.gas2.org

By John Richardson in Mumbai for the Asia Petrochemical Industry Conference (APIC)

EXISTING Saudi Arabian crackers will continue to run at less than 100% until the Kingdom's oil production returns to 10m bbl/day - and that's not going happen for some considerable time, an industry source told the blog earlier this week in the build-up to APIC.

"I visited Saudi recently and discovered with oil production hovering in the region of 8m bbl/day (it was 8.26m bbl/day in April) there's not enough associated gas around to generate the ethane necessary for these established crackers to run at full rates," he added.

"Until production returns to 10m bbl/day ethane will remain tight for these crackers.

"For Saudi Arabia, maintaining the oil price at $70-80 bbl/day has bigger financial and geopolitical considerations than helping petrochemicals out. 

"I think the US is happy with $70-80 bbl/day as oil is expensive-enough to deter the wasteful consumption of earlier this decade that contributed to spiralling crude prices. The days of the gas-guzzling SUVs (and similar vehicles such as the disgusting Hummer - pictured above) need to be over for good.

"I don't think global oil demand is going to return to 2006 levels for a long while, and so this means Saudi will have to stick to its OPEC production quota - which is around 8m bbl/day - to keep crude within the $70-80 bbl/day price-range."

There might be enough propane and butane available, but as downstream plants in these existing complexes produce mainly polyethylene (PE) and mono-ethylene glycol (MEG), this is unlikely to be of much help.

As for the new wave of crackers being brought on--stream at the moment, there is, as you would expect, also not enough ethane gas to go around.

"If a new cracker has an ethylene nameplate of above 1m tonne/year it is not going to be able to produce more than a million tonnes in the foreseeable future," said a second industry.

Saudi Aramco is making strenuous efforts to boost natural-gas production, but there doesn't seem to be any great confidence among the industry sources I have spoken to that this will lead to a big easing of the ethane supply shortage.

More immediately, the feedstock issue is combining with problems in starting up and stabilising production at new plants to keep PE - and also polypropylene (PP) markets tight.

It's not the same story for MEG if China inventory levels are anything to go by as we will discuss later on.

And returning to the feedstock issue, the blog will canvass more views among the delegates gathering for APIC.

Mumbai at night

Source of picture: travelygan.wordpress.com

By John Richardson in Mumbai

POLYOLEFINS will not see a margin collapse this year due to persistently strong demand growth and continued problems with new-capacity start-ups, said numerous industry sources on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Mumbai.

The belief seems to be growing that barring another catastrophic global economic crisis, the industry should be fine.

It is interesting that sources are expressing bigger fear of a demand rather than a supply-side shock. This is the result of the belief that associated gas shortages in Saudi Arabia, problems in starting-up new plants and operating-rate discipline among western producers will continue.

Booming Asian demand has created a lot of confidence. Is this misplaced?

China's apparent polyethylene (PE) consumption grew by 36.9% in 2009 over the previous year and polypropylene (PP) demand by 29.1%, according to the petrochemicals consultancy, DeWitt & Co.

"On scrutiny, much of the 2009 growth was due to replenishment of stocks after massive de-stocking at the end of 2008 and also reduced use of recycled material by converters," said Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co.

But growth remains strong so far this year and is likely be above 10% for the whole of 2010, estimated several sources.

In India, polypropylene (PP) demand grew by 27% in 2009, according to India's Chemicals & Petrochemicals Manufacturers' Association (CPMA).

PP will grow by 12%, reaching apparent demand of 2.462m tonnes, the CPMA adds.

Overall PE growth was 7.6% in 2009 but is expected to accelerate to 10.5% this the year, the CPMA continued. This would leave India's apparent demand for all grades of the polymer at 2.879m tonnes.

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.

Despite the uncertainty surrounding markets prospects and the risk of another demand-led downturn, petrochemical producers are busy planning expansions and new investments.

At last week's Apic conference in Mumbai, a source close to Total Petrochemicals revealed that the company was looking to produce more petrochemicals downstream of its joint-venture refinery project in Saudi Arabia.

The 400,000 bbls/day refinery project, executed by Saudi Aramco Total Refining and Petrochemical Co (Satorp), already includes 700,000 tonnes/year of paraxylene (PX), 200,000 tonnes/year of polymer-grade propylene and 140,000 tonnes/year of benzene.
The project is progressing well and was expected to be completed in 2013.

All the PX would be exported at the beginning until derivative plants were built in Jubail, said the source.

"The propylene and benzene are destined to stay in Jubail and Satorp has been through a bidding process to find local consumers," he added.

Satrop is also expected to supply refinery feedstocks to a cracker project being developed by Saudi Aramco and Dow Chemical. The project - initially planned for Ras Tanura - is likely to be moved to Al-Jubail.

The blog had earlier reported that Total's cracker joint venture in Qatar, Ras Laffan Olefins, would also be expanding its capacity. The source clarified that the expansion would initially be based on ethane.

"The company sees a bubble of ethane availability from the Pearl gas-to-liquids (GTL) project which will be about 1m tonnes/year. They are looking to take that and expand the cracker from 1.3m tonnes/year to 1.6m tonnes/year," he said.

As the ethane would not be available to RLOC for the long term, the company was also looking at cracking propane, he added.

If the expansion is feasible, RLOC would do it by 2011-2012.

The additional ethylene would be used by Q-Chem and Qatofin to debottleneck their derivative plants, he added.

Other newly commissioned crackers are also likely to be expanded in the next couple of years.

Indian Oil Corp (IOC) plans to soon start expanding its newly commissioned cracker at Panipat by 25%.

"We will immediately take up the expansion proposal after stabilization of operations at the cracker; we have already made provision for a 25% capacity expansion," said a company executive said on the sidelines Apic.

After the expansion, the cracker would be able to produce 1.2m tones/year of ethylene and propylene. The cracker currently produces 857,000 tones/year of ethylene and about 500,000 tonnes/year of propylene.

The company would either debottleneck the exisiting deriviative plants or look at new derivatives such as low-density polyethylene or ethylene oxide.

A senior executive at ExxonMobil said in an interview with ICIS news at Apic that a study was on to expand its joint-venture cracker in Fujian, China. The Fujian complex includes a 240,000bbl/day refinery and an 800,000 tonne/year ethylene steam cracker with downstream plants.

Its downstream plants include an 800,000 tonne/year polyethylene unit, a 400,000 tonne/year polypropylene unit and a 700,000 tonne/year paraxylene unit.

And also in China, the National Development and Reform Commission (NDRC), has issued an initial permit for a joint-venture refinery and petrochemical complex between Sinopec and Kuwait Petroleum Corp (KPC) in Guangdong province, reports ICIS news.

The $9b joint-venture project - which includes a 15m tonne/year refinery, a 1m tonne/year cracker and other chemical units - was forced to relocate to Zhanjiang from the earlier planned site in Nansha, also in the province, last year because of environmental concerns.

The project in the south of Guangdong province is expected to come on stream in late 2013. A clearer picture on the completion date is possible only after the companies get the final approval.

Earlier this week, India's Reliance Industries announced it has signed an agreement with Sibur to produce butyl rubber at Jamnagar. Reliance is planning a number of petrochemical projects in India including a huge cracker and new plants for polyethylene, monoethylene glycol, purified terephthalic acid, polyester and other synthetic rubbers such as styrene butadiene rubber and polybutadiene rubber. Details are still awaited.

Out of the investment deep-freeze?

Source: tehrandaily.wordpress.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

A few weeks back the blog had reported that Total was interested in producing more petrochemicals downstream of its refinery joint venture with Saudi Aramco at Al Jubail in Saudi Arabia.

And yesterday, Michel Govaerts, general manager of business development for Middle East and Asia at Total Petrochemicals, confirmed that the company was in talks with Aramco to build a multi-feed cracker capable of producing 1.5m tonnes/year of ethylene and 500,000 tonnes/year of propylene.

Govaerts said the partners began talks more than a year ago about building a cracker that could use byproducts from the joint refinery. He also said that financing for the project is being finalised.

However, he did not give a timeline for the project or derivatives that are being planned. But with construction tenders yet to be issued the project is unlikely to come up before 2014.

And in any case the 400,000 bbls/day refinery, executed by Saudi Aramco Total Refining and Petrochemical Co (Satorp), is due for completion in 2013.

This is the second Aramco joint-venture cracker that is being planned at Jubail. It follows the Aramco-Dow Chemical cracker project which is likely to be moved from Ras Tanura to Jubail.

Total's proposed cracker confirms the growing trend in the Middle East to link petrochemical projects to refineries on diminishing availability of gas feedstocks.

But it looks like there will be competition for refinery feeds as well as Dow and Aramco were said to be looking at getting some products from the Satorp refinery.

By Malini Hariharan

After enjoying years of plentiful supplies the Gulf Cooperation Council (GCC) countries face a gas shortage that could last another five years, says consultancy Booz & Co.

And this is happening at a time when other countries around of the world, especially the US, are seeing a surge in availability.

Source: Booz & Co

The consultancy has identified five factors responsible for the demand and supply imbalance in the GCC countries. There has been a rapid rise in power consumption and gas is increasingly needed by this sector. Gas is also being used for re-injection of depleting oil fields to maintain reservoir pressure and oil production. The growth in petrochemicals, steel and aluminium sectors have also contributed.

On the supply side, the region 'faces extraordinary challenges in maintaining and increasing gas production at a level that would allow it to meet demand,' says Booz. An Opec-led cut in crude oil production has meant lower volumes of associated gas and new sources of non-associated gas have been difficult to locate.

And, lastly, long-term export agreements for liquefied natural gas (LNG) have limited local supplies.

The bad news, says Booz, is that the shortage will become more acute over the next five years despite forecasts of slower economic growth.

GCC governments need to act fast to resolve the situation. Suggested actions include improve in energy efficiency through regulation, a gradual increase in local prices, use of alternatives in the energy mix and providing incentives to international oil companies to participate in the gas sector.

The report adds to what the blog has been writing about - the imminent rise in costs and shortfall in associated gas constraining petrochemical plant operations.

The gas equation has changed affecting not only current production but also future petrochemicals development.

Deepwater disaster expected to impact shale gas 

Source of picture: Minnpost.com

By John Richardson

THE booming shale-gas industry could either benefit or suffer from the BP Gulf of Mexico oil-well disaster, with the end-result determined by the effect on energy prices of any long-term clampdown on deepwater and Arctic drilling.

Those for and against shale gas are lining-up to make their cases as to why the BP catastrophe will be a negative or a positive for what Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says is "the most significant energy innovation so far this century".

An executive with a Houston-based oil and gas services company told the blog: "Shale gas may well enjoy an easier regulatory ride in the US in light of the fact that deepwater and Arctic drilling is going to be a lot more problematic.

"If you can't get your energy from far out at sea or under the Arctic and the US still wants to improve its energy security, then shale gas is the obvious solution as it is onshore and therefore easier to deal if there is an incident. It's also inherently safer than going offshore."

And he pointed out that politicians will surely decide to pursue the path of least resistance.

"Once Deepwater Horizon has faded in the public imagination - i.e. when it drops out of the 24-hour news cycle - the focus of voters will return to the cost and availability of energy.

"The White House will face the choice of either seeing energy costs rise or letting the development of the perfectly-safe shale gas process continue."

Last month, in a supplement on the natural-gas industry, the Financial Times quoted Scott Van Bergh, an energy expert at Bank of America Merrill Lynch, as saying that higher deepwater hurdles might make shale-gas exploration and production (E&P) easier.

Negative publicity towards shale gas looked as if it had slowed, he added.

But his comments came before two incidents at the Marcellus shale -gas field in Pennsylvania earlier this month. One involved a gas leak and the other an explosion which injured seven workers.

And the hydraulic fracturing or "fracking" process used to extract the gas from the shale remains under scrutiny because of emissions and groundwater pollution claims.

Congress has, as a result, asked the US Environmental Protection Agency to complete a comprehensive study into fracking.

The US-based Natural Resources Defense Council argues that the oversight and insufficient regulations that have occurred offshore are an equal concern onshore.

The outcome of this whole debate could have big implications for petrochemicals.

In the US, the big oversupply in US gas has helped to make ethane cracking a lot more advantageous.

The other factors behind the fall in US natural-gas pricing is liquefied natural gas (LNG) oversupply and the drop in gas demand resulting from the economic crisis.

To date, the benefits delivered to US petrochemicals by the rise in shale-gas production have been indirect through its contribution to the drop in overall gas prices.

Continued E&P is seen as crucial to fulfilling the current forecast that US total gas reserves will last a further 100 years. Before the shale-gas technology breakthroughs, reserves were only expected to last 30 years.

Plus, there may be opportunities for direct feedstock supply from shale gas via any fields which prove to be rich in natural-gas liquids (NGLs).

And overseas, there's huge interest with feasibility studies taking pace in countries such as China, the UK, Austria, Germany and Poland.

The studies in Poland have indicated that shale-gas reserves could raise total European natural-gas reserves by 50%. But questions have been raised about the accuracy of these estimates and how quickly and effectively Polish and other reserves can be developed.

Still, though, the shale-gas revolution - provided it is not stymied by regulations - could benefit petrochemicals outside the US through advantaged feedstock.

This possibility has arisen as the Middle East gas advantage erodes, raising the chance of new places to build super-competitive crackers.

In the end, energy costs and energy security seem certain to set the future of shale gas globally, as well as in the US.

The unfeasible alternative is a radical change in consumer behaviour and lifestyle expectations.

Europe and China: A two-tier market is hard to bear...

Source of picture: blog.pinkcakebox

By John Richardson

CHINA'S polyolefin pricing is likely to remain under downward pressure over the next few months as a result of a persistent inventory overhang, new supply and weak construction and auto markets, two traders and one producer have told the blog.

And as we reported earlier this month, falling US PE prices are raising concerns over very competitively-priced imports from the States.

The weakness in the Chinese market is in contrast to Europe, where tight supply is keeping prices firm and is attracting imports.

A further negative factor in China might be a stronger Yuan, which could encourage price-cutting by local suppliers, the producer said.

But so far this week the local currency has both weakened and strengthened against the US dollar following the weekend announceement that it would be allowed to trade in a wider daily band across the US dollar.

One argument is that the government's decision was designed to engineer more volatility in order to discourage currency speculation and not a stronger Yuan.

Reports that the Yuan will definitely strengthen therefore seem premature.

"The polyolefins inventory overhang is still the result of the surge in bookings from overseas in late November and early December," said the first of the two traders we spoke to, who is based in Guangzhou, Guangdong, China.

"We are also seeing the affects of new supply, in both China and the Middle East.

"A symptom of the downward pricing pressure has been the recent re-export of Iranian material.

"As was the case when the re-export market opened-up on the last occasion, we are not talking about big volumes and the size of the total trade has been exaggerated. However, the shipments are hurting sentiment."

The second trader, who is based in Hong Kong, concurred and added: "There is going to be no relief on stock levels from local construction and auto markets that have slowed down considerably.

"Construction is being affected by all the government measures to cool the property sector, whereas tighter credit conditions are hurting autos.

"Auto manufacturers are telling us that they also have high inventories as a result of vehicles manufactured earlier this year on the assumption that extremely strong growth levels would be maintained.

"I am hearing that tighter credit is reducing private purchases, with many of the entire 2010 fleet orders by government companies brought forward in to Q1 because they anticipated that credit would be reduced."

A source with a major Western producer agreed with both traders and added: "I am concerned that we might have seen the best of Chinese demand for imports for this year in the first half.

"China's new plants are running reasonably well and we are seeing stabilisation of production at some recently started-up Middle East facilities.

"The positive news, though, is that OPEC oil quotas continue to limit production at established Middle East plants and we are definitely going to see more delayed start-ups."

The weekend announcement over the Yuan led to sharp fluctuations in its value in both directions on Monday-Wednesday.

"It is early days yet, but if the Yuan was to show consistent greater strength this is likely to create a further negative for pricing," added the first trader.

"Greater local currency strength would give buyers more ability to buy overseas material - i.e. they would need fewer Yuan to buy dollar-priced imports.

"The priority right now at Sinopec is to maximise the off-take from newly-commissioned local plants.

"So watch out for active centralised downward-management of pricing, plus more aggressive discounting by individual producers, in order to gain market share.

"A forward indicator of this would be reliable reports of rising Sinopec inventories following a sustained period of Yuan strength."

A stronger Yuan would also weaken the competitiveness of local finished good exporters, such as the auto makers, thereby providing a further motive for Sinopec to manage polyolefin pricing to the benefit the local industry.

By John Richardson

THE steep decline in Asian ethylene margins - detailed in the chart below from the ICIS pricing weekly margin report - seems to be largely the result of the worrying state of China's polyethylene (PE) market, which we discussed yesterday.

"The Saudis have reduced their PE operating rates, resulting in an increase in the availability of merchant ethylene," an industry observer told the blog today.

A longer-term factor is the surplus from the Shell Chemicals complex in Singapore. Shell switched from being a net buyer to being a net seller of C2s earlier this year when its 800,000 tonne/year steam cracker was commissioned.

Ethylene margins in Northeast Asia (NEA) had recovered to $161/tonne on 25 June from $101/tonne on 18 June on cheaper naphtha, according to the ICIS report.

(Note that PE margins look far better - for example, NEA integrated high-density injection-grade PE margins were $262/tonne on 25 June, again according to ICIS, but still down on a first-quarter average of $357/tonne. But the crucial issue right now for PE is volumes due to the inventory overhang in China)

Despite the recovery in ethylene margins on 25 June, the NEA average for Q1 was $474/tonne with the downtrend ominously paralleling that which occurred in 2001.

"We saw a similar steep decline in that year, ahead of an extended period of poor returns on oversupply," said Larry Tan, Director, Data & Analytics (Asia) for ICIS pricing.

"The nameplate capacity due on-stream for the remainder of this year is in excess of likely global growth."

He, of course, accepted that - as we have seen repeatedly over the last 18 months - start-up delays and OPEC oil output restrictions that have reduced feedstock supply to existing Saudi Arabian plants - could change the picture.

Operating rate discipline in the West has also been ferocious.

But many senior industry sources at last month's APIC conference in Mumbai warned the blog that the bigger danger was the economy - which is proving to be the case.

A plethora of economic problems have combined over the last few days to suggest that we could be heading for a douple-dip global recession.

These include growing concerns over whether China is suffering a significant slowdown on government economic cool-down measures.

The Conference Board, the New York-based research organisation, yesterday downgraded its economic indicator for China on falling construction activity and export orders.

"The rising trend of the [index] has been moderating since the middle of last year, suggesting there is no strong basis for assuming accelerating growth," Bill Adams, resident economist for the Conference Board China Center in Beijing, said in a statement.

"The majority of [index] components have been increasing, but consumer expectations fell in April, and new export orders have been weakening for most of the previous six months."

Up In The Air?

Source of picture: www.marcdussault.com.blog

By John Richardson

QATAR Petroluem and ExxonMobil have started talks to dissolve their partnership for a 1.6m tonne/year cracker project in Qatar, according to an article published earlier this week by the Middle East Economic Digest (MEED).

The project, due for start-up in 2015, would have two 650,000 tonne/year polyethtylene (PE) and one 700,000 tonne/year monoethylene glycol (MEG) plants downstream of the cracker.

Shell Chemicals told us last December that it would ideally like to build two new world-scale crackers and downstream Omega process MEG plants in Qatar with Total Petrochemicals also understood to have submitted a proposal to the Qataris.

Ben van Beurden, executive vice president of Shell Chemicals then told the blog in May: "The situation on feedstock supply is dynamic and I think we have submitted a very good proposition to Qatar. I think they are impressed with our proposal and I am confident our day will come."

Qatar has extended its moratorium on more gas projects based on the giant North Field from 2012 to 2014, in order to study reservoir behavour. This points to limited options for more petrochemicals in the medium-term and a great deal of competition for what gas feedstock is available.

A source close to Total earlier told my fellow blog author, Malini Hariharan, that an option to expand Total's existing joint-venture cracker in Qatar was to make use of ethane from the Pearl gas-to-liquids (GTL) project.

Pearl GTL, a joint venture between the Qataris and Shell, is due on-stream next year.

Van Beurden had also told us in May of plans to integrate Shell Chemicals' planned new cracker in Qatar with Pearl through shared use of utilities, but made no mention of making use of the ethane.

He had earlier ruled out the prospect of using the highly paraffinic naphtha - which will also be produced by Pearl - as feedstock in Qatar

Dear Readers - here is, hopefully, a hand summary of some of the key themes that have emerged over the past two weeks with some important additional data on imports and inventory levels in China - plus a rather unscientific industry confidence survey.

By John Richardson

The mood seems to have changed since the Asia Pacific Petrochemical Industry Conference (APIC) in May, when there was talk of the worst of the economic crisis being over.

Back then - a time that now feels almost like the distant past, before the escalation of the euro debt crisis and a weakening recovery in the US - senior executives were talking confidently of a new Asian growth momentum discounting any persistent weakness in the west.

It was also thought that there was not going to be a major supply crunch in polyolefins due to constant start-up delays, meaning that these new levels of growth in Asia would greedily gobble up new volumes entering the market.

But the big proviso expressed at APIC was that everything could be derailed by macroeconomic events.

This now appears to be looming a little larger, according to polyolefin producers, traders and buyers. Eight of the 12 industry sources recently surveyed by this correspondent said a double-dip global recession is on the way; in late April, only four of the same 12 contacts thought so.

There are those who argue that this has been a disaster waiting to happen for a long while, because the global economic recovery had weak foundations.

Equally, there are others who say that we shouldn't get carried away by recent declines in polyolefin prices, or by a highly unscientific (and small) survey by one reporter.

The price falls are partly the result of overstocking in March, when confidence among traders was so much higher.

"There was a lot of speculative booking of overseas cargoes by traders, at a time when local production was on the rise," said one Shanghai-based trader.

"Oil prices were firm at that time and we thought that they would go higher. We were also more confident about the [Chinese] economy," he added.

China's domestic production has averaged approximately 800,000 tonnes/month this year compared with less than 700,000 tonnes/month in 2009, according to one industry observer.

"Increased domestic production is leading to careful price management by Sinopec," added the trader.

"Sinopec's priority is to maximise sales from these new local plants, which means that falling Yuan-based pricing is leading the market, pushing dollar-based imports in the same direction."

China's ability to quickly stabilise production at new plants is in contrast to persistent operating issues that have limited output from the Middle East, where most of the new capacity came on-stream in 2009.

Low density polyethylene (LDPE) imports reached an all-time high of 225,000 tonnes in March, according to New York-based trade data and analysis publication International Trader Publications.

Overall polyethylene (PE) imports totalled 865,000 tonnes in March compared with last year's monthly average of 610,000 tonnes, based on figures from International Trader.

Imports have fallen steeply since their March peak, to 624,000 tonnes in April and 545,000 tonnes in May.

"This is hardly surprising, as all the bonded warehouses in China are full. Inventories are very high," said a second polyolefins trader.

Sinopec's stock levels are reported to be at 700,000-800,000 tonnes compared with the usual 500,000 tonnes.

Interestingly, polypropylene (PP) is reported to be not as overstocked because there are less speculative traders in the polymer than in the bigger PE sector.

Imports of PP were 373,000 tonnes in March compared with an average of 350,000 tonnes/month in March 2009, according to International Trader. These fell to 318,000 tonnes in April and 292,000 tonnes in May.

PP pricing has, as a result, held up slightly better than PE  as these chart (click link below) show.

PPTJuly5.ppl

A further factor behind the steeper declines in PE was cutbacks by Middle East producers, an industry observer said.

This had led to greater availability of merchant ethylene delivered into a market already made longer by the surplus from Shell Chemicals' cracker in Singapore, he said.

But more fundamentally, the March bust points to the "game being over", as the global economy weakens, said Paul Hodges, UK-based chemicals consultant with International e-Chem.

Two major global polyolefin producers hold a much more positive view of the second half of this year.

They accept that the China growth picture looks a little weaker because of government restrictions that have cooled down the property sector.

But they add that China should still see polyolefin demand-growth in excess of 10% in 2010 as a huge amount of money is still working its way through the economy thanks to economic stimulus.

This should result in reasonable demand for imports in the second half, despite an 19% increase in local polyethylene (PE) capacity in 2010, they argue.

So, as usual, take your pick from the views of the pessimists or the optimists, both of which claim to be realists.

By John Richardson

ASIAN ethylene and polyethylene (PE) margins both fell last week - a further indication that the Chinese market remains weak.

Bonded warehouses are still full of PE as a result of high imports in March at a time when local production was being ramped up, the blog was told this morning.

But nobody seems clear about the outlook for final end-user demand in an increasingly uncertain domestic and global economic climate, which is being reflected in highly volatile crude-oil prices.

This has led to some converters reverting to the hand-to-mouth buying patterns that occurred immediately after the start of the economic crisis in September 2008, we have been told.

A further factor behind the negative buying climate is the imminent start-up of more capacity and, as we reported last week, success relative to the Middle East by China in stabilising new production.

Sinopec's priority also appears to be in keeping the new plants running at or close to 100%, even if this means weakening Yuan-based pricing.

Naphtha-based Northeast Asian (NEA) ethylene margins fell by $50/tonne for the week ending July 9, according to the ICIS pricing Weekly Asian Ethylene Margin Report. This was the result of an $8/tonne in naphtha costs and a $20/tonne fall in C2 prices (see separate article below).

NEA margins averaged $474/tonne in Q1, $378/tonne in the second quarter and only $222/tonne so far in Q3.

Linear low-density PE (LDPE) and high density PE (HDPE) margins for integrated producers in NEA (i.e. those with captive ethylene supply) were also down for the week ending 9 July, according to the ICIS pricing Weekly Asian PE Margin Report.

LDPE margins fell by $60/tonne and HDPE by $65/tonne on weaker PE pricing and a rise in naphtha costs. LDPE film-grade prices had slipped by $30/tonne and HDPE film by $20/tonne in the China CFR market.

HDPE injection grade NEA margins averaged $398/tonne in the first quarter, $357/tonne in Q2 and $305/tonne so far in Q3.

"There is no storage space available in any of the bonded warehouses in southern or eastern China," said a Shanghai-based polyolefins trader.

But he added that there were contradictory reports of high or only medium storage levels in the domestic warehouses that store resin priced in Yuan.

"I don't think inventory levels actually matter that much. There is such uncertainty about the outlook that we are seeing some converters managing inventory the way they did in late 2008," said a Southeast Asian polyolefins sales manager.

"In other words, purchasing is hand-to-mouth with a great reluctance to buy anything more than minimum quantities because of oil-price volatility."

Another factor behind the reluctance of buyers is signs of weakening growth in the Chinese economy. For example, on a month-on-basis basis auto sales slipped in June with a senior government official warning last week that property prices were heading for a significant correction.

Further new supply just around the corner includes the 540,000 tonne/year Borouge 2 LLDPE plant. Production at the 1.5m tonne/year cracker which will feed the PE plant was due to be stabilised by the second week of July, ICIS news had reported.

It is easy to paint a very gloomy outlook for the PE market - and it seems likely that some of the problems we've dealt with above apply to other chemicals and polymer markets.

We will endeavour to look at these other markets over the next few weeks.

Several Factors Behind Ethylene Price Weakness
The fall in ethylene prices to $850-900/tonne FOB Korea occurred despite an outage at the Formosa Petrochemical Corp 700,000 tonne/year No 1 cracker, which is set to last 2-3 months.

But Formosa already had high C2 inventory levels built-up ahead of a turnaround at its 1.03m tonne/year No 2 cracker, according to ICIS pricing.

Asian spot ethylene markets have also lengthened this year on the start-up of the Shell Chemicals' 800,000 tonne/year cracker in Singapore.

Saudi Arabia has also reportedly increased ethylene exports in the last few weeks on lower PE operating rates due to the weak Chinese demand and an outage at a PE plant.

Cargoes are also being lifted from Abu Dhabi, where Borouge is in the process of commissioning its new 1.5m tonne/year cracker and associated downstream plants.

It is therefore to very hard to work out to what extent this latest ethylene price decline (four weeks ago pricing was at $900-650/tonne FOB Korea) is the result of weak demand versus these other factors.

By John Richardson

Qatar Petroleum and ExxonMobil have delayed the start-up of their 1.6m tonne/year cracker and derivatives project in Qatar, my colleague Anna Jagger reported on ICIS news yesterday - quoting sources familiar with the project.

This confirms an earlier media report to this effect - and adds the extra details that start-up of the project could have slipped from 2015 to 2016 due to the possibility of Qatar Petroleum needing to search for a new partner.

Interestingly, Graham Hoar of Nexant is quoted in the ICIS news article as saying that the project's "gas (feedstock) is not as cheap as you might think and the economics are not as attractive as you might expect."

He doubts whether either Shell Chemicals or Total Petrochemicals - both rumoured in the earlier media report to be interested in the project - would rush to replace ExxonMobil due to the questionable economics.

The blog had been told last December by Ben van Beurden, executive vice-president of Shell Chemicals, that "ideally, we'd like to build two crackers and two OMEGA process plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane.

"There are only so many allocations of ethane available from Qatar at the moment and plenty of interested parties."

We gained the impression at that time that it was the lack of availability of gas rather than the price which was the problems.

The cost of gas might hinge on whether Qatar is keen, for national strategy reasons, to add more petrochemicals.

The recent cancellation of Qatar Petroleum/Hanwha Chemicals cracker project appears to fall into another category as around 70% of it feedstock was due to be naphtha.

Later on we discovered that about 1m tonne/year of by-product ethane is available from the Pearl gas-to-liquids (GTL) project, a joint-venture between Shell and Qatar Petroleum. This could, perhaps, help make the economics of another gas cracker in Qatar work better, given what seems  to be increased ethane gas costs from its huge North Field reserves.

Clearly, we need to do some more work on this story and will keep you informed.

By Malini Hariharan

India's long-running investigation into dumping of polypropylene (PP) from Saudi Arabia, Singapore and Oman is inching to a close. Final anti-dumping duties (ADD) are expected to be announced soon, say industry sources.

Affected producers have made their case but are unlikely to escape from ADD. Provisional duties, ranging from $44.40 to $1033.65/tonne, were announced in July 2009.

Some industry sources say that while the upper limit is likely to be brought down, duties would be extended to all Saudi producers. Interestingly, the Indian government is said to have examined the discount that Saudi Arabia offers on feedstock propane supplies while formulating final duties on PP exports from the Kingdom.

After completion of this case, Indian officials are expected to focus on investigating another claim of PP dumping, this time by producers from South Korea, Taiwan and the US.

Meanwhile, Indian polyolefin demand remains firm and is projected to have grown by around 5% in the last quarter. The number could have been higher but falling prices dampened buying activity in the last couple of months.

And sentiment continues to be weak with market players uncertain if the bottom has been reached.

By Malini Hariharan

Yansab posted a net profit Saudi Riyal (SR)502.4m ($134.0m) in the second quarter, its first full quarter of commercial operations. However, results could have been better if its plants had run at full capacity.

Analysts at NCB Capital estimate that average utilization rate was below their expectation of 93% for the quarter.

"We had assumed a similar 93% utilization rate for the remainder of the year, however will likely reduce this somewhat as the company ramps up production at a slightly slower pace than our original outlook," said NCB in a recent report.

Yansab's 1.3m tones/year cracker is based on 38% ethane and 62% propane feedstock mix.

In an earlier report this year NCB had referred to problems faced by Yansab in securing its full feedstock allocation.

"Yansab receives 35,000 barrels per day of propane from Aramco, which is actually 10,000 barrels per day below its full requirement. As a result, the ethylene cracker will likely run at a sub-optimal utilization rate. Though Sabic is seeking approval for additional propane from Aramco, we believe it may be difficult to secure this due to rising domestic demand amid limited supply."

Sabic has a 51% stake in Yansab.

It also pointed out that the full feestock allocation (35,000 bbls/day of propane and 80m cubic feet/day of ethane) was sufficient to produce only 1.25m tones/year of ethylene and 325,000 tonnes/year of propylene, which would imply an operating rate of 93%.

The blog has been regularly hearing and reporting about feedstock issues constraining operations at Saudi crackers. It also appears that there is a mismatch in plant capacity and feedstock allocation and achieving 100% operating rate is unlikely to take place very soon.

By John Richardson and Malini Hariharan

Cautious optimism first gave way to mounting anxiety over the prospects for the second half of this year, but now the mood surrounding China's polyolefins market is downright pessimistic.

"It is going to take a few months to clear up polyolefin inventories and volumes from new plants," Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co said recently. "We are looking at probably sometime in the second half of 2011.

"Asia will have to rationalise production in August. Integrated crackers are still doing OK in terms of margins. But even if operating rates are cut to 85-90% you still have bigger Middle East volumes to contend with. The market is fundamentally weak and directionally it is not looking good."

Northeast Asian cracker operating rates will be cut by 5-6% with overall rates across Asia reduced by 1-3%, estimated N Ravivenkatesh, Singapore-based refining consultant with Purvin & Gertz in his latest Asian petrochemicals feedstock report.

He, like everyone else we have spoken to over the past two weeks, points to a toxic combination of stronger output in China and the Middle East and weak demand in China as being behind expectations of rate cuts.

"Polyolefin markets in China are very soft with producers having no choice but to push material at whatever price," added a source with a major South Korean producer.

"So far there have been no rate cuts in Asia, but at end-July/August it is possible that marginal producers will cut operations."

July-August was normally a hot season for the manufacture of household goods in China, he added - reflecting a widespread hope that demand might be about to pick-up to help consume extreme overstocking in polyethylene (PE).

"So far we haven't seen positive signals. In automobiles in China, inventories are 45-60 days, which is not much," he said.

"But customers in the construction sector have high stocks of pipes as a result of a slowdown in the real estate sector. If this continues, the government may remove controls to boost the construction sector."

Concerns over the success of Beijing's clampdown on the property sector are being widely voiced in the media, with one senior government official quoted as predicting earlier this month a steep property-price fall .

Relaxation of the measures might deliver a vital shot in the arm to the chemicals and polymers sector in general, as real estate in China is so important for the overall economy.

But the risk being apparently debated at senior central government levels is that easing restrictions too soon could create an even bigger property bubble in the future.

Back to the plight of Asia's cracker operators and the ICIS Weekly Ethylene and PE Margin Reports point to a sharp deterioration in variable margins since the first quarter of this year.

Naphtha-based northeast Asian (NEA) ethylene margins were averaging just $209/tonne for the third quarter on 16 July, compared with $378/tonne in the second quarter and $474/tonne in the first, according to ICIS.

Part of the decline is the result of increased ethylene availability in Southeast Asia -the result of the start-up of the Shell Chemicals cracker in Singapore, which is in C2s surplus.

Another factor has been increased spot sales from the Middle East due to production problems at one plant and commissioning of a new cracker ahead of associated downstream start-ups.

