If you think you've had a bad day at work....
......spare a thought for whoever at Formosa ends up carrying the can for perhaps the biggest blunder in the history of petrochemicals. Any other candidates?
......spare a thought for whoever at Formosa ends up carrying the can for perhaps the biggest blunder in the history of petrochemicals. Any other candidates?
The optimism seems infectious: Reliance's market capitalisation breached the RS3 trillion level today, placing the giant in an elite group of only three Indian companies.And the petrochemicals major is predicting 12.59m tonnes of polymer demand in India in 2011-12 with local supply at slightly below 8m tonnes/year.
The forecast big deficit is based on a very rosy view of the economy and therefore polymer demand growth. Its estimate for polymer consumption in 2006-07 is a mere 5.49m tonnes.
Reliance might be using these bullish demand-growth numbers ahead of firming up a cracker project in India, which was first announced several years ago. The project is due on stream after 2010. Next year, the Indian major will commission 900,000 tonnes/year of polypropylene at Jamnagar.
Are Reliance and its investors guilty of irrational exuberance?
Quota cheating, lack of investment in oil infrastructure and incredibly low domestic gasoline and other oil-product prices mean that Iran could be forced to exit oil export markets by as early as 2015, according to Roger Stern of John Hopkins University.
The government would be under threat if local prices were jacked up. Cutting back on oil exports would make it hard for Iran to balance its books.
If Stern is right, this makes investments in Iran''s gas-based petrochemicals seem even more risky.
Oh and by the way, there's the slight problem of the affect on global prices if Iran is forced to quit exports.
The news that Iran is accelerating its uranium enrichment process brings the country closer to United Nations sanctions and quite possibly a military strike by the US or Israel.
The No 9 and No 10 Olefins projects are far too progressed to be cancelled - the plants are virtually complete and the only issues remaining are achieving a smooth commissioning process (no straightforward task in Iran) and sorting out utilities problems.
But what of Olefins, No 11, No 12 and No 13 etc? Will any foreign engineering and construction company and technology supplier be prepared to sign on the dotted line as the prospect of sanctions or military action becomes increasingly likely?
If you take these crackers out of olefins and polyolefins balances what will this mean or the timing of the next downturn? Answers, please. No 11-No 13 were supposed to be on stream in 2008.
I can just about remember when Indonesia was talked about in the same breath as China - huge latent demand, lots of foreign direct investment and great natural resources.
Then came the Asian financial crisis and economic ruin. But now, as this article from the Economist indicates, the government had paid off its debt to the IMF, the stockmarket has been booming and the rupiah is strong.
True, the recent floods have hit growth. But the potential is perhaps closer to being realised than at any time since 1997, provided the government spends its money wisely on much-needed new infrastructure and there is more private sector investment.
This is a country with a huge population with per capita polymer consumption at only 17.5kg and an already proven case for more petrochemical investment: Indonesia still only has one cracker and has big monomer deficits.
But perceptions are hard to shake off, even if the government has balanced its budget and is dealing with corruption.
I had a feeling in my bones that Reliance was laying the groundwork for a major project announcement with its endlessly bullish forecasts about the Indian market (see my earlier blog 'Is India about to crash?').
And low and behold, last week we saw the Indian major firm up its long-rumoured plans for a new cracker and derivatives complex at Jamnagar. The cracker is due on stream in 2010-11, using off-gas and other refinery by-products from its new refinery as feedstock.
Commentators say feedstock costs will be low. The petrochemical giant is already said to be producing some of the most competitive propylene in Asia. If its growth projections prove too bullish, Reliance will need to focus very hard on costs.
Indonesia before 1997 had three cracker projects and huge demand growth. It was mentioned in the same breath as China. And, of course, then came the crisis.
But this year GDP growth could be the highest since the crisis with the government in sound financial condition.
The case for petrochemical investment is obvious as monomers and polymers are in big deficits. Will anyone take the plunge, though, and build one of the two new crackers that are needed by 2010-11, based on industry association estimates of deficit levels during those years?
The new boss at Titan, the Malaysian buyer of PE producer Peni, says he is interested in a cracker. Let's hope that the cautious optimism over Indonesia is justified.
This article from Reuters highlights the danger of overpaying for assets in the current India M&A frenzy.Perhaps its point about the overall of over-confidence is valid, especially given that previous deals were small scale. Other Indian companies, following Tata Steel's lead, are starting to bid the big league. Integrating small acquisitions to add value is one thing, but multi-billion purchases are another. Just ask Dow Chemical that ended up destroying value after buying Union Carbide.
And on the subject of Dow, will they won't they? The deluge of stories about Reliance and Dow continues with the latest suggestion that the pair are heading for an alliance rather than Reliace buying DowPlus, as you can see from the first Reuters link, Reliance are being linked with a stake in Carrefour.
Is this an unsustainable M&A bubble that could all go horribly wrong if purchase prices are too high? We are still in a global economic upcycle despite recent stock market collapses. What happens when the real slump does arrive and companies are left with assets purchased during oone of the strongest economic upcycles in history, coinciding with a period of exceptionally cheap credit?
No point obviously. As this report from Deutsche Bank Download file notes, the global skills shortage is not just in the west.
In the engineering sector, and perhaps this applies to petrochemicals, Deutsche Bank claims that the huge outpouring of Indian and Chinese graduates is grossly exaggerated; and it adds that the quality of graduates from both India and China can be pretty poor, meaning a great opportunity for western Europe - particularly Germany.
It's other conclusion, that the service industry boom cannot be sustained in India because of the skills shortage, is interesting. The route that India must therefore take, it says, is lots more manufacturing.
This is potentially tremendous news for petrochemical demand, again provided there are enough workers to run the plants.
But if India does embark on a huge build-up in manufacturing capacity, God help the environment.
I am already advising my 11-week-old son to buy a house on high ground. Soon I might need to suggest the Himalayas.
A boring topic to harp on about again I know, but this article from my colleague Nigel Davis from the Insight section of ICIS news supports what I have been saying for the past two years.
The industry has overbuilt, and despite all the optimism engendered by project delays and probably cancellations in Iran of No 11 Olefins and beyond, this is still, as Nigel says, an unprecedented wave of new capacity.
The reasons for this overbuilding are the easy liquidity that Paul Hodges of international eChem talks about in our commentary section, the optimism over sustained strong global growth and a continuing demand boom in China and India.
Nigel's report came out on the same day that Ben Bernanke's remarks sent stockmarkets into decline.
Imagine this: a combination of an unprecented wave of Middle East capacity, greater self sufficiency in China due to the large amount of capacity being built there and a US housing sector-driven recession that Bernanke's comments were interpreted as pointing towards.
This could be a great opportunity to pick up some cheap petrochemical shares and bankrupt companies in 2009 and beyond.
Will China relax the price controls that have led to wallopping great losses for domestic refiners, thereby justifying ExxonMobil's Fujian investment?
As we can see from this Bloomberg article, Exxon is pinning many of its hopes on these controls being relaxed. Does the US giant know something we don't or are they taking a punt?
All very nice to talk about China's demand growth for petrochemicals also being the driver behind the refinery-to-petchem project, but what about growing competition in an ever more crowded market?
Give me a call Exxon and tell me all your demand versus supply growth projections in detail, and give me an inside track on what's happening in Beijing over fuel pricing policy.
If that happens, flotillas of pigs (can a collection of pigs be called a flotilla?) will fly past my window.
Actually, don't call Exxon as that could be very dangerous - I am near Changi Airport in Singapore and so the pigs could get in the way of the flight path. Better to keep on feeding journalists unbacked-up arguments.
The eternal optimists at Nova Chemicals presented a very bullish view of olefins and polyolefins markets at their recent results meeting.Aaron Yap, trader with Integra, was also equally bullish at the ICIS Asian Polymers Conference in Shanghai last week - see Download file
In short, Aaron believed that demand growth would hold up downstream while olefins supply would lengthen in 2008-12. This will mean much better margins for the PE and PP producers.
Needless to say, I think this is all nonsense. I will be buying truckloads of petchem company shares in 2009 when valuations crash. Any bankers who also want to join with me in a few cheap buyouts, you know my phone number.
The International Energy Agency has further brought forward its forecast on when China will become the world's biggest polluter to 2007 from 2010. Only three years ago, they were predicting not before 2025!
Coal-fired power stations are big cause of rising greenhouse gas emissions in China, says the IEA.
Will this result in a harder approvals process for not only coal-fired power stations, but also coal to chemicals?
And what about the international response to China's growing greenhouse gas threat? Will it become harder to invest in China?
Or do you care? Maybe not now, but you might in a few years' time when you either cannot build more ethylene and C2 derivatives to serve the China market, or have to find some new, cleaner ways of making C2s from renewables.
Reliance is building the world's first cracker that will be entirely fed by off-gas from its huge refinery expansion at Jamnagar. This technology has been used before, but never on this scale because nobody has had enough refinery capacity to run a cracker 100% on very cheap off-gas.
The Dow strategy includes looking for cheaper sources of ethylene and for "asset light" investments, ie, where it doesn't have to spend a bundle of cash to get its hands on cheap raw material. This has proved a highly effective strategy in Kuwait through the Equate joint venture.
In addition, Dow would get access to the Indian market where the growth potential is huge.
As for Reliance, it wants technologies - Dow's great strength - and also access to the US chemicals market. The US, despite low growth, is still the world's biggest market.
And so, I think, a Dow-Reliance tie-up makes a lot of sense.
As for a leveraged buyout of Dow, the complexities of which are made so simple even I can understand them in this excellent article from my colleague Joe Chang, what about the politics?
Middle East companies would very probably have to be part of such an historically massive to deal; they have the cash and don't have pressure from nervous shareholders. I am not sure whether Sinopec or PetroChina would be interested as their focus is on securing overseas oil and gas assets.
After the Dubai Ports controversy last year, an LBO involving the Middle East would surely be blocked by Congress.
Imagine having to sack two of your senior management team after unauthorised takeover discussions.
And then imagine just a few weeks later being forced to announce a 20% reduction in first quarter earnings.
Andrew Liveris, Dow CEO (continuing our Dow theme - see below), is having a hard time of it. Mind you, life is supposed to be tough at the top and this is what he is paid for.
The likeable Liveris has come out fighting, as this article illustrates. Shareholders, though, in the US in particular, are not famed for the patience.
I am not sure about the reference to Rugby: Liveris, an Aussie, should remember that England beat Australia in the last Rugby World Cup Final.
Don't mention the cricket......
And also a whole host of other chemicals if this article on the excellent All Roads Lead to China blog is correct and incentives that have encouraged the real estate boom are removed.
This serves of the dangers of overheating. What goes up must come down and, in this case, the real sector has a long way to fall. Lots more PVC for export might be the end-result
In the old days all you had to do was propose an ethane cracker with PE and MEG downstream and you were away.
But these days if you want to get feedstock, especially in Saudi, you need to offer something a bit different because of the drive to diversify to create jobs.
This is a big opportunity for medium-sized players such as Lucite with the right technologies, hence their methyl methacrylate project with Sipchem.
Quite possibly, yes, despite my instinctiive pessimism. Perhaps emerging markets such as China and India have reached such a critical mass that no matter how much capacity is brought on stream, it will be easily absorbed.
Or maybe some disaster lies just around the corner.
Who cares if you've made your money in the most extraordinary bull run in history and have already cashed in your chips.
The consultants, traders and producers I spoke to last week insist that the current wave of new Chinese ethylene capacity due on stream in the current Five-Year Plan (2006-10), Download file
is more or less on track to be completed on schedule. Also see on these slides the ICIS insight Asia list of crackers after 2010 and the major PE and PP projects.
Unlike the Middle East, where project delays can run into several years, the Chinese have abundant manpower, engineering resources and cash to keep to their petrochemical time table.
There has been a lot of optimism from western CEOs recently, most notably Jeff Lipton of Nova Chemicals, over how delays to Middle East projects could extend the cycle.
But what will be the impact of timely start-ups in China? To what extent will these commissionings further erode the imports that have buoyed exporters for so long?
Sinopec and PetroChina is, apparently, discussing with the government over the next wave of crackers due on stream after 2010. Announcements are expected within the next 12 months.
On paper, the high density polyethylene deficit is due to remain at 2.5m tonnes up until 2012 with the polypropylene shortfall set to rise to 3.5m tonnes by 2011 from the current 2-3m tonnes/year. Will this prompt more investment by China or will the Chinese decide to let the Middle East meet the deficits? The Middle East is no longer just a PE player as the switch to mixed-feed crackers and the increasing use of the PDH process raises PP output.
What could this mean for global balances? Answers, please - and perhaps we can generate the world's first user-generated consultants report. All hail to Web 2.0....
Petrochemical markets are being badly ruffled by two recent Chinese government decisions.
In late June, there was the decision to change the VAT export rebate system for yuan-priced product.
And then this week there was a widening of the deposit rules governing import duty and VAT rebates on petchem imports priced in US dollars.
But beyond the immediate disruptions to imports and domestic sales, the long term implications could require a major strategic shift by chemical companies.
See below for detailed anaylsis. But in short here, as China phases out its low-quality manufacturing through these and quite possibly other further measures, chemical suppliers will have to move up the value chain with their customers.
As everyone focuses on when the next downturn might arrive, macro issues such as the implications of a likely US withdrawal from Iraq are rarely publicly discussed.
But if I were on the board of any company making investment decisions, I'd be worried.
If the US withdrawal from Iraq is well managed then fears such as those expressed in this article will come to nought. Sadly, "Iraq" "the US" and "well managed" are words and phrases that rarely share the same sentence and so the future looks a little shaky to say the least.
As the Middle East struggles to find labour and raw material supply with contractors' order books bursting at the seams, the Chinese seem to have no difficulty in executing their projects.
See below for detailed analysis of what's happening with the current wave of Chinese crackers. Suffice to say here that nearly all of China's cracker projects will be on time, unlike the Middle East where the delays are mounting.
Contractor markets are forecast to be tight until 2008--09. Could the Chinese be able to leverage their way into joint ventures in the Middle East before the market slackens by offering a one-stop shop of labour, equipment, contractors and financing?
Technology supply, marketing reach and cash have been the traditional means the foreigners have used to get their hands on highly competitive Middle East gas supply. Perhaps the Chinese might also offer lump-sum turnkey contracts plus a dollop of cash from one of China's state-owned banks with highly attractive lending terms, given that they are weaker on technologies and marketing.
The Middle East project builders would be, of course, happy and so would the Chinese government. Its priority is energy security, whether at the oil and gas or basic petrochemical level.
The collective sigh of relief was almost audible late last week when the Fed cut its discount rate - the rate banks charge each other for lending.
Action from other central banks, including the European Central Bank, could follow this week. Analysts also rate the likelihood of the Fed cutting its formal interest rate at its meeting next month at 50 per cent or more. This is the rate charged to companies and other non-bank borrowers.
But still, this credit crisis is not going to away that easily. See more detailed analysis below, but in short here, the implications could be:
*A weaker Chinese economy. Roughly one-third of China's GDP is dependent on exports and if the US goes into recession, this is serious. Many overseas chemical projects have been justified by estimates of persistently strong demand from China for imported chemicals that will be re-exported as finished goods. Sales of locally made chemicals would, of course, also suffer
*Unfunded projects backed by smaller private companies being shelved.
But a lot of capacity in the Middle East and China is too far advanced to be cancelled. In the Middle East, many of the projects already under construction might come on stream bang on time because the producers there can make money in any market conditions. Projects under construction in China start up on schedule because the government wants to gain greater independence from imports.
Let's hope this crisis goes away, but if it doesn't why on earth didn't the supposedly smart people who run the global financial system realise the dangers? Joseph Stiglitz, a genuinely smart guy, has been warning for years about the risks, which he outlines in this excellent article
As Paul Hodges notes in his Chemicals and the Economy blog http://www.icis.com/blogs/chemicals%2Dand%2Dthe%2Deconomy/, China's Finance Minister quit this morning - either over his role in a sex scandal or because inflation and the stock markets are out of control.
Petrochemical demand growth has been booming in China because, as a bureaucrat put it shortly after WTO entry, "China is like an elephant riding a bicycle".
By that comment he meant that China had to achieve growth of at least 10 per cent year (peddle hard) to avoid a heavyweight crash. High growth has been viewed as essential to maintain social stability through creating sufficient new jobs to replace those lost by WTO accession and the constant drift of migrant workers from the impoverished countryside to the towns and cities.
But perhaps now, with inflation rising alarmingly and the stock market in the midst of an enormous bubble, the government really does want to cool the economy down instead of just paying lip service to this objective - it's current approach. Perhaps the calculation is that high inflation and the potential for a stock market collapse represent a bigger risk to social stability than a moderation of growth.
But if policies are introduced that cut growth by too much, every industry from petrochemicals to the overseas retail and auto giants that have staked so much on China will find their profits trimmed. Make sure you steer well clear of any passing bikes with elephants on board, therefore, the next time you are driving through Beijing.
All should become clearer in six weeks when the Communist Party Congress, which only takes place every five years, is held.
Paul Hodges, in his excellent chemicals and the economy blog, talks about the recent Shenhua Energy listing on the Shanghai stock exchange and how it shares jumped by 93% following the IPO.
Now it has ample cash to pursue its ambitions.
Shenhau is just one of numerous companies involved in coal-to-liquids projects in China which will provide transportation fuels and also methanol-to-olefins production through to polymers. Cash will not be an objective for a sector which is expected to see Yuan60bn worth of investment in 2006-10
The US is also looking at making much more use of its coal reserves to boost energy security and reduce carbon dioxide emissions.
But just how environmentally friendly are coal-to-liquids technologies? According to the non-profit organisation, the Natural Resources Defense Council, it makes more CO2 sense to refine oil - Download file
However, in the end will the solutions we seek to the peak oil crisis be driven more by energy security issues than environmental concerns?
And when the Greenland ice sheet has collapsed into the ocean, Shanghai has been submerged and hundreds of millions of people have been displaced by the global rise in sea levels, how secure will we feel?
This was the warning from Bob Bauman of Nexant ChemSystems at last week's 25th Annual Petrochemical Conference in Houston, Texas.
Read below for some rather gloomy predictions of where markets could be heading in 2011-12
The article below, from Sean Milmo of ICB, makes the case that the Middle East will not be able or willing to lead pricing in Europe during the next downturn because of the control that European producers will be able to exert on their home market.
When you consider that total global output is around 300m tonne/year, this is quite staggering.
On paper, China should be balanced on naphtha because of a huge refinery construction wave. However, the consultants argue that the refineries will be run primarily to make gasoline. The importance of gasoline supply to China as a means of stimulating economic growth, thereby maintaining social stability, was illustrated yesterday when the government raised fuel prices by 10%. The hope is that the price hike will end shortages through boosting refinery production as a result of improved refinery margins.
And globally, will there be enough naphtha to supply China? Many of the 700 or so refinery projects being built could be delayed or cancelled because of rising construction costs and tight contractor and raw material markets.
Even if there is enough supply on paper, will refiners want to make the naphtha that China and the rest of the world needs? Quite possibly not as naphtha only accounts for around 5% of total refinery output.
Therefore, globally, as in China, refineries exit primarily to maintain supply and make money from the transportation sector.
Asian industry leaders are playing lip service to the environmental crisis the world confronts .
George Monbiot, the excellent author and journalist, argues that what the West needs is a recession to give the planet a breather.Asia also needs a substantial economic slowdown to give policymakers and technology developers more time.
Now, please be patient - the sting is in the tail. This could have great relevance to your business…..
The industry in which I work - the media - has been decimated by the Internet with billions of dollars of earnings and hundreds of thousands of livelihoods sucked out of traditional publishing by online advertising.
And now the threat comes from the democratisation of content through Web 2.0, where the traditional “top down” approach to content is being removed by a huge army of amateur content providers.
Keen, with his Luddite hammer firmly in his grip, paints a nightmare Web 2.0 world of hopelessly inept amateurs dessiminating inaccurate garbage which becomes the accepted wisdom because of the power of the Internet.
He attacks Wikipedia, for example, on the grounds that the intellectually challenged are given as much weight as those with expertise and experience.
The Long Tail, on the other hand, argues that while at the micro level mistakes abound in the free online encyclopaedia, the Wisdom of Crowds theory guarantees that it is more or less as accurate as the paid-for Encyclopaedia Britannica. And the beauty of Wikipedia is that you can correct mistakes immediately they are spotted rather than wait for a reprint of Encyclopaedia Britannica or any other paid-for work of reference edited by committees of professional experts, Anderson adds.
I sometimes like to believe Keen’s hope for the future will be realised, which is outlined in the last chapter of his book. This involves a consumer backlash against the rubbish being generated by all the useless amateurs out there who are destroying the media - and also the music and film - industries.
I sometimes prefer Keen’s vision of the future because it would involve the value being retained in the “old media skills” I have spent years acquiring; change is never easy, especially if it comes at the expense of your livelihood.
But if Anderson proves to be more right than Keen (with the truth, as always, likely to be somewhere between the two extremes) what could this mean for the chemicals industry?
Your research departments are already flooded with free news from paid-for services, either legally or illegally acquired.
Why on earth pay for BASF’s financial results when they will appear on Google half an hour after they are released, unless time is such a factor for your business that you need the numbers immediately they are released? If so, then subscribe to a wire service.
The value in paying for exclusive news - and also in-depth and informed analysis written by experienced old hands - remains, provided, of course, the content cannnot be copied or stolen and you are short on ethics.
Equally, revenue is willingly and often freely spent on reports produced by in-house research departments and consultants.
But what if Anderson is more right than he is wrong?
In the future, the Wiki approach could lead to a free way of for, example, predicting when a plant will start up. If the Wisdom of Crowds theory is valid, collective knowledge might prove as accurate as the persistent digging of an experienced old hack.
Supply and demand and also price forecasting could also go the same way. Why pay for a grey hair with years of industry experience to pass down pearls of expensive wisdom from his intellectual mountain top, when, to more or less quote Mulder, the truth is already out there?
It is certainly worth further discussion, and maybe even an experiment. Watch this space…..
For three wonderful years, petrochemical producers have had the pricing power thanks to tight supply and demand balances and very strong growth economic growth.
Now with crude close to pushing past the pyschologically important $100 a barrel barrier and construction sectors in the West slowing down on the sub-prime crisis, the polyvinyl chloride industry in Europe has reported a sea change reports Nigel Davis of ICIS news.
Speciality chemical producers Rhodia and Clariant have both annnounced price rises. If they fail to achieve their targeted increases, it will be a further indication of the shift in dynamics.
It is too early to make a call on Asia. Maybe the economic decoupling that everyone talks about will leave producers here with the power to push through increases.
However, with naphtha in Asia at another all-time high yesterday of $888-890/tonne CFR Japan, any naphtha cracker operator would be bleeding money based on current product prices. Cost increases are necessary and so the next few weeks could be critical.
And nobody probaby needs reminding that from the second half next year, supply will begin to lengthen as new capacity is commissioned. We could face the perfect storm of persistently high feedstock costs, lower economic growth and longer supply.
China annnounced on Wednesday that it had shifted its monetary policy stance to "tight" from "prudent" in response to food-price driven inflation, soaring real-estate prices, the surge in local stock markets and continued strong growth in industrial investment.
How this policy shift will be implemented remains unclear, but media reports suggest that total bank-lending growth could be limited to 13% next year from 15% in 2007.
The concern is that this will affect working capital as well as funding for new projects.
The ICIS pricing team is already picking up anecdotal evidence of petrochemical producers and buyers struggling to afford and source working capital in China during this year. This is the result of several interest rate hikes and increased reserve requirements imposed on the banks by China's central bank.
Next year could therefore be even tougher for cash flow. But the greater danger is that if the government doesn't succeed in taking some of the heat out of China's economy, and that some of the froth might end up making one giant bubble - to quote Alan Greenspan.
Loss of working capital is a small price to pay for avoiding the popping of a bubble which would have huge consequences for the global economy.
See below for an extended analysis of why everything is about to go wrong.
Looking forward to picking up some bargain chemical shares over the next two years and some cheap US and UK property!
As the Asian head of M&A and acqusitions for a major bank told me this morning: "Wnen everyone tells me I must buy as the market will definitely keep going up I sell.
"When they tell me to sell, I buy."
Counter-cyclical advice that served the Huntsmans well for a long time, until they became over-leveraged.
Talking about over-leveraging, only interest rate cuts right down to zero will prevent the great unravelling of the paper-bottomed credit-fuelled boom.
