Asian Chemical Connections

Source of picture: gilesbowkett.blogspot.com

The excellent daily energy and shipping report, The Schork Report said today that the bottom had "fallen out of the entire (energy) complex."

With the Bulls on the defensive, the authors believe that crude could retreat towards $60/bbl.

Natural gas markets are so oversupplied that prices in the region of $2/mBTU are possible, it adds.

Back in March, the report offered what I think is the best summary of the denial of fundamentals that's taken over equity and commodity markets recently:

Our concern is this: with each passing session it appears more traders are encouraged to "participate", hence, the market keeps moving higher. That happens enough times and soon you have $100 oil and Matt Simmons all over the tube alleging the Saudis are doctoring their books and that Petrobras and ExxonMobil didn't just find all of that oil in Brazil. Then, just like we saw last spring, when the price path of the market decouples from the fundamentals, perception trumps reality and high prices become the justification for higher prices. All because the
smart money [sic] doesn't want to "miss out".

Since March, August WTI prices on the NYMEX have rallied from $58.07/bbl to a $73.48/bbl high (+26½%).

Despite some recent headlines pointing to tighter oil supply (for example, more civil unrest in Nigeria and US dollar weakness) the energy-market mood has changed.

Until last week greed seemed to be chasing greed. "The market was going higher...and they (the speculators) went on a buying spree because once again, high prices justified high prices," wrote Schork on July 6.

So what began as a bear-market rally ended up as a growing consensus - which perhaps too few dared challenge - that the recovery would be V-shaped. Doesn't this sound an awful lot like the consensus views of decoupling and ever-rising energy costs which prevailed during H1 last year?

What changed last week was a fall in June US consumer confidence and a sharper-than-expected rise in unemployment. The employment-to-population ratio also fell to its worst level since 1984 and average hourly earnings have remained stagnant in two out of the last three months.

An indication of just how far we are away from a consumer-led US recovery is that US gasoline prices fell last week - for the second week in a row. This was the first consecutive weekly decline this year and occurred even though this is the peak driving season.

Chemicals pricing has increased in line with energy costs - as this chart from ICIS pricing shows. Naphtha, ethylene and polyethylene (PE) have been chosen as examples.

View image

Global production cutbacks and delays to Middle East start-ups have also helped sustain a chemicals price rally which began in February.

Efforts are being made to push through further prices rises. European PE and polypropylene producers are, for example, bidding for 10% July increments. These are aimed at recovering higher upstream costs and improving margins.

But the new capacity won't be delayed forever. China's import demand has already started to weaken on anticipation by buyers of extra volumes in H2 and resistance to price hikes.

This is bad news for the US and European producers. They have enjoyed strong exports to Asia in Q1 and during some of the second quarter, which has helped them keep domestic markets tight.

As I said last week, chemicals companies that have continued to manage inventories well during this paper-bottomed boom will be in a better position than those who have been taken in by the markets.

They always say the best form of flattery is immitation and so thanks to my colleague Paul Hodges for this graph indicating a huge surge in China's polyethylene imports - courtesy of data from Edwin Pang of Credit Suisse.

I agree with Paul in the latest post on his blog, Chemicals & The Economy, that the extroardinary rise in imports is partly the result of rising oil prices (inventories once again being built ahead of demand) and misplaced confidence that the worst of the economic crisis is over.

Other factors were deep Asian refinery and petrochemical operating rate cuts on terrible markets in Q4 and Jan-Feb this year and more recently, a heavy turnarounnd programme.

Picture: The China Daily

"I've given up trying to read the polyolefin market in China. I just can't figure out what's going on," said a senior source with a major North American producer late last week.

"I keep returning to the fundamentals and cannot understand why prices have risen so steeply since mid-February."

Him and me both; we are perplexed by statistics which show a rise in domestic polyethylene (PE) production and imports, despite, as my colleague Paul Hodges points out, a sharp in exports of finished goods.

Where is all this stuff going? Into inventories of finished goods, perhaps, as factories are kept running for social reasons?

Paul, on his blog Chemicals & The Economy, says today that there has been a strong correlation between stockmarket strength and rising crude .

Oil is another reason why chemicals pricing in general has gone up by so much.

Now it looks as if equity and oil markets are heading in the other direction.

But as a second source told me by email this morning: "I've stopped worrying about this; I am just making money while it lasts."

Quite, but to return to the North American producer and his theories for these weird numbers, he added the following:

(Anybody else out there - your views as always are more than welcome).

"Dalian (the LLDPE commodity exchange) is now leading the market - i.e. people are pricing off it.

"The Chinese government has apparently also tightened up regulations on scrap imports after concerns were raised over health risks."

The scrap factor could be important as over the past 2-3 years, the steep rise in recycled material has taken around 4-5 percentage points a year off virgin polymer growth.

Also, once polymer prices go past $1,000-1,200/tonne it becomes economic to ship in scrap polymer and convert, according to one source.

Take away this automatic price-capping mechanism and you could have another reason why prices have risen by so much since mid-February - and why production and imports are both up.

My last blog entry quoted a North American industry source who was concerned over the potential for physical delivery on the Dalian futures exchange to flood the real market and send prices crashing.

In my ignorance of how futures markets works, and as a typicaql semi-numerate journalist, I therefore asked a colleague with a futures/mathematical bent to help out. This will hopefully allay the above fear.

Here is his explanation (please feel free, as always, to disagree):

If you look at the English part of the website you'll see that several months before a contract expires (.e.g. in April for July delivery) there is an enormous amount of open interest (the dating system is confusing as each contract starts with 10 after which it makes sense).

They will agree in advance to cash settle before the expiry of the contract and so you if then look at a few days before a particular contract closes the open interest declines dramatically as once a contract does close and no cash settlement takes place, physical delivery has to take place. This helps to explain the very small delivered volumes also reported on the site.

See an Insight piece from my colleague Becky Zhang in our Shanghai office -. It seems as if the producers and buyers are not using the market in a big way to hedge; it's more the speculators trying to make lots of good money.

This raises an interesting separate point on the debate over whether there are large volumes of physical polyolefins in inventory.

Why would a lot of people bother renting a warehouse, taking delivery and taking all the risks associated with this when you can just go on the exchange and make money out of purely paper trading?

The other good thing about Dalian, as I understand it, is that you can get your money out straightaway - and with such incredible volatility on a daily basis you stand to make (or lose) money very quickly. This a lot quicker return than waiting to close a physical position.

This still leaves the longer-term issue of whether the market could become a de facto pricing influence. This could happen either because people believe it's important (to use another cliché again a self-fulfilling prophesy) or if the big producers and buyers start using it in a big way to hedge.

This is all work in progress so I will keep asking.

The above also doesn't explain why LLDPE demand has apparently remained resilient in the physical market, even though this is not an agricultural film-buying season.

I am also still working on the issue of the influence of availability of imports of recycled polyolefins.

Source of Picture : purchasing.com

In his own words, here is how one contact describes the current situation with a couple of extra points added by yours truly (with links)

"We've seen arbitrage close from Europe on polyolefins with no new business since April-May. Some material was delivered in June but this was merely May deals.

"The reason is delays to new capacity and re-stocking. We haven't seen a new PE plant in China for over a year with the next ond due on stream in July-August - Fujian.

There has also been substantial China petrochemical turnaround programme in April-June as our re-launched World Ethylene Plant Report illustrates.

In addition, deep cutbacks were made earlier in the year for market reasons.

"I think the reasons for the project delays have been that EPC (engineering, procurement and construction) resources have been severely overstretched.

"The fall in crude by $10/bbl is clearly also going to have an effect and buying patterns will change as everyone holds back rather than brings forward purchases."

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Chemical companies as a whole displayed "dangerously complacent" views about second-half 2009 prospects when they released their Q2 results late last week, argues chemicals analyst Paul Satchell in his blog.

"They believe that demand has bottomed. Although they can't see the upturn yet they believe the worst is definitely behind us," writes Satchell.

"This blog sees this as dangerously complacent, particularly as analysts and investors have returned to a positive stance on the sector."

When you look at the results themselves, the numbers look better but only on a sequential basis (and watch out for some misleading year-on-year numbers in H2 when performances are very likely to be better than the disastrous second half of 2008. A more useful comparison might be with H2 2007).

Most companies reported year-on-year volume declines in the low 20% range - better than reductions of more than 30% in the first quarter of 2009.

Margins were again lower than in the same quarter last year but up on Q1 2009.

In the case of basic upstream petrochemicals, producers have largely been playing catch up with higher crude prices in this year's second quarter.

The overall margin improvements are likely to be the result of stronger returns further down the product chains.

These relatively better downstream performance could well be the result of extraordinary increases in apparent demand for polymers and other commodity chemicals. These have occurred at a time of tight global supply (the result of market-driven deep production cutbacks after the Q4 2008 price collapses and turnarounds).

The true nature of the demand increases is at the heart of the complacency Paul is worried about.

Numbers emerging from China remain counter-intuitive.

In January-May over the same period last year high-density PE (HDPE) general trading was up by more than 130%, even though re-exports were down by 16%.

To repeat yet again, how can this happen while China remains so heavily dependent on exports and the global economy remains weak?

BASF, when it disclosed its Q2 results, said that it expected global chemicals output to fall by 8% this year.

This would mean that by the end of this year, production would be back to 2005 levels.

In other words, the global chemicals industry will have lost three years of growth.

The broad-based chemicals giant is signalled out by Satchell as one of the few companies that has acknowledged the risk of another downturn caused by overcapacities, bankruptcies and growing unemployment.

The end of the bubble in oil and oil-product prices might cause severe problems in H2 this year. This could be before new petrochemical capacities and/or a winding down of speculation in China start directing markets.

"The risk from a potential fall in oil is only being thought about in terms of raw materials pricing. People seem to have already forgotten what triggered the de-stocking from last summer," adds Paul Satchell.

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.

"Reports of my death are greatly exaggerated," Mark Twain once famously said after his obituary was published before he had died.

Similarly, the US polypropylene (PP) industry had been virtually written off late last year after a calamitous collapse in pricing resulted in inventory losses totalling a staggering $700m in November alone.

But the day of reckoning has been postponed by numerous project delays and a big recovery in Chinese demand.

US PP exports to China more than tripled in the first five months of this year compared with January-May 2008, according to the US Department of Commerce.

Of the extra 2.77m tonnes/year of Middle East capacity due on stream by now, only around 1m tonnes/year has hit the market.

"What also happened from mid-November was that buyers globally, and particularly in China, recognised that prices had hit rock bottom," says Joe Congdon, a consultant with Townsend Solutions.

"And then you had the Chinese stimulus package boosting confidence with the recovery in oil prices from around February, adding extra momentum."

Other export markets were far weaker, however, for US producers - their shipments to Mexico were down by 20% and to Canada by 25%.

Not surprisingly, sales to Brazil tumbled by 43% as a result of a 350,000 tonne/year plant that started up there last year.

Total US PP exports in January-May of this year were 4% lower, and, as the accompanying chart from the American Chemistry Council (ACC) shows, production was substantially down during the whole of the first half of 2009.

View image

But without the surge in shipments to China, which perhaps bought more time for some tough decisions, the overall picture might have been a lot worse.

Nobody had the luxury of time late last year when announcements were made about closing 500,000 tonnes/year of capacity in the first half of 2009. Some of the plants being shut down are part of integrated complexes that are not necessarily entirely loss-making.

Oversupply is still big. Consumption totalled just above 7.4m tonnes in 2008, which was 8% lower than the previous year, with capacity still at 9.4m tonnes.

No further announcements about capacity closures have been made so far this year.

"What needs to happen to bring supply more in line with demand is further closure announcements. Another 500,000 tonnes/year of shutdowns would bring capacity utilisation to 85%, Congdon added.

Townsend Solutions is currently forecasting North American rates at less than 80% for the next five years.

"We are predicting global growth of 3.7%/year in 2008-13 compared with last year's forecast of 4.9% for 2007-12. The future of PP has changed dramatically in just one year," Congdon added.

The US domestic market looks likely to be difficult. Exports will also be hit much harder as a result of the new capacity.

And as for the more immediate prospects, current exports were characterised as "lousy" by a US industry source - the result of the high cost of feedstock.

Monomer supply has been reduced by refinery operation rate cutbacks due to weak gasoline demand. Fluid catalytic crackers (FCCs) are running at around 85%.

But if PP export opportunities existed, enough propylene could be found, according to market sources.

"The market will pay maybe 47-48 cents/lb for bagged homopolymer free on board (FOB) exported from Houston," said a trader.

"But with a potential 4-cent spike in monomer contracts this month, PP producers are looking 53-54 cents/lb FOB Houston in a bag."

The US PP industry has become more heavily dependent on refineries for feedstock supply. Naphtha cracking has suffered as a result of the fall in natural gas prices relative to crude, and ethane cracking is now far more economic.

"Around 70% of C3s are being sourced from refineries and 30% from crackers. The split used to be 50/50," said a US PP producer.

Gasoline demand isn't expected to improve due to the weak US economy.

Another factor behind the weak PP export trade is a steep fall in buying interest in anticipation of the further new volumes.

These include the recent start-up of a 350,000 tonne/year line by PetroRabigh in Saudi Arabia, which is supplied by propylene from a deep catalytic cracker.

Output from Saudi Arabia's new propane dehydrogenation (PDH)-to-PP complexes is also expected to increase, with several start-ups set to take place in China during the second half of the year.

Mark Twain was twice feared dead before he finally passed away of a heart attack in 1910.

And, of course, the US PP industry isn't going to really expire. This is a huge market with very sophisticated distribution and marketing networks.

A lot of acquisition interest seems likely to emerge very soon.

David Barry contributed to this article.

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.

MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)

Source of Picture: www.autospies.com

The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.

But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.

Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).

So what might this mean for the polymer industry? Here are a few thoughts:

*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines

*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed

*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains

*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues

*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)

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.

I have been digging a little deeper into the Map Ta Phut issue and it looks like expectations of major delays to projects at the site were a little premature.

Construction has not stopped despite a ruling by Thailand's Central Administrative Court to stop work on 76 projects at the site. The ruling was directed at the government which has so far not asked companies to halt work as all the projects have received environmental clearance. The government has now appealed to the Supreme Court and Thai companies are also planning to approach the court.

Although work is ongoing companies may not receive permission to commission their projects if the issue is not resolved quickly. The first of the major projects due at Map Ta Phut is PTT Chem's 1m tonnes/year cracker. The company is still hoping to commission this at the end of the year though it is unlikely to run at full capacity until a new gas processing facility is brought onstream in first quarter of 2010. PTT Chem's plan is carry out a maintenance shutdown at one of its smaller crackers to divert feedstock to the new cracker during the commissioning period.

Pic source: Wikimedia Commons

Nobody is very clear on how quickly the government will be able to sort out the Map Ta Phut problem. I was told by one Thai analyst that anyone giving dates is surely bluffing. But he believed that it is likely to take months rather than years to work out a compromise.

The government is certainly under a great deal of pressure - investment, employment and GDP will be hit if projects at Map Ta Phut get delayed but at the same time it cannot afford to ignore the demands of the local people.

And what the people want is full implementation of Section 67 of Thailand's 2007 constitution. This guarantees Thai people the right to participate with the State in preserving the environment and stop any project or activity which may damage the environment unless it has been evaluated and approved by an independent body made up of representatives from private environmental and health organisations.

But the government has yet to form an independent body or pass a law that companies can follow while seeking environmental clearance for their projects.

It will certainly do so now which means that companies will need to carry out a Health Impact Assessment (HIA) study besides the Environmental Impact Assessment study (HIA). And this, in the words of the analyst, will not only take more time but will also be a tougher hurdle to clear.

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.

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?

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.

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.

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.

By John Richardson

A lot of the projects which have pushed the world into severe overcapacity were based on the assumption that China would remain in big deficits for many basic commodity chemicals and polymers.

It was thought that the world's most-important market would remain a sink for surpluses for a very long time at a time when tough questions over financing were rarely asked.

But it's become clear over the past few years that many of the assumed deficits won't be there.

China is seeking very high levels of self-sufficiency through building a big wave of new refineries integrated downstream with crackers, polymers and other derivatives.

Now the search for what to build - and what to provide storage and other support services for - outside China to supply China is likely to be a great deal more rigorous and selective.

The usual approach to this problem would be to conduct a study looking at the announced projects while also examining where China lacks the economics and the technology in a particular product.

"I am afraid this won't work in the political context of this country," a Westerner based in Shanghai told me last week.

"If a chemical looks like being in big deficit and even if China has no obvious competitive advantages or technology to start production, this doesn't mean it won't be built.

"The government would rather haemorrhage money than be dependent on imports for anything they regard as strategic."

Those able to read the minds of China's senior leadership should therefore be able to do very good business.

Another approach might be one of bitter regret if you haven't already got substantial capacity on the ground in China.

More constructively, if you have missed the boat what would be better is to take China's demand largely out of the equation when deciding your strategy for basic chemicals.

The Thai Supreme Court's decision to uphold a September injunction halting development of $12bn of petrochemical and power projects could affect the on-schedule start-up of capacities of a large amount of petrochemicals capacity.

Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claims that most of its 25 petrochemicals projects will be unaffected by the verdict. The reason it gives is that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.

Further - media reports say that former prime minister Anand Panyarachun will review the court ruling and make recommendations in the first quarter of next year.

In all, according to the reports, only 11 out of 76 projects at the site have been given the go-ahead by The Supreme Court.

The petchem start-ups that might be affected are as follows:

*PTT Polyethylene's 1m tonne/year ethane gas cracker, which was due onstream by the end of this year, according to a Thai industry contact who spoke to this blog. Downstream of the cracker will be 400,000 tonne/year of linear-low density polyethylene (LLDPE), 300,000 tonne/year of low-density polyethylene (LDPE) and 400,000 tonne/year of high-density polyethylene (HDPE), according to ICIS Plants & Projects

*The new Siam Cement/Dow Chemical complex centred on a cracker that will produce 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene). Also at the site will be a big new metathesis unit downstream of which will be a PP unit (currently checking the capacity). In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects

*The PTT and LyondellBassel joint venture, HMC Polymer, which comprises a 310,000 tonne/year propane dehydrogenation (PDH) unit and a 300,000 tonne/year polypropylene (PP) plant. This plant had been due to start-up by August this year, the blog was told.

*The PTT/Asahi Kasei Chemicals joint-venture 250,000 tonne/year acrylonitrile project, due on-stream in Q4 next year, according to ICIS Plants & Projects. This will involve Asahi Kasei's propane route to PP. This would be the first commercial plant in the world to use propane rather than propylene as feedstock

News reports list chlor-alkali and vnyl chloride monomer (VCM) projects by Vinythai and a polyvinyl chloride (PVC) project by Thail Plastic & Chemicals as also being delayed. We are checking the details.  

According to The Nation newspaper, these are the 11 projects which were given permission to continue by the Supreme Court:

. Clean energy and product quality enhancement/Rayong Refinery
2. Gas recycling enhancement/HMC Polymers
3. Clean energy, oil vapour controlling unit installation/Star Petroleum Refining
4. Oil vapour controlling unit installation/PTT Aromatics and Refining
5. Air pollution improvement/Indorama Petroleum
6. Wastewater treatment improvement/PTT
7. Chlorine vaporiser and wet scrubber installation/Aditya Berla Chemicals (Thailand)
8. Tank relocation/Map t Tank Terminal
9. LPG/Brutene Depot-Wharf/PTT Chemical
10. Loading Arm Installation/Star Petroleum Refining
11. Petrochemical Depot-Wharf/Map Ta Phut Tank Terminal

Is history about to repeat itself?

Source of picture: www.vietbao.vn

The last year for polyolefins has been a bit like the wonderful 1980s and early 1990s for genuine football fans - when the often-repeated phrase of Manchester Utd supporters was "next year, definitely" when they were talking about their prospects for winning the then First Division Championship (just replace "next year with "next month").

Sadly, of course, the rest is bitter and painful history when it comes to "Utd".

The question now, after a year of constant project delays and problems with output from existing production, is whether the same will soon apply to polyethylene (PE) and polypropylene (PP) as oversupply crashes the market in 2010.

No matter what the demand outlook - and we'll look at demand later this week - the on-paper increases are just too big to prevent major market disruptions.

"Practically every month this year we've seen buyers retreating from the market expecting a flood of supply that simply hasn't happened," said a Shanghai-based source with a leading Asian polyolefin producer.

The most recent example was the steep fall in pricing just before the October holidays - by some estimates as much as $200/tonne - on false anticipation of stabilised production at PetroRabigh in the Middle East and at the Fujian and Dushanzi complexes in China.

After the October break prices bounced back.

But surely some time in the New Year all three of these new plants, which have been hit by technical problems, will reach 100% or thereabouts (whatever rates the market - or perhaps in the case of the Middle East unbeatable economics and in the case of China government policy - determines).

China is due to increase its high-density polyethylene (HDPE) capacity by 45% next year, linear-low density PE (LLDPE) by 35% (there are no new low-density PE plants) and PP by more than 30%, according to CBI China.

How quickly these further new volumes are introduced into the market will again, though, depend on the extent of technical problems that have plagued the start-up of ever-bigger and more complex plants. The shortage of experienced engineers has made the process more problematic.

A key measure will be Sinopec inventory levels as it contends with this potential flood of new supply.

So far this year it has apparently controlled inventories exceptionally well after the painful experience of late 2008.

More buying of junk in H1 next year that nobody really needs?

Source: www.blogcleveland.com

By John Richardson

TWO theories about growth in China next year revolve around either an appreciation or devaluation of the Yuan.

The appreciation theory is far more widespread as it assumes no global double-dip economic recession.

It's assumed that by mid-2010 inflationary pressures will be build to the point where fiscal tightening will be needed, through, for instance, a cut in new loans and a rise in interest rates.

Part of this tightening would also include a long-awaited appreciation of the Yuan from around 6.8 to the US dollar, where it is at the moment, to 4.8.

Until and if this happens we could continue to see hot money pouring into and around China's economy as everyone tries to maximise Yuan revenue ahead any appreciation.

Weird and wonderful speculation
This has led to all sorts of weird and wonderful examples of speculation this year, including in chemicals markets.

My very able colleagues at CBI tell me, for example, that cargoes are sometimes being bought for the sake of the credit that is then used to punt in another commodity - for instance, equities.

There was one case of an ethylene dichloride (EDC) shipment that was sold at below raw material costs because the trader had used his credit to make a fortune from speculating elsewhere.

