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."

Source of Picture: http://blogs.suntimes.com/ebert/

We have just started doing our research and so more details later - but see attached this Excel spreadsheet - lendingVDalianOI.xls

It compares the increase in lending from China's banks with the amount of open interest in the Dalian Commodity Exchange's linear-low density polyethylene (LLDPE) futures contracts.

Volume traded on the exchange has risen to mind-boggling heights this year - 99.9% of which is cash settled involving no intention by either party to provide or receive physical delivery.

As you can see from the Excel, when lending rises in one particular month the following month has seen increases in activity on the exchange.

Up to July 17, open interest on Dalian was at Yuan250bn with lending rising by Yuan1.43t trillion in June.

If July carries on its current pace Dalian activity might well exceed that in June after only Yuan664.4bn of credit was issued in May.

"An increase in available credit in China normally takes about a month to find its way into people's pockets and so there may be a correlation," a friend who reports on the financial industry told me over the weekend.

"It would be interesting to also compare the rise in credit with the response of local stock markets (up by around 80% from their November lows) and other physically and paper-traded commodities."

The other way to look at it could be to take the overall rise in credit this year to see the year-on-year influence on markets. This should also include the property sector, which, according to The Economist, has seen home purchases rise by 80% up until June.

Those who speculate on the stock market are likely to also to chance their arm on property - with some of these same gamblers also chemicals traders (so you might seeing switching of exposure between different markets, leading to dips and rises in activity that doesn't always respond in simple straight lines to increased credit; in other words keep it simple by just looking at the effect of the overall rise in lending).

Our obvious next step is also to see if any similar pattern has emerged in "physical" PE markets.

This might go someway towards answering the concern that the price recovery - which still shows no signs of faltering, according to ICIS pricing (see slides below) - involves a great deal of speculation.

PP-PEICIS20July.ppt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Make your own mind up about the role of the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) and polyvinyl chloride (PVC) futures contracts from the interviews below.

The first quote is from Sinopec - from an ICIS news story.

There then follows my interviews with a major Asian producer and a consultant based in Asia.

The chart below shows the correlation between Dalian LLDPE and domestic physical market prices in China, courtesy of CBI - our joint venture partner in China.

  My next step, after what the major producer has said, is to do some research into any links between Dalian and pricing in the overall chemicals market.

Sinopec's view

"We will not take futures price as pricing references. The impact of futures prices on spot markets will remain only a reflection of market sentiment," a senior official in Sinopec's synthetic resin department."

"This is the result of the limited amount of physical deliveries taking place through the futures markets."

The Asian producer:
"
The Dalian futures market LLDPE price plays a big role in the Chinese polymer market. Although it trades only LLPE and PVC, it has become a trend setter for the entire market.

Many traders and end users also take part in the trading. Sinopec and PetroChina follow the Dalian market ."

The consultant

"The Dalian exchange has become a reference point for producers. Even though they are not trading on it (no hedging is taking place as it's also financial and chemicals traders) there is a psychological effect as it's a daily price that's very easily accessible: just log on to the screen each morning and there you go.

"In the absence of a complete picture of what's happening in China, Dalian is as good a guide as any.

"This doesn't mean that the volumes will go down necessarily - this depends on whether bank lending remains free and easy.

"I see an upside potential for pricing in Q3 because the new capacities won't have hit the market then but I see things turning bad from the fourth quarter."

A Mars Bar feast in store if crude hits $30/bbl again

Source of Picture: Amazon.com

Polyethylene (PE) inventories in China at the second and third local distributor levels are at very high levels, two reliable industry sources have told us.

This has led to some confusion in the market as earlier reports indicated that inventories were in fact low - but this referred to stocks in bonded warehouses (imported material) and the first level of local distributors.

Speculating in polyolefins has been made a great deal easier by lax bank lending - contributing to a 51% rise in imports during January-May 2009 over the same months last year.

The US was able to raise low-density PE (LDPE) exports to China by 27%  in January-May and HDPE by a staggering 65% (up until end-March shipments were actually down by 3%, indicating how strong the buying spree has been since then on greater macroeconomic confidence, tight supply on shutdowns and rising oil prices).

Strong end-user has also added to the momentum. 

The booming construction sector consumed lots of high-density PE (HDPE) pipes.

We are also hearing reports of government investment in better disaster-preparedness - after the mistakes exposed by last year's Sichuan tragedy - as being partly behind very tight HDPE yarn grade markets. Yarn grade is used to make tarpaulin for tents with the surface of the tents laminated by linear-low density (LLDPE) and LDPE.

Demand for agricultural film (LDPE and LLDPE) has received a boost from government initiatives to raise output on farms. One of the peak seasons for agricultural film demand is also about to start.

Lack of availability of recycled plastic is another major factor in the surge in demand for virgin resins.  

Recently, though, markets have become becalmed due to a classic buyer and seller stand-off.

Are we at one of those inflexion points or could the rally be sustained for some time yet?

I still think this won't be a V-shaped recovery so it's only a question of when there is another severe correction in pricing (of course, the same applies to the other polymers. I will look at PP over the next few days).

New supply will become the biggest factor in directing markets, but, according to some sources, perhaps not until as late as Q4 due to continued start-up delays.

But even if the new-output glut doesn't hit the market until the fourth quarter -or perhaps even late - a collapse in crude might have already flushed the true level of Chinese inventories out of the system.

Or could more air be first of all pumped back into the crude bubble?

Premiums for long-dated US crude futures have grown dramatically since mid-July, according to this report from Reuters.

"The discount for front-month to second-month oil futures has nearly doubled since July 13, to $1.75 from 89 cents," the report continues.

This shift in the forward curve might be big enough to trigger a new round of buy and store programmes for offshore vessels that were off-loaded in May when the curve moved in the opposite direction.

Bargain prices for very chartering Very Large Crude Carriers (VLCCs), which can help store up to 2m barrels of oil, could revive the offshore storage trend.

But the danger is that one day storage space might simply run out - or before that the cost of storage rises above that of finance. Cheap and easy lending, the result of the US government's rescue of the banks, is one of the main reasons behind the rise in oil.

Before any of the above happens, the weak state of demand might be enough to topple the market.

OPEC is predicting a sharp drop in oil prices over the next few weeks because of the huge build inventories of crude products, according to this report in the Wall Street Journal.

Stockpiles of diesel and heating oil are at 24-year highs, leading to the possibility of more crude oil production cuts being announced at the next OPEC meeting on 9 September.

Venezuela, Iran and Angola are already apparently exceeding existing quotas, raising doubts over whether any additional cutbacks would work.

Further demand destruction seems likely because - as we've written about before - defaults on unsecured consumer debt, such as credit cards, could result in a second wave in the financial crisis.

"The real unknown is to what extent a recession on par with the 1930s will be turned into something much worse by consumer debt," writes the FT in this article.

As this chart shows UK household debt has risen steadily over the last nine months to stand at 170% of disposable income with the US at 140% - well ahead of levels during the early 1990s recession.

The free lunch cannot last forever. But somebody I spoke to today at least might benefit from the free Mars he has wagered that crude will be back at $30/bbl over the next few months.

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.

Source of Picture: Australiannews.com

In this article in the South China Morning Post (you can register for free for 14 days if you are not already a subscriber) Michael Pettis makes the argument that China is taking a big risk by stockpiling commodites such as iron ore, copper and oil.

Inventory building is on the assumption that the current strong growth will be maintained. But as we have highlighted on many occasions on this blog, dangerous imbalances make a fall in growth seem more likely.

It doesn't seem logical that in the mighty scheme of things chemicals are being strategically stockpiled as buying chemicals as a hedge against future price rises is far less critical than oil.

But the rebound in Chinese demand for oil - with a lot going into storage - has helped drive up the global price of crude. And, of course, chemicals have followed.

And what has made China well which might make it sick again - excessive loan growth - has helped speculation in commodity chemicals and polymers.

As my fellow blogger Paul Hodges has said before, "Hope for the best, but prepare for the worst".

"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.

Goldman Sachs is talking about crude oil at $85 a barrel by the end of the year.

Sound familiar? Not quite forecasts of $200 a barrel, but is there a danger of repeating the mistake that the James A Baker III Institute on Public Policy claims was made in 2008?

In a new report, the institute claims that in the spring of that year financial speculators - out of touch with physical oil storage - missed the amount of floating storage that contributed to the subsequent collapse.

EF-pub-MedlockJaffeOilFuturesMarket-082609.pdf

Speculators don't care about the effect on the real economy, only in making money their money and getting out at the right time.

"In 2007-08 dramatically rising oil prices fed US indebtedness. This led to an even weaker dollar, driving oil prices even higher," write the authors of the report.

Index funds linked to the value of the greenback have increased their activity on the Nymex fourfold since January 2006, they add.

Non-commercial players as a whole have been lead indicators of pricing - again from January 2006 - thanks to market liberalisation introduced in 2000.

So do we need governments to use strategic petroleum reserves, as did President Clinton in the 1990s, and the use of spare capacity by producers to take the power away from the speculators?

Source of picture: rateyourmusic.com

...steal a lot and they make you a King," wrote the great Bob Dylan in A Sweetheart Like You on his great 1980s album, Infidels.

This seems appropriatea as we commemorate exactly 12 months to the day since the West's financial system imploded.

Obama is talking tough on new regulations - and I am sure he sincerely means it - but Wall Street seems to control the overall Washington agenda.

Why does it matter for the chemicals industry? Because the distortions in energy, other commodity and equity markets are creating a false impression for the industry.

As the president says: "It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system and a more broadly-shared prosperity."

Hear, hear.

Forget supply and demand, just record the index cards....

Source of picture: Heatusa.com

This amateur pundit is beginning to think he got it very wrong.

"I've been thinking the same thing - I was as gloomy as you a few months ago," said an oil-and-gas consultant friend of mine this morning.

"The Singapore property market is close to its all-time highs of 1997.

"The consumer-confidence indices have seen a complete about-turn from 12 months ago.

"Could the improved sentiment itself result in this being a U rather than a W-shaped recovery?"

"Maybe the Chinese government will continue spending as much as it can to stimulate the economy as a hedge against the US dollars.

"Why buy more Treasuries when dollar weakness seems to be a long-term factor with the risk that the dollar might also be replaced as the reserve currency?

"It could well be in China's longer-term interests to keep investing heavily in moving the economy from an export to a domestic focus.

"This will need to involve winding down policies that have provided temporary relief from the global crisis (i.e. huge increases in bank lending and other stimulus policies) in favour of reforms that will boost the pace of genuine, underlying consumption growth.

"These need to include better healthcare and pension systems, financial sector liberalisation and deregulation of distribution and logistics."

"It seems amazing that only a year ago we were talking about something as bad the Great Depression of the 1930s.

"Perhaps the problem is that we've been looking too much at fundamentals - at supply and demand from oil down to finished goods.

"The focus instead should perhaps have been on international capital flows.

"We need to more carefully study how money flows between borders and between different equitiy markets, commodity futures markets and over-the-counter (OTC) trading,"

Here are my views...

Electronic trading systems have revolutionised the speed of capital flows.

The IntercontinentalExchange website, for example, says that transactions on its wide and ever-expanding range of markets each take only two milliseconds.

You have dollar and oil markets sitting on the same exchange. Movements in both markets are presented in real time.

Has this contributed to the correlation between a weaker dollar and higher crude prices -along with the rise of index funds linking the two?

Energy prices have been virtually divorced from stock levels since 2003 and so recent historic-high storage of oil, refined products and natural gas is nothing new.

The current bull-run in crude might well last until real demand catches up.

It seems unlikely that interest rates will rise before then. The US government will want to avoid banks - which are benefiting from public fundingand less competition - in trouble again.

Ironic, isn't it? Bail-out money is being used to make more bets. The bigger the bets the less the risk for a financial institution.

And maybe even the speculators have done us a favour by pricing in future tight supply now.

An issue for chemicals companies is controlling their production and stock levels to reflect the genuine needs of their customers.

The task of separating market froth real and immediate demand would surely benefit from some harder thinking.

Source of picture: zerohedge.blogspot.com

It might seem a little melodramatic (and it's a wonderfully melodramatic name), but what kind of threat do dark pools - and other off-exchange trading mechanisms - present to all our livelihoods?

You can see that the World Federation of Exchanges might have a financial motive in making their complaint to the G20 over the threat these mechanisms represent to their "macro-economic role".

But after the role that the shadow banking system played in the financial crisis you have to be worried.

The $64,000 dollar question has to be how you regulate dark pools etc.

And for the sake of melodrama: Unseen forces, unaccountable and anonymous, might start determining all our livelihoods.

Sudden and entirely unpredictable shifts in global commodity markets could push countries into financial ruin and even wars.

At least in the case of the exchanges, because pricing is transparent, you can challenge the logic of say the futures price of oil being way out of step with supply and demand fundamentals.

But the problem with these dark pools etc is that you won't have a clue on what might happen until it hits you.

A bit like the fund managers who are anxious to keep the equities rallies going until the end of the year in order to protect bonuses, there must be a lot of petrochemicals people hoping pricing in our sector will stay equally firm.

Perhaps, though, these hopes will be more inspired by job preservation rather than fat bonuses - yet another indication of how financial-world reality has become divorced from the demand for actual stuff out there.

Apart from presenting a relentlessly upbeat face in an effort to sway sentiment, there is little any one of us can to do influence petrochemical pricing.

So anxiety is building as to exactly what will be the level of demand after the long Chinese holidays, which take place from 1-8 October.

"I am not expecting demand to fall off a cliff in Q4, as stocks are not that high, relative to the position last year," said Paul Hodges of International eChem.

"There may be some destocking if the oil price does slip back towards $40/bbl, but really it's a question of what happens next, now that restocking is coming to an end. 

"My view is that its not going to be 'onwards and upwards' in a V-shaped recovery, but a more muted outlook where the environment is characterised by  higher savings, lower consumption, and global GDP growth of perhaps 2.5% rather than the historical 3.5%."

China's economic stimulus will continue, but perhaps at a slower pace.

And no government in the West will be willing to jeopardise the fragile recovery - although temporary stimulus measures, such as cash-for-clunkers, are coming to an end.

In Asia we have now seen a month of falling prices in polyolefins with the declines in benzene and fibre intermediates lasting even longer.

This slide, from ICIS pricing, illustrates the point:

Presentation1.ppt 

This indicates that however confident people might feel about the overall economy, chief financial officers and traders are playing it cautious.

Chemical companies don't want to risk high inventories in case demand falls of a cliff in late October, assuming they want to keep their jobs.

You are also likely to see similar wind-downs towards the end of the year in order to preserve cash.

De-stocking by traders in China seems to be another factor behind the recent price falls, a clear indication that the 7-8 straight months of record-high polymer and chemicals imports into China involved considerable speculation.

Operating rates new plants are also reported to be stabilising.

Polypropylene (PP) has already seen a big increase in output from the Middle East and elsewhere.

Now a wave of new polyethylene (PE) and monoethlyene (MEG) capacity is expected.

"And what's an interesting challenge in balancing inventories for producers is that these new plants are a lot bigger," said my colleague Malini Hariharan, India country manager for ICIS (She will soon join this blog as a full-time commentator - more details later).

"This means if that there is a sudden unanticipated correction in demand you could be left with very high stock levels."

Asian cracker operators are talking about rate cuts in October after three months of running at 100% in many cases.

How much of the improved demand was down to re-stocking after historically high de-stocking and rate cuts in Q4 last year and the first quarter of 2009?

All should become clear very soon.

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.

.....said Mervyn King, governor of the Bank of England

Source of picture: northbriton45blogspot.com

ANY excitement over US house-price figures for July - which showed the biggest monthly gain for years when they were released yesterday - has to be put into the kind of context that undermines a lot of recent positive economic numbers.

The price recovery is partly the result of the $8,000 tax credit for first-time buyers and the Federal Reserve buying mortgage-backed securities. The tax credit expires at the end of November.

Inventory of unsold homes is at its lowest level in more than two years, according to The National Association of Realtors.

But there's a "shadow inventory" of delinquent or foreclosed mortgages of some 7m houses, according to Amherst Securities.

This matters to the global chemicals industry because of the large amount of chemicals and polymers which go into your average US home.