There are strong rumours circulating that the hopelessly fragmented Indonesian petrochemical industry might undergo some more restructuring.
This would follow Titan Petrochemical's purchase of troubled polyethylene producer PT Peni, now renamed PT Titan, for a bargain price.
Common ownership between sole cracker operator Chandra Asri and its numerous downstream companies would go a long way to resolving the country's flawed petrochemical economics.
Meanwhile, talk of adding olefins capacity in Indonesia has gone very quiet. This time last year, there were cracker projects reported to be under evaluation.
But still, it does seem as if the government is taking some measures to restrict loan growth.
Earlier, it appeared unclear as to whether the restrictions would effect trade finance. Now it seems that quotas will set per quarter next year for total loan growth, whether it's trade credit or capital expenditure.
What Andrew Liveris didn't address when interviewed over the Dow/PIC deal is what the $19bn olefins and polymers deal could mean for Asia, the Middle East and commodities.
All the talk was of specialities with speculation sure to be rife over the next few months over how the US major will use its now substantial war chest to boost its presence in performance products.
But when it comes to commodites, Kuwait is not blessed with abundant supplies of natural gas.
Although the Equate joint venture (the jv between Dow and PIC) has sufficient gas to build and supply a second complex, which is due on stream next year, talk of a third cracker in Kuwait has gone quiet. There were reports late last year of a significant new gas find in the north of the country, but apparently the new field is not ethane-rich.
And so if Dow/PIC can't further expand in Kuwait, where might they build?
Perhaps in Egypt where discussions have been taking place with the Egyptian government for an ethane cracker.
And PIC, through its parent company Kuwait Petroleum Co, has access to crude oul supplies. This could get Dow/PIC into China, where future foreign participation in future integrated refinery and petrochemical projects might only be possible if the foreign partner brings oil supply into the deal. This is a commodity of which China is in desperate shortage.
Dow has also been pursuing a coal-to-chemicals project in China. Will its interest in coal-to-chemicals persist now that it is better able to build oil-based petrochemicals in the world's most-important market?
Finally, though, it's worth noting that there has been a lot of talk, and hints from those in the know, about further pipeline links across the Middle East.
On of the places with lots of gas in the region (excluding Iran, which has too many other issues to worry about than pursuing regional co-operation) is Qatar. Linking Kuwait into future spurs of the Dolphin pipeline might not be beyond the realms of possiblity - thereby, making Kuwait a place for further expansion.
Or what about moving gas from Iraq, if that country ever becomes politically stable enough? Or maybe even Dow/PIC could co-operate on eventually even building a cracker together in Iraq?
Worth ringing Mr Liveris and asking him these questions. I will ask my colleagues to help out.
The two big gaps in the US major's Asian presence (and gaping gaps they indeed are) are cracker complexes in India and China.
China could be fixed through the alliance with PIC - meaning, Dow has leverage to get a license to build a naphtha cracker complex by offering crude supply through its new jv.
Atlernatively, it could achieve te same objective by completing its methanol-to-olefins project.
But India remains blocked by Bhopal. One wonders why a company with the wisdom of Down cannot work its way through the ever-in-flux Indian system, but maybe no foreigner can without the support of a strong local partner.
This is not meant to make light of the lingering misery of one of the world's worst chemical disasters, but the motives of some of those petitioning for more money are perhaps a shade dubious.
What's certain is that the issues cannot be as simple as portrayed in this Voice of America article.
I sincerely hope not, but all the signs are there because of:
*A financial crisis which nobody again saw coming, this time with global implications
*What could prove to be too much spending on new equipment and capacity. This time high equity prices have paid for these investments rather than US dollar-denominated bank loans, as was the case in 1997.
The fundamentals are still strong, as today's article from ICIS news on share-price collapses points out. Asian demand is at much higher levels now than 11 years ago.
But the power of sentiment should not be underestimated.
It's too early to read the long-term effect on petrochemical pricing. More volatility seems certain with sentiment driving shifts in pricing on every piece of negative or positive economic and stock market news.
Lower feedstock costs on cheaper oil will also play a role, but as the extended article below points out, the impact on the real economy will take time to assess. It is this impact that will set the long-term direction and determine whether we the downturn has, finally, arrived.
.......I had heard a company saying it was moving up the value chain (or rather a Euro or a British pound these days), I wouldn't be writing this blog entry while smelling the wonderful aroma of pork sausages being cooked for my tea. Brown sauce and mash as well, of course.
Can Dow Chemical make a success of this often-mentioned strategy? See below for extended analysis.
If it cannot, the prospects for the US producer could be bleak in the long run
Recent comments by An Qiyuan, chairman of the Chinese People's Political Consultative Committee for Shaanxi, warned of the environment and social catastrophe facing the northwestern province of China because of a shortage of water.
He was referring to the diversion of water from Shaanxi to Beijing ahead of the Olympics and hydroelectricity plants which he believes should be closed down.
Water is a particularly scare resource in western China - where most of the country's coal gasification projects are located. The technology is arguably a wasteful, heavy consumer of water.
And this raises an interesting dilemma for Dow Chemical - potentially a joint investor with Shenhua Energy in a coal-to-chemicals project in Shaanxi.How do you balance economics with the environment?
Coal gasification could represent the promised land - provided you can solve the logistics problems and provided the long-running doubts over the viability of methanol-to-olefins technologies are unfounded.
Shortly after I wrote this article (see below) on the doom and gloom surrounding China polyolefins markets, hey presto, prices rallied and I was wondering whether I needed to be wiping egg off my face.
But shortly after the slight rally occurred, a polyolefins trade told me it was likely to be the last margin grab, the last push to maximise earnings on the back of stronger crude as stock markets around the world tumbled and investors piled into commodities. However, prices did enter new territory - in the case of most grades of PP, for example, breaching the US$1,5000/tonne barrier on a delivered basis.
I think he could've been right. Based on the assessment of PE and PP markets by ICIS pricing last Friday, it certainly seems as if the recent retreats in crude (brought about by a realisation that weaker economic growth will ultimately undermine demand for oil and other commodities) and concern about the impact of the likely US recession has led to greater caution among buyers.
And, as I keep saying, this caution comes as the buyers prepare to benefit from the great supply surge.
Very interesting speech from Alan Kirkley, Vice President of Strategy and Portfolio for Shell Chemicals, which first of all goes over the predictable ground of where we are in the cycle and the threat from the Middle East.
However, he then makes the valid point - which I made earlier this week - that the end of the world has not necessarily arrived for the US and Europe.
There are some big question marks over how much more capacity the GCC region will be able to add post-2012, and perhaps even further afield as global LNG markets take off. Gas cracking may no longer as consistently benefit from feedstock at virtually give-away prices.
The likes of Shell and ExxonMobil have existing technology and know-how to make more highly competitive basic petrochemicals - and to take maximum advantage of the petrochemicals/refining interface.
Kirkley predicts that there will be an increasing use of hydrocracking to make petrochemicals, tapping into light ends that have a diminishing value in the gasoline pool and more revamping of catalytic cracking capacity towards olefin production.
Given the likely continued high cost of EPC and raw materials, anybody with a fully depreciated refinery requiring only relatively modest investment could be in a strong position.
But, of course, the first task is to survive the current downturn in one piece.
See below for an extended interview with Shell Chemicals vice president, Ben van Beurden, who talks of the search for new feedstock sources. He raises the possiblity of using syngas from the Pearl GTL project in Qatar to make methanol and then olefins. Or perhaps the high paraffinic naphtha and ethane from the same project will be the way to go for Shell in Qatar?
Meanwhile, more investment in China looks likely. Read on......
First of all, apologies to readers for my complete neglect of this blog over the last six weeks. I can only plead overwork and being too stunned by the collapse of the global economy to think about the blogosphere.
I promise regular posts from now on, provided I am not once again dazzled by the headlights of the advancing global-calamity juggernaut.
Now to the actual first post since early June: The recent fall in crude prices provides some hope for hard-pressed liquids cracker operators confronting the squeeze of higher feedstock costs and weaker demand.
But the pricing decline is partly a reflection of just how bad demand has become - surpassing all estimates of reductions in fuel consumption in both Asia and the West. It's not just energy efficiency triggered by high prices that has driven crude down, but also the credit crisis.
Fundamentally, crude supply remains constrained and it would only take an Israeli attack Iran (a strong possiblity over the next six months) for oil to reach $200 a barrel.
Commodity chemical companies need a different approach to customer management, new methods to deal with with highly volatile raw material costs and fresh ways of keeping costs down. Otherwise those without feedstock advantages are in danger of going bust.
....that's the case - in the Middle East case because of advantaged feedstock and in China's case because it will be strategic.
In previous downturns, far more capacity was western, or other Asian, and liquids based and so rate cuts brought markets more quickly into balance.
The graphs below from ICIS Plants & Projects data show that while only 14.8% of existing capacites comprises the M-E and China, this will rise to 62.3% of the new capacities being brought onstream in 2008-12.
This will leave M-E and China accounting for around 27% of total gobal ethylene capacity.
This article from The New Scientist suggests we might have to develop a whole new way of asssesing what drives all commodity markets.
Intuitively, everyone knows that the herd instinct matters. But to measure this mathematically, or statistically, seems a mountainous but fascinating challenge.
At least it will keep the a few academics off the streets for a few years and journalists busy writing articles.
Now this is old but not widely publicised - Jurgen Hambrecht's comments during the BASF Segment Day Chemicals event which took place in London on 8 July.
Navigate down, click on the webcast, and listen to the Q&A session after Dr Hambrecht's presentation.
You can listen yourself, of course, but here is a summary:
The first question is about BASF's search for alternative basic chemical production.
"We are not only looking at crackers but also syngas leading to olefins," he says. This would give BASF the flexibility to use oil, gas, coal and natural products - i.e. biomass - as raw materials.
The chairman and CEO talks about how the Engelhard acquisition was partly driven by how an increase in catalyst capabilities would give BASF more options on basic chemicals production.
"Catalysts are crucial for the future of the industry," says Hambrecht, adding that they will reduce energy barriers that have hithertoo blocked alternative routes to making olefins and other upstream chemicals.
And in a remarkably strong statement, he states: "This will be very substantial, it will be decisive."
A lot can happen between R&D and commercialisation, but should we read into this that BASF is set to make a breakthrough that will be challenge the dominance of the Middle East in feedstocks?
What's the timescale? "Certainly five years out," says Hambrecht.
A blink of an eye in the great scheme of this things.
But what will happen if the oil price collapses to this research project and others like it?
Back in the 1980s, before Japan's "Lost Decade" of stagnant growth, management gurus lined up to praise the country's collective spirit as the basis of a sustainable economic miracle.
Since then, of course, the West has been consistently espoused as the best.
And even the Japanese wish they could break free of their consensus shackles, according to this week's issue of The Economist -- hence, the huge popularity of management hero Kosaku Shima of conglomerate Hatsubishi Goya Holdings.
He thinks outside the box, acts decisely, is not scared of telling people what he thinks and has been successful even though he has always sat outside political factions within his company.
And in June, Shima (see picture above) truly broke the mould when he was promoted to shacho (president) of his company at the tender age of just 60 - very young by Japanese standards.
There is one slight problem: he is a manga or cartoon character.
"Shima is influential - business people want to be like him but can't," says Yuko Kawamoto, management professor at Waseda Uniiversity in Tokyo.
"Maybe there is hope for Japanese society. We want to change, but do not have the courage."
The grim reality for the average salaryman, according to The Economist, remains a life of drudgery and of stifled opinions because of the dreaded fear of causing a superior to lose face. As a result, bad decisions go unchallenged and become ingrained policy.
Japan's chemical companies have often broken the mould through innovative technologies - and were talkiing about and acting on energy efficiency long before the current oil and environmental crises.
Sumitomo Chemical is also about to start-up a huge petrochemical complex in Saudi Arabia - along with Saudi Aramco - and is talking about a major second wave of investment at the same site. This also involves breaking the mould as it's the first occasion that a Japanese chemicals company has invested on its own in a big overseas cracker project.
But the perception remains, fair or otherwise, that the chemicals industry could and should have undergone more restructuring.
Fair or unfair?
Anybody who has had the misfortune to have to listen to me ranting on about Peak Oil of late might have heard - if they managed to stay awake long enough - that I predicted crude could not fall below $100 a barrel because of the fundamentals.
A calmer, more measured and sensible reaction came later - that this might be good news for my battered, bruised and badly depleted shares, most of which are on Asian markets.
Weaker crude might also help us all keep our jobs. Falling oil prices are occurring as reports of project delays, or even cancellations, in the Middle East and China keep emerging - meaning that the chemicals industry might get some relief from the twin squeeze of higher feedstock costs and oversupply. I'll be dealing with these reports on this blog in the next few days.
"Here's some news for you - you're often wrong and so get used to the idea," said my wife. She's very direct, being Scottish.
But still - and here goes the rant again - I still feel that the long-term fundamentals are of a tight market as we accelerate towards Peak Oil, possibly by as early as the middle of the next decade.
Maybe a persistent bout of lower oil prices would be bad news as this would make us conserve less and lower investment in renewables (which, admittedly, are only ever likely to provide a small percentage of our total energy needs. Hence, we need to conserve!)
The cost of shipping a standard 40-foot container has tripled since 2000 and labour cost increases have risen by average of 19% per year in China compared with just 3% in the US.
The consultancy makes the point that you have to do very thorough input-by-input calculations for each product and grade of product before making any decisions. And, of course, you need some reliable forecasts of where the economics of offshoring versus onshoring are heading - including predictions on crude-oil prices. Predicting crude, as I discussed earlier on today, is where I fall short.
You also need to take a view on the direction of environmental legislation - i.e. will there by carbon taxes and/or cap and trade systems introduced globally that penalise producers for extended global supply chains?
If history is anything to go by, McKinsey has worked out that manufacturing a "midrange" product in Asia will cost you an extra $16 today compared with the US when all landed costs are included. In 2003, Asia had a $46 advantage.
Add to this the likelihood that more petrochemical feedstock will become available in the US thanks to declining gasoline demand and perhaps, as again I talked about last week, the industry in the states might be set for a revival. It has been comparatively higher feedstock costs and the drift of downstrean customers overseas that has caused so much damage to the US industry.
For anyone who subscribes to ICIS news, you might find this artice of interest. Allen Kirkley of Shell discusses some of the new emerging feedstock options and converging economics between the West and the Middle East.
A drowning man will grab hold of any floating debris - even a plastic bag made from standard-grade Chinese polyethylene (PE).
The president of Sinopec Corp, the Hong Kong-listed arm of the Chinese refining and petrochemical giant, was quoted in press reports as saying that projects that had already been postponed would be suspended indefinitely (taken as a face-saving euphemism for cancellations). He also reportedly said that the pace of other projects would be adjusted.
"Fantastic. At last we are seeing some commonsense," said a Singapore-based executive with a Western polylefins producer.
Sadly, though, only a few days later, Tianpu amplified his statement by saying that 2008 petrochemical expenditure would be cut by only $675m - amounting to much less than the cost of one cracker.
The excitement that greeted his first statement was the result of concerns over just how bad conditions could become over the next few years.
The hope was that a much bigger budget cut might take place - affecting the timing, or even the continued existence, of projects slated for commissioning in 2009 and beyond.
ICIS Plants & Projects estimates that 21 per cent of global ethylene capacity additions in 2008-12 will be accounted for by China.
The Middle East will be responsible for a further 36%, resulting in worldwide C2 capacity increasing to 156.3m tonne/year from 135.5m tonne/year.
China has every strategic reason to push ahead with more petrochemical capacity, even if growth looks precarious on the back of the likely frequent boom-and-bust cycles created by tight crude markets.
And we all know about the Middle East advantage, even if it might be eroding a little on tighter feedstock supply and higher capital costs.
"The knowledge society will strike back - eventually. Energy efficiency and renewable energy will be rewarding projects," says Norbert Walker, Chief Economist at Deutsche Bank in his Asia Trip Report 2008.
So if you are not in the Middle East and not in China, are not moving up the innovation curve or don't have good refinery-petrochemical integration (ideally, you will have a combination of all the above) you are in big trouble.
You're only option is to sell your business to some gullible fool during the next up cycle -but you'll have to be quick as the recovery is unlikely to last for long!
For the first time, quite probably, since the Chinese economy opened some producers are predicting that polyolefin demand growth could be flat or even negative this year. In the case of PE, reports are emerging of sales declines above 20% over the last two months.
This compares with 8 per cent growth for PP and 5-6% growth for PE in 2007.
This blog focuses on the long term and there is a long term danger here.
The depth of the economic problems in the West is the main cause of the fall in polyolefin volumes due to the the collapse of the re-export of finished goods.
Let's hope this only a temporary problem and the global recovery arrives fairly quickly. But it seems likely that we haven't even reached the bottom of the current crisis and there is a danger of a deep global recession, or even depression, lasting several years.
The fact that Chinese growth has taken such an historic blow from the collapse of finished-goods exports exposes the corporate flannel about tremendous domestic market growth as being exactly that - corporate flannel of the worst kind designed to hoodwink dumb investors and lazy journalists.
In the short term, as described, the re-export sector remains hugely important for the Chinese economy.
There is also a shift by the government away from an export and fixed asset investment-led growth model. This means a lot less growth from the re-export sector over the long term for anyone shipping basic commmodity chemicals to China.
Volatility in crude is a problem that might last for a while, given the fundamentals of tight supply and the potential for the re-emergence of strong demand growth.
In the case of polyolefins, this is leading to sudden surges in resin buying when converters think crude will continue to rise and running down of inventories when the reverse occurs.
This might, to some extent, have masked the depth of fundamental weaknesses in the market up until mid-June. If you recall, oil was on a bull run until then.
The last few days have, of course, seen crude enter one of its most volatile periods in history - making it even harder to read the direction of oil and therefore naphtha, olefins and polyolefins pricing.
Who'd want to be a purchasing manager for a plastic processing company in this current climate?
I am taking a well-earned break in Perth, Western Australia until early next week so this blog will be quiet until then.
And no, I am unlikely to find out anything interesting on feedstock issues surrounding the Australian cracker as I'll be too busy, hopefully, lying on the beach.
Yes, I know this blog has gone very quiet - but as the world has imploded, a few more pressing issues have come to the fore.
On a business trip last week the extent of the crisis became apparent when a Middle East producer told me that travel and entertainment budgets are being ferociously cut for 2009 (many companies are busy at the moment preparing their budgets for next year with deadlines for submission due n November).
Everyone asks "how bad is it going to get?" with the hope that someone will offer at least some degree of optimism that will - just for a few fleeting seconds perhaps - relieve the anxiety.
But despite yesterday's stock market bounce, the real economy seems likely to get much worse before it gets better, even if most of the bad news from the financial sector is out of the way.
The trouble is I keep hearing that much more bad news might yet emerge - for example, the enormous size of credit-default swap commitments.
The Middle East producers face:
*Much lower oil prices than just about anyone had forecast, meaning lower margins between their fixed feedstock prices costs current global petrochemical prices, which are set by the oil-based players
*Plants coming on stream in 2008-11 with far higher capital costs than during the last building spree. This is due to soaring raw material, equipment and labour costs and much more complicated project configurations due to diversification downstream away from basic ethylene derivatives
*The decimation of demand. Polyethylene and polypropylene demand could be zero or even negative in China this year. I talked to one industry source who also expects the same for polyester As recently as July, he was forecasting growth of 12% with the market expanding by 17.2% last year
How long will it be before the Middle East producers begin to cut capital expenditure programmes and how will this influence the fate of projects yet to reach the financing stage?
Of course, everything is relative and although the Middle East players may be earning far more thann they anticipated, they have huge cash reserves.
Wouldn't these reserves be better employed buying existing capacity rather than adding new plants?
There will surely be no shortage of suitors, especially those with high leverage who expanded through acquisitions at the wrong time.
Mr Obscenely Rich Got Out In Tiime Banker, please look into these eyes, see the pain from the last Great Depression and maybe you will give some of your obscenely huge bonus towards poverty relief.
And perhaps also you'll be willing to pay for all the counselling that the children of this new Great Depression will need when they grow up into adults. As a rich an educated breed, you should be aware that the first few years of a child's life, how secure and encouraged they feel, determines their entire future.
Anyway, see below for my take on the state of the crisis and its implication for chemicals, written for a good friend and contact.
Chemicals demand is being affected by frozen credit markets and the fall in export trade of finished goods to the West.
But as you can see from this article, the feedback effect on the consumer, and therefore, manufacturing companies, could get a great deal worse before it gets better. Bad corporate results caused the declines in stock markets yesterday (Wednesday 23 October) and as more consumer loans turn soar and unemployment rises globally, corporate earnings will deteriorate even further - at least for the 12 months, I think.
However, the chemicals industry will remain under severe strain for at least the next year, even if the credit crisis eases enabling letters of credit to be more easily obtained (a global shortage of LC's has left commodity shipments, including chemicals, stranded).
The reasons are:
1.) The export dependency of some economies. China's GDP growth will be around 9% this year compared with 11.9% last year, for example, largely due to the slowdown in export trade. Delegates at the APPEC conference in Singapore this week were talking about very quiet demand for fuel products and chemicals at a time when China should be ramping up manufacturing for exports to the West in time for Christmas. Economies such as Singapore are even more vulnerable
2.) The volatility in energy and chemicals pricing. You could probably produce a graph these days linking crude-oil price movements with the equity markets. So until everyone reaches a consensus that the bottom has been reached, we are going to see constant dramatic day-to-day fluctuations in equities and therefore crude. OPEC might cut production at its next meeting, but this will just mean the volatility is within a higher band ($70-90 a barrel is the prediction instead of the current $60-80 a barrel. You cannot rule out the possibility, even if OPEC does make cuts, of a lower range than today - $40-60 a barrel. This would indicate that the real economy has become a great deal worse). Volatility creates the danger of being caught on the wrong side of the deal for sellers, buyers and traders (e.g. high cost raw materials purchased one day that cannot be passed on in higher-cost finished product because of a sudden fall in crude). For resin buying patterns, the uncertainty over the direction of crude is a crucial factor - in a bull market they stock up and in a bear market they de-stock. Crude is in no-man's land and so, combined with LC issues, worries about the overall economy and cancelled orders from customers buyers are remaining firmly on the sidelines.
3.) Last but certainly not least, is the huge wave of new capacity. Polypropylene was supposed to lead the downturn this year but didn't because of start-up delays. Equipment-delivery problems are being blamed, but market reasons seem likely to be another factor. The problem is that with markets showing no signs of turning, producers with heavy debt commitments can only hold back for so long and so will have to commission capacity soon - even if at operating rates lower than planned. For the Middle East producers, now that there is no immediate sign of markets turning, start-ups might as well take place because at the very least on a cash-cost basis contributions will still be achieved on a cash-cost basis (because of low and fixed feedstock costs), just about no matter how low crude goes - and with it petrochemical pricing.
Conditions could get dramatically worse very quickly. One factor not included above is the run on Asian currencies, and possibly even some banking systems, because of the dollar ironically being used as a "safe haven investment".
In the medium term, (the next 12-18 months) the only upside I can see is short-term recoveries in chemicals buying on signs that government interventions are working (with more likely to happen). But these recoveries, as I said, could be short-lived as more evidence emerges of the delayed effect on the real economy (e.g. further falls in corporate earnings).
To be frank, all bets are off on demand-growth forecasts - (so I am sorry this is not going to help you much in coming up with firm numbers!).
Everyone has been wrong and so it's best to err on the side of extreme caution and with a bit of luck we might be pleasantly surprised.
To give you an example of how quickly things can change, a Chinese PTA producer had been forecasting overall polyester growth in China at 12% are recently as July; now it thinks the market will be lucky to get away with zero.
I'd suggest looking at your forecast numbers, going back to those who have supplied the numbers, and asking them if these take into account their worst-case scenarios. Any forecast that predates September cannot be trusted at all.
Hope this helps!
Chemicals demand still exists, believe it or not, but the new economic order -one that could last as long as six years - requires new approaches.
Purchasing managers need to start acting locally as well as globally.
Who would want to be a financial controller if you work for a big company or the jack-of-all-trades managing directors of a small or medium-sized enterprise? Every purchase order and every invoice, literally every single transaction, needs to be reviewed by whoever understands overall credit availability.
One small step out of line, one tiny error by an over-enthusiastic purchasing manager or sales executive and bang, you've exceeded your credit limit. Even if you have a sound business model, your bank might have no option but to say "sorry, but that's it - we are withdrawing all your credit". But is there really such a thing as a sound business model these days?