More such speculation will happen in H1 next year if the motive to gamble in order to make a currency gain remains high, particularly if economic policy stays broadly on the same expansionary track.

Yesterday, the State Council announced that economic policy would stay mainly unchanged for the time being because of a continued focus on boosting domestic consumption.

Some new pro-consumption measures are to be introduced, such as increasing cash-for-clunker car rebates.

Trying to let the air out gently
But two measures were also announced yesterday that might slightly deflate very bubbly auto and housing markets. As we reported yesterday, auto sales in November increased by 96% year-on-year.

The air-sucking steps are:

*The purchase tax on cars with engine sizes of 1.6 litres or less will be raised to 7.5 percent from 5 percent, though that is still lower than the 10 percent tax rate for most other cars

*Individuals must own their homes for five years to be eligible for sales tax exemption, up from the previous minimum of two years. In July, the China Banking Regulatory Commission decided to tighten mortgage conditions for second-time homeowners and big banks announced that they would start to offer discounts on mortgages only to selected qualified applicants

Government policy makers have a poor record of implementing the right housing policies at the right time, says Rosealea Yao of the Beijing-based online economics research publication, The China Economic Quarterly (CEQ).

The reason is that data on the property market can be misleading.

For example, there's recent evidence that stocks of unsold homes are increasing in several local markets, such as Beijing, Shenzhen and Hangzhou, whereas year-on-year nationwide sales accelerated by 48% in October.

A heavy-handed approach in 2007, involving interest rate rises and a reduction in credit to developers, caused the last collapse in China's property markets.

So the point she makes that if further measures are needed to cool the housing market and the overall economy down from mid-2010 - which the CEQ believes will be the case - the central government needs to tread very carefully.

The dilemma for China is that while a healthy construction sector is crucial for the economy, so is making sure that property prices don't increase out of the range of average earners.

Expect even more chemicals volatility
It seems very possible, therefore, that if inflationary pressures do start to build, chemicals pricing could become even more volatile and unpredictable ahead of any new government measures.

"There have been much closer links this year between overall economic sentiment, reflected in global and local equity markets, and what's happening in polyolefin pricing and trading patterns," said an industry source.

So when the rumour-mill starts churning about fiscal tightening, expect to see polyolefin markets - and perhaps chemicals markets in general - responding to fluctuations in share prices.

These fluctuations might, of course, have no relevance whatsoever to the underlying fundamentals of chemicals supply and demand.

What about the other theory?
We have long-argued on this blog that oil prices are way out-of-kilter with immediate demand.

They have been this way since 2006, but right now the fragile global economic recovery has increased the risk of a sudden and sharp correction.

Some unforeseen crisis, more globally systemic than Dubai World, could result in a retreat to the US dollar and a collapse in crude back to $30-40 a barrel (where some believe it should be based on the physical market fundamentals).

This would result in the Yuan appreciating much faster than the Chinese want - because of its link to the dollar - as they try to gradually rebalance their economy away from exports and towards more domestic consumption.

A competitive devaluation of the Yuan might then take place in order to protect export trade, leading to deflationary pressures from Chinese exporters. We could then be in the middle of major global trade war.

Let's hope for a more benign outcome!!

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 Malini Hariharan

Some projects never die.

JG Summit has been planning a cracker since 1995 but has always had problems in securing funding. The project was revived in 2005 even as questions were raised about its viability.

It would help JG Summit secure feedstock for its polyethylene and polypropylene plants, but how would it compete with larger well-established players in Singapore and Thailand, especially after the implementation of the Asean FTA from 1 January 2010 when import tariffs would fall to zero.

The market meltdown in the second half of 2008 had pushed the project to the back burner. But with economic recovery the project has once again reappeared.

JG Summit says that it is close to receiving funding from the Export-Import Bank of Korea for a 320,000 tonnes/year cracke at Bataangas.

Lance Gokongwei, president of JG Summit Holdings told reporters in Manila this week that the company was pushing ahead with the estimated $731m project. "We expect to operate the plant in 2013," he said.

Gokongwei said JG Summit had already signed an agreement with Lumus for technology and site and design development would start in March 2010.

"If the financing package from the Korea Eximbank is completed by May to August next year then the project is a sure go," Gokongwei said.

"If we can't get the financing, we will have to assess. The fallback is we wait for the right time," he added.

That sounds familiar.

By Malini Hariharan and John Richardson

Expect the unexpected and you probably stand a good chance of making money in the polymer market.

Defying expectations of a slowdown in demand ahead of the Chinese new year in February markets have started 2010 with a bang - material is short and prices are steadily moving up.

Prices have risen by $50-170/tonne from early December. LdPE is now being talked about at $1450/tonne cfr China, lldPE at close to $1400/tonne cfr China while hdPE at $1350-1450/tonne. PP has hit $1300/tonne in China and one trader thinks that it will cross $1350/tonne by the end of the week.

"I bought a load of material in December and so I am delighted. Everyone else was being bearish, but I thought with the economy doing so well, why not [buy]," says a second trader

The first trader describes the markets as "being on fire" supported by the strength in crude oil prices ($81/bbl today) and tight availability because of plant problems in the Middle East and Asia.

Supplies from new plants (Sharq, Yansab, Fujian Petrochemical and Dushanzi Petrochemical) are still not arriving as expected, says a third trader. And if you add turnarounds and operating problems to the equation buyers face a very tight market.

However, there is still not much confidence that the bull run can be continue after operations at new plants stabilize. Concerns about the health of the global economic continue to cloud the picture. There is nervousness in some quarters that very high prices will only lead to a steep fall in the future. "Remember 2008? Everyone is scared of a repeat," says one producer.

But leave room for the unexpected to create surprises at least in the short term. For instance, severe winter conditions across most of the northern hemisphere are affecting petrochemical production.

Pic source: Xinhuanet

Our colleagues at ICIS news have reported that naphtha is short in Asia as a result of reduced shipments from Europe. This has forced lower operating rates at some aromatics units and Formosa's three crackers in Taiwan.

There have also been unconfirmed reports of a reduction in operating rates at some crackers in Europe.

In China, heavy snow in the northern provinces has closed expressways and affected movement of products, reports ICIS news. Chemical producers were also facing power shortages and they do no expect the situation to ease before March.

And China's cold spell could also affect start up of new plants. The second trader says Tianjin Petrochemical's new cracker complex is likely to start only after the Chinese new year, a delay from the earlier target of end-2009.

We have also heard that start up of new methanol-to-propylene (MTP) projects in the north, such as the Datang Power project, could be delayed to the second quarter.

"This season is not good to start up; companies would not like to take the risk," says a Beijing-based industry source.

More delays would tighten supplies further. And if demand holds up the bull run may not end very soon.

By John Richardson

THE BIG gap in credit growth between China and the developed world has been thrown into further relief by recently released data - raising inflationary concerns in the world's most important economy, while emphasising how rich-world countries remain on government life-support systems.

Broad money supply growth was a huge 30% in China in the ten months to November 2009, according to The Economist.

This compares with a fall in money in supply in the Euro area over the past year with US money supply only increasing by 1.2% in the six months to November last year.

In Australia, lending to the business sector declined by 8.2% in November 2009 year-on-year, said the Reserve Bank of Australia (RBS).

A strong indication of the importance of government life-support is that thanks to low interest rates and Canberra's tax credits for first-time buyers, credit to the real-estate sector grew by 8.2% in November over the same month in 2008, the RBS added.

This supports the anecdotal stories I keep picking up of credit remaining very tight in the developed world, particularly for small -to medium-sized chemicals companies, end-users and traders. While banking systems might have been rescued from financial collapse, the surviving banks are too busy rebuilding capital to take the risk of increasing lending to businesses - and perhaps also because they fear another bust could be around the corner.

It also seems likely that even where banks are more relaxed about credit, rich-world companies in certain sectors - certainly including chemicals - are maintaining very tight cash-management policies because of this same fear of another bust.

"In this financial environment no-one is holding more than 2-3 weeks inventory cover," said an Australian plastics processor.

"Who could finance it and take the risk in (such) a volatile market?"

Some converters have, according to one Singapore-based polyolefins trader, been constantly caught out by new supply that hasn't arrived due to all the project delays -and now most recently production problems in Saudi Arabia.

This forced them to restock when low inventory levels became quickly depleted during several supply-side shocks in 2009 and into the first weeks of this year. This has made an awful lot of money for the traders.

The converters - and also many of their suppliers who also continue to exercise careful cash-management - appear to be aware of the risk of a sudden collapse in crude and other commodity prices.

The danger of a mini-repeat of H2 2008 lingers. Everyone down all the chemicals chains could again be left with big inventory losses if the bull-runs in crude, commodity and equity markets suddenly come to an end at a time when stocks are high.

But as Paul Hodges, chemicals consultant with International eChem has pointed out, rising crude and chemicals prices automatically increase potential losses - no matter how strict your inventory management.

Watch out for much more on all these themes (and a great deal more) throughout this week.

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 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 John Richardson

IT is always useful to make a note of both what economists are saying and where they are coming from.

To give you an example, I was at a conference last year when I heard a ridiculously rosy outlook for both emerging and developed economies, delivered by an economist working for a certain bank.

This bullishness remains in stark contrast with a refinery industry grappling with overcapacity in the US, for example, resulting in the need to close operations down.

The same will eventually have to happen in petrochemicals in higher-cost countries such as Japan and South Korea when big volumes of much-delayed polyolefin capacity finally hits the market, according to Mazlan Razak, Kuala Lumpur-based petrochemicals consultant with DeWitt & Co.

True, returns from petrochemicals - a very real industry that makes stuff that is tangible and worthwhile (quite often a perquisite in recent times for actually losing money) - were much better in 2009 than anyone had expected.

How good margins exactly were on a genuinely-valid comparative basis (with 2007 during the economic boom) is something we will look at on this blog a little later.

What we can say for certain right now, though, is that volumes on a global basis were way down as Western companies kept overall operating rates at very low levels. I suspect that those who made the best returns were the chemicals traders who guessed the right way during an unexpectedly strong rebound.

Back to my original point, the banks and other financial institutions have a vested interest in talking up this recovery, potentially creating false and harmful optimism among chemicals and other manufacturing companies.

The weight of evidence remains overwhelming to support the view that in the developed world, recovery is anaemic and far from complete.

China is another story which we have dealt with many times before on this blog. It emerged more clearly last week that inflation followed by interest-rate rises are big threats to China maintaining the sort of growth we saw in 2009.

Back the developed world and a new report from the McKinsey Global Institute (see chart below) - Debt and De-leveraging: The Global Credit Bubble and its Economic Consequences.

Most rich countries have seen huge increases in their ratios of debt to GDP (gross domestic product) over the last ten year, according to a summary of the report in The Economist.

Britain and France are the most extreme with increases in their ratios by more than 150 percentage points each, to 465% and 365% respectively.

Financial sector debt increased hugely, in line with the big rise in household debt (it was all the exotic financial instruments which caused the economic crisis that enabled household debt to increase so sharply).

In America middle-income families built up most of the debt whereas in Spain it was poorer families, an example of a lack of uniformity in how household debt was built up across the developed world.

Deleveraging has barely started.

The composition of debt has shifted, however, from the private sector to governments with the financial sector cutting back the most.

Half of the ten rich countries in the survey have one or more sectors that are "highly" vulnerable to debt reduction.

These include households in America, Britain and Spain and to a lesser degree, Canada and South Korea - as well as commercial property in America, Britain and Spain.

The survey looked at 32 examples of sustained deleveraging in the past where the debt/GDP ratios have fallen by at least 10% after financial crises.

Typically, deleveraging began two years after the beginning of a financial crisis and lasted six-to-seven years.

In almost every case, output shrank for the first two or three years of the process.

McKinsey identified reasons why this current period of deleveraging could be more protracted than in the past, which include:

*The scale of indebtedness is higher. The highest previous ratio was Britain at 286% after the Second World War, but on this occasion more than half the countries in the McKinsey survey have debt totalling more than 300% of GDP

*The number of countries afflicted simultaneously is a lot greater, meaning that rapid expansions of output through exports is not easy on this occasion (plus, the export competition from China has increased enormously since the 1980s and 1990s recessions)

*Big increases in public debt, while cushioning the declines in demand in the short term, increase the overall debt reduction that will eventually have to take place. Once private sector deleveraging is done then the public-sector wind-down will have to begin

A further problem is that investors might worry about public-sector debt levels before the private sector deleveraging has been completed, pushing up bond yields - for example, the recent concerns over Greece.

The result could be a cut back in public debt before the private sector has completed its own reduction, damaging growth by far more than if an orderly wind-down takes place.

By John Richardson

CHINA'S capacity expansions in industries including steel, aluminium and petrochemicals continue to astound.

Take polyvinyl chloride (PVC) for example., where, according to a new report by ChemSystems, "capacity (in China) has expanded from 5m tonne/year in 2003 to over 15m tonne/year in 2009, almost 90 percent of total global capacity expansion over the period.

"Despite legitimate environmental concerns, relating both to massive carbon emissions and mercury pollution, the development of acetylene-based capacity in China shows no sign of slowing.

"The government's effort to restrict the construction and expansion of less efficient, environmentally hazardous plants has had little impact on the overall pace of development, although has perhaps prevented some sub-scale projects from moving ahead."

 This makes one wonder whether the huge increase in bank lending in 2009 and the first few weeks of this year has further added to the capacity-building momentum.

As China's coal/acetylene feedstock advantage is mainly located in under-developed Western China, it hardly requires an enormous leap of imagination to figure out that local authorities will have cashed-in on the opportunity while they had the chance.

                                                       Regional PVC Capacity Additions

.

Source of graph: ChemSystems

The consequences of big feedstock and capital-cost advantages will be felt very keenly in Japan, South Korea and Taiwan. If these projects in China couldn't repay their loans would anyone have the ability or desire to attempt foreclosures?

Japan, South Korea and Taiwan have a collective PVC surplus of 2.4m tonne/year which used to be shipped to China, said ChemSystems.

The search for other overseas markets - where greater distance is likely to create freight-cost and delivery-time disadvantages - could be made extra difficult by ongoing North American capacity expansions.

New projects in North America will be targeted for exported as, of course, the region's construction industry is in major crisis, the consultancy added.

Shintech, part of Japan's Shin-etsu Group, Westlake Chemical and Georgia Gulf were all scheduled to have expanded capacity by this year, according to ICIS news.

Taiwan's Formosa Plastics Corp is due to bring on-stream an 180,000 tonne/year capacity increase in Point Comfort Texas in Q1 2010, says the ICIS Plants & Projects database.

US PVC exports were 202,438 tonnes in November, more than double the 91,859 tonnes a year earlier, ICIS news reported yesterday - quoting the United States International Trade Commission (ITC).

For the first 11 months of 2009, US PVC exports were up 54% from the year-earlier period at 1.914m tonnes, the ITC added.

There are yet more problems for Japan, South Korea and Taiwan: Natural gas prices which remain very low relative to naphtha could give ethane-based US ethylene-to-PVC producers an export edge, along with further weakness in the US dollar.

By Malini Hariharan

There is no light yet for companies whose projects have been suspended at Map Ta Phut. Last Friday, Thailand's Central Administrative Court rejected 30 petitions submitted by companies looking to resume work as their projects had received environmental clearance and would not create pollution.

"The outlook is not promising," says a Bangkok-based analyst. He is also not surprised by last week's court ruling. "Nothing has changed for the court to change its mind. All the petitions had information already seen by the court. The court wants companies to follow the constitution," he adds.

And article 67 of the Thai constitution requires health impact assessment studies to be conducted and approved by an independent committee.

The government is still struggling to put together the regulation to implement article 67 and also an independent committee.

Earlier this month, a four-party panel, headed by the country's former prime minister Anand Panyarachun, prepared and submitted a new regulation which was approved by the cabinet. And a 19-member coordinating committee was also appointed to advise the government on approval of projects at Map Ta Phut.

But an environmental group, Stop Global Warming Association, is now seeking to block implementation of the regulation and has filed a petition with the administrative court. The NGO says that no public hearings were held while drafting the regulation despite the fact that it would affect a large number of people and organisations.

Pic Source: Pattaya Daily News

Affected companies are still trying out all options to resume work at Map Ta Phut. Siam Cement said in a statement today that it has already started to comply with the new regulations invoked by the state in accordance with article 67. The compliance process is expected to take between 8-12 months, it said.

And Siam Cement is also trying to "expedite a conclusion through consultation and coordination with official agencies concerned as well as investors to find solutions."

Eighteen projects run by both Siam Cement subsidiaries and its joint-venture companies are among the 64 projects affected by the Supreme Court's order to halt construction. The investment cost of these 18 projects is worth over Baht57.5bn ($1.74bn).

Siam Cement did not identify the 18 projects but according to one industry source the company's joint-venture cracker, hdPE and PP projects are not on the list but a lldPE project is stuck. The blog has not yet been able to confirm this with the company.

Meanwhile, PTT Chem has started its new 1m tonnes/year cracker and expects to achieve on-spec production by the end of this month, reports ICIS news. But sustaining full operations at the new cracker would depend on when parent company, PTT, is allowed to commission its No6 gas separation project at Map Ta Phut.

A PTT source says that the project was 99.8% complete at the end of last year and that construction work is almost over. But after last week's court ruling the company is not able to provide any clarity on when work can resume at the project.

PTT, says the source, plans to work with government agencies and ask them to file a fresh petition in the Administrative court. It is also evaluating approaching the Supreme Court directly. And it also working on a health impact assessment study which should be ready for evaluation by April.

"In the worst case we are looking at a one year delay in the commissioning of the gas plant," says the source.

To keep the new cracker running, maintenance shutdowns will be carried out at PTT Chem's two existing crackers. A 460,000 tonnes/year cracker is due to be shut in mid-February for 35 days while a 515,000 tonnes/year cracker will be shut for 30 days in June.

Extra ethane (around 600,000 tonnes/year) would also be available once PTT completes revamping two of its existing gas separation plants. The revamp project is not the list of affected projects and test runs are due in February.

But even these arrangements may not provide sufficient ethane to the new cracker. "We believe we cannot run it at 100%. We have to wait and see when we finish commissioning of the gas separation plant," says the source.

The delay in the new gas separation plant has implications that go beyond petrochemicals as Thailand will have to import huge volumes of LPG.

"It will be around 100,000 tonnes/month and the government will have to subsidise this. They [the government] are under a lot of pressure. International prices of LPG are in the $700-800 range while the local price is around $330. The government subsidy would be around $1.5bn every month," says the source.

But this is something that the government has known since September last year when the administrative court made its first ruling on Map Ta Phut, points out the analyst.

The Map Ta Phut mess is just one of the many problems that the beleaguered government is facing. The stock market has fallen to a seven-week low on concerns about political uncertainty.

Investors appear to be increasingly worried about an impending collapse of the current coalition government. The Bangkok Post also reports about discontent in the armed forces and rumours of a coup which have spooked the business community.

"Any Old Iron?"

Source of picture: http://www.investorfsbo.com/refinery.html

By John Richardson

A LONG-TERM shift in refinery economics is posing a major threat to petrochemical margins - along with the delayed supply crisis that's likely to hit the industry at some point over the next year.

"Refiners, when the global economy was booming and particularly after the Hurricane Katrina gasoline supply shock, were pushing out naphtha to achieve balance across the barrel," said Paul Hodges, chemicals consultant with the UK-based International eChem.

"But now you have worldwide oversupply in refining with US gasoline demand peaking in 2007.

"You have ethanol as a percentage of total fuel consumption in the States already having doubled from 5% to around 10% and likely to go to 15%.

"The new auto fuel-efficiency regulations, announced last year, require big improvements in vehicle efficiency - another drag on demand."

And then there is the US economy, which, as we've said before on this blog, faces deep-seated long-term problems, including a far-from-complete deleveraging process.

US refineries ran at 78.4% of capacity in the week ended 22 January, steady with the prior week but down from 82.5% a year earlier, according to data from the Energy Information Administration (EIA), which was reported by ICIS news yesterday.

In the US, naphtha supply is unlikely to be the main issue for petrochemical producers as the big natural gas advantage over naphtha has led to a heavy switch to gas cracking. Instead, it's the availability of propylene from Fluid Catalytic Crackers (FCC) that's the big issue

Proof of this pudding came yesterday when US propylene producers nominated increases of up to 14% for February contracts on lack of availability from refineries, according to the same report already linked to above from ICIS news.

"In Asia, where gasoline demand growth is stronger, refiners outside China are being squeezed by the Chinese who have added so much capacity that they have swung into a gasoline export position," continued Hodges - a fellow blogger.

N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz, agrees.

Low refinery operating rates on poor gasoline and middle distillate markets - along with high Asian cracker operating rates - were likely to increase the East of Suez naphtha deficit in March and April, he recently predicted.

"A couple of recent, seemingly incongruous, headlines caught our eye," wrote the authors of the daily energy and shipping report, The Schork Report, yesterday.

They were referring to the Bloomberg story on January 24 - headlined "Morgan Stanley Expects Oil to Rise to $95 (in 2010) on Demand" and one the next day on the same wire service, which was titled: "Refining Profit Stays Weak on Overcapacity, Ernst & Young says".

"Ninety-five dollars on 'strong demand'....huh? Did anyone on Wall Street see Valero's earnings yesterday," continued yesterday's Schork Report.

But as we pointed earlier this week, you have to be aware of why someone might be making bullish growth forecasts.

"Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446mbbl/d of European and North American refining capacity was closed permanently in the fourth quarter (2009) and why another 663m bbl/d was shut down indefinitely and 560m bb/d partially shut down," the report added.

This amounted to lost oil demand of 1.7m bbl/d by the end of last year, the Schork Report calculates.

But this doesn't mean it's ruling out the possibility of $95/bbl by the end of this year.

If the financial speculators continue to spin their "sustained global economy recovery" story successfully while credit remains cheap and plentiful on continued strong worldwide government stimulus and China doesn't come off the rails, conceivably, yes. Why not?

But this would mean more pressure on refiners margins because even crude around $70/bbl is too expensive given the current economic fundamentals, never mind $95/bbl.

Petrochemicals would be squeezed from both ends of the product chain as refiners cut back even further, thereby reducing feedstock availability - with the firmer crude setting a higher floor for raw material costs.

Producers could also soon face, as we've already said, the long-awaited petrochemicals supply surge and damage to economic growth caused by the higher crude.

I am often accused of being overly pessimistic, but I really do believe petrochemical and chemical companies in general need to plan for a very difficult few years. It would be in everyone's best interests to plan prudently. 