More importantly, without the return of some kind of "wealth effect" (this still seems a long way off in real-estate as the S&P Case Shiller Index is still 30% below its 2006 peak) it's hard to see a sustained rebound in US consumer spending.

"It's the level, stupid - it's not the growth rates. It's the levels that matter here," Mervyn King, governor of the Bank of England, was quoted as saying last month.

Levels to be concerned about include western consumer indebtedness that is still too-high relative to income expectations and credit availability, wrote Mohamed El-Erian in the FT yesterday. He is chief executive and co-chief investment officer of Pimco.

Bank balance sheets are also still too geared for the comfort of regulators and the managers of the banks, he added.

As my colleague Nigel Davis saidthis Insight article from ICIS news, real levels of lending to businesses, especially the small -and medium-sized ones, remain constrained.

Unemployment has also risen well beyond expectations and it will take years for the jobless rate in the US to return to its natural rate, El-Erian continued.

Yesterday I quoted the excellent Schork Report which put into context some more supposedly encouraging statistics: July's Vehicle Miles Travelled (VMT) figures were released last week, showing a 2.3% increase from July 2008.

But as the authors pointed out: "The July number was still down by 3.5% compared with July 2007."

This was a year when demand for just about everything under the sun was at historic highs.

Further - the modest improvement in July 2009 happened after a 38% year-on-year fall in gasoline prices.

Growth in urban VMT was less than that for rural travel, according to the latest statistics.

Urban driving is seen a stronger indicator of overall economic health as it includes travel work.

Unemployment was therefore a threat to the "nascent recovery", added the Schork Report.

The US Conference Board's latest index of consumer confidence, which was also released yesterday, seemed to support the Schork view: The index slid to 53.1 in September from 54.5% in August.

How should chemical companies respond to these challenges?

There will be more on this, and the implications for Asia, over the coming days and weeks.

Source of picture: Time.com

Yesterday I talked about lack of willingness by western banks to lend money because their focus was on rebuilding reserves.

But Steven Major, Global Head of HSBC's Fixed Income Strategy Team, puts a different spin on the problem.

In the Fragile Recovery video from the Financial Times' View From The Markets section, he said banks would dearly love to be earning 8-10% from loans rather than the paltry interest rates on leaving cash in reserves or on low-yield government bonds.

The demand for loans simply wasn't there because the "real economy" had yet to recover to the extent of financial markets, he added.

Stock markets have long been lead indicators, pricing in recoveries before they reach consumers and companies. The same has also become the case with energy markets where price discovery is now driven by futures contracts.

Equities had already priced in strong growth in consumption and company profitability in 2010-11, Major said.

Neither, of course, is guaranteed - meaning that investors entering markets now "are not being paid for the risk", he continued.

The same is true for oil, but fundamentals are set to catch up very soon with a dip to $45 a barrel on the cards before the end of the year.

Here are a couple of questions anybody attending this weekend's European Petrochemical Industry Association (EPCA) meeting in Berlin might want to put to chief executive and chief financial officers etc:

*How much of your recovery over the last few months has been the result of cost-cutting and restocking?

*When both come to an end (and this may well have already happened for restocking) how confident are you on a scale of 1-10 that you'll be able to continue delivering quarter-on-quarter improvements in 2010-11? In other words, can you grow volumes?

The answers could be very telling.

The views of two Singapore-based chemicals traders explain some of the fundamental shifts in production, logistics and demand since the economic crisis began.

"I have done reasonable business this year and made quite good returns, but volumes are way down," said the first of these two traders, who deals in toluene and mixed xylenes (MX).

"Cracker-based aromatics producers are being exceptionally cautious and are very unwilling to risk building inventory.

"Whereas I used to get, say, 5,000 tonnes a month from a particular company it's a maximum of 2,000-3,000 tonnes and sometimes none at all."

Reformer-based output in China has been heavily influenced by liberalisation of government restictions of fuel prices, he added.

This has led to sudden and sharp increases in output that markets have, at times, found hard to absorb.

"Aromatics pricing has recovered, of course, It's been either firm or rising for most of the last eight months, " he continued.

"But the end-user demand hasn't really responded in the same way. All we've really seen is some re-stocking, the cost-push from higher crude and a lot of speculation by Chinese traders.

"Weaker volumes are making it really hard for the shippers.

"There's a lack of small vessels of below 5,000 and up to 10,000 tonne in capacity. A lot of the ones out there are close to being scrapped because they are old.

"A customer in China, say, might only want less than 5,000 tonne but it's not economic to ship such a small cargo from Southeast Asia to China.

"So even if I can find a supplier it can be difficult to find a ship, despite a big surplus of tonnage.

"A lot of new vessels are being delivered which will keep freight rates down for some time. These are either medium-sized ships at 20,000 tonnes or large vessels between 60,000-80,000 tonnes."

He was worried about recent price corrections and believed that "a lot of unsold inventory in China has yet to work its way into the market."

But the trader was confident that crude would remain at $65-70 a barrel for the rest of the year.

"I don't see a problem with storage," he said, disagreeing with the forecast of $45 a barrel.

"The crude price will obviously set a floor for toluene and MX.

"Even if everything goes into free-fall the crude traders are likely to come in and buy-up surplus aromatics.

"This happened last year when they set a floor for toluene and MX at about $400/tonne.

"I think the floor will be higher this time because crude will remain relatively stable."

The second trader - this time in polyolefins - agreed that oil would stay at $65-70 a barrel for the rest of this year.

"But we are facing a lot of indigestion. China has imported a huge amount of polyethylene (PE) and polypropylene (PP).

"Since September the market has been very quiet. This always happens after a strong buying spree.

"The Dalian Commodity Exchange futures contract in linear-low density PE (LLDPE) has collapsed.

"This is a sign of weak overall sentiment. Traders have also suffered heavy losses and so they have less cash to spend in the physical markets."

Volume and pricing on the exchange have fallen very steeply as this chart from Paul Hodges shows:

September volume was down by 63% from April.

"What we have to wait for is end-November when pricing (in the physical markets) should pick up as manufacturing increases ahead of the next Chinese New Year (February 2010)," the second trader added. 

"If it doesn't this is a sign of some big supply imbalances."

But even if there was a brief rally at the end of November, he predicted that afterwards there would be a prolonged trough on new capacities and a fall in Chinese bank lending.

.....and a January collapse

PERHAPS commodity and equity markets will continue to keep denying the weak fundamentals until bonus cheques for fund managers etc have been signed and are in the bank.

Fund managers, because of the way they are benchmarked, will be desperate to stick close to the performance of stock market indices, said John Authers in this article from the Financial Times.

"It is a disincentive (the benchmarking) to making a big move either into our out of the market even if a fund manager has a strong view that we are heading for a rally or a fall," he wrote.

"This behaviour may yet allow the current stock rally to persist in spite of the disappointing economic data."

The same, I guess, could apply to crude - blowing the case for $45 a barrel by the end of the year out of the water.

Barclays Capital is, in fact, predicting a rise in oil to $70-80 a barrel over the next month with Goldman Sachs forecasting $85 a barrel by end-2009.

So once the bonus cheques have cleared, a combination of sobering economic facts and investors getting out while they are ahead could cause a steep dip in January.

Might we then see another temporary bottom to crude, equities etc and further buying opportunities?

This will depend on government cash remaining cheap and plentiful and an improvement in the real economic outlook.

My bet is on a prolonged trough because we are back to 2006 demand levels in chemicals and presumably lots of other stuff  - before the credit-fuelled false-bottomed boom.

Offsetting the risk of being over-optimistic?

Source of picture: thetradingpit.net

MAYBE there should futures contracts in realism versus recklessness. That way any senior company executive who wants to take a punt on next year being better than 2009 can offset the risk by going "realistic" on the futures markets - and, of course, vice versa.

How on earth you would design futures contracts around such abstract and subjective concepts as realism and recklessness is a challenge I feel only able to deal with this weekend - over a few beers.

This post is not all nonsense. Stories posted by my colleagues from ICIS news  indicated chemical industry leaders were going long on realism in physical markets during this week's European Petrochemical Industry (EPCA) conference in Berlin.

Margins will not be back to 2007-08 levels until 2011, said Tom Crotty, INEOS Olefins and Polymers CEO.

Europe has yet to feel the full impact of new Middle East capacity, much of which has so far been sucked into China, he added.

The capacity down cycle will hit very soon as China's broad-ranged overstocking leads to more of these Middle East volumes heading to Europe.

"Anyone who says that the industry is going to be in great shape in the middle of next year is fooling themselves," said Shell Chemicals vice president Graham van't Hoff.

"We're still waiting for the major impact of excess capacity from the Middle East that we have to be braced for and ready to manage."

Demand wouldn't return to earlier levels for 2-5 years, he added. 

Now that's what I call wide-ranging scenario planning.

ExxonMobil, as they often do, talked about feedstock innovation and cost savings; hardly surprising as they are rather good at both.

And Albert Heuser, president of petrochemicals for BASF, expects overcapacity in the market in 2010-11.

If only this realism had been around in sufficient quantities during the boom years.

Will the experience and knowledge gained from this recession be retained to prevent another down cycle of recklessness?

The Chinese government appears to have an important objective to achieve while promoting commodity futures trading in the country?

A report in today's Wall Street Journal says that the government is positioning its futures markets in setting world prices for metal, energy and farm commodities. Jiang Yang, chief futures industry policy maker and assistant chairman of the China Securities Regulatory Commission is quoted as saying that the government has a long-term goal of increasing China's influence in pricing. Yang also says that futures may assure Chinese commodity importers of 'fairer deals'.

Pic source: Xinhua

The big implications are for the oil market as China imports huge volumes every year. The Shanghai Futures Exchange is said to have plans of introducing its own contract for crude oil next year. This may not be an immediate threat to the Nymex contract but the development needs to be watched closely especially if it has the support of the Chinese government.

"Beijing believes hosting big futures markets will enhance the country's economic security by essentially advertising what the world's biggest customer for some commodities considers a fair price. For the rest of the world, the exchanges could mean less guesswork about China's buying habits, possibly reducing volatility in the global market."

The strength of Chinese buying in the physical market has for some time now guided global petrochemical prices. But with the lldPE and PVC contracts turning out to be spectacular hit this year on the Dalian Commodity Exchange will these contracts soon become a reference for global pricing?

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

Source of picture: www.whipnspurs.co.nz

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

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

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

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

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

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

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

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

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

Another concern is unwinding government subsidies.

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

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

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

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

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

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

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

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

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

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.

Source of picture: www.textually.org

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source of picture: New York Daily News

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source of picture: wartakota.co.id

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 But does the Pertamina plan really add up?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The EU removed similar safeguard duties in December 2007.

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

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

Restocking and crude oil have been important factors.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It's the same story for Indonesia.

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

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

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

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

This is also especially true of China.

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

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

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

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

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

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

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

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

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

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

By John Richardson

We don't have the actual data yet (hopefully, we'll be able to give you the numbers later this week), but......

......China's commodity chemicals and polymer imports "continued to amaze" in September with monoethylene glycol (MEG) shipments hitting an all-time high, said Jean Sudol, president of US-based International Trader Publications Inc (ITP).

"Imports of most of the commodity polymers we follow continued heavy in September, with relatively small changes, most of them positive from August," added Sudol, whose company provides trade data and analysis on chemicals and polymers.

The commodity polymers ITP tracks showing increases were low-density polyethylene (LDPE), linear-low density PE (LLDPE), high-density PE (HDPE), polypropylene (PP), ethylene vinyl acetate (EVA) and propylene copolymers.

"Polyvinyl chloride (PVC) trended downwards for the third month in row with polystyrene (PS) mixed," she added.

Imports of the engineering polymers acrylonitrile butadiene styrene (ABS), polyacetals and styrene acrylonitrile (SAN) also rose, continuing an upward trend that has lasted several months.

"Among the major organics, imports of ethylene dichloride (EDC), vinyl chloride monomer (VCM), methanol, styrene and propylene were also up from August. MEG reached a new all-time high."

But benzene imports remained low, maintaining a trend that began in June, with ethylene shipments slowing moderately.

Domestic demand is still a relatively low proportion of GDP (gross domestic product) growth and so a lot of this stuff must be going into gains made in re-exports of finished goods.

Commodity chemicals pricing is more affordable than in H1 last year.

A depreciated Yuan versus the currencies of other developing countries, raw-material import tax cuts, increased export tax rebates and very flexible labour markets have also made China's exports more competitive.

There's also a mountain of cheap and plentiful bank lending to make life even easier for the Chinese re-exporter.

The end-result is that - as we discussed yesterday - China has seized market share in export sectors including textiles and garments and electronic goods.

Chemicals companies whose main business is with China might be benefiting, whereas exporters to other countries could be losing out as could chemicals industries in these other countries.

China's finished product exports might be down in value terms. But how much does this matter if you have such big competitive advantages and state-owned banks willing to bail you out if you get into trouble?

In some cases there could have even been export-volume improvements in 2009 over pre-crisis levels. This, along with the lower pricing, could help explain what seem like counter-intuitively high record-high shipments of chemicals and polymers to China.

There are winners and losers in other export-focused countries.

It's fine if you supply, for example, commodities or high-tech components to China to be assembled in to finished electronic goods.

But it's not so rosy if you compete head-on in industries such as textiles and garments and plastic toys.

Chinese manufacturers are likely to have the capacity to discount even deeper thanks to a supportive government. Further discounting might become essential if other areas of the economy falter.

Even with all this backing, margins are likely to become tighter - especially as the widespread perception is that oil prices are heading back to $100 a barrel. Perceptions make the price through the futures market.

This will leave the Middle East, with its increasing capacities, in a very strong position to take advantage of what could be an even longer bull-run in commodity chemical and polymer exports to China.

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.

Source of picture: www.prisonplanet.com

Misleading perceptions can be very dangerous - especially when they apply to the crude-oil futures markets.

"The price has more than doubled this year partly because of the belief that the recovery in Chinese oil-import demand is all about booming local consumption" said a source on the sidelines of this week's APPEC oil and gas conference in Singapore.

But China is adding around 25m tonne/year of refinery capacity in 2009, which, of course, requires a lot more oil to operate.

Liberalisation of fuel-price controls has raised refinery profitability, resulting in recent operating rates of more than 80%.

This high throughput hasn't been matched by an equivalent increase in gasoline consumption, despite the humongous increase in vehicle sales.

"People seem to be buying lots of new cars, driving them home to impress the neighbours but not driving them much after that," said Jason Feer, vice-president and general manager, Asia Pacific, of the Argus Media Group in a speech at the conference

Fuel-price liberalisation has pushed the cost of gasoline close to US levels, he added afterwards.

This miss-match between supply and demand could be a factor behind China becoming a bigger exporter of gasoline and diesel.

China exported 505,505 tonnes of gasoline in September - 153% higher than a year earlier, according to China Customs.

Diesel exports have also risen, reaching close to 400,000 tonnes in August and 293,759 tonnes in September.

This led to talk of overseas refinery margins being put under pressure for the long-term by China's exports.

But another source said: "This is just one of those conspiracy theories about China. Any company will export when it makes more economic sense.

"China's refiners are listed, remember, and so operate like listed companies. Exports are not a long-term strategic objective."

Another factor behind the rise in fuel exports was unwinding of big inventories built ahead of last year's Beijing Olympics, he said.

What's clear is that the rise in oil imports this year - expected to be around 5% - isn't just a sign of an immediate surge in domestic consumption.

And as we've already covered on this blog, China's overall growth story is not as straightforward as crude and equity markets appear to believe - another nail in the bull's coffin.

A further misleading view was that we were already in a V-shaped recovery, believed a number of delegates.

"I expect the recovery to be W-shaped," said Gati Al-Jebouri ,Chief Executive Officer of Lukoil, in a speech to the conference.

One of the economic threats he highlighted was fiscal tightening.

Australia has twice raised interest rates over the past few weeks, Norway recently raised rates and India has tightened reserve requirements for the country's banks because of inflation concerns.

A string of comments from US Fed hawks indicate a possible change in direction.

If fiscal tightening isn't timed properly, it might come too soon for a fragile recovery.

Higher interest rates could narrow the contango that's helped make storing crude, gasoline and diesel etc a low-risk option.

Very high storage levels don't fit with current crude prices.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $79.71 a barrel this morning, down 69 cents in the Globex electronic session.