But Middle East shipments have also risen due to PE rates being cut in the region due to poor demand in China, added Ravivenkatesh.

And the PE margin story reflects the pressure being exerted upstream on ethylene: Integrated injection grade high-density PE (HDPE) margins in northeast Asia for the third quarter averaged $294/tonne on 16 July as against $377/tonne in the second quarter and $398/tonne in the first.

So why has the outlook become so bleak so quickly, just a few weeks after senior executives were talking at the Asia Petrochemical Industry Conference (APIC) in Mumbai of new levels of demand limiting the downside potential?

With the benefit of hindsight, here are two factors that we are told are behind the about-turn.

The macro-economy was always going to be a threat and delegates at APIC had included the proviso that events out of their control could wreck the rosy outlook. So it seems to have happened with weaker European and US prospects and slower growth in China. Anecdotal reports of the China slowdown were confirmed last week with the release of the second quarter gross domestic product (GDP) growth number

And production at new Chinese polyolefin plants seems to have been stabilised quicker in the first half than Middle East start-ups last year. This stabilisation occured as traders increased imports in March on the belief that crude oil would go higher - a reason for the high stock levels

Last year was also an exceptional year in China because of what Paul Hodges, UK-based chemicals consultants with International e-Chem, called the "desperation of the giant stimulus package".

This brought forward growth from future years, and created the unsustainable inflationary pressures that have led to tighter lending conditions in general, including those affecting property, he added.

Staggering demand-growth numbers for polyolefins in 2009 could have largely been down to this temporary economic boost, re-stocking and the decline in the use of recycled materials.

Has overconfidence led to companies over-promising to investors? If so, some deep operating rate cuts might be necessary, both to restore investor confidence and drag markets back towards a more balanced position.

By John Richardson

IRANIAN polyethylene (PE) exports to China could help to cap or even prevent a recovery in pricing during the second half of this year.

Although in volume terms, Iranian material only accounts for a small percentage of the total market, in sentiment and therefore price-setting terms, it seems to be playing an increasingly important role.

Shipments of low-density PE (LDPE) to China from Iran have in particular increased quite sharply in January-May of this year compared with the same period in 2009, according to my colleagues at ICIS pricing.

A report on ICIS news yesterday said that Iranian shipments to Pakistan were consistently $30-40/tonne below cargoes from other Middle Easern countiries, in order to offset the impact of worries over delayed shipments.

"Iranian material to China is also nearly always priced below material from other countries because of reliability of supply and sanctions issues," said a Shanghai-based polyolefins trader.

"Concerns over reliability of supply relate to difficulty in always achieving stable production at Iranian plants.

"And because of the increasingly tough sanctions regime, the Chinese buyers are in a strong position as they know that Iran now has fewer other options."

One other option is to move Iranian material to Iran, place it in bonded warehouses, and then re-export it to Southeast Asia and elsewhere..

"When these re-exports occur - which are never great in total volume and can also involve shipments to China from other destinations - this is taken as a sign that a market is in severe distress. This can contribute to sudden and quite sharp declines in the CFR China price," the trader added.

As we reported earlier this week, there are plenty other reasons to believe that further downward pressure on PE is likely to continue for the next few months. One consultant sees no light at the end of the tunnel until as late as the second half of next year.

By Malini Hariharan and John Richardson

Saudi polypropylene (PP) producers could potentially be hit by anti-dumping duties (ADD) and other duties from more countries if an Indian ruling on an ADD petition sets a legal precedent, said a senior trade lawyer.

The Indian authorities have ruled - in response to the petition lodged by local PP producers - that the Saudi formula for pricing propane, feedstock for polypropylene, provides an 'unfair advantage' over other international producers.

The ruling came in a disclosure statement released last week as part of India's investigation into alleged PP dumping by Saudi Arabia, Singapore and Oman.

India's commerce ministry said that the advantage was "entirely on account of the Saudi government intervention of maintaining dual prices for domestic consumption and exports".

This is the first time that the Saudi price formula for propane and butane, which is linked to naphtha and gives local buyers a discount of around 30% on the Japan CFR (cost and freight) naphtha price, has been termed as unfair by another country.

"We have seen cases before where countries have made claims against non-market economy countries over government control of raw-material pricing. But we have never before seen a case where one market economy, in this case India, has made this allegation against another - Saudi Arabia," said Ed Sim, partner in the Singapore branch of international law firm, Appleton Luff.

He pointed out that Saudi exporters had defended their case on the grounds that the mechanism for propane and butane pricing was allowed as part of the country's accession agreement to the WTO (World Trade Organization).

"But the Indian counter-claim is that when this has been put into practice in the case of PP it constitutes dumping - and this is, of course, not allowed under the WTO rules," he added.

To ensure a fair comparison, the Indian commerce ministry has adjusted the Saudi propane prices upwards to international levels to arrive at the cost of production of PP and determined that dumping had taken place, said a source close to an Indian PP producer.

Sources close to the affected Saudi PP producers, which include Advanced Polypropylene Co, Saudi Polyolefins Co, SABIC and its affiliates said that the companies were lobbying the Saudi government to raise the issue at a diplomatic level with India, and if that failed to go to the WTO.

"The Indian government decision could set a precedent and open the door for other countries to pursue trade action against Saudi Arabia, if the Indian argument is upheld on appeal to the WTO - and an appeal seems highly likely. The appeal process would take about a year," explained Sim.

The Indians have gone after Saudi Arabia on anti-dumping instead of countervailing (anti-subsidy) duties as the latter would have opened the door for counter-claims against Indian subsidies in other industries, he pointed out.

If the WTO rules in favour of the Indian case, it would set the scene for action by other countries for both anti-dumping and countervailing duties, Sim said.

"This Indian decision is clearly a very big deal and other countries will watch the eventual outcome very closely," he added.

The Indian commerce ministry also said in its disclosure statement that while Saudi PP producers had contended that feedstock propane was priced lower due to inherent benefits such as cost savings in infrastructure, marketing and commercial advantage associated with long-term contracts, no positive evidence was provided.

A source close to one Saudi producer said that the company was reluctant to disclose full details. "They are worried and do not want to get into the cost issue," he added.

The Indian commerce ministry is expected to announce final anti-dumping duties after reviewing responses by the affected producers, which are due to be submitted by 2 Augut.

This marks the final stage of Indian investigations into dumping of PP by Saudi Arabia, Singapore and Oman which was initiated in March 2009. Provisional duties, ranging from $44.40 (€34) to $1,033.65/tonne were announced in July 2009.

India is also carrying out an investigation on dumping of PP by producers from South Korea, Taiwan and the US.

By John Richardson

CHINA'S domestic linear-low density polyethylene (LLDPE) prices have rebounded by as much as Yuan 1,000/tonne ($147.5./tonne) or 8% over the last two weeks, according to this ICIS news article from my colleague Rainy Ma.

As these graphs show (click below) there is now a significant gap between more expensive domestic material and cheaper imports.

ChinaLLDPEAug2010.ppt

This has led to a rise in imports as traders place the cheaper overseas material into storage in order re-sell in to the Dalian Commodity Exchange's LLDPE futures contract.

The price spike in the physical market has come at the same time as prices have also risen on Dalian, with the increases on the exchange apparently driven by higher crude.

An important question in these circumstances (This has happened before: A rise in the Dalian last November/December attracted a surge in imports) is to what degree the local physical market is being influenced by Dalian and vice-versa.

I suspect the physical market is being Dalian-driven because all the indications are of a poor H2 on weaker demand and increased supply.

Import prices for all grades of PE also edged-up last Friday, according to assessments by my colleagues at ICIS pricing. For example, high-density PE (HDPE) increased by $10/tonne to $1060-1110/tonne CFR China.

The justification for higher import prices was that domestic inventories had been depleted - and that the peak buying season was just around the corner. August is when China's manufacturing industry ramps-up to meet demand from the West for goods for Christmas.

But there is clearly a need to separate the imports that have gone into storage to speculate on the Dalian and those that have been delivered to converters to meet real demand - in order to get to the bottom of the real reason for higher import prices.

The hopes of a strong peak buying season seem a little forlorn, given slowing growth in the US and also in China.

In addition, the market is going to take considerably more time to absorb increase Chinese and Middle East production.

So while any price recovery has to be welcomed following a couple of months of declines, this rebound looks as it might well be driven by the traders after a quick buck from Dalian.

The exchange is therefore - as we've mentioned before - making the market more opaque.

"It used to be that we had two markets in Asia - China and the rest of Asia, but now we have three - Dalian, China and the rest of Asia, which is causing a lot of confusion," a source with a global polyolefin producer told the blog.

"What I am really worried about is the 100,000 tonnes of LLDPE that is in Dalian warehouses right now, which has to be delivered into the physical market when the September contract closes.

"If activity on the Dalian remains strong beyond the September contract then that's fine, but if not and people start bailing-out, there could be a lot of negative pressure from this 100,000 tonnes."

By Malini Hariharan

Despite doubts about availability of gas, its cost and viability of using naphtha or other feedstocks, companies from the Middle East are continuing to plan new petrochemical projects.

The latest is Kuwait's Petrochemical Industries Co (PIC) which is looking to invest $5bn in a new 1.4m tonnes/year mixed-feed cracker and derivatives complex.

"Going downstream, there will be some ethylene-glycol, polyethylene, polypropylene, depending on the mix of feed. We're targeting a world-scale capacity for those units," said PIC managing director Managing Director Maha Mulla Hussain.

She expects the project to be operational in 2016.

It is not yet clear if the project will be executed by state-owned PIC on its own or with Equate, a joint venture between PIC and Dow Chemical.

At an earnings conference call yesterday, Andrew Liveris, chief executive of Dow, made a fleeting reference to the project.

"As Kuwait PIC seeks to expand, we always get asked and talked to, and it has to fit our strategy up to and inclusive of whether they want to buy into any of our assets," he said.

Liveris was responding to a question on whether the Kuwaitis could potentially revisit K-Dow, Dow's failed effort to park its basic chemicals asset in a joint venture with PIC.

Liveris also talked about Dow's Saudi joint venture with Aramco. The company now aims to have the project "up and running in the mid-part of the decade".

The two companies issued a statement yesterday confirming that the project has moved to Al Jubail and that front end engineering and design work would be completed in H1 2011.

Liveris also said that he believed the Aramco venture 'is really going to be one of the last large complexes' in the Middle East as the region faces a shortage of cheap feedstocks.

By Malini Hariharan

The blog is hearing a number of reports about delays in polymer shipments from Saudi Arabia because of port congestion. This is being attributed to a shortage of containers and labour ahead of Ramadan.

"It is now takes us 25-30 days to get material out of Saudi Arabia as against the usual 15 days," says a source from a company with polyolefin operations in the Kingdom.

The situation is so severe that some shipping lines are considering bypassing Dammam port, the export hub for petrochemical companies in Al Jubail.

Pic source: Edmark International

Another media report states that slow loading and unloading at the port has led to ships being delayed for up to four weeks.

Port authorities tried to play down the crisis but an official attributed the delays to the inability of a contractor to hire enough workers.

Meanwhile, the local chamber of commerce blamed shipping agents for deliberately delaying unloading of cargoes.

The Ramadan holidays have no doubt contributed to the congestion but sources pointed out that there were other factors as well.

Nearly 3-4m tonnes/year of new capacity has come up in Al-Jubail over the last couple of years and most of the output is meant for exports through Dammam port.

While the situation is likely to ease after Ramadan but there will continue to be pressure for another 1-2 years until the port is expanded.

By Malini Hariharan

Qatar Petroleum's (QP) ambition to extend its global reach has taken the company to Algeria.

QP is reported to have picked up a 10% stake in the Total-Sonatrach joint-venture petrochemicals project at Arzew, Algeria.

The entry of QP would result in a dilution of Total's stake in the project to 41% with the balance held by Sonatrach. But it would help Total meet a government regulation that requires the majority share in a joint venture to be held by an Algerian company.

A Total source had told ICIS news last year that the new law was one of the reasons for a delay in implementing the project, scheduled for completion in 2013.

The project involves a 1.2m tonnes/year cracker with downstream polyethylene (PE) and monoethylene glycol (MEG) units.

Technology license for the proposed 550,000 tonnes/year MEG unit was recently awarded to Scientific Design.

The ethane cracker would reportedly obtain ethane from two liquefied natural gas (LNG) plants.

The Algerian development comes after QP acquired a part of Shell Chemical's stake in Singapore's Petrochemical Corp of Singapore (PCS) and The Polyolefins Co (TPC) in November 2009.

That deal is expected to help QP expand its presence in the Far East with Singapore as a base. Additionally, the deal could help QP market liquefied petroleum gas (LPG) and liquefied natural gas (LNG) into Singapore

And QP also has a presence in China through a joint venture with Shell and PetroChina for a petrochemical project at Taizhou, Zhejiang.

Qatar Builds Its Future

Source of picture: The New York Times

By John Richardson

EXXONMOBIL and Qatar Petroleum have formally ended their agreement to build a $6bn petrochemical complex in Qatar, says a report by the Middle East Economic Digest.

This follows the earlier MEED report that discussions to break-up the JV had begun.

Several other international oil and petrochemicals companies have entered into talks with Qatar Petroleum - with more details expected to emerge when Ramadan ends in mid-September, this latest report continues.

An ICIS news article, quoting a consultant, had suggested - when the first MEED story broke - that the higher cost of gas meant that if ExxonMobil wasn't interested, then quite possibly nobody else would be.

But from recent discussions the blog has had with senior company officials, we feel this isn't the case.

Feedstock costs for petrochemicals have certainly increased in Qatar as a result of the need to bid the gas away from perhaps more important liquefied natural gas (LNG) projects.

But even though the price of ethane seems likely to have gone up in Qatar, this doesn't necessarily make the country a bad bet when measured against the economics elsewhere. Ethane would have to rise by a great deal to wipe out the big advantages of making basic derivative such as polyethylene (PE) and mono-ethylene glycol (MEG) in the Middle East.

And one gets the feeling - given the recently extended moratorium on new gas-based projects in Qatar - that the feedstock parcel for this particular project might be the last for a while.

Ethane in general is in tight supply in the Gulf Co-operation Council (GCC), making the number of future ethane crackers few and far between (i.e. future projects with a very high percentage of ethane as feedstock, with a top-up from less-advantaged propane and butane).

So, in other words, get in while you have the chance!

By John Richardson

EXXONMOBIL is insisting that its cracker and derivatives project with Qatar Petroleum is still on despite a media report to the contrary.

It certainly seems as if there are several suitors for this particular bride - perhaps the last major feedstock parcel available for petrochemicals in Qatar for some time.

The economics of this project don't seem to be the issue here, more whatever the truth is behind the politics.

We will endeavour to find out for you.

SABIC headquarters in Riyadh

Source of picture: france24.com

By John Richardson

The days when the price of future ethane supply in Saudi Arabia - at the time called an advantaged feedstock because nobody knew what else to do with it - was based only on the cost of separation and distribution have long gone.

Now we are into a whole different world of economics where the word marginal is being muttered for the first time as feedstock slates become heavier and derivatives capacity more complicated.

The cause of this staggering turnaround is the well-publicised shortage of ethane in the Kingdom.

But what might not be as well-known are the complex and multiple causes of this shortage.

Short-term implications are disruptions to existing production. There is a risk of drawing hasty conclusions about the long-term consequences of this shift of competitive advantage, particularly as the ethane shortage has taken place in parallel with the shale-gas boom.

The risk comes from multiple unknowns that could either restrict further investment in Saudi Arabia or result in the domestic industry continuing to expand at a healthy click.

"Ethane is tight in Saudi Arabia because of OPEC quotas - and also because as associated gas (a by-product of oil production) supply matures in the Kingdom, it is becoming drier (less ethane content)," said Earl Armstrong of petrochemicals consultancy, DeWitt & Co recently.

OPEC has reduced Saudi Arabia's oil-production quota in order to help manage weaker global demand for crude, resulting in the country's output being pegged at around 8.4m bbl/day.

However, it needs to be producing 10m bbl/day (it is capable of going up to 12m bbl/day) to provide enough ethane for crackers to run at 100%.

"Petrochemical producers can seek a top-up from non-associated gas-field operators," added Armstrong, managing director of DeWitt, speaking at the company's recent Asian Olefins Forum in Kuala Lumpur, Malaysia.

"But the cost of extraction from non-associated fields may be as much as $2/mBTU with the price for ethane fixed at around 75 cents/MBTU - so where's the motivation for these gas producers to supply petrochemicals?"

Crackers are, therefore, being forced to run below their final capacity capabilities, said DeWitt's Joe Duffy, who was speaking at the same event.

"So a cracker that, say, was originally designed to be 1m tonne/year will only receive feedstock to produce that amount, even though it can actually produce substantially more than that," he added.

Such is the squeeze on ethane availability that ethylene exports from the Kingdom are being constrained.

"Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. In February it exported 5,000 tonnes and nothing since then because of feedstock shortages," said Duffy, vice-president for ethylene, polymers and derivatives in Europe, the Middle East and Africa.

"Essentially, 500,000 tonnes/year of exports have gone to zero."

This is just one of many factors that make the outlook for merchant ethylene exports from the Middle East in general extremely hard to read.

"Shale gas is a huge game changer, the biggest in my career," added Armstrong, referring to the growth in this formerly non-conventional type of natural-gas production.

This has helped reduce US gas prices to the point where the country's ethane-based cracker operators have become a great deal more competitive. The other factor behind the decline has been the growth in liquefied natural gas (LNG) as the economic crisis occurred.

"In the gas industry they say that shale gas is so rich in NGLS (natural-gas liquids), in one particular area you can practically pour it."

"US ethylene costs are around $400-450/tonne at the moment, down from $700/tonne a few years ago. Saudi ethylene costs are $150/tonne, but could rise to $300-350/tonne on the limited gas availability."

So could the boost to US competitiveness lead to the country expanding cracker and derivatives capacity, the very idea of which would have seemed ludicrous three years ago?

"Not if this leads to big volumes of exports. In my view, the lower feedstock prices will make the US better-able to defend its big home markets from imports," said Duffy.
"The danger is that exports can reduce the returns from your home market if they are priced at levels that are too low."

But numerous shale-gas projects are being pursued throughout the world, including in China and Eastern Europe, and China has enormous further potential in coal-to-olefins.

An alternative to ethane that's already being used in a big way in the Kingdom is liquefied petroleum gas (LPG). The wave of crackers being commissioned at the moment runs on up to 40% of LPG.

The future of the domestic pricing formula for LPG, which enjoys a nominal 29% discount off prevailing CFR Japan naphtha prices, is a major concern here, though.

There might also be the risk that if Indian antidumping duties against polypropylene (PP) imports from Saudi Arabia are upheld on appeal to the World Trade Organization, the discount structure could be the basis of more antidumping, and possibly also countervailing, petitions from other countries.

 
Another alternative being looked at in Saudi Arabia is naphtha, but an industry observer said: "Naphtha, even with the current discount of around 28%, is way less competitive for cracking than ethane.

"I did an internal rate of return (IRR) comparison for a straight ethane cracker in Saudi versus a pure naphtha cracker - and an ethane cracker had an IRR of 30% and a naphtha cracker around 2%."

Saudi Arabia has vast financial capabilities to further support petrochemicals, regardless of feedstock economics.

"Right now, though, the government's view seems to be that petrochemicals have already received a great deal support and so the focus has switched to developing other areas of the economy," said a second industry observer.

"But this could easily change, making the financing of increasingly more marginal projects easier."

By Malini Hariharan

The Gulf Petrochemical and Chemicals Association (GPCA) is speaking up on behalf of Saudi producers who are worried about the Indian government's recent ruling on dumping of polypropylene (PP).

The Indian position, outlined in a disclosure statement, was that the Saudi price formula for propane gave local PP producers an 'unfair advantage'. And the blog had highlighted a few weeks back that Saudi producers risked more dumping and other duties from countries around the world if India's ruling sets a legal precedent.

In a statement yesterday, the GPCA termed the Indian government's approach to the issue as 'baseless' and urged it to throw out the case before it affects economic relations with the Gulf region.

"This decision is not justified because GCC companies are neither dumping products in India nor causing injury to the Indian petrochemical industry.

"For obvious commercial reasons, including proximity to the source and low local production and distribution costs, the price of feedstock in Saudi Arabia, as in the Gulf region generally, is more competitive than in countries like India that do not have the same endowment of natural resources," said the GPCA.

The argument put forward by the GPCA is not new and was used by Saudi producers during investigation by Indian authorities. The problem though is that no evidence has been provided, or that is what the Indian side has claimed. The blog has also been told that Saudi producers are extremely reluctant to share data relating to costs.

The GPCA has also tried to step up the pressure on India by referring to 'India's desire to improve economic relations with Gulf countries and considering the massive investments and employment of Indian nationals in the region'.

Saudi producers have also turned to the Saudi Export Development Center (SEDC) for support.

"During WTO talks the Kingdom had proved that Saudi feedstock prices were fixed on a commercial basis with gas producers taking a reasonable profit. All WTO members including India have accepted this point. India has signed the WTO agreement. So the Indian argument has no basis," the SEDC chairman said yesterday.

He also said that Saudi Arabia's commerce, finance and foreign ministries had made a lot of efforts to convince New Delhi to change its "irrational" anti-dumping-tax decision.

So will India yield to all this pressure? We should know very soon. The anti-dumping investigation was announced on 23rd February 2009 and according to WTO rules it has to be completed within 18 months which is 22 August 2010.

The major long-term shift in US refinery economics and C3s

Source of picture: blueplanetgreenliving.com

By John Richardson

CHINA will account for around one-third of global polypropylene (PP) consumption by the middle of this decade, up from the current 25%, as domestic demand continues to grow at more than 10% a year, said Mike Smith, consultant with DeWitt & Co.

This will be fed both by new capacities in China itself and the rapid rise in output from the Middle East.

New capacities will outpace demand growth for the next few years with global average operating rates below 90% up until 2014, Smith warned.

The Middle East is set to be able to produce 8-9m tonne/year of PP in 1-2 years' time (most of this will be associated with propylene), placing it "in the same ball-park as the US," added Smith, vice-president for propylene and derivatives.

The US and Europe are losing ground in PP export markets as a result of the new capacities, he said.

Exports helped support a rapid recovery in the US and European industries last year, with re-stocking in the US continuing to offer support, he added. Inventory rebuilding is being boosted by improved demand from the consumer electrical goods automobile sectors.

The US exported 600,000 tonnes of PP in 2009 - 8% of production - with European exports at 282,000 tonnes accounting for 3% of output, to China thanks to its unexpectedly rapid economic rebound.

North America has already seen PP capacity reduced by a net 700,000 tonne/year (closures in the US and start-ups in Mexico), said Smith. Europe has seen 1m tonne/year of closures since 2006 with 400,000 tonne/year of start-ups and a further 245,000 tonne/year earmarked for shutdown.

Europe is facing particular pressure from the Middle East in the key Turkey export market, but further announcements of capacity closures were possible in both regions, he warned.

And while there was good demand growth in Central and Eastern Europe (C&E) that was supporting the western European producers, Smith warned that capacity in C&E would also eventually rise.

The decline in the US and European polypropylene industries has occurred in parallel with dramatic changes in feedstock availability and economics.

The US has seen a 25% fall in C3 availability from steam crackers as a result of the drop in natural gas prices relative to crude and subsequent drop in ethane, which has widened the advantage of ethane over naphtha cracking.

Plus US refinery C3s availability has been reduced as a result of weaker gasoline demand and will continue to be constrained from greater use of biofuels and tougher fuel-efficiency standards, say industry sources.

There has been a lot of talk about the influence of Petrologistics' 544,000 tonne/year propylene facility on US supply. The propane dehydrogenation-based facility, which is located in Texas, is due to come on-stream in late August this year.

But Smith said that the plant will add only 3.5% to total US C3s supply.

US propylene export availability has been reduced to such an extent that the country was "no longer the flywheel provider of C3s to the rest of the world", said Smith.

European refinery propylene availability should improve as the economy picks up, but Smith warned that this could be offset by weaker gasoline exports to the US. Europe has seen its shipments to the States decline for reasons we've already highlighted.

Steam cracker operating rates in Europe could also come under downward pressure from ethylene derivative- imports from the Middle East, he added.

And the further bad news for PP producers in all regions is the supply surge.

Twelve million tonnes per year of capacity is due on-stream in 2009-11 in the Middle East and Asia, comprising 4.2m tonne/year in the Middle East, 5m tonne/year in NEA, mostly in China, and 2.8m tonne/year in Southeast Asia, he said.

Source of picture: keplarllp.com

By John Richardson

It always seemed as if the Asian polyethylene (PE) price rebound was built on a house of cards.

The Chinese economy is slowing down, the country's domestic production has greatly increased and new capacity in the Middle East - though still plagued by start-up and operating problems - is now starting to arrive in much bigger volumes.

Hence the Asian PE report released by ICIS on 13 August, which revealed that, despite further moderate price rises, Asian producers were, at best, "cautiously optimistic".

This followed the previous week's bigger price surge on temporary production issues. 

These included ExxonMobil's outage at its 600,000 tonne/year PE plant in Singapore and the impact of the fire and shutdown at Formosa Petrochemical Corp's No 1 cracker at Mailiao, Taiwan, on ethylene and derivative markets. The cracker is not expected to be back on stream until late September or early October.

A collection of other temporary factors could play a big role in supporting ethylene and therefore PE markets over the next few months - or could swing the other way and make conditions a lot worse.

First, with ethylene, the spot market in Asia has, on paper, become a great deal longer because of a 150,000 tonne/year surplus at Shell Chemicals in Singapore. The Shell cracker, which came on stream in March, is structurally long on C2s.

Lengthy problems in stabilising production of new derivatives capacity from crackers in the Middle East could also lead to more merchant ethylene.

Reasons for the six to nine months it can take to stabilise operations include manpower shortages and the huge scale and complexity of what's being commissioned.
Iran is also structurally long, by as much as 40,000 tonnes/month.

A further difficulty is that plants can, of course, suffer outages. This was the case with the recent report of a big, high density PE (HDPE) facility in the Middle East, which was brought fully on stream last year.

The producer in question was forced to sell 30,000 tonnes/month of ethylene for three to four months - a big reason for the ethylene price declines before the Mailiao outage, an olefins trader said.

The perception is that this current wave of capacity from the Middle East is more susceptible to outages than the previous one, for reasons that are best not to go into in print.

Spot pricing in Asia helps set what consumers pay on contract for their ethylene (term or contract sales account for well over 90% of the region's total consumption), and there are only a handful of spot deals in this region each week. So an extra few cargoes can make a great deal of difference to ethylene pricing.

But feedstock shortages in Saudi Arabia have greatly reduced the country's merchant ethylene sales.

February was the last time ethylene was loaded from the Al-Jubail site in Saudi Arabia, and even then it was only 5,000 tonnes, according to Joe Duffy, petrochemicals consultant with DeWitt & Co.

"Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. Essentially, 500,000 tonnes/year of exports have gone to zero," he added.

Iran's ethylene shipments can also dip very sharply when the power sector and the country's other users of natural gas leave petrochemicals short of feedstock.

Whether Iran can achieve the investment in gas infrastructure to solve this problem is a moot point, given the current issues surrounding sanctions.

Another negative - or positive, depending on which side of the fence you sit - is that increasing demand for long-haul cargoes is creating repositioning problems for ethylene vessels.

Lack of sufficient vessels is also expected to result in higher C2 freights until the end of next year, limiting arbitrage.

"Freight rates are on the rise and could go a lot higher. The Singapore-to-Taiwan rate was, for example, $100/tonne (€78/tonne) in June and has risen to $125/tonne in August," added the olefins trader.

The long-running butene-1 shortage continues to significantly restrict linear low density polyethylene (LLDPE) supply

A wider disparity in container freight rates is benefiting the European PE industry, while hurting Asia.

"We usually see around 30% of Middle East polyolefins moving to Europe with the rest to Asia, but a bigger gap in rates to Europe is resulting in a higher percentage heading this way," said a Singapore-based source with a global polyolefins producer.

"Because of the dramatic recovery in global trade, the gap between freight rates on the European routes to the Middle East compared with China has widened," he added.
"This is the result of China's dominance in low-end manufacturing, creating more fully occupied container space to and from the Middle East and China."

The outlook for European polyolefin demand remains uncertain, but supply has long been tight.

Limited PE and polypropylene (PP) supply was at first the result of deep operating rate cuts when the 2008 financial crisis began - and then also the rapid Chinese economic recovery, which enabled Europe to export significant volumes.

European polyolefin exports to China have since fallen due to displacement by new capacity from the Middle East and China.

But Europe remains tight because of continued operating-rate discipline and the high freight rates that are discouraging buyers from acquiring Middle East material, an industry observer said.

"European PE prices were recently as much as $400/tonne above those in Asia, but that was still not enough to attract Middle East shipments," he added.

The longer all these temporary factors continue the longer producers might be able to squeeze out decent returns.

But the problem remains that an awful lot of surplus capacity still needs to be absorbed by a stuttering global economy.

"We haven't seen the worst of things yet. More permanent shutdowns by higher-cost Japanese and other producers are clearly needed," said a second source with the same global polyolefins producer we referred to earlier on.

People have been saying this for years, though, and plant closures are easier said than done for a myriad of reasons.

The source made a good point, though, when he added: "Rate cuts and permanent closures might occur if price reductions are $50-100/tonne per month rather than the increases we have seen of late.

"Otherwise, we could be struggling with fundamentally long markets throughout next year, with a recovery only occurring in early 2012."

However, if you are higher cost, why not limp through until 2012, given that you might well have loads of money in the bank from the boom period?

By Malini Hariharan

The blog has been regularly highlighting the changes to the Middle East petrochemical environment where feedstock issues have been clouding prospects for new cracker projects and also affecting operations at existing plants.

"We are trying to figure out at what price to offer gas or naphtha to ensure a project is viable and also give best returns for the resource to the country," said a source from a state-owned upstream company in the region.

Ethane is no longer available in required volumes and the cost of extracting the little that is available is much higher than current prices, which are in the $0.75-3.50/MMBtu range across the region. As for propane, butane and naphtha, the source posed the question of whether they should be sold in the international market or provided to local projects at subsidised prices.

Parts of the Middle East are sitting on huge reserves of non-associated gas. But many of these reserves have high sulphur content and treating the gas could push up costs to more than $4/MMBtu.

Iran, with the world's second-largest reserves, has for a long time had the potential to be a game changer, but its problems have multiplied after the recent round of sanctions by the US and the EU.

Iran has now turned to Turkey for help. The two are discussing construction of an urea and an ammonia unit in the industrial hub of Assaluyeh in southern Iran, state-owned Press TV has reported. Talks include construction of a petrochemical plant in Miyandoab in western Azerbaijan province that can produce 539,000 tons of petrochemical products annually.

But Turkey has limited experience in this industry.

Ahmed Hassan of Alembic Global Advisors estimated in a recent report that Iran's five crackers brought on stream from 2005 had experienced start-up delays of 18-24 months and operating rates in the 50-60% range during the first two years of production.

"Iran continues to suffer from extreme skilled labour shortages coupled with political-sanction-driven inability of foreign companies to do business with and in Iran," he explained. "Additionally, once these facilities are eventually up and running they tend to operate at reduced operating rates as utilities and feedstock supply projects do not come on stream at the same time. We do not see this situation reversing any time soon."

He pointed out that the latest sanctions were also likely to affect routine operations.

"Iranian petrochemical producers may also see reduced operating rates stemming from import restrictions. Iran imports from Europe a large amount of catalysts, additives and specialty polymers which are not produced in the country," he said.

And another headache for Iranian companies, which are gradually being privatised, is rising feedstock costs as the government is keen to obtain a better value for its gas resources.

The country's ability to draw foreign investors is getting increasingly restricted and in the absence of foreign money, technology and expertise, completion dates of its many projects - with a total ethylene capacity of around 5m tonnes/year - remain highly elastic.

Every dark cloud has a silver lining...

By John Richardson

GLOBAL polyolefins markets are being kept very tight be a collection of what might seem like only temporary factors.

But in the case of the butene-1 shortage, for example, (see below) this has been restricting linear-low density polyethylene (LLDPE) for more than a year.

And many of the other reasons for supply restrictions have been dragging on for a long time now, enabling Asian consumption to grow - thus making it easier to absorb new capacities.

This is all well and good provided there is no double-dip recession, of course.

Here's our list for the reasons for persistent tightness, resulting in unexpectedly strong margins for those able to operate:

1.) Reduced feedstock availability in the Middle East. This includes both ethane and also liquefied petroleum gas (LPG). LPG has been tight because of, among other factors, reduced refinery operating rates and increased demand from petrochemicals in the Middle East.

2.) Plants keep falling over in the Middle East and new plants are taking a long time to stabilise because of manpower, technical issues etc.

3) Logistics factors which include port congestion, repositioning problems with ethylene vessels (see the link to the first article above), lack of sufficient ethylene vessels and not enough container vessels. Shortage of enough shipping space is also placing a cap on operating rates because this prevents arbitrage (e.g. polyolefins to Europe from the Middle East).

4) Europe's inability to sell gasoline in big volumes to the States anymore. When the US was enjoying an economic boom, ethanol blending wasn't as big and fuel-efficiency regulations were more relaxed, Europe was able to export its gasoline surpluses to the States. But now that cannot happen, this is forcing operating rates at refineries down, thereby restricting the availability of feedstock to petrochemicals, according to my fellow blogger, Paul Hodges.

5) In the US, the drop in gasoline demand is restricting the availability of propylene; in Europe most of the propylene comes from steam crackers so the lack of naphtha is the problem here. Also, the increased demand for polypropylene) PP due to innovation is another factor behind propylene becoming more expensive than ethylene.

6) Lack of spending on maintenance is reportedly the cause of numerous outages in Europe. Lack of maintenance spending is also a problem for PP production in the US, we have been told

7) In Europe also, the product managers are maintaining margins rather than market share (unlike the state-run companies, such as Sinopec, and the South Koreans). This is further restricting production.

8) Lack of enough low-density PE (LDPE) capacity, with the plants that do exist being pushed so hard to meet demand that outages are occurring very frequently.

9) The butene-1 shortage limiting LLDPE production.

Downtown Riyadh

By John Richardson

As my fellow blogger Malini Hariharan wrote last week "the projects environment in the Middle East has irrevocably changed" and with it the rather glib and outdated assumption still being frequently made that building capacity in the region represents a licence to print money.

First of all, as Malini pointed out, further supplies of advantaged gas feedstock are no longer available with high sulphur content meaning that extra processing costs could push non-associated prices to $4/mmBTU and above.

And as we reported earlier on, the issues around associated gas supply include exactly when we can expect world oil demand to return to normal. Plus there is the more long-term concern about existing associated gas supply becoming drier as it matures.

One well-placed industry observer told the blog over the weekend about another problem: Diminished revenues as a result of the ownership structure of projects in Saudi Arabia.