This new economic order could have major implications for how chemical pricing behaves. Old understandings on how to read the direction of markets might need to be revised.
"There have always been two kinds of demand in the confectionary industry - long and short term," said a plastics-wrapping manufacturer on the sidelines of the ICIS World Polymers Conference, which took place in Bangkok, Thailand, earlier this week.
For the next few paragraphs, the confectionary industry and upstream to polyolefins will be used as an example of how purchasing managers need to act differently. The same rules could also apply to other product chains.
"Nothing has changed when it comes to your big 1b bar of chocolates. You can still ship large volumes of packaging material economically from, say, China to the US as these slow-moving items will sit on the shelf for months," the manufacturer added.
But for your fast-moving confectionary - for example, discounted big bags of miniature chocolate bars placed in toddler-reach on shelves near supermarket checkouts - shipping wrapping material from China no longer makes sense.
"A big percentage of a confectionary manufacturers' revenue comes from fast-moving and short-term promotional offers. The trouble is that these promotional offers are no longer as fast-moving because consumers are cutting back on spending."
Much smaller quantities of wrapping material are needed and so for logistics reasons, buying locally adds up. If you make chocolate in a developed markets, these small suppliers might have previously been ruled out because of their high labour costs and low capacity.
"It's not economic to half-fill a container and ship it all the way from China. Local suppliers can also much more quickly respond to small day-by-day changes in demand," the manufacturer added.
There are other reasons to buy in small quantities (and therefore locally).
Oil prices move in an almost perfect relationship with equity markets these days. Stock markets rebound as investors clutch on to some fleeting good news and crude rallies by a few dollars a barrel, only for the reverse to occur the following day.
So nobody at any point in any product chain wants to sell or buy big in case they end up on the wrong side of a shift in highly erratic energy prices. For example, why buy a big quantity of resin today only to see the WTI price tumble the next?
Your equally hard-pressed customers, even the ones you've worked with for years, will not be able to do you any favours if you plead that you made a mistake on crude.
Shortage of credit is a further reason to keep orders at a minimum.
"My MD is signing off every purchase order. You need to make your credit stretch. The other problem is that you need to very carefully monitor the credit situation of your suppliers and your customers. Make sure you have enough of each in every region where you operate in case some of them go bust," said the manufacturer.
Buying locally also extends up this chain to polyolefins.
"Polyethylene (PE) and polypropylene (PP) exports from the States have declined because of the weaker dollar and the collapse in pricing that closed-off arbitrage," said a polyolefins producer on the sidelines of the same conference.
"Another factor is that end-users prefer to buy local because retailers are placing smaller orders."
A further reason to keep inventories low is the huge economic uncertainty out there. Nobody knows how deep this recession will be and how long-lasting.
"We keep looking further and further back into history for parallels," said Matthew Sullivan, Director of Energy Structuring and Origination for Standard Chartered Bank, in a speech during the conference.
First it was the dot-com bubble crash of 2001, then the Asian financial crisis and next the global economy downturn of 1980-82. Now all the talk is of the Great Depression.
"Vehicle sales in the US, on a population-adjusted basis, have fallen to their lowest level since World War II," he added.
"I hate to give you the bad news, but I think it could take 5-6 years to get through this. Most of the iceberg is still beneath the water."
The dreaded consumer confidence feedback mechanism may have only just begun.
Banks might, theoretically, be in a better position to lend thanks to all the rescue packages - but at ground level in the chemicals industry trade finance remains desperately hard to obtain.
Inventory write downs are huge because of raw materials bought before the crash in demand and pricing. This will affect financial results in Q1 next year.
This will in turn lead to more job cuts in chemical and other companies. When you are worried about losing your job, if you haven't lost is already, you don't spend; and as Japan found out during the 1990s, consumers are even less likely to spend if they think that prices will be lower tomorrow.
As consumers make even deeper cuts into their spending, this leads to even worse corporate results, more business failures and more job losses and so on and so on....
"People are reviewing their retirement plans (because of the collapse in equity markets). They feel a lot poorer, which is another disincentive to spend - and they will have to add 5-6 years to their working horizons," Sullivan added.
The next big banking scare just around the corner might be further write downs on credit-card losses
In the midst of economic calamity and the resulting shift in buying patterns, what does this mean for how chemical pricing will behave?
Chinese buyers used to periodically withdraw from markets en-masse, in the case of polyolefins.
This would lead to big price declines because the volume of lost trade was big.
The guessing game would then begin over inventory levels and demand - meaning when they would need to re-stock.
When they did return, of course, volumes on the positive side were equally big, resulting in big price rallies.
Bu increments are these days as low as $20 or $30 a tonne a time because of small-volume sales. Prices then quickly fall back.
When prices retreat, even more ground can be lost than had been gained because of worsening economic news.
Nobody can be sure when chemical-pricing markets will bottom out for good in this current cycle - just as nobody has any clue when the economic recovery will arrive.
Yes, that's my target for the truck above, which is actually for 4-11 year olds and my son is only 22 months - but what the hell, don't we all deserve a second or, in my case probably a tenth or perpetual, childhood? And I am trying to teach him the value of recycling (the above picture is of a recycling truck) - even more bad news for the conventional chemicals industry.
The truck was S$249 (Singapore dollars) two weeks ago, has fallen to S$199 and surely has much further to go as the deflationary spiral begins to bite. My target is S$100, provided, of course, it hits this level before Santa sets off with his reindeer and his elves etc (poor old reindeer - less carrots this year, and I imagine Santa will be laying off some of his little helpers and moving those he retains to flexible short-term contracts with less healthcare and other benefits. Do the elves have a union, though? Not sure...answers, please).
But the serious point is that the deflationary vicious spiral - delayed purchases and higher savings rates leading to worsening corporate results, more unemployment and further delayed purchases - may have only just begun.
I remember reading an article in The Economist a few months ago which concluded that the US would not suffer a Japan-style decade-long slump because it had inflation. Not now.
Down every product chain, in the case of lego from crude oil to the plastic (acrylonitrile butadiene styrene) to the finished goods, inventory has been manufactured using high- cost raw materials. Remember when crude was above US$100/bbl? It seems almost a distant memory.
So this means everyone - from the retailer in Singapore selling my boy's truck right up to the ABS producer and the cracker, aromatics and refinery operators - will have to endure lots of hair cuts in this first circle of the deflationay spiral.
Volker Trautz of LyondellBasell is right to say that destocking of this nature is a big cause of weak demand at the moment - and that the true nature of underlying demand might not emerge until Q1 next year (see below for interview).
But by the time the first quarter comes around, we could be into the second loop of a deflationary spiral that might push is into something as bad as the Great Depression, or a global version of Japan's long and painful economic paralysis.
What's your strategy to survive this?
18 November 2008 17:45 [Source: ICIS news]
HOUSTON (ICIS news)--Petrochemical customers have cut purchases as they expect prices to continue falling - a trend that has masked the true level of demand during the global economic slowdown, the CEO of LyondellBasell said on Tuesday.
Starting in the third quarter, customers reduced purchases on the expectations that prices would fall in upcoming weeks, said Volker Trautz, LyondellBasell CEO, during a conference call.
Such destocking accelerated in the fourth quarter, Trautz said.
At the same time, demand has dropped because of the global economic slowdown, he said. "The economy has clearly slowed."
LyondellBasell will not have a clear picture of underlying demand until the first quarter, he said.
As it is, LyondellBasell has idled an olefins plant and reduced operating rates as a result of the slowdown, Trautz said. The company has also shut down polymer plants.
The company has reduced its 2009 capital expenditures programme to $800m (€632m), the minimum deemed necessary to meet safety and environmental standards, Trautz said. LyondellBasell has also adopted a cost-cutting programme.
In the upcoming months, LyondellBasell may consider selling off noncore assets, such as real estate, the company said.
In all, the company should generate cash in the fourth quarter, which should allow it to reduce its net debt, Trautz said.
In other news, LyondellBasell expects to remain in compliance with its covenants in the fourth quarter and in 2009, the company said.
($1 = €0.79)
By: Al Greenwood
+1 713 525 2653
For many years, many an Asian country has wanted a petrochemical industry as much as car or a textile industry.
Some of those countries have pursued investment even though their competitive advantages in petrochemicals have been somewhat dubious.
Singapore can argue that - because of its very efficient ports and corrupt-free politics - it is a good location for petrochemicals.
Shared and efficient utilities and feedstock advantages tied to mixed-feed cracker technologies by ExxonMobil, and soon Shell Chemicals, add to the argument. In the past, the case has been won by very strong profitability.
But what kind of growth will lift the West out of recession? Will it be the new-energy New Deal proposed by Obama?
Is this the only kind of growth possible, given that US and the UK consumers are leveraged up to their eyeballs and bankers will remain exceptionally cautious in lending?
In other words, no matter how many tax breaks are thrown at consumers, they might well be unable or unwilling to rush out and buy yet more junk that they do not need - made from petrochemicals shipped from Singapore to China to be manufactured into finished goods for re-export to the West.
The other danger, if the International Energy Authority is right, is that we run the risk of another crude-oil price surge if growth in the conventional economy returns to previous levels.
It seems unlikely, therefore, that we will see further crackers in the foreseeable future (beyond those already under construction) in an Asian country without a home market for petrochemicals big enough to result in only marginal export volumes.
Paul Hodges, my good friend and colleague in his excellent Chemicals & The Economy blog describes the "Minsky moment" for the global economy, when deleveraging accelerates. Hyman Minsky, the famous old economist, described how long periods of stability were followed exactly what we were seeing at the moment.
One former investment banker once said of my articles, "if you predict the end of the world for long enough, it will eventually happen".
In a petrochemicals context, though, I've been worried that the more that things went up - including pricing and a flood of investment predicated on a very simplistic view of growth - the greater the fall. At last May's APIC, somebody very senior in the industry was virtually saying that down cycles were no more. His company is now sitting on a huge inventory loss and depressed local and export demand as it prepares to bring on stream a huge slug of new capacity.
Let's hope that the same irrational idiocy doesn't take hold of the industry ever again.
Is my colleague in London a cat lover? I am, but did not take offence at the analogy.
If I knew when chemicals prices were going to rebound, I would tell you - but only for some hefty fees.
By Nigel Davis
LONDON (ICIS news)--Beware the 'dead cat bounce'. Global chemical market intelligence service ICIS pricing editors are seeing some spot prices in Asia moving up from recent lows although contract prices remain severely depressed.
Are these the first signs that feedstock-to-product price differentials are recovering?
A dead cat bounce is a "figurative term used by traders in the finance industry to describe a pattern wherein a spectacular decline in the price of a stock is immediately followed by a moderate and temporary rise before resuming its downward movement, with the connotation that the rise was not an indication of improving circumstances in the fundamentals in the stock," according to Wickipedia. It is derived from the notion that "even a dead cat will bounce if it falls from a great height".
As with the world's stock markets, it is too early to call the upturn with anything approaching a degree of certainty. Chemical prices globally are falling because of much weakened feedstock costs.
Oil prices this week have dipped below $50/bbl which is hardly a position from which chemicals prices might be expected to recover.
But looking beyond that, it is the global demand slowdown that is giving the worlds' chemicals markets the jitters.
Industry economists work with real data and they have little visibility. Their forecasts make salutary reading.
The American Chemistry Council's (ACC's) chief economist, Kevin Swift, for instance this week told the New York Society of Security Analysts (NYSSA) that chemicals production in the US could fall by as much as 5.7% next year. This is a forecast for the sector excluding pharmaceuticals.
In the ACC's 2008-year end analysis and outlook Swift notes that forecasting now involves considerable uncertainty.
The general consensus, however, is that recession is spreading across the globe and this is affecting the business of chemistry worldwide.
"Global business of chemistry growth has essentially stalled since earlier in the year, with outright decline in the developed nations and slowing growth in most developing nations," the ACC's report says.
"As a result, global output will moderate significantly in 2008 and will further slow in 2009 before a recovery emerges in 2010. For the business of chemistry in the US the recession will adversely affect demand into 2009, resulting in lower production volumes."
Other sector economists point to slowed growth in the US and a sharp slowdown in Europe, Japan and elsewhere. The outlook is hardly bright, whichever way you look at it.
Analysts have continued to talk about the lack of visibility for the sector which is battling the demand slowdown, or rather consumer disinterest, against the backdrop of lower feedstock and product prices.
Demand has all but ground to a halt in December across great swathes of the sector. The (multi) million dollar question is when will it return.
Producers widely believe that demand will return once price/feedstock cost ratios have stabilised. There will be a new floor from which producer might expect to see greater interest in their products and from which they could hope to drive prices higher.
But we have yet to find the floor in relation to feedstock costs. And the chemical industry's customers themselves are not exactly overwhelmed with new orders.
The situation could change but is unlikely to do so rapidly and certainly not before the start of the New Year.
Swift suggests that the indicators for the US economy will become more negative as consumers retrench, sales fall, inventories rise, and production falls, which is hardly good news for chemicals.
A similar patter of reduced payrolls, mderating incomes and a "viscoious self-reionforcing cycle" is seen across other major global economies.
It pays to look forward, certainly, but it is too early yet to be overly optimistic. "Things will get worse before they get better," Swift says in his latest ACC report, "but eventually they will get better when confidence returns".
As if you needed to reminded, be aware of the conmen who might try and sell you something you don't need in 2009 as everyone tries to find a way through the crisis.
There could be more contradictory methods to manage volatility and financial problems out there than unsold tonnes of benzene.
And perhaps something akin to a Ponzi - or maybe what should from now on be called a Madoff Scheme - will emerge.
I had to laugh at reading of the joke prospectus sent out to London investors during the 1820s stock market boom, involving a plan to rescue gold and other valuables left at the bottom of the Red Sea by the Egyptians.
It's all about hoarding cash over the next few years, but survival might not even be possible for even the best managed of companies if Martin Wolf's worst-case scenario comes true. The Financial Times columnist writes of the unravelling of globalisation into the protectionism that characterised the Great Depression years if the Obama stimulus package fails.
There is a good chance it will fail, fears the Federal Reserve in the notes released from its December meeting.
At a chemicals company level, leverage is obviously out and the private equity model thoroughly discredited - perhaps for good.
You can argue that the biggest mistake of the biggest casualty so far, LyondellBasell, was timing as the acquisition of Lyondell Chemicals took place in December 2007. Asset prices were then at their peak with many believing that the boom would continue forever, despite the already rapidly deflating US housing bubble. As recently as March last year, The Economist was talking of Asia's decoupling as the potential saviour of the global economy.
But leverage is itself the problem because of how the extraordinary multiples over tangibe, realisable assets were generated through the shadow banking system, creating the climate for deals such as the Basell takeover of Lyondell to occur. It is this badly regulated, free-for-all system that's brought the global economy down.
Maybe we will never again see the break up chemical companies for sale to private, or public, companies burdened by enormous amounts of debt.
Perhaps the well-integrated chemicals company with sufficient diversification to provide compensating cash flows when a particular subsidiary is struggling is the way forward. Is this yet another case of back to the future?
In an even better position are the state-owned giants in the Middle East and China. They are in the enviable position of cash in hand, and government ownership structures that guarantee funding if that cash was to ever run scarce. These are the only companies I can see able to make the acquisitions the industry now needs.
At the moment, a shell-shocked chemicals industry is still recovering from the impact of destocking following the huge inventory write downs in Q4.
The next step will be to measure the state of genuine, end-user demand and how this compares with the fantastic growth we saw in 2003 right through until the end of H1 2008.
Comparisons will inevitably look bad, even if, as some hope, recovery arrives in the second half of this year. This is bound to have a pyschologically dampening effect on markets.
Plus, chemicals and plastics markets are about to be roiled by large amounts of new capacity.
And so cost will remain King in the second of 2009, and perhaps for several more years.
The rise of private equity in chemicals, which I examined in a previous post, resulted in claims that the sector's more efficient management techniques would result in money being made "even at the bottom of the cycle".
But key to survival may no be longer innovative financial engineering and cutting costs social and bureaucracy costs incurred by previously much bigger, listed companies.
It might instead be all about chemical engineers getting every last cent of value out of production processes through optimising "every pipe and every valve," says my colleague Nigel Davis - editor of the Insight section of ICIS news.
It will be fascinating to watch how this plays out - and what becomes of chief financial officers.
It's easy to take pot shots at the boss, and everyone of course feels they have been underpromoted and could do the job better themselves. Andrew Liveris is just the latest in a long line of CEOs to experience both envy - and at the moment perhaps a little pleasure at their failures. The gloating reaches extroardinary heights in the comments posted on this Wall Street Journal blog entry.
Sure, he should have seen the crisis coming and not agreed to pay such a high price for Rohm & Haas.
And sure, a man being paid such massive sums of money perhaps should have had sources inside Kuwait who would have forewarned him that the commodities merger was going to collapse.
Perhaps we should also expect him to secure world peace, reverse global warming and prevent Manchester Utd from ever winning a Premiership championship again.
Herein begins an occasional series where I offer advice on how to make a little cash.
By the way, is it me or do I get the sense that a lot companies haven't woken up to the severity of the crisis we are in? A recovery this, and I think quite probably next year, is out of the question. We need to find new sources of growth to replace the US consumer who isn't going to start spending money again in the same volumes as before for a good many years.
Anyway, here is my handy tip: purely by coincidence discover one day that quite fortuitously you have priced your local product so high - way above international levels - that this has attracted competitively priced imports. Take advantage of this wonderful, joyouous happenstance, this glorious instance of serendipity and lodge an antidumping petition.
I only feel slightly smug because it seems obvious that naphtha was a big driver - and that markets were being talked up by producers desperate to recover monumental Q4 losses.
There will be lots more mini bubbles like this before the crisis is over.
In the depths of the Asian financial crisis an American industry executive said, "I don't know why Korea has a petrochemical industry. It should be just shut down."
There were also widespread complaints over "soft" government-directed loans that supported Asian companies through the difficult times of 1997-98.
How the tables have turned, according to another senior executive of a Western company who spoke recently about the current crisis.
"The bedrock of the US economy has been oil, natural gas, refining and petrochemicals," he said.
"A lot of industry people think that if you allow plastics and petrochemicals to go you might as well also let the big automakers collapse."
So could these attitudes be sufficient to win government support for some of the distressed chemicals companies in the US?
Will this impede restructuring that should take in place in order to make assets and businesses globally efficient?
Or will global efficiency matter as much as it used to if trade barriers rise - and if the need to buy locally to preserve cash becomes an entrenched way of doing business?
High leverage is out - surely for many years. When new projects are again being seriously assessed, more equity and less debt will be needed.
What will this mean for the private equity model? Some argue that low asset valuations will lead to a resurgence of private equity. But access to complicated lending markets will likely no longer be an option as these markets have virtually ceased to exist.
The smart chief financial officer with good connections to the finance industry might become of less value than the day-to-day operations managers - including clever chemicals engineers who can maximise the efficient running of plants.
"We also need new ways of assessing demand growth. We will continue to confront the problem of timing capacity additions, but we have to adopt fresh thinking, including a wider range of scenarios to stress-test our assumptions," the second executive added.
"These approaches should involve methods of more effectively anticipating macro-economic shocks."
These are the big issues you can ruminate over while enjoying a beer in the evening. More pressing, though, is how to get through this crisis.
Speciality chemicals players and other end-users of commodity chemicals are in strong purchasing positions after years of being squeezed by tight upstream supply and demand balances.
They are beefing up their business analyst teams to more effectively monitor markets, according to several sources in downstream companies.
Senior executives are also being asked to monitor pricing markets in an effort to spot short-term money-saving opportunities.
All purchasing decisions are going through top people as part of the struggle to preserve credit.
So if you are selling basic chemicals you too need to beef up your business analysis capabilities in order to counter much better customer intelligence. This is no easy task with budgets under so much pressure.
Your sales and marketing teams will also need to have exceptionally convincing stories to tell - as they could be talking to the very-wise who have heard it all before.
Scrambling for every extra dollar will be crucial for the highly leveraged commodity chemicals companies as they struggle to stave-off debt defaults.
This scramble for cash is not being helped by a faltering petrochemical-price recovery. Ethylene, propylene and aromatics prices were on the retreat in Asia during the week ending 20 February, according to ICIS pricing.
Those with new plants in the Middle East will not have any problems in servicing debt. "Even if ethylene fell to $200/tonne they would still make money," said a consultant.
But the Middle East players are facing tough times as new plants on a stand-alone basis will be generating a great deal less earnings than had been forecast.
Higher capital costs and different feedstock mixes were always going to make this round of building less competitive than the last. A further dent to profitability is the collapse in oil prices, eroding the advantage over naphtha-based producers.
The western petrochemicals-only players face an added problem.
Those back-integrated to refiners might have to repeatedly sell petrochemical and polymer inventories at very competitive prices in order to keep big complexes balanced.
The greater your integration the more chances you have of generating decent overall returns.
A bigger percentage of gasoline and diesel consumption is less discretionary than many of the petrochemicals that go into durable goods - hence, one of the advantages of also being in the refinery business.
Lower gasoline prices have also prompted a slight demand recovery in developed markets. Asian demand growth is also likely to remain positive this year.
Distressed sales of petrochemicals and plastics have always happened but could now occur more frequently because of the difficulty in reading markets.
Preserving value in innovation is a further challenge for the solution providers.
"It's about explaining that cheap doesn't always equal value for money. One possibility is that there could be a flight to quality if we can make the right case," the second executive added.
But will premium grades always carry the premiums needed to keep some of the heavy betters on innovation going?
A lot of sophisticated chemicals and polymers - supported by value-added customer service - go into end-use sectors such as electronics and autos.
Here is another big question to ponder over a beer: Will rising protectionism make it easier for Western chemical producers to preserve their share of domestic markets?
The downside is that trade barriers, whether formal or informal, could make it harder to further outsource - and to move whole operations to emerging markets - in the battle to reduce costs and capitalise on stronger growth.
It's incredibly tough out there for those trying to hit sales targets - even if they are being constantly reduced to meet the worsening business environment.
The danger is that if senior people spend too much time focusing on sales and cost targets, strategies to deal with the big issues will never be drawn up or put to adequate test.
This could result in gains from smart short-term management being lost during the next cycle.
Is it just me or is sentiment in chemicals markets even more erratic than usual? Only two weeks ago people were talking about an imminent supply glut in polypropylene, but now the talk is of tightness and stable prices.
Perhaps those with more time on their hands have more time to talk.
This lack of visibility must be making planning very difficult indeed.
There are reports, confirmed by one consultant, of a flood of US polyolefin exports from the US to Asia, China in particular.
Staggering polyolefin import figures for China in January-February show big percentage increases both year-on-year and month-on-month. The March data is due out shortly.
The big worry remains how much of this is going into inventories because of the easy credit in China, which, according to some unconfirmed reports will not last much longer. Others, however, predict that the lending binge will support China's economy for the rest of this year.
Alot of the froth in the China market could also be the result of a big up-tick in activity on the Dalian Commodity Exchange.
But to go back to the main point of this blog entry, there are predictions that US ethane versus naphtha costs could remain very competitive for the next two years because of the fall in natural-gas demand.
And with Brazil also rumoured to be an increasingly important polyolefin exporter to Asia, US/Americas-Asia trade flows may be about to enjoy one last hurrah before the Middle East and growing China self-sufficiency slam the door shut - perhaps for good.
Another thought: Could the recent apparent rise in US-Asia exports be the result of producers making hay while an anaemic sun shines (comparatively higher prices in Asia compared with the West) ahead of a possible General Motors bankruptcy?
That's the beauty of blogging - you can raise the questions and ask others to provide the answers!
Petrochemical markets, as is the case with stock markets, are I believe in the midst of a bear-market rally.
As chemicals consultant Paul Hodges predicted on his blog last year, restocking in Q1 was inevitable after the great inventory run-down of the fourth quarter.
Paul has consistently made the right calls on the economic crisis and on its implications for the chemicals industry. His accuracy in predicting the major events - from crude-oil pricing to the collapse of Bear Stearns - can be demonstrated by visiting his blog.
Petrochemicals benefited from the Q1 restocking, of course.
We have also seen an across-the-board price rally sustained by a lot of speculation in China made possible by ample availability of credit. The question now is whether credit will be restricted as China becomes concerned over inflation.
Petrochemicals pricing has also been supported by stronger naphtha due to firmer crude, first of all because of refinery rate cuts when the Q4 crisis occurred and more latterly a huge programme of refinery turnarounds in Asia. According to oil and gas consultancy Purvin & Gertz, this turnaround programme is due to come to an end around June.