December Brent crude on London's ICE Futures exchange fell 70 cents to $78.19 a barrel.

I found it hard to find any delegate who found much logic in today's price of oil.

"It could easily more or less half to $40 a barrel in the New Year. That's where it should logically be," said one delegate.

Admittedly, though, one tends to seek out those who support your biases - and I could be described as a tad pessimistic about this recovery.

Buy now, pay later....

Source: www.examiner.com

Note: There is a special prize for the first blog reader who can explain the above headline.
 

In the 2001 recession, US consumer spending slowed but did not fall, and picked up again very quickly.

In the early 1990s, it dipped a bit but returned to pre-recession levels in a few quarters.

But this recovery is different because of the long-term changes in consumer behaviour in the West, which we've talked about before.

Unemployment in the States is nearing 10% with consumer spending falling in September after four months of improvements.

These gains look as if they came at the expense of savings as people, quite sensibly, took advantage of cash for Clunkers and other government-backed spending schemes.

Cash for Clunkers is over, but Cash for Appliances is about to begin.

However, the government needs to rebalance its budget and fulfil its pledges to rebalance the economy away from over-reliance on consumption.

So can consumer spending continue to be propped up in 2010? If not, what will this mean for chemicals exports to China re-exported as finished goods to the States?

The gap between the real economy in the developed world and the commodity and equity markets remains as wide as ever.

For example, here are the opening lines from an Associated Press story this morning: "Oil prices rose above $78 a barrel Monday in Asia as a weaker U.S. dollar offset signs of slumping consumer demand.

"Benchmark crude for December delivery was up 94 cents to $78.37 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange".

Some delegates at last week's APPEC oil and gas conference in Singapore believed crude could be overvalued by as much as 50%, based on the fundamentals.

"I expect the recovery to be W-shaped," said Gati Al-Jebouri, Chief Executive Officer of Lukoil, in a speech to the conference.

The upward curve of the W might last for some time longer, he added - but Al-Jebouri had no doubts whatsoever that fiscal tightening would be a major factor in preventing a U-shaped rebound.

If oil does decline next year - when reduced quantitative easing makes speculation less attractive, forcing the market to finally catch up with the prospects for real demand - a flight to the dollar is inevitable.

This is hardly going to help the US government's need to make the economy more export-based.

But with the finance industry so well-embedded in Washington, it's hard to envisage legislation that will make financial markets more helpful to the real economy.

.......and no trite Public Relations-speak answers, please!!!

This is not me, by the way, (my computer is an older model) but the expression about sums it up

www.scienceblogs.com

No matter where you seem to turn these days, whether it's to the refinery industry or to any chemicals production chain, the story is more or less the same: A wide gap between the expectation of recovery - already priced into crude and equity markets - and actual production and consumption.

The demand-growth numbers from China, taken in isolation and not placed into the context of declines elsewhere, continue to amaze.

Auto sales in China continued to boom in October, though at a slower pace than in previous months, according to data from the semi-official China Association of Automobile Manufacturers.

Sales rose 72.5% from a year earlier to 1.23 m vehicles, slower than September's 77.9% increase and August's rise of 81.7% - the year's peak growth rate so far.

Sales have been boosted by government stimulus measures that include rural subsidies and a purchase tax cut on vehicles with engine capacities of as much as 1.6 litres.

Demand for textiles used in cars has been so strong that workers have been forced to put in extra hours following mass lay-offs earlier this year.

But, turning to the styrenics chain, an industry sources said: "Downstream demand in all the big derivatives - acrylonitrile butadiene styrene (ABS), polystyrene (PS), expandable PS (EPS) and styrene butadiene rubber (SBR) is very weak.

"EPS had a good H1, but it's now the down season for construction because its winter. Even taking this into account, consumption is very poor."

Spot PS and ABS prices have been stagnant over the past few weeks while feedstock costs have increased, according to ICIS pricing.

"My worry is that it's all cost-push at the styrene end of the chain and so buyers run the risk of repeating the mistakes of H2 2008, but of course on a much smaller scale." the source added.

What on earth is really going on? This blog will dedicate a big chunk of the rest of its life to try and find out.

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.

Stay cool and don't panic!

Source of picture: www.wired.com

By John Richardson

THE growth of the carry trade US dollars - leading to a sharp depreciation of the greenback and possibly of many other unintended consequences - represents a major threat to the chemicals industry in 2010.

Any corporate planner with her or his salt should factoring in, and hedging against, the danger that the many warnings about the damage from this trade come true.

Warnings have been issued over the last few weeks by the Chinese government, the International Monetary Fund (IMF), Hong Kong chief executive Donald Tsang and Dallas Fed chairman Richard Fisher.

Economist Nouriel Roubini, who accurately predicted the current economic crisis, has been proclaiming loudly from every available rooftop that this is the "mother of all of carry trades".

He believes that, potentially, it could cause even more damage to the financial system than the crisis from which are still struggling to recover.

But this blog was able to find two people who disagreed: A UBS analyst and a hedge-fund trader. Nothing to worry about, then!

Just as a reminder, the carry trade involves borrowing at zero interest rates in dollars (because of the ultra-loose Fed monetary policy) - and also shorting the US currency on the assumption that it will depreciate.

As the dollar has tumbled - creating extremely good returns - investors have also piled into equities and commodities, incurring very high leverage.

Oil increasingly moves in inverse correlation to the dollar these days so, I suppose, this whole business has gained its own self-perpetuating momentum: The more that investors short the dollar, the more it goes down and the more crude goes up. Sounds like daylight robbery.

Stronger crude - which we've frequently said doesn't reflect current supply and demand - is seen as a false sign that the world economy is in firm recovery.

And so, hey presto, equities rise in response to higher oil prices, resulting in yet more fat profits for the speculators.

The dollar could appreciate by as much as 25% if, all of a sudden, traders are forced to cover their shorts (a phrase that, I am afraid never ceases to appeal to my puerile sense of humour), warns Roubini.

He predicts that one of four events could trigger this new financial calamity:

*The dollar value cannot fall to zero and at some point it will stabilise. The cost of carry would then become zero rather than negative (no more money being made on shorting the greenback)

*The Fed cannot suppress volatility forever. Its $1,800bn purchase plan of mortgage-backed securities and government agency debt such as Fannie Mae's etc will be over by the Spring

 *If growth is on the upside in the third and fourth quarters, markets may start to expect Fed tightening sooner rather than later

*A flight from risk could occur due to concerns over a double-dip recession or a geopolitical crisis - e.g. a US/Israel and Iran conflict

Before listing some of the possible implications for chemicals, it's worth adding the following context.

Big increases in Asian property prices (for example, Hong Kong's are up by 28% this year) start to add up in light of the Fed's ultra-loose monetary policy that's prompted the carry trade.

Asian countries have been forced to follow the Fed in order to prevent their currencies from appreciating too much. 

This is creating dangerous real-estate bubbles in Singapore and South Korea as well as Hong Kong, with all the associated higher levels of consumption which come with the property wealth-effect.

China is different as it's re-pegged the Yuan to the dollar.

But the country's huge economic stimulus package has created the well-documented big rise in property prices and a boom in auto, home appliance and other retail sales.

Meanwhile, China is also benefiting from improved export competitiveness as a result of its currency being reconnected to the weaker greenback.

So those chemicals corporate planners worth their salt should be worrying about:

*The risk of being on the wrong side of overbuilt inventories, or even just the normal 45-60 days of working capital tied up in raw materials, when and if crude takes a tumble

*Confusion over sustainable levels of chemicals demand-growth in housing, autos etc in Asia. If the Fed tightens in response to worries over the impact of excess liquidity so will the rest of the world

*Damage to underlying, or fundamental, demand caused by crude being too high at this point in the economic recovery. My fellow blogger, Paul Hodges, points out that this concern is high within OPEC.

*Chemicals import volumes into China destined for re-exports as finished goods have been supported by the weaker Yuan. These imports could obviously decline if the dollar lurches upwards

*US petrochemicals producers have benefited from dollar weakness and the fall in natural-gas prices relative to crude (70% of US ethylene is derived from natural-gas liquids). Thermoplastic exports are up 16% in the year-to-date with domestic sales down nearly 14%, according to the latest American Chemistry Council (ACC) weekly report. So, again a surge in the greenback would threaten this much-needed compensation for a weak home market. 

When might the carry trade unwind? Nouriel Roubini is not prepared to offer any prediction, but warns that the longer this bubble inflates the worst the consequences will be when it deflates.

Source of picture: www.walletpop.com

By John Richardson

In his own words Paul Hodges of International e-Chem - and also a fellow blogger - puts in a nutshell some of the dangers confronting the chemicals industry as we approach the New Year, with a few interspersed further thoughts from this blog:

"If crude were to fall back to $40 a barrel - where based on fundamentals it should be - this would further cloud visibility about the real state of end-user demand. It would become hard to distinguish between a fall in demand down the chain because of de-stocking and greater caution, and a fall in the final consumption of chemicals.

"Oil at its current price is hindering rather than helping the recovery because we are seeing demand destruction again. This is because we are already seeing greater caution on the part of those companies that recognise the risks of lower demand for chemicals. "For example, as the gasoline price has gone up, people are driving less to the shopping malls in order to buy stuff made from plastics - i.e. discretionary spending."

There are even reports of this happening in China as a result of higher crude and fuel-price liberalisation.

"In Our Feedstocks for Profit Study, and I think this still holds, we saw a green light for growth was $25 a barrel, an amber light $50 a barrel and red at $75-80 a barrel.

"It's generally accepted that demand destruction occurs at $80-100 a barrel."

The last US recession began in December 2007 when crude touched $100 a barrel. This came at the same time as the sub-prime crisis. An important question now is with real wages in the West in decline and unemployment rising are we talking about demand destruction much closer to the $80 a barrel level?

"The crude price is being driven by irresponsible bankers, who are simply focused on generating maximum short-term trading profits (and personal bonuses for themselves). The money to support these trading activities is effectively being provided by taxpayers, as a result of the bailouts that have taken place," continued Hodges.

"The strength in crude oil is directly correlated to movements in the value of the US$, often on a minute by minute basis. This is not about free markets. It is about bankers using the low interest rates now on offer in the US, caused by their earlier greed and reckless lending, to once again bite the hand that feeds them.

"Bankers need to behave more responsibly, especially at a time of crisis such as today. If they are not prepared to do so of their own will, we need effective legislation.

"When this unwinds you could see a big return to dollars, strengthening the currency significantly," Hodges continued.

"This is hardly going to help progress in the US government's effort to make the economy more export-based - part of the global rebalancing efforts."

"Today's oil prices are not the fault of chemicals companies, but they will suffer as a result."

The risk is that the unwinding of these trades causes further disruption. As oil prices fall, so will chemical volumes as everyone de-stocks.

"This is why chemicals companies need good hedging strategies," said Hodges.

"Another problem is the cost in terms of working capital. This will lead to a further problem as demand recovers. When demand is really weak, it's possible to conserve working capital by cutting operating rates and other costs - hunkering down until the recovery arrives.

"But when the recovery does arrive, the difficulty is estimating how much to ramp up rates at the expense of working-capital preservation.

"Demand visibility - even without as yet a collapse in crude - is already extremely poor, making planning very difficult. "

"More companies go bust in an upturn than a downturn, because of the inevitable increase in working capital. This is a major risk in 2010, given the fragile state of the financial system, and banks' unwillingness to lend."

Abu Dhabi ahead in the race?

Source of picture: www.gulftrackservices.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 in Shanghai and Malini Hariharan

China is set to see polyolefins demand growth of 30% or more this year, depending on the which particular grade, according to preliminary estimates prepared by companies and market analysts.

Even if you take into account last year's relatively low growth rates (I say relative because despite the economic crisis, demand for some grades of PE grew by as much as 7% - which by itself would be the envy of most other countries), the 2009 forecasts take your breath away.

We will give you more details of the numbers next week.

As always with unexpected events, the search for after-the-facts reasons has begun.

One factor is the sharp drop in availability of recycled material that has forced converters to concentratre more on virgin resin.

A further reason is, of course, China's enormous economic stimulus.

This has included a big rise in bank loans, a factor behind the third explanation behind the forecasts: A sharp rise in speculation.

"Non-traditional traders entered the market who only wanted to get their hands on polyolefins in order to use the 90 days' credit for something else," said an industry source.

"They would take the credit and use it to speculate on say equities. Sometimes they made such big profits out of the stock market that they were willing to sell PE and PP at a loss."

The strong growth - combined with big cuts in production by Chinese producers in Q4 last year and early 2009 - help to explain the surge in polyolefin imports.

HDPE imports were up 73% in January-September and LDPE by 85%, according to China Customs.

The question now, obviously, is whether this great performance will be repeated in 2010.

We've been saying this so many times this year, but new capacities are a threat.

They keep getting delayed, but on paper China is set to increase PE capacity by more than 40% next year.

And will the Chinese government, worried about asset -price bubbles, reduce economic stimulus?

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.

On A Very Sticky Wicket

www.theage.com.au

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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.

Money to be made, or saved, again?.....

Source of picture: www.evworld.com

After last week's estimates, a big producer (who wishes to remain anonymous) has given us his forecasts for the strength of 2009 growth in demand for polyolefins in China - see full details in the article below.

Interestingly, he saw the dip in recycling as a big factor in this year's extraordinary recovery. 

We all know about the strength of China's economic rebound - sustainable or otherwise - but it could be that keeping a much-closer track on the recycling industry will also be a key factor in 2010.

With the delta between recycled and virgin material recently close to the minimum $400/tonne and if this trend continues, it will be interesting to see whether next year sees some reverse substitution.

A lot will depend on government regulations that have made it harder to ship scrap to China, and how many traders are prepared to take the plunge again. As long as there is a danger of a sharp correction in crude, trading in scrap could remain too-risky a business for many. In Q4 last year, a lot of the traders in recycled plastic went bust during the big oil-price correction.

A lot will, of course, also depend on the outlook for new virgin-resin supply - which we covered earlier today.

By John Richardson

China's polyethylene (PE) and polypropylene (PP) virgin resin demand will rise by 20-35% in 2009 over last year on a lack of recycled material, strong domestic demand and speculation, estimates a leading exporter to China.

High-density polyethylene (HDPE) demand will grow by 35% to around 7m tonnes, linear-low density polyethylene (LLDPE) by 19-20% to 4.5m tonnes and low-density polyethylene (LDPE) by approximately 20% to 3.3m tonnes, said the exporter

PP demand would grow by 20% to 12m, he added.

This follows either dips in demand during 2008 or modest increases, depending on which grade of polyolefin. LDPE fell by 7% and PP by 1% with LDPE rising by 3%, he said.

"A factor behind the strong recovery is the lack of availability of scrap material, forcing converters to switch back to using virgin product," said a Shanghai-based markets observer.

A drop exports of finished goods - delivered wrapped in plastic film which is shipped back to China for recycling - was behind the reduced availability, he added.

"Some traders who had dealt in scrap have also switched to virgin resin, boosting the amount of trading activity in new material."

Many traders in recycled material also went bust in Q4 last year when scrap prices fell below  the cost of virgin resin - placing further strain on the distribution network.

A further factor has been tougher government regulations restricting scrap imports on environmental reasons.

Virgin resin prices had also remained too low to justify converters using scrap material for most of this year, said a Shanghai-based source with a major polyolefin producer.

"In September, though, the delta or gap between recycled and virgin material - which has to be a minimum of $400/tonne to make recycling economic - was almost reached," he continued.

"This was the result of very tight supply of virgin product and the cost-push from higher crude oil."

Domestic polyolefin demand had surged on huge government economic stimulus, including a rise in bank lending, he said.

"This has led to a steep rise in automobile and real-estate sales with the resulting rise in property prices triggering a construction boom."

Government vouchers providing discounts of the price of white goods such as washing machines and refrigerators were also behind the recovery in polyolefins, he said.

The big rise in bank lending had also fuelled speculation, he added.

"Non-traditional traders entered the market who only wanted to get their hands on polyolefins in order to use the 90 days' credit for something else."

They would take the credit and use it to speculate on say equities. Sometimes they made such big profits out of the stock market that they were willing to sell PE and PP at a loss."

This is trend apparent across other chemicals and polymers, adding to price volatility.