A post-Chinese New Year dream....

Source of picture: http://www.scsa.net.au/

By John Richardson

The large amount of polyolefins delivered to China over the past few months is causing further head-scratching and anxiety among producers and traders.

One view, well rehearsed previously on this blog, is that this is further evidence of a speculative bubble that will pop as a result of tighter bank lending in China.

There might be even more pressure on this "bubble" following China's 12 February decision to raise bank-reserve requirements for the second time in a month.

However, some economists argue that was only to be expected, and is a regular tightening exercise that takes place post Chinese New Year (CNY) to even-out lending. There is traditionally a surge in lending ahead of the CNY.

The big anti-inflationary step, which has yet to happen, would be to raise deposit and/or lending rates, they argue.

Returning to polyolefin markets, the optimistic view is that widely reported high inventory levels will be quickly absorbed when CNY comes to an end (the official holidays in China run from 14-19 February).

High stocks are being reported both in bonded warehouses (for imported US dollar-priced material) and in other warehouses (for locally, yuan-priced product).

"Around 1.3m-1.4m tonnes of polyolefins were delivered to China in December and a further 1.3m-1.4m tonnes in January, according to our analysis," said a Singapore-based trader, who is among the optimists.

"Although China's imports of many products are generally high in December, prior to a slowdown for the [Lunar New Year holidays] in January/February, the volumes this December were exceptionally high," said Jean Sudol, president of US-based trade-data analysis service, International Trader Publications.

This suggests that there might be inventory pressures in China in more than just polyolefins, given that January is always a quiet time for demand across the board.

So what drove reports of in the context of what is already going to be a stellar year for shipments to China?

"In early November, linear low density polyethylene (LLDPE) prices for physical cargoes were below those on [the] Dalian for the settlement month of May 2010 and beyond," said the trader.

(China's Dalian Commodity Exchange offers monthly futures contracts in LLDPE film up to a year ahead. The contracts have become an important indicator of sentiment and therefore physical price direction).

"The stronger futures pricing in early November reflected crude increasing to around $82/bbl and forecasts from banks that it would reach $95-100/tonne in 2010," he added.

"It was also down to confidence that Chinese growth would remain very robust in 2010.

"[The] Dalian is used as a proxy for the direction of all physical polyolefin pricing, and so we saw a lot of interest from traders in acquiring all grades of PE and polypropylene (PP) to ship to China, after this early November turning point."

Low density PE (LDPE) was also buoyed by very tight supply due to outages, he said.

This analysis of what drove increased imports and prices in November-January was supported by a source with a major global polyolefin producer.

"It's easy to assume high inventories in China indicate a bubble, but I am not that sure," said the source.

"On the growth side, yes, measures have already been taken to cool the property sector. There might also be a little less easy money available to fund speculation and discretionary spending on consumer goods.

"But I think this will be replaced by further strong consumption growth in less-developed regions, and huge government infrastructure spending throughout China.

"Infrastructure projects launched last year have yet to be completed with more spending on roads, railways etc still to come."

The Singapore-based trader and the source with the producer both point to the absence of panic among the Chinese traders and distributors holding high stocks.

"Nobody is in a rush to liquidate. The reason is that despite the credit tightening, possible US restrictions on proprietary trading by banks and more anxiety over European government debt problems, polyolefin pricing has only edged down since late January," said the trader.

Prices for several grades of PE in Asia fell by $10-50/tonne for the week ending 5 February, according to ICIS pricing. PP remained either stable or increased by $20-30/tonne, depending on the grade.

Both PE and PP pricing were reported to be stable for the week ending 12 February as the Asian market was closed for the Lunar New Year holidays.

One might well ask what on earth the connection is between a possible US clampdown on investment banks, sovereign debt issues in southern Europe and polyolefin pricing.

"The link is that on a day-to-day basis at least, sentiment in wider commodity and equity markets is playing an increasing role in what people are prepared to pay for polyolefins," said the producer.

Low producer inventories outside China are a big factor behind why pricing has only eased slightly since the gloomy macroeconomic news broke, said the trader.

"Producers have managed their stocks so well that they can afford not to budge on what is pretty much theoretical pricing at the moment, as the market is so quiet ahead of the [Lunar New Year]."

Concurring with the producer's view on continued strong economic growth in China during 2010, the trader added: "As early as the first week of March, we should begin to see the strength of demand after the New Year.

"I think we will see these high polyolefin inventories easily absorbed as Chinese buying picks up ahead of the peak season for manufacturing finished goods, which occurs during the summer months."

Let's hope for everyone's sake that he proves to be right, as further strong support from China is crucial for the survival of this tentative, very nervy and very patchy recovery.

A roar or a whimper?

Source of picture: http://break4fun.zarke.net

By John Richardson

THE ASIAN aromatics market has had "both its legs chopped off below the knees, and has also had its proverbial hands broken," said an Asian-based petrochemicals consultant today.

"As a result, we are crawling in a great deal of pain towards what should be a better outlook for supply and demand after the Chinese New Year (CNY) holidays."

The holidays officially this Friday, but buyers are not expected to return in big numbers to any petrochemicals market until the first week of March.

"In benzene, it's largely about China (surprise, surprise), which went from being a major net exporter in September and October to being on the verge of balanced in November and December," the consultant added.

"In September and October exports were 40,000-55,000 tonnes for each of these monthd. This swung to exports of only 7,000-8,000 tonnes in November and the same quantity in December."

Ahead of this steep decline, RMB prices increased by enough above US dollar values to open arbitrage - leading to a ramp-up in reformer and cracker-based production elsewhere in Asia.

But now with RMB and dollar prices at parity, China could soon swing back to big export volumes.

High inventory levels also point to this happening. Sinopec, for example, had 24,000-25,000 tonnes in storage compared with the usual 17,000-21,000 tonne with stocks likely to be at elevated levels elsewhere in China, the consultant added.

"Benzene inventories are a bit worrying, but toluene is positively scary. Normal total stocks in China are approximately 70,000 tonnes, but know there is around 150,000 tonnes in the tanks," he said.

Mixed xylenes (MX) inventories in China totalled around 100,000 tonnes this month as against the normal 50,000 tonnes, he added.

Toluene and MX production peaked at the same time as benzene - in November and December last year, he said.

"The good news for toluene is that when seasonal gasoline demand picks up, this surplus should easily be absorbed for blending.

"But there's a great deal of uncertainty around the strength of post-CNY demand for benzene derivatives and down the fibres chain."

Overproduction of BTX in general was the result of the market paying too much attention to a bullish macroeconomic outlook and strong crude, with oil prices reflecting this outlook, he continued.

An aromatics trader added: "OK, accepted that benzene also faced production problems on weather-related delays to naphtha shipments in November-December and naphtha-benzene spreads were excellent, but this still didn't justify levels of production.

"This was a time of weak end-user demand, which everyone realised. Too much attention was being paid to the forward curves, with traders easily able to take positions because of ample bank lending in China."

This was what we had earlier been told had driven the rise in C6 production.

As with polyolefins, therefore, the strength of real post-CNY demand will be critical to whether these high stock levels will be easily absorbed.

An awful lot is going to hinge on the effects of recent credit tightening.

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

THE current glum mood in the Asian fibre intermediates chain is in stark contrast to the optimism in polyolefin and other petrochemical markets.

A broad-based price rally has occurred following the end of the Chinese New Year (CNY) holidays belying fears, for the time being at least, that China's credit tightening will force a decline in pricing.

But the contrasting misery in paraxylene (PX) through to bottle and fibre-grade synthetic resins serves as a warning of how overconfidence can be a dangerous thing in this exceptionally uncertain economic environment.

Back in early November it was assumed that Chinese textile and garment manufacturers would - as they have nearly always done in recent history -benefit from a pick-up in orders from the US.

So stocks of paraxylene (PX), purified terephthalic acid (PTA) and synthetic fibres began to build up.

"What also led to the inventory build at a time when business would normally be fairly quiet were expectations of higher crude prices," said Leonard De Guzman, Philippine-based petrochemicals consultant with DeWitt & Co.

The US orders didn't come in because textile and garment business was lost to Brazilian, Mexican and other non-Asian competitors, and oil prices didn't go up.

"The cost-consciousness of the Western retailers, such as Wal-Mart and JC Penney, is getting even more ferocious, meaning even Chinese garment manufacturers are not cheap enough," De Guzman added.

"I just don't see a quick recovery on the High Street in the US and Europe and this will continue to place pressure on the Asian apparel and non-apparel industries.

"Despite all the talk of rapidly rising domestic consumption in countries such as China, this is still a heavily export-dependent region and so trade with the West remains crucial."

This trade needs a kick-start ahead of the crucial March-to-May production and sales season.

"What's stopping this from happening at the moment is cotton prices," continued De Guzman.

"Very poor harvests in Q4 2009 in China and the US led to the China and New York futures markets registering steep rises over the CNY week."

Bumper harvests were reported in India, Bangladesh and Pakistan but this had no effect on the cotton price as none of these countries had futures markets, explained De Guzman

"And so now we have synthetic fibre prices being supported by cotton. The textile mills in China, which are running at average operating rates of 60%, need a break from cheaper raw materials.

"The price of cotton is keeping synthetic fibers high as fibre makers are linking their prices to cotton rather than raw materials."

Fibre economics were very good with staple filament yarn at more than $1500 and raw material costs at $1130, said De Guzman

"This link to cotton is the reason why their customers - the textiles and garment manufacturers - lost orders, and so this could be the wrong decision.

Polyethylene terephthalate (PET) bottle chip economics were very different as producers were struggling to keep their heads above water, he added.

Further upstream from naphtha, margins are being squeezed.

"Naphtha was at $730/tonne CFR Japan recently which compared with spot PX at $1,000-1,020/tonne CFR China," said De Guzman.

"The PTA producers are on paper actually doing alright. With PX at around $1,000 tonne the minimum needed to cover production costs is $830/tonne CFR China, and so the current PTA price of $950/tonne CFR China is very comfortable.

"But sales or transaction volumes are likely to be very low at the moment, which is why the PTA price hasn't budged for some time.

"It should fall, but when a PTA producer asks his customer 'If I cut my price would you buy more?' the usual answer is no, so there is no incentive to do so."

Despite the broad-based post-CNY price rallies, De Guzman worries that too many buyers in too many product chains are chasing higher oil prices rather than responding to stronger demand.

"I just don't see the demand there, not in the fibre chains, not in styrenics - not anywhere in fact."

By Malini Hariharan

Many Asian aromatics producers are optimistic that the worst is over and a gradual improvement in global demand coupled with firm Chinese demand will help them through 2009.

There is also the expectation that a pressure on refining margins will lead to more plant closures which would also help the aromatics business.

A source at an integrated refinery and aromatics producer points out that nearly 2m bbls/day of refining capacity addition took place last year and another 800,000 bbls/day of capacity is due by next year.

"This will be offset by reduction in capacity in Europe and the US. We have seen reports that suggest that nearly 7m bbls/day of capacity will have to close," he says.

"In the future the refining industry needs more investment to meet environmental regulations. Investment at old plants this investment is not justified and they will have to close," he adds.

An industry analyst says that every refiner talks of closures but wants another company to implement them.

Refiners with high cost facilities in the West are the ones under greatest pressure but pushing through a capacity reduction programme is not always easy as Total's experience in France shows.

The company confirmed on 8 March that it would permanently shut down its Dunkirk operations due to a collapse in demand. The refinery had been idled in September last year.

Despite assurances of zero job losses unions were quick to call for a new strike.

The first source says that some refineries may limp along for a year or two. But eventually poor profitability will force a shutdown although governments may have to step in to help companies close plants.

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.

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.

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.

Flagging Recovery

Source of picture: www.guardian.co.uk

By John Richardson

THE latest US Institute of Supply Management survey signalled a buoyant manufacturing sector, in line with likely Q1 GDP (gross domestic product) growth of 5%, says the latest Weekly Chemistry and Economic Trends report from the American Chemistry Council.

"Consumer spending is expanding and this continued into March as evidenced by light vehicle sales. Moreover, consumers appear to be regaining some degree of confidence," continued the report.

Light vehicle sales rose from an annualised 10.4m units in the year to February to 11.8m in March with the Conference Board's latest consumer confidence index showing a strong increase.

But as fellow blogger Paul Hodges points out light vehicle sales were 15-17m per year in 1995-2007.

"With each auto using $2973 of chemicals, according to the ACC, this means the market is currently worth just $35bn versus its peak of over $50bn," writes Hodges.

And the 162,000 improvement in non-farm payrolls - announced late last week which has contributed to this week's rallies in equity and crude prices - was placed into context by the excellent Lex Column in the Financial Times over the weekend.

"Recruiting for the census and a rebound from snow-hit February boosted the count, but clearly more people were hired than fired," writes Lex.

"The problem, however, is that the job market is unlikely to stick to the recovery script from here.

"Natural workforce growth is one impediment, as is return of the discouraged. The broadest measure of unemployment, capturing those who give up or take part-time work, stands at 18 per cent. Moderate economic growth will keep headline unemployment frustratingly close to double digits.

"From where will a strong rebound in demand for US goods and services come? China is tightening and Europe is moribund. US states must rein in spending. Inventory restocking is largely complete, so businesses need higher sales to generate activity.

"Ample spare capacity means industry can survive with little investment. Small businesses, responsible for almost half of recession job losses, need to seek credit from regional banks feeling nervous about commercial real estate exposure."

Hear, hear. From a chemicals-industry perspective, there's clearly a risk of mistaking restocking from historically-low inventory levels for a solid recovery.

Source of picture: www.wrh.noaa.gov/hnx/newslet/sum...mber.htm

By John Richardson

Hope springs eternal when it comes to trying to fathom the direction of the polyolefin market in China.

One particular hope rests on March import numbers from China Customs, due to be released later this month.

The data might just give a pointer to the extent that new local capacity has displaced the need for imports - and whether all the talk about credit-tightening has translated into weaker demand.

"March will be the first 'normal' month in 2010, when comparisons might just be valid with import volumes last year. Late January and the whole of February were distorted by the build-up to the Chinese New Year," said a Southeast Asia-based petrochemicals consultant.

New local capacity includes Tianjin Petrochemicals. Volumes from the recently-started complex are being seen in much greater quantities in the market, according to several traders and producers.

The Dushanzi Petrochemical complex also recently came started up in China. Some sources report large volumes from this site hitting the market, while others have yet to see significant deliveries.

Output from new plants is being absorbed as producton from the Fujian Refining & Chemicals complex, which came on stream at the end of August last year, is close to 100% of capacity, according to a source familiar with its operations.

But what will make the March numbers hard to read, as so often happens with China import statistics, was until recently a huge inventory overhang in polyethylene (PE) - the result of heavy buying by traders of overseas material late last year.

"I remember that you had asked me where all these heavy imports were going," said a source with a major 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."

Credit remained extremely easy to obtain late last year with less concern over the Chinese government's efforts to cool the economy down, said a Singapore-based polyolefins trader.

"Many of the traders made the dangerous assumption that the future would be the same as the past.

"Recently, the government has been talking about cutting loan growth by 22% compared with 2009."

Such has been the inventory overhang in PE that small quantities of resin imported into China has been re-exported to Brazil, Bangladesh and Israel, the trader added.

But my fellow blogger Malini Hariharan, who was in Shanghai last week, talked to Asian producers and traders who reported that PE inventories are slowly coming back to normal as a result of a dip in buying activity.

What is strange is that PP shipments also surged late last year - and yet the PP market is in radically different shape to that of PE.

"Our assessments of rolling inventory indicate that PP stocks in China have not been as high as those for PE," the Southeast Asian-based petrochemicals consultant added.

"Reduced availability from the US in January-February has certainly been a factor behind this and this has been reflected in pricing. Whereas PP pricing had remained pretty solid over the past few weeks, PE slipped by $50-60/tonne."

The drop in supply from the US is due to the 53% rise in propylene costs since November 2009, with April contracts prices settling at 7 cents/lb ($154/tonne) early last week.

In short, therefore, if the March import figures show a sharp drop in both PE and PP this might tell us little about the underlying, long-term state of the market (PE numbers could be down on this huge inventory overhang with PP also lower, partly on lack of availability).

And if the statistics surprise on the upside, be careful of anybody who argues that this is a firm indication that China's underlying demand is booming.

"OK, credit has got a little tighter locally, but there are still an awful lot of speculators out there," continued the Singapore-located trader.

"I have done a lot of business with other traders in China who only want to buy resin in order to get hold of the 90 days' credit for speculation in other commodities.

"A lot of foreigners don't understand what continues to underpin demand in China.

"These traders will buy resin in US dollars and then sell in Yuan at a loss to local end-users. They will then use the credit to try and make money in steel, coal and other hot commodities before the 90 days are up."

This complex intra-trade business is now been further bolstered by rising expectations of a Yuan revolution, he added.

"The hope is that if you borrow in US dollars and convert to Yuan the local currency will have strengthened by the time your 90 days are up."

This suggests that a bursting of the bubbles in steel, coal and other commodity prices would have a big knock-on to demand for polyolefins, as would a Yuan revaluation.

And it also suggests that any month's polyolefin import statistics need to be taken with a large pinch of salt.

So what's the sentiment like among buyers then, perhaps a more useful pointer to the underlying state of the market?

"Overall, it's one of cautious optimism over the economy. But they know there's a lot more new capacity just around the corner," said a Hong Kong-based polyolefins trader.

New ethylene capacity in Asia and the Middle East alone - including, of course, a lot of downstream PE - will total 9.5m tonne/year in 2010 with global demand growth in normal market conditions around 5m tonne/year, according to ICIS data.

"Increased supply from the Middle East has been particularly big in linear low density PE (LLDPE) so far this year," continued the Singapore trader.

"A major producer from the region plans to deliver 40,100 tonnes into warehouses in Singapore in April for sale to China and Southeast Asia.

"This same producer only sold a total of 200,000 tonnes to China in the whole of 2009."

He added that high density PE (HDPE) would also get ugly.

New PP capacities in 2010 include the 800,000 tonne/year Borouge plant in Abu Dhabi and the 400,000 tonne/year Siam Cement facility in Thailand.

The Borouge plant will start up in the third quarter and Siam Cement in the fourth quarter, according to ICIS plants and projects.

The volume of new capacities seems to be far too big to prevent a severe margin-squeeze at some stage, with most estimates indicating that this will happen in the fourth quarter this year.

But making an educated guess about what this margin-squeeze will mean for the China market remains about as easy as nailing water to the wall.

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

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.

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.

Source of picture: omniglobal.com

By John Richardson

A FASCINATING theme to emerge from last week's Asia Petrochemical Industry Conference (APIC) in Mumbai was a growing belief in refinery integration in Asia as a means of being able to compete with the Middle East.

Reliance Industries is planning a giant cracker complex based largely, if not entirely, on off-gases from its Jamnagar refineries. These off-gases will come from fluid catalytic crackers and delayed coking units. This is the first time an investment of this kind has ever been tried.

And, of the course, the well-established Shell Chemicals and ExxonMobil mixed-feed cracker technologies have created a highly profitable production platform in Singapore.

Shell Chemicals officially opened its new Singapore cracker two weeks ago. It can crack very light feeds all the way to the very heavy feeds.

Shell has adapted its hydrocacker, which is part of the company's existing refinery in Singapore, to supply hydrowax as a cracker feedstock.

ExxonMobil is also due to bring on-stream its second mixed-feed cracker complex in Singapore in 2011-12.

"This current new wave of Middle East projects is not as competitive as the last wave because firstly, capital costs are higher and secondly, they are cracking a higher percentage of propane and butane due to the ethane-gas shortage," said an industry source

"Propane and butane doesn't deliver as stellar margins as ethane as the local liquefied petroleum gas (LPG) price formula is linked to the naphtha price in Japan minus a 28% discount.

"I would also argue that the new Saudi propane dehydrogenation-to-polypropylene (PP) complexes face the problems of a capital-intensive technology and a technology that's difficult to operate.

"Plus conversion of propane to propylene is only 15% per pass and a lot of energy is needed to heat and cool these plants."

Ethane gas-supply is so limited in Saudi Arabia that there are very few new crackers due on-stream in the Kingdom post-2012

Liquids cracking in Saudi Arabia - or anywhere in the Gulf for that matter- makes little economic sense, according to some consultants.

Do you agree that Asia has an opportunity to work the refinery-petrochemicals integration even more to its advantage in the future?

Or have we fallen victim to a load of company flannel?

By John Richardson

WE will explore the following issues in a lot more detail over the coming days, assuming that the crude and financial market turmoil continues.

But for now here follows the interpretation of the crisis from a source with a major polyethylene (PE) producer.

The themes are consistent with what we have been picking up from numerous conversations at APIC and this week.

In summary, here, and as I said we will give you more details later, this crisis is financial-sector driven and doesn't reflect the strength of growth in Asia - which has been very good. The US has also enjoyed a moderate recovery.

But if confidence goes, and the financial-sector fear spreads to the wider economy, then there could be a new global recession.

But to talk about collapsing chemicals demand is far too premature. Prices have so far corrected on lower and increasingly volatile crude oil as inventories are re-adjusted.

Enough - I am getting carried away!

In his words, our source told us last night:

"The European market remains tight because of outages and operating-rate discipline. Overall cracker op rates remain at around 80% and the tight market means that price rises to compensate for higher dollar-based feedstock costs are being pushed through. For example, Dow has announced (an attempt at) a Euros70/tonne PE price rise.

"The high PE inventory levels in China could well be the result of material imported in November-December when prices were low."

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

Asian polyolefins (PO) producers are seeing no signs of an immediate recovery in demand and pricing as buyers in the key China market continue to remain on the sidelines.

There are just too many negative factors, says one producer referring to concerns about the economic health of Europe, the Chinese government's efforts to control asset bubbles, volatile crude oil and additional supplies from new plants in the Middle East and China.

This is probably the reason why prices in the physical market did not increase despite an improvement in linear-low density polyethylene (lldPE) futures on the Dalian Commodity Exchange.

A second producer does not expect Chinese demand to pick up for the next couple of months. "The controls on real estate mean that the construction sector will be weak. We are also hearing that car companies are holding very high inventories of more than 1m cars; they do not want to produce more. And while the film sector is not too bad, the agricultural film season is over," he explains.

Chinese exporters of finished products are reported to be seeing delays in shipments as European buyers have asked for deliveries to be spread out over a long period.