Naphtha supply will increase in H2 on more exports from India, higher production from one condensate splitter in the Middle East and the start-up of another splitter. Supply could increase in Asia by 20-30%.
I think crude is likely to trade around the $50/bbl mark for the rest of this year so this will set a floor for liquid-feedstock costs.
However,I don't believe that petrochemical producers will be able to use tight naphtha as a justification for maintaining current price levels because of the increased supply.
Petrochemicals supply will also lengthen when Asias' big cracker turnaround season ends after June.
Middle East project delays are likely to continue, but some further extra supply in polyolefins, MEG, aromatics and propylene oxide (PetroRabigh is in the process of starting up the region's first PO plant) can be expected in H2.
The second half of the year could also see the start-up of lots of capacity in China. But how much volume actually hits the markets will have to be closely tracked.
Demand will be better this year than in 2008, but hey, so what?
Last year was exceptional bad because of the destocking, and all the economic uncertainties will not be compensated for by the boost from government stimulus packages.
So, in short, expect feedstock-price support to weaken and for petrochemical supply to lengthen in a persistently weak demand-growth environment.
The big unanswered question is to what extent the recent price prices were also the result of speculation in China. In methanol, an incredible two-thirds of Q1 imports were for speculation on futures markets.
As Paul again points out on his blog, the volume of contracts being traded on the Dalian Commodity Exchange is nothing short of staggering (an average of 1Om tonnes a day during the first quarter!).
Has this contributed to LLDPE prices trading above LDPE over the last few weeks for the first time in two years?
How much of the chemicals and polymers that have been imported into China recently, or purchased locally, and are being held in inventory for speculation purposes? To what extent has this speculation been made easier by increased credit?
With as many as 30m migrant workers laid off in China and export-focused factories operating at only 50% of capacity, how can all this increased chemicals trade be justified by an improvement in the final demand for finished goods?
China's economic stimulus package is kicking in. Over the last few days I hear of improved sentiment in China that the worst might be over.
But given that 10-30% of China's economy (depending on who you believe) is dependent on exports, it would take a heck of an effective stimulus package to boost domestic growth sufficiently to replace all the lost export trade in the second half of this year.
We've also picked up anecdotal reports that factories are being kept running by soft loans from banks for social stability reasons.
It's unlikely that the total extra production will replace all the volumes lost through factory closures.
But at the end of certain product chains you could see China exporting deflation in H2 to relieve inventory - another reason to believe that chemicals pricing will decline in the second half.
However, it might not be in China's interests to flood oveseas markets with goods at bargain-basement prices if this triggers international tensions and a further rise in protectionism.
Overseas chemicals players seem to have benefited from the relative strength of China's market with volumes of benzene and polystyrene, for exampe, being shipped from Europe.
Large increases in polyolefin shipments from the US to China are also being reported, in the case of PE the result perhaps of comparatively cheaper ethane versus naphtha.
The word on the street, from our price-reporting team, is that nobody can really say for certain whether the recent price rises are the result of improved demand or speculation.
But add all the above factors together and it seems a sharp correction from June onwards remains very likely.
And the more uncertain that price direction remains the closer the correlation might be between oil and naphtha and chemicals pricing on a daily, weekly or perhaps even a longer-term basis.
In the absence of clear direction, crude and equities might end up as the only guides available (or perhaps chemicals might even move in the opposite direction to equities in China as a lot of traders traditionally move their money between the two - and also property - depending on where they think the next gains can be made).
For the traders in China and those who know know how to play the domestic markets extremely well, it's also a question of maximising returns from micro-price movements.
On a weekly basis, one trader estimates that domestic polyolefin prices have fluctuated by $50-100/tonne in 2009 compared with $40-50/tonne in 2007. Last year can be discounted as an exceptional year because of the inventory building and the H2 collapse so, hence the comparison with 2007.
The Dalian exchange must also be adding to this volatility.
Bear-market rallies are better than no rallies at all, of course, and we could several more rises and sudden dips in chemicals pricing before this crisis is over.
To keep you updated on what we believe is happening in petrochemicals, here are some important recent trends:
*Futures markets in China are playing an increasingly important role in influencing pricing in polyolefins, methanol and PTA. Trading volume on the Dalian Commodity Exchange (watch out for Focus piece due out on ICIS today) for LLDPE has hugely increased this year. Traders are playing off micro movements in pricing, and it seems as if all the contradictory government signals on the Chinese economy could be affecting volatility. It would be interesting to also check the correlation between other futures exchanges, local stock markets and the DCE
*There's lots of anecdotal evidence of higher trader physical inventories - the result of easy liquidity
*China polyolefin prices have, a result, of all the above, been higher than in the West. This has attracted increased imports (note the Jan-Feb trade figures). US ethane-based PE production is very competitive because of low natural gas prices relative to naphtha. This is forecast to remain so for the next 1-2 years
*In short, the China market across several chemicals and polymers has become even more speculative than usual
*This might not be true, but watch ICIS to see if rumours have been confirmed of a softening in pricing this week. This would be ahead of the fundamentals that pointed to a correction after June
*This could be followed by a broader fall in crude, equites and global chemicals prices.
*OECD and IEA latest figures point to even higher crude stocks and there are reports of land-based storage being so full that newly commissioned supertankers are being used for storage. The financial speculators seem to be keeping crude at around $50/bbl on the belief that the global economic recovery will arrive by Q2/Q3
Good news, bad or indifferent? It was hard to gauge a clear picture from the Q1 macroeconomic numbers for China.
While retail sales grew at 14.7% in March compared with 11.5% in February, exports fell 20% during the first quarter.
GDP (gross domestic product) growth was 6.1% for the whole quarter, less than half of the pace at which the economy was expanding in md-2007.
Prime Minister Wen Jiabao has warned against "blind optimism" over the speed of the recovery, according to the New York Times. He cited weak overseas demand, overcapacity in some industriess, job losses and low investment in the private sector as the reasons why the foundations for recovery were not solid.
Export trade won't recover until the Western consumer starts spending again close to pre-crisis levels. Without such spending it might be reasonable to assume that China will struggle to post any further years of double-digit growth.
Overcapacity in some industries includes petrochemicals, although markets have been kept tight temporarily for reasons we've already covered in this blog.
China's petrochemical self-sufficiency ambitions could force all but the Middle East and a few other low cost producers out of being able to export some products to China.
I noticed in this Economist article that industrial production was sharply up in March by 8.3% and I read elsewhere that factory gate prices slipped by 6% - again in March - from 4.5% the previous month.
I've picked up anecdotal reports - again mentioned earlier on this blog - that factories are running hard in the textiles and garments sector to keep people in jobs, aided up soft banks. This conjures up an image of rows of warehouses stacked high with shirts that nobody wants to buy.
Is there a danger that in H2 China will export deflation to relieve some of its finished-goods inventory pressures? If so, what would this mean for the business of chemicals?
A sure way of telling might be a survey of purchasing managers in the West, asking whether they have been offered unusually large quantities of very cheap Chinese goods.
Jun Ma, Deutsche Bank's Chief Economist for Greater China issued a note this morning about the possibility of restrictions on the growth in loans because of poor lending practices.
This followed a warning against credit risks by Liu Mingkang, chairman of the China Banking Regulatory Commission, which this Wall Street Journal article has also picked up.
There are widespread anecdotal reports of commodity chemicals prices being over-inflated because easy lending has made it easier to speculate.
This speculation is across chemicals and polymers, futures exchanges for chemicals and polymers such as the Dalian Commodity Exchange and prroperty and stock markets. The same trader can often be dabbling in all the above.
One of my good contacts and friends had a "Joe Kennedy" moment last week (this refers to the famous story where the father of John F Kennedy was advised to invest in stocks by a shoe shine boy. He promptly went out and sold his shares just in time to avoid the Wall Street Crash).
The trader's moment came when he was asked by a Bangladeshi customer for ten full container loads of polyethylene (PE).
"I knew something was very wrong because there is no way demand in Bangladesh would justify this size of shipment. It was obvious this was for speculation," he said.
This followed a call from a Chinese chemicals trader who had never traded in polyolefins before asking for a cargo on behalf of a friend of a friend. "It was obvious he knew nothing about melt indices, the product or its applications. I could hear the sound of the herd stampeding towards the edge of the cliff."
So the trader liquidated all his positions late last week ahead of what he thought would be sharp price falls in polyolefins in China. It will be interesting to see if he was right.
In the longer term, as the Economist article also points out, better infrastructure - a major feature of the stimulus package - will help boost domestic growth and reduce reliance on exports.
If the government also manages to introduce a good nationwide health and social security system, domestic growth could really accelerate. I would bet that China has a much better chance of success than the US.
But China is China and if there is a way of making money out of a crisis, the famously savvy Chinese traders will find a way.
The danger is that this sends misleading signals about the true state of demand to outsiders - and at the moment, we are all desperate for any bit of good news. Has this made us a little more gullible than normal?
Speculative bubbles in property and construction - brought to an end by credit restrictions- was the start of the country's economic decline, The Economist adds.
Government policy was wrong.
If factories at the end of some chemical product chains are being kept running at high operating rates for social rather than demand reasons, this could turn out to be another flawed policy.
It would be nice to start the weekend with a little cheer, but I'm afraid no amount of gormless optimism would work.
DuPont, as you can see from this excellent piece from my colleague Nigel Davis at ICIS, has revised its forecast for 2009 global growth down to minus 2.5% from minus 0.6%.
Every chemicals end-use segment you can think off from automobiles to construction to electronics looks a lot weaker than in H1 2008.
We need a new way of thinking to get through this, but as I head for a weekend with my family where the plan is to avoid reading any financial news, I am short of any ideas - other than maybe working for an NGO and accepting a much-reduced standard of material liviing.
Making money in this climate remains extremely hard - although from a business journalist's perspective, it is of course a fascinating time.
The first stage of the 105th Canton Trade Fair - which involves electronic and electrical appliances, hardware and tools, machinery, vehicles and spare parts, building materials, lighting equipment and chemical products - concluded this week. Sales totalled $13.03bn - a 20.8% fall on the same stage last year.
I also read this other report about a surge in job creation in China's cities in Q1 over the the fourth quarter last year. What are all these extra workers doing?
Are they building dangerously high inventories of semi-finished and finished goods?
China's economy is showing signs of recovery, but not enough to replace the 20% fall in exports during the first quarter.
......all the right reasons than to be wrong altogether?
Sounds a dumb question, perhaps - unless you take particular pride in being one of those know-it-alls.
The point I am trying to make (and assuming that chemicals pricing doesn't collapse beforehand on a broader retreat in crude and equites on maybe panic over swine flu or the realisation that a global economic recovery is a long way off) is that I have thought for a while that the fundamentals point to a major price correction from June-July onwards because of:
*New supply from the Middle East. Surely, yes surely, there will be more capacity hitting the market in H2 as PetroRabigh ramps up output - even if YanSab, Sharq and perhaps even the new cracker in Qatar - are effectively pushed into next year
*A lot of new supply in China. My colleagues at CBI Research & Consulting are working on an update of the subtantial amount of additional capacity due on stream in H2, including Fujian Petrochemical & Refining (the latest world on the start-up of which is July)
*The end of the May-June petrochemical turnaround season in Asia
*An increase in naphtha supply (as much as 20-30% in Asia, according to Purvin & Gertz) as a result of higher production from two new condensate splittlers in the Middle East and greater naphtha exports from India
*A I said, my belief that everyone will have to wake up to the fact that the global economy, including China, will not enter recovery in 2009 or perhaps even in 2010. I remain worried about the quality of China's growth (is it too production rather consumption-driven?), how much stimulus-package money has been wasted on speculation, including in building chemicals inventory, and the possiblity that China - directly or indirectly - might start exporting deflation
But today I spoke to some goods contacts and friends at a leading petrochemicals trading company who gave the following additional reasons for their long-held view that prices would tank in July:
*US and European producers upping operating rates in response to strong arbitrage opportunities. The Europeans have already raised rates, apparently, and the US more recently. In the case of propylene, though, stronger demand for refinery-based C3s from several derivative producers might, perhaps, make further US PP shipments unworkable
*Strong interest in shipping petrochemicals from the US and Europe to Asia for arrival after May (all May business was concluded around 20 April). Cargoes could be at sea and uncommitted just as the shift in fundamentals listed earlier starts to take effect. Big quantities have already been shipped from the West to East during Q1, including very large amounts of BTX and polyolefins. Around 200,000 tonnes of US and European benzene is heading for Asia for March and April arrival, according to DeWitt & Co. China imported 114,000 tonnes of benzene in March alone, which compares with just 328,000 tonnes for the whole of 2008 - an average of 2,733 tonnes per month. The surge in toluene shipments from the West to China is equally dramatic: China received 66,000 tonnes in January, 77,000 tonnes in February and 94,000 tonnes in March compared with a 2008 total of 273,000 tonnes.
Inventory pressures in the West have been relieved and some of the big losses suffered in Q4 have been recouped (and some of the traders seem to have done very well indeed).
So batten down the hatches once again.
This could be good news if West-East arbitrage in general becomes more difficult.
During Q1 and the first few weeks of the second quarter, big quantities of US and European aromatics, olefins and derivatives were shipped to Asia as a result of much-stronger prices in this region compared with the West.
The Western producers (and, of course, the traders who seem to have done very well) benefited greatly from being able to relieve inventory pressures.
Volumes would have been even greater if it hadn't been for vessel re-positioning issues and delays caused by increased piracy off the coast of Somalia.
But now the risk is that further big West-East volumes are fixed for arrival after May.
June-July will see cheaper naphtha and increased petrochemical supply, creating the potential for across-the-board price corrections that could be made a lot worse by continued high levels of deep-sea cargoes.
This very interesting note from Jun Ma, chief economist for Greater China at Deutsche Bank (see the end of this post) offers evidence to support what this blog has been worried about for some time - the quality of China's economic rebound.
The government would presumably be less concerned about the sharp increase in loan growth if the extra money had substantially boosted domestic consumption.
Instead, a large portion of the new loans could well have ended up in the hands of speculators (helping to drive chemicals prices up), Factories also seem to have been encouraged to keep operating rates high for social reasons - and state-owned enterprises area wash with cash for industriall investments. This is crowding out borrowing by private companies.
Net lending falls 70%mom to RMB592bn in April
RMB net lending fell sharply to RMB592bn in April from RMB1.9tn in March, broadly consistent with our expectation. We believe this reflects the success of the window guidance (about 3 weeks ago) by PBOC and CBRC that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget.
Going forward, the continuation of these factors will likely lead to a further decline in net lending to about RMB300-400bn per month in the remainder of this year.
As lagging indicators, the yoy growth in outstanding loans remained at 29.7% in April and M2 growth accelerated a little to 26%. Within a few months, we expect these yoy rates will begin to moderate following the decline in monthly net lending.
We see two main implications from the slowdown in net lending. First, net lending is a good leading indicator for QoQ GDP growth in China, with a lead time of about one quarter. The 70-80% fall in QoQ net lending in Q2 implies that QoQ GDP growth will likely moderate in Q3, following its peak in Q2 (at an annualized rate of 12-14%). Together with other factors such as a more visible corporate capex slowdown and a less supportive inventory cycle, it will likely result in a second phase of economic deceleration (measured on a QoQ basis) from Q3. On a YoY basis, the second down-leg of the economic cycle will likely begin in Q1 next year, as YoY growth lags QoQ growth by about two quarters. Second, net lending has a high correlation with market turnover in the A share market. The decline in net lending growth will therefore likely be associated with reduced liquidity for the A share market going forward.
Yoy inflation falls further in April
CPI inflation declined to -1.5% yoy in April, down from -1.2% in March. Producer prices are also declining, falling 6.6% yoy in April, vs a fall of 6.0% in March. Both figures are identical to our forecasts. In the CPI index, a 0.8%mom decline in food prices led the index down. Other commodity prices were essentially unchanged on the month according to the Ministry of Commerce. We expect yoy CPI inflation to remain in negative territory for another three or four months and PPI inflation to remain negative for six months. Upside risks to inflation stem from the possibility of higher wheat prices after a drought earlier in the year and the possibility of higher pork prices as farmers have slaughtered pigs in recent weeks due to the 10% drop in pork prices amid the Swine Flu outbreak (note that mainland China reported its first confirmed swine flu case today). Month-on-month PPI inflation - much more influenced by non-food raw materials prices - should recover on stronger demand due to rising gov't-led capex and inventory restocking in coming months, but these price increases may not be sustained beyond mid-Q3 when we think the QoQ increase in the number of new projects starts to fall and the inventory cycle turns less favorable.
Apologies for letting this blog slip again, but have been busy trying to make a crust presenting ICIS training courses.
And so as a bonus for our army of avid readers, here are my extended thoughts on the above:
In the midst of the economic crisis it would be so easy to bury your head in the proverbial sand and forget that once the recovery does arrive, the same old feedstock-cost problems seem almost certain to re-emerge.
"The profitability of your average Asian naphtha cracker with the right level of investment in derivatives was extremely good throughout 2007. This was particularly the case if you were processing C4s into butadiene," said an industry observer.
"But in the first half of last year margins turned negative because of rising crude and naphtha costs. Every manufacturer down every product chain frantically built inventory because of the fear that oil would reach $200/bbl by the end of the year."
Of course we all know what really happened: Crude prices collapsed in Q4 resulting in the biggest inventory losses in the history of the chemicals industry. Stocks simply had to be liquidated due to the non-availability of working capital.
Governments are lavishing cash on stimulus packages in a desperate effort to return the world to business as usual.
This might on the surface seem the sensible thing to do, but unless that money is spent wisely in boosting energy conservation and renewable technologies, a return to strong growth could hasten the return of $100/bbl plus crude.
There's not much sign of smart investment in China. A surge in bank lending has been used to ramp up steel and aluminium production and provide the finance for manufacturers of finished goods to run their plants hard in order to limit job losses.
China announced a $586bn stimulus package last November and then in March disclosed plans for heavy investment in ten industrial sectors, including refining and petrochemicals.
"While the (investment) proposals may boost the economy, and thus energy demand in the short term, they could also lead to continued growth of energy-intensive industries in the medium to long term," writes the UK-based Cambridge Energy Consultants in an article on its website.
The Obama administration has also come in for some pretty fierce criticism over a cap-and-trade-bill before the House of Representatives. Lots of emissions permits would be given free under the bill, offering benefits to coal-based electricity generators and other energy-intensive industries.
Oil industry experts are queuing up to warn that the economic crisis has cut capital investment by the small independent oil companies in harder-to-get-at conventional crude reserves. The oil majors have slowed down development of unconventional sources of oil, such as the Alberta Tar Sands.
OPEC warned at its recent meeting that the fall in prices was resulting in lower investment, and the Paris-based International Energy Agency estimates that spending on oil and natural gas exploration will fall by 21% this year over 2008. This would represent $100bn less spending on building reserves.
The implications of a return of very expensive crude are obvious for Asia's petrochemical industry, which is largely naphtha-based.
The Middle East gas-based producers would once again stand to benefit due to another surge in margins as, of course, global petrochemical prices are oil-driven.
But what if everyone suffers? Could the return to crude in excess of $100/bbl re-awaken inflation, further stoked by excess liquidity resulting from government stimulus packages?
The danger is that we might repeatedly see nascent economic recoveries nipped in the bud by surging energy costs.
BASF announced last June that it was looking at making petrochemicals from biomass using its catalyst expertise, and said that it had made good progress at the laboratory stage.
Numerous companies were also looking at methanol-to-olefins technologies, including ExxonMobil and LyondellBasell.
China's coal reserves offer an opportunity to make methanol into large amounts of olefins and transportation fuels.
Let's hope that cutbacks forced on companies by the financial crisis have not included freezing research into attempting to break the crude-petrochemicals link.
Another concern is the long-term outlook for naphtha supply.
The US announced new car and truck fuel-efficiency regulations last week, which, in the short term could increase the availability of the feedstock.
By 2016, all new autos will have to meet a 39 miles per gallon standard (mpg) standard, up 42% from the current 27.5 mpg. Trucks will have to do 30 mpg versus 23 mpg today.
"Europe was already heading for an enormous gasoline surplus by 2015 even before this announcement," said Paul Hodges, chemicals consultant with the UK based International eChem.
Diesel demand in Europe has surged at the expensive of gasoline. However, the Europeans have been able to export their way out of gasoline surpluses due to shortages in the States.
But these exports were already under threat from increases in US refining capacity and the mandated steep rise in ethanol blending, added Hodges.
"The new fuel-efficiency standards will increase the pressure for European refinery closures, but in the interim there could be a disposal problem.
"This could create the opportunity for cost-advantaged naphtha supplies into the hard-pressed European and US petrochemical industries."
Eventually, though, refinery capacity will have to close because, as one Asian-based oil and gas consultant put it "there is going to be a worldwide glut of gasoline. Even on a straight-run basis before you look at more advanced processing, there will be a big surplus requiring rationalisation."
It is far too early to say whether refinery closures will lead to a net reduction in available naphtha.
Asia is adding capacity as Europe confronts the need to rationalise. In 2009-10 alone, 2.7m bbl/day of refining capacity is due to be come on stream in Asia Pacific, according to oil and gas consultancy FACTS Global Energy.
But naphtha exports from the Middle East could decline as the region looks to crack more naphtha in order to widen its petrochemical-product slate.
In Abu Dhabi, for example, a naphtha cracker complex is due to start-up by 2013.
Anyone with either access to advantaged ethane, propane and butane or with a proven technology that breaks the refinery/petrochemicals interface might be OK during the next oil shock.
The key for Asian liquids-based producers without either of the above must surely be maximising feedstock flexibility.
This flexibility could include cracking more liquefied petroleum gas (LPG).
LPG should be in abundant supply once liquefied natural gas (LNG) demand is booming again on higher oil costs and rising environmental concerns.
LNG producers either extract the gas during initial processing or leave it in the LNG to be taken out at re-gasification terminals.
Whatever are the solutions, they need to be found and found quickly if surging stock markets are proof of a quicker-than-expected economic recovery.
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.
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?
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.
"My big concern is that large volumes are being stored in Dalian warehouses for physical delivery and could hit the market in one flood. I am still confused about how much actually turns physical - very little so far from what I've read, which is strange as the website states that each contract has to close with physical delivery.
"The Dalian exchange might be a reason why we have seen both stronger import volumes and higher local production.
"Some strange things are happening which might be down to the futures market. For example, agricultural film demand remains strong even though this is not the agricultural season.
"This could be the result of Dalian and/or speculation and high storage levels in the physical market made easier by the very easy credit conditions in China.
"There also seems to be a correlation between higher pricing and the fall in recycled or scrap imports.
"The reduction is about 30% so far this year, which is due to less scrap-material availability in the West.
"Supply in the scrap markets is tighter because less consumer goods are being bought in Europe and the US, which are wrapped in recyclable PE.
"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.
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).
This huge volume of open interest mainly involves financial speculators who have no intention of either acquiring or taking delivery of physical material.
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 recent rise in European monomer prices (about Euros85/tonne for C3s and Euros$80/tonne for propylene) has helped claw back margins at the cracker level. In fact if you now look at the propylene-to-PP spread it's the worst it has been for the past two years.
"Clearly, these increases in contract monomer prices have put paid to any further arbitrage for the time being."
"I think the recent ethylene and propylene prices rises have been driven mainly by short covering from traders and with energy prices coming off I can't see current levels being sustained.
"One of the major reasons is that the non-PP consumers can't continue to pay the high monomer prices and so will have to cut back on operating rates - if they haven't already (for example, in the case of acrylonitrile)
"In the first half, the European industry was helped by pretty good operating rate discipline, but in the US plants have been running pretty hard.
"The European plants were also constrained from running any harder because spot monomer prices made this economic if they had insufficient flexibility in contract arrangements to up their operating rates.
"The rise in China PE imports is probably also reflected in PP which is not what the industry expected - we had anticipated import growth to be flat this year.
"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.
"You just couldn't get enough of these experienced project managers to oversee the big investments - and also cost constraints were a big issue because of the high prices of both labour and raw materials.
"You faced a choice of, say, focusing on the cracker and certain derivatives at the expense of lesser derivatives which have meant some parts of some projects have been delayed.
"The delays are not the result of market factors.
"When you think about the China market, if it grows at 5% a year that means there is a need for one new world scale plant every 12 months - which hasn't transpired. If it grows at 10% you need three new world scale plants.