By Malini Hariharan

I have been trying to get some clarity on what is happening at Map Ta Phut and what companies are planning to do.

Construction activity has not yet stopped despite the Supreme Court ruling last week which suspended 65 projects, says a PTT source. The government has yet to issue a notice to the companies. So it looks like prime minister Abhisit Vejjajiva has not acted on his plan to inform companies about the court order.

The situation is complicated. Most of the projects have received EIA approval and complied with all existing rules and regulations. Article 67 of the constitution asks for a health impact assessment (HIA) study to be evaluated by an independent body but that body has yet to be formed. A government panel, led by former Thai prime minister Anand Panyarachun, has been given the task of drafting new regulations and set up an independent body. The panel is now trying to accelerate the process and is likely to complete its task by the beginning of next year.

PTT's biggest concern is its No6 gas separation project which would provide feedstock to PTT Chem's new cracker. The cracker is not on the list of affected projects and can start at the end of the year. PTT Chem's plan is to carry out a turnaround at an existing cracker to divert feedstock to the new plant. PTT is also working on a plan to supply ethane from its No2 and No3 gas recovery plants where the company is due to complete a modification project by the end of the year. This project is not the list of 65 projects.

But the new cracker is unlikely to run at 100% until the No6 gas separation plant is commissioned.

PTT is also busy working out a strategy to ensure commissioning of this project in Q1 2010. One alternative being evaluated is asking the Central Administrative Court for a waiver as the project had already received EIA approval. This appeal could well be rejected as HIA is now needed. So PTT has also started preparing a HIA report which can be put up for approval once an independent body has been set up.

I was also told that another alternative under preliminary evaluation by PTT and Siam Cement is suing the government agency responsible for sanctioning their projects. "That is because the companies have done everything to comply with the rules; they have not done anything wrong," says the source.

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!!

This is a huge subject, one that this blog will need to keep revisiting - and if you tell us we've got it wrong, we'll always listen and respond.

Are we seeing the start of a major shift, or is this a ridiculous stretch?

Source of graph: International eChem

By John Richardson

Volatility in China's polyolefin prices has greatly increased in 2009 as a result of closer links with short-term  changes in crude oil and equity prices, said market observes and participants.

This is obscuring real levels of demand and making the planning process even harder, they added.

Linear-low density polyethylene (LLDPE) futures prices on the Dalian Commodity Exchange have closed tracked the shifts in the cost of crude oil since July 2008 - when the contract took off, said Paul Hodges of the UK-based chemicals consultancy, International e-Chem (see graph).

"Daily or even weekly fluctuations in crude don't necessarily reflect a change in the fundamentals of any chemical or polymer market," he added.

"What matters, of course, is supply and demand in a particular market and effect of crude prices on feedstock costs when you buy your raw materials."

But Hodges believes that a growing army of speculators are moving LLDPE prices on the exchange in line changes in crude as they try to make money out of daily price volatility.

China's huge increase in bank lending has made speculation in all sorts of commodities a lot during easier during 2009, he added.

"Although volumes on the Dalian Exchange have gone down a lot recently (they peaked at 85m tonnes in April of this year), it is still a great guide to sentiment in the overall physical polyolefin markets in China," said a Shanghai-based source with a major Asian polyolefin producer.

"The market is so hard to read at the moment that Dalian has become as good a guide as any. Nobody is actually pricing off the exchange, but it's helping us assess the mood.

"The Dalian exchange is shifting on a daily basis in line with equities." (equities often follow, lead or move in tandem with shifts in oil prices).

When the Dubai World debt crisis erupted in late November leading to global dips in equity markets the LLDPE futures contract also fell, he added.

On the Thursday and Friday of that same week very few buyers in China were prepared to commit to any polyolefin purchases, said Shanghai-based commodity information service CBI.

LyondellBasell's chief operating officer, Ed Dineen, also recently said that China's physical-market PE prices were being increasingly driven by crude.

Polyolefin pricing had become much more volatilie in 2009, making sales and marketing strategies very hard to plan, said a Singapore-based source with a second Asian polyolefin player.

"The maximum visibility I can hope for these days is 2-3 weeks out, and so to describe this as a sales and marketing strategy would be a stretch," he added.

"Estimating levels of real demand has become much harder these days because poylolefin pricing is moving in line with equities - which move often on pure sentiment."

By John Richardson

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

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

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

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

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

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

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

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

By 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

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. 

We should have originally written 'integrated low-density polyethylene (LDPE) in paragraphsix, but instead wrote linear-low density PE (LLDPE). It's now been corrected and apologies for the error - we will be buying some better glasses (less of this "we" - it's actually "me"!)

By John Richardson

The rise in ethylene prices to what ICIS pricing says is a 17-month-high has created the widest spread between naphtha and ethylene since 2007.

As of last Friday (29 January), the spread was $620/tonne, based on ethylene at $1,310/tonne FOB Korea -and naphtha at $690/tonne CFR Japan. This compares with a spread of $627/tonne on 17 August 2007 and a tremendous $667/tonne on 5 January of the same year.

In 2007, the world was vastly different as it was in the midst of the highest economic growth in a generation.

Interestingly, despite the inevitable complaints of squeezed margins by PE producers - and anecdotal reports of market-driven rate cuts and plant-idling - the latest weekly ICIS pricing margin reports tell a more nuanced story.

"Naphtha-based ethylene margins in Northeast Asia rose by $37/tonne due to weaker naphtha prices," said The Ethylene Asia Margin report for 29 January.

Naphtha costs had fallen by 4.8%, offsetting a 4.6% dip in co-product values, the report continued.

Integrated low density PE (LDPE) and high-density PE (HDPE) margins also increased - by $30/tonne and $39/tonne respectively - said The Weekly Margin - PE Asia report.

And so the incentive for integrated producers to increase ethylene sales at the expense of PE didn't seem to be that strong as of last week, despite reports to the contrary.

On a non-integrated basis, however, standalone LDPE margins fell to their lowest level since July 2008, the report continued.

Average January HDPE margins were the worst since way back in September 2004, it added.

I would strongly suspect that converters, who, like the standalone PE producers, lack market muscle because of their scale, are also being squeezed; the few who I have spoken to since the start of the year certainly claim this.

Ethylene-PE margins have been strong because of temporary supply issues.

"Some ethylene traders have a sense that C2 prices will decline from March because of increased supply," said an industry source today.

"For example, a large amount of ethylene is expected to hit the market when the 800,000 tonne/year Shell cracker in Singapore starts up."

Shell is expected to have 180,000-200,000 tonne/year of ethylene to export when its cracker is commissioned in Q1.

The remaining surplus from its cracker (it's only associated plant is the 750,000 tonne/year Shell monoethylene glycol plant which came on-stream late last year) will be sold to other producers on Jurong Island, say market sources. How this will affect the market's net balance is uncertain.

"Another factor to consider is that Shell has actually been buying ethylene in order to run its MEG plant. So you have a buyer who helped tighten the market becoming a significant seller of ethylene," the source continued.

A further reason for the ethylene rally has apparently been tight supply from Iran as a result of unconfirmed cracker outages.

 Polyolefin supply has also been immensely tight since December on a host of production problems.

 Recent supply issues seem likely to be resolved over the next few months with a great deal of new capacity yet to come on-stream.

 The other reason to be bearish is the potential for weaker economic growth in China, concerns over which have led to a sharp correction in oil and other commodity prices during the past few weeks (higher crude has, of course, also underpinned the olefin-polyolefin price rallies).

 "The big factor to assess post-Chinese New Year will be the influence of China's tightening of lending conditions," the source continued.

 "The big monster in the room is China's property market and whether that might collapse. This is very worrying, indeed."

 As we said before, this is a very different world economy than in 2007.

 China's huge - and now apparently inflationary - economic stimulus has perhaps provided temporary protection from a great deal of lost export trade to the West.

 Because of deep-seated economic problems in the West, this trade is unlikely to be regained anytime soon.

"Hello everybody - welcome to the island of Sodor. Time to flip your positions'

Source of picture: www.dragoart.com

By John Richardson

MY three-year-old son has, quite rightly, an incredibly short attention span. A child of that age should be overwhelmed with the excitement of lots of wonderful experiences and possibilities.

But I would argue that some of those who write about and analyse financial and commodity markets should be able to retain a consistent thread of thought for slightly longer than it takes my son to switch from wanting to play Thomas The Tank Engine train tracks to screaming, stamping his foot and demanding a splash-around in the swimming pool.

There's a lot more money riding on effectively playing the deception game these days, though - for example, $20bn was invested in the oil futures markets in the first half of last year compared with $8bn in H1 2008, according to a commodities consultant.

So the motive to talk up good news or amplify bad news from one day to the next is incredibly strong, thanks to a ludicrous waste of government money that should have gone into creating real jobs in real and worthwhile industries.

To give you an example, the world was all doom and gloom late last week on tightening credit in China, poor economic news out of the US and the wider implications of Greece's government-debt crisis. Commodities prices across-the-board had been softening for several weeks.

And then on Tuesday of this week, whoosh - we had been saved by bullish global manufacturing data and manufacturers' sentiment indices.

Oil prices, as a result, had bounced back by earlier today to $76-77/bbl from around $73/bbl late last week.

Benzene bids for March loading were at $965/tonne FOB Korea and offers for April material at $980/tonne FOB Korea at noon today, according to ICIS news.

Benzene had been assessed at $910-935/tonne FOB Korea by ICIS pricing on 29 January, $115/tonne lower than the week before.

This is not a criticism, by the way, of my colleagues at ICIS pricing as their job - and it's a very difficult one - is to reflect the day-to-day shifts in sentiment in highly liquid markets such as benzene.

Short-term benzene price direction is increasingly being driven by erratic intra-day movements in crude - reflecting the huge capacity to gamble in oil futures. Every scrap of contradictory macroeconomic news and trade data is being seized upon to make a fast buck.

Perspective is what's needed and a big, deep proverbial breath, provided by journalists such as those who write the excellent Lex column in the Financial Times.

In Tuesday's column - on the release of all that bullish trade data etc - Lex wrote: "Surveys can be disconnected from reality. In the US, for example, the Institute of Supply Manager's survey (the latest figures from which were very strong) excludes small companies and therefore half the workforce."

If only all the front-page headlines on that same day had read something like "Surveys Can Be Disconnected From Reality".

One can but dream....

A Ring of Truth?

Source of picture: http://web.pdx.edu/~nathanh/benzene/benzene2.gif

By John Richardson

TUMBLING Asian benzene prices are being blamed on weaker crude, itself a reflection of macro-economic worries over higher-than-expected US jobless figures, government debt problems in the Euro zone and tighter credit in China.

"It's not a question of whether, but when the secon dip in this duuble-dip recession occurs. We are going through a transition period of lower global growth but the financial markets don't reflect this," said a lawyer friend of mine this morning.

"So you have crude overvalued thanks to all the free government money being used for speculation, along with other unrealistic pricing of other commodities and equities."

Hear, hear.

But as we said on Wednesday, financial-market players have big incentives to feed gullible journalists with constantly shifting economic outlooks. 

The muddle in newspaper headlines is quite extraordinary at the moment as only on Tuesday of this week, crude rallied on strong manufacturing data and rising manufacturers' sentiment indices.

So benzene could be back up again by Monday lunchtime.

But while the benzene traders are blaming the collapse of C6s on crude, overproduction on over-confidence in downstream chemicals demand that might not be there post-Chinese New Year has to also be a factor.

This suggest that there is a lot more to do this can merely volatile crude.

The fantastic spreads between naphtha and benzene of late must have also been a factor in higher operating rates.(click on link below with data from ICIS pricing ). Spreads were boosted in late December and early January on naphtha-delivery issues and benzene plant operating problems which tightened supply.

Naphtha-benzenespreads.xls

A separate point is that the benzene traders might have been playing their usual games - a further reason for the price declines.

"One particular trader recently sold large quantities of benzene in order to drive down the price of paraxylene (PX), as it needed to cover short positions on PX," alleged a source earlier this week.

A benzene cargo can change hands as much as six times before it's even loaded, and so it's devilishly difficult to separate the underlying fundamentals from the speculative claims.

But this gets away from the main point: The recent declines in benzene might just be an indication of the begining of the double-dip in this recession.

Mind you, I have said this many times before over the last 12 months 

By John Richardson

The start of the next dip in what this blog has long thought would be a double-dip economic crisis looks as if it could have begun.

If not now, it's going to happen at some point because of major global imbalances.

What's worrying right now is the combination of:

*Potentially weaker demand from Chinas as credit is tightened due to inflation concerns

*Government debt crises in Europe

*More negative than positive news on employment from the US

Further evidence of China's inflation challenge has emerged with the announcement that Jiangsu province, in eastern China, is to raise its minimum wage by at least 12% . Other major exporting and manufacturing provinces are expected to follow.

Concerns over Greece's ability to fund its budget deficit - along with other Euro zone countries such as Spain and Portugal - has been the main reason for the sharp fall in global equity and commodity markets over the last two weeks, according to the Financial Times.

Darius Kowalcyk, chief investment strategist at SJC Markets in Hong Kong, was quoted in the FT as saying that contagion thinking was behind the sell-off as concerns grew over a new global downturn.

"Asia continues to be so dependent on exports to the developed world, that if these developed market governments cannot fund their stimulus spending, then they will not grow and Asian exports will suffer," he added.

The across-the-broad collapse in markets is being partly blamed on exchange-traded funds - for example, the US dollar/crude funds. These operate via highly complex super-fast computer programmes that can move hundreds of millions of dollars within a fraction of a second.

The greenback has rallied as a shelter in the new economic storm, forcing crude down - revealing the lie that the rebound in oil was mainly due to stronger macroeconomic fundamentals.

Last year was a story of huge global economic stimulus with little or no focus on when this spending would have to be reduced.

"It seems the market (now) wants to accelerate an issue (winding down this spending) that the authorities were hoping that time would heal," Jim Reid, strategist at Deutsche Bank was quoted as saying in the FT.

A McKinsey report on Western debt - released last month - warned that investors might worry about public debt before private sector deleveraging had been completed.

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

Even with an orderly wind-down it could take a further six-to-seven years for the West to bring debt down to sustainable levels, said the study.

Worries over public debt in the Euro zone has caused a sharp fall in the shares of European banks with big exposure to weaker economies such as Greece, Spain, Portugal - and also Ireland and the UK (see table below from the European Commission, via The Economist, of the world's biggest national debtors measured as percentage of GDP).

 The full article in The Economist where this table was drawn from is well worth a read.

Logically, therefore these European banks might have to tighten lending - stifling finance to companies, particularly the medium and small-sized.

As for US unemployment, the overall jobless rate had fallen to 9.7% from 10% in January, with the retail and manufacturing sectors gaining 42,000 and 11,000 new jobs respectively.

But 8.4m jobs have been lost since the crisis began, 1m higher than previously estimated.

And most disturbingly of all, long-term unemployment - those without a job for 27 weeks - jumped to 6.3m from 2.7m a year earlier in January!!!

We'll be looking at the effect that these macro issues will have on chemicals over the next week or so.

Source of picture: http://www.twelveatthetop.uku.co.uk/page18.htm

...I see from this news report - - that you have denied claims of your interest in buying Liverpool Football Club.

If, perhaps, you do have any interest in buying an English football club may I turn your attention slightly eastward to the wonderful city of Leeds - home to the greatest football club on Earth?

Leeds Utd has a huge fan-base, which is passionate and loyal, and we'd be a lot cheaper. You would be, in effect, buying a Premiership club of the future as we are currently in the English third-tier of football - League One.

Should you be interested, please let me know and I can send you photocopies of my match-day programmes from the 1972-73 season.

Best Regards
John Richardson

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 Malini Hariharan

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

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

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

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

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

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

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

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

Pic source: Tehran Times

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

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

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

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

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

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

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

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

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

What's the gas?

Source of picture: wwww.arabianoilandgas.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

Penchom Saetang of Ecological Alert and Recovery - Thailand (Earth) is not a typical activist vociferously denouncing companies for their environmental misdeeds. She is soft spoken and rational in her criticism of the state of affairs at Map Ta Phut, Thailand's premier industrial zone and a major petrochemicals hub.

After spending over ten years studying and documenting the pollution problems at Map Ta Phut she was not surprised to see the local population take legal action last year to block implementation of new projects at the industrial estate.