And another worrying trend, says a market participant, is that Chinese buyers at the second level of polymer distribution chain are backing out of contracts. That is contributing to the pessimism, he adds.

Asian producers are also anticipating higher export volumes from the US where domestic polyethylene (PE) prices are continuing to fall.

US producers have reduced June offers by 4cents/lb, reports ICIS news. And buyers are gunning for further reductions.

"I expect more, maybe a couple of cents," a US buyer said. "Our demand isn't slow. I think they [producers] just built up inventory while pretending they were short."

A question that is being increasingly asked is whether Asian producers will start cutting operating rates to prop up markets.

But as can be seen in this chart, from ICIS pricing, margins for Asian naphtha crackers have fallen sharply in June but are still fairly comfortable at around $200/tonne.

"The second half of 2010 could get more dicey especially if the new Middle East capacities for ethylene and PE flood the market. Margins will then start to deteriorate. In 2001, Asian cracker margins were not even $100/tonne. We are not there yet but the potential of getting there is very real," says Larry Tan, ICIS pricing's director of data & analytics in Asia.

But in the midst of all the pessimism certain segments such as lldPE hexene and lldPE octane are doing well. Producers' inventories are still at manageable levels. And there is confidence that Chinese demand for local consumption will remain strong, although exports, despite the jump in China's May numbers, is a matter of concern.

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.

Petronas seeks to scale new heights

Source of picture: www.mir.com

By John Richardson

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

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

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

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

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

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

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

....again

By John Richardson

THE sharp fall in polyethylene (PE) pricing in China is being blamed on speculative acquisition of cargoes by traders in March and a rise in local production.

Apparent consumption (imports plus local production) is reported to have surged to 1.7m tonnes in March and 1.5m tonnes in April compared 1.3m tonnes in February and an average of 1.3m tonnes per month in 2009.

These high numbers reflected both stronger imports than in January and February and successful stabilisation of production at several new plants in China. Domestic production is said to have averaged around 800,000 tonnes per month so far this year compared with less than 700,000 tonnes a month in 2009.

This is slightly different from the story we were told last week, when traders and producers were blaming excessive inventories on high overseas bookings dating back to as early as November-December of last year.

But as a senior industry source, who has worked in Asian polyolefins for 25 years, told the blog today: "You can obviously hold PE in storage for an unlimited amount of time - and there is a willingness in China to hold on for long periods - so the high stock levels could be a combination of both November-December and March bookings."

Interestingly, stock levels for polypropylene (PP) appear to be far lower with apparent consumption only around 1.1m tonnes/month in March and April - about the same as the monthly average for 2009.

"This reflects the fact that there are far more speculators in PE than PP, the reasons being bigger PE capacity and the ease of substituting PE for PP. PP is harder to substitue for PE because of shrinkage and other issues," the senior industry source added.

So why did the traders pile into PE imports in March at a time when it must have been very clear that local production had substantially increased?

One factor was probably confidence in the economy - somewhat undermined since by measures designed to cool-down the property sector.

My fellow blogger Paul Hodges also points out: "Don't forget that in Q1, Goldman came out with incredibly bullish noises about $96/bbl oil, whilst all the technicians were busy forecasting higher prices by end-June." (there were other equally bullish forecasts)

"If one was a trader on the Dalian Commodity Exchange (where a futures contract in linear low-density PE is traded), one would have seen the oil price rising in March - the bullishness of many analysts about the outlook for China and oil.

"This was occurring while the  physical linear-low density PE (LLDPE) price was actually weakening."

The problem is that futures and physical traders are one and the same so confidence in the Dalian might have been infectious - prompting the rise in imports.

The big question now is whether this is just a period of temporary indigestion or is the start of a sustained macro-economic and PE supply-driven downturn.

Cautious hope was being expressed late last week that pricing might have reached the bottom.

"I believe we are floating at the bottom of the market at this point and appropriate operating rate corrections will be made by producers to prevent further declines," said a source with a major North American-based global producer.

"In China, going by an annualised 10% growth in consumption, even without economic stimulus, the increase in domestic capacity of 19%  taking place this year should still allow imports to remain steady."

But Hodges makes a very strong case - as I have in the past but now remain slightly less convinced and a little more hopeful (or maybe I am living in cloud cuckoo land?) - that the game is over as the global economy weakens.  

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

Source of picture: irantrip1wordpress.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By 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

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.

The layout of the Pasir Gudang complex

Source of picture: Titan Chemicals

By John Richardson and Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

ASIAN aromatics producers are struggling from an oversupply driven both by weak demand for their products and strong overall reformer economics, the blog has been told.

As this chart below illustrates for benzene, toluene and xylenes (BTX), the price declines for these base chemicals mirror those we have reported on extensively in the olefins chain.

The weaker demand outlook in China is impacting BTX and its derivatives after the strong growth seen in 2009.

Additionally, weaker naphtha pricing and higher octane differentials between the 92 and 97 grades of gasoline point to strong reformer operating rates over the next few weeks, says N Raviventatesh, Singapore based consultant with Purvin & Gertz in his latest Asian petrochemicals feedstock report.

This report from ICIS news points to a moribund naphtha market dogged by increased supply and weaker demand due to the Formosa Petrochemicals cracker outage, with crack spreads the weakest for all the refinery products.

China has also added a lot of refinery capacity of late and has become a more significant exporter of gasoline as it runs its refineries hard for what my fellow blogger Paul Hodges describes as "social stability and job-creation reasons".

BTX values could therefore suffer further, as has so often been the case in the past, from factors beyond the control of the chemicals industry.

But as Ravivenkatesh points out, his assumption of high reformer operating rates depends on no significant cutbacks in naphtha production.

And with cracker margins still on the decline in Asia, we seem to be getting close to the point of cracker rate cuts - by possibly as early as August. This would further help to rebalance BTX markets through less availability via pygas.

Will this year's K-Fair see some major announcements to take advantage of the relative fall in ethylene costs?

Source of picture; http://www.k-online.de/

By John Richardson

THE rise in the price of propylene relative to ethylene is exercising the minds of senior executives in the polypropylene (PP) industry.

As fellow blogger Paul Hodges highlighted earlier this month in a post on this subject, C3s have moved from being a disposal problems in the 1970s through heavy investment in PP technologies.

Ethylene and benzene were in tight supply, and therefore polyethylene (PE) and polystyrene (PS) more expensive, adding a further push to PP innovation. 

This investment led to demand growth for propylene at 1.2 times global GDP (gross domestic product) by the mid-2000s compared with 1.0 GDP for ethylene.

But just as we have seen with the shale-gas revolution in the US that has transformed the economics of the country's PE industry, tipping points can be reached and surpassed before you even know it.

So is the case with PP where greater consumption of the polymer, along with other propylene derivatives, and reduced refinery and liquids cracker operating rates have inverted traditional price relationships.

As Paul points out in his article, the solution to expensive C3s relative to ethylene could come from on-purpose propylene, but a senior Singapore-based source with a global poylolefins producer told the ACC blog yesterday:

"A problem with the propane dehydrogenation-to-PP process is that it is extremely difficult to operate and expensive because although propane and butane is supplied at a discount in Saudi Arabia, it is still a discount from a market price (Note from the blog: 28% off the prevailing CFR Japan naphtha price. This is unlike ethane which has been traditionally priced based only on the costs of separation and distribution as it has had no alternative value - although this is changing)

"Bio-based propylene production has yet to be proven and the Chinese government has also closed the door on coal-to-olefins projects (Note again from the blog: over-investment has led to restrictions on new projects. A tougher approvals process is also the result of lower oil prices and concerns over the environment).

"But PP is by far the biggest derivative of C3s and so this will limit the upside for propylene as PP is a pure commodity. Once prices reach a certain level, and we are already seeing this, PP will be replaced by high-density PE (HDPE)."

Right now of the three major grades of PE, HDPE is suffering the most from oversupply because of big new capacities, polyolefin traders tell the blog.

So perhaps we are about to see some major innovations in PE to take advantage of longer ethylene markets.

The blog has heard that big announcements on new PE technologies are expected at this year's K-Fair.

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 Malini Hariharan

The advent of shale gas and a fall in natural gas prices has already altered the fortunes of US ethane-based petrochemical producers. And now a new report says that the advantage is here to stay.

The Energy Information Agency (EIA) estimates that the US has 1,744 tcf (trillion cubic feet) of technically recoverable gas of which 550 tcf is shale gas. Based on the country's 2007 production rate there is enough gas to supply the US for the next 90 years, says Ahmed Hassan of Alembic Global Advisors.

His analysis shows that shale gas becomes economically viable to drill at prices above $5/mmbbtu which suggests that there is scope for upward momentum in current US gas prices.

US Shale Gas economic viability analysis (USD'000 unless otherwise stated)

"From a chemical industry perspective as long as natural gas prices remain at or near $5/mmBtu and crude oil prices remain above $70/ bbl the US industry will be extremely advantaged. Under such an energy price regime our proprietary global ethylene cost curve pegs average US ethane based production costs at $650/tonne (29c/lb) comparable to the newly starting up Saudi mixed feed facilities at $500/tonne (23c/lb) but well below marginal naphtha based costs of USD1,250-1,350/tonne (57-61c/lb) and current price levels of USD870/tonne (40c/lb)," he writes.

A continued disconnect between crude oil and natural gas prices means that US producers would remain substantially advantaged relative to naphtha based marginal producers which today account for over half of global supply.

http://www.icis.com/blogs/asian-chemical-connections/2010/03/the-changing-world-of-gas.html

Jurong Island

Source of picture: www.pcs.com.sg

By John Richardson

SINGAPORE plans to eventually raise its ethylene capacity to 6-8m tonne/year from the 4m tonne/year which will be reached when ExxonMobil's second cracker complex at Jurong Island is on-stream, Liang Ting Wee, Director of Energy and Chemicals at the Economic Development Board (EDB), has told the blog.

This confirms what industry sources have been telling us for several weeks now - that the country could build several new cracker complexes after the ExxonMobil start-up, which is expected by 2012.

Speculation is intense as to whom the investors might be and we are attempting to confirm various rumours. We will keep you posted.

Feedstock options being assessed for the new ethylene capacity include more use of refinery bottoms - refinery products from the bottom of distillation columns which can have low alternative value in fuels markets.

The Shell Chemicals and ExxonMobil existing crackers - and the second ExxonMobil plant - already make use of these refinery products, thanks to the companies' mixed-feed cracker technologies.

Another option being evaluated is liquefied petroleum gas (LPG) as Singapore continues with its evaluation of an LPG terminal.

Qatar Petroleum might end up being a key LPG, and also condensate, supplier to Singapore following its acquisition of stakes in Petrochemical Corp of Singapore and The Polyolefins Co last November.

Source of picture: anirudhsethireport.com

By John Richardson

WE reported earlier this week that cautious confidence is being expressed that the worst might be over in polyolefin markets with prices having reached the bottom.

"The market seems to be improving and my view there is no much room for further price corrections from a cost standpoint despite the oversupply," said a source with a major global producer in response to earlier our story about the 30% increase in Chinese production in H1.

"If demand recovers or even holds, prices should stabilise at slightly higher levels to where they are today,"

I hate to be pessimistic yet again, though, but sadly I think that any recovery could be a dead-count bounce - an edging-up by producers of prices $10-20/tonne every week or so because of a moderate re-stocking and the cost factor mentioned above.

This is barring major operating-rate cuts - or even some quick decisions on further permanent plant closures which we also talked about earlier this week.

"We haven't seen the worst of things yet and without some permanent shutdowns by higher-cost Japanese and other producers, we will remain in a down cycle throughout 2011 with no recovery until the following year," a senior industry source told the blog.

His view is that the moderate price-recovery currently being talked-up might actually be bad news as it will delay painful decisions on scrapping capacity.

"What we actually need are price reductions of around $50-100/tonne a month rather than any increases," he added.

On the demand, side, as we've said before, China's economy is clearly slowing and problems in the West are mounting - meaning that a rebalancing is needed, even if in the longer-term the outlook for Asia remains amazingly good (the tantalising prospect of shortages beyond 2012 might well put paid to the rationalisation our industry source would like to see, forcing everyone to muddle through).

A very interesting, well-written and extremely thorough article from my colleague Mark Victory at ICIS news earlier this week said that summer demand in Europe across a range of chemicals and polymers was stronger than had been expected.

Here we are broadening the perspective out. The blog doesn't have the resources to, on the whole, cover anything more than the olefins and polyolefins markets, but we from time ot time we are able to point out parallels with what's happening elsewhere in the chemicals industry.

Mark's article points out, though, that factors other than fundamentally strong demand can be used to explain this brighter picture.

I can't also help feeling that there is a lag-effect here - e.g. European sellers of chemicals and polymers into the auto market have yet to be hit by the slowdown in demand from China.

The American Chemistry Council (ACC) late last week also reported a global slowdown in chemicals production, according to an article by another of my ICIS news colleagues, Nigel Davis.

He wrote: "The 'V'-shaped recovery in Asia Pacific has stalled, or "dissipated" in the ACC's words. European output growth has continued to show strong gains but there has been individual national output weakness.

"Production in the UK, for instance, has dropped for the past three months compared with the year-ago periods. UK chemicals output is slewed considerably towards pharmaceuticals, a segment facing tough times, but the country's more basic chemicals output has not recovered strongly.

"The situation across Western Europe is generally different, with a strong rebound apparent from the sharp fall in output in 2008-2009 in countries such as Germany and France.

The pace of growth, however, eased off slightly in June and prospects for the second half do not look good."

Singapore's Marina Bay Sands complex

Source of picture: Washington Pos

By John Richardson

"SUCCESS in this business, whether you are tracking price direction or planning new investments, is 95% about feedstock," says a senior European-based sales manager with a global polyolefin producer.

So perhaps it shouldn't be a great surprise that a considerable amount of the planning and thinking going into Singapore's next wave of petrochemicals capacity relates to raw materials.

To say that this business is 95% about raw-material advantage, however, may, in some instances at least, be an overstatement.

Energy efficiency, the environment and logistics matter a great deal, too, which is also reflected in the discussions taking place in Singapore as the Jurong Island Version 2.0 strategy is compiled.

Working committees have been established involving the government and the private sector to help formulate the new direction in these areas.

Singapore is already a major regional supply source with sufficient competitive advantages and so where it goes from here will be the focus of keen interest from Houston to Beijing.

Despite having no oil or gas reserves to draw on, the country has still managed to build cost-efficient capacity.

This is partly the result of the mixed-feed cracker technologies employed by ExxonMobil and Shell Chemicals enabling the use of refinery products that can have low alternative values in fuels markets.

Shell Chemicals brought on-stream its 800,000 tonne/year cracker in Singapore in March. It can crack a full range of feedstock from very light to very heavy, including hydrowax from a revamped hydrocracker.

And ExxonMobil is expected to have commissioned its second cracker on Jurong Island by 2012, which, like its first cracker in Singapore, will be closely integrated with the company's refinery.

These two investments will see the country's ethylene capacity rise from 2m tonne/year to 4m tonne/year.

"This puts us on path to increase our ethylene capacity to 6-8m tonne/year in the long term," said Liang Ting Wee, Director of Energy and Chemicals at the Economic Development Board (EDB) in an emailed response to questions. The EDB is part of the Singapore government.

The eventual ethylene target suggests that several more crackers might be built in Singapore, leading to considerable industry speculation about likely investment candidates.

Further use of refinery bottoms is a feedstock option for additional crackers.
"There is a global trend towards cleaner and low-sulphur transportation fuels," Liang added.

"The implication of these stricter fuel standards and policies is that there will be more refinery bottoms (available), which can either be upgraded to cleaner fuels, or used as a feedstock for chemicals.

"We are currently studying this closely with the refineries in Singapore to understand the economics of the various options."

He added that Singapore was also keen to diversify the range of petrochemical raw materials.

To this end, he said that "in partnership with the industry, we are studying the feasibility of an LPG [liquefied petroleum gas] terminal to enable companies on the island to import LPG in more significant volumes.

"LPG could be used as an alternative feedstock to naphtha for crackers, as well as other industrial users."

One obvious potential supplier of LPG is Qatar Petroleum, which in November last year acquired equity stakes in two local Shell Chemicals/Sumitomo Chemical joint ventures - cracker operator Petrochemical Corp of Singapore and the downstream company, The Polyolefin Co.

"I'm hopeful that condensates and LPG would flow from Qatar to Singapore as a result of Qatar Petroleum taking an investment in these joint ventures," said Ben van Beurden, executive vice- president of Shell Chemicals when the deal was announced.

Biomass is another option being evaluated.

"In the area of biomass, we are keen to position Singapore as a leading location for biomass-to-chemicals conversion technologies," said Liang

"Our geographical position in the middle of a region rich in biomass, and strong logistics connectivity, coupled with integration opportunities to our chemical industry, will present interesting new opportunities for companies.

"Examples of biomass available in this region include palm-based materials such as palm oil, palm kernel oil and empty fruit bunches, sugar cane, starch-based materials such as cassava and sago palm, as well as cellulosic biomass materials."

As for energy efficiency and the environment, Liang added: "We are also looking to enhance the sustainability of the chemical industry through R&D in emerging areas such as carbon capture and utilisation. The availability of concentrated streams of CO2 on Jurong Island can present exciting opportunities for companies."

Work is also underway to create a comprehensive master-plan to meet the long-term water needs of Jurong Island, while reducing dependence on supplies from the Singapore mainland, continued Liang.

This could include use of seawater for cooling towers and recycling waste heat for applications such as water desalination, he said.

Logistics improvements being considered included the feasibility of a second road link between Jurong Island and the mainland, a new container barging terminal and an island-wide pipeline grid system, he added.

All of this gives a useful insight into not only how the future could shape-up for Singapore, but also for the petrochemicals industry as a whole.

Beyond the current down cycle, significant new capacities will be needed to meet emerging market demand.

The debate taking place in Singapore shows that meeting this demand has become a lot more complicated, thanks to factors such as a greater need for logistics efficiency and energy efficiency and environmental challenges.

And to finish as we started on feedstock, ethane gas shortages in the Middle East could mean that this next wave of capacity is built largely outside the region.

By Malini Hariharan

Formosa Petrochemical Corp's problems are mounting after two accidents in less than a month at its refinery and petrochemical site in Mailiao, Taiwan.

Wu Den-yih, the country's premier was at the site last week and ordered an investigation report to be submitted on 6 August.

And in a bid to reassure residents he declared that the company's No 6 naphtha cracker "will not be allowed to re-open unless the cause of the fire is discovered and operating safety is fully guaranteed".

Pic source: Focus Taiwan

It was not clear if he was referring to all the plants at the No 6 naphtha cracker site or only parts of the refinery that were damaged by the fire and the No 1 cracker that was hit by a blast in early July.

The No 6 site includes the refinery, two crackers, an aromatics unit and a number of derivative plants operated by affiliates of Formosa Petrochemical.

Formosa Petrochemical restarted one of its three 180,000 bbl/day crude units in Mailiao last week, with plans to put another unit back on stream this week.

Meanwhile, local residents have started asking for extensive compensation. They want Formosa to pay their health insurance premium, subsidise their electricity bills and even offer jobs to the local young people at the company. Practical considerations appear to have outweighed concerns about health and safety.

Residents have also been seeking a suspension of all operations at the site so that all plants can be inspected. They are also asking for a termination of Formosa Petrochemical's expansion projects.

ICIS news reports that the company has plans to beef up its ethylene capacity by 300,000 tonnes/year and increase the capacity of its refinery to 580,000 bbl/day under the fifth phase of Mailiao complex expansion.

The planned Taiwan Dollar (NT$) 280bn ($8.75bn) expansion - which would involve 43 new projects, including petrochemical intermediates such as methyl methacrylate (MMA) and phenol - is currently being assessed by Taiwan's Environmental Protection Administration (EPA), said Jack Shieh of the Petrochemical Industry Association of Taiwan (PIAT).

"The expansion permit was supposed to be given to them [Formosa] by the end of the third quarter (of 2010) but because of the fires last month this could be pushed back by half a year, said Danny Ho, a Taipei-based petrochemical analyst at brokerage Yuanta Securities.

But the company remains optimistic of obtaining an approval by the end of the year.

Formosa is not the only Taiwanese company facing project-related problems. Kuokuang Petrochemical is still struggling to get approval for its cracker and derivatives project which was first mooted in 2006.

The latest news is the withdrawal of one of its investors.

"I'm not investing. No investment project in the world can defer for so long," said Preston Chen, chairman of the Chinese National Federation of Industries.

He complained that major investment projects in Taiwan did not receive enough support and pointed out that a similar project proposed in Singapore half a year later than the Kuokuang project had started commercial production.

Given a bleak environment for petrochemical projects in Taiwan and also Thailand it is perhaps not surprising that Singapore is gearing up to attract more investments.

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.

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."

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.

The Risk Of Exhausted Optimism

Source of picture: http://www.thedigeratilife.com/blog/double-dip-recession/

By John Richardson

Global polyethylene (PE) oversupply will be "challenging but manageable" over the next year-and-a-half provided there is no double-dip economic downturn, said Joe Duffy, consultant with DeWitt & Co.

"My analysis suggests that if economic growth continues into 2011 at the same rate as 2010, 2009/2010 expansions should be absorbed by the market with only 300,000 tonne/year of overhang," he added.

"However, more expansions are planned for 2011 which will maintain the overhang into 2012.

"On paper, conditions should start picking up in 2013/14 - but I would expect this to begin in mid-2012, as buyers seek to restock in anticipation."

He estimated that Asian demand growth would be 2.4m tonne this year versus 3.2m tonne/year of new production in Asia and 2m tonne/year in the Middle East.

This would leave oversupply on paper at 2.8m tonnes this year - but Duffy said that this would be reduced by lower European, Japanese and US operating rates as their exports decline.

"These three big industries enjoyed strong exports in 2009, mainly to China. They took advantage of a window of opportunity provided by the strong economic rebound and delays to Middle East start-ups," added a Singapore-based source with a global polyolefin producer on Tuesday.

"Last year was a big relief to all us. Even the marginal-cost producers in Japan and elsewhere could make money."

The US doubled its exports to China last year, but its export volumes could dip very sharply from the second half of 2010, continued Duffy.

And so when you take away what he characterised as the "low hanging fruit" of exports being easily displaced by higher production in the Middle East - and also Asia - this reduces the 2010 surplus by 1m tonnes to 1.8m tonnes.

On the upside more production problems in the Middle East - which has been beset with difficulties in starting-up and stabilising production at new plants - seem very possible.