"And despite the global economic problems the market is still growing.
"Another factor behind tight PP in China has been small plants have been off-line because poor refinery economics have meant that the propylene hasn't been available. There is a total of about 500,000 tonne/year of these smaller, refinery-linked plants in China.
"The refineries have been running at low rates because of weak fuels demand and rising oil prices. Restrictions are still in place which prevent refiners from fully passing on the costs of more expensive crude.
"It's clear, though, that when all this new capacity starts up there will be a blood bath.
"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.
"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.
"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 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.
"For example, there are no truly reliable inventory assessments at all the polymer and finished-goods levels, and there can be a lack of clarity on local production levels.
"What is fundamental growth versus the short-term boost from rising bank lending? The exchange has, as a result, become a very useful tool and a great way of making money.
"The world is a bit lopsided now because there are also so many other factors confusing the market - including the real effect of the decline of the availability of recycled material versus the oil price.
"When the new supply hits the market then new supply will become THE factor and it's likely that people will take less notice of Dalian.
"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."
Source of Picture: www.autospies.com
Not an easy answer and not one much suited to a few paragraphs of blogging.
But here's one thought as the competitive environment becomes a great deal more difficult due to new Middle East capacity and the potential for China to move towards self-sufficiency in polyethylene and polypropylene: Have a chat with one of those poor old European refiners facing big naphtha surpluses.
Perhaps the refiners will be willing to do deals on long-term offtake deals at very preferential rates in order to keep operating. While gasoline might be falling in value in Europe for both local consumption and exports, diesel certainly isn't.
Polyolefin producers doing RMB business in China were delighted when price increases on the Dalian Commodity Exchange linear-low density polyethylene (LLDPE) futures contract started leading the physical market on the way up.
"We used the exchange to justify charging higher prices for real deals because in the heady days of February-early August the general trend was up or at least stable.
"The trouble is that prices on the exchange have become more volatile in both directions. Physical trading is also slowing down on what I think are high distributor and trader inventory levels.
"The few buyers who remain interested are picking days when Dalian is on a downtrend in order to ask for discounts.
"It's too early to call this as the correction we've been all been waiting for since April.
"This will become clearer after the long Chinese holidays which take place from 1-8 October.
"At the moment it's hard to decide whether the drop in sales is down to a traditional pre-holiday lull or something much deeper."
August volumes on Dalian were down 58% from their peak so far this year, which was in April.
According to Paul Hodges, who prepared this chart for his Chemicals & Economy blog last week, this indicated that the smart money was flowing out of Dalian and commodity and equity exchanges in general.
His view is that equities, commodites and the real-estate and auto sectors in China have risen way out of line with the underlying demand we keep referring to. As a result, he believes we are heading for a sharp correction.
The polyolefin producer understandably hopes he is wrong but concedes that first-half imports into China, and overall demand, were "highly deceptive" because of the temporary boost from domestic production cutbacks and speculative inventory building.
But still, he added: "I went to China two weeks ago and the mood was bearish because of a decline in Dalian. I came back the next week and the mood was bullish and now it's bearish again!" (he was speaking on Monday this week).
"It's all been driven by sentiment and speculation and by Dalian because nobody has a clue about the fundamentals.
"The big question now is that if the stock market declines continue and liquidity tightens up further, will Dalian volumes go into a long-term decline?
"Less volume might mean has relevance, but with markets so opaque even a market with very low volumes might remain valuable."
His big fear is that buyers will get the most value out of Dalian in future, using it as a big stick to beat their suppliers.
What goes round comes round.....
"China, please please do what we did and spend what you might not be able to afford..."
Source of picture: The Daily Maily
Whether or not China's pace of economic recovery will be maintained would have become an intensely boring topic of discussion if it wasn't so important for all our livelihoods.
More data specific to polymers and chemicals has emerged as to just how staggering the rebound has been: Imports of un-compounded polyvinyl chloride (PVC) were up by 100% in the year to June compared with 2008, according to International Trader Publications Inc.
Benzene, vinyl-chloride monomer (VCM), methanol and propylene imports were up by 100-550-% during the same period, the publishing company added.
"During the last recession, when prices bottomed around December 2001-February 2002 period, there were also spikes in imports of some products into China," said Jean Sudol, the company's president.
"What was different then versus now is that fewer products were involved, the spikes were nothing like the magnitude we are seeing now, and the surge only lasted 1-3 months. This time it's endured for 7-8 months."
Evidence of weaker demand has emerged over the last few weeks.
At the risk of boring you yet again (if you are not too worried about your job), is this demand-decline partly the result of too-much of inventory re-building of chemicals, polymers and of semi - and finished-goods?
All will hopefully become a little clearer after the very-long Chinese national holidays from 1-8 October. It is hard to discern to what degree recent sales dips are due to business winding down ahead of this break, overstocking and bleaker economic prospects.
On the surface, a lot of the macro-economic numbers look terrific: Retail sales grew by 16.6% in the first half of this year and by 15.4% up until the end of August.
But scratch the surface and you find that retail sales include government purchases and shipments to shopkeepers before any sales to consumers are recorded.
"This makes them a very bad proxy for consumption," writes Michael Pettis on his blog, China Financial Markets. Pettis is a professor at Peking University's Guanghua School of Management.
Retail sales-growth was in excess of the expansion in GDP (gross domestic product) over the last six years, he adds.
"Consumption (real consumption and not the retail-sales numbers) has been growing over the past several years by about 8-9% a year, while GDP has been hurtling forward by 10-12% a year," he argues
"Not surprisingly, this implies arithmetically that consumption is declining as a share of GDP."
The China Economic Quarterly (CEQ), an online research publication, agrees that the retail sales numbers aren't much use in tracking genuine consumption. Even government officials don't attach much credence to them, it adds.
But, unlike the more-pessimistic Pettis, the CEQ believes it's well within China's capability to maintain GDP growth at 8-9% in 2010 (growth is expected to easily reach 8% in 2009).
The reason is that there is still plenty of money in China's state-owned banks to support high levels of lending with equal oodles of cash around to maintain investment in public infrastructure.
As to asset bubbles which might lead to drastic government slowdown measures, the "hysteria is premature", writes the publication in its third-quarter issue.
"Price-earnings ratios are well under half their truly speculative October 2007 peaks.
"Our detailed analysis (of the housing market) suggests that the pool of prospective upgrading -and investment buyers is so large that the market can continue to rally for another year or so."
But it warns: "Continued growth at 8-9% in subsequent years will depend on whether the government uses the time it has bought through monetary stimulus to push through domestic market reforms."
"We are pretty optimistic about financial sector liberalisation; less so about service-sector reform."
China has finally created a bond market, meaning capital is being more accurately priced rather than always handed out virtually free to state-owned enterprises (SOEs).
A new stock market for small -and medium-sized enterprises will probably begin trading in Shenzhen in the fourth quarter this year.
These measures should help shift the economy away from dominance by the SOEs towards what in theory are more-efficient private companies.
Extra credit mechanisms are also being created to increase the availability of consumer finance.
"But we have yet to see much evidence of a serious effort to deregulate service sectors, notably distribution and logistics, that remain sink-holes of state-dominated inefficiency," the publication adds.
Liberalisation and deregulation are crucial in re-balancing the economy away from exports and towards a genuine growth in consumption as a share of GDP.
"Don't trust the government, any doctor or any lawyer," I was once told by a drunken tour-guide in Greece before he started reciting poetry.
In this case we have to trust the Chinese government in the hope that it can do a better job than certain White House administrations.
You could argue that wouldn't be particularly difficult.
....what do these environmental issues mean for Thailand as an investment destination?
The Map Ta Phut refinery-petrochemicals complex
Source of picture: Pattaya News
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Here's yet another unexpected project delay that could prop up markets in the fourth quarter.
The Thai Central Administrative Court decided to halt construction of 76 projects at Map Ta Phut on environmental grounds last week.
The long list of projects includes new crackers and derivative projects by PTT and Siam Cement/Dow Chemical.
PTT was due to have started commissioning a new 1m tonne/year cracker complex in the fourth quarter, while Siam Cement and Dow Chemical's 900,000 tonne/year cracker and downstream plants were scheduled to commence operations next year.
Both of the Thai companies have issued statements that the projects are likely to be delayed, and PTT has even decided to delay a maintenance shutdown at one of its crackers from October to January 2010.
Thailand is already a net exporter of PE and PP and the new projects would have increased the country's export burden.
One local newspaper report said that projects could be delayed by a year, although the two companies have not yet declared revised start-up dates for their projects.
PTT issued a statement that it was working closely with government authorities to resolve the crisis and that it had submitted a petition to a higher court. The prime minister has already asked the industry ministry to appeal against the ruling.
The Bangkok Post reported that the appeal would be made in two parts.
The first section would ask for court permission to allow industrial projects that have no impact on the environment to continue, while the second would seek a temporary halt to projects that had problems with environmental impact assessment (EIA) studies.
The story did not identify projects that had EIA problems.
There is no doubt that the government will have to act fast. But it faces a tough task of balancing public opinion and expectations while protecting the interests of local and foreign investors.
Public opinion - seen in some of the comments that the Bangkok Post report has drawn - will be difficult to ignore.
It might be even harder to address growing concerns about Map Ta Phut as an investment destination in Southeast Asia.
This latest crisis in Thailand is also a fresh reminder of the growing power of the people in many parts of Asia to influence chemical-project activity.
Protests against construction of mega projects on environmental grounds are getting louder and louder.
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.
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.
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?
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
South Korean petchem majors are expected to post another quarter of bumper earnings thanks to high operating rates and strong sales volumes.
A Seoul-based equity research analyst think this year could well turn out to be a bonus. He expects the fourth quarter to be tougher with operating results likely to be lower than Q3, partly because of the negative impact of new capacities flooding the market. But strong results in the first three quarters of the year should help the companies post favourable numbers for the full year.
This was evident in LG Chem's recent announcement of an 83% year-on-year increase in Q3 net income. Operating profit for the petrochemicals division was up 63% from the same period last year but down 2% from the second quarter (see slide). The big gains came in from the LCD and battery businesses on the back of rising mobile handset and notebook sales. Other South Korean companies are due to post their results in the next few weeks.
LG's success in diversifying its portfolio has caught the attention of other South Koreans.
SK Energy is set to challenge LG in the battery business. It was recently selected to supply lithium ion batteries to Daimler AG's Japanese unit. LG Chem has already signed a contract to supply batteries for a new hybrid car to be launched by General Motors.
And Hanwha announced yesterday that it would invest $673m in the solar energy business. It plans to start a new plant in Ulsan for producing solar batteries capable of generating 30megawatts of power annually. Hanwha's ambition is to become one of the top ten global manufacturers of solar batteries by 2015 with a worldwide market share of 5% and revenue of approximately $841m. To achieve this number, annual production would be raised to 330 megawatts in 2012 and 1 gigawatt in 2015.
Given the growing competition in petchems it makes sense for the Korean companies to branch out. But the analyst is not convinced that they are all moving in the right direction. For instance, the solar energy space is already crowded and he is not sure if Hanwha will be able to make money in solar batteries.
The odd one out is Honam Petrochemical which has not yet diversified from petchems. The only announcement by the company this year was a decision to merge affiliate KP Chemical. It is said to be looking at acquiring a stake in downstream engineering plastic and speciality chemical businesses in South Korea. But it will have to act faster to reduce its exposure to commodity petchems.
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.
As this updated table from my colleagues at CBI in China illustrates, cracker-complex delays in China have the potential to further stagger the arrival of new volumes into the market.
This follows the widespread problems in starting up new capacity in the Middle East.
The 800,000 tonne/year Fujian Petrochemical/ExxonMobil/Saudi Aramco cracker is on-stream, but there have been operating issues with downstream PE.
But the Dunshanzi complex, centred on a 1m tonne/year, was commissioned on schedule in September. The operating rate is reported to be 85% with product being sold across China.
2.56m tonne/year of capacity is due to start-up this year compared with the original 3.56m tonnne/year.
In Thailand, the new 400,000 tonne/year PTT linear-low density polyethylene (LLDPE) plant is due to start next week, but the 1m tonne/year cracker won't be on-stream until the end of the year/Q1 2010.
A new 300,000 tonne/year low-density polyethylene (LDPE) project is not due to be commissioned until Q3 next year, according to ICIS Plants and Projects.
The start-up is being fed by ethylene from existing crackers, but it's not clear whether this will be sufficient to quickly achieve optimal rates
Further out, there appears to be some more good news for existing producers from China.
The 800,000 tonne/year Fushun cracker, originally scheduled for 2011, has been delayed to 2102. An associated refinery has already started up, but only preliminary work has taken place on the petrochemicals complex.
There are also unconfirmed reports of operating problems at several Middle East complexes brought on-stream this year.
"I think an on-going problem in the Gulf Co-operation Council (GCC) region is going to be the shortage of natural-gas supply," said an industry source.
"Every summer, until this problem is resolved, you are going to see a big pull of gas into the power sector at the expense of petrochemicals."
He suggested that there might also be issues with stabilising production at several new gas-phased polyethylene (PE) plants due to their scale.
Existing crackers in Iran are expected to continue to experience deep rate cuts in winter as gas is diverted for domestic and power-generation consumption. Iran has plenty of natural-gas reserves, but political difficulties have slowed down investment in extraction.
A Famous Ditherer
Source of picture: sarafinewordpress.com
Chasing higher oil prices and/or a response to the now long-running recovery in Chinese demand that's become sustainable?
Not wanting to sound too much like the start of a famous Shakespeare soliloquy, these are the questions that should be wracking everyone's brains as they try to figure out price rises, which continued last week.
Ethylene rose again and low-density polyethylene (LDPE) was up by $50 a tonne to $1,235-1,300 tonne CFR China, according to ICIS pricing.
The polyolefin was at $1,130-1,180/tonne CFR China four week. Click here for a graph showing the price history for all the PE grades since January last year - Olefin-PEprices.ppt.
But interestingly, while the sentiment in the China market was described as bullish due to stronger crude and second and third tier traders and distributors were stocking up, actual end-user demand was characterised by market players contacted by ICIS as weak.
This suggests stocking up ahead of the assumption that oil prices will go higher, even though the outlook for the next few weeks is mixed given recent negative reports over the US economy.
It then comes down to the sustainability of the eight-month long rebound in demand from China. Head-scratching continues as to where all this stuff is going, more of which later this week.
Asian cracker operators, according to my colleague Peh Soo Hwee, ICIS pricing's ethylene editor in Asia, seem to believe its worth running hard for the time being at least.
"Some of the cracker operators, notably in Japan, had reduced production to below 90% in September-October, partly due to turnarounds at derivative plants," she said in a recent note to one of our customers.
"Most of them now expect to increase rates to close to 100% next month (November)."
"So far, with the exception of a few crackers in the region running at lower rates - Chandra Asri in Indonesia at 75% and South Korea's YNCC at 90% - the bulk of producers aim to keep ethylene production at 90-100% in November."
Supporting these decisions were improvements in margins last week. Ethylene margins rose for the second week in a row as a result of the pace of C2 price increases outpacing those for naphtha, according to the ICIS weekly Asian Ethylene Margin Report.
But still, October ended up as the worst month for ethylene margins since June.
PE margins also rose on a better spread between C2s and the polymer and improved co-product credits, according to our Asian PE Marging Report - also weekly.
Again, though, overall margins were down in October over the previous month. Stand-alone players did better than integrated operators.
Plan cutbacks and/or sell November stocks early and you miss the potential of better returns. Some polyolefin producers sold October volumes earlier than they should have done because they expected prices to fall.
The flipside of the risk is being left holding overpriced inventory as oil prices fall and more new polyolefin capacities hit the market.
Nothing new in having to make these decisions, of course; the difference is the absence of any consistent and reliable patterns from all the data to support planning.
Just picked up on the interesting news (not sure how big a deal this is) after attending one of those long interminably-long internal planning meetings. But on this occasion we at least were discussing something useful - not just the new colour for the carpet in reception.
So why has Qatar Petroluem bought into Petrochemical Corp of Singapore (PCS) and The Polyolefins Co (TPC).
Interesting that the PetroRabigh marketing arm - the joint venture betweeen Saudi Aramco and Sumitomo for the new plant in Saudi Arabia - is run from Singapore by Sumitomo.
This Dow Jones report, from a former colleague of mine, quotes Ben Van Beurden, executive vice president of Shell, as saying the following: "One of the critical success factors of any petrochemical venture...is access to competitive feedstock.
"I'm hopeful that condensate and liquefied petroleum gas (LPG) will flow from Qatar to Singapore as a result of QPI taking an interest in these joint ventures."
That makes a lot of sense as feedstock advantage is going to be crucial for an older and smaller cracker-derivatives complex such as PCS-TPC to compete in the and far more difficult environment.
The giant new Middle East crackers have big scale and raw material advantages.
One of the responses to date from the very experienced and very capable guys at TPC has been to work the trade advantages within the Asean region, concentrate on relationships and higher value-added grades.
Shell Eastern Petroleum operates a 500,000-bbl/day refinery on Pulau Bukom.
The company is building a petrochemical complex comprising an 800,000-tonne/year steam cracker and MEG unit, using Shell's Omega technology, due on-stream in Q2 2010.
This cracker will be fed by hydrowax from an updgraded hydrocracker at the same site and so it is not clear whether feedstock from Qatar will also be an option for this facility.
In Qatar, Shell and Qatar Petroleum are building the $18bn Pearl gas-to-liquids (GTL) plant scheduled for completion by the end of 2010.
Condensate will be be produced from the GTL plant, which has been entirely funded by Shell. This condendate has been evaluated for producing petrochemicals in Qatar.
Shell has a cracker project in Qatar likely to start-up only after 2012.
The Anglo-Dutch major has also talked about more petrochemicals in China to build on its existing CNOOC joint-venture Nanhai cracker and derivatives project.
Again, whether the closer relationship with Qatar will have any implications for these plans remains to be seen. The Chinese want mainly one of two things from any potential new petrochemical JV partner - energy supplies (oil or gas) and/or technology.
"If we contemplate new investments in chemicals, they only make sense if we can continue to build integrated positions and they rank favourably with our overall capital investment programme," van Beurden told me in an interview last year.
"Everything we want to do in chemicals must be integrated with the rest of Shell. Capital goes first to upstream projects and so chemical investments have to make a lot of sense and clear very high hurdles."
Sumitomo retains its interest in PCS and TPC and so - as often is the case in deals like these - the internal parent-company competitive landscape has shifted.
The Sumitomo part of TPC, now with Qatar Petroleum as a partner, is competing with the Sumitomo share in a new Middle East producer - PetroRabigh!
Singapore's Jurong Island
Source of picture: www.pcs.com
Qatar Petroleum International (QPI) sees Singapore as a good base for expanding in to the Far East, said CEO Nasser Al-Jaidah yesterday after the announcement of the new partnership with Shell.
QPI and Shell signed a series of agreements on Wednesday to jointly own 50% of Petrochemical Corporation of Singapore (PCS) and 30% of The Polyolefin Company (Singapore) Pte Ltd (TPC), to be held through a joint venture company called QPI and Shell Petrochemicals (Singapore) Pte Ltd.
Sumitomo Chemical's 70% stake in PCS and 50% share of TPC remain unchanged.
Singapore is becoming an increasingly important energy-storage and trading hub. QPI's closer relationship with the island state - through the Shell deal - could be key in helping to market and sell big new volumes of liquefied natural gas (LNG) and liquefied petroleum gas (LPG).
Qatar's enormous LNG ambitions, through joint ventures with the likes of Shell and ExxonMobil, also leave the issue of getting maximum value out of co or by-product LPG.
There are several options for LPG.
The LPG (propane and butane) can be extracted during natural gas and LNG processing.
It could be used by Qatar for petrochemicals in Qatar itself or elsewhere in the Gulf Co-operation Council (GCC) region.
Another option is to ship the LPG to petrochemical and other customers overseas.
"One of the critical success factors of any petrochemicals facility, whether it is in the Middle East or here in Singapore, is access to competitive feedstock," said Ben van Beurden, executive vice-president of Shell Chemicals, when the deal was announced.
"I'm hopeful that condensates and liquefied petroleum gas (LPG) would flow from Qatar to Singapore as a result of [Qatar Petroleum] taking an investment in these joint ventures."
As we discussed yesterday, this would enable the PCS-TPC joint ventures to better compete against the new wave of bigger feedstock-advantaged Middle East crackers.
Singapore is building an LNG terminal due for completion in mid - to late 2012.
Another probably very unlikely option is to ship "wet" LNG and then extract LPG on arrival. This extraction also involves removing ethane - and so again there's a petrochemical option here.
And finally, some LNG customers - such as power generators - prefer their gas delivered as "wet", creating competing economics for extracting LPG and ethane for petrochemicals.
The QPI-Shell deal raises several more questions which this blog is seeking to answer:
*Will this give extra feedstock flexibility to the new Singapore cracker, due on-stream next year? We understand it will be run mainly on hydrowax from an up-graded hydrocracker. But will an option now be to use condensate/naphtha feedstock via Qatar? How would this work as, if at all, as Shell Eastern - which operates the cracker project - is a separate subsidiary?
*The Pearl gas-to-liquids project (another joint venture between Shell and Qatar Petroleum) will produce condensate as well as ultra-low sulphur diesel. Will this condensate, split into naphtha, be sold directly into the merchant market or used for producing petrochemicals in Qatar? Is this still a possible feed for the Shell cracker project in Qatar and/or are other petrochemical options in Qatar? The background to this we understand that there's a shortage of new gas allocations available from the North Shelf due to an extended moratorium, making it difficult for all the cracker projects in Qatar to go ahead.
*Could the condensate/naphtha from Pearl be supplied to Singapore instead?
*Is developing a new project in China now a priority with QPI over petrochemicals in Qatar?
In China, QPI has a joint venture with PetroChina and Shell (China) Ltd to build a refinery and petrochemical complex at Taizhou in Zhejiang province.
"We are hoping to get approval [for the project] by the end next year," said Al-Jaidah.
Perhaps the biggest of all the priorities might be this joint venture.
But whether or how the closer relationship between QPI and Shell will accelerate this project is not clear.
China is on the whole looking for one of two things from future petrochemical joint-venture partners: Energy supplies (oil and gas) and technology.
The existing QPI and Shell relationship already firmly ticked both of these boxes.
Shelf-space to be in short supply again?
Source of picture: www.zrdata.com
ASIAN naphtha prices hit their highest level for more than a year yesterday - reaching $701/tonne CFR Japan for second-half December open-spec material on "improved market conditions".
Earlier this week we picked up more reports of bleak demand in styrenics and fibre intermediates that countered continued optimism in equities and crude markets.
This is also usually the quiet season as petrohemical production declines on weak seasonal demand.
Is the Asian petrochemicals industry ramping up production because it thinks crude is going to get stronger and the real economy is set to improve?
Oil fell to below $77 a barrel yesterday on evidence that US motorists and businesses were cutting back on energy use, according to this Associated Press report.
Have we returned to the demand destruction which caused the economic downturn in the first place?
Despite soaring auto sales in China, there are reports that gasoline consumption is being affected by higher crude, the impact of which is being more keenly felt this year as a result of fuel-price liberalisation.
The Energy Information Administration (EIA) said in its weekly report that US oil and gas supplies grew more than expected last week, even though many oil companies have shuttered refineries as fuel consumption slumps.
US refineries had slowed production to the lowest levels since September 2008 and they were importing nearly 15% less crude than last year, the report added.
This is worying when you think of the state of the economy this time last year. Most other comparative numbers are showing improvements.
What perhaps helps to explain the 15% decline is big new refinery capacities in India and China etc putting pressure the developed-world players.
With refinery runs reduced everywhere in the world except China (where the Chinese refineries are enjoying improved profitability as a result of the fuel-price liberalisation), reduced supply could be another factor behind the rise in naphtha.
But let's take it as read that better demand from petrochemicals is the main driver behind the increase in naphtha.
It would be a very risky business to build inventories right at this moment - given all these uncertainties and the big surge in new petrochemicals capacity.
Abu Dhabi ahead in the race?
Source of picture: www.gulftrackservices.com
By John Richardson
The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.
"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.
"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.
"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."
The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.
But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.
"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.
"But it is true that we have already seen transfer of very valuable polymer technologies."
SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.
The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.
These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.
But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."
IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.
It also has a 64% of Austria-based polyolefins group Borealis.
"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.
"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."
And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.
Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "
The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.
And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.