She is hopeful of a compromise that will enable completion of projects already underway but warns of an anti-industrialisation wave that is spreading across Thailand, especially in the southern provinces where the government would like to create a new industrial zone.

"People of every province have networked to resist investments; now it is almost too late to recover. People are opposing any king of factories, even power plants, as they fear pollution and loss of livelihood; the feeling is very deep," she warns.

And she admits that even she has problems discussing the matter rationally with the local people.

"It is not easy to communicate; if my group acts neutral we will be resisted. It is a very sensitive issue," she says.

The roots of this crisis can be traced to the mistakes made by the government and companies over the years at Map Ta Phut which has generated bad feelings and an antagonistic stance towards industry, says Penchom.

"Map Ta Phut is a modern industrial estate but some local communities don't have supply of clean water; they have stopped using rain water because of contamination

"There was a big incidence of air pollution in 1997 when thousands of students were taken to the hospital. But no one from the factories walked out to acknowledge their fault. The following year there was another incident.

"Local people set up their own smelling group to use their nose to walk around Map Ta phut to detect the source of air pollution. They found 7 factories responsible and requested for a temporary closure.

"Every year since 1998 there has been lots of illegal dumping; the erosion of the coastal area is still going on. The local people have demanded several times to stop expansions but this voice was ignored by the Industrial Estate Authority of Thailand, "she says.

Pic Source: Bangkok Post

The first proposal to declare Map Ta Phut as a pollution zone was made in 2003-04 but this was rejected a couple of times.

There was a conflict of interest as some government officials held positions in companies with operations at Map Ta Phut, points out Penchom.

Today Map Ta Phut is in urgent need of a big environmental cleanup and the government needs to focus on this rather that talking of further expansions, she advises.

Penchom also dismisses claims of Bangkok city being more polluted than Map Ta Phut and Thailand having better environmental standards than some developed countries.

"There is a difference in the air pollution cocktail; benzene content is high in Bangkok in areas of traffic congestion but the air does not have as many compounds as Map Ta Phut," she points out.

As for environmental standards, it is only on some parameters that Thailand is better, she says.

"The big problem is VOC and Thailand did not have any regulation before 2009".

But Penchom has a positive attitude and would like to work towards solving the environmental problems.

"It is not easy to change but we want to let them [the government and companies] know that civil society is keeping a watch on them," she warns.

By Malini Hariharan

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

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

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

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

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

Source: The Economist

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

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

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

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

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

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

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

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

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

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

The first is the uncertainty about how the success of shale gas exploration outside North America. And the second is the concerns voiced by environmentalists about spoiling landscapes and contaminating water supplies.

The US government recently announced that it would begin a two-year study to determine if hydraulic fracturing, a technique used to produce shale gas, threatens water quality and water health.

There are differing views on how long the surplus situation will continue.

Companies that have invested in LNG believe that there is room for both shale gas and LNG in the US market.

Sceptics point out that shale gas is expensive to produce. With gas futures prices stuck below $5/MMBtu - and breakeven prices anywhere from $3-6/MMBtu - they are questioning how long shale producers will run rigs.

The Economist quotes predictions by experts that the LNG glut is likely to ease by 2014 as low prices would force some projects to be abandoned. France's Total is of the opinion that demand recovery would require more LNG projects while the Energy Information Administration (EIA) predicts decades of relatively weak prices.

A complicated picture but certainly one that needs to be unravelled.

Ras Tanura in Saudi - private companies bunkered by feedstock shortage?

By John Richardson

The gas feedstock shortages in Saudi Arabia - which we have commented on before - are such that no private company will receive any allocations in the future, claimed an industry source.

"It's only going to be for Saudi Aramco and SABIC from now on," he added.

Several privately-owned propane de-hydrogenation (PDH)-polypropylene (PP) plants have recently been commissioned in the Kingdom, whereas private ownership of crackers has never really got off the ground.

Saudi Arabia's Minister of Petroleum and Mineral Resources, Ali Al-Naimi, was reported to have said last December that the Kingdom was working on making more ethane available for petrochemicals.

But several well-placed sources we have spoken to have said that this was unlikely to happen anytime soon.

Al-Naimi pledged that investments in the sector would be maintained as Saudi Arabia tries to raise its petrochemicals capacity from approximately 60m tonne/year at the moment to 80m tonne/year by 2015.

This suggests that the way forward to more petrochemicals could well be naphtha - making the decision on how the feedstock will be priced into petrochemicals in the future crucial. An announcement is expected next year. 

Of the $120bn that Aramco has pledged to spend in the Kingdom over the next five years, half will be invested in petrochemicals including the naphtha crackers that are part of the huge Ras Tanura project with Dow Chemical.

Media reports say that plans to expand the refinery at Ras Tanura - which would provide the feedstock for the crackers - has been shelved indefinitely. 

Reports earlier in the week suggested that the petrochemicals portion of the project could be moved due to issues surrounding terrain at the current site, which is on Saudi Arabia's west coast.

Aramco and Dow have not made any comment.

A high chance of more showers

Source of picture: www.stuff.co.zn

By John Richardson

A closer look at last year's polyolefin trade flows illustrates just how vulnerable European producers will be over the next few years to rising pressure from Middle East imports.

"The volume of trade in Western Europe (intra-regional plus imports) for all the grades of polyolefins and polyvinyl chloride (PVC) fell by between 3% and 18%  in 2009," said Jean Sudol, president of International Trader, the New York-based trade-data analysis service.

"But at the same time imports from the Middle East actually increased."

A slowdown of imports into China seems inevitable this year after the staggering increases seen in 2009. For example, low-density polyethylene (LDPE) imports rose by 90% over the previous year to 1.34m tonnes and polypropylene shipments were up by 49% at 4.2m tonnes.

"A reduction in government stimulus, new capacity in China and the difficulty in repeating the sheer size of imports in 2009 points to a slowdown in 2010," added Sudol.

"My guess is that imports won't fall back to 2007/2008 levels and will still be high in 2010, but not as high as in 2009."

So the Middle East producers, as they ramp-up capacity this year and in 2011, will be searching for other destinations to compensate for a dip in demand from China. Europe is an obvious port of call.

ICIS pricing's Worldwide ethylene plant report shows that in the five years from 2008 to 2012, around 29m tonnes/year of new ethylene capacity will be added.

Nearly 16m tonnes/year will be added in the Middle East and around 14m tonnes/year in Asia, of which China accounts for nearly 7m tonnes/year, says the report.

This has partly been offset by the 2m tonnes/year that has closed in North America.

However, some 16m tonnes/year of this capacity growth was still to become operational as of the end of February 2010, the report adds.

"Ethylene demand actually fell in 2008, as economies crashed and extensive de-stocking took place throughout the value chains," wrote my colleagues Paul Ray and Peter Taffe in a recent article on our magazine, ICIS Chemical Business.

"In 2009, demand recovery has been weak. In normal market conditions, a rule of thumb indicates that ethylene demand globally grows at 5m tonnes/year. "

Paul Hodges, UK-based consultant with International e-Chem, added: "These new Middle East plants are going to run at close to the optimum rate of 93%, regardless of market conditions, because of their feedstock advantages,"

A painful reckoning is clearly at hand with restructuring likely to be given some extra impetus by problems in the European refinery industry.

           Riyadh

Source of picture: help.berberber.com

By John Richardson

PRIVATE Saudi Arabian petrochemical companies need not fret about the ethane-gas shortage that two sources had last week told us would hold up their development, according a third industry source we spoke to today, who is based in the Middle East.

"The private companies I've spoken to recently, all see a bright future for themselves in investing in more differentiated downstream products," this third source added.

"The objective is to broaden the range of petrochemicals produced in the Kingdom order to create more downstream jobs. This doesn't necessarily mean having to build a cracker.

"More differentiated petrochemicals, such as acetyls, tend to be smaller in scale than your standardised polyethylene (PE) and mono-ethylene glycol (MEG) plants and there is plenty of spare ethylene within the Saudi system."

The private company Sipchem, for example, decided to cancel its proposed cracker because of mounting costs and the availability of spare C2s, he added.

"It only needs around 250,000 tonne/year of ethylene for its acetyls projects, which are in the process of being brought on-stream right now at Al-Jubail.

And interestingly, more spare propylene might become available if any of Saudi Arabia's four propane dehydrogenation-polypropylene (PP) producers decide to expand.

"Each of the plants has the feedstock allocation to raise C3s output by 20%, but they might not also increase PP capacity.

"And we could be talking about cross share-ownership by feedstock suppliers in some of these downstream projects. If not, discount or transfer pricing arrangements for feedstock off-take are still likely."

As for the Saudi Aramco strategy of potentially cracking naphtha, the source said: "Aramco is losing huge amounts of money on its refinery operations when it sells products locally because of subsidised pricing for gasoline, diesel etc.

"So adding naphtha-based petrochemicals will result in better returns, even if they are weaker than cracking ethane."

Singapore's container port

Source of picture: www.gcaptain.com

By Malini Hariharan and John Richardson

A big challenge facing many companies that have built large polymer plants that are located far from key markets is how to move product most efficiently.

These facilities have been built to take advantage of competitive feedstocks in regions such as the Middle East, rather than proximity to customers, which are mainly in the Asia-Pacific region.

Companies have approached this problem in different ways. Some have stuck to the traditional model of producing, packaging and storing product at site and shipping it to the market once orders have been received.

The problem with this is the delivery time, as it can take up to two months to ship product from the Middle East to Asia, by which time prices could have changed two or three times.

Other companies have developed distribution hubs at strategic locations, or hired warehouses at multiple locations to minimise shipment times to customers.

But more innovative solutions are now being adopted. An example is the model that Borouge has developed.

Polyolefins that are produced at Borouge's plants in Abu Dhabi, United Arab Emirates, and destined for the Asia-Pacific region will not be packed at site, but instead shipped in sea-bulk containers to hubs at Singapore and the Chinese cities of Guangzhou and Shanghai, where third-party service providers will handle packaging, warehousing and onward shipment based on sales orders.

All three hubs will become officially operational in mid-2010 and will handle material from the Borouge 1 and Borouge 2 facilities, which have a total polyolefins capacity of 2m tonnes/year. Borouge 2 will be commissioned over the next few months.

"Other petrochemical companies are looking at what Borouge is doing, which is unique, and trying to decide whether to take this type of visionary concept or gamble their existing supply chain models will keep them competitive in the changing environment," says Eric Herman, CEO of CWT Logistics, which is handling Borouge's southeast Asian logistics hub in Singapore.

This is the first time that CWT is going beyond traditional logistics services.

For the Borouge project, it has built an integrated solution, including packaging lines, a container yard and a warehouse designed to handle 330,000 tonnes of polyolefins annually.

The Singapore facility has no silos and will instead rely on gravity to discharge product from the sea-bulk containers - which are regular 20-foot or 40-foot containers lined with polyethylene (PE) or polypropylene (PP) film - to the packaging line.

This gravity system reduces product handling as well as the chances of contamination, Herman points out.

CWT's overall model allows for shorter delivery time, and there are potential savings of up to 30% on ocean-freight costs from shipping product in bulk containers rather than as packaged goods in containers, he adds.

The decision on how to package products can be decided closer to the point of the order from the final customer, avoiding the need for costly repackaging as is often seen in European logistics centres, he says.

In addition, having a packaging and distribution hub in a location such as Singapore means a Middle East-based company can deliver to China or other Asian markets in shorter lead times, enabling it to compete with South Korean and southeast Asian companies that have always had a delivery-time advantage.

"The strategy is to position products closer to the main markets and reduce the overall time it takes to deliver to the end-users," says Herman.

This is possible from Singapore, which is one of the busiest container ports in the world. The heavy traffic also means there is less pressure to return containers and the free time offered by shipping companies before containers must be returned can be maximised.

"It can be seen as expensive to outsource the supply chain. But, firstly, you are only talking about a fraction of overall product costs," he adds.

Secondly and much more importantly, in increasingly volatile markets a shorter lead time preserves cash flow and hedges your bet on product price fluctuations, Herman says.

"You can say that it is cheaper to pack product at the plant itself, but customers are demanding a shorter lead time, similar to the just-in-time concepts developed in the auto industry by the Japanese."

A source from a polyolefins company with joint ventures in the Middle East thinks the model will work.

"Outsourcing of packaging and warehousing reduces capital costs and improves the project's return on investment, which is important when you are fighting with other divisions within the company for investment dollars," says the source.

CWT's Herman adds that outsourcing of packaging and warehousing also allows companies to save land for future plant expansions.

However, another Middle East producer thinks the model will work only for companies that manufacture huge volumes.

To make this model more accessible, CWT is also establishing a multi-user packaging and distribution centre in Singapore, where a company can experiment with, say, 50,000 tonnes/year, says Herman.

He is convinced that now is the time for the petrochemicals industry to learn to outsource.

"You look at Nike - it has outsourced its entire logistics. Most industries have learnt to outsource. The petrochemicals industry is changing fast, and logistics is going to be a key component as more products need to be moved closer to the market," says Herman.

Logistics could well become the next platform for companies to differentiate themselves in the market.

By John Richardson

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

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

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

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

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

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

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

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

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

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

Source of picture: www.destination360.com

Dear Reader

Please click here - ChinaChems2009AndOutlook.doc for my review of what happened in China last year and Q1 2010 and for some pointers for the rest of this year.

All the best
John Richardson

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.

By John Richardson

Polypropylene (PP) appears to have become very tight in China over the last week as a result of a reduction in import availability and a resurgence in buying activity.

"PP is incredibly tight right now because the supply from North America is no longer available for delivery to China," said a Singapore-based trader.

There's been a sharp decline in availability from North America as a result of rising propylene costs.

C3s have risen by 53% since November 2009, according to my Houston-based ICIS pricing colleague, William Lemos. Contract pricing for April settled on Tuesday at 7 cents/lb higher ($154/tonne).

The surge in US propylene has been driven by reduced refinery operating rates on the dismal state of the refining industry globally.

PP producers have become more heavily dependent on feedstock supply from FCCs over the last 12 months due to crackers switching to lighter feedstocks.

"US Gulf Coast crackers are running on 82% ethane and only 18% naphtha compared with 65% ethane and 35% naphtha a year ago," a North American industry source told the blog earlier this week.

The switch to lighter feeds is the result of tumbling US natural gas prices relative to crude, a response to the big rise in local gas supply.

"I haven't seen virtually any US material arriving in China so far this year and the Middle East producers, for whatever reason, don't seem to be able to fill the gap right now," the Singapore trader continued.

But the lack of US dollar material has only tightened the China market over the last week as before then buyers were largely on the sidelines, the trader added.

"What happened about a week ago was the sudden re-entrance of the baxially oriented (BOPP) finished-film producers who hadn't been buying raw-material resins for several months," he said. 

"These finished-film producers are big in scale in China, using the latest modern equipment, and so when they buy they buy in big volume.

"I think they came back in a rush because both yarn and BOPP film-grade resin prices had slipped to very affordable levels (these converters can run either yarn or BOPP film-grade resin through their machinery).

"A big factor behind their re-entry into the market was the rise in oi prices."

Yarn grade was at $1,250-1,300/tonne CFR main port China and BOPP film-grade resin was at $1,280-1,350/tonne CFR main port China, according to the ICIS pricing assessment for the week ending April 2.

As the ICIS pricing graph below indicates, pricing for these two grades has declined recently.

All homopolymer grades were in tight supply with stocks in bonded warehouses almost exhausted, the trader added.

This might just scupper the hopes of European buyers who are keeping an eye on availability in Asia in an effort to gain relief from high local PP pricing.

PP prices have already increased in Euros200/tonne in 2010 with further rises of as much as Euros130/tonne on the cards, according to my London-based ICIS pricing colleague, Linda Naylor.

PP Producer inventories in Europe have been low a result of restricted supply of C3s due to refinery and cracker operating-rate cutbacks.

Propylene supply is restricted because European refineries are running low on the terrible state of refining margins.

Cracker rates were also cut back earlier this year in an effort to initially prevent ethylene from becoming oversupplied.

Heading West,,Jeddah's container port

Source of picture: http://ofwngayon.com/home/?p=257

By John Richardson

SABIC has increased its exports of PE to the US in response to high pricing and what could be weaker demand in China, a source with a North American producer told the blog earlier this week.