Linear low-density PE (LLDPE) production might also remain constrained by the shortage of butene-1 co-monomer, the result of lower liquids cracking operating rates on cheaper ethane feedstock in the US.

Higher cost liquids cracker production is also under pressure from the new Middle East capacity, he said.

"Delays to start-ups of alpha olefins facilities (which produce butene-1) have also contributed to the shortage," he said

"Around 1.8m tonne/year of swing LLDPE/high density PE (HDPE) is being commissioned this year, but LLDPE is tight because of the butene-1 shortage.

"It is also more difficult technically to produce LLDPE and so while the commercial guys might want the right mix of grades, from a production perspective - i.e. achieving close to 100 per cent operating rates - it is easier to only produce HDPE."
.

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?

The Indo-Pacific Humpback Dolphin

Source of picture: townsvilledolphins.org

By John Richardson

AS Singapore forges ahead with its petrochemicals-expansion ambitions (it would be unwise for us to share rumours about potential new investors in cracker complexes on Jurong Island), spare a thought for the embattled Taiwanese industry.

The environmental controversy surrounding the Formosa Plastics Group following two fires at its Mailiao complex in three weeks, has resulted in the government delaying issuing a permit for the company's planned refinery, ethylene and downstream expansions.

Even before the fires, Formosa was ordered to launch a second environmental impact assessment study into the proposed investments, delaying the start of construction by six months until the end of this year.

And the already-tormented Kuokuang Petrochemical Technology Co refinery and cracker project at Changhua could face even more scrutiny.

Chinese Petroleum Corp (CPC), one of the shareholders in Koukuang, aims to construct a new refinery and a 1.2m tonne/year cracker which would replace an old refinery and cracker at Kaohsiung.

The project is seen as vital for CPC and small downstream companies as they seek to boost their competitive position versus the all-powerful Formosa.

But even before the Formosa fires, more than 300 academics had opposed the project as they claimed it would endanger coastal wetlands.

It has already been relocated from Yunlin in Taiwan because of a row over water consumption.

The cost of the project has also risen due to the need to provide an eco-corridor around the site for the highly endangered Indo-Pacific Humpback Dolphin.

A rather confusing Bloomberg report says that the project will be scrapped if environmental approval is not granted by 17 November.

Petrochemical producers need to run ever-faster to stand still if they are to remain globally competitive - i.e. they need to be constantly examining new investments in order to maintain economies of scale.

The Taiwanese industry, which has long faced environmental pressures, may now find it virtually impossible to expand at home thanks to even greater public hostility.

Is this therefore the right time to intensify lobbying efforts aimed at persuading the government to lift the ban on building crackers on the mainland?

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." 

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."

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.

By Malini Hariharan

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

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

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

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

Source: Petronas Chemicals

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

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

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

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

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

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.

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...

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.

"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.

By John Richardson

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

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

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

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

                                            Chandra Asri

Source of picture: www.barito-pacific.com

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

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

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

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

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

Could further ownership changes be on the cards?

Watch this space.....

The goat has been got 

Source of picture: michaelscomments.wordpress.com

By John Richardson

EARLIER this week we blogged on the 25 or so ethylene carriers that could be delivered into the shipping market by 2013 and the risk this poses to freight rates.

Thanks to one of our readers, Mark Mirosevic-Sorgo - managing director of Singapore-based shipping broker Braemar Quincannon - for pointing out that the semi-refrigerated C2s shipping market, while suffering from a fine balancing point, has successfully absorbed speculative new capacity before.

He also stressed, in his comment on the post, that these ships have the flexibility to carry cargoes such as liquefied petroleum gas (LPG), ammonia and vinyl chloride monomer (VCM) - creating the potential for all this extra tonnage to be absorbed across several markets.

But whatever the impact on freight rates, the new-vessel orders point to a very worrying underlying issue, according to a petrochemicals industry source.

"Industry observers are going round saying that profitability in the ethylene chain will be back to peak levels by 2015, based on a global GDP ((gross domestic product) growth forecast of 3.8% per year," he said.

"This seems far too high, but the real issue is that part of their argument for record profitability is that some people will shut crackers down in the interim - but this is an oxymoron, as why would people shut down, if record profitability is forecast?

"Equally, forecasts of record profitability suggest to the great unwashed that more ethylene capacity will be needed and hence more shipping.

"They don't understand that there is no link between ethylene capacity changes and shipping as people always try to integrate supply/demand so they can instead move the derivatives.

"The observers are obviously not saying this, but their assumptions go everywhere, and people are simply drawing what seems to them to be an obvious, though spurious, conclusion. "

Somebody clearly got this bloke's goat, and I think, by the sound of it, for a very good reason.

But if it is fund managers awash with money to invest who have ordered these ships, (as we again said in the original post) the odd $40m down the proverbial sink isn't going to make much difference to their bonuses.

There is also a chance that these particular gambles among many might pay off - especially if, as Mark said, the extra tonnage ends up being comfortably spread across several chemicals.

More importantly for the main industry that this blog covers - petrochemicals in case you haven't already guessed - the industry source's comments point to the danger of new crackers being built before the market is ready.

Nothing new there then.....

Source of picture: http://www.intentblog.com

By John Richardson and Malini Hariharan

THE view from a particular geography, grade of polyolefin or end-use application might be distorting the outlook for 2011.

In China and India and other emerging markets demand growth continues to astound and even though the rates of expansion might have slowed down this year, percentage increases are from much bigger bases.

China's PP demand grew by 6% in January-August this year compared with the same period in 2009, said CBI - the Shanghai-based commodity information service.

Linear-low density polyethylene (LLDPE) demand soared by 34% with high-density (HDPE) 15% higher, added CBI.

LLDPE is tight globally because of a shortage of butene-1 that's not going to go away. This is the result of the switch to lighter cracker feeds in the US, the overall pressure on liquids cracking operating rates from increased gas-based production and refinery operating-rate cuts.

The polyolefin has also gained market share at the expense of low-density PE (LDPE) - which at first benefited from tight supply through higher-pricing, but now seems to be suffering from demand destruction.

LDPE demand in India fell by 22% in April-August, according to a major Indian producer.

But India continues to see robust growth in other polymers. For instance, PP demand is expected to grow at 13-14% in 2010-11, the producer added

This would be lower than the record 26% in the previous year but still very healthy.

The other big factor affecting the whole of the whole of the polyolefins industry has been delays in starting-up new projects and stabilising production at complexes brought on-stream over the last two years.

"Approximately 8m tonnes of PE that could have been exported from the Middle East during 2010 won't be due to these production issues. There is also the shortage of associated gas," said a Singapore-based industry source.

Saudi Arabia needs to be producing 10m bbl/day to run its gas crackers at 100%, but its OPEC quota stipulates output in the mid 8m bbl/day range.

One could go on and on. In Europe, lack of investment in maintenance is said to be a factor behind average cracker operating rates totalling only 82% in H1 this year. The crackers that were functioning were running at above 90% - suggesting good market conditions.

So you add all of this together and you could be tempted to draw the conclusion that 2011 will be as good, perhaps even better, than 2010.

"I think we are bumping along the bottom of the cycle as far as margins are concerned. South Korean companies are expecting another fly-up in pricing by the end of next year. My view is that this is a bit early, but it's not far away," said a Taiwan-based financial analyst.

The danger in his thinking is that Middle East production problems are, according to some reports, being resolved - and so a lot more PE and PP will soon hit the markets.

"True, but I don't expect oil demand globally to return to pre-crisis levels for at least three more years. This means no change in Saudi Arabia's OPEC quota during that time," said a source with a leading Middle East producer.

The longer maximum output is delayed in the Middle East, the greater the ability of booming emerging markets to cope with the volumes when they finally arrive, remains a common view.

It feels like one almighty muddle when you balance this optimism against persistent macro-economic worries in the West. Without a healthy West - which drives the vital re-export trade from Asia - the recovery has to remain highly suspect.

"As we move into the remainder of the year, the recovery has waned. The boost from inventory restocking has played out and underlying demand remains weak," wrote the American Chemistry Council (ACC) in its 3rd Quarter Situation and Outlook report, which was published last week.

Overall US plastic resins output will rise by 4.5% in 2010 before declining to 3.9% next year and 2.5% in 2012, added the ACC in the same report.

The confusion has made forecasting supply and demand very difficult, according to South Korean-based chemicals analyst (has it ever been easy?).

"The fourth quarter is likely to be better than expected. Earnings for the South Korean companies may continue to be strong for the next two quarters and for the whole year will be higher than 2009," he said.
DeWitt & Co, the petrochemicals consultancy, had factored in cracker operating problems but had not anticipated the extent of the difficulties at new crackers in the Middle East and other parts of Asia such as Thailand, said the company's Kuala Lumpur-based consultant, Mazlan Razak.
Nobody seems to have anticipated so much lost production.

"There is a big gap between actual production and nameplate capacity. Unless these crackers raise their production the situation will remain good; margins will be positive," added Razak.

Another argument being used is that the industry will heal itself even if margins head south through closures of high-cost capacity.

But the source from the Middle East producer we quoted earlier on believes that there will be no further European consolidation because of the risk of missing out on imminent good times.

"It is being argued that profitability will be back at peak levels by 2015," said an industry observer, who is based in London.

"Part of this argument for record profitability is that some people will shut down in the interim - but this is an oxymoron, as why would people shut down if record profitability is forecast?"

"The 2015 peak also assumes global GDP (gross domestic product) growth of 3.8% per year, which is far too high an estimate."

One much-more optimistic sales director with a North American polyolefins producer hopes that such pessimism is accepted by his company, as it will mean that he will continue to exceed his monthly targets.

We are just journalists and so are required to mainly stick to reporting what people tell us, and so we sincerely hope you haven't read through this article expecting any definitive answers.

Looking for such answers elsewhere might turn out to be equally futile, but all of us have to keep on trying.

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?

George Mitchell of Devon Energy - The "Father of Shale Gas"

By John Richardson

US polyethylene (PE) input costs will be 50% less than those in Europe and Asia beyond 2012, says a new report by Morgan Stanley.

The extraordinary gap in competitiveness is the result of the shale gas revolution that has sharply reduced US ethane costs.

Not so long ethane was above $11/mBTU in the States, but since the tipping point was surpassed on shale-gas technology, prices have ranged between $4-5/mBTU, resulting in a dramatic of US cracker feedstock slates.

Next year, though, Morgan Stanley expects natural gas liquids (NGL) supply to tighten in the US before lengthening again in 2012.

Last month we reported on a crisis of plenty for Northeast US shale-gas producers as they attempt to find a home for ethane which they view as a contaminant. The petrochemical feedstock could be moved by pipeline to Canada or liquefied and shipped to the Gulf Coast.

Once upon a time, just three years ago, Dow Chemical's weakness was that a big chunk of its production was based in the US.

But now Morgan Stanley says: "Longer term, Dow remains the most leveraged stock in our coverage universe relative to the Gulf Coast advantage that is forming within the global petrochemical industry".

When we spoke to Ben van Beurden, executive vice president of Shell Chemicals, earlier this year he told the blog that it was too early to talk about capacity being expanded in the States to cash-in on the ethane advantage.

Shell has been doing the opposite - reducing its US ethylene capacity while reversing its liquids/gas feedstock mix: It has gone from 75:25 liquid:gas feed to roughly 25:75 liquid:gas feed today.

But interestingly, in discussions that the blog held with senior Asian industry executives earlier this week, doubts were raised over the commitment of a US company to a steam cracker project in the region.

"We are not sure how serious they really are as a more viable option might be to build in the US," one of the industry sources told us.

And yesterday another of our sources told us of the here and now - i.e. the strength of US PE exports to China in September.

"Shipments to China totaled more than 200,000 tonnes last month, representing the second biggest-volume exports from anywhere in the world. This was the result both of low gas prices and the fall in the US dollar.

"The South Koreans and Japanese had slipped out of the top five and Singapore was way down, and so I don't know what these three countries were doing with all their material."

This all illustrates the importance of keeping track of changes in technology in order to improve the accuracy of forecasts.

The blog can only observe from the sidelines and wonder how this is done, but keeping track must surely involve taking into account the work of the outliers, those who defy conventional wisdom.

In the case of shale gas, this would have meant listening to and believing George Mitchell of Devon Energy at a time when his colleagues thought him a little eccentric. His vision has helped transform the industry's economics.

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 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.

Here is another article on the liquefied petroleum gas (LPG) market, a subject we have covererd several times on the blog over the last few months.

Below we discuss how the temporary supply constraints that have kept LPG tight this year look set to end, creating a very attractive feedstock option for higher-cost Asian cracker operators as they attempt to compete in an ever-more difficult environment.

By John Richardson

THE world is about to be hit by a flood of new liquefied petroleum gas (LPG) (propane and butane) supply, creating a big opportunity for higher-cost Asian cracker operators as they seek to survive in an ever-more competitive world.

An additional 20-30m tonne/year of LPG is due to come on-stream globally in 2008-2012, according to the Singapore-located cracker operator, Petrochemical Corp of Singapore (PCS).

This could lead to 5-10m tonne/year of extra LPG consumption by the petrochemicals industry if the pricing incentives are right, the company added.

"Europe has gone as far as it can in taking advantage of the LPG opportunity, but Asia is only just waking up to the need to be more flexible with some investments in the region taking place over the last 18 months," said Paul Hodges, chairman of UK-based chemicals consultancy, International e-Chem.

 Source of picture: Bombayharbor.com

Some South Korean, Japanese and Singapore cracker operators have already invested in the furnace adaptations and storage facilities necessary to make use of LPG - but many other producers lag behind.

"LPG normally becomes attractive as a cracker feed when its price is around 90% of the naphtha price," added Hodges.

Traditionally, this has been in the summer months in the northern hemisphere when LPG pricing falls due to lack of demand for heating.

The anticipated oversupply of LPG is the result of the ramp-up in liquefied natural gas (LNG) and condensate capacity in the Middle East, said oil and gas consultancy, FACTS Global Energy.

The capacity flood should have, in fact, already arrived by now, but this year has seen a surprisingly tight global market.

Lower LPG production by refineries - the result of oversupply in refinery capacity - is one factor behind the tightness.

Middle East petrochemicals demand for propane and butane has also increased due to a change in feedstock mix.

Recently commissioned gas crackers are running a higher percentage of LPG feedstock than plants that were brought on-stream earlier on because of shortages of ethane.

In addition, Saudi Arabia has seen the start-up of three propane dehydrogenation-to-polypropylene (PP) complexes over the last 18 months.

But by far the biggest factor behind delays in the LPG supply surge is reduced operating rates and maintenance shutdowns at LNG plants, added FACTS.

"It should be noted that this will be temporary and in the longer term, the LNG mega-trains will be strongly required to ramp-up their production to avoid any damage to project economics," wrote the consultancy in a recent report.

LNG production has been reduced because of the same problem afflicting the refinery sector: A lot of new capacity came on-stream just as the economic crisis happened, with the LNG industry facing the added problem of the shale-gas revolution in the US. This has left the States unexpectedly self-sufficient in natural gas and even, possibly, in a position to export rather than import gas.

In Qatar alone, total LPG and condensate production will surpass that of crude oil by 2012, added FACTS in the same report.

Of course, though, cheap feedstock for the smaller, older and therefore more marginal cracker operators in Asia won't by itself be a game-changer.

"Cracking propane and butane changes cracker yields," said a Southeast Asian cracker feedstock purchasing manager.

"As a result, a careful balancing act will need to be performed between savings on raw-material costs and what these different yields will mean for polyethylene (PE), polypropylene (PP) and other olefins derivative production.

"One obvious opportunity from using LPG is increased propylene yields. This might help what could be tight C3 markets over the next few years."

Propylene supply has tightened in recent months as a result, of again, lower availability from refineries.

Other factors have been low liquids cracking operating rates in Europe on lack of naphtha availability (again because of problems in the refinery industry) - and US cracker operators switching to lighter feeds due to the collapse in natural-gas pricing.

A further reason has been the boom in polypropylene (PP) production due to strong demand growth for the polymer.

The shortage of C3s is seen by some industry sources as a serious and long-term problem. Unless it is addressed they worry that PP could suffer from demand destruction.

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.

Please stop taking the Mickey..

Source of picture: China Daily

By John Richardson

ECONOMIC bubbles have been given their name for a good reason: They behave exactly the same as the soap bubbles that were prevalent at Hong Kong's Disneyland, where I paid with my three-year-old son yesterday.

So when the momentum of rising equity and commodity prices - mainly driven by what's happening in emerging markets - slows down the surface tension of economic bubbles eventually increases and they go pop.

It doesn't have to be one major event that causes such events and so it won't necessarily be another Lehman Bros-scale trigger that will cause equities and commodity prices, including chemicals, to retreat. It could instead be a loss of confidence that causes the momentum of bubble inflation to slow down, leading to investors exiting as they cash-in on their profits.

"During bull runs, like the one we are experiencing right now, the longer a rally lasts the more investors start becoming deluded that this time it will be different, that this time the boom will last forever," a former investment banker, who is based in Hong Kong, told the blog late last week.

"I know of several hedge funds which have strategies in place to take advantage of the end of the current run."

Ironically, it might be Asian investors who have made a fortune from the boom who pour money into hedge funds based in this region that are ready to short markets in a big way.

"Chinese investors are emerging as new a source of capital for (hedge fund) managers in Asia as fundraising from international institutions has become tougher after the financial crisis," writes Bloomberg in this article.

In the same article, the news service reported that hedge fund JT Greater China Long/Short Fund was launched in Hong Kong last week by a former senior adviser to China's state pension fund and the ex-head of Morgan Stanley's prime brokerage.

The blog remains convinced that the long-term trajectory for chemicals demand is very positive. Emerging markets have surpassed a tipping point, meaning that levels of consumption will over the next few decades compensate for any long-lasting problems in the West.

But this doesn't meant to say that the road ahead won't be rocky and littered with fragmented and slippery bubbles, in what indeed is an ugly sentence with an appalling mix of clichés.

John Authers, in his excellent The Long View in last weekend's edition of the Financial Times, makes the point that the rallies in equities and commodities since Lehman Bros can be exactly correlated with the availability of lots of cheap money.

And the latest round of Fed quantitative easing has resulted in more cheap money and the expectation that interest rates will remain depressed for a long time.

This in turn, of course, has led to the flood of money into emerging markets in search of higher returns, creating the danger of currency wars and inflationary pressures that hedge funds are likely to attempt to take advantage of.

"For investors, there is money in bubbles, so it is best to go with the herd and buy anything that would benefit - gold, oil and emerging markets could also rise much more before the bubbles burst - and make sure to get out in time," writes Authers.

For chemicals markets the dangers are that real demand pictures get distorted as buyers hedge against the anticipation of higher oil prices by building stocks (sounds familiar?).

And as the great scramble to guard against feedstock inflation gathers momentum, those who trade in chemicals might well be tempted to come out with outlandish and silly stories to justify why "real demand" is strong - i.e. to promote a bit more panic among the buyers.

We will detail suspected examples of these silly stories over next week or so.

Chemicals producers preparing budget plans for next year need to be prepared.

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.

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?

By John Richardson

THE wheels have started to come off the wagon - as we have been warning about over the past week or so - as a result of a broad sell-off in equities and commodities.

Inflation concerns in China and elsewhere, the result of all the hot money flowing into emerging markets due to QE2, dominate as investors seek to minimise risk.

And maybe the new Asian hedge funds we talked about early last week are now ready to swing into action, shorting all sorts of markets and accelerating the downward declines.

We can just about guarantee that we will also see sharp retreats in petrochemical pricing - exposing as flawed some of the reports that recent rallies have been justified by strong demand.

As regular readers know, we keep our closest eye on polyethylene (PE) pricing - now in the case of linear low-density (LLDPE) just another financial instrument in China.

And sure enough as the Shanghai Composite Index suffered a 1.9% decline on Wednesday to follow its 9% fall in Monday and Tuesday, the Dalian Commodity Exchange slipped again.

The most widely traded LLDPE contract on the Dalian at the moment - the one which closes in May next year - fell by a further 615 Yuan on Wednesday following a 440 Yuan fall on Tuesday.

Discussions with major PE and monoethylene glycol (MEG) producers earlier this week revealed that these two companies were expecting and were prepared for price declines.

They were able to see through some of the more dubious claims about the reasons for recent market rallies. Let us hope that they are not alone.

"We have studied the behaviour of the polyethylene (PE) market in China for the past ten years," said the first of the companies we interviewed, who was referring to reports we have received that this a peak demand season in China.

"Business has slowed down from mid-November onwards until January over the last decade.

"True, this is an agricultural film season that will provide some support for low-density PE (LDPE) and LLDPE demand.

"But I don't hold with the argument that there is already strong demand in China for packaging material ahead of the Chinese New Year (CNY). CNY isn't that big a deal anyway for PE." (He was again referring to comments made by traders to the blog).

"This is definitely a quiet season overall as everyone is trying to minimise the stocks on their books for tax and financial reporting reasons. We are well past the peak manufacturing season in China for making finished goods to be exported to the West in time for Christmas.

"What we think is instead happening is that there is a lot of trader talk to justify higher prices.

"The traders are moving PE to China to take advantage of the potential for a stronger Yuan as the dollar weakens on quantitative easing.

"Traders sell material in China to obtain Yuan that they then place into a deposit account - carrying interest rates of 2.5% which is much higher than you get in many other places - and wait for the local currency to strengthen.

"And so we believe that the demand we are seeing is not driven by fundamentals, but it is instead about speculation and we are worried about inventory levels.

."We are concerned about a sudden correction in commodities in general as all the clever investors profit-take and get out."

The source with the MEG producer told us that his company was also worried about recent price hikes.

"Three months ago inventory levels in China were at an all-time high at a near maximum level of 600,000 tonnes," he said.

"They have come down a bit recently to around 500,000 tonnes, but prices still rose late last week in line with equities and in response to what was happening in crude - and also on the purified terephthalic acid (PTA) and cotton futures exchanges.

"There are supply reasons why MEG has been so strong this year - i.e. the great supply surge hasn't happened this year because of problems with running new plants.

"But we still do not understand why prices went up last week given these still-high inventory levels."

As for what this will all mean for demand growth in China next year, perhaps the most telling and worrying comment in all the recent news reports came from Arthur Kroeber of Beijing-based economic research company, Dragonomics.

"The (Chinese) government's top priority has now switched from guaranteeing growth to controlling rising prices," he was quoted as saying in yesterday's Financial Times.