"These days you get to own only one-third of a project with the rest of the equity split between SABIC or Saudi Aramco and the general Saudi public (every new project has to these days undergo an IPO on the local bourse).

"So as a foreign investor you end up stomaching a large proportion, if not all, of the construction costs with a much smaller percentage of the revenues. Before IPOs were stipulated, projects were split 50:50 between the state-owned companies and overseas investors.

"At one time it was, indeed, a licence to print money if you had very cheap ethane feedstock and built only monoethylene glycol (MEG) and commodity grade polyethylene (PE) downstream of your cracker.

"But it's been well-documented that governments across the region want diversification. The problem is that if you go for a wider range for derivatives, especially if these derivatives are based on liquids cracking, rates of return are dramatically lower.

"Building these kinds of derivative makes more sense closer to big consumption markets - i.e. in Asia.

"Governments might provide big incentives to lure foreign investors into 'value-added derivatives', but in Saudi Arabia's case how will this fit with wanting to maximise returns for investors in IPOs?

"Investment incentives are one thing, but operating margins are entirely another matter - not only for stock market investors but, of course, also the foreign companies." 

By Malini Hariharan

The recent sanctions are making business operations difficult for Iranian petrochemical producers. And just when questions were being raised about the prospects of the country's numerous projects, news has emerged that Iran and China are on the verge of finalizing a pact which will see China invest money in Iranian petchems.

The amount is not very significant - the expected investment is likely to be around $1bn, according to a news report which is a fraction of what Iran needs to develop its petrochemicals sector. But it is an indication of the close relations that the two countries are moving closer across the energy value chain.

Iran is the third largest exporter of crude oil to China, behind Saudi Arabia and Angola. And it has also emerged as a major exporter of petrochemicals such as polyethylene.

Earlier this month the Chinese vice premier told the visiting Iranian oil minister that China was willing to work hard with Iran. China is also reported to have told the US that its trade dealings with Iran should not be criticized.

Pic source: Xinhua

With American and European companies out of the picture, Iran is desperately trying to woo companies from other parts of the world. National Petrochemical Co (NPC) is said to be in talks with Turkey's Petkim for a methanol project. It is also trying to put together urea and ammonia projects with companies from Oman and Indonesia, three petrochemical plants with Russia's Sibur and the Bushehr petrochemical project with Sasol.

Whether these companies will really work with Iran is debatable as they would antagonizing the US which is increasingly getting tough with companies that do business with Iran.

Source of picture: the truth about cars

By John Richardson

WHEN my fellow blogger Malini Hariharan once asked a particularly unhelpful individual who used to track polyethylene (PE) markets what was going on, his only response was "conditions are volatile".

And so as you kick-off this fine and sunny morning (at least it is here in Singapore), here is some further useful advice for you: Conditions are becoming even more volatile.

But unlike the individual referred to above, in a series of blog posts over the coming weeks we will endeavour to explain exactly why pricing markets have become even harder to predict. We believe that old tools of analysis need to be revised and old assumptions challenged.

We are going to start with liquefied petroleum gas (LPG) and how unexpected shortages have curtailed the length of the usual propane and butane "cracking season".

Every summer, when demand for LPG for heating in the northern hemisphere falls, cracker operators that have invested in the flexibility to change feeds often reduce naphtha consumption in favour of LPG. Cracker operators in Japan, South Korea and Singapore have, for example, invested in this flexibility.

But as these two recent graphs from the ICIS pricing Ethylene Margin Report show (click below to view), earlier this summer LPG cracking didn't make economic sense

LPGslide.ppt.

So we talked to oil, gas and refining consultants Purvin & Gertz and they gave us the following reasons why this happened:

1.) Refinery operating rates globally are constrained due to weak oil-product demand, despite the story the financial industry is spinning about booming demand
2.) Asian refineries were undergoing heavy maintenance programmes
3.) The economic crisis resulted in delays to liquefied natural gas (LNG) projects, thereby reducing the extra availability of propane and butane co or by-product that needs to be extracted from the LNG before it is shipped
4.) The well-documented OPEC oil quotas that have limited availability of associated ethane gas have also done the same for associated propane and butane
5.) Petrochemicals demand for LPG has increased due to the increased cracking of propane and butane resulting from ethane shortages, and the start-up of the three propane dehydrogenation (PDH) to polypropylene (PP) projects in Saudi Arabia. This is only a small part of the overall picture, BUT constrained LPG supply in Saudi Arabia - evidence of which came from a recent analysts report about Yansab - is one reason why it is over-simplistic to talk about new supply flooding the market without adding a few important qualifications

The LPG season has belatedly begun thanks to Asian refineries returning from turnarounds and LPG exports from a new gas-separation plant in Abu Dhabi, which is feeding the Borouge II cracker complex with ethane, add Purvin & Gertz.

But clearly there are some new variables for flexible-feed cracker operators that look as if they are here for the long-term and therefore need further study.

Tougher sanctions set to reduce Iranian exports

Source of picture: amix.dk/blog/post/19116

By John Richardson

I met a hedge-fund manager yesterday who wanted a straight answer as to why he felt that ethylene, propylene and polyolefin margins are holding-up relatively well, despite an apparent flood of new capacity.

"The margins, particularly for polyproplyene (PP), are much better than we had expected at this stage in the cycle," he said.

Interestingly, though, the ICIS Pricing Margin assessments for ethylene and polyethylene (PE) paint a different picture. We have calculated that from Q1 this year, spot cracker margins have declined by 66% in Asia, by 50% in the US - but by only 2% in Western Europe. Logistics and feedstock availablility have kept Western Europe very tight.

But even in Asia and the US, the general margins picture - although very useful in pointing towards overall direction - doesn't deal with contract prices as opposed to spot, of course.

And for specific smaller-volume grades where tightness is great, for example, low-density PE (LDPE) extrusion grade, the story seems to be very different. 

The hedge fund manager wanted simple answers in line with the history of the industry - that supply is repeatedly built way ahead of demand and that therefore, an inevitable across-the-board collapse in profitability must occur over the new few months. 

On paper, yes, if you look at the nameplate capacities that have been started-up so far this year - and those still due on-stream - and measure this against likely demand-growth rates, a collapse does seem inevitable. 

It is certainly true that Chinese production at new plants brought on-stream in H1 has quickly been stabilised, which is a significiant negative for supply and demand balances.

But I bored the hedge-fund manager, who I think wanted a good argument to short all petrochemical company shares, why supply constraints elsewhere might just mean that certain areas of the industry will get through this crisis without a collapse in margins to levels seen during previous downturns.

It will be about, I think, analysing companies based on their exposure to particular products. For example, anyone heavily into LDPE in general and linear-low density PE (LLDPE)  - for reasons we have already given on this blog many times before over the last year - might well ride out this crisis without major pain.

But PLEASE - there is a major caveat here: This all depends on no double-dip global economic recession. My good friend and fellow blogger Paul Hodges remains firmly of the view that there is a major risk of a double dip. His views are worth listening to and building into scenario plannning.

In a conversation with an industry observer today, the blog picked up some further perspectives on why history may not repeat itself on this occasion (and even if the margins collapse to previous levels, it seems likely that the explanation will be demand rather than supply-driven).

In his own words, this is what the industry observer told us:

"We need to re-examine our assumptions and maybe lower effective available capacity from Saudi Arabia and Iran.

"Propylene and C4s availability have passed tipping points and so there is a need for a very hard look at more on-purpose production."

By Malini Hariharan

More details have emerged on Petro Rabigh's second phase which conforms to Saudi Arabia's product diversification strategy.

The Kingdom is steadily expanding its presence in the aromatics chain and Petro Rabigh's plans include 800,000-850,000 tonnes/year of paraxylene (PX) and 200,000-400,000 tonnes/year of benzene.

The PX is likely to be consumed locally as Petro Rabigh plans to support a third party for construction of a 500,000 - 700,000 tonnes/year purified terephthalic acid (PTA) plant and a 200,000-400,000 tonnes/year polyethylene terphthalate (PET) unit.

Petro Rabigh has secured additional ethane allocation to enable it to debottleneck its cracker and add 300,000 tonnes/year of ethylene. But interestingly, the company has planned a 250,000-350,000 tonnes/year metathesis unit to produce sufficient propylene to meet the requirements of derivatives such as cumene and acrylic acid.

A feasibility study on the second phase is due to be completed in the third quarter of this year and if viability is confirmed the projects will start up in Q3 2014.

The report also highlighted that PetroRabigh has attracted 10 companies to invest in the Rabigh Plus Tech Park, a petrochemicals conversion zone that includes plastics processing. While the company might be happy with this number it only shows the difficulty that Saudi Arabia faces in attracting derivative investments as the Rabigh Park is designed for 50-60 petrochemical conversion industries.

Petro Rabigh

Source of picture: arabianoilandgas.com

By John Richardson

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

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

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

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

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

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

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

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

All our yesterdays... the ICI Runcorn site in its heyday

Source of picture: Chesterchronicle.co.uk

By John Richardson

Yesterday's blog post on Petronas illustrates once again how the state-owned giants, albeit in this case one that is about to undergo a partial IPO, are increasingly dominating the global petrochemicals industry.

The history of the European industry - with the now effectively defunct Imperial Chemical Industries (ICI) as a prime example - was one of government-directed and/or government-owned champions providing the basic raw materials - i.e. petrochemicals - for overall industrial development, says my fellow blogger, Paul Hodges.

But some of the old Western majors are increasingly being pressured by feedstock-advantaged or strategically-driven state-owned Middle East and Asia majors, such as Petronas, Sinopec, PetroChina and SABIC. By "strategically-driven", I mean that making a profit is not necessarily the major motive.

In theory, as we've written many times before on this blog, we should see more consolidation in Western Europe in particular (the situation on the ethylene derivatives side of the business in the US seems to have changed for the long-term because of the ethane-gas advantage. As my colleague Nigel Davis suggested in a recent ICIS news article, the US might even see capacity additions that would serve Latin American growth).

Thanks to a discussion with Paul yesterday, here are a few questions to ponder over your morning coffee:

*Can European countries afford to see too much capacity closed down if this jeopardises security of vital raw-material supplies to all those downstream industries so important to their economies?

*At what point should governments step-in (what constitutes too much capacity closure?) and save companies?

*Given that Western European companies are democracies, and, as a result, are often run by politicians with the attention span of hyper-active two-year-olds, is it realistic to expect coordinated and commonsense intervention?

Answers must be no more than 3,000 words, please, on lined paper and in legible handwriting, and NO chewing gum...

Source of picture: ICIS

By John Richardson

ICIS has just published its Top 100 listing for 2009, which, not surprisingly, reveals the nothing-short-of devastating impact of the global economic crisis on chemical company financial performances.

"Unprecedented operating and financial conditions helped drive annual sales for industry giants down more than 30%," writes my colleague Nigel Davis, in an ICIS news article yesterday about this year's Top 100.

The danger, as Nigel also points out, is that - to use a cliche from football or soccer - 2010 could be a game of two halves. Withdrawal of stimulus programmes in a new age of austerity has the potential to severely dent the remarkable rebound in chemicals demand that continued until at least June of this year.

My fellow blogger Paul Hodges has also written extensively about changing demographics and consumer behaviour (the result of the debt-fuelled pre-crisis spending binge) as major long-term threats to the chemicals industry. This includes a recent article in the Financial Times.

And in a series of blog posts over the next few weeks we will examine the Chinese government's ever-more difficult balancing act as it seeks to cool down overheated sections of the economy, while still stimulating domestic growth by a sufficient amount to replace lost exports to the West.

But that's the demand story. On the supply side, as we've written about before here, some polymer and chemicals markets remain remarkably tight because of the lingering impact of the Lehman Bros-triggered financial crisis beginning in September 2008.

For example, oil demand remains below pre-crisis levels - resulting in reduced associated gas supply to Middle East petrochemicals.

Lack of investment in maintenance in an effort to preserve cash might also be keeping petrochemical markets tight as plants seem to be breaking down with greater frequency.

Supply of certain petrochemicals is being constrained by factors relating both to the crisis and big shifts in consumption and production patterns over many years that have now gone beyond "tipping points" - most notably in the case of propylene.

And so if I were to be looking to pick winners and losers from the ICIS Top 100 for 2010 - which we will be publishing this time next year - I'd be looking closely at a company's product portfolio.

Key data to mine are what percentage sales a particular company derives from each of its products.

If I were looking for winners I would, for instance, be focusing on anybody with a heavy exposure to merchant sales of propylene and C4s.

Low-density polyethylene (LDPE) is an example of a polymer that's benefited both from a plethora of production problems (provided, of course, your plants are not down!) and resilient popularity that has confounded demand-growth forecasts. There has, as a result, been insufficient investment in new capacity.

A big challenge to LDPE's position in Asia is the increase in metallocene production in this region.

But metallocene-grade linear-low density polyethylene (LLDPE) is more expensive per tonne than LDPE. It goes further - allowing down-gauging - but you have to persuade converters very comfortable with LDPE to make the switch.

Major Middle East start-ups during 2010 will inevitably result in big increases in sales for producers such as SABIC.

But assessing just how big will require close monitoring of feedstock availability - and logistics - issues.

The region also seems likely to continue to suffer from more than its fair share of production problems.

This is the kind of depth of analysis we offer to our ICIS training customers during our training events and our Asian Markets Seminars.

We raise awareness of the key changes in the industry over the last two years (and keep regular and close track of how these changes are evolving) in order to help you plan for the future.

We don't claim to have all the answers, but we never assume that history will repeat itself in exactly the same fashion.

By Malini Hariharan

After a fairly steady climb Asian polyolefin markets have hit the pause button.

Demand for polyethylene (PE) and polypropylene (PP) in China and Southeast Asia has weakened but this development has so far been balanced out by continuous reports of operating issues across Asia and the Middle East.

The latest is Yansab's announcement that it was forced to shut its 1.3m tonnes/year cracker last Friday due to technical problems. Operating rates of derivative units have been cut and the company expected normal operations to resume within two weeks.

Al-Waha also shut its 450,000 tonnes/year polypropylene (PP) plant last week and is expected to be up over the next few days.

In China, the Sinopec and Sabic joint-venture 1m tonnes/year cracker is down due to mechanical problems which are expected to take a week to fix. All the downstream polymer plants have also been shut.

Qilu Petrochemical is expected to run its 800,000 tonnes/year cracker at 80% till end-September as repairs to the furnace that caught fire last month have still to be completed

In India, a fire at Gail's high-density polyethylene (hdPE) plant killed one person and injured three others last Saturday. The company has shut down one line and has started an enquiry into the accident.

Reliance's 400,000 tonnes/year gas cracker at Nagothane is running at reduced rates (around 70%) because of an accident at feedstock supplier ONGC's cooling tower has hit supplies of ethane/propane. The situation is expected to continue for a few more weeks and until then one line of the 240,000 tonnes/year hdPE/linear-low density PE (lldPE) plant is likely to remain shut.

Indian Oil Corp (IOC) has yet to stabilise operations at its new Panipat cracker complex and polymer plants. The swing hdPE/lldPE plant was taken offline a few weeks back because of technical problems. And while the standalone hdPE and PP plants are running production of onspec grades is an issue.

Operating issues have struck Asian polymer markets at regular intervals over the last year helping producers stabilise prices.

Will this be the case once again?

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 John Richardson

THE outlook for ethylene spot market availability remains muddled as a few weeks ago due to higher freight rates and uncertainties surrounding Middle East natural-gas feedstock supply.

Freight rates for all Middle East, Asia and West Mediterranean routes were higher in August than their 12-month average, according to Singapore shipping broker Braemar Quincannon.

The Middle East Gulf-Southeast Asia route was, for example, $12.92/tonne higher at $225//tonne and the Middle East Gulf-West Mediterranean route $17.50/tonne higher at $310/tonne.

"The September 2008 financial crisis led to orders for new vessels being cancelled. Since then a combination of the economic recovery and an increase in spot ethylene availability has significantly tightened the market," an ethylene trader told the blog yesterday.

We have heard that some new ethylene vessels are under construction in Asia and in a later post, when we have checked this out, we will let you know what the market believes will be the impact on freight rates.

But a further problem could remain even after any new ships come into operation: Ethylene carriers are being tied-up in more long-haul journeys, creating repositioning problems. We need a clearer explanation of the reasons for this (all we have been told so far is that this is the result of more cargoes being delivered to Northwest Europe from the Middle East) and so - again - we will get back to you.

What we can say with certainty is that gas feedstock supply in Saudi Arabia is still constrained because of the OPEC oil-quota issue.

Ethylene exports from Al-Jubail remain at zero (they have totalled 350,000-450,000 per year over the last few years, we have been told).

However, the Saudi Kayan Petrochemical Co cracker at Al-Jubail - which was brought on-stream in late July - has a C2s surplus of 500,000 tonne/year until all of its downstream units are running properly, we understand. Whether this ethylene will exported or supplied to other complexes in Al-Jubail is a moot point.

The Iran wild card remains wilder than ever: Ethylene exports have recently increased because of the closure of styrene capacity.

Styrene capacity has shut down because Iran, unable to import gasoline due to tougher sanctions, is making more of its own gasoline by blending increased quantities of aromatics (thereby, taking benzene feedstock away from styrene).

We will have to wait and see whether officially-reported new investment in gas- processing capacity and increases in electricity costs prevent the usual winter-time reduction in feedstock supply to petrochemicals.

During the winter, gas is diverted to power stations to meet greater demand for electricity for heating.

If life was easy it would be boring...

By Malini Hariharan

The much talked about revision in Saudi ethane prices may not take place in 2012. In a recent report on the Middle East petrochemical sector analysts from Nomura expected the current price of $0.75/mmbtu to continue until 2015.

They pointed out that there has been no official update from the Ministry of Petroleum over the last year.

"While changes can occur at short notice (for example, gasoline pricing in 2006), we believe the limited official update points to keeping the status quo for ethane pricing until 2015, with perhaps only minor changes to propane, naphtha and butane pricing," they said.

The analysts also confirm to the blog's view that the revision is unlikely to be significant as the Kingdom is still interested in promoting the petrochemical industry. Additionally, lenders to many of the new petrochemical projects would not welcome an abrupt price change that would adversely affect profitability.

The analysts also pointed out that several chemical projects in Saudi Arabia were being restructured as the industry was under pressure to justify to lenders that new projects met internal profitability hurdle rates at higher feedstock prices.

As for propane butane and naphtha pricing, Nomura expected the conversion factor to continue to rise modestly in line with the increases seen between 2002 and 2011.

"We assume that propane, butane and naphtha conversion continues to
gradually liberalise to approximately a 20-25% discount to international prices by 2020."

Iran's South Pars gas field

Source of picture: www.petropars.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

An example of how Lexan solar control IR sheets (made by SABIC Innovative Plastics) can be put to use

Source of picture: SABIC

By John Richardson

SAUDI ARABIA is busy reshaping its petrochemical industry to reflect a drastic shift in priorities.

Such is the change in the kingdom that commentators are going so as far as to say that major capacity additions of commodity petrochemicals will soon become a thing of the past.

The Saudi government is only supporting new investments downstream of the basic cracker derivatives in an attempt to diversify the economy and create more jobs (as you go further downstream, labour intensity increases).

To some extent, this also applies to other countries in the Gulf Cooperation Council (GCC). But what happens in Saudi Arabia is important, as this is where most of the project activity is in differentiated, or value-added, chemicals.

A separate but very important theme worth more exploration is where the new commodity capacity to serve voracious emerging-market demand growth will be added - as what is being planned in Saudi Arabia and elsewhere in the GCC is unlikely to be anywhere close to sufficient.

China is an obvious candidate. So is Singapore, as it takes advantage of spare refinery-based feedstock.

Malaysia is another strong possibility. It has very competitive ethane-gas feedstock, and the petrochemicals division of Petronas will have a much bigger motive to expand once its listing takes place, the current schedule for which is the fourth quarter this year.

But returning to Saudi Arabia, the shift downstream will leave the smaller, private producers that have a limited or even a single-product portfolio in a weak position, according to an industry source.

"Even if future allocations of natural-gas feedstock were readily available - and we all know they are not because of supply constraints - the government will only give them to companies moving up the value-chain," says the source.

It is a classic chicken-and-egg situation, according to an HSBC report on Middle East petrochemicals.

"Access to feeds that can be used for downstream development is likely to be limited to companies that [already] have a broad product portfolio and can therefore integrate internally," says the report.

Companies involved in refinery-based petrochemicals, such as Saudi Aramco, are also likely to emerge as winners, the report says: some of the downstream chemicals being planned require oil-based rather than gas feedstock.

So the strategy for these smaller, marginalised producers is likely to be mergers, acquisitions and diversification into plastics processing, adds the industry source.

It is important to stress, though, that larger and more diversified private companies are in a different position - most notably, Saudi Arabia International Petrochemical Co (Sipchem).

Sipchem brought its methanol plant on stream in 2004 and has since commissioned acetic acid and vinyl acetate monomer (VAM) facilities.

Last month, Sipchem announced a joint venture with Rhodia to build the Middle East's first ethyl acetate plant.

This is exactly the kind of "access to feeds" integration that HSBC is talking about, as Sipchem has acetic acid raw material for the ethyl acetate project.

SABIC, along with Saudi Aramco, is, of course, ideally placed to cash in on the diversification strategy because of its own access to feedstocks.

But to what extent will these two giants make money?

What is certain is that returns will be less than the massive margins generated by a relatively simple ethane-based cracker and downstream polyethylene (PE) and monoethylene glycol (MEG).

How much is made depends on what Saudi Arabia decides to build, says HSBC.

The bank carried out an internal rate of return (IRR) study of 40 basic and differentiated commodity chemicals that could be produced across the Middle East with a 10% hurdle rate for project viability.

Its conclusion is that intermediate chemicals - but not all the way downstream into specialities - Is where Saudi Arabia, and the Middle East in general, should be positioned.

These include acrylics, acetyls, epoxy resins, polyacetals and the polycarbonate (PC) and nylon chains.

SABIC has announced a polyacetals joint venture with Celanese, which is due to start-up in 2013.

Saudi Kayan Petrochemical Co (Saudi Kayan), which is 35% owned by SABIC, will become the region's first PC producer when it brings its plant on stream at Al-Jubail, Saudi Arabia, next year.

And the second phase of Saudi Arabia's PetroRabigh - the joint venture between Saudi Aramco and Sumitomo Chemical - could include other intermediate petrochemicals such as ethylene propylene rubber (EPR) and thermoplastic olefins.

The second phase might also include paraxylene (PX), purified terephthalic acid (PTA) and polyethylene terephthalate (PET), which HSBC identified as other products suitable for the region.

A feasibility study into PetroRabigh's second phase is due to be completed in the third quarter of this year, with a start-up targeted for the third quarter of 2014.

What will not work in the Middle East is production of water treatment chemicals, plastic additives, construction chemicals, catalysts, oil-field chemicals and speciality coatings and adhesives, adds HSBC.

This is the result of low demand for these products in the region and the importance of locating plants in countries where the consumption is big, such as China.

This assumes, though, no heavy government subsidies, with plastic additives quite possibly part of slow-to-get-off-the-ground plastics-processing parks in Saudi Arabia and Abu Dhabi.

A big question is to what extent western and Japanese companies will be willing to license technologies.

The returns for licensors are solid enough, as they include marketing and distribution fees at 5-8% of revenues and licensing fees at a further 1-2% of revenues, says HSBC.

Access to low-cost finance is another temptation, with interest rates at just 2-3% - well below what the foreign majors would have to pay in their home countries.

The evidence to date is that a fair number of overseas players have been prepared to license technologies, although a great deal more deals need to be struck if Saudi Arabia is to fulfil all its ambitions.

But a second industry source adds: "The western and Japanese speciality chemicals market is highly fragmented...so for the smaller players, going to Saudi Arabia makes every bit of sense.

"These smaller players are in a bind when you think about it. It is a choice of no growth at home or going overseas to sometimes less-than-ideal returns."

Saudi Arabia also has the money to acquire companies that own these technologies. An historic case in point was SABIC's purchase of GE Plastics, and with it a distribution network.

Ownership of distribution networks becomes important as you go downstream.
Where there is money, there is usually a way around most obstacles.

By Malini Hariharan

Sabic's Saudi Kayan appears to be heading down the same road as other recent Saudi petrochemical projects.

After starting up a 1m tonnes/year cracker and a mono ethylene glycol (MEG) facility, a local media report states that commercial production is likely only in late 2011 and not mid-2011 as was widely expected in the market.

The report, which quotes a senior company official, did not give reasons for the late start of commercial production.

The blog had heard a few months back that the Saudi Kayan needed another couple of years to complete the entire project and that plans for a 2010 start were too ambitious but this news was dismissed after the company's announcement of a successful start of the cracker. It appears we were a little premature.

Source: Saudi Kayan

Saudi Kayan has been a troubled project right since its inception in 2003. First conceived by a private-sector company, it did not progress as there were difficulties in putting it together because of its size and the breadth of the product slate which ranged from polyethylene to ethylene oxide derivatives and polycarbonate (PC). This was of course necessary as the Saudi government was putting pressure on companies to add value to base petrochemicals.

The project was finally rescued by Sabic in 2006 and was initially targeted for completion in 2009 and then pushed back to 2010.

It has turned out to be an expensive project. The company said in July that it was 24% over budget after having spent about $9.4bn till the end of March. It has since then secured a loan of $1.2bn and is in talks to obtain the balance amount.

"To us this start up delay and financing issues clearly signifies deteriorating economics for mixed feed facilities in Saudi Arabia," pointed out Ahmed Hassan of Alembic Global in a recent report on the company.

He estimated that ethylene production costs for a mixed feed facility like Saudi Kayan were in the $450-500/tonne range, significantly higher than pure Saudi ethane facilities with production costs of $200/tonne.

"If I didn't care what happens to you...."

Source of picture: www.sydbarrett.com

By John Richardson

AS many as 25 new ethylene vessels could be in operation by 2013 as a result of what one shipping industry source told the blog was "irresponsible shipping brokers and consultants talking up the market".

He predicted that the end-result would be a steep fall in freight rates if anywhere close to this number of ships actually ends up in service.

The good news is that some of the vessels on order represent options that can be cancelled if the market starts to turn pear-shaped well before 2013.

Those who have taken out the options might alternatively demonstrate a little vision if the immediate outlook for rates remains firm. Pigs could also take flight - or is that a tad too cynical?

Right now, as we have reported  several times during the last few weeks, ethylene freight rates are high as a result of a shortage of ships and repositioning problems.

"The shortage is the result of some orders for vessels being cancelled at the height of the recent economic crisis," the source adds.

And he further helped explain the repositioning problem as being the result of a greater amount of tonnage being tied-up on long-haul journeys due to increased surpluses in the Middle East.

Numerous difficulties with starting-up new complexes in a coordinated fashion and last month's steep rise in exports from Iran - a consequence of the knock-on effect of diverting benzene into gasoline production - have added to Middle East volumes.

As a result, more ships are plying the Middle East-to-Asia and Middle East-to-Europe routes than was the case before. This is creating longer lead times to get ships back in place to work short-haul routes - for example, Southeast Asia to Northeast Asia.

So the brokers and consultants have been conducting road shows on the wonderful long-term returns that the ethylene freight market promises based on what are only short-term issues, says the source.

Eventually the new complexes in the Middle East will fully stabilise production by sorting out technical problems, reducing volumes from the region, he adds.

Restructuring at SABIC might also encourage greater internal use of ethylene (perhaps more of this later when we have asked more questions).

Feedstock shortages in Saudi Arabia resulting from the OPEC oil quotas are also likely to last for several more years, maintaining downward pressure on shipments out of the Al-Jubail site. We will discuss this in detail in another post later this week.

It also seems inevitable that project announcements will be made in Singapore sooner rather than later which will consume some, if not all, of Shell Chemicals' 150,000 tonne/year surplus. This might include a 200,000-300,000 tonne/year metallocene linear-low density PE (LLDPE) plant by Japan's Prime Polymer.

And the Ras Laffan Olefins Co cracker in Qatar, currently long by an estimated 100,000-150,000 tonne/year, is set to become balanced when a low density polyethylene (LDPE) project starts-up. The plant is due to be brought on-stream in Q1 2012, according to ICIS Plants & Projects.

And in a further post this week we will explore opinions on future ethylene trade from Iran as new sanctions are more rigorously applied. There is a significant risk of a sharp fall in exports.

But even if all of the sources we have spoken to on the merchant ethylene trade are wrong and volumes do not dip in a big way, our shipping industry sources makes the point that 25 ships would still be far too many.

It would represent around 125,000 tonnes of additional tonnage into a market, which, we think, totals very roughly 450,000 tonnes (sorry, but this is very rough: Our estimate is based on 90 ships in service at maybe an average of 5,000 tonnes each - please correct us if we are wrong).

So why is the ethylene shipping industry in this position?

"As I said, it is irresponsible brokers and consultants who have persuaded mainly fund managers with big resources to place orders for new ships," continues our source.

"The managers have been tempted not only by high freight rates but also the fall in the cost of building vessels because of the financial crisis - from $55-60m each to around $40m.

"The theory is that they order the vessels and re-sell them at a profit before delivery."

The money is a drop in the ocean (sorry for the horrible pun) for these managers of sometimes multi-billion dollar funds.

But the impact on the relatively tiny ethylene trade - and on any owners who buy these vessels - could be quite nasty.

"The petrochemical industry might have had a good year but owners across all the sectors - liquids, gases, dry bulk and containers - are struggling," he says.

Rates have only gone up 3-4% since the steep rises in bunker-fuel costs on higher oil and in labour costs on the shortage of qualified crew, he adds.

"Most owners are already defaulting on their original repayment terms. The banks have been willing to reschedule many of their loans because some repayments are better than none and, if they foreclose, they wouldn't get anything."

The arrival of these new ethylene ships runs the risk of making a bad situation even worse.

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

By John Richardson

AN allegation has been made that traders could be changing bills of lading on cargoes of a certain liquids chemical being shipped out of Iran in an effort to get round tougher international sanctions.

"What is I suspect is happening is that a cargo loaded in Iran is first being shipped to another country where the bill of lading is then changed to indicate that it was loaded in that second country. It then leaves this second port for its final destination," an industry source told the blog late last week.

We have obviously been told what particular chemical is involved in this alleged trade and where it is claimed that the trading companies are based - but have decided it would be best not to publish details without documentary proof (which, with our resources, we are very unlikely to get!).

A second source said yesterday that while he hadn't heard of specific instances where this was happening, he would not be surprised at all if bills of lading were being changed given current market conditions.

But a shipping broker pointed out over the phone this morning that bills of lading were checked very closely by ship owners, none of whom would do anything that was illegal.

"If this is happening I think it must therefore be on a very small scale," he said.

Regardless of the truth of the allegation, the people we spoke to agree that the Iranian petrochemicals and polymer industries are becoming increasingly marginalised by the tougher sanctions.

Questions are being asked about whether Iran will be able to continue to export ethylene. This would be a big deal for the merchant market as the country is a major source of supply.

"If you are a trader and attempt to make payments to Iran in either dollars or euros through a Western bank, there is a much higher chance these days that the money will be frozen," added our first source.

"Similarly, any money you are owed by an end-user for a cargo from Iran is much more likely to be suspended in the current political climate."

And the shipping broker added: "There is big pressure from the US on Western banks and on lenders in the Middle East - particularly in Abu Dhabi and Dubai where a lot of business is done with Iran.

"US officials are paying visits to those suspected of continuing business with Iran and are being warned that if they don't comply with the new rules, they will be banned from doing business in both the US and in the Euro zone. No major bank can take that risk."

We have also been told that it has become much harder to insure Iranian shipments - as there is also greater pressure on the insurance companies.

Here's the stereotype....

Source of picture: www.watblog.com

By John Richardson

WE talked last week about how emerging markets continue to astound when it comes to demand, meaning that we might have to take a long and hard look at the parameters used to measure growth.

Further support for this argument came from a visit the blog paid last Friday to Reliance Industries' Jamnagar refinery and petrochemicals complex in Gujarat, India. Many thanks to the good people at Reliance Industries Ltd (RIL) for arranging the trip at very short notice - particularly Kamal Nanavaty, president of the company's crackers and polymers sector, and his team.

Anyway, during the trip it was pointed out to me that the first 1m tonne/year of polypropylene (PP) capacity at Jamnagar - which was brought on-stream in 1999 and integrated with the first refinery - is produced via four reactors.

The additional 900,000 tonne/year of PP of nameplate capacity is produced via just two Unipol reactors. This facility, fed by the second refinery at the site, was started-up in 2008.

Never before had a single Unipol reactor been designed to produce 450,000 tonne/year. The design has been replicated at the Yansab petrochemicals complex in Saudi Arabia, which was commissioned earlier this year, the blog understands.

The reason for the scale of the reactors at the second Jamnagar PP plant is the rapid growth in the Indian market. Demand is of a much-bigger volume than most commentators had expected and so it made economic sense to build reactors on this scale to produce single grades for extended periods of time.

Opportunities abound for further game-changing growth. For example, the Indian industry is reported to be working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper-carriages to bedding made from non-woven PP.

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

Further - it makes it very economically viable to recycle PP-made bed clothes as there is only collection point: Where a train journey terminates.

An estimated six billion people travel by rail in India every year.

On a global basis, challenges still abound for the petrochemicals industry.

Perhaps the biggest current macro-economic threat at the moment is the eruption of an all-out currency war followed by waves of trade protectionism.

But for those on the ground with local knowledge of the changing characteristics of emerging markets, strong returns could continue.

Or has the blog abandoned its useful cynicism?

The brightest and the best, but will there be enough of them?

Source of picture: schoolsinnewdelhi.com

By John Richardson

EDUCATION, education and education are three of the biggest challenges facing developing countries over the next 10-20 years.

This will determine overall growth of economies. Without the right skill sets the rapid rates of growth we have seen over recent years might not be maintained, resulting in social and political pressures.

And at a petrochemical industry level, a shortage of engineers isn't just a developed-world phenomenon as the blog discovered when it talked to the Singapore Chemical Industry Council (SCIC) earlier this year.

In the Middle East, the challenge is to provide the right kind of education as it seeks to move downstream from oil, gas, refining and petrochemicals. Success is crucial in tackling high youth unemployment.

"The region is riding a wave of demographic changes - high birth rates, declining mortality rates and a young population," wrote HSBC in a recent report on Middle East petrochemicals.

"Government estimates place more than half of the Middle East's population under the age of 20, meaning that they will join the workforce over the next decade."

The problem is at its most acute in Saudi Arabia, where, according to HSBC "over half the population of 18.5m is under 20 years old and only 3m, or 16% of the population, are in the workforce.

"Around 2m Saudis are between the ages of 20 and 24, and in this age range only 0.5m are employed, including expats.