"I have heard of more linear-low density PE (LLDPE) cargoes in particular being shipped from Saudi Arabia, the source added.

The graph attached - View image shows the surge in US PE on the back of more expensive ethylene during Q1.

What does this trade - apparenly via both bulk containers to the bigger inland US converters and in bags to the smaller, coastal processors - also tell us about the China market?

PE indigestion in China seems high as a result of overstocking late last year and in early 2010.

"I remember that you had asked me where all the heavy imports in Q4 and January this year were going," added the source with the North American PE producer.

"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."

China's PE buyers have appeared to be standing on the sidelines over the last few weeks at a time when Saudi capacity is ramping. YanSab is apparently back at 100% after electrictiy-supply problems caused an outage earlier this year and the the second Sharq complex has just come on-stream.

But as we heard yesterday, a rise in oil prices might have brought China's PE buyers back into the market in significant numbers.

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 John Richardson

Inventories of copper, aluminium, lead and nickel have risen as prices for all these commodities have also surged, says this article in The Economist.

Source of graph: The Economists

Copper stocks total half a million tonnes in metals-exchanges warehouses in what HSBC analyst Andrew Keen describes as a market that's departed from fundamentals.

The reason behind high stocks and rising prices is the willingness of traders to take positions in the belief that demand for these commodities will get even better next year.

And surprise, surprise, a lot of these hopes rest on China's economy continuing to expand at or at least very close to the rates we saw in 2009 and in Q1 2010.

But pointers to significant further economic tightening in China are emerging every few days.

Last week, for example, the People's Bank of China issued three-year bills for the first time in about three years in order to reduce liquidity. Financial analysts told ICIS news that Beijing was becoming more creative as it attempted to keep a lid on inflation short of interest-rate rises.

And last week also, there were reports quoting unidentified sources that Shanghai is considering a property tax in order to clamp down on investment properties. The source of the original news story was Shanghai Securities News, affiliated to the state-owned Xinhua News Agency.

This suggests the government is at least thinking about such a tax, and maybe is using the news stories to sound-out market and public reaction.

A slowdown in China's overall growth would obviously mean that demand for metals would be less than is being anticipated, leading to a sudden unwinding of stockpiles.

If interest rates globally start to increase - a possibility as governments ease back on economic stimulus - this could give metals traders another reason to develop cold feet.

As the pricing of all commodities are so heavily interlinked these days, crude, chemicals and plastics pricing could also head south.

What's interesting and needs more research by this blog are the more direct links between trading in chemicals and plastics and other commodities, such as metals, which seems to be common practice in China.

Parallel trading contributed to a sharp rise in China's polyethylene (PE) stocks in March, which we talked about yesterday.

By John Richardson

THE betting remains on trough conditions arriving for polyolefins at some point later this year with new supply expected to begin to severely lengthen markets towards the end of Q2.

A temporary buying strike in China that dragged on for too long - following overbuilding of local resin inventories - has helped create a fairly bullish mood as the huge ChinaPlas exhibition in Shanghai begins today.

As we discussed last Friday, in linear-low density polyethylene (LLDPE) there's just too much due on-stream by the end of 2010 to in theory prevent major market indigestion, regardless of the strength of demand.

A recent UBS report estimates that 8.6m tonne/year of ethylene capacity is due on-stream globally this year with demand growth likely to be only 2.6m tonne/year. This is set to be the biggest annual increase in C2 capacity in a decade.

But the unknown unknowns are too great, in the view of this blog, to be confident in predicting a trough by the end of this year - and there is a chance that the low-point in this current cycle could be pushed into 2011.

LLDPE is tighter than high-density PE (HDPE) because of what appears to be a global shortage of the co-monomer butene-1 with octene also reported to be in tight supply - as again we discussed in last Friday's post.

Other reasons include OPEC's decision to maintain production quotas at levels reflecting post-crisis oil demand, suggesting continued constraints on associated gas and therefore operating rates of existing Middle East crackers. However, quota compliance has reportedly slipped dramatically, to just 53% in March.

The ongoing long-term problem of increasing alternative demand for gas in the Gulf Co-operation Council region will continue to place limits on both existing and new production.

We understand that these days, new crackers in the region can only operate at 90% of their nameplate capacities because of feedstock allocations.

And remarkably, a senior company executive from a leading Middle East producer confirmed to a colleague of mine recently what we had been hearing for several months from contractors: Cost savings were made in buying raw materials and equipment for plant construction when project-financing costs were at their peak in 2005-07, resulting in technical difficulties in starting-up new complexes.

The shortage of senior start-up engineers is another problem, a long with the scale of the plants being built in this current round of capacity additions. These plants are the biggest of their kind in the history of the industry, meaning that smooth start-ups were always going to be a problem.

But one factor that might lead to the cycle low-point arriving this year is that according to the same UBS report we quoted earlier, 46% of this year's ethylene start-ups are in China versus only 17% in the Middle East. Last year around 80% of start-ups were in the Middle East.

General labour shortages, including not only senior engineers but also construction workers, don't appear to be as acute in China as elsewhere.

Infrastructure outside the battery limits of plants, another factor which is rumoured to have slowed capacity additions in the Middle East, are less likely to be a problem in China.

But 15% of Asian current Asian ethylene capacity will be closed down this year for turnarounds compared with 10% in 2009, again according to the UBS report.

And operating-rate discipline among Western producers remains high, with more rationalisation of capacity, especially in Europe, possible.

The scale of recent closures has been big. For example, Shell Chemicals recently disclosed that it had shut 22% of its US ethylene capacity over the past two years or so as it shifted to greater use of ethane feedstock.

By Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

Reliance Industries is moving ahead with its Jamnagar cracker project and is looking at completing it in 2014, reports ICIS news.

Preliminary activity on the project, which was put on hold after the 2008 economic crisis, has resumed. Discussions are on for technology selection and a firm start up date will be set after contracts have been awarded.

The cracker, which would have a capacity to produce 1.3m-1.6m tonnes/year of ethylene and small volumes of propylene, would use offgases from Reliance's two refineries at the same site as the primary feedstock. Other refinery feeds would also be cracked.

The derivative slate includes mono ethylene glycol (MEG), low-density polyethylene (ldPE) and linear-low density polyethylene (lldPE).

It is not only the cracker project that is being revived. Reliance is also refreshing plans for new capacities in purified terephthalic acid (PTA), polyester, styrene butadiene rubber and butadiene rubber (BR).

The company had said last year after the completion of its second refinery that it would renew its focus on the olefins and derivatives project.

With Indian petrochemical demand showing very healthy growth prospects it makes sense for Reliance to expand in the country. And as its effort to grow the petrochemicals business inorganically by acquiring LyondellBasell has failed its time for Reliance to return to something that it is very good at - building mega projects.

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.

Flagging-up the dangers...

Source of picture: http://www.illusionsofdander.com/2007/08/car-dealerships-and-flag-companies-may.html

By John Richardson

THE recent 22% and 18% falls in US spot ethylene and propylene prices might be a sign that this yeat's price rallies have been more the result of stronger crude and petrochemicals re-stocking and supply constraints than sustainable demand increases. 

As my colleague Nigel Davis, editor of the Insight section for ICIS news, wrote in the same article we linked to above on the C2 and C3 price retreats: "Inventories seem to have filled, with real demand growth now taking up the slack.

"The rate of that growth will very much determine producers' fortunes in the latter part of the second quarter and particularly in the second half of the year.

It is another reason to be cautious about the continued strength of the chemicals recovery if not the sustainability of the current upturn."

The big question - not just in olefins, of course, but in many commodity and also speciality downstream segments - is the continued strength of recovery in the light of the Greek debt crisis and further efforts by China to cool its economy down.

BASF CEO Jurgen Hambrecht summed up the need for caution on the release of his company's excellent first-quarter results when he said that there were risks from "the continuing financial and debt crisis, the winding down of national stimulus programmes, volatile raw materials markets, excess capacities, growing geopolitical tensions and protectionism".

He also makes the point that this quarter's results were always going to look good given that the world economy was in deep crisis in Q1 last year.

This will make quarter-on-quarter comparisons weaker as this year progresses because of the recovery that began to take hold in Asia, especially China, from the second quarter of 2009.

Dow Chemical's Greater China sales volumes could help prove the above argument. They grew by 46% in Q1 this year, but I very much doubt that this growth can be sustained as China's huge economic stimulus only started to deliver major benefits from the second quarter of last year.

My fellow blogger Paul Hodges has also repeatedly made the point, taking data from key chemicals consumption markets such as US autos and housing, that in absolute terms demand is a long way short of where it was in 2007-08.

By John Richardson

THE jury is out over whether the recent decline in US propylene prices will re-open arbitrage to Asia for polypropylene (PP).

Arbitrage for ethylene has remained strong with Dow Chemical disclosing that 20% of its US production went to Asia during Q1

US propylene contracts for May settled at a reduction of 12 cents/lb ($265/tonne, Euros209/tonne), according to a report by Houston-based colleague William Lemos on ICIS news last week.Polymer grade C3s settled at 63.50 cents/lb and chemical-grade propylene at 62 cents/lb.

The drop, the first in contract prices since October 2009 and only the second in the last 17 months, was the result of weaker demand and a decline in spot values.

But will it last?

At the same time as propylene has fallen, so has ethylene due to the easing of supply constraints. US ethylene contracts for April have slipped by 3 cents/lb ($66/tonne, Euros50/tonne).

The settlement, which leaves the monomer at 52.50 cents/lb, is the first drop in the monthly contract since July last year.

"According to producers and buyers, cracker feedstock is getting light again as ethylene values have dropped and producers are no longer able to crack any feed (both light and heavy) and make money on ethylene and co-product propylene, C4s, etc," Willliam told the blog.

"So, it seems crackers here will go back to the mom-and-pop routine of cracking NGLs (natural-gas liquids) to keep costs down and preserve their margins as long as possible.

"I heard a consultant say NGLs jumped to 85% of the feeds in April, compared with 80% in March. A caveat would be the start-up of Petrologistics in late July."

This is a propane dehydrogenation plant in Houston that will add 544,000 tonnes/year of propylene capacity to the market, added Willam.

"Crude could be another factor. If prices stay in the mid-70s/tonne it could help keep costs down and encourage heavier cracking in the months ahead."

Yesterday, though, crude jumped by around 2% on confidence over the EU Greek rescue package, in line with the huge rebounds in global stock markets.

You hardly have to be an Einstein t forecast a lot more volatility in days and weeks to come.

An industry source agreed that propylene costs would soon increase again in the States.

"US gasoline stocks are at record highs and the US is exporting lots of gasoline right now. Stocks are very high ahead of Memorial Day (May 31) which should not be the case if we are going to have a strong US driving season," he said.

"So I don't see the recent increase in US refinery operating rates and therefore the lower propylene prices being sustained. I see C3s going up again and so no arbitrage to Asia."

He added that the situation for ethylene economics was more complicated.

"True, supply constraints are easing for ethylene which has pushed the price down, but the ethane sellers are charging quite a high premium over Henry Hub right now and with gas-oil so cheap (because of very long overall middle distillate markets), this makes cracking gas-oil attractive."

Goodbye to all of that

Source of picture: www.gas2.org

By John Richardson in Mumbai for the Asia Petrochemical Industry Conference (APIC)

EXISTING Saudi Arabian crackers will continue to run at less than 100% until the Kingdom's oil production returns to 10m bbl/day - and that's not going happen for some considerable time, an industry source told the blog earlier this week in the build-up to APIC.

"I visited Saudi recently and discovered with oil production hovering in the region of 8m bbl/day (it was 8.26m bbl/day in April) there's not enough associated gas around to generate the ethane necessary for these established crackers to run at full rates," he added.

"Until production returns to 10m bbl/day ethane will remain tight for these crackers.

"For Saudi Arabia, maintaining the oil price at $70-80 bbl/day has bigger financial and geopolitical considerations than helping petrochemicals out. 

"I think the US is happy with $70-80 bbl/day as oil is expensive-enough to deter the wasteful consumption of earlier this decade that contributed to spiralling crude prices. The days of the gas-guzzling SUVs (and similar vehicles such as the disgusting Hummer - pictured above) need to be over for good.

"I don't think global oil demand is going to return to 2006 levels for a long while, and so this means Saudi will have to stick to its OPEC production quota - which is around 8m bbl/day - to keep crude within the $70-80 bbl/day price-range."

There might be enough propane and butane available, but as downstream plants in these existing complexes produce mainly polyethylene (PE) and mono-ethylene glycol (MEG), this is unlikely to be of much help.

As for the new wave of crackers being brought on--stream at the moment, there is, as you would expect, also not enough ethane gas to go around.

"If a new cracker has an ethylene nameplate of above 1m tonne/year it is not going to be able to produce more than a million tonnes in the foreseeable future," said a second industry.

Saudi Aramco is making strenuous efforts to boost natural-gas production, but there doesn't seem to be any great confidence among the industry sources I have spoken to that this will lead to a big easing of the ethane supply shortage.

More immediately, the feedstock issue is combining with problems in starting up and stabilising production at new plants to keep PE - and also polypropylene (PP) markets tight.

It's not the same story for MEG if China inventory levels are anything to go by as we will discuss later on.

And returning to the feedstock issue, the blog will canvass more views among the delegates gathering for APIC.

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?

Is The China Party Over? Hope you've got plenty of aspirin..

Source: The Daily Telegraph

By John Richardson

Apologies to our readers for a fairly quiet week on the blog this week - my fellow blogger Malini and I have been immersed in a week of training courses for our rapidly-growing training business, ICIS training. We will be back with a roar next week.

But we cannot let the week pass without commenting on this story from ICIS news.

This blog has frequently warned about how excess liquidity in China has created the potential for inventory distortions accelerating a downward price-spiral.

And sure enough these lines from the ICIS news story indicate how worries over the European debt crisis combined with high stock levels threaten to add to the momentum of price declines.

"The polyethylene market, meanwhile, was plagued with high stocks, with Chinese petrochemical majors PetroChina and Sinopec currently holding a total of 750,000 tonnes of the material, industry sources said.

The stocks were just a quarter short of the peak of 1m tonnes in August 2008, before the financial crisis struck"

One contact ours said on the sidelines of last week's Asia Petrochemical Industry Confwerence (APIC) in Mumbai: "My management has been asking me for the last 18 months 'where are all the volumes you've been shipping to China going?. Actual demand growth surely can't be that good'. I told them to enjoy the export boom while it lasted while expecting it to be brought to an end at any timy by some big economic event beyond our control."

How right he was to warn his board to be prepared for a dramatic weakening of market conditions.

Let's hope that his board took notice.

Greed definitely not good for chemicals....

Source of picture: reelmovienews.com

By John Richardson

THE chemicals industry is once again confronting the risk of being badly damaged by the ever-more interconnected oil, other hard commodity, currency and equity markets.

As fellow blogger Paul Hodges told us last November: "Demand visibility - even without as yet a collapse in crude - is already extremely poor, making planning very difficult.

"More companies go bust in an upturn than a downturn, because of the inevitable increase in working capital. This is a major risk in 2010, given the fragile state of the financial system, and banks' unwillingness to lend."

We have now seen a mini-collapse in crude from around $87/bbl at the beginning of May to this morning's NYMEX price for July delivery of $70.33/bbl.

One of the reasons for poor visibility back in November was confusion over to what extent crude prices reflected a fundamental improvement in demand versus financial speculation that a sustained global economic recovery was just around the corner.

Now we have our answer: Money has poured out of crude and into the US dollar, indicating widespread aversion to risk and a clear indication that the rise in oil prices was, indeed, mainly built on speculation. The switch to the dollar, as the US dollar carry-trade starts unwinding, could gain very damaging momentum.

Further strengthening of the dollar would also very likely lead to greater reductions in other futures-traded commodities, such as metals - and equity markets.

John Authers of the Financial Times neatly summarises the evolution of markets to where we are today.

Problems he identifies include the rise of super-fast computers that can move hundreds of millions of dollars in milliseconds between commodities and equities, the "other people's money" syndrome" (i.e. the rise of trading by institutions), and "herding" - investment managers following the general trend because of the way they are incentivised.

This has exacerbated bull runs and has made bear markets worse.

Fear has once again overtaken the investment community as talk of a double-dip recession and deflation regain popularity.