Are we moving from huge stimulus to de-stimulus and what will this mean for the chemicals industry?

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 John Richardson

AS the blog had anticipated would happen, there were sharp retreats in some chemicals and polymers pricing late last week on the steep declines in equity and crude prices.

Polyethylene (PE) fell by $70-130/tonne, according to our colleagues at ICIS pricing, as the Dalian Commodity Exchange once again demonstrated that it has become a major influence.

Many industry sources now tell us that PE in general (the Dalian has an influence across several different grades) has almost become a financial instrument; in other words, its day-by-day and week-by-week price in China moves in line with the Dalian as the Dalian moves in line with crude oil and equities.

Therefore, you could draw a neat line between last week's dip in PE pricing and the retreats in crude and equities as investors took flight.

Towards the end of the week equities and oil regained ground as confidence reportedly grew that Beijing's measures to tackle rising consumer-price inflation would have a limited impact on the broad economy.

The recoveries were also said to be the result of greater confidence that a rescue package would be successfully agreed for Irish banks.

In parallel, Dalian saw four consecutive days where the futures contract fell beyond the maximum allowed in one day's trading, forcing trading to be suspended, before a recovery on Thursday.

Source of picture: Inoldlasvegas.com

Polypropylene (PP), too, retreated on the influence of Dalian but by a more modest $10-20/tonne as traders seemed to be in a comfortable position to try and ride out the negative sentiment.

Propylene was more steeply down, by $20-70/tonne, as it reacted to the dip in crude futures.

But there seem to be factors specific to the C2s markets sufficient to override the overall sentiment which kept ethylene stable.

Click here for these numbers in graph form -

ICISprices19Nov.ppt

This reaffirms our view that this market has become very hard to read because of more extreme shifts in spot cargo availability.

Benzene, perhaps the mother of all chemicals, was down $15-50/tonne but interestingly, paraxylene (PX) staged a rally later in the week as market participants had time to react to the recovery in equities and crude.

One of the big macro questions is whether China will, indeed, get it right by taking targeted measures that are sufficient to bring inflation under control.

This article from the Wall Street Journal suggests, rather worryingly, that China is now running out of ammunition to fight the hot money flowing into its economy - which at risk of continuing as long as quantitative easing lasts.

Every mood swing in equity and commodity markets is bound to find a reflection in chemicals and polymer markets over the coming weeks as the prospects for next year seem exceptionally uncertain.

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.

By John Richardson

A rumour emerged a few weeks ago that Sinopec would be required by the government to cut its operating rates in order to either or both help China achieve its 11th Five-Year Plan emissions targets and/or increase diesel production.

China is attempting to hit the targets under the plan before the next Five-Year Plan is announced in the spring and is well behind schedule, we have heard.

This is thought to be the result of the economic stimulus package that has greatly boosted industrial production and therefore put behind China behind.

The other theory behind the rumour was that the cutbacks were being planned in order to help China produce more diesel. Gas oil is used as feedstock for crackers in China and so we assume that this raw material would be diverted into fuel, thereby forcing rate cuts.

China is short of diesel because of the attempts to hit the emissions targets. This has caused electricity cuts resulting in factories, both big and small, to switch to their own diesel-powered generators.

Early last week or colleagues at CBI got confirmation that the production cuts would take place. As a result, they received confirmation from Sinopec that this would mean polyethylene (PE) production would fall by 100,000-150,000 tonnes in December and polypropylene (PP) by the same amount. This is equivalent to 10% operating rate cut,

Source of picture: regainyourhair.co.uk

But fathoming China is never easy: A producer told us when we were in Shanghai last week that he had heard Sinopec had only made this statement to jack-up local prices. He added that there was no need to cut rates as rolling power cuts in China, indicating that the emissions targets had already been hit. The end of the cuts would also ease the diesel shortage.

(As we said yesterday, though, we think the polyolefins market will weaken rather than strengthen during December.)

Whatever the truth about the story, the fact remains that China's push to hit its 11th Five-Year Plan emissions targets have been a significant factor in shaping polyolefin and other chemicals and polymer markets over the last few months. We will examine how the drive to reduce pollution has affected polyvinyl chloride (PVC) in a post later this week

Despite the comment from the producer, we have heard yet another story that China is still struggling to hit its emissions goals and so efforts to hit targets will continue until March next year. That is when the 12th Five-Year Plan is due to be formally approved and begin.

Confused? If you were being paranoid you could also believe that this was a conspiracy.....

By Malini Hariharan

The blog is hearing about fresh delays at ONGC Petro-Additions Ltd's (OPaL) cracker project at Dahej on the west coast of India.

Conceived a few years back, the dual-feed 1.1m cracker project, based on ethane separated from LNG and naphtha supplied by parent ONGC, has been jinxed from the start. There have been plenty of delays in issuing tenders and awarding contracts as well as a sharp rise in project cost.

The gas separation plant was completed in 2008 well ahead of the cracker.

The construction contract for the cracker was finally awarded to Linde and Samsung Engineering in December 2008 and technology for a swing linear-low density polyethylene (lldPE)/ high-density PE (hdPE) and a polypropylene plant was selected in February 2010.

Pic source: Samsung Engineering

Work on the cracker has started but construction contracts for downstream units have yet to be awarded. So the company now faces a situation where the cracker is likely to be completed at least six months ahead of the derivative units.

The company is holding on to a start-up date of Q1 2013 but sources associated with the project believe there is little chance of this deadline being met.

"There is a serious delay," said one source. A tender for the downstream units was issued recently but the earliest that this can be settled is Q2 2011, he said.

"We are approaching the Christmas holiday season; plus there are plenty of questions from potential contractions that need to be answered," he added.

He pointed out that the company has also not completed technology selection for an hdPE plant.

OPaL, which has been promoted by ONGC, Gail (India) and Gujarat State Petroleum Corp (GSPC), is one more in long list of Asian and Middle Eastern projects that are unlikely to meet start-up schedules.

And every delay increases the probability of the supercycle theory coming true.

By John Richardson

The huge and long-lasting impact of the economic crisis on the US chemicals industry is detailed in the excellent Year-End Situation and Outlook report from the American Chemistry Council (ACC), which was released late last week.

Light vehicle sales and housing starts will still be below 2006 levels in 2015 - the final year in the industry advocate group's forecast period.

The number of light vehicles sold in 2006 totalled 16.5m which fell to 10.4m in 2009, the lowest point of the crisis for light vehicles.

A recovery in sales to 15.9m in 2015 is forecast by the ACC.

Source of picture: Theodore's World

Housing starts were 1.81m in 2006, falling to a low point of 560,000 in 2009 and are forecast to gradually increase to 1.51m in 2015.

The housing market - which is crucial for the US chemicals industry as each new home contains around $15,000 worth of chemistry - bottomed-out this year, according to the ACC.

But with the US and global economic recoveries in such a fragile state, with house prices back to 2003 levels, and with an estimated "shadow inventory" of 5m homes waiting to be sold, further downward corrections cannot be ruled out. This shadow inventory represents homeowners on the sidelines waiting to see if and when the market improves.

A further worry is that mortgage defaults are mainly among sub-prime borrowers in 2008, but are now primarily among borrowers with safer loans, who, the ACC says, "have become delinquent due to a job loss or other economic setback".

The unemployment rate rose in the US last week, providing further evidence that this is a jobless recovery.

Employment losses in the US chemicals industry have totalled 180,000 over the last decide with 80,000 of these losses - 40% - occurring since the crisis began in 2007, adds the ACC.

But it is not all doom and gloom: US chemicals exports were up by 16.8% this year over 2009, resulting in a $50.1bn trade deficit switching to a $3.7bn surplus. Plastic resin exports were up by 15% (we will attempt to provide you with more details later on).

The rebound in global trade and the shale-gas story are the factors behind this reversal.

Further shale-gas technology improvements and movements up the learning curve might make US ethane-based ethylene production even more advantageous.

The Marcellus and other shale-gas fields, however, lack infrastructure to deliver natural-gas liquids (NGLs) to petrochemical producers.

Public concerns over groundwater pollution from fracking could result in "ill-conceived" legislation with excessive demand growth a further risk, says the ACC.

Before companies start detailed evaluation of petrochemical investments based on increased US natural-gas reserves, the ACC predicts that further capacity closures are on the cards. This will obviously be of older, higher-cost facilities.

Overall US industry operating rates were only 74.1% in 2010, it says.

(This suggests that the return to profitability enjoyed by producers is as much about carefully matching production to demand as well as feedstock costs)

Capacity utilisation is only expected to edge-up to 79.8% in 2015, pointing to the likelihood that the industry might still be a long way from expansions.

Could it be that by the time investments are being seriously studied, the gas advantage will have significantly eroded? Or might it have even disappeared altogether?

Before you say "nonsense" how many of you predicted the shale-gas revolution and its impact on US natural-gas prices?

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 Malini Hariharan

After reading news reports about fresh protests against Kuokuang Petrochemical's proposed refinery and cracker complex in Taiwan the blog is wondering whether the company should be spending time and money in pursuing this ill-fated project.

Kuokuang, a joint venture between state-owned CPC Corp and several Taiwanese private companies, has been unable to secure the mandate of the local people since it was first mooted in the 1990s and has struggled to receive environmental clearance.

This time clashes broke out between hundreds of supporters and opponents at Changhua County, hours before a scheduled hearing on the project by the Ministry of Economic Affairs. The police was able to restore order but the hearing ended without any conclusion.

Pic source: The China Post

The company is now looking at scaling down the project which includes a 300,000 bbl/day refinery, a 2.4m tonnes/year cracker and more than 20 downstream units.

While the government is actively supporting the project, which is expected to generate revenue of NT460bn and generate 18,000 jobs, environmentalists are ramping up their protests as they firmly believe that the project would cause irreversible damage to marine life in Changhua County.

Getting local approval appears to be next to impossible and perhaps it is time for Kuokuang's partners to cut short their losses and focus on investments elsewhere in Asia.

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.

Source of picture: anahoyhanioblogspot.com

By John Richardson

THE blog will be taking a few days off this week as 'tis the season to be Merry', regardless of what you may think is our rather cynical and often-times pessimistic view of the chemicals industry.

We will come roaring back towards the end of this week by the 28th European time and the 29th in Asia to tackle more on the extent of the US shale gas advantage. In the meantime, happy festive season to all our readers as we look forward to what we hope, despite or cynicism and occasional pessimism, will be another prosperous year.

By the way, 50% of the blog (John Richardson) is in the process of relocating to Perth, Western Australia - hopefully in time to gloat about England retaining the Ashes.

Source of picture: alfin2100blogspot.com

By John Richardson

SINCE when has the truth mattered in the battle between environmentalists and the oil, gas and chemicals industries?

This is a game of perception on both sides as estimates of risk are heavily subject to data that is either biased in the way it is collected or how it is interpreted.

And so the environmental evidence being stacked-up to support further growth in US shale-gas production - crucial to the competitiveness of the country's petrochemicals industry - might not matter a jot of if a major pollution incident occurs.

According to energy industry-backed websites such as this - the "fracking" process has been practised without groundwater pollution in Texas for the past 60 years. The only pollution of drinking water that has occurred has been caused by the secondary recovery process, different from fracking, where water is injected into depleted oil and gas wells.

The energy industry also argues that the bulk of chemicals used in the fracking process in the giant Marcellus Shelf are very small in volume and of the type used in disinfectant, cosmetics and even pharmaceutical production.

Benzene, toluene, ethlybennzene, xylenes and naphthalene can also be used in fracking, but these much-more toxic chemicals are not as economic.

There is also environmental pressure, though, over the large amount of sometimes short-in-supply water used in the fracking processThe debate around shale gas seems sure to intensify now that reserves, production, and perhaps therefore the chance of an accident, are on the increase.

In its annual report released this month , the US Energy Information Authority (EIA) estimates that as of 1 January 2009, the US's technically recoverable shale-gas reserves had more than doubled compared with a year earlier.

Ethane production in the States is set to increase by 30% over the next two years to 850,000 bbl/day, according to industry estimates reported by our colleagues at ICIS news.

This implies that the feared lack of fractionation capacity will not hold the growth of ethane supply back, thanks to drill-to-earn provisions.

But, as we have said, the public mood towards shale gas could turn decidedly negative if there is an accident.

Attitudes towards the industry have recently improved, however, according to Sven Royall, Vice-President for Intermediates at Shell Chemicals.

"Four -to five months ago (after Deepwater Horizon) I would have said that the regulatory outlook looked a lot bleaker for shale gas, but it has since got better," Royall told the blog in a recent interview.

"Preventing groundwater pollution is about making sure that cementing and casing is right because the actual shale gas extraction takes place beneath aquifers."

His colleague Iain Lo, who is Shell Chemicals' Vice-President New Business Development and Ventures, said that he had no concerns about operating reliability when it came to the bigger, more experienced shale gas operators.

"There could be issues with the smaller players, however," he warned.

The other threat to projections of ever-improving economics for US ethane-based petrochemicals is an unexpected surge in natural-gas demand from other industries, such as power generation.

And as we have said before, talk of building a new ethane-based cracker in the US might well be premature given the state of the economy.

Current capacity would a first need to be maxed-out - although there could be further smaller opportunities to debottleneck and switch to lighter feedstocks.

Jim Galloghy, CEO of LyondellBasell, has said that it is too soon to talk about building a new cracker in the US. This is despite an initial economic assessment of doing so in the Appalachians.

But Royall interestingly added: "What you need is confidence about gas prices being at the right level for 25 years - the life of a project. This confidence is not quite there yet, but it is getting closer."

The other opportunity now emerging is the rising value of propylene versus ethylene as a result of the big switch to cracking ethane away from naphtha.

Dow Chemical CEO Andrew Liveris talks about pushing more propane into the US major's domestic feedstock mix in order to resolve the C3s shortage, in the same article we have just linked to immediately above.

The first option is to address the industry-wide propylene tightness would be to crack more propane in steam crackers,

Despite the technical difficulties that can beset the propane dehydrogenation-to-polypropylene (PP) proces - plus the need for guaranteed long-term low-cost propane supply - might we also see more of these units being proposed in the US?

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 Malini Hariharan

With crude oil at around $88/bbl and naphtha hitting $890/tonne cfr Japan on Monday, the pressure is building up along the olefins chain.

Ethylene is trading at around $1200/tonne cfr NEA while propylene is at $1280/tonne cfr NEA. Offers of ethylene at above $1250/tonne and propylene at $1320-1330/tonne have not found any takers.

Further downstream, polyolefin offers have been raised and some business has been transacted at levels higher than December prices.

One trader believes that market fundamentals are quite strong. "Price hikes in January are possible; supply is still short for some grades. I am positive," he says.

He is also confident that Chinese government measures to tighten liquidity this year will not be at the cost of economic growth.

However, others say the outlook is still uncertain. "Chinese demand is not as strong as expected; there is also resistance to high prices," says one source.

Pic source: www.bordbia.ie

The Chinese government's decision in late December to raise interest rates by 25 basis points is likely to dampen buying especially by traders. And supply is rising as new plants in Thailand, India and the Middle East ramp up production.

"This is the downcycle; we are in it now. Operating rates will have to be cut; it is only a matter of time," says one very pessimistic source.

In the short term producers have to contend with naphtha which is being supported by crude oil prices and a cold winter in the northern hemisphere.

Naphtha is predicted to remain firm as supply is set to tighten following refinery turnarounds in the Middle East.

Traders say that Abu Dhabi National Oil Company (ADNOC) is due to shut a 140,000 bbl/day condensate splitter for a month from mid-January. And Saudi Aramco is expected to slash naphtha exports to Asia by half a million tonnes in the first half of 2011 due to refinery maintenance in Rabigh and Jubail.

Prices are likely to ease only in the second quarter once cracker turnarounds start in Asia. If that's the case the pressure on margins is likely to continue.

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

Asian naphtha prices, which were expected to remain firm this quarter, have come under pressure as large volumes of European material are heading towards this region.

Naphtha was trading at around $885/tonne cfr Japan last evening supported only by the strength in crude oil prices with WTI at $91.69/bbl and Brent at $98/bbl.

But with nearly 600,000 tonnes of product on its way from Europe naphtha premiums have slipped and could fall further, traders told Felicia Loo, ICIS pricing editor for naphtha.

Europe has been able to move large volumes because of poor demand as some crackers switched to liquefied petroleum gas. Poor economics for gasoline blending have added to the problem.

In petrochemicals, ethylene and propylene prices have been stable this week but benzene has moved up, led by price hikes in the US and Europe and supported by crude oil.

Prices have hit a 28-month high of $1,120-1,130/tonne fob Korea, a level last seen in early September 2008.

     "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.

By Malini Hariharan

How many projects is Petronas Chemical planning?

Last week the blog had covered an ICIS news report which referred to a study on 1m tonnes/year ethane cracker and derivative units at Kerteh.

Now a report from UBS says Petronas Chemical is looking at making operational improvements at its two existing crackers at Kerteh and building an integrated refinery-petrochemical complex with international partners.

"Petronas Group is taking the lead in evaluating the project, and Petronas Chemical should be more closely involved in examining the project at a suitable juncture. If this project were to proceed and be completed, Petronas Chemical would be able to further diversify its feedstock source and expand its production capacity. We estimate this project has the potential to add 1mtpa cracker, with downstream PE and PP capacity of around 400ktpa," says UBS.

The blog has heard from other sources that a feasibility study on the refinery-petrochemical project has started and that it would be located in southern Malaysia. If the project is approved this year completion is likely in 2015-16.

The naphtha cracker would also provide the feedstocks to support an investment in speciality chemicals that is being studied by Petronas Chemical and BASF.

It is difficult to see Petronas Chemical pursuing two cracker projects simultaneously as this would place a huge demand on the company especially in terms of manpower resources. Then there are doubts on whether sufficient ethane is available. The existing crackers at Kerteh are reported to be facing a shortfall in ethane supplies.

And if the Petronas Group makes investments in upstream gas facilities to improve ethane availability it make more more sense to expand the existing crackers rather than build a new one, points out one source.

Besides new projects Petronas Chemical is also looking at acquisitions, says UBS in its report.

"The company has indicated that it might consider selective opportunities to expand both domestically and overseas through strategic acquisitions that are consistent with its core petrochemical activities or that help Petronas Chemical to gain a foothold in markets where the Petronas Group already has oil and gas operations."

This would allow Petronas Chemical to develop vertically integrated operations.

Davos 2011 

Source of picture: eacci.net

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

Yesterday we suggested that demographic challenges in the West, the strain on resources resulting from rising consumption in emerging markets and rising inflation should heavily feature in discussions at this week's World Economic Forum in Davos.

Chemical industry leaders who could be attending include Mohamed Al-Mady, CEO of SABIC, Andrew Liveris, CEO of Dow Chemical and BASF CEO Juergen Hambrecht, according to my colleague Nigel Davis at ICIS news.

My fellow blogger Paul Hodges is highly sceptical over whether one very well-recognised issue will be the subject of the right kind of debate at the great annual economics talking shop: Inflation, the main cause of which is the rise in the cost of crude oil.

The problem that the great and good at Davos, and everyone else, face is predicting the timing of any crude-related inflation bust as it will be sentiment-drive, added Paul.

"Supply/demand balances have been telling us for 18 months that there's too much supply, so trying to decide when sentiment and fundamentals might reconnect is an art, not a science," he continued.

"It might even be starting to happen now, in fact, as Saudi Arabia has made a fairly clear statement that it doesn't want prices over $100/bbl.

Set to keep the wild, drunken student party going?

Source of picture: benarnke.net

"Put this alongside China continuing to tighten, and by March, people might be starting to believe oil prices won't move up much further.

"If this became a general belief, as in July/August 2008, or Q1 1980, then procurement people will start the process of re-balancing their inventories, etc etc.

"But on the other hand, if Bernanke has another go at driving up asset prices and announces QE3, we could be off to the races again...."

Credit Suisse supports the view that there is a big overheating risk right now.

This evident from its newly-launched index that measures growth dynamics in the chemicals, energy, paper and packaging and transportation and shipping industries.

Click here to download a copy - CreditSuisseCSBasicMaterialsIndex.pdf

The index uses North American ethylene production and (naphtha) margin data and demand data for polyethylene (PE), polypropylene (PP) and polyvinyl chloride (PVC), although the chemicals weighting in the index is low. This is again according to analysis by my colleague, Nigel Davis.

"The December estimate is consistent with the observation from recent real economic data that last summer's global slowdown scare is now turning into something approaching a global speed-up scare," writes the bank in its first index report.

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

VERY occasionally the blog deviates from its close coverage of petrochemical markets to focus on broader business issues. Today is one such occasion after a discussion with a manager of a major Asian chemicals trading operation.

The manager is convinced that the good times are behind us, to refer back to the petrochemical markets environment very briefly, as a result of weaker Chinese demand growth, the substantial threat that rising energy costs pose to the global economy. He also warned of seemingly positive US macroeconomic indicators that he said had created a "false dawn".

Maybe on all the above he is just trying to present a bearish picture as he has gone short, not just in chemicals trade but also in his myriad other investments which the blog freely admit that it does not understand.

But what is admirable about this manager are the occasional pep talks he gives to his team.

In his latest pep talk said: "These will be difficult times after an excellent 2010.

"You have my promise that I will give you all the support you need on the detail and delivery of your work in what's going to be a challenging 2011. If things go wrong I will take the blame and if things go well I will not take all the credit with our directors.

"If you feel at any time that I am not communicating clearly and effectively let me know. My door is always open.

"You will not be blamed for not taking big risks this year. Let's play it cautious. We are in this together."

What a boss, eh? Anybody else like that out there? Please let the blog know.

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

EUROPEAN refiners are "awash with naphtha" as a result of long-term structural length and a lack of arbitrage, a petrochemicals feedstock purchasing manager told the blog yesterday.

The decline in US gasoline demand (according to most experts consumption in the States peaked in December 2007 and has been falling ever since) has left European refiners long on both gasoline and therefore naphtha for several years now.

At the same time the European refiners are under pressure to maximise production to meet strong local diesel demand!

What has added to these long-standing pressures in the last few weeks is closure of naphtha arbitrage to Asia due to the upcoming cracker turnaround season, added our source.

"Brazilian arbitrage is also shut because that market has been well-supplied from elsewhere," he said.

This could, in theory therefore, create an opportunity for European cracker operators to squeeze some heavy discounts out of the refiners.

The high cost of Brent crude, though, which is trading at a big premium to West Texas Intermediate, is underpinning the price of naphtha in Europe.