"Of the 1.8m Saudis between the ages of 15 and 19, few have jobs. All this suggests that around 1.7m jobs must be found in the next 10 years - more if women are to play a greater role in the workforce."

This helps to better-explain the drive to go downstream into manufacturing components of finished goods, and even the finished goods themselves, in the three plastic processing parks being developed in the region - two in Saudi Arabia and one in Abu Dhabi.

On a straight cost-competitiveness basis, it seems to make little to build manufacturing industries Gulf Co-operation Council (GCC) region. Arguments against include low domestic consumption due to low population levels, lack of sufficient local skill sets and therefore expensive labour.

You can perhaps make a stronger argument for Iran because of its much-higher population, notwithstanding the sanctions issue.

But demographic pressures in the GCC make it likely that manufacturing industry will be made to work, even if heavy subsidies are needed.

Local people will still have to be educated to the right levels to work in these industries, though, and so can the biggest of the GCC countries - Saudi Arabia - deal with this issue?

"My colleagues and I were joking a few years ago about Saudi Arabia having a car components business but no longer, as in around four years time we now think they will have one. One day they might even build their own autos," a petrochemicals industry source told the blog recently.

"It is a huge challenge for the Saudis, but I am convinced they will get there. A patronising view from the West is that they spend all their time sitting on proverbial camels staring into proverbial sunsets.

"But these are extremely bright senior people who have been to INSEAD, Harvard etc and are determined to put the education system right from the bottom-up.

"They are looking at the Singapore system and trying to copy it from the Kindergarten level upwards. I know of one Singaporean guy who is talking about franchising a whole series of Kindergartens in Saudi.

"And at the top end of the education system they are looking to partner top Western universities with their own universities - again following the example of Singapore."

India faces the risk that if it fails to reform its education system, growth could hit the buffers.

The top universities are excellent, but places at the Institutes of Technology and Institutes of Management are incredibly scarce, said this article from Amy Kazan in the Financial Times.

This same article - and one in The Economist - also argued that below the top universities, education was poor and in need of major reform.

India, like Saudi Arabia, has a highly youthful population. This will only be a competitive advantage over China - where the population is ageing - if the education problems can be solved.

"The (Indian) workforce may be young and growing, but 40% are illiterate and another 40% failed to complete school," wrote The Economist.

"The Boston Consulting Group sees a shortfall of 200,000 engineers, 400,000 other graduates and 150,000 vocationally trained workers in the coming years. Meanwhile, there are 62m surplus workers in agriculture, most of them barely skilled."

On our trip to India last week, Reliance Industries Ltd (RIL) expressed its concern over the domestic shortage of chemical engineers.

RIL has to battle hard to find enough of the brightest and the best to run its plants due to fierce competition from the tax-free Middle East.

Like everywhere else in the world, India also faces the problem that chemicals engineers are often lured into information technology or finance.

Chemical companies and industry associations in developing countries are going to have to continue to work hard and smart with governments in an effort to tackle these education challenges.

Over the coming weeks and months the blog will be talking to the industry about initiatives already taking place and those being planned.

Will enough be done? We certainly hope so and if we have any bright, or more likely otherwise, ideas of our own we will let you know.

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

Source of picture: babygavin.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

And there has not been much progress since then.

Pic source: www. tv.ae

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

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

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

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

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

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

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

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

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

By John Richardson

In theory there should be an additional 20-30m tonne/year of liquefied petroleum gas (LPG) coming on-stream between 2008-2012, according to Petrochemical Corp of Singapore (PCS) - the Singapore Jurong Island-based cracker operator.

This could lead to 5-10m tonne/year more LPG being cracked if the pricing incentives are right, added PCS in a recent presentation.

But as the blog has discussed before, LPG has been much-tighter this year than anyone had expected as a result of the associated gas issue, delays to liquefied natural gas (LNG) projects and reduced refinery operating rates. A further factor has been the increased use of LPG for petrochemicals in Saudi Arabia.

As a result of the lingering impact of the above, it therefore seems questionable whether the PCS prediction that LPG markets will be long in 2011-12 will come true.

Firstly, as we've discussed on many occasions before on this blog - but it is worth re-emphasising because of its importance to global petrochemical balances - world oil demand is being forecast not to return to 2007 levels for a couple more years.

This will mean OPEC will have to manage this lower demand to attempt to prevent a price decline, resulting in Saudi Arabia's oil-production quota being maintained at a level that will limit its propane, butane and ethane production.

LNG projects have been postponed or even cancelled due to the economic crisis. And commissioning continues to be affected by the old chestnut also harming the start-up of on schedule of new petrochemicals facilities - the shortage of qualified engineers, said a Singapore-based oil and gas consultant.

"More than 30 LNG ships are standing idle at the moment out of a global fleet 370. This is an indication of project delays and weaker-than-expected demand," said an industry source.

Some 12m tonnes of LNG that should have been delivered to the US this year will instead to diverted to Asia because of the country's weak economy and the rise of shale gas, said Jason Feer, Vice President and General Manager Asia Pacific for the Argus Media Group, in a speech during last week's APPEC oil and gas conference in Singapore.

The shale gas boom, that has dramatically improved the economics of US petrochemicals producers, might in itself lead to more LPG availability.

But this is not part of the PCS estimate we gave above and outside the US, extra LPG volumes from LPG remain highly speculative as projects are at a very early stage.

Further - a global shale-gas boom could put paid to more LNG projects!

And then, of course, refinery operating rates remain under pressure due to factors including new capacity arriving just as the economic crisis occurred - and the peaking of US gasoline demand due to increased fuel efficiency and ethanol blending.

The jury is out over whether refinery margins have bottomed out with maybe only the complex, modern refiners set to prosper.

And then finally in this long list of reasons why we are not drowning in a flood of LPG, petrochemicals consumption has risen in Saudi due to more cracking of propane and butane and the start-up of several propane dehydrogenation (PDH)-to-polypropylene (PP) projects.

Saudi Aramco recently cut export allocations by 20% because of the associated gas problem and increased demand from petrochemicals, said an LPG trader.

BUT - according to the industry source we quoted above - two gas projects in the Middle East, due on-stream over the next few years, have 7-8m tonne/year of LPG of co or by-product LPG "that they don't know what to do with".

As PCS points out, in a world of more competitive gas-based cracker capacity and increased China petrochemicals import self-sufficiency, feedstock flexibility for the higher-cost Asian (ex-China) and European crackers will be essential to survival.

So making investments in the right separation facilities, in furnace adjustments and LPG storage could be worthwhile - especially as LPG yields a higher percentage of propylene than naphtha, and could therefore help solve a potential long-term C3s shortage.

But the key issue, as we have pointed above, is going to be timing!

By John Richardson

THE Morgan Stanley Supercycle report, which we first blogged on last Friday, has created a big stir among the blog's contacts.

 Click herefor a copy of the report RI_PETROCHEM_BLUEPAPER2010.pdf   

As we said in this ICIS news article on both the Morgan Stanley report, and one from Merrill Lynch which is in a similar vein, the paradigm seems to be shifting away from a supply-driven collapse in margins.

Certain senior industry executives have been telling us for a long while - some claim for several years - (maybe we were not listening hard enough?) that any crisis would not be supply-driven.

But now the majority of people we talk to are climbing on board the same argument - along with the belief that emerging-market demand-growth will be more than good enough compensate for a new recession in the West.

But an industry analyst we talked to earlier this week holds a very different view.

"Think about it - the US consumes around 21m tonne/year of ethylene or ethylene equivalent a year, Europe 24m tonne/year and Japan 7m tonne/year and so you are talking about a total of around 52m tonnes from global consumption of approximately 120m tonnes," he said.

"So I don't think it is right to suggest - as Morgan Stanley does in its much talked-about report - that Chinese and Indian demand alone, never mind the rest of the emerging markets, can compensate for weakness in the West.

"The bank's own data shows a decline in Western consumption in 2000-2009.

"If the US and Europe fall back into recession, and with the energy conservation and environmental pressures growing ever-stronger, their ethylene equivalent consumption is going to decline even further."

This would place even more pressure on China and the other emerging nations to carry the load - but recent evidence suggested that the Chinese economy was slowing down, he added.

Operating-rate problems that have constrained production this year would eventually be resolved leading to oversupply, he said

But he admitted that the associated gas issue was the wild card in the pack. The lack of petrochemicals feedstock via oil wells is likely to constrain production at Saudi crackers for several more years until global oil demand returns to pre-crisis levels.

Research by Kunal Agrawal, Asia Energy Analyst at BNP Paribas in Singapore, supports the oversupply argument.

"In 2009-2011, we see more than 21m tonne/year (30% of 2010E installed capacity) of new ethylene capacity in the Middle East and Asia," he wrote in a recent report.

This will lead to surplus capacity of 11.1m tonnes in 2009-2011 and 12.1m tonnes in 2010-11, he warned.

Operating rates would, as a result, decline to 83% in 201011 compared with the average 96% over the past five years.

The BNP Paribas research - taking into account all the project delays - estimates that while 5.1m tonne/year of ethylene came on-stream in Asia and the Middle East last year, this will have risen to 8.8m tonne/year in 2010, and will climb to 8.5m tonne/year in 2011.

The good news is that if the optimists are wrong this should become apparent over the next few quarters - thereby postponing any rash of new projects.

The bad news is that 2011 budget expectations may have already been raised, leading to another ferocious round of cost-cutting in the petrochemicals industry as margins and share prices tank.

By John Richardson

A GREAT deal more polyolefins supply is expected to hit the Asian markets over the next few months resulting in what two chemicals analysts tell the blog will be depressed margins up until March next year.

After that the analysts - one in Singapore and the other in South Korea - predict that we will begin to climb towards the sunny uplands of the supercycle, justifying the already very-high share prices of petrochemical companies, especially those in South Korea.

By the way, the blog is in Seoul at the moment and we will be talking a great deal more about the South Korean industry over the next week or so.

Returning to the supply issue, we were told a couple of weeks ago that the giant 800,000 tonne/year Borouge polypropylene (PP) plant at Ruwais in Abu Dhabi had achieved commercial production. This was confirmed to ICIS news by a source close to the project late last week.

Source of picture: marketoracle.co.uk

Qatar Chemicals (Q-Chem) was reported to be in the process of starting up its 350,000 tonne/year high-density polyethylene (HDPE) plant at Mesaieed in Qatar two weeks ago - with a big new linear low-density (LLDPE) facility in Asia also said to have recently achieved commercial runs.

Bangkok Polyethylene has started test runs of its delayed 250,000 tonne/year HDPE facility at Mab Ta Phut in Thailand, again according to ICIS news

Several PE plants have come back from turnaround or are about to do so, including Titan Chemicals in Malaysia and SK Energy in South Korea.

But we have been here before, of course, many times over the last 18 months.

Who can really guarantee, given the plethora of technical problems that have plagued recent start-ups, that further problems will not be encountered?

As for demand, well, that depends on reliable economic forecasts and as a chief executive officer interviewed by the blog caustically remarked yesterday "the more economists are wrong the more their views are in demand - so it perhaps helps them that they keep getting it wrong."

We are deeply ashamed of ourselves....

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

SOUTH Korea is set to raise its ethylene and propylene capacities by 700,000 tonne/year and 740,000 tonne/year by 2013, Seo Kyung Sun, executive director of the consulting business of Seoul-based Chemical Market Research Inc (CMRI) told the blog last week.

Downstream expansions in polyethylene (PE), polypropylene (PP) and ethylene vinyl acetate (EVA) are also due to take place.

This is further evidence of the optimism - driven by the supercycle theory - which is sweeping through the petrochemicals industry.

The blog visited Seoul last week and came across widespread support for the Morgan Stanley view that market conditions will tighten in 2012-14, leading to historically strong profitability.

Not so long ago South Korea was picked out by consultants as one of the countries which would have to further consolidate, rather than expand, in the face of a flood of new lower-cost Middle East capacity.

But that capacity has been drip-fed into markets, due to all the production and feedstock issues we have documented many times on this blog before, as demand growth has also exceeded all expectations.

South Korean companies - as we will detail later this week - are cash-rich thanks to excellent 2009 and 2010 financial results and soaring share prices, and so funding these expansions will be not be a problem.

Source of picture: noonablog.com

And we understand that in addition to the already-announced projects we are going to detail below, several more expansions - postponed as a result of the 2008 global economic crisis - are being re-evaluated.

We have also been told that one of the South Korean companies we met with last week is considering an investment in a cracker project in China with a Middle East partner that would supply imported liquefied petroleum gas (LPG) feedstock.

South Korea's current ethylene nameplate capacity stands at 7.6m tonne/year with Yeochun Naphtha Cracker Centre (YNCC) the country's biggest cracker player, added CMRI's Kyung Sun.

"YNCC, a joint venture between Daelim and Hanwha Chemicals, has expanded ethylene capacity by 50,000 tonne/year this year and will add a further 300,000 tonne/year in 2012. All the additional ethylene will be for export," she said.

Honam Petrochemical is scheduled to raise its ethylene capacity by 250,000 tonne/year in 2012 while also increasing high-density PE (HDPE) by 250,000 tonne/year, she continued.

And next year will see LG Chem expand ethylene by 100,000 tonne/year. No details were immediately available as to what these extra C2s would be use for.

The country's current propylene capacity is 5.7m tonne/year with expansions set to come via steam cracking (410,000 tonne/year) and fluid catalytic cracking (330,000 tonne/year), said Kyung Sun.

Honam will use its additional propylene output to add to 200,000 tonne/year of PP, she added.

SK Energy is set to increase its linear low-density PE (LLDPE) capacity by 20,000 tonne/year with Hanwha planning a 40,000 tonne/year EVA expansion.

Let us hope, as we've said before, that all this confidence doesn't end in tears.

Source of picture: tycoonreport.com

By John Richardson

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

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

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

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

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

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

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

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

ChinaImportPEPrices12November.ppt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                    Dubai crucial for Iran

By Malini Hariharan

The blog recently had an opportunity to talk to a few Iranian companies and was impressed by their sanguine approach to the challenges posed by the new round of sanctions.

This too shall pass was the prevailing philosophy.

"We have a long experience [in dealing with sanctions]; we feel the pinch immediately after the announcement but slowly adjust and find new ways to do business," said an Iranian source.

Dubai continues to be the main conduit for exports but in some cases secondary companies have been set up at other locations to mask the trail to Iran.

A second source believed the sanctions were merely a test and was confident that nothing can stop them from exporting product.

They often do not get the best price in the market but no one was complaining about this.

The figures do suggest that Iran has been successfully placing product.

The Tehran Times reported that exports were up 50% (in value) during the first seven months of the Iranian calendar year ended 22 October, with polyethylene (PE) and methanol being the major exports.

The managing director of Iran's Petrochemical Commercial Co (PCC) said the country had defined new target markets such as Africa and South America. He also noted that "the final stages of negotiations between Iran and Egypt were ongoing "for exporting  poylpropylene (PP), urea, fertilizer, methanol and paraxylene".

But China will remain a key market. Iran exported around 350,000 tonnes of High Density polyethylene (HDPE) to China during January-September, up 33% from last year, reports my colleague Bee Lin on ICIS news.

Linear-low Density PE (LLDPE) exports were up 15% at 50,000 tonnes while Low Density PE (LDPE) exports tripled to 187,819 tonnes.

The volumes are set to rise even further as PCC Shanghai, a wholly-owned subsidiary of PCC, has obtained a licence to sell PE and PP in yuan in the Chinese domestic market.

It has also applied for a license to sell liquid petrochemicals in yuan.

The only worry that was evident in some quarters was the move by newly privatised companies to enter their market on their own. Previously PCC was the sole exporter of Iranian product.

"They don't have much experience and sometimes undercut other sellers by as much as $100-150; they don't realise that they are running the risk of starting anti-dumping investigations," complained a third source.

The private companies are no doubt been eager to test their wings. But with the going getting more difficult and ingenious ways needed to do business they could eventually return to PCC.

Shell's refinery and petchems complex in Deer Park, Texas

Source of picture http://www.msnbc.msn.com/

By John Richardson

THE excellent third-quarter financial results of the likes of Dow Chemical and LyondellBasell further confirm the extraordinary turnaround in the cost positions of those with a big proportion of their global polyolefins production based in the US.

Some more pain might be ahead for these now advantaged feed producers (if such a phrase had been used by anyone in connection with the US three years ago they would have been advised to seek the help of a psychiatrist) as higher production from new plants in the Middle East is absorbed. We will detail this risk in a post later this week.

But producers can at least look back on a year that has confounded probably even the most optimistic of expectations.

A recently released chemicals research report by the privately held financial institution, the Susquehanna Financial Group (SIG), details just how good 2010 has been in terms of margins.

"We have a more positive view on the ethylene cycle for US producers due to what is turning out to be a longer lasting and greater cost advantage for US ethylene production from ethane feedstock," write the authors of the report.

"With this cost advantage it now appears that the long anticipated 2011-12 downturn due to new ethylene capacity in the Middle East and Asia will be almost a non-event for US ethane-based ethylene producers.

We project that contract cash margins for US Gulf ethylene production from ethane feedstock will trough at $0.15/lb.in 2011 versus our previous expectation of $0.10/lb.

This represents a mid to early peak cycle margin by historical standards - US ethylene margins for all feedstocks troughed at $0.08/lb in 2001-02 and peaked at $0.18/lb in 2006. "

And as we said we will discuss later on this week, SIG see some tougher times ahead as the supply-driven downturn - delayed by all the start-up problems in the Middle East and a reduction of associated gas supply - has yet to fully happen.

"The downturn will be more severe for other feedstocks and regions (other than the US)," the report continues.

"Margins for naphtha-based ethylene production in the US, as well as Asia and Europe, should reach trough levels in 2011-12 before a broad-based upturn starts in 2013 as demand growth absorbs the new capacity.

"US producers should see higher operating rates due to continued export competitiveness. We project US operating rates above 90% in 2011-12 versus low-to-mid 80s globally."

Who on earth would want to exit US ethane-based petrochemicals capacity given such an outlook?

Perhaps not just yet....

By John Richardson

COULD it be that some chemicals industry players and observers, in the great galloping rush to join the supercycle stampede, have got ahead of themselves in predicting that we are already through the bottom of the margins trough?

This distinct possibility was raised by Joe Duffy, consultant with DeWitt & Co, in a discussion with the blog.

"I always get nervous when people talk about 'floods' and 'tsunamis' of new supply. What matters is not the absolute volume as much as whether or not it exceeds expectations," he told us.

"At the start of this year people were extremely pessimistic and maybe going into next year they are a little too optimistic," added Duffy, who is the petrochemical consultancy's vice-president for ethylene, polymers and derivatives for Europe and the Middle East.

"The market can turn the wrong way if supply exceeds expectations by as little as one tonne.

"I am a bit concerned that the growing supercycle consensus is confusing the short and the long-term.

"You can make a case that based on announced capacity that things will tighten a lot in 2014-2015 - and perhaps as early as 2013 if people buy ahead.

"But we at DeWitt still think that next year will be a year of absorption as the plants in the Middle East that are already on-stream run better."

The YanSab and Sharq complexes in Saudi Arabia have yet to maximise production and the recently commissioned giant Borouge complex in Abu Dhabi will take around 18 months to be fully stabilised, several industry sources have told us.

Production downstream of the new Ras Laffan Olefins Co facility in Abu Dhabi is nowhere close to being maximised.

Plus one would have thought the myriad technical problems confronting the PetroRabigh plant in Saudi Arabia will eventually be rectified.

Another factor pointing to further year of absorption is more bullish forecasts about global oil demand for 2011, including one issued by OPEC recently.

"We are assuming that oil demand will be slightly better next year and so there will be more associated gas available for the older, more established crackers," said Duffy.

He explained that older and newer complexes have seen their feedstock allocations reduced to only being sufficient to supply their original design capacities.

An excess of optimism might lead to some major disappointments next year as financial performances and earnings per share fail to live up to expectations.

This could be the case even if the bubbles in commodity prices, driven by too-much easy money, haven't inflicted long-lasting damage now that the air has started to escape.

By Malini Hariharan

The polypropylene (PP) anti-dumping investigation that Indian producers had initiated against exporters from Saudi Arabia, Singapore and Oman has finally drawn to a close.

The Finance Ministry confirmed anti-dumping duties (ADD) late yesterday, just a day before a recommendation made by the Commerce Ministry in August was due to expire.

Pic source: simplifyyourmoney.com

The duties range from $28.49-323.50/tonne (lower than the provisional tariffs announced in July last year) and would be levied for 5 years.

Among the producers affected by the ADD are Singapore-based ExxonMobil Chemical Asia Pacific, Sabic Saudi Yanbu Petrochemical Company and Saudi Polyolefins Company.

For the Saudis, the duties are a major cause for concern as India's commerce ministry has ruled that the Saudi formula for pricing propane, feedstock for PP, gives them an 'unfair advantage' over other international producers.

As reported by the blog earlier, Saudi producers risked more dumping and other duties from countries around the world if India's ruling sets a legal precedent.

The Saudis had put up a strong defense and this was probably why the Finance Ministry took such a long time to confirm the duties.

But the story is unlikely to end here, especially as the Saudis have warned that they will take the case to the WTO if ADD is levied.

By Malini Hariharan

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

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

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

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

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

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

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

By John Richardson and Malini Hariharan in Shanghai

A TWO-TIER China polyolefin market had developed in China over the last couple of years - but the $64,000 question right now is: At which of these two levels will most business be settled during December?

The ever-volatile Dalian Commodity Exchange determines the day-by-day sentiment, while overseas producers have long been very effectively managing production in an effort to set physical pricing.

They are being supported by tightness in specific grades such as butene-1-based linear-low density PE (LLDPE) and extrusion-grade low-density PE (LDPE). This tightness can be due to luck rather than just good management.

And so even as the Dalian tanked late last week on worries over more inflation-tackling measures by China's government, overseas producers were reported to be preparing to raise offers for December material. Their attitude on certain grades seemed to be "take it or leave it" because of their claims that they are holding very-limited stocks.

Will they be successful?

On the positive side of the equation are reports from our colleagues at Shanghai-based pricing and news service CBI that Sinopec is to cut polyolefin production in December by 10% (equivalent to 100,000-150,000 tonnes each of PE and polypropylene).

 Source of picture:www.willgoto.com

This decision is apparently about helping to relieve China's diesel shortage or is to do with reaching the 11th Five-Year Plan emissions cuts targets - or maybe a bit of both. Watch out for our post tomorrow when will go into this story in more detail.

Our colleagues at ICIS pricing also say that December allocations from PetroRabigh to China are  expected to be cut by 50% because of yet-more production problems at the Saudi Aramco/Sumitomo Chemical joint-venture complex.

But converters were reported by a producer to be reluctant to buy, resulting in all of his recent sales being to converters and distributors.

What is making the converters hesitant could be the rapid rise in prices since July. Up until late November PE and PP had risen by 22-29% contributing to an unexpectedly robust Q4

During the same period naphtha rose by 28% and crude by 19% - indicating that a substantial portion of the increases have been feedstock-cost driven.

Click here for a graph - PriceRisesSinceJuly.ppt 

Add to this the perennial worry about how much polyolefin consumption is the result of trader speculation on attempts to cash-in on a stronger Yuan, and we are back once again to the well-worn and somewhat tired bubble theory.

"End-users pick up their newspapers every day read about the inflation threat in China and possible further government tightening measures," said an industry source.

"The other big macro-economic threat worrying everybody is bank problems in Ireland."

Perhaps some end-users are therefore worried about a sudden collapse in crude-oil prices.

Hedge funds make up a large percentage of current open interest on the oil market, according fellow blogger Paul Hodges.

He writes that they could very quickly head for the hills if sentiment turns, driving oil to as low as $60/bbl.

Converters might well also be worried about the strength of resin demand next year as there are reports that the Chinese government plans to raise interest rates twice more before July 2011 in the battle against inflation.

The big four big state-owned banks recently announced that they have already fulfilled their 2010 quota for lending to real-estate buyers and will not making any further loans this year.

Beijing's Renmin University has warned in a report that government restrictions on the sector could lead to a 20% fall in property prices next year.

If you are converter you also know that a lot more new polyolefins supply should be just around the corner (how long have we been saying this, though, only to be proved wrong by all the production problems?).

December demand is receiving support from agricultural film buying - but history shows that this is generally an off-season.

Plus January is just around the corner - when business quietens down ahead of Chinese New Year (CNY) which falls on 2 February.

A reflection of this uncertain direction is that our colleagues at ICIS pricing left their price assessments for PE and PP in China largely unchanged last Friday.

This is reflected in, as we've said, the producer we spoke to only being able to sell to distributors and traders.

He said that price increases since July had been too rapid - and that further increases of above $50 a week would be very hard to achieve.

This suggests that the customers of the converters - the wholesalers and retailers - are also feeling very uncertain at the moment.

Their uncertainty was evident at the Canton trade fair in October, he added.
(The bi-annual trade fair is a crucial barometer of the strength of overseas demand for China's manufactured goods).

"Order periods were shorter than the previous fair in May because the wholesalers and retailers haven't got a clue where their raw-material costs are going."

Another factor might be the added volatility in the value of the Yuan versus the US dollar as a result of QE2 and macroeconomic uncertainty.

Macro-economic concerns feel as if they dominate at every level of the polyolefins business at the moment.

So we wager that producers will fail in their bid to raise December prices - and that, in fact, further reductions are on the cards over the next few weeks.

"I am so happy to be supporting polyethylene film pricing"....

Source of picture: Canada-China Agriculture and Food Development Exchange

By John Richardson

IT looks as if attempts by polyolefin producers to raise prices for December deliveries have, as we predicted last week, been largely unsuccessful.

Some grades of polypropylene (PP) edged up by $10-20/tonne but polyethylene (PE) across all grades remained unchanged, according to last Friday's assessment by ICIS pricing,

What's highly curious is that while our colleagues report that the production cuts by Sinopec and rising feedstock costs had pushed up PP, the same wasn't the case in PE.

The blog will be attending the Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai this week and so shall endeavour to dig out the reason for this disparity.

The slight improvement in PP is unlikely to have done much to compensate for the sharp rise in raw-material costs.

And the latest edition of the ICIS pricing Asian PE margin report illustrates the ground that was lost last week.

Click here for pricing and margin graphs - PricingMarginGraphs6Dec2010.ppt

Integrated PE margins fell, for example, by $60/tonne on a 4.3% rise in feedstock costs and after a $55/tonne fall in stand-alone margins, these high-cost producers will be struggling to cover fixed costs.

The fourth quarter started with a roar with November volumes exceptionally strong, some producers and traders had claimed.

One spurious argument was that this was a peak demand season, driven by strong pre-Chinese New Year (CNY) sales.

But other than the usual kick to demand provided by the agricultural film season for low-density polyethylene (LDPE) and linear-low density PE (LLDPE0, we feel that markets were being talked-up to try and compensate for stronger raw-material costs.

End-users are bound to continue to feel nervous at the moment with more interest rate rises quite possibly on the cards in China very soon and reports that the property market could be weakening.

Polyolefin supply will increase as production is increased at plants that have suffered from technical problems and delayed start-ups.

Our fellow blogger, Paul Hodges, also makes the very interesting point that refineries might have more naphtha available to dispose of into petrochemicals as a result of the diesel short ages in China (part of the reason for the Sinopec production cuts) and Europe.

Refineries are running harder at the moment to tackle lack of diesel.

As a result, petrochemical producers might be tempted, or perhaps even required in order to maintain internal balances, to run harder as more naphtha is also produced.

This year was probably better than anyone even dared to expect, but almost every day it seems as if the challenges for 2011 are multiplying.

By Malini Hariharan

Global monoethylene glycol (MEG) markets are likely to remain robust in 2011, supported by strong demand from China and a lack of new capacity additions, a top executive from MEGlobal told the blog at the 5th Gulf Petrochemicals and Chemicals Association (GPCA) forum being held in Dubai, the United Arab Emirates (UAE).

"If the dynamics stay intact, there is nothing that we see now [to show] that 2011 will not be as good as 2010. And that is across the chain; our optimism is dependent on our customers remaining profitable," said Ramesh Ramachandran, CEO and president of MEGlobal
.
This year has been a surprise for producers of MEG, a commonly used intermediate in the production of polyester fibres that go into clothes, as a widely expected industry downturn did not materialise. Prices and margins recovered throughout the year, supported by the strength in the polyester industry - especially in China.

Global MEG demand was expected to rise by around 10% to 21m tonnes by the end of this year, driven mainly by Chinese demand, which was expected to hit 9m tonnes, up from around 7m tonnes last year.

China would eventually account for 50% of the global MEG market, said Ramachandran.
"You may debate about when this will happen, but it is only a matter of time," Ramachandran said.

Besides demand, supply-side factors also helped producers in 2010 as operating problems constrained availability.

Ramachandran stressed that while on paper global MEG capacity was in excess of demand, forecasts should not be based on this "simplistic view"
.
"Not all capacity runs all the time; our take home message from last year has been that overcapacity does not mean oversupply," he said.

He cautioned that although MEG was a commodity, one should not assume that it was easy to produce as it involves difficult technology.

Source of picture: /bjgeruite.en.made-in-china.com

There needs to be an estimate of effective capacity; in our view there is a 10% swing between nameplate capacity and effective capacity over the course of the year," he added.

With demand in key markets such as China and India running strong, Ramachandran acknowledged that MEGlobal, which currently produces 1m tonnes/year of MEG and markets another 2m tonnes/year of product, would soon need new capacities.

"We need to build; we definitely need to bring economically viable capacity as our customers are growing. We have nothing to announce now, but we are looking," he said.

.
The GPCA annual forum runs on 7-9 December.

By John Richardson

THE next OPEC meeting - which takes place in Ecuador this Saturday (11 December) - is crucial for petrochemicals for two reasons.

Firstly, the crude market has turned bullish recently as a result of the early onset of winter in Europe and the growing belief that the oil-supply cushion is being reduced.

So if OPEC decides not to pump anymore oil forecasts by certain banks (here we go again, eh?) of higher crude prices next year might appear to be more likely to come true.

Goldman Sachs is predicting average prices of $100/bbl for West Texas Intermediate in 2011 and $110/bbl in 2012.

JP Morgan last week raised its forecast for 2011 Brent average prices by $3/bbl to $95/bbl.

An OPEC decision to maintain quotas - or maybe to increase quotas by an amount that doesn't satisfy markets - might prompt a surge in buying by some petrochemicals end-users.

This would be on either the anticipation of higher crude, or oil actually moving higher.

If crude does move higher we can guarantee that the Dalian Commodity Exchange's (DCE) futures contract in linear low-density PE (LLDPE) will move up on Monday. This is provided there is no off-setting further negative economic news emerging from China or anywhere else.

Depending on how the rest of next week plays out, we could then see physical prices of PE and polypropylene (PP) also firming.

This has been a pattern on many occasions this year as end-users have tried to beat higher crude in a min-repeat of 2008 with, to some extent also, the same risks.

The second reason why the OPEC decision needs to be carefully observed is that if quotas are kept where they are now, there will be no extra associated gas available to raise Middle East petrochemical operating rates.

But before polyolefin end-users (back to our comfortable stomping ground!) view this as another reason to stock-up on inventory, they might be well-advised to take into account the compensating impact of more stable production at new plants in the Middle East.

A further positive factor for the converters could be higher operating rates at naphtha crackers, resulting from the push by refiners to maximise diesel production.

By the way: Two major Middle East petrochemical producers told an industry observer - who the blog spoke to late last week - that they don't that OPEC will raise its quotas.

By John Richardson

OPEC's decision to maintain crude quotas at current levels could give the banks further ammunition to manipulate opinion that the black stuff is genuinely in tight supply.

There is plenty of evidence that oil is, in fact, still pretty long - and that this bull-run is yet again about speculators talking up the market. Petrochemical producers and end-users who rush-in to build raw-material inventory do so at their peril.

"The crude price has to be about speculation because there is still 6m bb/day of spare crude output," an oil and refining consultant told the blog late last week on the sidelines of the Gulf Petrochemicals and Chemicals (GPCA) conference in Dubai.

"There is also still 2-3m bbl/day of surplus refinery capacity and gasoline inventories in the US were recently five times their historic average.

"The banks have once again a lot at stake in making the crude bull argument. Refinery margins will recover next year, but not by that much. It will be the complex, full-conversion refineries that will benefit the most and not the simple refineries.

"Even diesel inventories are high in the US and have been at comfortable levels in Europe, despite the cold weather."

Source of picture: Arabianbusiness.com

One immediate benefit for petrochemical supply and demand balances is that the OPEC decision will mean no further associated gas supplies to boost Middle East output. We discussed this last week when we reported that quotas were forecast to remain unchanged.

As far as the immediate effect on polyethylene (PE) pricing is concerned (a reasonable proxy for the polymers industry as a whole), higher crude in response to the OPEC verdict might exert some upward pressure.

But the negative factors in the China dominated the mood late last week.

Importers were staying on the sidelines fearing what our colleagues at ICIS pricing said could be a "meltdown in the commodity markets" as a result of further measures by China to control inflation.

Price assessments were therefore left either unchanged or $20-30/tonne, adding more weight to our belief that efforts by importers to raise December prices will fail (if they haven't already).

More bad economic news emerged at the end of last week. China's inflation rate rose to 5.1% in November, up from 4.4% in October - leading to a further increase in the bank-reserve requirement.

A three-day government conference to set economic policy for 2011 ended on Sunday with the following statement released to the media: "Strategic economic restructuring will be accelerated and stabilising price levels will be given a more prominent position."

The excellent China Economic Quarterly - the Beijing-based research service - was predicting several further interest-rate rises and additional hikes in the bank-reserve requirement during 2011, even before last week's government meeting.

Further monetary tightening now seems even more likely in light of the official comment we have just quoted.

"I think the current uncertain, worried mood in the market will persist until March next year," a polyolefin trader told us, again on the sidelines of the GPCA.

"Some more clarity, and perhaps a bit more confidence, should emerge after then - when the National People's Congress (NPC) meets to confirm more details of the 12th Five-Year Plan."

Any price rises up until March will therefore be in response to higher crude and could well be only minor and subject to sudden reversals, he believes.

Whether even the NPC meeting will change the mood has to be in question as the key issue for market confidence is how quickly China can bring inflation under control.

By John Richardson

SHELL Chemicals announcement that it has signed a memorandum of understanding (MOU) for a cracker and derivatives project in Qatar seems to have upped the ante in what could be a struggle for only one parcel of feedstock.

Graeme Burnett, Total Petrochemical's senior vice president for Asia and the Middle East, in November re-emphasised the French major's interest in a cracker project in Qatar.

He perhaps sounded the right note when he stressed Total's interest in adding to a particular country's product portfolio in the Middle East through building the styrene and polypropylene (PP) facilities. Qatar only has ethylene derivatives.