With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.
"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.
"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."
Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.
SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.
There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.
Reliance Industries has made an offer for LyondellBasell says an official statement released yesterday on the LyondellBasell website:
"LyondellBasell has received a preliminary non-binding offer from Reliance Industries Limited to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter 11 reorganization.
"This offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganization previously filed by the company."
This confirms months of rumours to this effect. According to an unnamed merchant banker quoted by the Times of India, Reliance would have to pay at least $12bn - double an earlier estimate by the Economic Times.
India could be playing a major role in the shift of basis chemicals ownership from West to East - along with the Middle East
After failing in its efforts to capture Innovene and then Dow Chemical's commodity petchems unit, this is Reliance's fresh attempt to move into the global top league. The ICIS top 100 places LyondellBasell at the No 4 slot of top chemical companies globally.
A marriage of the two companies would result in a formidable giant with an annual turnover in excess of $75bn, including Reliance's earnings from its growing oil, gas and refining portfolio. It would also create the largest PP producer and also a top player in PE and give Reliance access to LyondellBasell's profitable technology portfolio.
Reliance's offer is subject to due diligence and sufficient credit support. The company issued a very cautious statement: "This review is ongoing and there can be assurance of the outcome with respect to any of the opportunities under review."
Reliance, it appears, is evaluating other opportunities too in its core businesses.
LyondellBasell's statement confirms that Reliance had earlier placed non-binding equity financial proposals and the latest offer represented was a 'potential alternative to the initial plan of reorganization'.
LyondellBasell was the first petrochemical giant to stumble at the start of the crisis last year. And it looks like it could well be the first big ticket M&A deal in what promises to be a busy season ahead.
We have already heard of IPIC on the prowl for European and
An investment banker said last week that it was only in the last few months that he has seen an interest in boards and ceos. Capital market conditions have improved substantially and money will not be a deterrent, especially for companies like Reliance which are already sitting on huge piles of cash.
Relaince's biggest problem in the past has been its conservative valuations which have seen the company lose out to other global bidders, except in a few instances (Trevira and Hualon). There are already reports of rival bids emerging for LyondellBasell from Chinese companies and private equity investors. And ICIS news reported last week that analysts believe that LyondellBasell would also be a good fit for IPIC.
So will Reliance change its mindset and be bolder this time?
By John Richardson
A lot of the projects which have pushed the world into severe overcapacity were based on the assumption that China would remain in big deficits for many basic commodity chemicals and polymers.
It was thought that the world's most-important market would remain a sink for surpluses for a very long time at a time when tough questions over financing were rarely asked.
But it's become clear over the past few years that many of the assumed deficits won't be there.
China is seeking very high levels of self-sufficiency through building a big wave of new refineries integrated downstream with crackers, polymers and other derivatives.
Now the search for what to build - and what to provide storage and other support services for - outside China to supply China is likely to be a great deal more rigorous and selective.
The usual approach to this problem would be to conduct a study looking at the announced projects while also examining where China lacks the economics and the technology in a particular product.
"I am afraid this won't work in the political context of this country," a Westerner based in Shanghai told me last week.
"If a chemical looks like being in big deficit and even if China has no obvious competitive advantages or technology to start production, this doesn't mean it won't be built.
"The government would rather haemorrhage money than be dependent on imports for anything they regard as strategic."
Those able to read the minds of China's senior leadership should therefore be able to do very good business.
Another approach might be one of bitter regret if you haven't already got substantial capacity on the ground in China.
More constructively, if you have missed the boat what would be better is to take China's demand largely out of the equation when deciding your strategy for basic chemicals.
The Thai Supreme Court's decision to uphold a September injunction halting development of $12bn of petrochemical and power projects could affect the on-schedule start-up of capacities of a large amount of petrochemicals capacity.
Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claims that most of its 25 petrochemicals projects will be unaffected by the verdict. The reason it gives is that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.
Further - media reports say that former prime minister Anand Panyarachun will review the court ruling and make recommendations in the first quarter of next year.
In all, according to the reports, only 11 out of 76 projects at the site have been given the go-ahead by The Supreme Court.
The petchem start-ups that might be affected are as follows:
*PTT Polyethylene's 1m tonne/year ethane gas cracker, which was due onstream by the end of this year, according to a Thai industry contact who spoke to this blog. Downstream of the cracker will be 400,000 tonne/year of linear-low density polyethylene (LLDPE), 300,000 tonne/year of low-density polyethylene (LDPE) and 400,000 tonne/year of high-density polyethylene (HDPE), according to ICIS Plants & Projects
*The new Siam Cement/Dow Chemical complex centred on a cracker that will produce 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene). Also at the site will be a big new metathesis unit downstream of which will be a PP unit (currently checking the capacity). In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects
*The PTT and LyondellBassel joint venture, HMC Polymer, which comprises a 310,000 tonne/year propane dehydrogenation (PDH) unit and a 300,000 tonne/year polypropylene (PP) plant. This plant had been due to start-up by August this year, the blog was told.
*The PTT/Asahi Kasei Chemicals joint-venture 250,000 tonne/year acrylonitrile project, due on-stream in Q4 next year, according to ICIS Plants & Projects. This will involve Asahi Kasei's propane route to PP. This would be the first commercial plant in the world to use propane rather than propylene as feedstock
News reports list chlor-alkali and vnyl chloride monomer (VCM) projects by Vinythai and a polyvinyl chloride (PVC) project by Thail Plastic & Chemicals as also being delayed. We are checking the details.
According to The Nation newspaper, these are the 11 projects which were given permission to continue by the Supreme Court:
. Clean energy and product quality enhancement/Rayong Refinery
2. Gas recycling enhancement/HMC Polymers
3. Clean energy, oil vapour controlling unit installation/Star Petroleum Refining
4. Oil vapour controlling unit installation/PTT Aromatics and Refining
5. Air pollution improvement/Indorama Petroleum
6. Wastewater treatment improvement/PTT
7. Chlorine vaporiser and wet scrubber installation/Aditya Berla Chemicals (Thailand)
8. Tank relocation/Map t Tank Terminal
9. LPG/Brutene Depot-Wharf/PTT Chemical
10. Loading Arm Installation/Star Petroleum Refining
11. Petrochemical Depot-Wharf/Map Ta Phut Tank Terminal
Is history about to repeat itself?
Source of picture: www.vietbao.vn
The last year for polyolefins has been a bit like the wonderful 1980s and early 1990s for genuine football fans - when the often-repeated phrase of Manchester Utd supporters was "next year, definitely" when they were talking about their prospects for winning the then First Division Championship (just replace "next year with "next month").
Sadly, of course, the rest is bitter and painful history when it comes to "Utd".
The question now, after a year of constant project delays and problems with output from existing production, is whether the same will soon apply to polyethylene (PE) and polypropylene (PP) as oversupply crashes the market in 2010.
No matter what the demand outlook - and we'll look at demand later this week - the on-paper increases are just too big to prevent major market disruptions.
"Practically every month this year we've seen buyers retreating from the market expecting a flood of supply that simply hasn't happened," said a Shanghai-based source with a leading Asian polyolefin producer.
The most recent example was the steep fall in pricing just before the October holidays - by some estimates as much as $200/tonne - on false anticipation of stabilised production at PetroRabigh in the Middle East and at the Fujian and Dushanzi complexes in China.
After the October break prices bounced back.
But surely some time in the New Year all three of these new plants, which have been hit by technical problems, will reach 100% or thereabouts (whatever rates the market - or perhaps in the case of the Middle East unbeatable economics and in the case of China government policy - determines).
China is due to increase its high-density polyethylene (HDPE) capacity by 45% next year, linear-low density PE (LLDPE) by 35% (there are no new low-density PE plants) and PP by more than 30%, according to CBI China.
How quickly these further new volumes are introduced into the market will again, though, depend on the extent of technical problems that have plagued the start-up of ever-bigger and more complex plants. The shortage of experienced engineers has made the process more problematic.
A key measure will be Sinopec inventory levels as it contends with this potential flood of new supply.
So far this year it has apparently controlled inventories exceptionally well after the painful experience of late 2008.
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.
A real head scratcher......
Source of picture: www/http://blogs.miaminewtimes.com
By John Richardson
Confused? Sorry, but so far we cannot be of much help bringing any precision to what the implications of Thailand's Supreme Court ruling will mean for the timing of petrochemical start-ups.
If you remember, last Friday we wrote about how the Supreme Court had backed the verdict of a lower court which had halted development of $12bn of petrochemical and power projects at the Map Ta Phut site (or should it be Mab Ta Phut?).
Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claimed that most of its 25 petrochemicals projects would be unaffected by the verdict.
The reason it gave was that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.
Media reports said that former prime minister Anand Panyarachun would review the court ruling and make recommendations in the first quarter of next year.
That seemed clear as watered-down mud can be.
But then later the same day - last Friday again - PTT provided us with a list of 65 projects formally under suspension.
These include more projects than we had earlier listed - for example, bisphenol-A (BPA), and polycarbonate (PC) expansions by PTT and Bayer respectively and polyvinyl chloride (PVC) and vinyl chloride monomer (VCM) expansions by Thai Plastic and Chemicals.
What remained unanswered was whether progress on the Siam Cement/Dow Chemical complex had been halted.
The complex includes 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 polypropylene (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.
So we asked Dow to put the record straight.
Sadly, this was their statement today: "We are currently assessing the impact of the Court's decision. We are in full compliance with existing regulatory requirements and remain highly committed to ensuring that all of our projects fully comply with government regulations."
Perhaps nobody knows, in which case I am sure everyone would welcome a great deal more clarity.
More buying of junk in H1 next year that nobody really needs?
By John Richardson
TWO theories about growth in China next year revolve around either an appreciation or devaluation of the Yuan.
The appreciation theory is far more widespread as it assumes no global double-dip economic recession.
It's assumed that by mid-2010 inflationary pressures will be build to the point where fiscal tightening will be needed, through, for instance, a cut in new loans and a rise in interest rates.
Part of this tightening would also include a long-awaited appreciation of the Yuan from around 6.8 to the US dollar, where it is at the moment, to 4.8.
Until and if this happens we could continue to see hot money pouring into and around China's economy as everyone tries to maximise Yuan revenue ahead any appreciation.
Weird and wonderful speculation
This has led to all sorts of weird and wonderful examples of speculation this year, including in chemicals markets.
My very able colleagues at CBI tell me, for example, that cargoes are sometimes being bought for the sake of the credit that is then used to punt in another commodity - for instance, equities.
There was one case of an ethylene dichloride (EDC) shipment that was sold at below raw material costs because the trader had used his credit to make a fortune from speculating elsewhere.
More such speculation will happen in H1 next year if the motive to gamble in order to make a currency gain remains high, particularly if economic policy stays broadly on the same expansionary track.
Yesterday, the State Council announced that economic policy would stay mainly unchanged for the time being because of a continued focus on boosting domestic consumption.
Some new pro-consumption measures are to be introduced, such as increasing cash-for-clunker car rebates.
Trying to let the air out gently
But two measures were also announced yesterday that might slightly deflate very bubbly auto and housing markets. As we reported yesterday, auto sales in November increased by 96% year-on-year.
The air-sucking steps are:
*The purchase tax on cars with engine sizes of 1.6 litres or less will be raised to 7.5 percent from 5 percent, though that is still lower than the 10 percent tax rate for most other cars
*Individuals must own their homes for five years to be eligible for sales tax exemption, up from the previous minimum of two years. In July, the China Banking Regulatory Commission decided to tighten mortgage conditions for second-time homeowners and big banks announced that they would start to offer discounts on mortgages only to selected qualified applicants
Government policy makers have a poor record of implementing the right housing policies at the right time, says Rosealea Yao of the Beijing-based online economics research publication, The China Economic Quarterly (CEQ).
The reason is that data on the property market can be misleading.
For example, there's recent evidence that stocks of unsold homes are increasing in several local markets, such as Beijing, Shenzhen and Hangzhou, whereas year-on-year nationwide sales accelerated by 48% in October.
A heavy-handed approach in 2007, involving interest rate rises and a reduction in credit to developers, caused the last collapse in China's property markets.
So the point she makes that if further measures are needed to cool the housing market and the overall economy down from mid-2010 - which the CEQ believes will be the case - the central government needs to tread very carefully.
The dilemma for China is that while a healthy construction sector is crucial for the economy, so is making sure that property prices don't increase out of the range of average earners.
Expect even more chemicals volatility
It seems very possible, therefore, that if inflationary pressures do start to build, chemicals pricing could become even more volatile and unpredictable ahead of any new government measures.
"There have been much closer links this year between overall economic sentiment, reflected in global and local equity markets, and what's happening in polyolefin pricing and trading patterns," said an industry source.
So when the rumour-mill starts churning about fiscal tightening, expect to see polyolefin markets - and perhaps chemicals markets in general - responding to fluctuations in share prices.
These fluctuations might, of course, have no relevance whatsoever to the underlying fundamentals of chemicals supply and demand.
What about the other theory?
We have long-argued on this blog that oil prices are way out-of-kilter with immediate demand.
They have been this way since 2006, but right now the fragile global economic recovery has increased the risk of a sudden and sharp correction.
Some unforeseen crisis, more globally systemic than Dubai World, could result in a retreat to the US dollar and a collapse in crude back to $30-40 a barrel (where some believe it should be based on the physical market fundamentals).
This would result in the Yuan appreciating much faster than the Chinese want - because of its link to the dollar - as they try to gradually rebalance their economy away from exports and towards more domestic consumption.
A competitive devaluation of the Yuan might then take place in order to protect export trade, leading to deflationary pressures from Chinese exporters. We could then be in the middle of major global trade war.
Let's hope for a more benign outcome!!
By Malini Hariharan
Reliance Industries' bid to acquire LyondellBasell is progressing quite rapidly. I am told that a team of top executives from the company is in the US holding discussions with LyondellBasell.
And according to this report in the Houston Chronicle, the team has also been enjoying Indian food in Houston.
My source tells me that Reliance is also is talks with LyondellBasell's creditors about rescheduling debt repayments. But the company has denied an Indian media repot that it would buy out a fifth of LyondellBasell's $27bn debt.
"Why do this? Creditors would have more confidence if Reliance takes on LyondellBasell. And so debt can be rescheduled," says the source.
Another Reliance team is also said to be visited LyondellBasell's plant sites in the US.
Everyone is now waiting for 15th December when the bankruptcy court is due to hear LyondellBasell's petition to extend the deadline until 6 September 2010 for discussing its reorganization plan with creditors. Reliance is likely to make a binding offer depending on how this court hearing goes.
What has surprised many is that no new names have emerged for LyondellBasell. It was widely expected that Reliance would face competition from other competing bidders. Have the complexities associated with LyondellBasell deterred others?
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.
For what it's worth, the article below might give you some food for thought.
The influence of crude we are talking about below is different from that of converters responding to short-term movements in crude by stocking up on resin or running down inventories - which has long been their practice. This is purely a hedging strategy that can result in either gains or losses.
Whether the converters move the price of resin by increasing or cutting back on purchases depends on all the other influences on supply and demand.
This article refers to links between crude and equities that have nothing at all to do with the underlying fundamentals of polyolefin markets.
The other crucial difference is that the increasing influence of financial speculation - through exchanges such as Dalian - could, more-often-than-not, be actually moving the price of resin ahead of any actual changes in buying patterns; in short, unrepresentative changes in crude and equities could be leading polyolefin markets.
It's always been argued that there are too many types and too many grades of chemicals and polymers for them to be exchange-traded in the same ways as oil and other commodities.
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 Malini Hariharan
Reliance Industries will take a call today on submitting a final bid for LyondellBasell, says this report from CNBC TV18.
The report, quoting unnamed sources, adds that Reliance may be having second thoughts about the acquisition. Key concerns are said to be LyondellBasell's high debt, potential liabilities if it tries to shut some older facilities and integration and management issues.
Some of the concerns appear surprising. LyondellBasell was known to have a high debt burden though it is possible that due diligence has thrown up some previously unknown facts. Closure of any plant in the US would be expensive and time consuming. And integration should have been a worry right from the start especially as LyondellBasell has been put together through so many mergers and acquisitions over the years.
By Malini Hariharan
Yesterday's media report about Reliance Industries on the verge of taking a final decision on LyondellBasell appears to have been a little premature. My sources say that a decision will be made only after the US bankruptcy court decides on a restructuring plan put forward by LyondellBasell.
The company filed a revised plan last Friday. The court is due to hear today a petition filed by LyondellBasell asking for an extension until 6 September for the exclusive right to propose a reorganization plan.
The court's decision will give more clarity to Reliance, says a source familiar with developments. If the revised plan is approved then Reliance does not have much of a chance to participate in LyondellBasell's restructuring unless invited by the current management.
But the source said that as creditors are not happy with the revised plan, Reliance has a good chance. However, Reliance still needs to do a full due diligence and only then can it take a call on whether to submit its own plan for reorganizing LyondellBasell.
The source also said that last week's meetings in the US were 'not very fruitful' as not much information was shared. 'The [LyodellBasell] management is keen on keeping control," he added.
By Malini Hariharan
Qatar has reconfirmed its commitment to build more petrochemical plants including a new worldscale cracker.
At a ceremony to mark the start of construction of Qapco's new ldPE project, the deputy premier and minister of energy and industry said Qatar was launching an aggressive plan to achieve optimal utilization of the country's natural resources.
Pic source: The Peninsula
"We are working very hard to expand our petrochemical industry. Every year we are trying to add a project. We have now several projects under discussion to expand our petrochemicals and develop another world scale ethylene cracker," he said.
However, as reported by this blog, Qatar is facing a shortage of ethane which has affected Shell's plans for a cracker.
Other cracker projects that have been under study/discussion for a few years include one by ExxonMobil and the other by Honam Petrochemical.
All the three projects have been planned as joint ventures with Qatar Petroleum.
I have heard that Qatar has enough ethane to support one worldscale cracker project of at least 1.3m tonnes/year capacity. This project could be onstream in 2013-14. There is no confirmation yet on who will be the lucky recipient of this ethane but it could be ExxonMobil as its project is the most advanced.
By Malini Hariharan
Some projects never die.
JG Summit has been planning a cracker since 1995 but has always had problems in securing funding. The project was revived in 2005 even as questions were raised about its viability.
It would help JG Summit secure feedstock for its polyethylene and polypropylene plants, but how would it compete with larger well-established players in Singapore and Thailand, especially after the implementation of the Asean FTA from 1 January 2010 when import tariffs would fall to zero.
The market meltdown in the second half of 2008 had pushed the project to the back burner. But with economic recovery the project has once again reappeared.
JG Summit says that it is close to receiving funding from the Export-Import Bank of Korea for a 320,000 tonnes/year cracke at Bataangas.
Lance Gokongwei, president of JG Summit Holdings told reporters in Manila this week that the company was pushing ahead with the estimated $731m project. "We expect to operate the plant in 2013," he said.
Gokongwei said JG Summit had already signed an agreement with Lumus for technology and site and design development would start in March 2010.
"If the financing package from the Korea Eximbank is completed by May to August next year then the project is a sure go," Gokongwei said.
"If we can't get the financing, we will have to assess. The fallback is we wait for the right time," he added.
That sounds familiar.
By Malini Hariharan
There is some good news for chemical companies affected by the Map Ta Phut crisis. The Thai cabinet will ask the Administrative Court to remove 19 projects from the list of 65 projects that had been ordered to stop work.
PTT's No 6 gas separation project and PTT Chemical's phenol and polyethylene projects are among the lucky 19. A full list is available here.
In another major development yesterday, the Central Administrative Court has allowed construction to resume on a steel plant as the environmental impact assessment report for this project had been approved before the 2007 Thai constitution came into effect on 24 August 2007. It had also received an operating license prior to this date.
Abhisit Vejjajiva, the Thai prime minister, has said that five or six more may be given the go ahead as they fall in the same category. And he has also reiterated the government's commitment to find an early solution.
But Map Ta Phut is just the start of a bigger movement.
In this blog report, Srisuwan Janya, a lawyer fighting on behalf of Map Ta Phut residents, disclosed that he was investigating as many 181 projects all over Thailand.
Pic source: Nation Multimedia
"The whole country will have to change," he said. "From now on, industry will have to worry about the environment and take care of the people. The government will have to also be much stricter about this."
Polyethylene (PE) and polypropylene (PP) producers expect trade to pick up only from the second quarter of 2010 when restocking activity will resume, writes our colleague Bee Lin.
Chinese importers are unlikely to build stocks before the Lunar New Year holidays which are in February. Operating rates at plastic units would also be low during this period.
Producers would then have to wait until March for a revival by when they would also see some support emerge from olefin markets. A heavy cracker turnaround schedule in Asia next year should keep ethylene and propylene supplies tight and prices firm.
An estimated 22 crackers would be shut for maintenance in 2010 compared with 15 facilities that were taken off line in 2009.
By Malini Hariharan
Even as market players celebrate the finish of what has been an unexpectedly good year there are not many who expect a repeat performance.
A key concern is Chinese demand which saved the industry in 2009. A massive government stimulus package boosted domestic consumption and imports of a wide range of petrochemicals.
But is this sustainable? And no is the answer that I am hearing. That of course makes betting on China a risky proposition.
Pic source: kafka4prez
"We expect Chinese demand to be good in the first quarter. But what will happen in the second quarter will depend on whether government stimulus will continue. Margins were good in 2009, but they will probably be squeezed next year," says a South Korean polyethylene exporter.
David Jiang of Beijing-based Sinodata Consulting says the Chinese government can't continue investing for growth.
"China faces an overinvestment problem in the coming years. Many industries face oversupply. Chemical companies are building plants for polyvinyl chloride (PVC), methanol or dimethyl ether (DME) despite low operating rates. The average industry operating for methanol and DME in H1 2009 was only 30-40%," he points out.
These investments are mostly made on government funding and few promoters care if the projects will make money. "It is a government gift," he adds.
Any deceleration in Chinese demand next year would coincide with the completion of more new projects in the country and elsewhere in the region. New capacities commissioned in 2009 are also expected to stabilize operations next year.
"We may be entering a period when supply would be easing. Will demand growth offset that? I kind of doubt it," says Mazlan Razak of Dewitt & Co.
But there are also reasons to not be too pessimistic about 2010.
Firstly, the global economic outlook looks better next year. This means that on the demand side, things will pick up in the rest of the world, points out Mazlan.
And though the Chinese government is likely to go easy on its stimulus program, it is unlikely to allow the economy to slow down.
A rise in the yuan dollar exchange rate could draw money from overseas and keep the asset bubbles from bursting.
A stronger yuan would make imports attractive and support overseas players in the Chinese market, says the Korean exporter.
China has the resources to chase growth and it has regularly been surprising sceptics. Let's hope it will once again do so.
Still too crowded...
Source of picture:www.tripadvisor.com
By John Richardson
Dear Readers - Welcome Back.
Having spent the last two weeks lying on Western Australian beaches, drinking beer and reading books on European history - while also building sand castles etc with my three-year-old son - I have given little thought to chemicals.
But here's to another year and another dollar - or quite possibly a lot less dollars if the forecasts of excess petrochemicals supply prove to be correct.
On the big-picture macroeconomic front these area few of the things we should also be worrying about:
*Global demand being too tied to government economic stimulus packages (Western governments will have to at some point ease back on stimulus to cut back on deficits in order to avoid credit downgrades leading to higher borrowing costs, or perhaps even defaults on debt; China has dollops more cash to spend on boosting the economy, but needs to worry about inflation)
*Consumer debt levels and unemployment in the developed world will remain high and so a big recovery in consumer spending seems very unlikely
*Restocking has come to an end across many industries including chemicals
The question is whether we will see a sustained V-shaped global recovery or a long period where global demand for everything, including chemicals, will remain much-below 2007 levels for many years to come.
My betting is firmly on the latter scenario.
Cash won't be as tight as early 2009, but some of the hype of H2 last year needs to be put into the context of all that restocking - plus the fact that numerous project delays have postponed the inevitable impact of a flood of new capacity. Even though more delays are likely, the amount of new volumes suggests a tough second half of 2010
The emerging markets story remains exciting, but demand growth in China, India and Indonesia (Indonesia being probably a much under-rated source of demand last year) won't be enough to return us to 2007.
Commodity chemicals companies that have made big-enough shifts to developing markets and/or to where the cheap feedstock is located should be OK - as long as tight inventory management, and therefore cash preservation, continues.
By Malini Hariharan and John Richardson
Expect the unexpected and you probably stand a good chance of making money in the polymer market.