Until or unless regulations are introduced to make commodity and financial markets less greedy, less short-term, and less driven by what Hodges describes as "irresponsible bankers", an important part of managing chemicals businesses will remain understanding how all these markets work.

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."

By Malini Hariharan

Is this the right time to buy petrochemical stocks? Asian equity analysts are having a tough time answering this question being posed by portfolio managers across the region.

They are seeing a 'mini downcycle' emerging with a weaker second half relative to H1 2010 and potentially a weak H1 2011, explained one equity researcher. So the perfect opportunity to accumulate petrochemical stocks would be later this year as investors can then benefit from expected improvements in profitability in 2011-12 and 2013.

"Many investors did not buy petchem stocks in late 2009 and H1 2010 and they missed out the good times; so a lot of portfolio managers are starting to pay attention. They believe that they need to catch the next upturn," he added.

Pic Source: Stockmoneymarket.com

Some other investors with a shorter investment horizon are looking at shorting petrochemical stocks in anticipation of weaker stock prices later in the year, said another researcher.

But a big problem is forecasting earnings for petchem companies. Many had not anticipated the margin recovery in 2009 and visibility for the rest of this year and 2011 is still cloudy.

The ongoing downward pressure on olefins, polyolefins and many other petchem prices is closely linked to developments in crude oil and the global financial market where risk-averse investors are collecting back liquidity.

Petchem prices are likely to stabilise only after crude does. And when that will happen is still an open question.

By John Richardson

LAST week's sharp decline in polyethylene (PE) pricing in China is being partly blamed on converters who occasionally act as traders liquidating their raw-material inventories.

Trading activity by end-users can account for more than 10% of total sales activity in the Chinese market in any one week, the blog has previously been told.

A broad-based price correction on declining crude was reported by ICIS pricing for week. For example, linear low-density PE (LLDPE) was assessed $90/tonne lower at $1,160-1,230/tonne CFR China on 21 May compared with the previous Friday. High density PE film was at $1,120-1,150/tonne CFR China - down $60/tonne.

"The converters saw crude slipping and so might well have entered markets in great numbers to sell their stocks. It should be remembered that compared with conventional traders they are always in a stronger position to trade resin because they get cheaper supplies from Sinopec and the local Chinese/foreign joint-venture producers," speculated one industry source.

"I think this activity by the processors could have played an important role in the price declines. From their perspective you can understand the decision to re-sell their stocks as the economic outlook at that time was exceptionally uncertain on worries that the European debt crisis could lead to a new global economic crisis.

"Also weighing on their minds were lending restrictions in China designed to cut overall credit growth and slow the property sector down.

"It might have seemed a lot safer to sell inventories rather than produce plastic goods that nobody might want to buy. The other risk they could have been hedging against was further steep declines in crude that would have left them unable to pass-on their raw material costs to their customers."

This is obviously highly speculative, and only one opinion, but it does point to just how difficult the Chinese market is to read. More research is needed by this blog - and more opinions are more than welcome.

This theory, though, does offer support to the argument we will develop over the coming days: That the recent price declines do not necessarily reflect weaker fundamentals. The demand-growth numbers we are going to provide for Q1 point to the China boom story continuing.

And a further illustration of how PE markets could have separated from the fundamentals was what one producer described as a "growing correlation with the Dalian Commodity Exchange over the last week or so."

As we have reported before, Dalian offers a futures contract in LLDPE that at times reportedly leads physical pricing. This was the case last week when the contract fell 5%, the maximum allowed in one day's trading, which was followed by a drop in physical RMB pricing.

"At times of extreme volatility and uncertainty, the Dalian becomes the market-setter. Somebody needs to do a study into how Dalian moves with the local stock market, with crude and in turn how Dalian then actually influences the deals that are done in the real market and how the correlations have varied since the futures contract really took off early last year."

Over to the statisticians......

Out of the investment deep-freeze?

Source: tehrandaily.wordpress.com

By John Richardson

A VERY interesting story from my colleague Bee Lin Chow on ICIS news today reports the signing of a memorandum of understanding (MOU) between Sinopec and Iran's National Petrochemical Co (NPC).

The agreement will explore joint- venture opportunities in petrochemicals and related businesses in the two countries.

China needs oil and has the political muscle and pragmatic mindset to in some cases place energy security above geopolitical concerns such as alleged nuclear proliferation and human-rights abuses.

Hence, it is now talking to Iran about petchem and associated investments.

And it has done energy deals in the past with Sudan and other countries with dubious human-rights records.

Iran, as we reported on the blog last October, is finding it increasingly difficult to get the foreign investment it needs to develop iits refining, gas-processing and petrochemicals industries. Even obtaining catalysts to run plants has reportedly become difficult.

New investment is sorely needed to shore up the economy. Value is, for example, being given away as Iran exports crude and imports gasoline with domestic pricing of the fuel heavily subsidised.

And in petrochemicals, limitations on gas extraction can cause erratic operations at existing crackers.

Lack of feedstock supply and an inability to source foreign investment and technologies have also stymied growth in petrochemicals capacity.

The scope of the MOU between Sinopec and NPC also involves joint marketing of products.

This might help Sinopec limit price disruptions in the Chinese market that might occur at times of sudden influx of Iranian petrochemical products.

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

By John Richardson

DOOM-MONGERS are scratching their heads as to why the global petrochemicals industry has remained in such a healthy state over the past 18 months.

Old assumptions are, as a result, being challenged. It would be a painful irony if these assumptions are changed just as a new global economic crisis creates yet another set of realities.

Right now, it is far too early to say that the end is nigh.

Sure, we have seen Asian ethylene margins take a hammering over the last couple of weeks - but all that seems to have happened is that they have gone from obscenely good to still pretty good in historic terms.

The correction was always going to take place as the full impact of Shell Chemicals in Singapore switching from a major net buyer to a net seller of ethylene was felt by a thinly-traded spot market.

The fall in oil, polyethylene (PE) and mono-ethylene glycol (MEG) prices on the escalation of the euro crisis for the week ending 21 May were obvious other factors.

Last Friday (28 May), ICIS pricing reported no further reductions in PE values, whereas ethylene had tumbled a further $160/tonne to $980-1020/tonne FOB Korea.

But the decline in ethylene came before the end-of-the-week rebound in crude to around $75/bbl.

This reaffirmed that the weakness in petrochemicals pricing is all about the euro crisis, China's economy, geopolitical tensions in Korea and their impact on confidence across many economies and industries.

To get back the original point of this article, just why therefore have the doom-mongers been proved wrong - and why do the optimists believe that this will continue to be the case?

"I think it could be because petrochemicals demand-growth in the four biggest emerging economies in Asia - China, India, Indonesia and Vietnam - is much-higher than many of us had expected," said a former doom-merchant.

"I think we need to go back and re-examine our assumptions and re-crunch our data. Maybe, for example, we are no longer looking at growth multiples of 1.2 times GDP (gross domestic product); perhaps they should be more like 1.5 times."

The other big factor we've well-documented on this blog is delays in project start-ups.

These look set to continue because of a myriad of issues including manpower, technologies and the use of inferior equipment when building costs were at their peak.

The iron operating-rate discipline of Western producers also looks likely to persist.

Highly-nervous shareholders will accept nothing less and for private equity companies such as LyondellBasell and Ineos, cash-flow remains King.

My London-based colleague Nigel Davis, editor of the Insight section of ICIS news, reports that inventory management in Europe remains exceptionally rigid down all the value chains.

"European crackers are running at an average operating rate of around 80%", added a source with a North American PE producer.

So if the euro crisis does escalate, resulting in damage to strong Asian economic fundamentals and the moderate improvement in the US, production is likely to be cut even further. This might be enough to bring markets back into balance, provided this new economic crisis isn't worse than the last one.

And if the oil price was to fall to the low $60s/bbl and stay there, a further output cut by OPEC is likely to happen in attempt to get the crude price back up to the target range of $70-80/bbl.

This would mean even less associated gas for Saudi Arabia's crackers. They are already operating at below 100% because of feedstock supply reductions resulting from the current OPEC production quotas. 

A further factor behind strong margins has been the steep drop in ethane-gas prices in the US thanks to the rise in overall gas supply.

We all knew that butadiene, and C4s in general, would become tight because most of the new cracking capacity is gas-based. What nobody had predicted was the big switch to lighter feeds in the US by existing cracker operators.

So anybody operating a liquids cracker with butadiene extraction is enjoying excellent returns.

As we said, it is still very possible that we will get through this current crisis intact with margins remaining very strong.

And with so little new capacity planned for post-2011, what are the odds against another fly-up sooner than is expected by the pessimists?

By Malini Hariharan

Asian aromatics markets are getting increasingly hard to read not merely because of volatile crude prices.

Demand, usually strong at this time of the year, has so far failed to materialise. The US gasoline season has started on a slow note. In Asia, benzene demand has been hit by maintenance shutdowns and operating troubles at styrene plants. And Chinese refiners have preferred to use MTBE instead of toluene for gasoline blending.

On the supply side, operating rates at reformers and pygas-based units have been kept high in anticipation of demand. And even now, producers are hesitating to cut output as they do not want to be caught with low stocks once demand kicks in.

"Though the market is long now, the volumes can be easily consumed when demand comes," says Leonard de Guzman of Dewitt & Co.

But when that will happen is still uncertain. The US is said to be awash with gasoline and summer driving is predicted to remain much lower than what it was two years ago.

The US Energy Information Administration's (EIA) Gasoline Summer Consumption and Supply report predicted an increase of just 0.9% in gasoline consumption this summer, but gasoline stocks were about 7m bbl (3%) higher than the start of the 2009 driving season.

Source: ICIS pricing

The net result is an oversupplied market that pushed benzene prices down by 18% in May and toluene by 17%.

Prices rose last week on stronger crude prices but fell again in the last few days.

Producers are struggling with high stocks. It is estimated that Sinopec is holding a benzene inventory of around 40,000 tonnes, double the normal level.

De Guzman predicts that Asian benzene will be slow to recover as the global inventory situation has still to be resolved.

The key, he says, is operating rates at reformers - will they be cut or will producers keep them running in expectation of the summer gasoline demand and also a recovery in styrene demand.

By Malini Hariharan

The weakness in Asian petrochemical markets is continuing with buyers taking cues from developments in the crude oil and stock markets.

In polymers, despite a slight rebound in polyethylene (PE) prices late last week the buying sentiment remained negative in China. The mood worsened today following a 5% fall in linear-low density PE (lldPE) futures on the Dalian Commodity Exchange (DCE).

Trading of September lldPE futures on the DCE was stopped right after it opened at 9:00am local time, reports ICIS news.

Purified terephthalic acid (PTA) futures also dropped by about 4% and trading of September contracts was halted on the Zhengzhou Commodity Exchange (ZCE) at around 11:00am.

"The futures market is under panic sentiment today on the back of multiple negative news over the weekend," said a source referring to falling crude values and also stock prices.

And not surprisingly, the physical market was quick to react. PTA prices fell to an eight-month low.

LldPE trading slowed to a trickle today, reports my colleague Bee Lin from ICIS pricing.

"The physical market has fallen into an uneasy silence as buyers are not interested to bid, and sellers are unsure what price to offer," said one trader.

Local producers and traders have so far refrained from lowering offers as they are not confident that this will be sufficient to draw buyers. But the question is how long can they hold on.

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.

By Malini Hariharan

A merger of PTT Aromatics and Refinery (PTTAR) and IRPC has once again been postponed to early next year due to concerns about legal issues and the business outlook, reports to Bangkok Post.

The legal concerns relate to the country's competition law and outstanding lawsuits filed by Prachai Leophairatana, the founder of Thai Petrochemical Industry, which was taken over by PTT and renamed as IRPC.

And when in doubt it is best to ask for a fresh study.

So an unnamed consultancy company has been hired to once again examine the pros and cons of a merger, the global petrochemical business outlook and future performance of the two companies.

The proposed merger has been delayed fairly regularly since it was first mooted in early 2009. It was first planned as a merger between all subsidiaries of PTT Plc but was then narrowed to PTTAR and IRPC in the first phase.

Meanwhile, Thailand's new minister for industry, Chaiwuti Bannawatis, has been assuring companies that he will find a quick solution to the legal impasse that has stalled projects at Map Ta Phut.

As a first step the minister will isit companies at the industrial estate to restore confidence. He has also suggested road shows to boost confidence of international investors.

But investors are looking for action and not words. Confidence will quickly return if Thailand can get a few projects going.

By Malini Hariharan

After enjoying years of plentiful supplies the Gulf Cooperation Council (GCC) countries face a gas shortage that could last another five years, says consultancy Booz & Co.

And this is happening at a time when other countries around of the world, especially the US, are seeing a surge in availability.

Source: Booz & Co

The consultancy has identified five factors responsible for the demand and supply imbalance in the GCC countries. There has been a rapid rise in power consumption and gas is increasingly needed by this sector. Gas is also being used for re-injection of depleting oil fields to maintain reservoir pressure and oil production. The growth in petrochemicals, steel and aluminium sectors have also contributed.

On the supply side, the region 'faces extraordinary challenges in maintaining and increasing gas production at a level that would allow it to meet demand,' says Booz. An Opec-led cut in crude oil production has meant lower volumes of associated gas and new sources of non-associated gas have been difficult to locate.

And, lastly, long-term export agreements for liquefied natural gas (LNG) have limited local supplies.

The bad news, says Booz, is that the shortage will become more acute over the next five years despite forecasts of slower economic growth.

GCC governments need to act fast to resolve the situation. Suggested actions include improve in energy efficiency through regulation, a gradual increase in local prices, use of alternatives in the energy mix and providing incentives to international oil companies to participate in the gas sector.

The report adds to what the blog has been writing about - the imminent rise in costs and shortfall in associated gas constraining petrochemical plant operations.

The gas equation has changed affecting not only current production but also future petrochemicals development.

Deepwater disaster expected to impact shale gas 

Source of picture: Minnpost.com

By John Richardson

THE booming shale-gas industry could either benefit or suffer from the BP Gulf of Mexico oil-well disaster, with the end-result determined by the effect on energy prices of any long-term clampdown on deepwater and Arctic drilling.

Those for and against shale gas are lining-up to make their cases as to why the BP catastrophe will be a negative or a positive for what Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says is "the most significant energy innovation so far this century".

An executive with a Houston-based oil and gas services company told the blog: "Shale gas may well enjoy an easier regulatory ride in the US in light of the fact that deepwater and Arctic drilling is going to be a lot more problematic.

"If you can't get your energy from far out at sea or under the Arctic and the US still wants to improve its energy security, then shale gas is the obvious solution as it is onshore and therefore easier to deal if there is an incident. It's also inherently safer than going offshore."

And he pointed out that politicians will surely decide to pursue the path of least resistance.

"Once Deepwater Horizon has faded in the public imagination - i.e. when it drops out of the 24-hour news cycle - the focus of voters will return to the cost and availability of energy.

"The White House will face the choice of either seeing energy costs rise or letting the development of the perfectly-safe shale gas process continue."

Last month, in a supplement on the natural-gas industry, the Financial Times quoted Scott Van Bergh, an energy expert at Bank of America Merrill Lynch, as saying that higher deepwater hurdles might make shale-gas exploration and production (E&P) easier.

Negative publicity towards shale gas looked as if it had slowed, he added.

But his comments came before two incidents at the Marcellus shale -gas field in Pennsylvania earlier this month. One involved a gas leak and the other an explosion which injured seven workers.

And the hydraulic fracturing or "fracking" process used to extract the gas from the shale remains under scrutiny because of emissions and groundwater pollution claims.

Congress has, as a result, asked the US Environmental Protection Agency to complete a comprehensive study into fracking.

The US-based Natural Resources Defense Council argues that the oversight and insufficient regulations that have occurred offshore are an equal concern onshore.

The outcome of this whole debate could have big implications for petrochemicals.

In the US, the big oversupply in US gas has helped to make ethane cracking a lot more advantageous.

The other factors behind the fall in US natural-gas pricing is liquefied natural gas (LNG) oversupply and the drop in gas demand resulting from the economic crisis.

To date, the benefits delivered to US petrochemicals by the rise in shale-gas production have been indirect through its contribution to the drop in overall gas prices.