ExxonMobil also has a cracker project on its books in Qatar which has reportedly been delayed.

Source of picture: Qatar Living 

When we asked a source close to Shell whether there was enough feedstock for one, two or three new crackers in Qatar recently, he said: "That's a very good question you would need to address to Qatar. The position is not clear."

And last November Ben van Beurden, executive vice-president of Shell, told the blog:
"Ideally, we'd like to build two crackers and two OMEGA process monoethylene glycol (MEG) plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane.

"There are only so many allocations of ethane available from Qatar at the moment and plenty of interested parties."

Qatar's moratorium on new allocations of gas from its North Field and a keen awareness of alternative values for natural gas all seem to be factors in limiting feedstock supply for petrochemicals.

By John Richardson

OVERCONFIDENCE is perhaps the biggest risk for 2011 as a result of sales volumes that have this year exceeded even the most wildly optimistic forecasts.

The danger is that we have yet to see the worst of this current petrochemicals cycle. Companies and chemicals analysts might have got a little ahead of themselves by predicting that a "Supercycle" will begin from as early as the second half of the coming year.

A strong argument can be made that by 2013-2014 lack of investment in sufficient new capacity could lead to record-high margins. This assumes that the world economy doesn't suffer a double-dip recession.

But cautious commentators are warning that a delayed supply-shock is still on the cards in the New Year, thanks to further start-ups and more stable operations at recently commissioned plants in the Middle East and Asia.

"At the end of 2009 the industry was, in hindsight, too pessimistic and this fed through into sales targets for 2010," said a UK-based industry observer.

"I get the feeling that forecasts for 2011 have gone too far the other way and that we are about to go through a period of absorption as operating rates at new plants increase.

"This is where human nature comes into the game. Product managers faced with targets that are too high could end up chasing market share through maximising output. This would make oversupply even worse."

Chemicals analysts at South Korea-based Woori Investments wrote in a November report that 2011 would see a decline in global utilisation rates.

"We believe that [global ethylene] supply will rise by 10m tonnes over the next year, topping our global demand-growth estimate of 5m tonnes over the same period," said the report.

This was based on commercial production starting at new facilities with a total capacity of 6.2m tonnes/year and higher operating rates at plants already on-stream.

Extra capacity absorption that still needs to take place includes Borouge's 800,000 tonne/year polypropylene (PP) and 180,000 tonne/year linear-low density (LLDPE) plants that started up in the third quarter.

"We are not seeing much material from these plants right now and so we are expecting the real impact to occur next year," said a Singapore-based polyolefins trader in early December.

The same can be said for Saudi Kayan Petrochemical's polyolefin capacities, which includes 400,000 tonne/year of high-density polyethylene (HDPE).

Although the SABIC subsidiary's Saudi-located complex has been on-stream since August, the big volumes seen in the market so far have only been of ethylene.

Source of picture: whrbsportsblogspot.com 

Plants in Thailand, delayed by a complicated environmental muddle, have recently been allowed to start-up. These include Siam Cement/Dow Chemical's 350,000 tonne/year LLDPE and PTT Chemical's 300,000 tonne/year HDPE facilities.

Recently commissioned complexes in China are expected to run a little more smoothly next year.

A further danger hanging over the market is an increase in OPEC crude-production quotas.

The oil cartel left its quotas unchanged after it met in Ecuador earlier this month, but if the cost of crude keeps on increasing the pressure for greater output will rise.

Saudi Arabia's current quota, around 8.5m bbl/day, has resulted in a reduction in associated gas supply to many of the country's crackers. Oil production needs to be at 10m bbl/day for the crackers to run at full rates, estimate several industry observers.

Ethylene exports from the Al-Jubail industrial city on Saudi Arabia's east coast have fallen to virtually zero in 2010 from several hundred thousand tonnes in 2009 because of the cut in associated gas.

Higher oil quotas could result in exports returning to 300,000 tonnes or more over a 12-month-period.

Either that or SABIC might successfully push for much-higher downstream operating rates now that the company, in theory, has more control over its subsidiaries thanks to a new corporate structure introduced earlier this year.

From a "value addition" point of view, exporting ethylene can be viewed as making less sense than shipping-out poyolefins or mono-ethylene glycol (MEG).

One would have thought that major technical issues at complexes such as PetroRabigh in Saudi Arabia will have to eventually be resolved. The Saudi Aramco/Sumitomo Chemical joint venture has suffered around five major polyolefin outages during 2010.

Further support to the market has been provided by what have reportedly been delays at the container port in Al-Jubail.

If customs-processing issues said to be behind the delays are resolved, this could mean a smoother flow of volumes into Asian and European markets.

A consensus is building that refinery margins have bottomed-out, meaning that some refiners might push production harder in 2011. This would help solve the butene-1 co-monomer shortage that has restricted LLDPE production.

The growth side of the story can also be viewed as little more negatively.

New plants in China have raised the country's polyolefins self-sufficiency and the country's GDP (gross domestic product) growth is forecast to fall to around 8% in 2011 from approximately 10% this year.

Lower growth in China is expected to be the result of efforts by the government to control inflation.

Inflation is a threat to growth in many major Asian chemicals-consumption markets including India, Indonesia and Thailand.

"The battle against inflation in Vietnam has been lost by the government," added the polyolefins trader we quoted earlier in this article.

"Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation."

The value of the dong (the local currency) has fallen by one-fifth over the US dollar since mid-2008 and last week, Moody's Investment Service downgraded Vietnam's sovereign debt.

All of the above might have sounded a little like the kind of comments that Ebenezer Scrooge would have made if he had been involved in the chemicals industry.

He is instead the lead character in the Charles Dickens' novel, A Christmas Carol.

But being told to cheer up and show a little more generosity of spirit at this festive time of year is hardly the basis of sound planning.

By John Richardson

A gaping chasm has opened up over the past 18 months between nameplate capacities and effective operating rates, resulting in much greater focus on the latter.

It isn't easy and it is getting ever-more complicated to assess the actual volumes likely to hit markets.

There is a considerably well-supported school of thought that 2011 will represent a year of capacity absorption. More new plants are set to start up and facilities recently brought on stream should, in theory, run a little better.

But this assumes that the myriad technical problems at new Middle East plants that held back production in 2009 and 2010 will be resolved.

What nobody seems to have a clear perspective on is the extent to which faults have been built into the basic structure and design of plants, making technical fixes hard to achieve. If such fixes are possible, why haven't they already happened?

It has been suggested that corners were cut on construction when project costs were at their highest in 2006-07.

The manpower issue is also not going to be resolved anytime soon.

Petrochemical companies the world over, and particularly in Iran, lack sufficient experienced staff to operate plants and rectify outages in a timely fashion.

"A mechanical problem that would take two weeks to fix in Europe can take several months to sort out in Iran," an industry observer said.

There are rumours of major logistics problems at the container port in Al-Jubail on Saudi Arabia's east coast.

A lack of enough experience in handling bills of lading and letters of credit is a cause of delays in shipments from one particular complex in the Middle East, according to a polyolefins trader.

Insufficient reliable information about the extent of these issues, and when and if they will be resolved, are further complications.

Government policy in China is another major imponderable that will still have to be pondered in 2011.

Sinopec was forced to cut polyolefin production by 10% in December because gas-oil feedstock for crackers had been diverted into diesel production.

Has China already achieved its emissions target under the 11th Five-Year Plan that expires in March, and will this therefore mean no more cuts in coal-derived electricity supply?

It was efforts to achieve these targets that led to a diesel shortage as factories were forced to switch on their diesel-powered back-up generators.

Source of picture: incadventures.com

Once the 12th Five-Year Plan has been announced at the National People's Congress in March, there is the added complication of working out the timing of further cuts in emissions.

The Beijing-based online economic research publication, the China Economic Quarterly, says that China will reduce its total emissions by an additional 17% during the upcoming Five-Year Plan, which will run from March 2011 until March 2015.

Will everyone wait until towards the end of the plan to hit emissions targets, as was the case this time?

Or will the government force quicker compliance in order to avoid the embarrassment of being at risk of missing its own target?

A further imponderable is how global refinery operations will affect feedstock supply for petrochemicals.

Constrained production at European refiners was a factor behind low operating rates at crackers in 2010.

Oil, refining and chemicals analysts have been queuing up of late to claim that refinery margins have bottomed out, meaning higher production in 2011.

But a Singapore-based oil and refining consultant said: "Refinery margins will recover but not by that much. It will be the complex, full-conversion refineries that will benefit and not the simple refineries."

Reading the intentions of OPEC is also going to be critical. If the oil cartel cannot resist political pressure over rising oil prices we might see an increase in production quotas later this year, resulting in more associated gas supply. Lack of associated gas was perhaps the biggest factor of all in restraining Middle East production in 2010.

If there is a delayed oversupply crisis as new plants run better and both naphtha and associated gas feedstock supply increases, how will the petrochemicals industry in the West respond?

The past two years have seen exceptional operating-rate discipline among these producers. This has been the result of mergers and acquisitions that have taken place since the last big downturn and inventory losses suffered in the fourth quarter of 2008.

Without an inventory shock on the same scale (and for goodness sake let's hope that this doesn't happen), will producers be as quick to turn operating rates down?

If producers bring idled plants back on stream just as markets tank, and if under-pressure sales staff are tempted to chase volumes in an effort to hit unrealistic targets, will this make the problem worse?

Perhaps the biggest doubts of all, though, rest around growth.

Global demand growth for chemicals has to a large extent been driven by China's re-export trade. This has involved importing large volumes of chemicals and polymers for re-export to the West and to wealthier parts of Asia.

A recent report by Credit Suisse goes to the heart of the debate over how quickly home-grown domestic demand in China will replace lost exports.

With the West in deep economic funk and the Chinese government eager to wean the country off exports, will growth decline? This question applies to this year and probably much of the rest of the current decade.

"Over the last 22 years, demand multipliers - ethylene demand growth to global GDP growth - have averaged 1.3x. However the multipliers in this decade (2000-07) have averaged only 0.9x," Credit Suisse said in the report.

"The question is what are we going to get going forward? Will multipliers rise as demand growth shifts to emerging markets as some have suggested? Or will it be otherwise?

"Using China's exports of plastic-related products, we estimate that in 2009-10, China's exports of product accounted for 45% of total ethylene/propylene demand, or 11% of total world demand.

"Going forward, as export growth slows, and shifts away from the more manufacturing-driven products into higher value-added things, the demand for petrochemicals from this segment of China's GDP is likely to slow."

By John Richardson

ONE of the many factors behind petrochemicals supply being less than expected during 2010 has been logistics problems in Saudi Arabia.

One trader we spoke to on the sidelines of last month's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai told us that one particular complex was struggling to accurately complete documentation necessary for letters of credit.

"This is down to a lack of experienced staff - a major issue throughout the region," he said.

The trader is now helping the company concerned to complete paperwork in the right way.

An industry observer said that it takes an average of 17 days to clear a container from Saudi Arabia. This compares with an Organisation of Economic Co-operation and Development (OECD) average of ten days.

The container port at Jeddah. Source of picture - Saudi government website.

"Part of the problem is constantly changing rules and regulations leading to confusion over paperwork and lack of system integration for clearance," he added.

Port delays have resulted in on-site storage running out, forcing operators to stack resin in the desert, he added.

Bringing on-stream all the new capacities in the Middle East was always going to be challenge - because of the number and the size of the plants.

But what nobody predicted was the extent of technical problems that have held back production, along with an equally unexpected shortage of feedstock.

Logistics is a further wild card thrown into the pack, making the task of assessing likely volume-flows from the Middle East in 2011 even harder.

By Malini Hariharan

Investment activity is picking up in Qatar. After Total, Shell and ExxonMobil confirmed their interest in new projects, Qatar Petrochemical Co (QAPCO) is talking on expanding its cracker.

The company is working on expanding its 720,000 tonne/year cracker to 900,000 tonnes/year by the first quarter of 2014, said QAPCO's board director and general manager, Mohammed Yousef al-Mulla in an interview with ICIS news recently. But it is not clear where the feedstock will come from.

Pic source: www.arabianoilandgas.com

As reported by the blog earlier, a feasibility study is also underway for an expansion of Ras Laffan Olefins' 1.3m tonne/year cracker to 1.45m-1.6m tonnes/year.

Mulla also disclosed that capacity of Qatofin's 450,000 tonne/year linear low density polyethylene (LLDPE) plant would be raised to 600,000 tonnes/year.

QAPCO is also on track to start commercial production at its new 300,000 tonne/year low density PE (LDPE) plant at Mesaieed by early 2012, raising the company's total LDPE capacity to 700,000 tonnes/year.

Meanwhile Egypt is turning to Sabic to kickstart its ambitious petrochemical programme. An Echem source told ICIS news that the that the two companies are studying a joint venture for an ethane cracker and a 400,000 tonne/year polyethylene (PE) plant in Alexandria, Egypt.

Echem hopes to start the new plants after three years - a very optimistic target as the joint venture has yet to be formed.

     "Only another thousand or so years to go....."

      Source of picture: Atlantic Council

By John Richardson

HERE we go again, eh? Yes, as rising crude-oil prices and overall inflation pose a major threat to the petrochemicals industry.

Nothing the blog has read or heard over the last two weeks has given us any great confidence that the fundamentals in polyolefin markets (the market we track most closely) have changed for the better since December to support rising raw-material costs.

And you can make an argument that the fundamentals look weaker than they did in late 2010.

The Chinese New Year (CNY) is, of course, on the way and this year it falls on 3 February.

How will buyers of resin effectively estimate their purchases ahead of the holiday period as during that period they - and the rest of China - will not be around to assess the feel of markets in general, from crude through to polyolefins? In other words, they might over or under-stock and be hit by an unanticipated shift in feedstock prices.

This fear, very evident from our discussions with a couple of converters this week, is based on the idea that if you are in the market you are able to predict what is going to happen. Sure thing....

The other big worry is on China growth, as we discussed yesterday in terms of the impact of a major government policy shift ahead of the official start of the 12th Five-Year Plan in March.

GDP (gross domestic product) and export growth is expected to slow down during the period of the plan. This would be the result of policies designed to switch the economy away from over-reliance of exports and investment and towards more domestic consumption.

The other big issue in China, across Asia, and also in the EU and the UK, is inflation in general

Are the inflationary pressures mainly core (excluding energy, other commodity and food costs) or non-core?

In China the inflationary pressures seem to be very-much core, despite the big contribution that rising oil and food costs have played in the recent surge in the consumer-price index.

Too much money is still sloshing around in the system following the late 2008 economic stimulus package, a symptom of which is the continued increase in property prices.

So China keeps on raising its bank-reserve requirements. Several more interest-rate increases seem to be on the cards for this year.

The rise in the cost of living sets back the government's agenda of reducing dependence on exports and investment as drivers of GDP growth towards increased domestic consumption, as higher costs are hurting the "sandwich generation". These are the young people too rich to qualify for the limited social housing available in the major cities, but also too poor to afford the now astronomically high costs of private accommodation.

An email that went viral just before Christmas, written by disgruntled Bejingers, calculated how long peasant farmers, blue-collar workers and prostitutes would have to work to afford a condo in the city.

As long as there were no natural disasters, a peasant farmer working an average plot of land would just have been able to afford an apartment if he or she somehow had worked since the Tang dynasty, which ended in 907AD, until today, the email calculated.

In another popular e-mail, an anonymous author describes the misery facing ordinary people in China's increasingly unequal society.

"Can't afford to be born because a Caesarean costs Rmb50,000; can't afford to study because schools cost at least Rmb30,000; can't afford to live anywhere because each square metre is at least Rmb20,000; can't afford to get sick because pharmaceutical profits are at least 10-fold; can't afford to die because cremation costs at least Rmb30,000," the e-mail reads.

Social stability is crucial for continued strong economic growth and for the Communist Party to remain in power, both of which, some would argue, are connected.

Inflation across Asia, driven by, as we've said, higher crude and also higher commodity prices in general, have prompted recent interest-rate rises in South Korea and India.

And as we said at the beginning, quite possibly here we go again as inflation is arguably being largely drive by speculative funds pouring into oil and other commodity futures markets.

 This year is to date is reminding everyone of 2008 when oil and crop prices surged to record highs and then collapsed.

There are two radically opposed schools of thought about the role of speculators rising commodities prices.

"I feel it is a combination of both speculation and stronger demand, but the essential danger remains a sudden unwinding of the price if the speculators head for the exit," said a Singapore-based oil and refining consultant earlier this week.

"As of a few weeks ago, there were far more non-commercial contracts (the quant funds, the hedge funds and the pension-fund managers etc) open on the NYMEX compared with June 2008, when oil reached its peak of $147/bbl.

"This suggests a huge increase in speculative money and in my view poses a significant risk.

"As I said, though, there are strong demand factors behind the price - for example, the recent minus 15 degrees temperatures in South Korea that have raised heating-oil demand. There has been the drive to hit emissions targets in China that resulted in a big surge in demand for diesel.

"But on the supply side there is a lot of surplus capacity still around - 6m bbl/day of crude, for example - and crude and crude-product inventories are high.

"This suggests that to some extent OPEC is deliberately keeping the market tight by keeping supply off the market, and that speculators are able to keep crude and oil products in inventory because interest rates remain low.

"And so nothing really has changed. The big concern remains what will happen if and when interest rates rise in the US and easy lending conditions disappear.

"My feeling is that a crude price of $80-85/bbl is justified based on demand and so an unwinding from current levels is possible."

Our fellow blogger Paul Hodges pointed to the extent of the oil oil-product inventory overhang in a post earlier this week.

OPEC seems to be happy provided prices don't consistently move above $100/bbl - good news in a way because it doesn't seem to have any immediate plans to raise output. Thus there is no risk of more associated gas increasing polyolefin supply. But supply could still increase substantially in 2011 if plants operate more smoothly.

In a worrying echo of 2008, purchasing managers down all the petrochemical chains could be tempted to chase higher oil prices. A sudden collapse in crude could, as we have warned many times before, lead to inventory losses similar to those in Q4 of that year.

Chasing higher oil prices is a huge risk in such an uncertain, and potentially a lot weaker, demand-growth environment.

Source of picture: Dallhouse University, Canada

By John Richardson

THE incredibly smart way in which polyolefin producers have managed production since the great collapse of September 2008 continues to defy what appear to remain some very uncertain, and some cases weak, macro-economic fundamentals.

As we discussed on Wednesday, China faces a significant demand-growth gap as its economy changes gear. Yesterday we talked about surging crude oil and inflation in Asia, Europe and the US as further big concerns for 2011.

But ever since the great Lehman Bros disaster there have been numerous other macro-economic threats - and constant predictions of new polyolefin supply wrecking the market - that have failed to make life a misery.

A big reason seems to be, as we said at the start of this post and as we've said before, the determination of producers to ration output and control their inventories.

Yes, emerging-market growth continues to surprise on the upside. But as Nigel Davis, editor of the Insight section at ICIS news points out, global production has yet to return to 2007 levels.

Right now the cost-push is intense as olefins, polyolefins and petrochemicals prices in general (we will look at some of the other product chains next week) surge to record levels.

US propylene contract prices rose by a whopping 28% in January with the ethylene contract up by 13% in December compared with October, according to William Lemos, Senior Editor, Manager, at ICIS pricing in Houston.

The European market continues to defy the pessimists. Polypropylene (PP) prices, for example, reached record levels earlier this week as producers were comfortably able to pass on the rise in propylene costs.

The blog began last year in a pessimistic mood, by May felt overwhelmed with the persistent optimism of the industry as it succumbed to a heavy bout of euphoria, felt a little more gloomy by December and now, quite frankly, hasn't got a clue.

Another of my colleagues, Linda Naylor, Senior Editor with ICIS pricing who covers the European polyolefin markets, has also spent a lot of time expecting everything to end in tears.

But she believes that her predictions have floundered largely thanks to production management.

One European PP buyer told her this week that there has always been a crash after a price rally on the lines of the one we are seeing right now.

He believes this time, though, that if volumes continue to be very skilfully controlled, a crash won't happen.

Asian prices have increased in line with those in Europe and the US, but in a sluggish, reluctant fashion due to widespread worries over weaker China growth.

There is talk of prices edging up a little further after the Chinese New Year (CNY) holidays, which fall in the first week of February.

Comments from a Southeast Asian-based sales executive with a leading North American polyolefin producer perfectly describe the nervousness in Asian markets we have been picking up over the past couple of weeks.

"The big question is how much more feedstock cost increases the end-users can take," he told us yesterday.

"They are remaining exceptionally reluctant to buy because they are worried about the direction of crude and the effect of inflation on demand.

"If you can manage to sell to an end-user margins are paper-thin at $20-30/tonne. You really need a minimum of $30/tonne to cover your storage and letters of credit costs.

"What we are seeing, therefore, is not much price movement.

"The Middle East is selling just below market prices and the South Koreans and Taiwanese are seeing their margins squeezed."

(Note - we have heard of one Southeast Asian cracker with poor integration which has cut back on high-density polyethylene production in order to sell more ethylene)

"We have seen in the past few days, though, a moderate increase in buying by traders as they take positions ready for after the CNY," continued the sales executive.

"I am not sure to what extent these purchases have been driven by current arbitrage on the Dalian Commodity Exchange, anticipation of higher oil prices versus estimates of an up-tick in real demand post-New Year.

"For the traders  it can be a no-lose game these days as even if physical prices start falling, they might have already made their money on the Dalian.

"Linear-low densitypolyethylene (LLDPE) domestic prices right are now equivalent to $1,320-1,330/tonne compared with the May contract on Dalian - which is at $1,380-1,400.

(Note - The May contract is seeing the biggest trading-volume at the moment, as is always the case with the contract which closes four to five months out)

"Import prices are, however, at the same level of Dalian so there is no arbitrage to use overseas shipments to back-up deals on the exchange," he added.

"LDPE is kind of stuck at $1,700/tonne and I don't see much room for movement upwards in the short term.

"The good news is that inventories are low across-the-broad. End-users are hand-to-mouth, as they have been since 2008, traders have only 3-4 weeks in stock and producers around a month.

"So far there is not much sign of anybody chasing higher oil prices."

There you have it. Any predictions gratefully accepted.

Ali Naimi, Saudi Arabia's oil minister, suggests more oil supply could be on the way

Source of picture: stonesoupstationblogspot.com

By John Richardson

CHEMICALS analysts at HSBC have added further weight to the argument that 2011 could well turn out to be a year of disappointment following the very high expectations set in 2010.

The financial results season is upon us with US analysts predicting significant full-year 2010 and fourth quarter gains for companies such as Dow Chemical, LyondellBasell, Georgia Gulf and Westlake.

An indication of just how high the bar has been set for 2011 has come through fourth quarter results already released by SABIC. Reliance Industries Q3 results for the quarter ending 31 December 2010 were also very good.

The chemicals analysts argue that supply constraints are set to ease slightly on a stronger European economy, resulting in more naphtha availability for cracking.

"Ethylene availability from European naphtha-based crackers dropped 20% below 2007 peak levels (in 2010) as a result of reduced naphtha supply," writes HSBC in a recent report.

As our fellow blogger Paul Hodges pointed out last week, Saudi Arabia is giving indications that it might pump more oil in order to tame surging crude prices. And if you click on this last link this also gives our view of the threat to chemicals posed by the rising price of oil.

Higher crude output would result in more associated gas for Saudi and other Middle East crackers. According to HSBC, Saudi crackers are currently running at only 80%.

Additional supply from existing crackers in Europe and the Middle East will therefore match demand growth in 2011, predicts the bank.

It also sees what we see: The extreme fragility of the argument that all is well with the world because of healthy emerging markets.

As a result, HSBC doesn't seem to quite buy into the Supercycle theory being expounded by Morgan Stanley and others.

"We are barely 18 months removed from one of the worst industry troughs in living memory," writes the bank, in the same report.

"Developed market demand for commodity chemicals is still well below the levels of 2007 with some major end markets, such as US autos and US housing, still at a fraction of their peak-activity levels.

"While emerging market demand remains robust, developed markets still account for 60% of the commodity chemical market by volume, and a sustained multiyear peak is unlikely as long as developed markets continue to drag, in our opinion."

Hear, hear.

Source of picture: robertsamsterdam

By John Richardson

IT will only be a question of making a large rather than a huge amount of money if you only take into account the relatively minor increases being forecast for Saudi Arabia's petrochemical feedstock costs.

The cost rises would have been far more dramatic if Saudi Aramco had got its way in a debate with the country's chemicals producers, says HSBC in a report published last week.

Aramco had wanted to increase gas costs to bring them quickly in line with current US levels - $4-5/mBTU - but HSBC says: "We believe policy makers are in favour of a phased approach."

If the bank is correct this could have implications for investment decisions both in the States and Saudi Arabia.

The rise of shale gas has made the US a possible location for new capacity, a dramatic turnaround from just a few years ago when all the talk was of feedstock cost-driven plant closures.

US producers would still be comfortably to the left of the correct if HSBC is right. But based on raw material costs only, Saudi Arabia is forecast to remain in the most advantageous of all positions.

The cost increases being predicted by HSBC include ethane rising from 75cents/MBTU to tr $1.25/mBTU in 2012, $1.50/.BTU in 2013 and $2.00/mBTU in 2014.

Current implied ethane costs in Saudi Arabia are just $47/tonne, according to HSBC. An increase in the gas price to $2/mBTU by 2014 would therefore not make that much a difference.

It is not just about feedstock pricing, though, as construction costs in the Middle East in general can fetch a premium because of expensive labour.

Petrochemicals markets might become more regional on a rise in trade protectionism.
Fortunately, there hasn't been a dramatic increase in trade barriers since the economic crisis but as long as deep-seated economic problems in the west continue, this danger will persist.

Saudi Arabia, despite efforts to grow domestic downstream consumption, is likely to export most of its petrochemicals for a long time to come. It therefore benefits a lot from low import tariffs etc.

The debate about the future competitiveness of Saudi Arabia versus the US and elsewhere could be a side issue if the Kingdom cannot resolve its current shortage of gas.

Extensive naphtha cracking is an alternative to using ethane, propane and butane. But industry observers argue that the economics of using naphtha in Saudi Arabia are a lot weaker.

The very well-documented Saudi ethane shortage is a factor behind the dearth of new cracker complexes currently planned for start-up in the country after 2011.

Aramco is making strenuous efforts to boost gas supply in order to supply not only petrochemicals but also the electricity generation, desalination and fertiliser sectors, adds HSBC.

This is a double-edged sword: While these efforts might reap more feedstock for petrochemicals, they also reflect the rising alternative values for natural gas - one of the main reasons why the price of gas is expected to rise.

Fifty per cent of all Saudi off-shore platforms are now devoted to gas exploration compared with 20-40% in the past, says the bank. Aramco has set itself the target of delivering 3 to 7 trillion cubic feet of additional non-associated gas supply each year.

The reason, as we have said, is the rise in demand for gas from non-petrochemical applications - most significantly electricity.

Unless supply increases are concurrent with the growth in gas demand over the next two decades, more than 60% of total Saudi energy production would have to be diverted to meet local needs, says HSBC.

This would result in a big revenue loss for the country through a reduction in oil exports and global crude prices would rise.

So the race is on to meet ambitious growth targets for natural-gas extraction as the scale and nature of these investments places upward pressure on pricing.

Aramco is to devote 10 per cent of its total capital spending on developing six offshore gas facilities over the next five years, adds the bank.

This will be non-associated gas and so the economics are very different from associated gas, which comes as a by-product of oil production.

Foreign investors have to also be attracted to these dedicated gas fields. Prices charged for output from the wells has to be high-enough to meet their rates of return.

In the old days, back in the 1970s when the Saudi petrochemical industry was first established, life was a lot simpler.

There was less competing demand for gas and so there were fewer alternatives to providing feedstock to the industry at very attractive prices (before 1998, ethane costs were only 50 cents/mBTU).

A feature of the gas-cost debate appears to have been unexpectedly high oil prices over the last few years.

These are viewed as having created exceptional profits and a cost advantage in "excess of what had been implicitly guaranteed when the (petrochemicals) industry was established," writes HSBC.

What level of profitability will be deemed as acceptable in future?

How will this decision affect confirmed future gas prices and overall government support for the petrochemicals industry?

By John Richardson

THE signs are ominous as they have been since the beginning of the crisis.

Intuitively, it still feels as if we are heading for some major macroeconomic problems. As Andrew Liveris, CEO of Dow Chemical, put it last week: "Overall, the world continues to recover to pre-recession levels. However, with inflation concerns in emerging geographies, lingering unemployment issues in the US and sovereign debt issues in Europe, we remain prepared for a reversal of momentum."

Call a crisis for long enough you will eventually be proved right, based on the maxim that what goes up must eventually come down,.

But rising oil prices, along with overall inflation, do seem to pose the most immediate threats for 2011 over what was a fantastic 2010.

ExxonMobil Chemicals lower sequential quarter-to-quarter segment earnings in Q4 last year reflected an inability to fully pass on rising feedstock costs and new petrochemical capacity, my colleague Nigel Davis wrote last week."The closing quarter of 2010 was a disappointing end to the year for many petrochemical producers," wrote chemicals consultancy ChemSystems in a report published last week.

"Renewed pressure on feedstock costs depressed profitability of petrochemicals in many markets, eroding strong gains in margins achieved in the first half of the year," added the consultancy.

Not surprisingly it was the European producers who were hammered the hardest because of their reliance on liquid feeds. Naphtha costs surged on crude and the severe northern hemisphere winter made liquefied petroleum gas (LPG unaffordable. The end-result was cracking margins being squeezed by Euros160/tonne, according to ChemSystems.

The US did much better because of its natural gas advantage with average polyethylene margins down just 5%.

Cash margins for Middle East producers were in contrast 14% higher.

So where do we go from here?

A key measure will be how Asian petrochemical markets respond as they return from the Chinese New Year Holidays this week, provided one can separate the usual nonsense talked by the huge trading community from what is really happening.

This could obviously be a very tough year for the higher-cost Northeast Asian cracker players as a result of further erosion of market share in China and the pressure from higher crude. As fellow blogger Paul Hodges pointed out last week, 2010 polyolefin import data showed a substantial gain for the Middle East in China at the expense of Japan, South Korea - and also Southeast Asia.

"The considerable cumulative excess capacity built since 2008 will take many years (to absorb) and operating rates will remain heavily depressed in the near term," ChemSystems added.

It is likely, as we have said before, that more of this cumulative excess capacity will hit the market in 2011 than in 2010.

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 John Richardson

THE optimism of Saudi Arabian petrochemical producers remains extremely high, according to an industry observer who spoke to the blog.

One might think we were to some extent stating the blatantly obvious as their margins will have swelled thanks to higher oil prices.

But there is also little concern among the producers that higher crude might cause a global economic bust, said this same observer - despite what we believe is a great deal of evidence to the contrary.

Another risk he pointed to in quotes below was operating-rate increases which end up being out of sync with the market.

This is a risk we have highlighted before. To a significant extent rate increases might happen because the feedstock is available rather than because the market is in a healthy-enough state to take increased volumes.

In his words, this is what he told us:

"The Saudi crackers are continuing to run at 80-85% and so obviously if there is more associated gas available through increased oil output, then we could see these crackers going to 100%. I estimate that this would represent a total of an additional 1m tonne/year of ethylene - in other words, one extra worldscale cracker.

"If all the European crackers were to go from their current operating rates of an average of around 80% we are talking about a lot more - 2.5m tonne/year of extra ethylene. This would obviously also depend on feedstock availability -i.e. how the refineries run in Europe for the rest of this year - and on demand.

"The mood among the Saudi producers remains exceptionally buoyant, the best for several years.

"Earnings in 2010 were excellent and they feel that this year could be even better. They were sold out by mid-January and told their customers 'come back in February when we will probably raise prices.' This also applied to some producers elsewhere.

"There is no real talk of the big macro-economic risks. Even if China's percentage growth rates slow down you are talking about lower growth from a much-bigger base than 5-10 years ago. China's polypropylene (PP) consumption is now bigger than that in the US.

"On logistics, and as well as on feedstock, what you see and what you calculate is different from what the companies say.

"You visit plants and you see resin stacked in the desert. They say 'this is because our capacity is so big', but obviously when you plan a complex you factor in sufficient storage to prevent resin from degrading in the desert.

"On feedstocks you can calculate from the trade data and earnings that they are, in fact, running at a lot less than 100%."

By John Richardson

THE main issue facing Asian cracker operators a couple of weeks ago was how long co-product credits would continue to compensate for a moribund China polyethylene (PE) market.

Feedstock cost is now the biggest immediate worry. A hike in naphtha saw integrated low-density PE (LDPE) margins plummet by $172/tonne, according to the 25 February ICIS pricing Asian PE Margin Report.

But while the crisis in the Middle East might be dominating everyone's attention, the weakness in China hasn't gone away.

Some contacts told us that imported prices for PE edged up by $15-25/tonne last week.

But from most of the meetings the blog held in Singapore last week, we could find no evidence of any improvement in pricing.

End-users remained severely hampered by temporary labour shortages caused by the job-hopping and the credit-tightening we have already discussed.

An improvement in overseas pricing doesn't also marry with continued reports of domestic pricing suffering further declines, said most of our sources.

The main focus in China right now is on reducing high levels of inventories of imported material through, for instance, re-exports by traders to South America, Vietnam and Turkey, they added.

The crisis in Libya is at front of mind, a sympton of which was last week's 8.8% rise in naphtha costs on higher crude.

"The prospects for this year looked very good before Libya. Tunisia and Egypt caused some concern, but we now have no idea about the full implications of what we are confronting," a senior Singapore-based industry executive with a leading polyolefin producer told the blog last week.

A great deal of Saudi Arabia's crude production is in the east of the Kingdom, where there is also a large community of Shia Muslims. It is the Shia majority in nearby Bahrain that have been behind the unrest there.

Assessments of the likelihood of unrest in Saudi Arabia have moved from a "no" probability to a "low" probability in the space of a week.

Saudi's apparent decision to raise oil output last Friday, which helped to calm markets, illustrated once again its crucial role ias a swing producer. Any disruption to the country's production could, as a result, be disastrous for the fragile global economic recovery.

"If crude were to suddenly go to $150 a barrel I could see demand falling overnight by 20%," the senior executive added.

But even if there are no problems in Saudi, analysts at Nomura have calculated that if unrest were to spread to Algeria, crude could rise to $220 a barrel.

Comparisons are therefore being drawn with the 1973 oil embargo, the Iranian revolution and Iraq's invasion of Kuwait.

The big danger is that petrochemical companies may not adequately see this risk.

They could instead look at last year, assume the global recovery will continue, and buy raw materials ahead of further increases in naphtha and other feedstock.

We are confronting another shock for the world's economy on the scale of Lehman Bros. Great caution is needed.

By John Richardson

ASIAN ethylene markets appear to be in a muddle over the Middle East supply picture.