Defying expectations of a slowdown in demand ahead of the Chinese new year in February markets have started 2010 with a bang - material is short and prices are steadily moving up.
Prices have risen by $50-170/tonne from early December. LdPE is now being talked about at $1450/tonne cfr China, lldPE at close to $1400/tonne cfr China while hdPE at $1350-1450/tonne. PP has hit $1300/tonne in China and one trader thinks that it will cross $1350/tonne by the end of the week.
"I bought a load of material in December and so I am delighted. Everyone else was being bearish, but I thought with the economy doing so well, why not [buy]," says a second trader
The first trader describes the markets as "being on fire" supported by the strength in crude oil prices ($81/bbl today) and tight availability because of plant problems in the Middle East and Asia.
Supplies from new plants (Sharq, Yansab, Fujian Petrochemical and Dushanzi Petrochemical) are still not arriving as expected, says a third trader. And if you add turnarounds and operating problems to the equation buyers face a very tight market.
However, there is still not much confidence that the bull run can be continue after operations at new plants stabilize. Concerns about the health of the global economic continue to cloud the picture. There is nervousness in some quarters that very high prices will only lead to a steep fall in the future. "Remember 2008? Everyone is scared of a repeat," says one producer.
But leave room for the unexpected to create surprises at least in the short term. For instance, severe winter conditions across most of the northern hemisphere are affecting petrochemical production.
Pic source: Xinhuanet
Our colleagues at ICIS news have reported that naphtha is short in Asia as a result of reduced shipments from Europe. This has forced lower operating rates at some aromatics units and Formosa's three crackers in Taiwan.
There have also been unconfirmed reports of a reduction in operating rates at some crackers in Europe.
In China, heavy snow in the northern provinces has closed expressways and affected movement of products, reports ICIS news. Chemical producers were also facing power shortages and they do no expect the situation to ease before March.
And China's cold spell could also affect start up of new plants. The second trader says Tianjin Petrochemical's new cracker complex is likely to start only after the Chinese new year, a delay from the earlier target of end-2009.
We have also heard that start up of new methanol-to-propylene (MTP) projects in the north, such as the Datang Power project, could be delayed to the second quarter.
"This season is not good to start up; companies would not like to take the risk," says a Beijing-based industry source.
More delays would tighten supplies further. And if demand holds up the bull run may not end very soon.
By Malini Hariharan
LyondellBasell's aggressive moves to convince creditors to approve its own reorganisation plan have drawn a reaction from Reliance Industries.
A source familiar with developments confirms that Reliance has raised its valuation of LyondellBasell to $13.5bn, up from $12bn and a letter has been sent to LyondellBasell.
But the Wall Street Journal reports that the LyondellBasell's board has rejected Reliance's latest offer as they deem it to be too low. LyondellBasell's own reorganisation plan has valued the enterprise at $15.5bn.
"Reliance has a valuation in mind and there is no point in quoting this on day one. The strategy is to start low and see what happens," says the source.
Reliance is also looking at participating in a $2.8bn equity issue that LyondellBasell has outlined as part of its reorganisation plan.
Does this then mean that Reliance would be willing to join hands with Access Industries and/or settle for a minority stake?
The source would only say that it is a fluid situation. " Reliance will be playing it by the ear," he says.
LyondellBasell has said that it has received substantial creditor support for its plan to reorganise the company and come out of US bankruptcy protection.
But the source stresses that unsecured creditors are not happy as they are getting virtually nothing.
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 soaring fourth-quarter GDP (gross domestic product) growth - and the release of the latest inflation statistic - has heightened fears among economists that interest-rate rises will be necessary, risking collapse in house prices if it's not managed skilfully.
Inflation rose to 1.9% in December last year from 0.6% in November, according to this same article in today's Financial Times.
As we've mentioned before on this blog it was higher deposit rates in late 2007 that caused the country's last economic contraction as property values and the stock market fell.
On this occasion an inflationary head-of-steam is being built up through not only rising real-estate prices (they were up in Shenzhen by 90% last year, for example, indicating that much more moderate nationwide statistics don't reflect localised inflation hot spots), but also higher food and utilities costs.
Just a few weeks ago the betting seemed to be on no rate rises before the second half of this year.
Now with the release of this latest GDP growth number, as we had suggested might happen earlier this week when we quoted the Lex column in the Financial Times, some pundits now think a rate rise before then is likely.
Higher deposit and/or borrowing rates - to follow fiscal tightening measures that have already been taken - would have another negative consequence for China: A stronger Yuan, denting export competitiveness for an economy that still remains around one-third dependent an overseas trade, despite all the talk about booming local demand.
A growing view seems to be that the Yuan will arise by around 3% against the US dollar. This would also dampen some of the speculation that has boosted petrochemicas demand (see details in link in paragraph above).
Yesterday we quoted Mazlan Razak, petrochemicals consultant with DeWitt & Co in Kuala Lumpur, as saying: "The last time China tightened liquidity in 2007 we saw a dip in PE imports. The imports fell to 4.6m tonnes in that year from 4.9m tonnes in 2006."
This is obviously the impact on only one polymer, and so tread with great caution when making plans for this year.
By John Richardson
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.
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.
South Korean producers have for long been dependent on the Chinese market to absorb a large percentage of their output. So it is perhaps not surprising to read that SK Energy plans to move the headquarters of its chemicals division to China. It is also said to be looking at hiving off the chemicals business into a separate unit.
This report says that the relocation is likely to be completed by 2015.
The company's official line is that the move to China is one of many options being considered for globalisation of SK Energy and that nothing has been decided as yet. No deadline has been set for a decision.
But the possibility is quite high as China already a major market for the chemicals division.
Plus SK is pursuing a joint-venture 800,000 tonnes/year cracker and derivatives project with Sinopec at Wuhan.
Progress has been slow and the last reported completion date for the project was 2012-13. A company source says talks have started with the main contractor. But he was unable to give a firm start up date for the project.
"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.
By Malini Hariharan
I have been reading a transcript of Dow Chemical's Q4 2009 earnings call and here are some interesting comments made by Andrew Liveris, the company's ceo.
Despite recording revenue and volume growth in 2009 Liveris was cautious on the outlook for 2010 citing an uncertain economic environment.
But constraints in Middle East supplies could lead to an early recovery.
"Even though there will be capacity adds, it won't come on when people think it will come on. We are one of the best operators out there and we had a slow start up of our Kuwait assets and we are very good at this. So I would tell you, you have not as much supply coming on as people think."
On the demand side, if global GDP expands at around 3% this year it would result in polyethylene (PE) demand growth of 4.5%. As global inventories are low across the chain restocking would push growth above this level, he said
Add to this 6-9m tonnes of high cost liquids cracking capacity rationalisation, 3m of which is already permanently down, gas not as freely available in the Middle East as people think and ethane cost advantage in the US which is now the second lowest cost producer on ethane.
Pic source: ICIS
"So when you put all that together, I think there is a case for a trough-like environment in 2010 with the excess capacity, a recovery in 2011 and a peak environment in the 2013 timeframe," he said.
He pointed out that Dow had effectively capitalised on its flexi-feed crackers and 20% of its US production in Q4 2009 was exported to China.
On implementing the asset-light strategy for basic chemicals, Liveris stressed that he was "not in a hurry to get it done at the wrong valuation" especially as the business generated an EBITDA of 1.7 last year.
"That is in a trough, demand led trough and great recession of all time. So we know we have a very high performing asset. The partners we are talking to are all strategic. There is three of them," he said.
And Dow was keen to implement the asset-light strategy for its chlorine business after completing ethylene-PE and styrenics.
"Today a good chunk of our chlorine capacity in Louisiana and Texas will feed our downstream chlorine envelope for performance businesses and be advantaged because it is integrated. You can expect us though to continue to find meaningful partnerships with people who want to be in PVC. So in essence, we will use our competitive advantage to partner with others because you have to have scale in the chlorine side. That should help us create an asset-light strategy for chlorine. We are determined to do that."
ICIS news also reports that Dow still plans to start up the first units at its Ras Tanura joint venture with Saudi Aramco in 2014 or 2015.
Prices have fallen for Middle Eastern engineering, procurement and construction (EPC) contracts and this has given a reason for Dow to delay releasing contracts.
But Liveris said Ras Tanura was moving ahead 'nicely on its milestones" and Dow would have more to say on the project by the middle of the year.
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.
By Malini Hariharan
With start-up delays, commissioning issues and operating troubles becoming increasingly common across the Middle East and many parts of Asia, I have been asking industry players on what they think are the major issues that companies are facing.
At the top of the list is the shortage of skilled manpower. We have been hearing a lot about this for the last five years. The shortage during the engineering and construction phase of petrochemical projects during 2005-08 is well documented.
But starting-up huge cracker complexes with a number of derivative units (PE,PP, MEG etc) also requires experience and skills - both of which are in short supply. Given this, they say, the problems are inevitable.
"A start-up [of a cracker] is (always) a tricky situation. Almost everyone faces problems; you have to be lucky to cut-in feed and get on-spec product in 48-72 hours," said a source at a leading petrochemicals company.
"A few have achieved if basic engineering has been done well and the commissioning staff is good.
A second factor is lack of familiarity with some of the newer technologies.
A source at a regional polyolefins producer says design and construction issues have also affected operations.
"Many of the plants were built at a time when raw-material costs were at their peak and some compromises were probably made," he said.
"I have been hearing of vessels and pipes corroding within a few months of start-up while older plants have been running for years without any issues."
A source at an engineering company thinks this is very much possible.
"Compromises could have been made in projects that were awarded on a lump sum turnkey (LSTK) basis just prior to the economic boom period of 2005-07."
And there is yet another reason for start up delays.
"Contractors can achieve mechanical completion of a plant on time but the client has to be prepared for start-up," says the source from the engineering company.
"He has to arrange for utilities and raw materials. If the client is not prepared or inexperienced then delays happen."
Even after a plant has successfully been commissioned, there are other issues that often affect operations.
This second source cited difficulties in coordinating work between sub-contractors and cultural issues as more locals from the Middle East countries have entered the work force.
"Many of the locals do not have experience in operating plants; their culture is also different from expats who have traditionally managed plants," he added.
But companies are working hard to resolve problems. Experienced engineers are being recruited to run the plants.
Another source from a petrochemical company said that Indian engineers over the age of 50 were being offered jobs to manage petrochemical plants in the Middle East.
"Earlier, only engineers in the 30s used to go. Age is no longer a bar," he added
It may take a while but companies should eventually get it right. That's when we will see the full flow of material - an event the industry has been fearing for a long time
By Malini Hariharan
A few weeks back I had written about robust demand growth figures emerging from the Indian polymer market. I will be posting some numbers over the next few days but ahead of that I would like to highlight what industry players have been saying on the major growth drivers and also developments in the BOPP sector where huge capacity additions are underway.
Polyethylene (PE), polyvinyl chloride (PVC) and polypropylene (PP) posted double-digit growth in 2009 and even polystyrene (PS), a laggard in the best of times, also reported a positive story.
Restocking has contributed to the numbers but producers also report a fundamental increase in demand. It must be remembered that India was one of the few countries to post growth during the meltdown of 2008.
Packaging and infrastructure continue to remain the key drivers with healthy contribution also from the automobile and electronics sectors.
A strike called by jute workers in December has helped increase sales of PP and hdPE in the raffia sector. India's Jute Packaging Materials Act mandates that jute should be used for most foodgrain packaging. But the strike has curtailed jute supply and prompted government departments to issue orders for raffia bags.
Orders amounting to 20,000-25,000 tonnes of PP have already been issued, says one industry source. And as the strike is still on, a second source estimates that the figure is likely to hit 50,000 tonnes by 31 March 2010. This figure includes hdPE but PP will have a bigger share.
"If the strike continues there is going to be tremendous pressure on raffia grade," says the first source.
And the second source adds that many processors who have received government orders for raffia bags are facing problems in securing material.
The raffia sector accounts for around 32% of PP demand and 16% of hdPE.
PP volumes in this segment are estimated to have grown by nearly 20% during April-December 2009.
Moving to BOPP, this segment continues to show good growth but processors expressed concern about the overcapacity that is building up in the country.
India's installed capacity for BOPP film during fiscal 2009-10 is estimated at around 258,000 tonnes/year during 2009-10. This is projected to rise to 336,000 tonnes/year in 2010-11. Demand in 2009-10 was around 195,000 tonnes and is expected to reach 250,000 in 2010-11.
Indian manufacturers of BOPP film will have to export but face competition from China.
"There are three places in world where demand growth is growing - India, Middle East and China," says Indrajit Ghosh, general manager business development, at Uflex.
But the problem is that capacity additions are taking place at all three locations.
He estimates that global BOPP capacity last year was around 5.7m tonnes last year as against demand of 5.3-5.4m. Global demand growth is expected to be in the 7-8%/year range.
"There are huge capacity increases taking place in the Middle East and Africa - Rowad International will add a 3000 tonnes/month line in Saudi Arabia; Gulf Packaging will start a 2500 tonnes/month line in Saudi Arabia; Flex will commission a 3000 tonnes/month line in Egypt and two plants with a total capacity of 6000 tonnes/month will start in Nigeria," says Ghosh.
Uflex will also be starting a line in Egypt in the next three months.
"There are lots of plants in China and the country is continuing to expand. Every year 8-10 new lines are coming up," he adds.
And the problem is that China too will be aggressively targeting the export market.
By Malini Hariharan
Some numbers today on Indian polyolefin and polyvinyl chloride (PVC) demand growth during April-December 2009.
The strong growth trend noticed in the early part of last year continued and belied earlier expectations of a slowdown because of a drought over parts of India.
PVC and polypropylene (PP) recorded the fastest growth rates driven by demand from the packaging and infrastructure sectors.
PVC demand was estimated to have risen by 30% to around 1.35m tonnes, compared with April-December 2008, on strong sales in the pipes segment, which accounts for 70% of consumption.
"This was a surprise as we were anticipating growth of 10-15%; the economy was not doing well at the end of 2008 and we were bogged down by this. We thought the numbers would not be good," said one PVC producer.
But sales remained brisk for most of 2009. Local producers sold an estimated 775,000 tonnes while around 560,000 tonnes was imported into the country. The import volume has been steadily growing over the last few years as there has been very little capacity addition in the country. Chemplast started operations at a new 200,000 tonnes/year plant in September 2009 but the volumes were easily absorbed.
Producers pointed out to a slowdown in sales since December.
"Some destocking is happening. But 24-25% growth for the full year [2009-10] should be possible," said a second PVC producer.
A third producer was more conservative projecting growth of around 20% for 2009-10.
PP demand rose by nearly 29% to 1.6m tonnes during April-December 2009, although growth rates were expected to moderate to around 20% for the full fiscal year.
Film, raffia injection moulding and non-woven sectors did well and PP also benefited from a revival in the auto sector.
Despite introduction of provisional anti-dumping duties on PP in February 2009, India imported about 300,000 tonnes during April-December 2008, up from about 100,000 tonnes in the same period in 2008.
With the commissioning of Reliance Industries Ltd's new 900,000 tonnes/year plant at Jamnagar Indian exports also increased, rising from 200,000 tonnes to nearly 500,000 tonnes.
In polyethylene (PE), low-density polyethylene (ldPE) showed the strongest growth with demand rising by about 25% to 260,000 tonnes aided by easy availability and a favourable price differential with linear-low density polyethylene (lldPE).
LLdPE demand was up 16% at 690,000 tonnes while high-density polyethylene (hdPE) demand expanded by 13% to 980,000 tonnes.
Import volumes also rose. LdPE imports were at 120,000, up 71%. LldPE and hdPE imports doubled to around 225,000 tonnes and 340,000 tonnes respectively.
"The packaging sector has been doing exceedingly well. We are seeing good growth in pipes for water distribution and conduit pipes for telecommunication cables. Drip irrigation is also a promising sector. The only area that is a problem is PE bags where there is negative growth because of environmental concerns," said a market source.
While market players were confident about long-term growth prospects they were cautious in their assessments for the January-March 2010 quarter.
Buying had slowed down in recent weeks as processors were apprehensive of a downward revision in polymer prices and a possible change in excise duties on finished plastic products in the Indian budget which will be announced on 26 February, they said.
Producers also stressed that the high growth numbers seen in 2009 were partly because of negligible growth recorded in the previous year due to the the financial crisis.
"There was some pent up demand at the beginning of the year; we should not set much store by this year's growth numbers and think that India can grow at this level continuously," cautioned the third PVC producer.
But he adds that 9-10% PVC growth in 2010-11 looked possible.
The market source concurred: "This year's high growth is partly because of inventory correction. But an interesting fact is that unlike other markets [around the world] which showed negative growth in 2008, Indian polymer market grew by 4-5%. So even if you take the last two years the Indian performance is still good".
By Malini Hariharan
PTT Chem is likely to miss its revenue growth target of 20% this year because of the Map Ta Phut crisis.
The company had set a 2010 revenue target of about Baht100bn (US$3bn), up from Baht80bn in 2009, reports the Bangkok Post.
As reported by this blog last month, suspension of parent company PTT's sixth gas separation plant would result in lower operating rates at PTT Chemical's new 1m tonnes/year cracker.
The company's president and ceo Veerasak Kositpaisal has said the cracker would run at 60-70% initially.
He also said that the cracker would supply 400,000 tonnes to a new lldPE plant, and 300,000 tons would be supplied to ldPE plant. Commerical operations at these two plants have been scheduled in the second quarter.
The rest of the ethylene from the new cracker would be supplied to a new hdPE plant which is on the list of suspended projects, said Kositpaisal.
ICIS news had reported last week that PTT may delay the startup of the new ldPE plant from end-February/early March because of a shortage of ethylene. The extent of delay was not specified.
The shortage has probably been aggravated by an unexpected shutdown of two older crackers last week because of a power outage in Map Ta Phut. The I-4 No 1 and I-4 No 2 crackers, which have nameplate ethylene capacities of 515,000 tonnes/year and 400,000 tonnes/year, are due to restart this week.
Meanwhile, the Office of the Attorney General has petitioned the Thai Administrative Court to allow 12 projects at Map Ta Phut to resume construction. The operators of these projects would carry out health and environmental impact assessment studies through the construction period. The argument being put forward is that there would be no pollution during the construction phase.
Most of the projects are linked to the Siam Cement Group and include Thai Polyethylene, Thai MMA and BST Elastomers.
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."
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 John Richardson
A remarkable feature of early 2010 has been the tremendous margins enjoyed by Asian ethylene producers.
Profitability in February, up until the end of the second week, had been the strongest since 2001, according to my colleagues who produce the weekly Asian Ethylene and Polyethylene (PE) Margin Reports. We will provide some graphs illustrating their findings a little later.
A dip in exports from Iran as all gas streams have been diverted to power and domestic consumption during the winter months
*Strong co-product credits from benzene in early January. These fell back, but then recovered late last week
*Shell Chemicals buying ethylene to run its new monoethylene glycol (MEG) plant at Jurong Island in Singapore
PE profitability, too, has been good - although the stand-alone players have inevitably come under a lot of pressure of as C2 prices have soared.
It's been so easy over the last 18 months to paint many gloomy pictures of the future that haven't come true for all sorts of reasoj.
And right now in the case of ethylene, Iran might be in a position to export more C2s as the weather gets warmer.
Shell is reported today to be buying more ethylene - but this time to test-run its new Singapore cracker.
When the cracker comes on-stream, which could occur in March, the global oil and petrochemicals major will be exporting around 115,000 tonne/year of ethylene from Singapore.
And perhaps needless to say, there are the threats to olefins and polyolefins in general from tighter credit in China and new capacities yet-to-arrive in the market.
This slide, from the re-launched ICIS global ethylene capacity tracker, illustrates the flood just around the corner:
By Malini Hariharan
It is not surprising to read that Reliance Industries has raised its offer for LyondellBasell by $1bn to $14.5bn. The blog had been told last month that a higher offer was one of the strategic moves that Reliance would have to make.
The Wall Street Journal reports the new Reliance offer would give some creditors a chance to get cash for their claims. "Creditors could also choose to receive stock in the restructured Lyondell under the new offer. A third option would allow some creditors to receive stock and also purchase additional Lyondell stock in a rights offering," it states.
And the revised offer would give Reliance only a minority stake in the company but also a supervoting power to control Lyondell's board.
A source close to developments had earlier told the blog that Reliance would not be interested in a small stake.
"Anything less than 26% would not be acceptable; [with 26%] there is a possibility of a board seat; there is some legal standing," he had said.
The source was, however, unwilling to comment today on the latest move and would only say that the deal was at a sensitive stage.
The Wall Street Journal also reports that Reliance has been attempting to persuade LyondellBasell to accept its offer as "a tie-up would create up to $1 billion in cost savings from synergies between the two companies".
But will this coupled with the $14.5bn offer be enough to tempt a reluctant LyondellBasell management? Maybe not as the company's own restructuring plan is said to value LyondellBasell at $15.5bn.
The company's recent announcement that it has reached a $450m settlement to satisfy a dispute with unsecured creditors indicates that it is making good progress on its own.
Is it time for Reliance to be more aggressive or is bumping up the offer a billion dollars at a time a better gameplan?
By John Richardson
"IF YOU want to develop a good memory, you should learn to stop xxxxxxx forgetting, you brain-dead idiot" a former editor of mine often said, in his charming Glaswegian accent, after I had made the same mistake yet again.
The same might apply to petrochemicals where maybe, just maybe, shutting down capacity with so few new projects being planned post-2011 could end up being the wrong decision - prompted by the mistaken belief that history won't repeat itself.
This chart, drawn up by my colleague and fellow Asian Chemicals Connection blogger Malini Hariharan, lists the paucity of announced investments in the Middle East. (It's hard to think of that many projects elsewhere.)
The chart shows announced new ethylene additions for the region:
"I noticed that 2015 was the date identified by KPMG by which time 14 of the 43 crackers in Europe should have shut down," said a senior industry source yesterday - referring to a recent study by the management consultancy.
"But by 2015-16 I think we could be in the midst of the next up-cycle and so anybody who exits this business, no matter how uncompetitive they seem to look right now, might end up regretting it."
I wasn't entirely sure, having only met this particular source once before, whether he was having a little fun with a gullible journalist by suggesting that old European crackers really have a future in a world dominated by the Chinese and the Middle East.
His broader point, though, was as old as the hills and might still have validity: Companies overbuild when they have money and markets are tight, suffer when supply lengthens and so hardly invest at all; they once again find themselves in very tight markets and so on and so on.
In the midst of all the talk of a new and permanently-changed competitive landscape, this reminds me of how the Japanese government back in the early 2000s warned that around 2m tonne/year of the country's uncompetitive ethylene capacity would have to close dow within a couple of years.
All of that capacity is still running and has made good money from the China boom.
The above scenario - of an upswing by 2015-16 - presupposes, though, that the world economy won't suffer any further cataclysmic setbacks.
Put yourself in the position of a European cracker operator with all the above uncertaintie. Unless you are absolutely forced to shut down why bother?
It would be pretty damned annoying to be the first to shutter your plant - only to later find out that you were also the last due to a strong market recovery!
By Malini Hariharan
Just when Asian propylene prices started easing comes news of disruptions in production and price hikes in the West.
Propylene availability in Europe was hit after a strike by Total's refinery workers early in the week resulted in the closure of 36% of France's C3 capacity. This forced Total to declare force majeure on propylene supplies. Then Shell Chemicals declared force majeure on ethylene and propylene supplies from its Moerdijk cracker in the Netherlands due to reduced operating rates.
The strike at Total has been called off and production at the refineries will be restarting soon but the developments helped tighten an already short European market and supported an increase in the March propylene contract price, reports ICIS news.
The US too is expected to see increases in propylene prices with one producer nominating a $110 increase for March.
Asian propylene prices have yet to react strongly to these developments although sellers are trying to raise prices. They will of course be supported in this endeavour by upcoming cracker turnarounds.
"Some traders are also trying to take Asian propylene to the West; we had an offer. But the arbitrage window is not big. Asia appears to be adequately supplied," says a source from a major Asian cracker operator.
Meanwhile, the propylene situation has started to impact PP markets. European buyers are bracing for PP price hikes in March while offers in the Middle East have already risen by $30/tonne, reports ICIS news. Availability from this region is likely to be constrained in March as Oman Polypropylene and Advanced Polypropylene will be carrying out maintenance shutdowns in March.