Continued E&P is seen as crucial to fulfilling the current forecast that US total gas reserves will last a further 100 years. Before the shale-gas technology breakthroughs, reserves were only expected to last 30 years.

Plus, there may be opportunities for direct feedstock supply from shale gas via any fields which prove to be rich in natural-gas liquids (NGLs).

And overseas, there's huge interest with feasibility studies taking pace in countries such as China, the UK, Austria, Germany and Poland.

The studies in Poland have indicated that shale-gas reserves could raise total European natural-gas reserves by 50%. But questions have been raised about the accuracy of these estimates and how quickly and effectively Polish and other reserves can be developed.

Still, though, the shale-gas revolution - provided it is not stymied by regulations - could benefit petrochemicals outside the US through advantaged feedstock.

This possibility has arisen as the Middle East gas advantage erodes, raising the chance of new places to build super-competitive crackers.

In the end, energy costs and energy security seem certain to set the future of shale gas globally, as well as in the US.

The unfeasible alternative is a radical change in consumer behaviour and lifestyle expectations.

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.

Will he back raising fuel prices to European levels?

Source of picture: sociologycompass.wordpress.com

By John Richardson

IN the midst of the continuing BP oil-spill saga, here's an important question for our American readers: Once the story is forgotten, meaning when it drops out of the 24-hour-news cycle, will you be willing to back tougher legislation that could lead to gasoline once again rising to above $4 a gallon?

Maybe I am reading the wrong reports, but I have yet to see a serious debate about the tough lifestyle choices the world's biggest energy consumer might need to make.

Sure, BP appears to have made lots of mistakes, but even with the best safety standards, pushing the technology envelope hard to extract oil from difficult, remote places may become uneconomic if the wrong kind of regulations are introduced.

Or, perhaps, the alternative is to go for much-tougher deep-sea and arctic drilling rules while providing hell-for-leather support for the US ethanol industry, without having to sacrifrice all those lovely SUVs? As this excellent article from my colleague at ICIS in Houston, William Lemos, points out the US ethanol is sorely in need of more support.

But what will happen if there are no commercial breakthroughs in second-generation technology and the food-versus-fuel debate rears its head again?

And/or as we wrote about earlier this week, the US has huge potential to add more natural gas to its energy mix, but there are environmental concerns over shale gas.

"Most of the risks in shale gas relate to what happens above ground - i.e. accidents in handling the acid used to extract the gas," a senior chemicals industry source told the blog this week.

Presumably, these risks should be fairly easy to mitigate, as indeed they probably have been, by a Responsible Care-style approach.

"What happens underground isn't a problem because the depth of these shale-gas wells is way deeper than aquifers and so the only problem for groundwater pollution would be if there was a rupture. Ruptures shouldn't happen if the right drilling procedures are used," he added.

The debate about the right energy choices needs to be serious, and informed by good science, along with the President of the US being brave enough to stand up and say: "I am going to raise taxes on fuel to the same levels as Europe."

Dream on.....

....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.  

By John Richardson

THE steep decline in Asian ethylene margins - detailed in the chart below from the ICIS pricing weekly margin report - seems to be largely the result of the worrying state of China's polyethylene (PE) market, which we discussed yesterday.

"The Saudis have reduced their PE operating rates, resulting in an increase in the availability of merchant ethylene," an industry observer told the blog today.

A longer-term factor is the surplus from the Shell Chemicals complex in Singapore. Shell switched from being a net buyer to being a net seller of C2s earlier this year when its 800,000 tonne/year steam cracker was commissioned.

Ethylene margins in Northeast Asia (NEA) had recovered to $161/tonne on 25 June from $101/tonne on 18 June on cheaper naphtha, according to the ICIS report.

(Note that PE margins look far better - for example, NEA integrated high-density injection-grade PE margins were $262/tonne on 25 June, again according to ICIS, but still down on a first-quarter average of $357/tonne. But the crucial issue right now for PE is volumes due to the inventory overhang in China)

Despite the recovery in ethylene margins on 25 June, the NEA average for Q1 was $474/tonne with the downtrend ominously paralleling that which occurred in 2001.

"We saw a similar steep decline in that year, ahead of an extended period of poor returns on oversupply," said Larry Tan, Director, Data & Analytics (Asia) for ICIS pricing.

"The nameplate capacity due on-stream for the remainder of this year is in excess of likely global growth."

He, of course, accepted that - as we have seen repeatedly over the last 18 months - start-up delays and OPEC oil output restrictions that have reduced feedstock supply to existing Saudi Arabian plants - could change the picture.

Operating rate discipline in the West has also been ferocious.

But many senior industry sources at last month's APIC conference in Mumbai warned the blog that the bigger danger was the economy - which is proving to be the case.

A plethora of economic problems have combined over the last few days to suggest that we could be heading for a douple-dip global recession.

These include growing concerns over whether China is suffering a significant slowdown on government economic cool-down measures.

The Conference Board, the New York-based research organisation, yesterday downgraded its economic indicator for China on falling construction activity and export orders.

"The rising trend of the [index] has been moderating since the middle of last year, suggesting there is no strong basis for assuming accelerating growth," Bill Adams, resident economist for the Conference Board China Center in Beijing, said in a statement.

"The majority of [index] components have been increasing, but consumer expectations fell in April, and new export orders have been weakening for most of the previous six months."

Up In The Air?

Source of picture: www.marcdussault.com.blog

By John Richardson

QATAR Petroluem and ExxonMobil have started talks to dissolve their partnership for a 1.6m tonne/year cracker project in Qatar, according to an article published earlier this week by the Middle East Economic Digest (MEED).

The project, due for start-up in 2015, would have two 650,000 tonne/year polyethtylene (PE) and one 700,000 tonne/year monoethylene glycol (MEG) plants downstream of the cracker.

Shell Chemicals told us last December that it would ideally like to build two new world-scale crackers and downstream Omega process MEG plants in Qatar with Total Petrochemicals also understood to have submitted a proposal to the Qataris.

Ben van Beurden, executive vice president of Shell Chemicals then told the blog in May: "The situation on feedstock supply is dynamic and I think we have submitted a very good proposition to Qatar. I think they are impressed with our proposal and I am confident our day will come."

Qatar has extended its moratorium on more gas projects based on the giant North Field from 2012 to 2014, in order to study reservoir behavour. This points to limited options for more petrochemicals in the medium-term and a great deal of competition for what gas feedstock is available.

A source close to Total earlier told my fellow blog author, Malini Hariharan, that an option to expand Total's existing joint-venture cracker in Qatar was to make use of ethane from the Pearl gas-to-liquids (GTL) project.

Pearl GTL, a joint venture between the Qataris and Shell, is due on-stream next year.

Van Beurden had also told us in May of plans to integrate Shell Chemicals' planned new cracker in Qatar with Pearl through shared use of utilities, but made no mention of making use of the ethane.

He had earlier ruled out the prospect of using the highly paraffinic naphtha - which will also be produced by Pearl - as feedstock in Qatar

                                 Please, please not again...

Source of picture: soccernet.espn.go.com

By John Richardson

The dreadful state of China's polyethylene (PE) market will last for at least the next two months as a result of the overstocking we talked about earlier this week and poor demand, two polyolefin traders told the blog today.

And one of the traders added that increased domestic production is leading to aggressive price-cutting by Sinopec.

"Its priority is to maximise sales from these new local plants which means right now that falling Yuan-based pricing is leading the market - pushing dollar-based imports in the same direction."

China's ability to quickly stabilise production at new plants is in contrast to persistent operating issues that have limited output from the Middle East, where most of the new capacity came on-stream in 2009.

A brief flurry of re-exports of Iranian material from China helped relieve some of the inventory pressure but arbitrage had now closed, he said. 

Traders are concentrating on how to make returns across equities and futures markets as physical activity remains weak, he added.

"Recent restrictions introduced by China to cool-down the property market have also led to more speculative money flowing in and out of equities, futures and some physical trading in commodities, but certainly not PE due to the high inventories.

"Also, gambling on the Yuan has become more risky since the June 19 decision to widen its daily trading band. This is leading to yet more hot money flowing elsewhere."

For those who still have the appetite to take risks, this makes the Dalian Commodity Exchange's futures contract in linear low-density PE (LLDPE) somewhere to play while the physical market is so quiet.

"LLDPE, both future and physical because of the influence of Dalian, has essentially become a financial instrument," said the second trader.

"LLDPE futures have a limited, but still quite important, influence over the direction of physical pricing in high-density PE (HDPE), low-density PE (LDPE) and polypropylene (PP)."

The overall mood music seems to have shifted since the APIC conference in May with the majority of conversations I've had this week dominated by mounting concerns over a double-dip global recession.

"I was watching the recent England-Germany match with some friends and I was the only one betting on a German victory. I would also bet on a double-dip recession," the first trader continued.

He also thinks Germany will go on to win the World Cup.

So if Germany were to win, that would means he'd also probably be right on the economy.

Please, please no.....

Dear Readers - here is, hopefully, a hand summary of some of the key themes that have emerged over the past two weeks with some important additional data on imports and inventory levels in China - plus a rather unscientific industry confidence survey.

By John Richardson

The mood seems to have changed since the Asia Pacific Petrochemical Industry Conference (APIC) in May, when there was talk of the worst of the economic crisis being over.

Back then - a time that now feels almost like the distant past, before the escalation of the euro debt crisis and a weakening recovery in the US - senior executives were talking confidently of a new Asian growth momentum discounting any persistent weakness in the west.

It was also thought that there was not going to be a major supply crunch in polyolefins due to constant start-up delays, meaning that these new levels of growth in Asia would greedily gobble up new volumes entering the market.

But the big proviso expressed at APIC was that everything could be derailed by macroeconomic events.

This now appears to be looming a little larger, according to polyolefin producers, traders and buyers. Eight of the 12 industry sources recently surveyed by this correspondent said a double-dip global recession is on the way; in late April, only four of the same 12 contacts thought so.

There are those who argue that this has been a disaster waiting to happen for a long while, because the global economic recovery had weak foundations.

Equally, there are others who say that we shouldn't get carried away by recent declines in polyolefin prices, or by a highly unscientific (and small) survey by one reporter.

The price falls are partly the result of overstocking in March, when confidence among traders was so much higher.

"There was a lot of speculative booking of overseas cargoes by traders, at a time when local production was on the rise," said one Shanghai-based trader.

"Oil prices were firm at that time and we thought that they would go higher. We were also more confident about the [Chinese] economy," he added.

China's domestic production has averaged approximately 800,000 tonnes/month this year compared with less than 700,000 tonnes/month in 2009, according to one industry observer.

"Increased domestic production is leading to careful price management by Sinopec," added the trader.

"Sinopec's priority is to maximise sales from these new local plants, which means that falling Yuan-based pricing is leading the market, pushing dollar-based imports in the same direction."

China's ability to quickly stabilise production at new plants is in contrast to persistent operating issues that have limited output from the Middle East, where most of the new capacity came on-stream in 2009.

Low density polyethylene (LDPE) imports reached an all-time high of 225,000 tonnes in March, according to New York-based trade data and analysis publication International Trader Publications.

Overall polyethylene (PE) imports totalled 865,000 tonnes in March compared with last year's monthly average of 610,000 tonnes, based on figures from International Trader.

Imports have fallen steeply since their March peak, to 624,000 tonnes in April and 545,000 tonnes in May.

"This is hardly surprising, as all the bonded warehouses in China are full. Inventories are very high," said a second polyolefins trader.

Sinopec's stock levels are reported to be at 700,000-800,000 tonnes compared with the usual 500,000 tonnes.

Interestingly, polypropylene (PP) is reported to be not as overstocked because there are less speculative traders in the polymer than in the bigger PE sector.

Imports of PP were 373,000 tonnes in March compared with an average of 350,000 tonnes/month in March 2009, according to International Trader. These fell to 318,000 tonnes in April and 292,000 tonnes in May.

PP pricing has, as a result, held up slightly better than PE  as these chart (click link below) show.

PPTJuly5.ppl

A further factor behind the steeper declines in PE was cutbacks by Middle East producers, an industry observer said.

This had led to greater availability of merchant ethylene delivered into a market already made longer by the surplus from Shell Chemicals' cracker in Singapore, he said.

But more fundamentally, the March bust points to the "game being over", as the global economy weakens, said Paul Hodges, UK-based chemicals consultant with International e-Chem.

Two major global polyolefin producers hold a much more positive view of the second half of this year.

They accept that the China growth picture looks a little weaker because of government restrictions that have cooled down the property sector.

But they add that China should still see polyolefin demand-growth in excess of 10% in 2010 as a huge amount of money is still working its way through the economy thanks to economic stimulus.

This should result in reasonable demand for imports in the second half, despite an 19% increase in local polyethylene (PE) capacity in 2010, they argue.

So, as usual, take your pick from the views of the pessimists or the optimists, both of which claim to be realists.

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

ASIAN ethylene and polyethylene (PE) margins both fell last week - a further indication that the Chinese market remains weak.

Bonded warehouses are still full of PE as a result of high imports in March at a time when local production was being ramped up, the blog was told this morning.

But nobody seems clear about the outlook for final end-user demand in an increasingly uncertain domestic and global economic climate, which is being reflected in highly volatile crude-oil prices.

This has led to some converters reverting to the hand-to-mouth buying patterns that occurred immediately after the start of the economic crisis in September 2008, we have been told.

A further factor behind the negative buying climate is the imminent start-up of more capacity and, as we reported last week, success relative to the Middle East by China in stabilising new production.

Sinopec's priority also appears to be in keeping the new plants running at or close to 100%, even if this means weakening Yuan-based pricing.

Naphtha-based Northeast Asian (NEA) ethylene margins fell by $50/tonne for the week ending July 9, according to the ICIS pricing Weekly Asian Ethylene Margin Report. This was the result of an $8/tonne in naphtha costs and a $20/tonne fall in C2 prices (see separate article below).

NEA margins averaged $474/tonne in Q1, $378/tonne in the second quarter and only $222/tonne so far in Q3.

Linear low-density PE (LDPE) and high density PE (HDPE) margins for integrated producers in NEA (i.e. those with captive ethylene supply) were also down for the week ending 9 July, according to the ICIS pricing Weekly Asian PE Margin Report.

LDPE margins fell by $60/tonne and HDPE by $65/tonne on weaker PE pricing and a rise in naphtha costs. LDPE film-grade prices had slipped by $30/tonne and HDPE film by $20/tonne in the China CFR market.

HDPE injection grade NEA margins averaged $398/tonne in the first quarter, $357/tonne in Q2 and $305/tonne so far in Q3.

"There is no storage space available in any of the bonded warehouses in southern or eastern China," said a Shanghai-based polyolefins trader.

But he added that there were contradictory reports of high or only medium storage levels in the domestic warehouses that store resin priced in Yuan.

"I don't think inventory levels actually matter that much. There is such uncertainty about the outlook that we are seeing some converters managing inventory the way they did in late 2008," said a Southeast Asian polyolefins sales manager.

"In other words, purchasing is hand-to-mouth with a great reluctance to buy anything more than minimum quantities because of oil-price volatility."

Another factor behind the reluctance of buyers is signs of weakening growth in the Chinese economy. For example, on a month-on-basis basis auto sales slipped in June with a senior government official warning last week that property prices were heading for a significant correction.

Further new supply just around the corner includes the 540,000 tonne/year Borouge 2 LLDPE plant. Production at the 1.5m tonne/year cracker which will feed the PE plant was due to be stabilised by the second week of July, ICIS news had reported.

It is easy to paint a very gloomy outlook for the PE market - and it seems likely that some of the problems we've dealt with above apply to other chemicals and polymer markets.

We will endeavour to look at these other markets over the next few weeks.

Several Factors Behind Ethylene Price Weakness
The fall in ethylene prices to $850-900/tonne FOB Korea occurred despite an outage at the Formosa Petrochemical Corp 700,000 tonne/year No 1 cracker, which is set to last 2-3 months.

But Formosa already had high C2 inventory levels built-up ahead of a turnaround at its 1.03m tonne/year No 2 cracker, according to ICIS pricing.

Asian spot ethylene markets have also lengthened this year on the start-up of the Shell Chemicals' 800,000 tonne/year cracker in Singapore.

Saudi Arabia has also reportedly increased ethylene exports in the last few weeks