Click here for a graph of the latest pricing - EhylenePrices1March2011.ppt 

A shipping industry source we spoke to recently insisted that more rather than less C2s were being exported from the region as opposed to the reduced volumes being claimed by Japanese traders.

One reason being put forward for the lack of clarity is how Iranian volumes are being reported, given sensitivities around compliance with sanctions.

The upcoming Asian cracker turnaround season and production problems at the YNNC No 1 cracker in South Korea, reported by my colleagues at ICIS news, lend support to the tight-market argument.

But it is fathoming the Middle East situation that remains crucial as the region is the swing producer for ethylene. Iranian volumes are the most volatile on a month-by-month basis.

The 300,000 tonne/year Ras Lanuf cracker in Libya was thought to have been down earlier this month due to the unrest. About half of the C2s are exported to destinations such as Italy, Turkey, Algeria and North Africa with propylene and butadiene shipped out of the complex, we understand

But even if Ras Lanuff were still down at the moment this wouldn't amount to much more than a tiny hill of beans in the overall picture.

"I really don't know for certain if there is less ethylene coming out of the Middle East but I suspect so," an industry source told us last week, reflecting the extent of the uncertainty.

"I don't think the Iranians are exporting as much, although how this is being exported might be obscured for sanctions reasons.

"What I do know is that the Saudis were approaching their contract customers in December to try and get back into old contracts that had been brought to a halt by the shortage of feedstock. In January and February, the Saudis don't appear to have had the extra export volumes that they expected."

This might be the result of less associated gas being available than had been expected, we both speculated.

The question now, following the apparent decision by Saudi Arabia to raise crude-oil production, is whether this will lead to more associated gas being supplied to petrochemicals. We then need to fathom whether this will work its was into more C2s or derivatives exports.

A further factor behind the tight-market view is unconfirmed reports of recent production problems at a major Saudi complex resulting from a flash flood and a power failure.

"I think ethylene will definitely stay tight for the rest of H1 but the second half is anyone's guess," our industry source added.

The blog feels that ethylene might have been talked-up a little last month in an effort to compensate for the flat polyethylene (PE) markets we referred to yesterday.

Right now, though, the uncertainty could well be a symptom of a wider lack of clarity there as fear and caution start to eat into confidence. The obvious catalyst for this is the Middle East.

By John Richardson

THIS might amount to a little more than a ripple in a teacup if the Middle East crisis brings the global economy down (as we said on Monday, crude could go to $220 a barrel if the crisis spreads to Algeria. Equity and oil markets were jittery yesterday on the belief that that unrest could, after all, spread to Saudi Arabia).

But nevertheless, in an attempt to carry on as if life were normal we have been talking to the polyolefins market over contrasting views about the immediate prospects for linear low-density polyethylene (LLDPE).

One view is that insufficient butene-1 feedstock will continue to constrain availability - along with the wide delta with low-density PE (LDPE).

LLDPE can replace LDPE in some applications or the two polymers can be blended together in varying proportions depending on economics.

Investment in LPDE has been insufficient over recent years to meet demand and many producers have also switched plants to higher-margin ethylene vinyl acetate (EVA) production, demand for which is being driven by the solar-panel industry.

EVA is used to make the encapsulants that go into the solar panels.

"Butene-1 remains tight right now, but not quite as tight as last year. However, supply is about to be reduced as a result of the Asian cracker turnaround season that is just starting," an olefins trader told the blog.

"Another factor that is already making butene-1 tight is the switch by European crackers to lighter from heavier feed. Every cracker that can crack propane is cracking propane as opposed to naphtha, because of the wider differential in the cost of the two feedstocks" (More on this subject later).

One of our senior industry sources disagreed.

He said: "Sure, there was butene-1 tightness a couple of years ago but more recently this has been an excuse used by producers to achieve their strategies. This is a C2s game not a C4s game as ethylene costs matter a lot more.

"High-density polyethylene (HDPE) prices have gone too low over the last couple of years as a result of antidumping duties by the US against plastic bag imports from China and Malaysia."

(Confused? Here's the explanation: LLDPE and HDPE are often produced in swing plants and so although each of these polymers have different end-use applications, the relative strength of each of their markets is crucial for production-volume decisions)

"In other words, what I am saying is that the market overreacted to the duties.

"Further support for HDPE has been provided by very expensive polypropylene (PP) due to the surge in propylene costs. Injection-grade HDPE can be substituted for PP.

"HDPE pricing in Europe has subsequently recovered slightly. This should have been the case in Asia also, but demand is currently awful for all grades of polyolefins so nothing is moving - the whole market is flat.

"Swing producers in Asia, the US and Europe are, as a result, swinging back more towards HDPE away from LLDPE.

"There is no change in the Middle East because plants there that are supposedly swing only produce HDPE as it a technically easier polymer to make."

"The trouble is that a producer can look at his own output and economics in isolation forgetting that everybody is likely to be doing the same.

"So you might end up with several hundreds of thousands of HDPE suddenly arriving in the market at the same time that can send prices heading in the opposite direction.

"Once you have made the production switch it has to remain in place for 3-6 months because of orders placed by your customers. While it is easy for a producer to quickly switch between HDPE and LLDPE it takes converters a lot longer.

"These decisions are crucial because you are looking at several hundreds of millions of dollars per 1m tonnes of additional production."

To the blog this is all fascinating stuff. Maybe we need to get a life?

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

CHINA'S polyethylene (PE) market - a reasonable proxy we often use for the chemicals and polymer industries as a whole - remains worryingly weak, according to several traders and producers interviewed by the blog this week.

Modest restocking did take place last week, leading to a very slight improvement in sentiment and an edging up in pricing, but as one trader told us: "All this probably amounted to was end-users hedging against further hikes in raw-material costs."

But while import prices might have edged up for some grades, domestic prices remained flat or declined.

A Southeast Asian end-user asked us the question, after looking at the cost pressures from crude upwards and the rally in polyolefins prior to the current lull: "Could this be a repeat of 2008?"

We think quite possibly, yes. On a wider basis this is a concern we have raised before.

The rally in crude, now driven by a supply (Libya etc) rather than a demand story, as was the case last year when it all about a booming China, could cause significant macroeconomic damage. Our advice to the end-user was to be very cautious over trying to hedge raw material costs by stocking-up on resin.

"We continue to see quite significant re-exports from China because PE inventories remain pretty high," added the trader.

A producer concurred and pointed out that the underlying cause of the current lull in the market is different from that which occurred in Q2 last year.

Click here for a pricing graph - PEpricingMarch42011.ppt

At that time speculative imports of resin, resulting from lax lending conditions, resulted in a steep fall in pricing as traders off-loaded their high stocks.

This time around there seems to be a genuine slowdown in demand taking place as a result of government measures aimed at taking the heat out of the economy. My fellow blogger Paul Hodges points to the fall in the Baltic Dry Goods Index and a recent OECD report as indicating this slowdown.

"End-users remain short of credit because of the new restrictions on lending. It is very quiet out there," a second trader told us.

On this occasion, unlike in Q2 last year, pricing has yet to fall off a shelf.

The reasons include an extensive cracker turnaround season which is restricting supply. This includes a nine-week turnaround that was begun at the ExxonMobil complex in Singapore earlier this week.

Another factor is the obvious cost-push from higher naphtha.

We made the point a couple of weeks ago that crackers mainly exist to convert ethylene into PE and that therefore co-product credits (strong propylene, benzene and butadiene) could only support margins for a limited period.

The March 4 ICIS Weekly PE Margin Report for Asia supported this view.

"Integrated PE margins in northeast Asia nosedived this week by around $155/tonne on a 7.0% rise in naphtha feedstock cost," wrote my colleagues.

"Naphtha prices are the strongest since August 2008. Co-product credits rose by 3.2% on firmer butadiene and propylene prices; polymer prices were unchanged.

"Integrated low-density PE (LDPE) margins are the lowest since July 2010 and integrated high-density PE (HDPE) margins are in negative territory and are the lowest this decade."

Standalone margins, however edged up slightly as ethylene prices declined.

The Ras Laffan cracker in Qatar was reported to be again exporting C2s after resolving technical problems. This might have been a factor behind weaker ethylene.

More ethylene could be on the way from the Middle East if the decision first by Saudi Arabia - and now apparently by other OPEC members - to increase crude output results in more associated gas feedstock.

Alternatively, the ethylene could be converted into more resin and/or monoethylene glycol (MEG).

Higher-cost producers in Asia might have to respond with production cutbacks that could well include extended turnaround periods.

By John Richardson

IF exploration and production (E&P) is the dog and refining the tail on the dog, poor old petrochemicals is merely a flee on the tail of the dog, goes the old saying.

Hence last November we reported on the strange case of how China's drive to hit emissions targets under its 11th Five-Year Plan had led to coal-fired power stations being closed down.

Manufacturers in China's southern and eastern provinces responded by switching on their diesel-run generators, thereby greatly boosting the demand for gasoil.

Sinopec was forced to cut polyethylene (PE) and polypropylene (PP) production as distillation columns were adjusted to make more gasoil at the expense of lighter ends, such as naphtha.

Gasoil that had been cracked directly in steam crackers was also diverted into the diesel pool.

Apparent oil demand grew by 17.7% in December last year as a result of refineries being run hard to meet the gasoil deficit, according to the International Energy Agency's February 2011 Oil Market Report.

"China's refiners also ran very hard in January in order to stockpile gasoil ahead of an anticipated demand spike over the Lunar New Year Period and to keep drought-hit areas well-supplied," a Singapore based refinery consultant told us.

"This resulted in gasoil exports falling to their lowest level since late 2008."

China's trade deficit for February was the largest in seven years and much-bigger than anyone had expected.

This could have been either the result of the Lunar New Year denting demand more than anyone had forecast, and/or that government tightening measures are substantially slowing the economy.

Could this mean that refineries are now sitting on stockpiles of gasoil? If so, will Sinopec cut back on operating rates or try to get rid of middle distillates by increasing supplies to its crackers?

Might Sinopec also re-adjust distillation columns to make more light ends again, including naphtha, thereby further increasing petrochemical feedstock availability?

The resulting increase in domestic petrochemicals production would be a further blow to Asian and Western importers, who, we believe, are facing more supply from the Middle East. OPEC has reportedly increased oil quotas, thereby making more associated gas available to run crackers in Saudi Arabia, Kuwait etc a lot harder.

Our assumptions about China could be entirely wrong, of course, but what we have suggested above is certainly worth checking out. Or perhaps you can point out what is really going on out there?

Another potential complication highlighted by the IEA relates to coal supply.

"Coal shortages could emerge, notably in winter, thus boosting gasoil use again: some observers note that bottlenecks are becoming much more serious, while coal stockpiles are heavily depleted (although imports are growing rapidly)," writes the agency, again in its February report.

This is worth further research. If coal supply is already severely constrained, or becomes so, we could see a repeat of late last year. Local petrochemicals production could be cut back rather than increased.

By John Richardson

CHINA'S polyethylene (PE) market is in such a bad state that re-exports are now being considered to Europe.

The wide disparity between a flat China market and strong pricing in European has created this exceptionally rare arbitrage opportunity, which, according to an industry observer "has happened before, many moons ago, but not on this scale."

Click here for a slide showing an example of this disparity -

EuropeAsiaHDPE23March2011.ppt

Traders left with too much material on their hands have been re-exporting resin for several weeks now to other destinations such as Vietnam, Turkey and Latin American.

What is remarkable, and worrying, is that PE in China has remained flat despite surging raw-material costs on the high price of crude.

This is despite the facts that we are in the midst of a major cracker turnaround season in Asia and a large percentage of Japanese production is down because of the earthquake and tsunami.

So what's going on?

We have already written about the reduction in available credit, a particular problem for small -and medium-sized enterprises, as a result of increased bank-reserve requirements.

Reduced liquidity must have surely also hurt the levels of speculation among traders that has helped pump up the market over the last couple of years.

Two producers, however, argue that while official credit growth had slowed down, off balance sheet lending made the real total of available financing a great deal higher.

Fitch, the credit ratings agency, has said that banks have shifted money off their books through, for example, packaging loans into securitised products. This has allowed them to sustain high levels of lending.

These kind of practices resulted in Rmb11 trillion of new loans in 2009, way ahead of the official figure of Rmb7.9 trillion, according to Fitch.

"The flat China market is more likely to be the result of a general lack of confidence in future lending conditions," said one of the producers.

"Tougher restrictions on property speculation and the end of tax incentives for auto purchases are other factors."

If the government continues to struggle to control inflation for the rest of this year and into 2012, more measures might have to be taken to cool the economy down.

China's Premier Wen Jiabao also recently said: "China will resolutely press ahead with controls on the property market to curb speculation".

He added that the government will "'severely punish" irregularities in the real-estate market, implement differentiated credit and tax policies, and hold local officials accountable for maintaining stable home prices".

Demand in Japan has, of course, also been hit by the earthquake and tsunami.

And here is something else to worry about: Crude oil production in Saudi Arabia has risen to 9.4m barrels a day from 8.4m barrels a day as part of OPEC's efforts to calm troubled markets, said an industry observer.

This could well be turned into more PE for shipment to China, further depleting the market share of the higher cost producers.

OPEC only officially abandonded quotas ten days ago and so it might take a while longer before we see these extra volumes. But given that Saudi Arabia can make money in any market conditions they will run surely run harder once they receive the extra feedstock.

By John Richardson

THE blog held a fascinating discussion with a very well-placed industry observer last week, further underlining some of the key challenges facing the Middle East..

These include the well-documented feedstock shortages that will result in a dearth of new capacity post 2012 - and the difficulty in executing the few projects that are going ahead.

Social stability is a key concern right now across the Middle East as a result of the virtual civil war in Libya and major unrest in Bahrain and Syria.

Just a few weeks ago nobody really worried that much about the push for democratic change spreading to Saudi Arabia. But that was then and this is now.

The consequences for the global economy are almost too frightening to contemplate if the Kingdom, the world's most important "swing" oil producer, was to face significant political and social upheaval.

He told us that only one new cracker project would go ahead in Qatar by 2015 due to limited gas availability for petrochemicals. The three-way tussle between Shell, ExxonMobil and Total for this gas allocation therefore continued, he said.

"I also doubt that some of the other projects in the region - in Saudi Arabia and Abu Dhabi - will go ahead on schedule because financing is a long way from being secured."

Another theme we discussed was the increase in Saudi oil production, which he believes has been from 8.4m barrels a day to 9.4m barrels a day (we discussed this last week).

This will surely result in more pressure on Asian polyolefin markets already struggling with moribund Chinese demand.

But the big issue we kept returning to was Saudi Arabia and the possibility of unrest.

"It is now being seriously discussed because of what we have seen in Bahrain etc," he said.

This linked back to the gas shortages limiting new projects that we mentioned at the beginning of this post.

Soaring demand for gas for power generation is one of the reasons why petrochemicals is being short-changed on supply.

"For social stability reasons there is no way that electricity costs will now be increased in Saudi and elsewhere in the Middle East," he added.

This is a region where power is so cheap that air-conditioning units are left switched on when people go on holiday in order to keep houses cool for when they return.

Without conservation driven by price, and with new reserves of gas likely to be more expensive to extract, the cost and availability of the feedstock for petrochemicals seem certain to remain under great pressure.

By John Richardson

LACK of credit and inflation are becoming even greater problems in China, which is reflected in polyolefin markets that remain very quiet indeed.

"It is ice cold out there with very little activity. Importers are waiting and hoping for some kind of improvement," a Singapore-based polyolefin trader told the blog today.

A source with a major producer agreed and added: "Lack of credit continues to be problem for the small -and medium-sized companies (SMEs) due to the increases in bank-reserve requirements.

"Many of the converters, who are SMEs, are struggling to get sufficient working capital to operate at full capacity.

"The other problem, if you can call it a problem, is that the speculators in eastern China are not able to open letters of credit to gamble in the market.

"This is affecting activity in both the physical market and the Dalian Commodity Exchange, pointing to the fact that some of the strong volume growth we saw last year was the result of the ease of speculation."

Cost pressures are another problem, resulting from an official inflation rate in China which is hovering around 5%.

"The packaging film, agricultural film and home appliance sectors are unable to pass on any further resin prices increases. This is part of the reason why polyethylene (PE) pricing has remained basically flat since the end of the Chinese New Year holidays," the producer added.

Crude oil is one obvious cause of the inflationary problem afflicting the whole of Asia, along with rising food costs.

The cost of food is, of course, tied to some extent to that of oil. But rising food prices are also the result of changing lifestyles as more and more Asians tuck into a diet containing much higher amounts of protein.

Wage costs are also on the up in China, the result of official action to reduce social unrest caused by a widening gap between the rich and the poor.

A further trigger for inflation is the huge stimulus programme launched in late 2008, resulting in the rapid and dangerous rise in asset prices, most notably in the property sector.

The stimulus package has contributed to the widening of the gap between the rich and the poor (the rich have got richer thanks to surging asset prices and the ability to speculate in everything from condos to plastic resin due to easy lending conditions).

And so ironically, a short term impact of the government being forced to raise wages is more inflationary pressure as it attempts to reduce inflation through higher interest rates and bank reserve requirements.

The effect on polyolefins had been "a climate of exceptional uncertainty" added the Singapore-based trader.

"This has resulted in lack of buying activity in both PE and polypropylene (PP)."

But strangely enough while PE pricing has, as we have said, been pretty much flat since the CNY, PP has fared slightly better.

Click here for a chart showing PE pricing since January 2011 -

March302011PEPPPrices.ppt

PP pricing, however, has risen steadily since January even if buying right now is exceptionally thin. For example, PP flat yarn prices had risen from $1,480/tonne CFR Main Port China on 7 January to $1,640 tonne on 25 March, according to ICIS pricing.

"It is all about supply. Supply is pretty tight in high-density PE (HDPE) and linear-low density (LLDPE), but not quite as tight as in PP," said the trader.

He attributed current tightness in PP to turnarounds in the Middle East and lost production in Japan (30% of PP production was down late last week because of the earthquake and tsunami, again according to ICIS pricing. However, more than 50% of LLDPE capacity was also off line, suggesting that both polymers will be imported very shortly).

The blog suspects that an additional longer-term reason for tight PP supply is the structural shortage of propylene. This is due to the switch to lighter feeds in the US and continued strong demand growth for PP.

Ethylene and propylene prices both went up last week, but PE remained flat while PP edged up. This appears to support the argument that the polymers are in different supply positions.

The big question, the crucial question, is whether the economic problems in China will last throughout the year.

This could change the fairly optimistic mood evident during this week's National Petrochemical and Refiners Association (NPRA) in San Antonia, Texas.

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

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

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

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

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

Here goes:

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

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

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

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

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

By John Richardson

POLYETHYLENE (PE) prices were assessed stable-to-weaker by my colleagues at ICIS pricing late last week as Sinopec was reported to be evaluating a 10% reduction in operating rates.

Sinopec hardly ever cuts production on market conditions as its main objective is not to make a profit, but rather serve local manufacturing industry as a whole. And so if the reports of a rate-cut evaluation are accurate this would further underline the dire state of the PE market.

Polypropylene (PP) seems to be benefiting from tighter supply due to maintenance work in the Middle East and feedstock shortages everywhere. Nevertheless, downstream sentiment remains equally glum on the big gorilla filling the room: Inflation.

In the fibre intermediates chain, mono-ethylene glycol (MEG) and purified terephthalic acid (PTA) firmed very slightly early last week on more speculation by the traders.

Click here for some recent pricing history - ICISpricing19April2011.ppt 

However, our ICIS pricing colleagues tell us that later in the week activity declined on the release of the 5.4% consumer price inflation number for March - the highest in 32 months.

Chemicals and polymers producers in general have been struggling since the Chinese New Year to pass on further cost increases down all the production chains.

And very interestingly, the All China Federation of Industry and Commerce has urged all the industrial groups it represents to heed Beijing's call not to raise prices. Twenty four of these groups attended a price conference last week in support of the Federation's position, including representatives from the textile, agricultural, fishery, pharmaceutical and bakery industries.

Polyester producers have already been forced to cut their operating rates on complaints from apparel and non-apparel manufacturers that the cost-push, driven by high crude and cotton prices, has gone too far. We could now see a concerted push for cost reductions following the textile industry's support of the Federation's stance.

And with the agricultural film season almost upon us (it starts in May), could we see strong pressure from farmers for lower linear-low density PE (LLDPE) and low-density PE (LDPE) costs?

Unilever has separately been persuaded to put on hold 15% price increases by China's National Development and Reform Commission (NDRC).

Finished-goods manufacturers have also been affected by rising wages costs, mandated by the central government in an effort to tackle the plight of those who have lost out during the stimulus-driven economic boom. These malcontents represent a major threat to social stability.

Inflationary pressure from rising input costs appears to be threatening the vital re-export trade (chemicals and polymer imports that are re-exported as finished goods).

Coastal factories are demanding higher prices for shipments, according to Dong Tao, a Hong Kong-based economist wit Credit Suisse, in this article in the New York Times. This is forcing the manufacturers to reject orders from Wal-Mart and other western retailers.

The sanguine view is that China's inflation problem is only temporary as it is mainly the result of more expensive oil on the Middle East crisis and more expensive food due to weather-related shortages and logistics problems. Speculation, which could in theory be tackled by a regulatory clampdown, is also being blamed by some commentators.

But Patrick Chovanec, professor at Tsinghua University's School of Economics and Management in Beijing, argues in this post from his blog that the causes of inflation are far more deep-rooted.

He has been warning since January 2010, as we have also been suggesting, that the huge economic stimulus package was a major inflationary threat.

China's money supply has risen by 50% since the stimulus began with far too much money pouring into fixed-asset investment and too little into consumption, he says.

Inflation in China represents one of the biggest risks to the global economic recovery. Chemicals companies need to be prepared for the worst possible outcome.

By Malini Hariharan

A question that every butadiene buyer has been asking for a long time is when will prices ease?

There are no signs yet although buyers are threatening to cut production.

Butadiene rose by more than $200/tonne last week to $3,080-3,120/tonne CFR Northeast Asia, reports my colleague Helen Yan on ICIS news.

Prices have been driven up by a number of cracker outages and turnarounds in Asia, Europe and the US. Butadiene supplies have tightened over the last year and the more recent shutdowns at two Iranian plants (Jam Petrochemical and Amir Kabir) and Shell's cracker in Singapore have not helped matters.

Butadiene prices have risen by around 50% since January.

But buyer resistance is on the rise and some are planning cuts in production.

Kumho Petrochemical, Asia's largest synthetic rubber producer, will shut a 70,000 tonnes/year styrene butadiene rubber (SBR) plant and cut operating rates at a second 100,000 tonnes/year plant in May.

Other SBR producers in Asia too are reportedly contemplating production cuts. Additionally, a few SBR producers have planned maintenance shutdowns in the coming weeks.

However, the production cuts may not materialise if high butadiene costs can be passed on. And there are signs that this is happening.

SBR prices in India have crossed $4000/tonne and are likely to remain firm in May, reports ICIS news.

Tyre producers are willing to pay high prices as they expect SBR availability to remain constrained because of production disruptions in Japan.

"We have received enquiries from some tyre producers in Japan. Their suppliers in Japan were not able to deliver their contract cargoes because of power outages and extensive damage to infrastructure after the earthquake," said a Korean SBR producer.

If this continues, SBR and butadiene can continue their upward march and provide much -needed relief to Asian cracker operators who have been hit by weak pricing for other derivatives.

By Malini Hariharan

Yesterday's announcement by Asahi Kasei, Sabic and Mitsubishi Chemical of a joint-venture acrylonitrile (AN) project in Saudi Arabia fills up one more slot in the kingdom's petrochemical value chain and supports the move downstream.

Sceptics might question the viability of this strategy but Saudi companies are slowly pressing ahead.

Mohammed Al-Mady, Sabic's CEO, said the AN project's key driver was the Saudi National Industrial Clusters Development Program which aims at growing and diversifying the kingdom's manufacturing sector.

The plan is to build plants for 200,000 tonnes/year of acrylonitrile and 40,000 tonnes/year of sodium cyanide at Al Jubail. A start-up date has yet to be confirmed but a final investment decision is due in 2012.

"AN and NaCN are very important chemicals for downstream diversification into acrylonitrile butadiene styrene (ABS), carbon fiber, acrylic fiber and acrylamide," noted Al-Mady.

For Asahi, completion of the project will fulfill its target of becoming the world's largest AN producer with a total capacity of 1.4m tonnes/year. It is currently at No2 with 750,000 tonnes/year of capacity with plants in Japan, South Korea. A new 200,000 tonnes/year unit in Thailand is due to start this year and a 245,000 tonnes/year plant in South Korea due in 2013.

Interestingly, the Saudi project will be based on propylene technology and not on the new propane process that Asahi is using in the Thai project. It's not clear why this is not being pursued, especially as Asahi had in the past talked about using the propane-based process in Saudi Arabia to boost its competitiveness.

By John Richardson

THE remarkable shift in the competitive landscape of petrochemicals resulting from shale gas was highlighted yesterday in an excellent post by our fellow blogger, Paul Hodges.

Drawing on data from the NPRA, with analysis from the ICIS data and analytics team and Bob Townsend of International e-Chem, Paul shows the steep rise in ethane versus naphtha/liquids cracking from 2006 to Q4 2010.

Switching to ethane has been a no-brainer for the US petrochemical industry, thanks to the shale gas technology break-through. The States is second only to the Middle East in competitiveness in ethylene derivatives.

Hence, the combination of the feedstock advantage and a weaker dollar has led to a sharp rise in US polyethylene (PE) and polyvinyl chloride (PVC) exports.

Our blog wonders, though, whether all the new cracker studies announced by US producers of late are a little premature, given the uncertain economic outlook.

We have also discussed the challenges to shale gas due to the environmental debate. A major incident - and/or a well-publicised study - could result in a regulatory clampdown leading to reduced availability and a further shift in the petrochemicals landscape.

The other immediate problem, as Paul also discusses, is the tightness of butadiene and propylene markets resulting from the switch to lighter feeds in the US.

The blog has heard talk of interest in making use of an old technology to produce on-purpose butadiene to meet the shortfall - n-butane dehydrogenation.

By John Richardson

MORE evidence has emerged of a slowdown in demand for polyolefins in China following the sharp decline in March imports.

The Middle East is now feeling the pinch as a result of the impact of inflation and the reduced availability of credit.

"I visited a propane dehydrogenation (PDH)-to-polypropylene (PP) producer in Saudi Arabia last week. The company's PP inventory level has risen from 25,000 tonnes at the end of February to 45,000 tonnes because of weak sales, primarily in China," an industry observer told the blog.

"Inventory levels in general throughout Saudi are climbing. They are now above 30 days and once they reach about 40 days, we will start seeing the Middle East cut prices."

What is interesting about the PP player's stock-build is that it is has occurred since the Chinese New Year holidays. The blog has consistently heard reports of weak demand immediately following the end of the week-long holidays.

This is an exceptionally long period of time in the recent history of sustained and very strong growth.

The observer's comments came shortly after extraordinarily forthright remarks from Torsten Penkuhn, the head of BASF's petrochemicals business in Asia, in a fascinating interview with my colleague Will Beacham of ICIS Chemical Business.

"We feel that underlying GDP growth in China is around 9%, with chemical industry growth perhaps into double digits," said the BASF man.

"But if you look at first-quarter results, you see 15-20% sales growth. So there is an underlying speculative element which comes from an anticipation of shorter availability of credit. There has been some pre-production by people worried about their credit lines being withdrawn."

This helps explain why trader friends of ours are playing a lot more golf after achieving very good sales during the early part of Q1.

And it led to us to speculate, during our discussions with the industry observer, that chemical company results may remain pretty good - perhaps even very good - in the second quarter. This might be due to pre-production and pre-buying in China that took place to beat the credit clampdown.

"This would involve just kicking the can down the road to a time when the slowdown in China starts to show up in the financial results," said the observer.

"Our views are in stark contrast to the views of just about every chemical company CEO during the Q1 results season," he continued.

"But perhaps some of the CEOs are out of touch on what's happening on the ground. Maybe they are sometimes the last people to see big changes in markets."

Volatility in crude oil has continued this week, including a 5.5% fall on the Nymex yesterday, resulting in trading on the exchange being halted for the first time in two years.

Weaker growth prospects in China are one of the factors behind yesterday's decline - and last week's broad sell-off in commodities.

Increasing concern over demand destruction caused by high crude prices has also contributed to the rout in oil.

Further evidence of this destruction emerged yesterday when the International Energy Authority revised-down its global demand-growth estimate for crude.

The inflation news from China doesn't get much better. Further credit tightening, higher interest rates and more restrictions on price increases seem likely.

By John Richardson

THE extent of the weakness in China 's polyolefins market has become more apparent as a result of reports that a much-anticipated increase in Middle East production hasn't happened.

Back in February, oil production in Saudi Arabia had been raised to 8.9m barrels a day from around 8.5m barrels in January, a Middle East industry source told the blog.

This was in response to the unrest in Libya , and elsewhere in the Middle East , that had driven crude prices to levels viewed by OPEC as threatening the global economic recovery.

"However, it quickly became obvious that the extra oil being produced by Saudi wasn't helping the market as it was sour, whereas the shortage was in the light, sweet crude that Libya produces," the source added.

Saudi oil production was therefore cut back to 8.4m barrels a day in March and 8.6m barrels a day in April, he said.

The result was that the country's petrochemical producers, who have suffered from reduced associated gas supply since early 2010, did not receive the expected increase in feedstock.

"Crackers in the Kingdom, are as a result, still running at operating rates of approximately 85% - the same as in Q4," he added

If all the crackers were running at 100% this would amount to 1m tonnes of more ethylene production - or one additional worldscale plant.

And when you add this to the 4% reduction in ethylene production by Sinopec in April and the 10% reduction reported to have occurred in May, markets should, if growth was strong, be in a lot better state.

The Asian cracker turnaround season is also still in progress, albeit nearing its end - and we are picking up reports of further logistics problems that are constraining exports from the Middle East.

But last week saw a $10-30/tonne fall in polyethylene (PE) prices in China , according to our colleagues at ICIS pricing - despite this pretty favourable supply scenario.

Polypropylene (PP) prices were flat as buyers retreated to the sidelines on the volatility in crude and a further increase in China 's bank-reserve requirements.

And a we reported last Friday, inventories are building in the Middle East, and perhaps, elsewhere, on weak China buyng.

Inflation fell only marginally in April - to 5.3% from 5.4% in March - indicating that further interest rate rises might also be on the way.

A further cause for alarm is that the reason why Sinopec has been forced to cut back on petrochemicals production is related to inflation.

This is not to do with weak petrochemical demand (the state-owned giant never cuts back on production for demand reasons), but is instead down to the need to prioritise gasoline and diesel production.

Refiners have been cutting back on fuel output because government price controls have prevented them from fully passing-on higher costs of crude.

A further factor behind this latest diesel shortage - following the one last December that also led to petchem production cuts - has been the switch to diesel-fired generators by manufacturers of finished goods. Diesel generators have been switched-on because of reduced supply from coal -and hydro-based power facilities.

One could argue that reduced industrial production on the constrained power supply we first reported last month  is good news for inflation.

But from a petrochemicals perspective we are coming up to the peak manufacturing season - when petchems are normally imported in great volume for re-export as finished goods to the West in time for Christmas.

Here are a couple of suggestions for chemical company CEOS:

1.)Do you really want to nail your reputations on forecasting a strong Q3 based on China ?

2.) Shouldn't you be a little cautious on how you explain any good second quarter numbers your companies report, as they might have been distorted by pre-production and pre-buying in order to beat the China credit crunch.

By John Richardson

THE blog attended the Asia Pacific Petrochemical Conference (APIC) in Fukuoka, Japan, today during which it heard mention of the phrase "China downturn" on 23 occasions from different contacts.

Confidence is clearly at a lower than last year than at APIC in Mumbai, when all the talk was about delayed introduction of new supply into the market and emerging-market growth way beyond anyone's expectations.

A toxic combination of power cuts in China that is said to have depressed petrochemical pricing since March - and the measures to combat inflation in both China and India - is behind the significant change in mood.

Another reasons for the shift in outlook is crude oil. Steady increases in pricing up until February, leading to chemical and polymer consumers buying forward, have been followed first by flat crude and now greater volatility and sharp declines.

"The momentum has changed. Petrochemical pricing went up too much in response to crude, it hit a ceiling and now the concern is where it goes from here," said an Indian industry source.

"Margins are under a lot of pressure, particularly for the higher-cost Northeast Asian cracker operators."

The optimists believe that inflation will be brought under control in China in 2-3 months.

But what if underlying inflationary pressure means that a lot tougher measures will needed to moderate the rise in the cost of living?

More to follow when the blog is feeling a little less full of Asahi.

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

GROWTH in China and other leading economies has slowed and oil prices have slipped but analysts are predicting strong prices for the rest of 2011 and 2012. Their reasoning is based on continued speculative activity in this commodity and geopolitical risks in the Middle East .

HSBC's recent report on this subject estimates that speculation has contributed as much as $30/bbl to May's peak oil price.

This is in line with arguments about we will make about the dysfunctional, and therefore harmful, nature of oil markets in our new ebook - Boom, Gloom and the New Normal.

The analysts point out that "net long positions held by managed funds have roughly doubled since February 2010 and nearly tripled since September 2009". Each 100m bbl in net long positions is associated with US$20/bbl move in the oil price.

While speculation is shaping markets in the short term, demand and supply fundamentals cannot be ignored, the report adds.

Demand is expected to grow this year but at a slightly slower pace than the 2.9% recorded in 2010.

Beyond 2011,the analysts forecast demand to expand at 1.4-2.0% annually with the bulk of the growth coming from the non-OECD countries. But there is a risk of demand destruction if prices remain above $100/bbl.

Supply from non-OPEC countries is expected to lag behind the estimated 1.5-1.6MMbbl/day increase in global demand annually. OPEC will have to play a balancing role producing a little under 30m bbls in 2011 and slightly above this figure in 2012.

OPEC currently has spare capacity to stop prices from rising but its willingness to use it is another issue. Its spare capacity is also likely to be eroded from 2014 on demand growth which should put upward pressure on prices.

HSBC's prediction for Brent is $110/bbl in 2011 and $90/bbl in 2012-2013. But other banks are more bullish.

"It is only a matter of time until inventories and OPEC spare capacity will become effectively exhausted, requiring higher oil prices to restrain demand, keeping it in line with available supplies," said a Goldman Sachs analyst.

Goldman Sachs recently raised its its 12-month Brent price estimate to $130/bbl while Morgan Stanley increased its average forecast for Brent this year by 20% to $120/bbl l and by 24 percent for 2012 to $130/bbl.

By John Richardson

POLYOLEFINS demand growth in China is likely to be flat in 2011 over last year, a senior industry executive and a consultant have told us.