The scenarios one can describe include cheap naphtha supplies that tempt European cracker operators to overproduce.

Our fellow blogger Paul Hodges believes that the biggest factor behind tight European petrochemicals markets over the last 18 months has been lack of feedstock from the refiners.

Or will refiners cut runs as crack spreads get squeezed?

By John Richardson

IS China's polyethylene (PE) market going through a temporary lull or are we seeing a sea change in conditions that could spell problems for the rest of this year? This was the question, to paraphrase Hamlet, facing the global industry late last week as lacklustre post Chinese New Year (CNY) demand continued.

As we wrote about last week, trader inventories in bonded warehouses are high as a result of imports before the New Year proving to be excessive.

We wrote in that same post that job-hopping after the holidays was restricting the ability of converters and finished-goods manufacturers to run at high operating rate.

But a much more important reason for the weak demand is bank-lending restrictions, according to Rainy Ma, our polyolefins expert in Shanghai, who works for ICIS Chemease.

"Converters and finished-goods producers have the orders, they just cannot get the working capital," she told the blog.

China has increased bank-reserve requirements twice this year with the latest announcement made last week. It has raised reserve requirements eight times since the start of 2010 in an attempt to cool the economy down.

A further factor behind moribund pricing - which as this ICIS pricing graph showed either remained flat or only edged up slightly last week - was the wide gap between offer prices from overseas producers and domestic bids.

The overseas producers we have spoken to continued to claim tight supply across several grades and, of course, higher raw material costs, as reasons not to budge on their pricing (see below for some analysis for producer margins).

Whereas import prices were more or less flat, there were some reports of declines in domestic pricing.

This was the result of traders off-loading cargoes from those overfull bonded warehouses in order to repay 90 day letters of credit due in March-April, the blog was told.

The traders were also continuing to re-export resin to South America and Vietnam in an attempt to tighten the market and to, of course, make some money.

High US ethylene prices have recently made exports difficult for the country's PE producers, including backyard shipments to South America.

Margins for Asian integrated low-density PE (LDPE) and high-density PE (HDPE) producers improved last week, according to the ICIS weekly Asian PE Margin Report.

LDPE margins rose by $48/tonne to their highest level since February 2010 with HDPE margins $65/tonne higher.

Improvements were the result of better co-product credits, particularly butadiene - which has been the case for several weeks now - while naphtha costs remained flat.

But it is polyethylene that over the long-run is the main economic driver of any steam cracker and so what is happening in China will remain a big source of concern.

By Malini Hariharan

Asian polyolefin producers face a difficult time with markets being pulled in different directions. Feedstock costs have steadily moved up at a time when downstream demand and price direction remains uncertain.

Political upheaval in Libya and Bahrain pushed WTI crude oil to over $94/bbl yesterday while Brent hit $107/bbl. Naphtha soared to $927/tonne CFR Japan, a level last seen in August 2008.

These developments coupled with tight supply due to upcoming cracker turnarounds raised ethylene price expectations to around $1,350/tonne CFR Northeast Asia while propylene was stable $1,460/tonne CFR Northeast Asia respectively.

However, polyolefin markets in China did not keep pace. Burdened by weak demand and oversupply Chinese traders were looking at re-exporting polypropylene (PP) to southeast Asia, reports my colleague Bee Lin Chow. Yarn and injection moulding grades were on offer at $1,650/tonne CFR Indonesia from China, about $50-90/tonne lower than offers from other sources in Southeast Asia.

In polyethylene (PE), the key linear low density PE (LLDPE) futures contract on the Dalian Commodity Exchange dropped 1.6% yesterday on profit taking. Traders were said to be locking their profits by taking a sell position on the Dalian.

Indian demand was also lacklustre as buyers were unsure of price direction, said one local industry source. The sharp rise in oil prices had not resulted in a spurt in buying as many players viewed this as a temporary situation which would be corrected with an easing of the Middle East crisis, he added.

In addition to this, moves by various Indian states to restrict the use of plastics bags also dampened sentiment. The Delhi government was said to be considering closing down over 400 plastic-bag manufacturing units to ensure effective implementation of its 2009 ban on use of these bags.

The country's Supreme Court also confirmed last week a ban on sale of tobacco products in plastic pouches from 1 March. This segment was estimated to consume over 50,000 tonnes of PE.

A second source pointed out that trading had been hit by the wide difference between international and domestic prices. Local producers have pegged PE prices below import parity levels for the last few months to restrict import volumes into the country. "Fundamental demand is not bad; but the price delta is so high that traders are not risking imports," he added.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

By John Richardson

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 Malini Hariharan

The long-awaited merger between PTT Chem and PTT Aromatics (PTTAR) was finally announced last week.

A presentation made to financial analysts gave details on what the merged entity will look like, planned synergies and opportunities for growth.

The new company with a total petrochemical capacity of 8.261m tonnes/year and petroleum products capacity of 228,000 bbls/day will be a clear leader in Thailand (ahead of Siam Cement Chemical) and also in Southeast Asia. It will be second to Petronas Chemical in terms of enterprise value but number one on revenue and assets.

Source: PTTAR

Synergy projects have already been identified which would require an investment of $92m. These include tapping the offgases, C3/C4, heavy aromatics and other streams from the PTTAR's refinery as feedstocks for PTT Chem's existing crackers and optimisation of facilities such as oil tanks, jetties, and steam and gas turbines, Once completed by 2015, these projects would yield annual benefits ranging from $80.2m to $154.1m.

The merged entity sees opportunities for expansion in value-added products/ differentiated products such as polyurethane, propylene oxide (PO), polycarbonate, polymethyl methacrylate and caprolactam.

In a statement to the Stock Exchange of Thailand (SET) the two companies also talked about improvement to the refining process that would result in increased production of hydrowax which will be used as feedstock for a new cracker project. No further details were available about this project.

The merger of PTT Chem and PTTAR is the first stage in the full consolidation of all the PTT affiliates. The next stage will see a merger of IRPC with the new company.

"This is our future plan, to combine all the petrochemical units in order to gain market capital, add value to our assets and improve cost efficiency," said PTT president and chief executive Prasert Bunsumpun at a press conference last week.

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

THE earthquake and tsunami that hit Japan on Friday afternoon is still hard to take in. We send our sympathy to everyone connected with this disaster and just hope and pray that the rescue efforts go exceptionally well.

As Japan returns to work this morning it will confront the huge cost of rebuilding at a time when its economy is struggling with slowing growth and lack of confidence in the government.

But this is a country that has overcome huge obstacles in the past and we are sure that history will repeat itself.

It seems almost in bad taste to talk about the impact on refining and petrochemicals, but of course life has to go on.

And so we have been trying to piece together the impact on these two industries both in Japan and elsewhere.

Petrochemicals plants at Ichihara, Chiba prefecture, and Sendai, Miyagi prefecture were reported to be still on fire 15 hours after the disaster occurred.

Chisso Corp's Goi Complex, which includes polyethylene (PE) and polypropylene (PP) plants, is at Ichihara.

Maruzen Petrochemical shut down its 480,000 tonne/year crackert at Chiba, east of Tokyo, after the earthquake.

Keiyo Ethylene shut is 690,000 tonne/year cracker at Chiba.

Keiyo Ethylene Co is 55 percent-owned by Maruzen Petrochemical and 22.5 percent each by Mitsui Chemicals and Sumitomo Chemical.

Idemitsu Co, Showa Denko and Mitsubishi Chemical are also reported to have closed down plants in order to carry out test.

Some 1.7m tonne/year of ethylene capacity is thought to be off-line.

There was also a fire over the weekend at the chemical factory of JFE Chemical in the Chuo ward in the city of Chiba, Chiba prefecture.

JFE Chemical produces coal tar, benzene, toluene and xylene and industrial gases including oxygen, nitrogen and argon.

JX Nippon Oil & Energy shut its paraxylene facilities in Kashima, Ibaraki prefecture, with a combined capacity of 600,000 tonnes/year, and in Kawasaki with a combined capacity of 350,000 tonnes/year.

Around 1.2m tonne/year of refinery capacity is thought to be also shut down. These include three JX Holdings refineries, one refinery operated by Cosmo Oil, another by TonenGeneral Sekiyu and a final one run by Kyokuto Petroleum.

The 220,000 tonne/year Cosmo refinery, which is at Ichihara, was reported to be on fire.

Japan is a major importer of naphtha and so crack spreads elsewhere will be under downward pressure due to the drop in demand.

Ten naphtha vessels were said to be heading from Europe to Japan when the disaster happened.

This could add further length to a European market that was already struggling to cope with oversupply.

By John Richardson

OUR sympathies again go to the people of Japan. The main focus should be on providing as much support as possible to the rescue efforts and let's hope that petrochemical companies globally step forward.

But as we said yesterday, life goes on. The Japanese stock market was down around 5% this morning in early trading, suggesting fears about serious damage to the economy. There is anxiety that another earthquake could occur over the next few days.

Here is a research note from UBS, which as you can see, estimates that 20% of Japan's refining capacity and 27% of its ethylene capacity and 30% of its aromatics production is shut down.

As we said in our post on Sunday, Japan is a major importer of naphtha and so some refiners will struggle to place their volumes. However, UBS sees an upside for Asian refining margins.

In the immediate term Formosa Plastics Corp, Formosa Chemicals & Fibre and LG Chem are expected to benefit the most from the outages as a result of their product mix, adds UBS. They should be able to gain market share in China.

The lost production might also help to rebalance what has been a weak polyolefins market in China.

The supply disruptions, which seem very likely indeed to be long-term .In the confused situation at the moment seems possible that major structural damage has been caused to refineries and petrochemical plants.

This is the UBS note in full:

Impact on Japan refining industry
The devastating earthquake and tsunami in Japan that took place on 11 March has resulted in 20% of refining capacity loss in Japan (900-950K bpd) or 3.5% and 1%of Asia and global refining capacity respectively. While some refineries are shut for safety concerns, Cosmo Oil has shut its 220K bpd refinery in Chiba due to fire

.

Implications for Asia refining market
Singapore complex refining margin jumped from US$7-8/bbl to US$15/bbl after
Hurricane Katrina hit the US Gulf coast in late Aug 2005, which resulted in 1.4mn bpd refining capacity loss. We believe Asia refining margin should see more upside in the near-term and major refiners in the region such as GS Holdings, SOi and Thai Oil are best-positioned in Asia.

Impact on Japan petrochemical industry
Around 2mn tpa ethylene capacity in Japan have been affected by the earthquake,
which translates to 27% of total ethylene capacity in Japan or 4% and 1.4% of Asia
and world ethylene capacity respectively. It has been reported that total aromatics
capacity being affected should be around 5.7mn tpa, or 30% of Japan production.

Implications for Asia petrochemical market

We believe any supply disruption in Japan could potentially impact South Korea and
Taiwan as these two are the main competition in China petrochemical market.
Looking at Japan's major export products, we believe FPC and FCFC in Taiwan and
LG Chem in South Korea are best-positioned to gain market share in Asia.

By John Richardson

ASIAN paraxylene (PX) and styrene markets look set to be the most affected by the loss of Japanese exports as the slide below from Bob Townsend at the UK-based consultancy, International eChem (Iec) illustrates. 

Japanese Exports.ppt

My fellow blogger Paul Hodges, also of IeC has analysed the data behind the charts to produce a breakdown of Japan's 2010 exports across the olefins, aromatics, fibre intermediates and polymers chains.

There are unconfirmed reports a 10% increased in Asian PX prioce as a result of the loss of production at JX Nippon Oil.

ICIS asessed pricing at around $1,740/tonne (€1,253/tonne) CFR (cost & freight) Taiwan and/or China Main Port (CMP) earlier today.

JX along with fellow Japanese producer Idemitsu Kosan and global major ExxonMobil are crucial to the Asian market as they nominate the monthly Asian Contract Price.

The nominations are then negotiated with the big five big buyers, two of which are Mitsubishi Chemical and Mitsui Chemicals.

The loss of Japanese PX production comes during a heavy turnaround period. Polyester producers in China are already complaining about squeezed margins and so it will be interesting to see whether the higher PX costs can be passed on down the chain.

A good article from my colleagues Peh Soo Hwee and Felicia Loo at ICIS news neatly summarises both the impact on naphtha of the loss of Japanese production and details of exactly which petrochemical plants are down across the major product chains. Our post from earlier today provides more detailsl these shutdowns.

The Kashima and Sendai ports have also been closed as a result of the disaster - meaning that even where chemicals plants are still operating, shipments may not be possible.

Again our sympathies go out to everybody caught up in this tragedy. We pray and hope that the rescue efforts go well and that Japan is soon able to focus on the rebuilding efforts.

By Nigel Davis

For some, life goes on. For others, everything is lost.

An email to the BBC on Tuesday from a resident in Mie, Japan, 350 miles from the stricken nuclear power plants on the east coast of the country, described a relatively normal day.

Utilities are available but people are feeling nervous and there is some stockpiling. "It feels as if there are two Japans at the moment," the correspondent, John Stephenson, said.

So, one question among so many at this particularly difficult time is: how are the two Japans coping, indeed surviving, in the face of such adversity?

The impact of the earthquake and tsunami on Friday 11 March, and now the aftershocks, can still only slowly be pieced together.

The world's eyes are on the damaged nuclear reactors. But the Nikkei stock market index had crashed by 10% at the close on Tuesday, reflecting the sharply negative economic outlook. Oil prices plunged.

Assessing the impact of the disaster on the petrochemical industry, and on regional markets, so far is difficult to say the least, although some headway is being made.

Reports suggest that important crackers and other production units are not operating.

We know for certain that ethylene and aromatics production is hit. ICIS has reported the closure of ethylene, benzene, paraxylene (PX), propylene oxide, propylene glycol, polyvinyl chloride, titanium dioxide and polyether polyols plants, and reduced output at others. It could take weeks or months for these units to come back on stream.

Paraxylene prices have climbed following a supply force majeure announcement by the world's largest PX exporter, JX Nippon Oil.

Three of its PX plants, with a combined capacity of 950,000 tonnes a year, located in the devastated Miyagi prefecture, are shut down.

Five refineries have shut down in Japan - a Cosmo oil refinery continues to burn - and port activities have been disrupted, putting further strain on foreign trade.

But many plants are operating normally, and others that shut down automatically as a precaution might be expected to restart soon.

However, the damage caused by the disaster is unimaginable, as is the hardship being suffered by so many people.

Production plants have closed automatically, while chemical company offices have been closed, giving staff time to come to terms with recent events.

According to reports, all of Japan's 12 automobile makers closed their assembly lines, for the first time ever. Some of them will not reopen until Wednesday.

Japan's chemical industry has been dealt a severe blow from which it will no doubt recover, but that recovery will take time.

For some in this business, life goes on as normal, but for others the disruptions to production capability and to trade will take time to come to terms with.

By Malini Hariharan

More companies are reporting damages to facilities after last week's earthquake and tsunami.

Mitsubishi Chemical said in a statement that berths, roads and infrastructure around the plant area at its Kashima site have been damaged and delivery or shipment of cargo "would be next to impossible".

"Restoration of capabilities will take quite some time," it added.

Infrastructure at its subsidary Japan Polypropylene's facility at Kashima has been hit.

"Basic infrastructure at the site is badly damaged and we'll need time to restore that, but damage at the PP plants may not be as serious," a company source informed ICIS news.

The company has a total PP capacity of 346,000 tonnes/year at the site. It has also had to shut down its PP plants at Goi after a fire in a neighbouring refinery run by Cosmo Oil.

Mitsubishi Gas Chemical said the building and equipment at a plant in Fukushima prefecture has been damaged by the earthquake and that operations have been suspended. The plant produces materials for printed wiring boards for use in smartphones and other consumer electronics and makes up to 60% of the global market for wiring-board materials.

Major Japanese electronic companies are said to be struggling with power blackouts and production has been suspended at a number of plants across the country.

Worries about supply-chain disruptions are mounting especially in the electronics and automotive sectors and some Asian businesses have slowed down production.

The impact of this should work its way up to petrochemicals in the coming weeks.

By John Richardson

Dear Reader

Below we take a break from our own coverage and focus on another topic - some thoughts on the future competitiveness of the European petrochemicals industry.
A widely-held assumption has been that a lot of European petrochemicals capacity will have to shut down as a result of lower-cost capacity elsewhere, particularly in the Middle East.

But the European industry enjoyed tremendous profitability in 2010 as a result of production being carefully aligned to demand.

More important reasons for these stellar results were probably the age of the plants and lack of investment in maintenance as a result of the 2008 global economic crisis. This led to a high number of force majeures.

Perhaps the biggest reason of all, though, was lack of naphtha from refineries. The collapse of demand in 2008, a long-term decline in US gasoline demand and the start-up of state-of-the-art "full conversion" refineries in Asia put the older European refineries under a lot of pressure.

Plant reliability should now improve as a result of the strong 2010 earnings.

But these earnings will give the Europeans a greater capacity to hunker down and wait for another fly-up in margins if the next 2-3 years prove difficulty because a weaker macro-economic environment.

Barring another major global recession that effects demand for all petrochemical products, Europe's use of naphtha as its main feedstock could continue to deliver very strong co-product credits.

The lightening of feeds in the US, as a result of the shale-gas bonanza, has helped tighten butadiene, benzene and propylene markets.

So has the most recent wave of new capacity which was predominantly in the Middle East and gas-based.

A further factor behind the C3s tightness has been polypropylene (PP) demand growth above the expansion in global GDP and in excess of that for other competing polymers.

This is the result of PP gaining market share from these other competing polymers, such as polystyrene (PS), and a lot of focus on application development.

Producers have therefore been lured into adding substantial amounts of PP capacity, in excess of feedstock availability.

Another even bigger bonus for European petrochemicals could be greater, rather than less, availability of naphtha over the next few years.

More than 50% of new vehicle registrations in Europe are of diesel vehicles.

European refiners might have to run harder to make diesel which will result in greater naphtha production. Exporting naphtha and gasoline to the US is going to get even harder because of the country's continuing decline in gasoline consumption.

Refining capacity in Europe might, in theory, be shut down in if the losses on naphtha and gasoline exceed the money to be made from diesel.

But the same mentality applies to refining as petrochemicals: Why be the first, and maybe the last, company to close capacity when there could be another fly-up just around the corner? (The global refining industry fairly recently made tremendous amounts of money as a result of the Hurricane Katrina disaster. The disaster left the gasoline market very under-supplied).

Environmental clean-up costs and contract obligations with customers may also continue to act as barriers to closure (as is again also the case with petrochemicals).

And if more overseas companies such as PetroChina - which recently acquired Ineos refinery assets - buy into the European industry they are unlikely to want to shut down.

The big oil companies are divesting refining assets in order to concentrate on more profitable exploration and production (E&P). A good example was Chevron's sale last week of a refinery in Wales, the UK, to Valero Energy.

Smaller companies such as Valero seem unlikely to want to buy-in and close-down assets.

A further factor preventing capacity being scrapped could be the intervention of governments anxious to maintain national fuel supplies.

If European petrochemical producers, therefore, do not shut capacity down as expected who might be the losers if there is another major economic crisis?

We are going to explore this theme in later posts, but the losers could be the South Koreans and other Northeast Asian producers.

They are facing much-tougher competition for import volumes into China from the Middle East. China's import growth could also slow down due to structural shifts in the economy and greater petrochemicals self-sufficiency.

South Korea, Japan and Taiwan are also entirely dependent on imported oil and heavily dependent on imported naphtha.

Like all scenarios there are a few caveats. Here are a few:

1.) The European economic crisis deepens, forcing further closure of manufacturing industry
2.) The Japanese earthquake and tsunami leads to major changes in the global economy, the scenarios for which are laid out in the post from Paul Hodges - which have linked to above
3.) The high price of propylene results in strong growth of on-purpose production, thereby reducing co-product credits for the liquids cracker players
4.) Continued tightness in C3s leads to PP demand destruction and, as a result, eventual weaker demand for propylene
5.) Co-product credits remain so good that the US makes a major switch to heavier feeds (This won't be naphtha as "heavier" in the US means moving from ethane to propane and butane). This weakens the competitive position of the Europeans

By John Richardson and Nigel Davis

THE humanitarian side of this disaster is foremost in everyone's minds with more than 18,000 people now estimated to have died in the Japanese earthquake and tsunami.

Of equal concern is the crisis at the country's stricken nuclear power plants which the International Atomic Agency describes as "very serious".

And the relief efforts following the 11 March disaster have been hindered by bad weather with around 350,000 people in northern and eastern Japan in shelters, according to media reports. Water supplies are still cut to almost 900,000 homes.

But economic effects are, of course, also at the front of everyone's minds with one of the most immediate consequences of tragedy being the tightening of some of the major petrochemicals markets.

As we wrote about yesterday, supplies of spot paraxylene (PX) have dried up following the closure of 950,000 tonnes of Japan's capacity. Spot PX prices last week hit $1,815/tonne (€1,271/tonne) CFR (cost and freight) Taiwan. Purified terephthalic acid (PTA) prices rose to a 16-year high of $1,500-$1,517 CFR CMP (China Main Port).

The polyester chain is being supported by all-time high cotton prices, but going back upstream again to PX and PTA these were already very tight markets before the disaster occurred.

How much longer can the polyester producers down to the manufacturers of apparel and non-apparel keep on absorbing these cost increases? When do we begin to enter demand destruction territory?

Of equal concern is what is not happening in polyethylene (PE) where pricing has remained flat since the Chinese New Year.

This is despite more than of Japan's linear low-density PE (LLDPE) capacity being closed down, with 38% of its low-density PE (LDPE) capacity shuttered and 26% of high-density PE (HDPE) off line, according to ICIS pricing.

Markets were already tight as a result of an extensive Asian cracker turnaround season and so the failure of PE to move up in China is a major worry.

We will examine varying opinions on reasons why PE remains so weak in a post later this week.

But to return to Japan, UBS provided a good summary of production losses in a report issued over the weekend.

Four major crackers remain closed, representing lost ethylene capacity of 31% - number that should decline to 25% by the end of the week, according to UBS.

Propylene capacity has been reduced by 37%.

Forty six per cent of polyvinyl chloride (PVC) capacity is down, 24% of PX and 20% of styrene.

Reuters on Monday listed some stark facts: 1.4m bbl/day of Japan's 4.5m bbl/day refining capacity and 1.7m tonnes of naphtha cracking capacity remain off line. Port facilities had been severely disrupted by the disaster.