"I am quite pessimistic and don't see the Chinese government winning the battle to bring inflation below 4% during this year (its target) and so the credit restrictions are going to stay in place and could get worse," said the executive.

"They are not going to loosen the tap again and pour money into the economy until this problem is solved. As a result, I think that PE and PP demand growth will be flat in China this year."

We have discussed on many occasions before how higher interest rates and increases in bank-reserve requirements have worsened the trading climate since late 2010.

"Since the April 1 local banks have also reduced the amount of credit that can be raised in foreign currencies," a Singapore-based polyolefins trader told us this week.

"As a result, you now have to open several letters of credit (LC) to buy one cargo compared with only one LC in the past. This is slowing and reducing trade."

PE apparent demand grew by 13% in 2010 to 17.4m tonnes and PP was up by 6%, according to industry sources. PE demand has grown by a staggering 53% in China over the last two years, estimates UK-based chemicals consultant Paul Hodges.

"All the signs are pointing in the direction of a flat year for China PE demand," added Hodges.

"Actual consumption, excluding inventory stockbuild, appears to have been down in Q1 versus 2010, and since then more tightening measures have been introduced by the government."

PE imports were down 14% in Q1 over the first quarter of last year, fellow blogger Hodges wrote in a post yesterday.

Not surprisingly, given the economic outlook in China and concerns about weakening growth globally, pricing headed further south last week, Asian PE prices fell by $10-60/tonne, according to 3 June ICIS pricing assessment. PP declined by $30-80/tonne.

This is a global problem as we pointed out last week.

US polyolefin sentiment remains weak with PE continuing to face import pressure, according to Houston-based ICIS pricing olefins editor William Lemos.

"Downward pressure from cheaper Asian imports continued to weigh on the US PE, keeping buyers and traders on the sidelines," he wrote in his June 3 report.

US PP remains bedeviled by propylene affordability due to the switch to lighter feeds and lower refinery operating rates. Weaker US auto sales are a further problem.

As in Asia, low-density PE (LDPE) in Europe has led PE pricing down as it became far-too expensive on restricted supply and firm demand. European LDPE has now fallen by 13% since early April - or Euros180-200/tonne - adds ICIS pricing.

Early last week an industry observer told us: "There is a risk that producers in the Middle East panic and chase market share by cutting prices. This would badly hurt the naphtha-based producers in Asia, but in the long-run would hurt everybody as we could end up with an extended period of lower prices."

Since this interview Middle East producers have aggressively cuts offers for LDPE in Asia and linear-low density PE (LLDPE) in Europe, says ICIS pricing.

It has been a fantastic two years for the industry following the 2008 calamity.

The big issue right now is whether we are in a prolonged downturn or one that will last only a few quarters.Companies need to decide and make a plan.

By John Richardson

YESTERDAY'S fractious OPEC meeting - where members were unable to agree on a proposal by the four biggest members to raise output - may not necessarily be good news for petrochemicals.

For a long time the industry has worried about Saudi Arabia's potential to raise crude output from approximately 8.5m barrels a day - where it had been for much of last year and into 2011 - thereby generating more associated gas feedstock.

As we have blogged on before, Saudi crackers need crude production to be at around 10m barrels a day in order to received sufficient associated gas to run at 100%.

In the first quarter of this year, the crackers remained at average operating rates of around only 85%. This had taken approximately 1m tonne/year of ethylene production out of the market.

This has provided some support for troubled ethylene derivatives markets, particularly polyethylene (PE). Chinese PE and polypropylene (PP) pricing has been flat or declining for the last five months due to problems with the economy. In Europe now also, pricing is on the decline, partly on the back of what's happening in China.

The OPEC meeting in Vienna saw a rejection of a proposal by the four bigger producers - Saudi Arabia, Kuwait, Qatar and the United Arab Emirates - to raise crude output by 1.5m barrels a day.

But, according to this Reuters report, Saudi Arabia, the world's most-important "swing producer", has already unilaterally raised output by about by 500,000 barrels a day in June to between 9.5m barrels to 9.7m barrels a day. Saudi's apparent motive for upping output is its concern over the impact of high prices on the global economy.

An increase of 500,000 barrels a day for June would mean that Saudi Arabia was already above well above 8.5m barrels a day of production in May. This means that they could already be running crackers at more than 85%, helping to explain reports of inventory problems among Saudi polyolefin producers.

The China market is just too weak at the moment to take any extra volumes. Hence, perhaps, the reason for the aggressive reductions in Middle East low-density polyethylene (LDPE) offers in Asia and linear low-density PE (LLDPE) offers in Europe.

It might not seem logical that Saudi Arabia raised output simply because it had more associated gas available to run harder.

But traditionally, crackers in the Middle East have always run flat out if they have had the required feedstock, regardless of market conditiions - as they can always make money no matter how bad things are.

The same could have well have happened on this occasion, especially if the Saudis accepted the conventional wisdom that China was about to come roaring back with strong orders.  

PetroMatrix, the Swiss-based oil-research service, has produced this chart which actually indicates a steep rise in Saudi oil production since January.

Click here to View image 

We had heard of a pick-up in Saudi output in March to help deal with the Libyan crisis. But we were then told that the Kingdom quickly cut back again when it found that it couldn't sell its extra production of mainly sour crude (Libyan crude is light and sweet and therefore the only option for many of the older refiners).

Now it seems as if bigger-picture concerns over the impact on the global economy of expensive crude has prompted a rethink.

Whatever the reality in Saudi Arabia, the OPEC decision not to raise its official quota is bad news for the battle against inflation - as the immediate response has been  rise in oil prices.

By John Richardson

SAUDI ARABIA'S crackers could soon be running at operating rates of 100% again following widespread reports quoting the al-Hayat newspaper that the country's crude production is set to rise to 10m barrels a day in July. Al-Hayat, a Saudi newspaper, is seen as a reliable indicator of government intentions.

We reported last week how Saudi production had already been raised to 9.5m-9.7m barrels a day in June, 500,000 barrels more than in May.

This all matters a great deal for petrochemicals as reduced associated gas availability, due to Saudi Arabia keeping its crude output at around 8.5m barrels a day for most of 2010 and into 2011, has taken around 1m tonne/year of ethylene production off the market. The country's crackers have been forced to run at average operating rates of 85% because of reduced associated gas feedstock.

The 10m barrels a day crude production level is very significant - as it is this amount that is viewed as necessary to provide enough associated gas for Saudi crackers to run flat-out.

Tighter-than-expected petrochemicals supply has provided major support for markets. This has been due to the associated gas factor, delayed start-ups in the Middle East and constrained operations at European crackers resulting from another feedstock issue - lack of naphtha supply as a result of cuts in local refinery production.

It might not seem logical that Saudi Arabia should raise output simply because it might soon have more associated gas available.

But traditionally, crackers in the Middle East have always run flat out if they have had enough feedstock, regardless of market conditions. The reason is that they can always make money no matter how bad things are.

Despite exceptionally weak market conditions due to what is happening in China, Saudi Arabia might still exercise its option of raising petrochemicals production (note: Tomorrow we will provide you with our usual weekly update of current polyolefin market conditions).

Raising petrochemicals production would result in Saudi Arabia gaining market share in Asia, as deep rate cuts would have to occur among the higher-cost Asian naphtha cracker operators.

Applying the same approach in Europe hasn't made sense for a long time because of SABIC's petrochemicals investments in mainland Europe and in the UK.

On a wider level the Saudi decision to raise crude output added further volatility to crude markets last week. This made "buying forward" an even more dangerous strategy for chemicals and polymers purchasing managers.

During the sustained run-up in crude prices - which began in Q4 last year and ended around February-March - building inventory made sense in order to beat higher raw-material costs.

Crude prices had first risen last week following OPEC's failure to agree on an increase production quotas during its meeting on Wednesday. 

But then on Friday, Saudi Arabia's apparent decision to unilaterally raise production caused oil prices to fall by their biggest amount in four weeks. Saudi Arabia, along with Qatar, Kuwait and the United Arab Emirates, had pushed for a higher OPEC quota because of concerns over the impact of expensive crude on the world economy.

The kingdom has the upper-hand in oil markets because it is the world's most-important "swing producer".

By John Richardson

THE decline in Asian and European ethylene and polyethylene (PE) markets continued last week with no sign of the recovery that producers still hope will take place by end-June at the latest.

Asian ethylene prices slipped by a further $60-70/tonne to $1,130-1,170/tonne FOB Korea to reach a six-month low, according to our colleagues at ICIS pricing.

Interestingly, our ethylene team picked up reports of cargoes from South Korea and the Middle East that will be sold on a floating formula rather than on a fixed-price basis. This is a further indication - as if we needed one - of how ethylene and PE have become buyers' markets.

Ethylene in Asia was probably artificially supported by technical problems at the Shell Chemicals cracker in Singapore after demand had already started to weaken.

But now problems downstream are dominating the C2s mood: Asian polyethylene (PE) declined by a further $10-30/tonne last week following a $60-80/tonne fall the previous week.

European ethylene producers conceded last week that the local market had gone into oversupply because they had failed to anticipate the extent of the dip in demand.

Producers have very successfully matched supply against demand for more than two years. Their failure to do so over recent weeks indicates the unexpected scale of the problems in China.

European ethylene and PE markets are under pressure both at home and overseas as everyone attempts to compensate for the weakness in China.

Some European PE June contracts had been settled at Euros20-45/tonne lower than in May, reflecting the Euros45/tonne fall in June contract prices, said ICIS pricing.

The full settlement of European June PE contracts had yet to be achieved as other buyers were hanging-on for reductions of Euros60-80/tonne over May, added our colleagues.

As we said at the beginning, the hope persists that China will recover by end-June at the latest

The inventory run-down process started three or four months ago, several polyolefin industry sources have told us.

China has historically only run on stocks for 3-4 months before it has had to come back into markets to restock, they added.

This means that by mid or end-June we should see a recovery in demand.

"The benefit could be that the longer China stays out of imports the bigger the pent-up demand and therefore the bigger the recovery in prices," said an industry observer.

Also underpinning this logic is the start of the peak Chinese manufacturing season and the next agricultural film season in July-August.

Traditionally, this is when demand picks up for polymer imports that are re-exported as finished goods ready for Christmas sales seasons in the West.

This coincides with an increasing requirement for low-density PE (LDPE) and linear low-density PE (LLDPE) film used by farmers.

How strong will the export trade be this year given persistent, and perhaps worsening, economic problems in the West?

And even if export orders are good, what about power-supply problems that could prevent manufacturing plants in China from operating?

The further concern is the strength of the domestic economy as the struggle against inflation continues.

"You are incredibly bearish," a chemicals analyst told us last week.

True, but if anybody out there could give us some good news we would love to report it.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

Is the International Energy Agency (IEA) being extremely bullish in predicting a 'golden age' for natural gas over the next 25 years?

In a recently released report (available here) the IEA forecasts a 55% growth in global demand to 5.1 trillion cubic metre (tcm) in 2035 driven mainly by China, India and also the Middle East. The share of natural gas in the global energy mix is expected to rise to 25%, from the current 21%, during the same period pushing coal's share down to 22%.

Where will the gas come from? Eastern Europe led by Russia is expected to remain the largest supplier followed by the Middle East and North America.

The agency is confident that production in the Middle East, despite political issues in Iran and Iraq, and a gas moratorium in Qatar, will more than double by 2035. But it admits that "an important factor influencing new gas development in the region will be whether domestic gas prices are permitted to rise to a level that stimulates investment".

This is crucial as new reserves, which are not associated with crude oil, are likely to be more expensive to develop.

Interestingly, the IEA also expects China to tap unconventional sources of gas such as coal bed methane (CBM) and shale gas to emerge as a major producer pumping out nearly 300 billion cubic metres (bcm) in 2035, up from 80bcm in 2008.

But the country will still remain a large importer as local production is likely to meet only half of domestic demand which is expected to match that of the entire European Union in 2035.

There are probably not too many questions on the projected demand growth for especially for power generation after Japan's nuclear crisis. The power sector is expected to remain the largest consumer accounting for 24% of total gas demand in 2035.

But perhaps the IEA's predictions on the rise of unconventional sources of gas, which it describes as "key to expanding the long-term role of as in global enery mix" are a little premature. The agency expects the share of unconventional sources to rise to 24% in 2035 from 12% in 2008.

"We project the share of shale gas in global gas production reaches 11% in 2035 while that of CBM reaches 7% and tight gas 6%. Unconventional gas production is currently concentrated in the US and Canada. By the end of the Outlook period, unconventional gas also reaches a significant scale in China (CBM and shale), Russia (tight gas), India (shale) and Australia (CBM)," says the IEA.

The agency is also confident that gas from unconventional sources can be produced at costs similar to those in North America ($3-7/mmbtu). This is debatable as costs are likely to be higher in some location which will have major implications on projected production volumes.

Also the shale gas revolution has yet to take root outside the US. China has only recently opened its doors while in India exploration has yet to start.

The IEA acknowledges the environmental issues surrounding the fracking technique used to get to shale gas but expects these to be resolved once regulatory frameworks are set up.

However, as reported by the blog earlier, the concerns are getting louder and some European countries like France have already taken action to place restricting shale gas drilling.

The world, including the petrochemicals industry, certainly needs more unconventional gas but gaining public acceptance is unlikely to be easy.

By Malini Hariharan

Saudi Arabia's growing oil demand is rapidly becoming a matter of concern for the country's planners. A new report forecasts that the Kingdom could fail to meet domestic demand in 2030 if current consumption trends are maintained.

Saudi Arabia, the world's largest crude oil exporter, is already consuming a third of its output and has one of the highest per capita consumption levels. And demand is projected to grow rapidly in the coming years especially from the power sector which is expected to expand at 7-8% annually for the next ten years.

How the government responds to this challenge has implications for the rest of the world and also extends to the petrochemicals industry.

The efforts so far are focused on boosting crude oil production and investing in alternatives such as solar and nuclear power which would free up oil for lucrative exports.

Plans have already been made to build 16 nuclear reactors over the next 20 years at a cost of more than $300bn and nuclear power is projected to meet 20% of the Kingdom's power needs.

The Saudi oil minister Ali-al-Naimi has very confidently stated that the country has the potential to produce enough solar power by 2020 to meet more than four times global demand.

And the government's seriousness to promote this alternative is source is evident in Saudi Aramco's decision to form a joint venture with Saudi Electric Co and Show Shell Sekiyu to develop a 500kw solar plant on Farasan Island.

But going solar or nuclear will only partly solve the problem. The Saudi government spends nearly $13bn a year to subsidize power and water consumption for citizens.

The bigger challenge will be to manage demand growth by raising domestic prices of electricity and gasoline to international levels- a sensitive task given the social unrest that the Middle East and Arab world has been seeing.

By John Richardson

THE reluctance of sell-side chemicals analysts to downgrade their forecasts should be severely tested by the Federal Reserve's decision to downgrade its outlook for the US economy.

US GDP growth will now be only 2.7-2.9% in 2011 compared with the April estimate of 3.1% to 3.3%, Fed chairman Ben Bernanke told a press conference yesterday.

Even if GDP only comes in at this lower range it would still represent a second-half bounce: First-half growth is only expected to be around 2%, said investment newsletter Barrons.

One can therefore see a positive spin being put on a "recovery". Temporary factors that have hurt growth in H1 - disruptions to industrial production caused by the Japanese earthquake, bad weather in the US and very-high gasoline prices - should recede in the second half.

So the sell-siders might stick religiously to their belief that all is well with the world - and that we are still heading for a chemicals Supercycle.

Further support for their argument could be provided by a quite likely rebound in petrochemical pricing in China, as the peak manufacturing season kicks-in.

The extent of a rebound would need to be measured against what happened last year, when we were in the midst of a strong recovery from the 2008 global financial crisis.

A recovery might also be the result of lower operating rates.

Production cuts have already taken place in Asia in response to a five-month lull in markets. Some Asian crackers are running at below 90% in June compared with more than 90% in May, said ICIS pricing late last week. Linear-low density (LLDPE) and high-density (HDPE) plants in Southeast Asia were on the verge of being closed-down because of poor margins, the blog was told two weeks ago.

There is a chance that no such pricing recovery will occur if higher Saudi Arabian crude output leads to the country raising petrochemicals production.

A further thought: If prices do stage a mini-rally despite Saudi Arabia increasing output, this might indicate very-deep rate cuts and plant closures among higher-cost Asian producers. What would this mean for the financial results, and therefore the equity values, of these higher-cost players in Taiwan, South Korea and Thailand?

But the bulls could still get their way in the second half, perhaps convincing a few banks to finance questionable additions to petrochemicals capacity. Project activity is ramping-up in anticipation of the next peak in the cycle, forecast for 2015-16.

Close attention should also be paid to other projections made by the Fed yesterday.

US GDP growth in 2012 would be between 3.3-3.7% as against the April forecast of 3.5-4.2%, Bernanke added.

More telling, perhaps, though, was the revision in the outlook for US unemployment to 8.6-8.9% in the fourth of this year, up from 8.4-8.7%.

Unemployment will be at 7.8-8.2% in Q4 2012 compared with the earlier expectation of 7.6-7.9%, said Bernanke.

A nice spin could again be placed on all of these numbers as they would still be down from the rate in May this year - 9.1%.

But Bernanke admitted: "Some of the headwinds that have been concerning us, like the weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, may be stronger and more persistent than we thought."

You betcha - and so what are the odds on further downward revisions by the Fed over the next few months?

The blog maintains, as we discuss in our e-book and our New Normal seminars, that the headwinds Bernanke is talking about are being driven by long-term changes in demographics. We need to get used to new patterns of demand.

By John Richardson

CHEMICALS and polymer demand looks even less likely to be supported by "buying forward" following yesterday's decision by the International Energy Agency (IEA) to release 60m barrels of crude into the market.

Here is a bit of context first before we look at the implications of the IEA decision, which, along the way, will help explain why it was taken.

From the fourth quarter of last year until around February 2011, chemicals and plastics end-users built raw-material inventory in anticipation that oil prices would keep-on rising. No purchasing manager who cared about his or her job was willing to bet against the consensus that crude would go higher.

But as we've discussed before on the blog, building stocks in this way is always a risky proposition because of lack of visibility down all the production chains.

It is never clear at what stage demand destruction will begin, and how serious the loss of demand is going to be, as there is a lack of regularly updated and reliable information on how more-expensive crude is affecting retail sales.

We have been warning for a long time that the underlying macroeconomic fundamentals are a lot weaker than during the last big crude bull-run - which ended in September 2008. The global economic crisis of late 2008 has left behind "strong headwinds" detailed by Fed Chairman Ben Bernanke earlier this week.

Warning signs should therefore have been flashing red when US gasoline prices  rose above their previous pre-crisis peak in March this year.

The impact of rising crude on emerging markets was also evident in early 2011 as inflation rates climbed.

Criticism is easy, though, when you are commentator rather than a participator. If all your competitors are buying forward and your managers are placing you under pressure to follow the trend, it is very hard to just say no.

A large European polypropylene (PP) buyer told ICIS news last week: "I am not buying a lot, just one or two trucks at a time. I kept a high stock level when prices were going up, so now I am using that up. Why would I buy now when I know prices will be lower in July?"

This hand-to-mouth buying pattern, which has also been the case in Asia since the end of the Chinese New Year (CNY) in late February, was a response to the already-existing uncertainty over the direction of crude and economic growth.

The IEA announcement should, perhaps, have been predicted because of the damage being caused by expensive oil.

But the release of the strategic stockpile seems to have made the outlook for crude even-more murky because:

1.) It could annoy OPEC into cutting quotas in order to fund higher social costs. The costs have risen as a result of the Arab Spring
2.) Can OPEC collectively, though, wield that much influence? Saudi Arabia is the only player who probably really matters within OPEC as it is the world's biggest swing producer. Saudi Arabia unilaterally decided to raise output earlier this month after OPEC failed to agree-on an increase in overall quotas. The release of the IEA stock-pile might be just a temporary measure until extra Saudi production calms the market, IEA Executive Director Nubuo Tanaka seems to have hinted in the Wall Street Journal article we linked-to in bullet-point one
3.) The IEA announcement was the reason given in many press reports for yesterday's steep fall in crude-oil prices. August Brent was, for instance, down by 6.1% at $107.26. But there were reportedly lots of other factors behind the slide in oil, including WEAKER GROWTH IN CHINA AND EUROPE, THE GREEK CRISIS AND THE POLITICAL IMPASSE OVER RAISING THE US BUDGET DEFICIT
4.) Goldman Sachs, interestingly, believes that the IEA decision alone could cut Brent crude by $10-12 a barrel. If financial players change their strategies will this play a big role in pushing oil below $80 a barrel by December - one of the forecasts we read yesterday?

It has been quite a week during which, we think, the chemicals industry and the global economy have gone beyond important turning points.

Hopefully, our coverage has helped. This is the kind of thinking we also provide - in more detail and with workshops - during our ICIS/International eChemNew Normal seminars.

The next event takes place in Houston in October.

By John Richardson

THE dreadful state of European polyolefin markets became even more evident late last week as prices continued their declines.

Discussions on further reductions in European olefin contract prices were also set to begin today.

High density polyethylene (HDPE) and linear low-density polyethylene (LLDPE) spot prices have now fallen by Euros80-150/tonne in June, according to our colleagues at ICIS pricing.

Low density PE (LDPE) became far-too unaffordable because of limited supply and unexpectedly strong demand in certain end-use segments. Spot prices fell by Euros100/tonne last week.

Producers had been hoping to limit June PE contract price declines over May to Euros45-60/tonne, which at the lower end would have been in line with the Euros45/tonne drop in ethylene contracts for the same month.

But the PE contracts settled Euros50-80/tonne lower, said ICIS pricing.

Some polypropylene (PP) June contracts were agreed at Euros80/tonne lower than in May, double the Euros40/tonne fall in the June propylene contract.

The global demand outlook is back to what one industry commentator described over the weekend as "late 2008 recession levels'.

Not surprisingly, therefore, as discussions begin today for the July ethylene and propylene contracts, further reductions are being expected by ICIS pricing.

Talk for ethylene is expected to focus on declines of Euros80-120/tonne.

The majority of propylene players are anticipating falls of Euros50-70/tonne. However, a couple of players said Euros100/tonne was possible.

"Margins are still historically very good and so cracker producers would still make a workable margin if they made significant reductions," a second commentator told the blog last week.

This was confirmed by the latest-available ICIS pricing Weekly European Ethylene Margin Report, which is for 17 June (the 24 June report is published later today).

As of 17 June, for example, naphtha-feed ethylene contract margins were at an average of Euros450/tonne for the year-to-date in 2011.

This compared with Euros354/tonne for the full-year 2010 and Euros228/tonne in 2009.

Improving margins are a result of production being well-managed against demand, naphtha feedstock shortages and a high number of force majeures.

"There is an old school of thought that decreases in monomer prices can make the situation worse," our second industry commentator continued.

"What is on everyone's minds is whether the Europeans will do enough to align their domestic markets with what is happening globally."

European olefin and polyolefin producers were clinging-on the hope - vain in our opinion - that weakness in China was only the result of destocking, the source added.

China's PE demand was down by 4% in January-May this year to 7.1m tonnes over the same period in 2010, according to this post from the ICIS Chemicals & The Economy blog.

European net exports to China halved over the same period to 71,000 tonnes as China also raised its own production and the Middle East took market share, added the post.

Higher Saudi PE production seems inevitable as a result of the Kingdom's decision to raise crude-oil output.

This will put more pressure on Europe - not only in the China export market, but also in other export markets as Saudi Arabia struggles to sell this extra output to China.

The blog believes that the China market is not going to stage a major recovery until the battle against inflation is won.

Despite China's Prime Minister Wen Jiabao declaring victory over inflation last Friday, the cost of living might get worse before it gets better. This would mean more interest-rate rises and further credit-tightening.

The outlook for crude is at best uncertain, and quite probably bearish, on higher Saudi output, last Thursday's decision by the International Energy Agency (IEA) to release some of its reserves, and the weak global economic outlook.

"Buying forward" is therefore unlikely to provide any support for chemical and polymer markets in general.

Perhaps the single-biggest risk to the global economy is Greece.

The Economist wrote in its 18 June issue that "dangerous political brinkmanship" over resolving the Greek crisis was affecting corporate spending.

"Companies are currently sitting on piles of cash because they are wondering how strong economic growth will be," added the magazine.

"Politics gives them more reason to sit on their hands rather than investing and hiring immediately, providing a boost the world economy sorely needs."

A Greek debt default seems inevitable with only its timing in question.

The consequences of such a default, according to this article from the UK's Daily Telegraph, would include:

1.) Every bank in Greece becoming instantly insolvent
2.) Greece walking away from the Euro and relaunching the Drachma at an exchange rate 30-70% lower than the Euro
3.) Insolvency at the European Central Bank

This further post from Chemicals & The Economy blog details the extent of liabilities of other European banks to Greece and what a default could therefore mean for the wider EU economy.

A petrochemicals Supercycle? You must be kidding.

By John Richardson

ANYONE clinging on to the hope that the weakness in the global polyolefin market is merely down to China going through a prolonged period of destocking could face a rude awakening.

China's polyethylene (PE) demand was down 4% in January-May this year, at 7.1m tonnes, compared with the same period in 2010.

Imports fell by 12% to 3m tonnes as exports doubled to 240,000 tonnes.

The surge in exports was the result of re-exports by traders who had shipped to China, only to find they were unable to sell and had to therefore move the cargoes elsewhere.

European, North American and northeast Asian producers lost market share in China to the Middle East and higher local production, he said.

The drop in demand feels nothing short of shocking when measured against forecasts of full-year 2011 growth at close to or above 10%.

"This is not destocking, as we have been arguing since March," said a senior source with a global polyolefin producer. "This is a significant correction that the industry is going to have to get used to."

A US-based chemicals analyst said: "We keep being told [by Wall Street] that the inventory rundown process in China will end next week."

China was first supposed to rebound in May, then in early June, mid-June, end-June, early July and now late July, as we pointed out last week.

Higher interest rates and tightening credit in China - along with the bearish outlook for the global economy - have had a big effect.

The Federal Reserve added to US macroeconomic concerns last week when it revised down GDP growth expectations and raised unemployment forecasts.

Greece is a huge concern, not just for China but globally.

As The Economist magazine wrote in its 18 June issue, referring to the failure to resolve the Greek crisis: "Companies are currently sitting on piles of cash because they are wondering how strong economic growth will be.

"Politics gives them more reason to sit on their hands rather than investing and hiring immediately, providing a boost the world economy sorely needs."

A Greek debt default is widely viewed as inevitable, with the only question being the timing.

 Economists have warned of consequences including insolvency of Greek banks, the re-launch of the drachma - and perhaps even the collapse of the euro as a whole due to widespread contagion.

Crude oil prices took an inevitable hit from the International Energy Agency's decision last Thursday to release 60m barrels of its reserves.

The declines were also attributed to greater macroeconomic pessimism.

"Buying forward" supported chemical and polymer pricing and volumes in general from the fourth quarter of 2010 until late February 2011.

Crude was on a bull run during that period, with confidence in China and the rest of the global economy very high.

Would any purchasing manager who values his or her career take the risk to stock-build in the current climate?

China led global polyolefin pricing upwards from the second quarter of 2009 until early 2011.

The country sucked in every spare plastic pellet, helping to keep US and European markets healthy - thanks to the biggest economic stimulus package in history.

Now China is suffering from a side effect of that package: inflation at well above Beijing's target rate of 4%, the observers added.

Prime Minister Wen Jiabao declared victory in the battle against inflation last Friday.
But it could take several more months, perhaps quarters, before any such victory is achieved.

Inflation, which was at a 34-month high of 5.5% in May, will rise to 6% in June, according to some economists.

And so further interest-rate rises and credit-tightening measures could well be on the cards.

This was the expectation in Asian polyolefin markets late last week, where prices continued to decline and buying interest remained depressed. PE prices were down by a further $20-80/tonne and polypropylene (PP) by another $20-70/tonne, according to ICIS pricing. Asian pricing has now been either flat or falling since the end of the Chinese New Year in late February.

China is again leading global pricing, but this time on the way down. Prices across all regions are slipping as they reflect what is happening in the world's most important market.

European low density polyethylene (LDPE) spot prices fell by Euros100/tonne last week, with linear low density polyethylene (LLDPE) and high density polyethylene (HDPE) also down.

Some moderate good news emerged earlier this week, however.

An initial European propylene contract price for July has settled at Euros1,130/tonne ($1,614/tonne), down Eurs75/tonne from June, a major producer said on Tuesday.

An initial European ethylene contract for July has been agreed at Euros1,090/tonne ($1,535/tonne), down Euro95/tonne, a major producer said on Monday.

More substantial decreases had been expected. We shall dig-around in an attempt to find out why the market held-up better than people had expected.

Spot offers for some grades of US PE emerged late last week that were 19% lower than May contract settlements. This was the result of falling feedstock costs and pressure from overseas imports.

Sell-side chemical analysts have remained persistently bullish in the face of the mounting negative news, the US-based chemicals analyst added.

Some chemical companies are also continuing to talk about recent setbacks being only temporary.

The longer that this goes on, the harder it will be to remain optimistic and to refer credibly to difficult market conditions as temporary.

If global GDP growth estimates keep on being revised down, what might this mean for the chemicals Supercycle theory?

By Malini Hariharan

The impending oversupply in purified terephthalic acid (PTA) and likely problems in securing feedstock paraxylene (PX) does not seem to have dampened enthusiasm for new investments,

Around 10m tonnes of PTA capacity is expected to come on stream from the third quarter of 2011 to late 2012, while another 12.9m tonnes of capacity is due to start during 2013-15, according to a recent estimate by ICIS.

China is of course leading the way with nearly 7m tonnes of new PTA capacities due in 2012. By the end of that year, Chinese PTA capacity would total to 32m tonnes/year as against a demand forecast of 23m tonnes. This could result in Chinese PTA exports provided new plants are able to source sufficient PX as capacity additions for the feedstock are taking place at a slower pace.

PX is likely to remain short in Asia until 2013 when five new plants are due to start. But the respite could be shortlived as new PTA projects are once again being lined up post 2013.

The recent entrants to a long list of companies planning new plants includes Ningbo Mitsubishi Chemical which is mulling a 1m tonne/year facility at Ningbo, China. The company has yet to set a start-up date.

Thailand's Indorama Ventures is also studying PTA projects in the Middle East and India, the company's chief executive said recently. These are part of the company's plans to raise its global production capacity, for PTA, polyethylene terphthalate (PET) and fibers, to at least 10m tonnes/year by 2014, from approximately 5.5m tonnes/year today.

Indorama has yet to disclose the location of its proposed Middle East facility but it could be Saudi Arabia where attempts are being made to draw in PTA investments that would offtake PX from a new refinery.

Lotte Pakistan is planning to triple its PTA capacity to 1.5m tonnes/year by late 2014 while Indian major Reliance Industries is working on two new PTA plants with a total capacity of 2.2m tonnes/year for start up in 2013-14. A third plant is also likely although details have yet to be firmed up.

At an industry conference earlier this week, a Saudi Aramco executive confirmed plans for a PTA plant at Al-Jubail based on 700,000 tonnes/year of PX supplied for the new Sartorp refinery. The refinery, a joint venture between Aramco and Total, is due to start operations in H2 2013.

"We've had two players coming forward previously but the negotiations have stopped. We are still looking for people to invest in the PTA unit," said the official, who did not disclose the names of the parties.

Oman and Kuwait, which currently export PX, are also interested in venturing downstream.

India's JBF had announced last year plans for a 1.2m tonnes/year joint-venture PTA plant with Oman Oil in Oman with PX to be supplied by Aromatics Oman. However, the blog understands that JBF has abandoned Oman and is now looking at building a plant in India.

This is likely to be a temporary setback for the Oman Oil which recently integrated its three subsidiaries Aromatics Oman, Oman Polypropylene and Oman Refineries and Petrochemicals into Oman Oil Refineries and Petroleum Industries Co (Orpic). The newly structured Orpic should be in a better position to pursue a PTA project on its own.

The investment wave is no doubt being driven by optimistic projections for polyester and PET and many of the projects probably have sound economics. But the risk of overinvestment needs to be carefully assessed.

By Malini Hariharan

The fight against anti-dumping duties (ADD) imposed by India on polypropylene (PP) exported by Saudi Arabia, Singapore and Oman is not yet over.

Some of the major companies that face ADD have taken the matter to the Indian Customs, Excise and Service Tax Appellate Tribunal and the issue is due to come up for hearing later this month.

Among the producers affected by the ADD are Singapore-based ExxonMobil Chemical Asia Pacific, Saudi Yanbu Petrochemical Company, an affiliate of Sabic, and Saudi Polyolefins Company.

Regular readers of the blog will remember that final ADD was imposed on product from the three countries was imposed last year despite strong protests from exporters.

The duties came after local producers led by Indian major Reliance Industries complained about the heavy influx of product during April-December 2008.

India's commerce ministry subsequently ruled in favour of the domestic producers and further said that the Saudi formula for pricing propane, feedstock for PP, gives Saudi producers an 'unfair advantage' over other international producers. More than the duties the India's reading of the Kingdom propane discount structure become a matter of concern for the Saudis as they run the risk of similar cases being filed by other countries.

This is the first time that the Saudi price formula for propane and butane, which is linked to naphtha and gives local buyers a discount of around 30% on the Japan CFR (cost and freight) naphtha price, has been termed as unfair by another country.

Saudi Arabia later threatened to take the issue to the World Trade Organization (WTO) but has yet to do so. It has instead been exerting maximum political pressure to ensure that India withdraws the duties. Delegations have been visiting Delhi and the Saudi ambassador to India recently said that the ADD issue is likely to be discussed at a high-level meeting due later this year unless it is resolved quickly. "It will be on the top the meeting's agenda," he said.

The Indian government has withstood Saudi pressure quite well so far. But it is uncertain if it can continue to do is given Saudi Arabia's position as a major supplier of crude oil to the country.

A source familiar with developments told the blog that India's oil ministry is now involved in the case and will be paying close attention to see that the issue does not create problems in oil supplies.

"They [Saudis] are expecting the duties to be removed; they are confident," the source added.

By John Richardson

RISING oil production in Saudi Arabia has resulted in bigger volumes of polyethylene (PE) being delivered into Asia-Pacific markets, a source with a major plastics processor told the blog late last week.

"Saudi Arabia has definitely, in my view, already raised PE production on more availability of associated gas. I am seeing more volumes in our local market," he said.

Clear evidence emerged last week that Saudi crude production has been on the up for at least two months.

Estimates for June production range from 9.4m barrels a day to 9.8m barrels a day, up from around 9m barrels a day in May.

Crucially, the International Energy Agency believes that Saudi Arabia has continued to raise production in July, possibly already reaching 10m barrels a day. This would, in theory, enable the country to once again run its crackers at 100% due to the greater availability of associated gas.

Saudi Arabia is producing more oil in order to pay for higher social costs following the Arab Spring. Another reason is concern over the effect of high crude prices on the global economy.

Polyolefin prices continued to rise last week - the second week in a row of increases. For example, PE rose on a delivered basis by $20-50/tonne in Northeast and Southeast Asia, according to ICIS pricing.

But with Middle East offers for August material expected to emerge in the third week of July, the big question remains whether the price recovery will be sustained.

Not only is supply not necessarily as tight as traders have argued due to the suspected increase in Saudi production, but also the macro-economic climate in China and elsewhere is getting worse.

The uptick in both prices and volumes over the last few weeks has mainly been attributed to traders re-entering the market on the perception that prices had bottomed.

Doubts are being expressed about how much of these volumes have been passed-on to end-users who remain very nervous about the risks ahead.

By Malini Hariharan

CEOs of Asian petrochemical companies worried about rising feedstock costs, a weak economic outlook and profitability should have been reassured to read over the weekend that even Mohammed Al-Mady, vice-chairman and CEO of Sabic is having sleepless nights.

His chief concern is keeping Sabic's record profits at record levels.

Sabic churned out a net profit Saudi riyal (SR) 8.1bn ($2.16bn) on sales of SR13.2bn in the second quarter of this year beating analyst expectations. Net profit was up 61% while sales rose by 45.3%

"What keeps me awake at night is keeping the successes we have. This is about the 8.1 billion riyals ... How long can we sustain this? It is challenging," Al-Mady said after declaring the bumper results.

Success in the last quarter has mainly been a result of increase in production and sales volume as well higher sales prices for most of its products compared with Q2 2010.

Production volumes are set to grow if Saudi Kayan quickly achieves commercial production. Al-Mady indicated that this was likely to take place only in second half of the year, delayed from the earlier target of H1. But given an uncertain demand outlook, especially in the key China market, placing additional volumes at the best possible price is going to be a challenge.

Al-Mady is of course hoping that crude oil continues to stay firm. In his view today's price range is "quite good for everybody" although some of his Asian counterparts squeezed by high feedstock costs may not entirlely agree.

But Al-Mady's challenge extends beyond the short-term as he has to figure a way to keep Sabic on the winning track. New projects will certainly help and Sabic has 14 of them lined up during 2012-15 including a $1bn expansion at its joint venture with Sinopec in China.

India continues to be on the radar.

"India is a huge market, the (Indian) government is thinking of attracting new investments and SABIC is looking at investments in India -- if there are any good investments in petrochemicals there, products from refineries," said Al-Maady.

But as projects take time to materialize a quicker route to growth will be through acquisitions and Al-Mady is, as always, open to the idea. The issue now is finding the right asset at the right price.

By John Richardson

EUROPEAN polyolefin markets are at one of those fascinating tipping points following the recent price recovery.

Ethylene spot prices rebounded late last week with July sales much better than those in June, wrote Nel Weddle, European ICIS pricing olefins editor, in this report.

Propylene, however, remained under pressure because of a long market.

The same pattern was reflected downstream where polyethylene (PE) spot pricing had strengthened while polypropylene (PP) remained under downward pressure because it was perceived as still too expensive.

But in both ethylene and PE the rapid change in the European mood was such that reductions in August contracts were no longer the only option under discussion; rollovers or even increases were being mentioned.

In Asia, the recovery seems a little less clear cut. Traders, producers and buyers keep mentioning one word over and over again - "affordability".

They agree with a HSBC assessment, published in a report released last month, that in inflation-adjusted terms PE, PP and polyvinyl chloride (PVC) prices were the highest that they had ever been in March 2011.

That month marked the end of a clear upward direction in crude, reducing the incentive of resin buyers in China to "buy forward".

March and every month since then has also seen further monetary tightening as China attempts to bring inflation below 4%. This has placed a great deal of pressure on the small -and medium-sized enterprises (SMEs) that make up the bulk of the country's resin buyers.

So the worry is that if prices go up by too much too quickly - before the battle against inflation has been won, enabling Beijing to result to relax monetary conditions - there will be a kickback from the converters.

Another big worry is that crude, buoyed by greater stock market confidence, might enter a new mini bull-run.

"Some of the less well-integrated Asian cracker operators would then face either stomaching weaker margins or attempting to pass-through prices that might well not be acceptable to the buyers," said a source with one major producer.

This would be a familiar problem, according to a report released by Nexant ChemSystems late last week.

"(The) average profitability of the South Korean industry (in the second quarter) fell to a six quarter low," wrote the petrochemicals consultancy.

It attributed this to rising naphtha costs and weak polyolefin exports to China.

One trader repeated his earlier comment that a lot of resin remained in the hands of the traders.

"The improvement in Asian pricing over the last two weeks is mainly down to the traders acquiring volumes. If the buyers do suddenly come back in big numbers, then whoosh - pricing could really take off."

But, of course, the other possibility is that the traders end up getting burnt.

As for supply, the blog is still struggling to get a definitive answer on whether higher Saudi crude production has resulted in more polyolefin output. This would be the result of greater availability of associated gas.

Contradicting the plastics converter we quoted earlier in the week, our trader source said: "I am not seeing bigger volumes coming out of Saudi. Several grades remain tight."

A Middle East-based chemicals analyst, however, said that the Q2 financial results released by Yansab, the SABIC subsidiary, showed its production had increased. Two and two makes four or five?

"Parent company SABIC's volumes were also up in the second quarter, but this might have been to do with greater overseas output," he said.

One obvious explanation for tightness in PP is reports of mechanical problems at two Saudi facilities. This has taken 1.1m tonnes of annualised capacity out of the market, if the reports are accurate.

By Malini Hariharan

Dow Chemical appears to be ready to take a final decision on its huge cracker and derivatives joint venture with Saudi Aramco in Al Jubail, Saudi Arabia.

Media reports in the last two days indicate that the $18-20bn project, first announced in 2007, has moved forward with a final decision likely to be announced in the next few weeks.

Contractors have been shortlisted. According to one report, South Korea's Daelim Industrial has been selected as the engineering, procurement and construction (EPC) contractor for the multi-feed cracker while Fluor Corp has been selected for utilities.

Dow or Aramco did not confirm these reports. But the timing seems right as Dow's CEO Andrew Liveris had said earlier this year that the project, which was initially planned at Ras Tanura, would move to the final approval stage in July. Front-end engineering and design work was also expected to be completed in mid-2011.

Both companies have yet to confirm the product slate and start-up dates.

Dow has lined up an impressive list of projects for execution over the next 5-10 years. Besides the Saudi joint venture, it is also has plans for a cracker and two propane dehydrogenation (PDH) plants in the US and then there is coal-based joint venture with Shehua in China. Will it proceed with all or is time to make a choice?

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The question, of course, is how much longer.

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

By Nigel Davis and John Richardson

On the financial markets it depends when investors feel confident enough to step back into shares. An analyst on Tuesday asked who would be willing to catch a falling knife?

But there are already indications of a mini-rally following the slump on global markets of the past week. Stock market indices in Europe moved higher on Tuesday and the Dow opened up on the Monday close. Chemicals stock prices rallied following steep falls.

But in this latest downturn, it has not been so much the magnitude of the slump on stock exchanges globally that has caught the attention but the speed of the fall.

The downgrade of US sovereign debt by Standard & Poor's triggered the latest turn down in stock and commodity markets, alongside the on-going struggle with the eurozone debt crisis.

The fundamentals behind the painfully slow recovery from the 2008-2009 crisis have been clear for a long time. High stock and commodity prices, particularly the price of oil, have built largely on the assumption that times are a lot better than they were.

No-one likes a bad story so no-one listens. But when the news is particularly bad, they sit up and take notice.

Fiscal stimulus underpinned market growth in 2009 and 2010 and, the removal of this underpinning of demand growth has begun to bite.

Consumers and companies react by spending less. Government cutbacks put the brakes on economies with little or no forward momentum in the first place.

Clearly, the chemical industry has benefited greatly from the money pumped into the US, European and China economies. It is one of the first to react to stronger industrial demand.

By the same token, it should be one of the first respond to falls in physical market demand and to lower commodity (feedstock) prices.

Chemical markets in Europe and the US have been weakening since late in the second quarter. That became widely apparent as producers reported on a strong period but one which demonstrated the first signs of weakness for some time.

China's important polyolefins markets had been weak since April and the impact was beginning to show. At the time the weakness in these markets was traded off to some extent by improving fundamentals in the US and in Europe.

But the extreme stock and commodity market nervousness of recent days has highlighted the uncertainty that overshadows both the US and other major world economies. The US is pulling out of the 2008-2009 recession but only slowly and could well dip back. Germany's encouragingly strong industrial growth in recent quarters was driven by exports - largely to the rest of Europe. As those exports weaken so the gloss is taken off the industrial giant which is so important to the well-being of the European chemicals sector.

In chemicals all eyes must turn to China, a country which has provided so much of the growth for the industry since 2009.

A key question is whether China can or, indeed, wants to, stimulate the economy the way it did in 2008 and 2009. Inflation hit a three-year high in July, and bad debts are rising, so this looks difficult.

For weeks now there has been a recovery in petrochemical prices in Asia as local manufacturers gear up to feed products into a Christmas season market in the West.

Asian markets are also being supported by tight supply in polyolefins as a result of scheduled maintenance work and mechanical problems at plants in Saudi Arabia and Taiwan.

But as of yesterday, confidence had evaporated. Traders were nervously eyeing their inventory levels as buyers hung around on the sidelines waiting to see when prices might bottom.

And given very weak consumer sentiment in Asia, it is hard to envisage a very strong peak manufacturing season.

The fact that producers and traders in Asia are now talking about when prices might bottom is a big change. Only a week ago they were talking about how much further they would be able to increase prices.

This new bottom in the market is likely to set by where oil prices settle.

By John Richardson

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

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

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

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

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

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

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

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

Denial continues in some quarters.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

A CAREFUL reading of all the major ICIS pricing reports covering olefins, polyolefins, aromatics and their derivatives over the last few weeks reveals very few mentions of the phrase "peak demand season".

This time last year, the reports were full of references to the seasonal surge in production of finished goods in China in time for the Thanksgiving and Christmas sales seasons in the West.

The reason is obvious: In comparative terms, this year's peak demand season has been exceptionally weak and therefore hardly worth discussing at all. 

"The container-shipping industry is contending with the longest stretch of near-zero rates in its half-century history on the Asia-to-Europe route, as a capacity glut combines with the slowest growth in trade since 2009," wrote Bloomberg in this article published last week.

"Commerce on the world's second-busiest container route rose 4.2 percent in the second quarter, the weakest since the end of 2009, Woking, England-based Container Trade Statistics Ltd. estimates."

It is a similar story on the Asia-US route, of course, due to all the macro-economic problems.

In polyolefins, what seems amazing at first glance is why pricing has held up so well.

Polyethylene (PE) and polypropylene (PP) were each, for example, only assessed $10-20/tonne lower last week. As the graph below shows (click on the link), pricing has remained pretty stable in the face of what is clearly a new global recession.

AsiaPEpricingSept52011.ppt

There are two reasons for this, which are:

1.) Olefin and polyolefin supply losses in Q3 have been huge - as this slide from our latest ICIS Worldwide Ethylene Plant Report illustrates - click here: AsiaEthyleneCapacityLossSept2011.ppt. Several scheduled turnarounds in Asia are now, however, coming to an end and some technical problems look as if they are close to being resolved. For instance, Formosa Petrochemical Corp hopes to restart its 700,000 tonne/year No1 cracker at Mailiao in Taiwan during the first half of this month

2.) The oil price has yet to free-fall. But the blog agrees with Paul Hodges, UK-based chemicals consultant, when says: "I used to think that prices would eventually stall and then re-stablise at around $60 a barrel, and this is still my base case. But I think the damage that has been done to demand by high oil prices may be so great - in combination with the other economic problems emerging around the world - that we may end up back at $25 a barrel."

We are heading for some very difficult times. 

Although the fourth quarter might be too soon for the major correction that we believe will eventually happen in crude oil, petrochemicals supply is set to lengthen not only in the olefins chain but also in paraxylene (PX) and styrene monomer.

Strong support from demand seems unlikely as the "peak demand season" is over, Q4 is traditionally a little quieter and the uncertain economic outlook is resulting in a lot of risk-aversion.

Another factor to consider when making your market-assessments for the rest of this year is  China's decision late last month to change how bank-reserve requirements are calculated.

"This is already making trade finance a lot harder to obtain," a Singapore-based polyolefins trader told us late last week.

The policy involves banks being forced to include "margin deposits", or collateral deposited by customers for letters of credit and other guarantees, in calculating the share of deposits they must put aside for reserves, according to the Wall Street Journal.

The move would "seriously cut off" traders' access to short-term credit, affecting 50-60 per cent of China's commodity traders, Henry Liu, head of commodities research at Mirae Asset Securities, was quoted as saying in the same newspaper.

Small and medium-sized enterprises were already struggling to obtain credit because of previous attempts by China to tackle inflation.

The West has looked to Asia to support growth since late 2008, but now the prospects for growth everywhere look bad.

A case in point is the PE market.

"The overriding sentiment in the European PE market this week is one of uncertainty over demand in the coming weeks," wrote our European polyolefins editor Linda Naylor in her latest report, published last Friday.

"Few doubt that Asia will continue to soak up volumes and many players look to Asia for direction in the mid-to-long term."

The Singapore-located trader we quoted above, however, also told us: "Traders are now looking to re-export Middle East from China to Europe because they have overestimated the strength of demand in China."

By John Richardson

EVERYWHERE you turn it is bad as fear over the future dominates the mood of polyolefin producers and buyers.

Aversion to risk seems to have increased because of the concern that this could be September 2008 all over again. Hand-to-mouth buying is the norm as no purchasing manager who values his or her job wants to be caught on the wrong side of a sudden collapse in crude-oil prices.

Last time around, when Lehman Bros went bust in September 2008 triggering the global financial crisis, governments came to the rescue through economic stimulus.

Markets were also buoyed by frequent technical problems at new Middle East plants during the 2009-2010 recovery. The great supply surge was always going to happen next month, then the month after that and so on and so on. Traders, supported by plenty of easy financing in China, were all-too happy to "help out" buyers who suddenly found themselves short of material.

Austerity is now a widespread policy in Europe with doubts over the extent to which the US will be able to overcome its political divisions and further boost its troubled economy.

Limited help for China's struggling small -and medium-sized enterprises (SMEs) has been announced in certain areas of the country over the last two weeks. The central government has also indicated that it might introduce nationwide measures to help the credit-starved SMEs, which make up the bulk of China's chemicals and polymer buyers - and which account for more than 50 per cent of economic output.

But the battle against inflation - the reason why credit conditions have got worse for the SMEs - looks very likely to stretch into next year. This would mean no great improvement in overall tight lending conditions that have badly dented China's chemicals trade throughout 2011.

"We were all taken a bit by surprise by the August inflation number at 6.2%. We had expected it to fall to 5.9 %, but it looks as if underlying inflationary pressure is stronger than we thought," said a sales and marketing executive with a major polyolefin producer.

"And so we don't expect any positive changes in the liquidity situation in China this year and probably well into 2012."

Beijing is struggling to deal with the harmful impact of its huge 2008 economic stimulus, which includes not only higher inflation but also a steep rise in non-performing loans due to over-investment real estate and other sectors, warn economists.

It cannot, therefore, risk a major relaxation in lending conditions - perhaps even if the global economy enters a new recession.

The government also seems to recognises that its investment-driven growth model is no longer sustainable for environmental reasons, hence the decision to end subsidies for auto purchases.

Since the subsidies were removed last December, auto sales have increased by just 5 per cent in January-July 2011. This compares with a 33 per cent increase for the full- year 2010.

"Polypropylene (PP) prices have come under a lot of downward pressure recently," said a Shanghai based sales and marketing executive with a second major polyolefin producer.

"I think a big factor here has to be autos. We are seeing an erosion of premiums for co-polymer grades (used in auto production) over homo-polymers."

High domestic polyethylene (PE) inventory levels, particularly in low-density PE (LDPE), have been weighing heavily on markets, he added.

Warehouses in Iran are also reported to be full of LDPE that is expected to put downward-pressure on prices in China, Europe and South Asia.

"I think LDPE, which had been tight for so long on very-limited global supply, became too-expensive and has suffered from demand destruction," added this second sales and marketing executive.

As for the Middle East supply story, a chemicals analyst believes that many of the production problems that plagued new plants during 2009-2010 have been ironed out.

"Overall petrochemical exports from the port of Dammam in Saudi Arabia are up," he said.

"We have also seen a substantial easing of a shorter-term tightness in PP as a result of less technical problems at three major Saudi plants."

Some 1.5m tonne/year of capacity was affected by difficulties at the plants in July-August, including the 700,000 tonne/year Petro Rabigh facility, according to ICIS news.

Everywhere you turn markets look bad, as we said earlier.

Take Europe as the first example. "PE demand is weak and several producers acknowledge that the only way to bring the market into balance is by cutting production," said the 16 September ICIS pricing European polyolefin report.

Turkey is a market worth monitoring because of its large domestic demand and low levels of production.

In tight markets this results in prices rising very quickly as exporters chase better returns than from domestic sales. But in weak markets the reverse happens as everyone fights for volume.

"European producers are selling at very competitive levels in Turkey followed by the Middle Eastern players who cannot place enough volumes in Asia," said in an industry source in Turkey.

"Co-polymer PP has lost its usual Euros50/tonne premium over homo-polymer grades," he added, which suggests that the problems in the China auto market might be crossing borders.

"The only optimistic point is that trader, distributor and converter inventories are not high. They are at, or are probably a little less, than usual levels."

Another cause for optimism is the food packaging business in China which is booming, according to the first sales and marketing executive we quoted above.

However, he warned: "The reason is that people are eating-in more as they cut back on visits to restaurants. Fear about the future is even affecting the Chinese consumer."

The mood in any market can rapidly change and perhaps such a change is just around the corner in polyolefins.

All that is needed is for Europe to resolve its sovereign debt crisis, the US to overcome its political paralysis and China to calm inflation and successfully redirect its economy away from an over-reliance on investment.

No problem then......

By Malini Hariharan

The gas shortage in the Middle East, especially Saudi Arabia, has been well documented with the situation expected to ease in the longer term once investments in new processing plants have been completed.

But in a recent report on the emerging market for LNG, Facts Global Energy (FGE) points out that more countries in this region are likely to start imports in the future. Middle East LNG imports are forecast to rise from less than 2.2m tonnes in 2010 to 15m tonnes in 2020 with Kuwait, Dubai, the Northern Emirates, Bahrain and Saudi Arabia emerging as the key importers.

Gas production in Saudi Arabia is growing with Saudi Aramco making heavy investments. However, this is unlikely to be sufficient to prevent a shortage by 2017-18. Saudi Arabia, says FGE, has the potential to emerge as the largest importer in the region - up to 4m tonnes/year by the end of this decade.

And if Saudi Arabia does not import LNG then it would need to burn at least 750 000 bbls/day of crude oil by 2020 for power generation on top of significant volumes of fuel oil.

As reported by the blog earlier, the Kingdom's booming oil demand, especially from the power sector where consumption is forecast to rise 7-8% annually for the next ten years, has become a matter of concern for planners.

A critical issue for Saudi Arabia and also for other countries in the region is the low price of gas which has been partly responsible for spiraling demand and the current crisis. But a revision in prices, especially for industrial consumers, is inevitable. LNG imports will have to take place at market prices. Plus new gas production, especially sour gas projects, will need higher prices to justify the investment.

Iran has taken the lead in revising prices upwards as part of a new reform plan approved by the parliament in October 2009.

Starting from December 2010, industrial projects including the petrochemical projects have to pay around $2.0/mmbtu for natural gas for the first year of the reform plan, compared with $0.53/mmbtu in early 2010, says FGE.

The ethane price has been set at US$145.1/tonne for the first year of the reform plan. Previously cracker operators paid less than $75/tonne.

Over the next 10 years Iran plans to increase gas prices for industrial projects to 65% of the average of export gas prices.

Saudi Arabia is also due to revise prices next year with some analysts expecting ethane prices to be raised to around $2/mmbtu from $0.75/mmbtu. But given current international price levels a more aggressive approach will probably be needed if the government is keen to curb demand growth.

By John Richardson

AROUND $6bn worth of proposed petrochemical investments in Kazakhstan - the giant central Asian country with abundant oil and gas reserves - once again confirms the three most important factors for success: Feedstock, feedstock and feedstock.

"The gas that will supply these projects is sufficiently advantaged to overcome major construction and logistics challenges," an industry source told the blog.

Final investment approval has been received for a propane dehydrogenation (PDH)-to-polypropylene (PP) project which is to built in the western Kazakh city of Atyrau.

Detailed design and engineering work is now underway with Lummus Technology supplying the licence and basic technology for the complex. Capacities of propylene and PP will each be 500,000 tonne/year with start-up slated for 2015.

Sinopec Engineering will construct the complex which will be operated by Kazakhstan Petrochemical Industries.

And last month, South Korean president Lee Myung-Bak was in Kazakhstan to sign contracts for a series of planned investments including an ethane cracker and downstream polyethylene (PE) capacity. Nursultan Nazarbayev, president of the Republic of Kazakhstan, was the joint signature.

Mr Lee put pen to paper because South Korea's biggest chemicals company, LG Chem, has formed a 50:50 joint venture with KPI to develop the project. Start-up is scheduled for 2016.

The complex, which would again be at Atyrau, would comprise an 840,000 tonne//year cracker and two PE lines with a total capacity of 800,000 tonne/year.

One of the lines would be linear low-density PE (LLDPE) and the other a LLDPE/high-density PE (HDPE) swing plant. However, it is likely that the swing plant would initially only produce HDPE.

"Given that the presidents of the two countries were involved in the signing of the JV it seems inevitable that the project will go ahead," the industry source added.

Total project costs in Atyrau will be significantly higher because of the remote location of the western Kazakh city, he added.

"A village will, for instance, have to be built to house workers who will operate the complexes and a rail line will have to be laid to connect the site with the existing Kazakhstan Railways network."

The further issue is the distance from the markets where the product will be sold - China, Southeast Asia, Russia, Turkey, India and Africa.

One transportation option would be to move product by rail into China.

However, this would face the disadvantages of competition for space on China's railways. Despite heavy investment in new rail capacity, demand for moving goods in general by rail is booming.

LG Chem and KPI might also face competition for freight-car space from PetroChina's Dushanzi Petrochemical complex in Xinjiang province in north western China. The complex is centred on an ethylene capacity of 1.2m tonne/year,

Re-export-based end-users may not be eligible for rebates on value-added tax and import duties if their raw materials enter by one border crossing and their finished goods exit by another crossing point or port.

This would obviously be the case if rail cars were used as finished goods leave China for export markets via coastal ports.

And so one of many options being evaluated is moving goods by rail to a Black Sea port and on by container ship to China.

"Logistics are so important with this project that the rail and shipping routes to market need to be identified and established much earlier than in other projects. Usually, such details are often not settled until a few months before start-up," said the source.

But despite all the hurdles, there is the cheap feedstock we mentioned at the beginning - and the lack of further natural gas feedstock availability in the Middle East.

Kazakhstan might not stop at just propane and ethane-based petrochemicals. Projects based on other hydrocarbon streams available in the Republic of Kazakhstan may be added during later phases of investment, the source added.

By John Richardson 

THE statistics speak for themselves. For example:

*The full HSBC August manufacturing index for China, which was released last Friday, showed that manufacturing input costs were rising at their fastest rate for four months, suggesting that the battle against inflation is a long way from being won. Although the final HSBC purchasing manager's index was revised up to 49.9 from an initial reading of 49.4 earlier in September, the index registered its lowest quarterly average since early 2009.

*Land auction failures surged 242% in the first seven months of this year because of government curbs on the property market and prices of new homes declined in 16 out of 70 cities last month compared with July, according to government data.

*Real-estate developers who have lost access to finance because of China's credit clampdown are reportedly being forced to sell, creating a downward spiral in prices.

*China's vehicle sales grew by only 3.3% in the first eight months of this year, according to the China Association of Automobile Manufacturers. For the full-year 2010, sales grew by around 30%.

*Some economists are talking of H2 2011 and first half 2012 GDP (gross domestic product) growth in the low single digits, possibly even as low as 5%.

A slowdown was perhaps inevitable following two years of stimulus-fuelled growth.

But the scale of the slowdown in some chemicals markets - as the central government continues to rein back liquidity in an effort to deal with inflation - is taking a lot of people by surprise.

"I just hope that the week-long national holidays (Oct 1-7) will bring some stability to the market and give people time to reflect," said a Shanghai-based marketing manager with a major Asian polyolefins producer.

China's polyethylene (PE) prices declined by an additional $20-50/tonne for the week ending 1 October, according to our colleagues at ICIS pricing.

PP was down by $60-70/tonne with a $70/tonne reduction in October offers for raffia grade pushing prices down to a nine-and-a-half-month low, added ICIS pricing.

Click here for graphs of the latest price assessments:

ICISPolyolefinPricesOct52011.ppt

Restricted credit has, as we have said, been a major factor behind the price declines and the credit situation continues to deteriorate.

"We understand that lenders in Zhejiang province were told not to issue 60-90 day letters of credit to importers from 20-30 September," added the Shanghai-based sales representative.

"It is all very opaque, which is not really helping the general atmosphere. We are not sure whether the restrictions will still apply once the October holidays are over."

The letters of credit restriction in Zhejiang affected sentiment throughout China, as it is in Zhejiang where many of the big end-users and traders are located, he continued.

Such is the negative mood out there that no great comfort is being taken from very-big increases in polyolefin imports in August.

High-density polyethylene (HDPE) imports, for example, rose by 27% month-on-month and 10% year-on-year to 320,517 tonnes, according to China Customs. Low-density PE (LDPE) imports were up 43% month-on-month and a huge 113% year-on-year at 169,520 tonnes.

Explanations for the strong numbers include international traders liquidating inventory in bonded warehouses in China in order to minimise losses. The resin was bought when prices were a lot higher. Material is only registered as being imported once it leaves the bonded warehouses.

"I think some of the product we saw in the August numbers could have been sitting in the bonded warehouses for several months," the sales representative added.

Further factors might be the inability to place volumes anywhere else, as demand in other markets such as Europe could well be worse than in China.

Saudi Arabian producers are also reported to be under pressure to place extra production of PP following the end of turnarounds and technical problems at three major plants.

The good news is that end-user inventory levels are said to be low, raising the possibility of a strong recovery in demand once the October holidays are over.

But despite international traders liquidating inventories their stock levels are still high, according to some market sources.

A strong demand recovery would require a dramatic change in sentiment - and more central and local government support for the hard-pressed small and medium-sized enterprises (SMES). The SMEs have suffered the most from the restrictions in credit which began late last year.

"What we need is a solid sign of improvement - an indication that the end-users are coming back to the markets in a big way," added a Singapore-based polyolefins trader.

"If the biaxially oriented PP (BOPP) film buyers came back in a big way for example, that would be very positive news. A typical BOPP converter buys 2,000-3,000 tonnes."

But even if the Chinese government did decide to relax lending restrictions, persistent macro-economic problems in Europe and the US might still weigh heavily on markets.

"Markets are so globalised these days that what is happening overseas is playing a bigger and bigger part," added the sales representative with the Asian producer.

"The Dalian Commodities Exchange (which has a futures contract in Rmb-priced LLDPE) is a really important barometer of the overall mood.

The Dalian fell by around Rmb1,300/tonne during September to Rmb9,300-9,500. Physical prices have fallen in response, but not by quite as much."

One shred of current comfort is reports of operating rate cuts at several South Korean crackers.

European cracker-to-PE producers have also lowered rates with further reductions expected, according to ICIS pricing.

It is, however, going to take a lot more than a few operating rate cuts to rescue what looks likely to be a very difficult fourth quarter in China.

By John Richardson

A DEBATE is taking place over whether the price of propylene will decline to its traditional discount versus ethylene.

In Europe, propylene prices went above ethylene for the first time ever during the second quarter of 2010. Since 2001, the price differential of ethylene over propylene had steadily eroded until it reversed in 2010. The price of propylene also has risen above that of ethylene in Northeast Asia.

Back in the good old days, propylene was viewed only as a by-product. Now it is a coproduct, perhaps even the main product in terms of profitability for some steam cracker operators.

ORIGINS OF IMBALANCE
The root cause of today's imbalance stretches back 30 years. In the 1980s, the plentiful availability of C3s led to the search for something to do with all this cheap raw material. This was the trigger for a great deal of R&D in polypropylene (PP). PP has proved to be a wonderfully versatile polymer, gaining market share from other polymers such as polystyrene (PS) and high-density polyethylene (HDPE).

PP global demand growth has, as a result, been well-above the expansion in global GDP and in excess of other polymers.

But propylene supply has failed to keep up with this strong growth because a lot of the recent new cracker capacity in the Middle East has been based on ethane, points out Paul Cherry, Hong Kong-based petrochemical consultant for Officium Projects.

Ethylene production based on ethane yields very little propylene co-product, while ethylene production based on naphtha feedstock yields a lot more propylene as a co-product. The next big wave of steam cracker capacity looks as if it is again going to be based on ethane, but in the US this time because of abundant availability of shale gas.

Ethane supply is tight in the Middle East, resulting in very few cracker projects in the region.

Existing crackers in the US have also lightened their feedstock slate, switching from naphtha to ethane, because of the explosion in shale gas capacity.

A further factor behind tight propylene markets is a reduction in operating rates at fluid catalytic crackers (FCCs) due to declining US gasoline demand.

Shale gas supply is expected to increase even further because of new exploration and a great deal of extra gas fractionation capacity. This could make existing cracker operators reluctant to switch back to naphtha. New shale gas capacity will yield more ethane than propane supply, says Cherry.

The US refinery sector also is expected to remain under pressure. Gasoline demand is expected to continue to decline because of, for example, tougher fuel-efficiency regulations.

ON-PURPOSE PROPYLENE
Will the prospect of propylene remaining expensive lead to a flood of on-purpose C3 projects? Could this drive the price of propylene back below ethylene? Or might there be demand destruction in PP as converters switch to other cheaper polymers? Could this loss of market share restore the discount of propylene to ethylene?

A lot of the talk at this May's Asia Petrochemical Industry Conference (APIC) in Fukuoka, Japan, concerned on-purpose propylene investments. PP demand destruction was also a significant concern among attendees.

A widespread belief was that the problem would be fixed and that enough investment dollars would be found to bring propylene down to a more-affordable level. Cherry argues that the petrochemical industry will have to continue living with expensive propylene because of the economics of on-purpose production. He also contends that PP demand ¬destruction will not be sufficient to drive propylene back down below ethylene.

The nature of spot propylene markets is another reason to believe that C3s will remain costly.

MORE HISTORY
"Propane dehydrogenation (PDH) technology was first developed commercially in the 1990s," Cherry said. "The initial units in South Korea and Western Europe often shut down in winter months when the seasonally higher prices for propane made PDH production economics unworkable."

Then came subsidised propane in Saudi Arabia during the 2000s, resulting in a substantial number of PDH investments in the kingdom. These were by Saudi industrial conglomerate SABIC and private Saudi firms such as TASNEE, Advanced Polypropylene, NATPET and Sahara Petrochemicals.

"There are a number of advantaged-propane PDH operators in Saudi and a small number in other countries such as Thailand and Malaysia," says Cherry.

And as the blog reported last month, PDH is now growing in China. 

"They represent a much smaller proportion of global C3 production than ethane cracker operators represent of global ethylene production." Subsidies for propane are also less than those for ethane, he adds.

"The effect of the PDH players on global C3 and PP pricing is therefore less pronounced than that of advantaged ethane cracker players on global ethylene and PE pricing." Cherry said.

Propylene has become so expensive that new PDH plants have been announced, or already constructed, without cost-advantaged propane, he adds.

One example is the 544,000 tonne/year Petrologistics PDH unit in Houston, Texas, which came on stream in October 2010. It is the only PDH unit in the US, although US-based Dow Chemical is planning to build a second unit in Freeport, Texas, by 2015.

China's Tianjin Bohua Petrochemical plans to start up the country's first PDH plant at Tianjin by June 2013. The $579.6m (€407.5m) project will have a capacity of 600,000 tonnes/year.

PETCHEM KNOW-HOW
"Metathesis has recently become another popular on-purpose production route for C3s in Japan, South Korea, China and Singapore," says Cherry.

"Metathesis involves the reaction of ethylene with butene-2 to form propylene.

"It requires a significant butene stream [approximately two tonnes of butene-2 for every tonne of ethylene], which is almost always sourced from FCCs. Typically, the economics are workable when the ethylene price is equal or less than the propylene price."

Metathesis units were built in Northeast Asia to "upgrade" ethylene that was devalued by all the cheap ethane-based capacity in the Middle East, says Cherry.

The Middle East, because it doesn't have access to butene-2 feedstock, only has one metathesis plant, which is run by Borouge in Abu Dhabi. This facility uses the dimerization process, where ethylene is converted to propylene without any need for an external source of butene-2.

Methanol-to-propylene (MTP) technology is the third on-purpose route to C3s. "It is a relatively new technology and projects are being considered in locations such as Nigeria and Trinidad. This is an option for upgrading the methanol being produced from locally available stranded natural gas," says Cherry.

"There are also plants in China which use coal as a feedstock to make methanol.

"It is too early to say if MTP technology will become a significant source of the world's propylene," he adds.

"But it can be said that capital requirements are very high due to the volume of methanol feedstock which needs to be produced. This is around three tonnes of methanol to make one tonne of propylene."

PDH, metathesis and MTP are growing in importance, but Cherry says that cost advantages over steam cracker and FCC propylene are not that significant

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UNEASY SUBSTITUTES
"Some will argue that the major C3 derivative PP will lose significant business to HDPE if there is a sustained price premium. However, a number of the major PP applications cannot be converted to HDPE such as biaxially oriented film, bulk continuous filament, spun-bond fiber, injection molded automotive applications and applications where the clarity of PP random copolymers is important.

These applications include housewares and DVD packaging," says Cherry. "Even the largest global application for PP, raffia, while substitutable by HDPE, requires HDPE producers to choose a particular production technology when constructing their plants," he adds.

Most PP technologies can ¬produce grades for most applications and the grade transitions are relatively simple, added the consultant.

HDPE plants, in contrast, tend to focus on a certain application. This is because some technologies are only suitable for a limited number of applications and the production of large quantities of off-spec material where grades can be changed.

"Until now, HDPE producers have focused on blow molding, film and pipe applications and the number active in the injection moulding and raffia markets is relatively few," says Cherry. "Therefore it seems unlikely that there will be enough demand destruction for PP to put any downward pressure on C3 prices."