With Tokyo Electric Power Co warning of rolling blackouts well into April, even if plants are soon brought back on-stream, there seems a possibility that production will be disrupted again.

How badly plants have been damaged is impossible to gauge at this moment.

Japan has been struggling to restructure uncompetitive parts of its industry for many years and so uncompetitive plants that have been badly damaged may not be rebuilt.Apologies if this sounds a little cold-blooded, but we are trying to think through all the economic consequences of these awful events.

But Japan also makes a lot of high-value chemicals that go into electronics supply chains. This area of its chemicals industry is highly competitive.

Disruption of production here could have a global impact as electronics assembly plants outside Japan are forced to shut down.

For example, The Economist magazine estimates that Japan makes 90% of the epoxy resins used the manufacturing of all the world's printed circuit boards.

By Malini Hariharan

The blog would like to share an interesting analysis in the latest issue of ICIS Chemical Business on the impact of US shale gas on petrochemical producers in the region.

Profitability has of course improved as seen in the results posted by majors such as LyondellBasell.

Shale gas production in the US has grown eightfold in the past 10 years, and now accounts for some 12% of total gas production, writes William Tittle of Nexant.

This growth in production has pushed down natural gas prices which are currently about one-quarter that of oil on an equivalent energy basis.

And at low natural gas costs, there is even more incentive to extract ethane from the gas. US ethane production has increased by one-third to 17m tonnes/year in the past five years and 63% of 2010 US ethylene production of 24m tonne was based on ethane, up from 46% five years ago, points out Tittle.

The availability of cheap ethane has boosted the export competitiveness of US companies. Back in 2004, ethane-based US high-density polyethylene (HDPE) producers had the second highest cost structure in the world.

But now integrated HDPE cash costs from ethane have moved dramatically down the global cost curve, points out Tittle. US producers are among the lowest cost producers in the world, after Saudi ethane, ethane/propane and Canadian ethane-based companies.

The return to profitable operations has already prompted producers to plan for increased use of ethane in the future. That's an easy decision to make.

But a tougher question as Tittle points out is whether to increase capacity significantly when the incremental market to be served is the export market.

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 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

THE blog remains extremely worried that there is about to be a major sell-off of commodities in general, including petrochemicals, as conditions right now feel very similar to those in 2008.

Whether we will face a systemic shock to the system, a black swan, on the scale of Lehman Bros is of course something nobody can predict.

But a sharp correction in pricing, regardless of such a shock, feels imminent and it might have already begun.

Goldman Sachs on Monday signalled it was time to take profits from its CCCP basket of commodities: crude, copper, cotton, soya beans and platinum.

"Not only are there nascent signs of demand destruction, but also record speculative length in the oil market," the bank said in a note to clients.

This was blamed for a subsequent correction in oil and other commodities within the Goldman Sachs.

But other forces, apart from Goldman prompting a sell-off, was behind the fall in oil prices by around $4 a barrel overnight on Monday.

In petrochemicals we saw declines in polyethylene (PE) week.

Paraxylene (PX), purified terephthalic acid (PTA) and mono-ethylene glycol (MEG) have been falling for two weeks in a row. MEG prices are down by 14% from $1,275//tonne CFR China February - a 37-month high, according to ICIS pricing.

Affordability seems to be a problem across petrochemicals in general as end-users struggle to pass on costs to their customers.

Fellow blogger Paul Hodges, in this excellent post, tracks the the long-term history of crude. He argues that average annual prices of over $50 a barrel, and of course we are well beyond that level now, have traditionally cause demand destruction.

In China, inflation is a major concern with increased interest rates and bank-reserve requirements restricting credit for small -and medium-sized enterprises.

A common story across several petrochemicals seems to also be that less bank lending in China is making it harder for the speculators to speculate. Speculative activity has offered big support to markets ever since the Chinese stimulus package was launched in late 2008.

And here's a worry on MEG: Inventory levels are reported to be very high.

"There is 600,000 tonnes in tanks in China a that the moment compared with the usual 400,000 tonnes," a source with a major producer told us last week.

As has been the case with PE since the Chinese New Year, might we see an attempt to re-balance markets through re-exporting this material?

By John Richardson

THE soaring confidence of the US petrochemicals industry over abundant ethane feedstock from shale gas could end up being colossally misplaced, as we have discussed before on the blog.

America is the most NIMBY (not in my backyard) of all societies and so it shouldn't come as a surprise to anybody that scrutiny is increasing over the environmental impact of the "fracking process". For example, several Senators said on Tuesday that the Environmental Protection Agency should step up regulations of shale gas because of concerns that toxic chemicals, such as barium and benzene used in fracking, could get into the water supply.

This followed another New York Times article on  Monday ahead of the release of a Cornell University study that will argue that as much as 7.9% of global methane emissions come from shale gas.

The gas is intentionally vented or flared from shale-gas wells or seeps out from loose pipe fittings along gas distribution lines, the study will claim.

This results in shale gas being worse for the environment than using coal for power generation.

But if the US wants to increase energy independence it is going to have to make some tough choices and with crude prices where they are right now, the natural gas industry might well find that its counter-arguments are well-received.

At the very least, though, this raises doubts over claims that the US is set to become the new Middle East of petrochemicals.

Chevron Phillips Chemicals has announced a feasibility study into a new cracker in the States and the blog has heard that that at least two more new facilities are under study.

Several expansions of existing plants are also under study amounting to a total of aorund 1m tonne/year of potential new capacity.

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 John Richardson

THE refining industry enjoyed a golden era before the global economic crisis thanks to a booming economy and gasoline shortages caused by Hurricane Katrina. Inevitably, therefore, as is so often the case with commodity industries, too much new capacity was planned that came on-stream at the worst possible time.

But recently some financial analysts have been arguing that the worst is over for the industry. This is based on the premise that the world's economic recovery is on solid ground - which we strongly dispute - and less capacity additions over the next few years.

A recent report by Kunal Agrawal, Singapore-based energy and chemicals analyst with BNP Paribas, suggests a more negative longer-term view for the industry.

"We expect global utilisation rates and benchmark refining margins to improve steadily over 2011-12 owing to incremental refined products demand outstripping refining capacity additions, which we believe will result in a sweet spot for refiners and Asian refiners in particular," he writes.

"In our view, it is a good time to have exposure to refining, but a longer-term return to the 'golden period' of impressive refining margins of 2004- 08 is unlikely, as refining supply growth should exceed demand growth beyond 2012.

"We do not foresee global utilisations increasing beyond 85%. The utilisation outlook is healthy - but is unlikely to support a robust recovery in refining margins.

"We believe a longer-term positive sentiment on the sector is being a bit optimistic. Beyond 2012, we expect an excess of 1.8 mbd capacity to be commissioned annually, which would mean that supply will likely be ahead of demand growth. This is an unfavourable situation for a robust refining environment improvement, in our opinion.

"We also anticipate a significant amount of heavy-fuel processing capacities being commissioned over 2010-15, which will increase demand for heavy oil, and pressure the light-heavy spreads to contract. We believe this is negative for highly-complex refiners in the region that had enjoyed superior refining earnings during the refining supercycle of the middle part of the previous decade (owing to extremely strong light-heavy spreads).

"In the next refining cycle, we believe the ability of complex refiners to lock in the incremental dollar margin per barrel will be compromised."

This could have major implications for the availability and affordability of petrochemical feedstocks in different regions.

We can speculate that while older European refineries might be pressured by the overall problem of supply being in excess of demand, they might find themselves in a relatively strong position because of the greater strain on the newer, more complex refiners.

Last month we argued that the push by European refiners to meet strong diesel demand might make light ends, including naphtha, cheap for local petrochemical players.

The BNP Paribas report provides further reasons to believe that these European refiners could run relatively hard, providing advantaged raw materials to highly experienced and fully-depriciated domestic petrochemical industries.

The complex refiners, some of whom are integrated with new or fairly new petrochemicals capacity, might find their competitive positions challenged. They could be forced further to the right of the cost curve.

And overall with a significant oversupply of refining capacity being predicted, there might be plenty of spare naphtha to be traded globally, assuming there is no major consolidation.

What might this spare naphtha mean for the competitiveness of naphtha-based crackers versus the gas-based players?

By John Richardson

IT has been a fantastic party. Nobody expected that the drinks would last for so long, thanks to Wen Jiabao and Ben Bernanke working overtime to man the 24/7 off-licence (it is called "liquor store" in the States and a "bottle shop" in Australia).

But now the market has clearly reached the top with China facing the unenviable task of tackling deep-rooted, systemic inflation that has placed Beijing in an exceptionally difficult situation.

It will have to clampdown much harder on the cost and availability of money if it wants to bring food prices under control. The risk of failing to do so is major social unrest. As my fellow blogger Paul Hodges said the other day "how can any government expect to survive food inflation at 11.7%?" (its level in March).

But crackdown too hard on the extraordinary growth in liquidity post-2009 and the risk is a severe correction in house prices. All the millions of Chinese who would then find themselves in negative equity could then instead exert pressure on the government.

S&P's decision to put the US's AAA debt review on reviews is, as Hodges says in this post, a potential game changer.

"It means that policymakers can no longer pretend the $5trn they have spent over the past 2 years on stimulus measures somehow "doesn't count" in terms of needing to be repaid. Oil markets will be first in the line of fire.

"The S&P move makes it much less likely that the US Federal Reserve will be able to follow QE2 with QE3. And QE2 has been the prime reason why oil prices have risen from $75/bbl to $125/bbl since August, when it was first announced."

Even Barack Obama has said that he believes the rise in oil prices has been driven by speculation and not supply shortages.

Chemicals prices rose following the announcement last August that QE2 was going to take place with confidence further bolstered by the continuing boom in China.

But since the Chinese New Year, the world's most-important chemicals market has stalled as the realisation has sunk-in that there is something deeply wrong with China's economy.

It has happened before as Patrick Chovanec, professor at Tsinghua University's School of Economics and Management in Beijing, says in this blog post we also linked to on Tuesday. He quoted a book called Red Capitalism, where the authors - Carl Walter and Fraser Howie - write of how there was a surge in bank lending and inflation ahead of the Tiananmen Square crisis in 1989.

In an attempt to confirm what we fear, the blog spoke to four chemicals and polymers traders yesterday to assess the current mood in China. They said that while some markets had seen slight rallies early last week on mild recoveries in confidence, volumes remained exceptionally subdued.

"All the end-users are buying hand-to-mouth. There is no visibility anymore over the economic outlook. We have done incredibly well since Q1 2009, but it is now time to reduce our exposure," said a polyolefins and polyvinyl chloride (PVC) trader.

This repeats what we heard from another trader on our recent trip to Singapore  

                                Jim Gallogly

                               Source of picture: ICIS 

By John Richardson

LYONDELLBASELL has joined the list of US producers that have disclosed ethylene expansion plans as a result of low-cost ethane and the belief that we are heading towards an up-cycle.

Jim Gallogly, LyondellBasell's CEO, said during an earnings call on Monday that debottleneckings are being considered for crackers at Channelview and La Porte, Texas. This could add at least 500m lb/year (227,000 tonnes/year) of ethane-based ethylene capacity

He also said that the company is conducting a study into a new cracker which could be as a joint venture.

Dow Chemical plans to build a world-scale ethylene plant on the US Gulf coast for start-up in 2017.

Chevron Phillips Chemical is studying the possibility of building a world-scale ethane cracker, and INEOS has undertaken engineering studies to debottleneck its cracker in Chocolate Bayou, Texas.

Westlake Chemical is expanding ethylene capacity at its Lake Charles complex in Louisiana.

LyondellBasell's announcement about its capacity intentions came less than a month after it declined to be drawn on the subject during the BB&T Capital Markets Industrial and Commercial Conference in New York last month.

However, Sergey Vasnetsov, the company's senior vice-president for strategic planning and transactions, laid the groundwork during the conference by predicting that the olefins and polyolefins industry was heading for an up-cycle in approximately 2014-16.

Stronger-than-expected GDP growth and/or major production problems could result in the good times occurring earlier than that, he added.

He presented an upbeat view of emerging-market growth without mentioning what we feel is a major risk: Inflation.

The former Wall Street analyst also made no comment on the threat to the fragile US recovery, if one can call it a recovery, of dealing with the budget deficit.

Interestingly, Vasnetsov said that the US ethane premium over natural-gas prices can be as much as 100%, a situation that will perhaps change as new fractionation capacity comes on-stream. He presented a slide during the event forecasting a 53% growth in fractionation capacity by 2015.

Perhaps the prospect of even more competitively-priced ethane is another reason behind all the recent capacity announcements - along with the consensus view that an upswing is on the way.

Consensus views can be very dangerous when they lead to over-investment.

By John Richardson

WE hate to say we told you so but the 15 per cent fall in oil prices last week - the steepest one-week decline in two-and-a-half years - was evidence of growing concern over the health of the global economy.

And as we predicted on 12 April, last week saw a broad sell-off of commodities in general.

Polyethylene (PE) prices in China were understandably down by $10-20/tonne, according to last Friday's assessment by our colleagues at ICIS pricing.

Price retreats were recorded across a broad range of chemicals and polymers, including a further $50/tonne fall in purified terephthalic acid (PTA), again according to ICIS pricing.

The fibre intermediate is now down by 11 per cent over a three-week period - a perfect example of how pricing has been driven-up by surging crude costs and is now on the retreat.

Cotton prices have also played a big role in strength up and down the entire polyester chain. Cotton futures prices are now down by 20 per cent in one month on concerns over a supply glut.

The run-up in crude and commodities in general has in our view been disproportionate to the underlying strength of the recovery. More expensive oil has been largely the result of the "one-way bet" on the Fed maintaining record-low interest rates for a long time to come.

The end of QE2 seems to have been a factor behind the rout in commodity prices last week.

But the biggest reason, we feel, is that investors suddenly realised, as the negative economic news built, that they were over-exposed on commodities and headed for the hills. A solid indication of this retreat was strengthening of the US dollar.

Despite good US job growth - the data for which was released on Friday - the US economy faces major problems, most importantly how to solve the budget deficit with Democrats and Republicans miles apart.

Sovereign debt issues in Europe could still create an global economic shock comparable to that, or perhaps even worse, than the collapse of Lehman Bros.

And, of course, there is China where most of the blog's attention has been focused over the last few weeks.

China confronts rising inflation, which has:

1.) Restricted the ability of chemicals and polymers producers to pass-on cost increases down value chains to finished goods
2.) Weakened the competitiveness of Chinese exports as a result of higher raw-material and labour costs
3.) Raised the prospect of major social unrest as a result of asset-price inflation that has widened the gap between the super-rich - those who made a fortune from China's huge late 2008 economic stimulus - and the average worker
4.) Left the government trapped between the devil and the deep blue sea. It might end up overreacting through too-stringent steps to contain inflation, or it may fail to take sufficient measures to reign-in rising costs, resulting in more of the social pressures we have just referred to

Last week's slump in commodity prices, if sustained, might make the job of tackling inflation in China - and other Asian countries such as India, which raised interest rates last week - a lot easier.

But the reasons why commodity prices declined should be of major concern for chemicals companies - particularly those that have presented a rather rosy view of China's immediate future and. Such companies may not, as a result, be prepared for the worst.

As we said, the global recovery is on very shaky ground. Support for this view is provided by recent surveys of purchasing managers working for Asian manufacturers. The resulting indices show that while orders have been growing, so have inventories, suggesting a slowdown in exports to the West.

This should be a big concern for the chemicals industry as we approach the peak manufacturing season in China, which runs from around July-August to September.

The peak season occurs as manufacturers of finished goods increase production in order to get finished goods on the shelves of Western retailers in time for Christmas.

A decline in imports of chemicals and polymers during this period - which are re-exported as finished products - would provide further support for our arguments.

Any declines could, though, be also the result of a low-end manufacturing having drifted to other emerging economies with lower labour costs - and so a wider examination of trade data might be necessary. 

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 Malini Hariharan

Malaysia's Petronas is expected to soon announce plans for a new refinery and petrochemical complex Pengerang, Johor, a project that the blog had discussed a few months back.

A report in the Malaysian newspaper Star says the project, named Rapid or Refinery and Petrochemical Integrated Development, would involve an investment of close to $17bn. The Johor government will be a partner in the project and multinational energy companies will be roped in at a later date.

The aim is to replicate Singapore's success in building Jurong island as a refining and petrochemical hub. Pengerang has been chosen as its waters can reach depths of more than 20m, which is what is needed for very large crude carriers (VLCC) and ultra large crude carriers, says the report.

This project will complement plans for a $1.7bn deepwater petroleum terminal at Pengerang.

Details of capacities and start-up dates were not disclosed but the blog had earlier been told that completion of the refinery and naphtha cracker is likely in 2015-16. The cracker would also provide feedstocks for new speciality chemicals planned by Petronas and BASF.

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 Malini Hariharan and John Richardson

The power crisis in China, highlighted in this post last month and yesterday, has worsened and is likely to affect economic output in the second quarter.

More than 10 provinces, including Zhejiang, Hunan, Anhui, Jiangsu, Hubei, Sichuan and Henan, have been affected.

Small and medium-sized petrochemical producers in the affected regions have had to cut operating rates or shut down operations because of the power restrictions, reports the blog's colleague Judith Wang on ICIS news.

"Downstream plastic plants in Ningbo were ordered to shut down for one day a week from March," said a Chinese polypropylene (PP) trader.

In Zhejiang province, some polyvinyl chloride (PVC) facilities have had to reduce their operating rates by 10-20% from March.

"It looks like the power shortage will be [of] unprecedented intensity this year," an industry source said.

The shortage has been attributed to a a drop in coal supplies that has affected output at the country's many thermal power plants. Additionally, a drought in the south has curtailed hydro-electric output.

The China Electricity Council has estimated around 30 gigawatts of power shortfall in summer, about 3 percent of China's generating capacity

Experts point out that this year's power crisis is different from the ones that China has experienced in the past. The country has enough capacity but many power plants are not running at full rates as power prices are fixed while coal prices are rising.

To sort out the problem power costs will have to go up, but this will only fuel inflation which the Chinese government is struggling to control.

Some polyester producers have turned to diesel generators but the availability of diesel is becoming an issue, as again we discussed yesterday. The situation could improve in the coming months as the government has suspended diesel exports indefinitely to meet domestic demand.

Yesterday's post also talked about how refiners, under pressure from rising crude prices, had reportedly cut back on production of both gasoline and diesel. Gasoline and diesel price rises - as with coal - are limited by government pricing policy, making it impossible for the refiners to fully pass-on increases in oil prices.

Sinopec been ordered to cut back on ethylene output - by 4% in April and 10% in May - in order to divert more naphtha to gasoline production and gasoil for making more diesel.

It will be interesting to see whether the measures taken so far will be sufficient to meet transportation-fuel demand and provide sufficient diesel for electricity generators.

Further ethylene production cuts by Sinopec to meet fuel requirements might help support weak polyolefins markets.

The power shortages we just detailed come, however, at the worst possible time for petrochemicals demand as China's peak manufacturing season for finished goods is about to begin.

Failure to fully solve the extensive power problems will therefore be another reason - along with all the inflation-tackling measures and the harm done to the economy by inflation - to expect lower petchem exports to China.

By John Richardson

THE euphoria sweeping through the US petrochemicals industry seems to indicate strong support for the "supercycle" theory.

Some of the comments made during the first-quarter results season certainly point that way, as does the upbeat mood of presentations made to investors over the past few months.

A consensus view appears to have emerged: we are through the bottom of the cycle; that not enough capacity will be added over the next few years; and that, therefore, by 2015-2016 everything will be wonderful.

Morgan Stanley first started talking about the chemicals "supercycle" - a view that has subsequently been supported by several other banks - in a report from October 2010.

"An inflection point in the global plastics market, driven by China and India [has been reached]. After a recent period of slower growth and a decoupling from global GDP growth, we now expect the strongest period of ethylene demand growth in the past 20 years," the report stated.

"We forecast that in the next five years, incremental annual consumption in China and India alone will equal the total current consumption in the US, until recently the world's largest ethylene consumer, and still responsible for 15% of the market.

"Global capacity should grow at just 2.3% in 2011-14. Utilisation rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally."

But, as Torsten Penkuhn, the head of BASF's petrochemicals business in Asia, told ICIS news in an interview earlier this month, the industry has a history of shooting itself in the foot by overbuilding capacity when confidence is high.

Where there is cheap feedstock and finance, companies will build. Individual companies are often unaware of the cumulative effect of all their competitors doing exactly the same thing.

Kunal Agrawal, a Singapore-based chemicals analyst with BNP Paribas, provides some numbers to support this view in a report released last week.

"While we believe the Middle East will find it challenging to approve and commission incremental gas-based crackers, we see significant opportunities globally for continued investments in naphtha-based crackers," he writes.

"We recently conducted a detailed bottom-up analysis on global refining capacity-addition plans during 2010-15. We found that at least 10m bbl/day of refining capacity is scheduled to be commissioned during the period, which, in our opinion, will provide enough feedstock for an additional 16m-17m tonne/year cracker capacity.

"These are projects for which either construction is already in progress or EPC (engineering, construction and procurement) contacts are being awarded.

"Sufficient naphtha and liquefied petroleum gas (LPG) will be produced by the 10m barrels per day of refining additions to supply a further 11m tonne/year of ethylene capacity that has yet to be announced," he adds.

This would be on top of the substantial number of studies into new crackers - and plans to expand existing facilities - that have already been announced in the US over the past few months. The mood of the industry has been transformed by abundant shale gas and confidence in the global economy.

Getting a cracker built by 2015-2016 that isn't already reasonably underway, certainly beyond the initial study phase, would be a big challenge.

But Agrawal adds in the same report: "We also believe the surplus capacity commissions through 2009-11 will require a couple of years of digestion before we see global utilisation rates tightening substantially."

Extra production is being planned during a period of increasing economic uncertainty.

The battle against inflation in China threatens to subdue growth for at least the next few quarters.

And, assuming the Chinese government wins the battle, it faces the huge task of weaning the economy off its addiction to exports - one of the main strategies under its current five-year plan (2011-15).

A period of transition appears inevitable as slower export growth (and therefore growth of chemical and polymer imports) is replaced by domestic consumption.

For the supercycle theory to come true, Asia must continue to do all the heavy economic lifting, as the outlook for the US and Europe is at best fragile.

The Morgan Stanley case was that strong Asian growth would be enough by itself, because the size of the continent's consumption meant that it would drive the global ethylene cycle.