"Polymer markets opened with a bang after the Lunar New Year; prices went up yesterday. There are the Asian turnarounds and people are still struggling with new plants," the source points out. This is certainly creating room for optimism, he adds.
By Malini Hariharan
And Sumitomo Chemical has discovered this.
The company recently said that PetroRabigh, its joint venture with Saudi Aramco in Saudi Arabia, has managed to secure fresh ethane allocation of 30m scf of ethane for a second phase of projects.
Ethane is running short in Saudi Arabia and getting an allocation, even a small one, is an achievement. But the second phase will need to use naphtha - about 3m tonnes. This will come from PetroRabigh's phase one which includes a refinery.
For phase one PetroRabigh had received an allocation of 95m scf of ethane sufficient to support a 1.25m tonnes/year cracker.
Details about the second phase are still sketchy. A feasibility study is due to be completed in the third quarter of this year and if viability is confirmed the projects will start up in Q3 2014, says Sumitomo
Pic source: PetroRabigh
The products being studied include ethylene propylene rubber, thermo plastic olefin, methyl methacrylate monomer (MMA) and poly methacrylate (PMMA), low-density polyethylene (ldPE), ethylene vinyl acetate (EVA), caprolactam, polyols, cumene, phenol, acetone, acrylic acid (AA), superabsorbent polymer and nylon 6.
But PetroRabigh phase two does not figure in Sumitomo's three-year plan, unveiled recently, as the plan runs only till fiscal 2012.
The plan does not have any surprises in terms of company strategy but Sumitomo has set some very tall sales and profit targets which might be difficult to achieve.
Despite an uncertain global economic outlook the company has set a sales target of Yen2,400bn and operating income of Yen190bn in fiscal 2012. This would mean a return of equity of 20%, up from the 1.8% projected for 2009-10.
"The numbers are too aggressive. Sumitomo has large exposure to cyclical businesses such as petrochemicals and information technology (IT); it will be quite difficult to achieve [the targets] if the recent price trend continues. The price assumptions for ethylene and polyethylene are very optimistic. A recovery in domestic petrochemicals is a dream story," says a Tokyo-based analyst.
To achieve its overall targets Sumitomo has said that it will quickly maximize profits and cash flows from major investments including its PetroRabigh cracker and derivatives joint venture with Saudi Aramco.
In petrochemicals, the company's policy is to ensure sustained profitability by establishing global operations. To achieve this Sumitomo plans to establish a worldwide marketing operation built on globally standardized products.
Profitability of operations in Japan would be strengthened, says the company without giving specific details on how this will be achieved.
"The issue of [improving] petrochemical competitiveness in Japan has been discussed for a decade; many people are sick of the discussion. The product mix is important. There should be more high performance chemical products. Sumitomo and Mitsui Chemicals have to change its business structure and not rely on ethylene derivatives," says a second analyst.
Sumitomo too is thinking along the same lines.
"We will increase the proportion of value-added petrochemical products we produce domestically from the current 70-80%," says a company spokesman. All options are being explored including new technologies and feedstocks and alliances.
A recent example of activity in this area is the new 150,000 tonnes/year propylene demonstration facility, a 50:25:25 joint venture by Idemitsu Kosan, Sumitmo and Mitsui.
Each company will contribute C4 fractions to the new unit and offtake propylene in proportion to their investment.
Sumitomo is unwilling to give details on what it plans to do with the extra propylene and would only say that it would be used for downstream production.
These and other initiatives are expected to help Sumitomo achieve petrochemical sales of Yen785bn and operating profit of Yen30bn in fiscal 2012, up from forecasted sales of Yen500bn and an operating loss of Yen9bn in the current financial year.
But the share of petrochemicals and basic chemicals in total sales is projected to shrink in the future from 43% in 2009-10 to 30% in fiscal 2020 as Sumitomo's priority is to achieve a balanced business portfolio.
Pharmaceutical and agrochemicals would contribute about 30% of total sales in 2020 almost unchanged from the current level, while the share of information and communications technology (ICT), battery and fine chemicals portfolio would expand to 30%, up from 21%.
Investments will be made to ensure this balance. The petrochemicals and basic chemicals segment would draw only about 20% of the company's investment dollars through 2020 while the other two segments would each draw 40%.
By Malini Hariharan
LyondellBasell's board is reported to have rejected Reliance Industries' revised $14.5bn buyout offer.
The rejection is not surprising as LyondellBasell is said to have valued itself at $15.5bn in its restructuring plan.
Reliance still has room to up its offer although financial analysts are worried that a high-priced deal would not be favourable to shareholders. And this was evident in the stock market today with Reliance shares moving up in reaction to the latest news reports. Investors perceived the rejection to be positive as it saves Reliance from making an expensive buy.
But if an acquisition makes sense then it is probably time for Reliance to be more aggressive and place an offer that LyondellBasell would find difficult to reject.
Meanwhile in another interesting twist to the story, the New York Post says that Apollo Management, the private equity company which is one of LyondellBasell's key creditors is looking at merging the company with Hexion Speciality Chemicals. Apollo has an investment in Hexion.
By John Richardson
PROPYLENE pricing is heading for "a crash" in Asia as a result of spot supply increasing by around 20,000 tonne/month, a senior industry source has told the blog.
Shell Chemicals will have a surplus 440,000 tonne/year of C3s from its Singapore cracker - in the process of starting up right now - as the oil-to-chemicals major failed to attract propylene derivatives investors, he added.
"There will also be a substantial surplus from the Map Ta Phut complex when the Dow Chemical/Siam Cement cracker is on-stream."
The Dow/Siam cracker is again in the process of being commissioned.
A second industry source added: "The market is bracing itself for huge C3s surplus once Shell is fully operational.
"You can add to the Singapore and Thailand surpluses, 150,000 tonne/year from Vietnam (the PetroVietnam fluid catalytic cracker) and 100-150,000 tonne/year of additional supply from Saudi Arabia."
Olefins supply has been pretty tight in Asia of late, helping to support the sustained rally in polyolefins (see graph below)Source of graph: ICIS pricing
With a lot more polypropylene (PP) capacity due on-stream this year, it's easy to forecast that this greater supply will combine with weaker support from feedstocks to bring about the long-awaited trough in PP pricing.
"We are talking about an awful lot of extra spot C3s into what is a very thinly-traded spot market. I can see propylene going from being a co-product back to by-product status," added the first industry source.
More liquefied petroleum gas (LPG) cracking and changes in cracker severity will probably be methods producers use to reduce the propylene surplus.
PP producers might benefit. They should have greater ability to discount as they battle for market share against their polyethylene (PE) competitors.
(Ethylene markets will also become longer, with new merchant-market supply including 115,000 tonne/year from Shell in Singapore However, the total surpluses don't look as if they will be as disruptive as those in C3s)
And the stand-alone PP producers - some of whom have had to shut down recently as a result of high C3 costs - may be able to resume production.
By Malini Hariharan
A new problem is brewing for Iranian petrochemical producers. It appears that the government is quite keen on raising feedstock ethane prices and this issue is now under 'hot negotiations'.
"The National Iranian Oil Co (NIOC) and the petroleum ministry would like to rationalise the price of ethane according to the international trend and not subsidise it; different formulas are being considered," he says.
The price could either be based on heat value or linked to that of propane and butane which have international prices. The formula could also have a mix of these two elements.
The source was confident that an agreement would be reached by the end of the year. The net result would be higher ethane prices. The cost is now less than $75/tonne, he says.
The rationale for price hikes is easy to understand. Like many other governments in that region, Iran too sees gas as a national resource that is for all generations.
"If they sell it cheap now then they will be questioned in the future," points out the source.
Another important factor is Iran's privatisation drive that is part of the country's fourth Five Year Economic Development Plan (2005-2010).
"Previously all plants belonged to the government. So the value was transferred from one pocket to the other. But now plants are being built by the private sector," says the source.
Pic source: Tehran Times
But he was optimistic that the price hike would be moderate as the government would not want to jeopardise petrochemical investments. A compromise is likely to be reached that would give the government better returns on the national asset and keep Iranian producers competitive.
The source was also critical of the privatisation drive as it had resulted in confusion in the market place.
Each Iranian petrochemical company is now free to set up its own sales and marketing operations and not necessarily sell its products through Iran Petrochemical Commercial Co (IPCC). In addition to this, independent sales and marketing companies can also be established that can act on behalf of local petrochemical companies.
And if that is not sufficiently confusing, every company also has the option of continuing to use IPCC to sell part or all of their production.
IPCC has been partially privatised and it is possible that it would eventually be fully privatised.
"The Iranian petrochemical industry is passing through a transition sage where the state-owned companies are being separated into many small private companies, as happened in the former Soviet Union.
"The customer does not come know whether to go to IPCC or the plant operator. The decentralisation has created confusion.
"The passage will be expensive as the country will loose some opportunities. We now have small producers with no brand; we are lost in the market; who will remember us?" he asks.
Smaller companies are likely to consolidate over time although this would not be a state directed effort, he adds.
What's the gas?
Source of picture: wwww.arabianoilandgas.com
By John Richardson
SAUDI Arabian feedstock pricing arrangements for ethane, liquefied natural gas (LPG) and naphtha could change in 2011 - affecting the competitiveness of existing and future investments, two well-placed sources have told this blog.
Ethane is currently still priced at around 75 cents/mBTU and there is a formula for LPG, based on a discount from prevailing CFR Japan naphtha prices, we have been told.
It wasn't immediately clear whether any change in how ethane is priced would affect existing or only future plants.
But the LPG discount available to Saudi Arabia's mixed-feed crackers and its propane dehydrogenation (PDH)-to-polypropylene plants has been reduced by one percentage point per year since 2003, one of the sources said.
"It now stands at a net discount of 20% (we've also been told it is still 28%) with a lack of clarity on what's going to happen next year, as is the case with ethane and naphtha - it's up to the government," he added.
The current formula for naphtha pricing wasn't immediately available, but naphtha use for petrochemicals is minimal in Saudi Arabia.
Perhaps not so in the future as the Kingdom continues to deal with an ethane gas shortage due to dwindling additional supplies via associated gas.
Rising demand for natural gas for power generation is also an issue for Saudi petrochemicals, as is the case across the Gulf Cooperation Council (GCC) region.
The economics of cracking naphtha in Saudi compared with natural gas is being questioned compared with the alternative of shipping the feedstock out to naphtha crackers in Asia. This might now change in either direction.
The second source made the point that even if ethane and LPG prices are adjusted, Saudi's gas cracker and PDH competitiveness - especially in a high oil price environment - will remain very strong.
"A change to how ethane is priced might actually be a good thing as it will mean an even closer look at the viability of future investments," he said.
By Malini Hariharan
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.
.....but time to party for some thanks to re-exports to Brazil
Source of picture: edgsgonesouth.com
By John Richardson
It's a funny old world - or so it seems in poylolefins at the moment as traders re-export resin from China to Latin America and elsewhere.
"I phoned up a trader in China the other day and asked if he wanted to buy some consignments of polyethylene (PE)," said another trader, based outside China.
"He asked me whether I would instead like to buy material for re-export."
And yet another trader - who is based in Singapore - added yesterday: "A lot of the re-exports have gone to Latin America, but I have also sold material to Bangladesh and Israel.
"Some of the shipments have made money. For example, I bought Linear-low Density PE (LLDPE) from Brazil at $1,170 CFR China a few months ago. Last week, I sold the same cargo back to Brazil at $1,450. With freight at $170/tonne I made a decent profit.
"Other re-exports have lost money, though, as traders have cut their losses due to high inventory levels in China.
"I estimate around a total of 10,000 tonnes has been re-exported over the last few weeks.
"This is a very small amount when measured against the huge volumes traded, but it seems to have helped sentiment a little. Confidence has slightly picked up in the Chinese trading community as a result of the re-exports easing inventory pressures."
Bonded warehouses in the south, the east and the north of China were, however, still close to full, he added.
"The problem is that traders purchased a lot of material in November and December because confidence at that time was high.
"They underestimated the risks of weakening monomer prices undermining support for both PE and polypropylene (PP) pricing, and measures the Chinese government has taken to slow the economy down."
Successful start-up of the new 800,000 tonne/year Shell cracker in Singapore took place on 22 March, according to an official announcement.
And in Thailand, Mab Ta Phut Olefins was heard to have achieved on-spec production at its 900,000 tonne/year naphtha cracker, ICIS news reported yesterday.
Shell was expected to export around 150,000 tonnes of ethylene and 250,000 tonnes of propylene on an annual basis, while Mab Ta Phut Olefins would ship out more than 100,000 tonnes of propylene a year, the same news report added.
But the blog has been told that much more than 100,000 tonne/year of extra propylene will be available for export from Thailand over the next 12 months.
And returning to ethylene, exports are expected to increase from Qatar and Saudi Arabia.
The mood among poylolefins buyers has shifted in China towards one of much-greater caution, added the Singapore-based trader.
"I recently visited five factories where all the factory owners knew that resin was long and didn't feel in a hurry to buy beyond their immediate needs.
"They can smell blood in the air as new capacities are coming on-stream and plants that have already started up are ramping-up production.
"The buyers also know that the traders are coming to the end of their 90-day credit terms and so are desperate to sell stuff out of the bonded warehouses.
"End-users are also becoming much more cautious because of the uncertainty over government economic policy and a potential Yuan revaluation. And they are struggling with the labour shortages."
The good news, though, seems to be that overseas producers are in comfortable positions due to their low stock levels.
"We are in no hurry to sell as we continue to manage our production very prudently," said a Singapore-based source with a global polyolefin producer.
The trader said that this was a comment that had been made by many of the big Asian ex-China and Western producers
"One of these producers has been offering PP homopolymer grade at $1,350 CFR China, which is completely unworkable as the current China price is $1,310, suggesting a comfortable position."
But the longer-term issue remains the strength of growth in China this year (to repeat, we think it's bound to be lower than 2009) as all the new capacities start-up.
Ras Tanura in Saudi - private companies bunkered by feedstock shortage?
By John Richardson
The gas feedstock shortages in Saudi Arabia - which we have commented on before - are such that no private company will receive any allocations in the future, claimed an industry source.
"It's only going to be for Saudi Aramco and SABIC from now on," he added.
Several privately-owned propane de-hydrogenation (PDH)-polypropylene (PP) plants have recently been commissioned in the Kingdom, whereas private ownership of crackers has never really got off the ground.
Saudi Arabia's Minister of Petroleum and Mineral Resources, Ali Al-Naimi, was reported to have said last December that the Kingdom was working on making more ethane available for petrochemicals.
But several well-placed sources we have spoken to have said that this was unlikely to happen anytime soon.
Al-Naimi pledged that investments in the sector would be maintained as Saudi Arabia tries to raise its petrochemicals capacity from approximately 60m tonne/year at the moment to 80m tonne/year by 2015.
This suggests that the way forward to more petrochemicals could well be naphtha - making the decision on how the feedstock will be priced into petrochemicals in the future crucial. An announcement is expected next year.
Of the $120bn that Aramco has pledged to spend in the Kingdom over the next five years, half will be invested in petrochemicals including the naphtha crackers that are part of the huge Ras Tanura project with Dow Chemical.
Media reports say that plans to expand the refinery at Ras Tanura - which would provide the feedstock for the crackers - has been shelved indefinitely.
Reports earlier in the week suggested that the petrochemicals portion of the project could be moved due to issues surrounding terrain at the current site, which is on Saudi Arabia's west coast.
Aramco and Dow have not made any comment.
A high chance of more showers
Source of picture: www.stuff.co.zn
By John Richardson
A closer look at last year's polyolefin trade flows illustrates just how vulnerable European producers will be over the next few years to rising pressure from Middle East imports.
"The volume of trade in Western Europe (intra-regional plus imports) for all the grades of polyolefins and polyvinyl chloride (PVC) fell by between 3% and 18% in 2009," said Jean Sudol, president of International Trader, the New York-based trade-data analysis service.
"But at the same time imports from the Middle East actually increased."
A slowdown of imports into China seems inevitable this year after the staggering increases seen in 2009. For example, low-density polyethylene (LDPE) imports rose by 90% over the previous year to 1.34m tonnes and polypropylene shipments were up by 49% at 4.2m tonnes.
"A reduction in government stimulus, new capacity in China and the difficulty in repeating the sheer size of imports in 2009 points to a slowdown in 2010," added Sudol.
"My guess is that imports won't fall back to 2007/2008 levels and will still be high in 2010, but not as high as in 2009."
So the Middle East producers, as they ramp-up capacity this year and in 2011, will be searching for other destinations to compensate for a dip in demand from China. Europe is an obvious port of call.
ICIS pricing's Worldwide ethylene plant report shows that in the five years from 2008 to 2012, around 29m tonnes/year of new ethylene capacity will be added.
Nearly 16m tonnes/year will be added in the Middle East and around 14m tonnes/year in Asia, of which China accounts for nearly 7m tonnes/year, says the report.
This has partly been offset by the 2m tonnes/year that has closed in North America.
However, some 16m tonnes/year of this capacity growth was still to become operational as of the end of February 2010, the report adds.
"Ethylene demand actually fell in 2008, as economies crashed and extensive de-stocking took place throughout the value chains," wrote my colleagues Paul Ray and Peter Taffe in a recent article on our magazine, ICIS Chemical Business.
"In 2009, demand recovery has been weak. In normal market conditions, a rule of thumb indicates that ethylene demand globally grows at 5m tonnes/year. "
Paul Hodges, UK-based consultant with International e-Chem, added: "These new Middle East plants are going to run at close to the optimum rate of 93%, regardless of market conditions, because of their feedstock advantages,"
A painful reckoning is clearly at hand with restructuring likely to be given some extra impetus by problems in the European refinery industry.
Source of picture: help.berberber.com
By John Richardson
PRIVATE Saudi Arabian petrochemical companies need not fret about the ethane-gas shortage that two sources had last week told us would hold up their development, according a third industry source we spoke to today, who is based in the Middle East.
"The private companies I've spoken to recently, all see a bright future for themselves in investing in more differentiated downstream products," this third source added.
"The objective is to broaden the range of petrochemicals produced in the Kingdom order to create more downstream jobs. This doesn't necessarily mean having to build a cracker.
"More differentiated petrochemicals, such as acetyls, tend to be smaller in scale than your standardised polyethylene (PE) and mono-ethylene glycol (MEG) plants and there is plenty of spare ethylene within the Saudi system."
The private company Sipchem, for example, decided to cancel its proposed cracker because of mounting costs and the availability of spare C2s, he added.
"It only needs around 250,000 tonne/year of ethylene for its acetyls projects, which are in the process of being brought on-stream right now at Al-Jubail.
And interestingly, more spare propylene might become available if any of Saudi Arabia's four propane dehydrogenation-polypropylene (PP) producers decide to expand.
"Each of the plants has the feedstock allocation to raise C3s output by 20%, but they might not also increase PP capacity.
"And we could be talking about cross share-ownership by feedstock suppliers in some of these downstream projects. If not, discount or transfer pricing arrangements for feedstock off-take are still likely."
As for the Saudi Aramco strategy of potentially cracking naphtha, the source said: "Aramco is losing huge amounts of money on its refinery operations when it sells products locally because of subsidised pricing for gasoline, diesel etc.
"So adding naphtha-based petrochemicals will result in better returns, even if they are weaker than cracking ethane."
Singapore's container port
Source of picture: www.gcaptain.com
By Malini Hariharan and John Richardson
A big challenge facing many companies that have built large polymer plants that are located far from key markets is how to move product most efficiently.
These facilities have been built to take advantage of competitive feedstocks in regions such as the Middle East, rather than proximity to customers, which are mainly in the Asia-Pacific region.
Companies have approached this problem in different ways. Some have stuck to the traditional model of producing, packaging and storing product at site and shipping it to the market once orders have been received.
The problem with this is the delivery time, as it can take up to two months to ship product from the Middle East to Asia, by which time prices could have changed two or three times.
Other companies have developed distribution hubs at strategic locations, or hired warehouses at multiple locations to minimise shipment times to customers.
But more innovative solutions are now being adopted. An example is the model that Borouge has developed.
Polyolefins that are produced at Borouge's plants in Abu Dhabi, United Arab Emirates, and destined for the Asia-Pacific region will not be packed at site, but instead shipped in sea-bulk containers to hubs at Singapore and the Chinese cities of Guangzhou and Shanghai, where third-party service providers will handle packaging, warehousing and onward shipment based on sales orders.
All three hubs will become officially operational in mid-2010 and will handle material from the Borouge 1 and Borouge 2 facilities, which have a total polyolefins capacity of 2m tonnes/year. Borouge 2 will be commissioned over the next few months.
"Other petrochemical companies are looking at what Borouge is doing, which is unique, and trying to decide whether to take this type of visionary concept or gamble their existing supply chain models will keep them competitive in the changing environment," says Eric Herman, CEO of CWT Logistics, which is handling Borouge's southeast Asian logistics hub in Singapore.
This is the first time that CWT is going beyond traditional logistics services.
For the Borouge project, it has built an integrated solution, including packaging lines, a container yard and a warehouse designed to handle 330,000 tonnes of polyolefins annually.
The Singapore facility has no silos and will instead rely on gravity to discharge product from the sea-bulk containers - which are regular 20-foot or 40-foot containers lined with polyethylene (PE) or polypropylene (PP) film - to the packaging line.
This gravity system reduces product handling as well as the chances of contamination, Herman points out.
CWT's overall model allows for shorter delivery time, and there are potential savings of up to 30% on ocean-freight costs from shipping product in bulk containers rather than as packaged goods in containers, he adds.
The decision on how to package products can be decided closer to the point of the order from the final customer, avoiding the need for costly repackaging as is often seen in European logistics centres, he says.
In addition, having a packaging and distribution hub in a location such as Singapore means a Middle East-based company can deliver to China or other Asian markets in shorter lead times, enabling it to compete with South Korean and southeast Asian companies that have always had a delivery-time advantage.
"The strategy is to position products closer to the main markets and reduce the overall time it takes to deliver to the end-users," says Herman.
This is possible from Singapore, which is one of the busiest container ports in the world. The heavy traffic also means there is less pressure to return containers and the free time offered by shipping companies before containers must be returned can be maximised.
"It can be seen as expensive to outsource the supply chain. But, firstly, you are only talking about a fraction of overall product costs," he adds.
Secondly and much more importantly, in increasingly volatile markets a shorter lead time preserves cash flow and hedges your bet on product price fluctuations, Herman says.
"You can say that it is cheaper to pack product at the plant itself, but customers are demanding a shorter lead time, similar to the just-in-time concepts developed in the auto industry by the Japanese."
A source from a polyolefins company with joint ventures in the Middle East thinks the model will work.
"Outsourcing of packaging and warehousing reduces capital costs and improves the project's return on investment, which is important when you are fighting with other divisions within the company for investment dollars," says the source.
CWT's Herman adds that outsourcing of packaging and warehousing also allows companies to save land for future plant expansions.
However, another Middle East producer thinks the model will work only for companies that manufacture huge volumes.
To make this model more accessible, CWT is also establishing a multi-user packaging and distribution centre in Singapore, where a company can experiment with, say, 50,000 tonnes/year, says Herman.
He is convinced that now is the time for the petrochemicals industry to learn to outsource.
"You look at Nike - it has outsourced its entire logistics. Most industries have learnt to outsource. The petrochemicals industry is changing fast, and logistics is going to be a key component as more products need to be moved closer to the market," says Herman.
Logistics could well become the next platform for companies to differentiate themselves in the market.
Here's a post from a guest blogger, my good colleague Prema Viswanathan - Deputy Managing Editor of ICIS pricing in Asia.
Ras Tanura and Al-Jubail
Source of picture: www.absoluteastastronomy.com
By Prema Viswanathan
A Saudi Aramco official has confirmed a Reuters report earlier this week that a change of location for the giant Ras Tanura petrochemicals project is under consideration. The project would be a joint venture between Aramco and Dow Chemical.
Al-Jubail is one alternative location being evaluated, which, like Ras Tanura, is a port city on the Saudi east coast (see map above). Other media reports suggest that Ras al-Zour is also being looked into, which is 80km north of Al-Jubai.
The Aramco official told us that the review into where to build the complex would only result in a slight delay to the start-up - currently targeted for 2014 - and not five years, as was suggested by the Reuters report. He added that this review would lead to the project being improved.
Sources we spoke to in Saudi Arabia this week nevertheless claim that it won't be easy to sort out either keeping the planned complex at Ras Tanura or shifting it elsewhere.
"The project would have to be reconfigured if they shift it to Al-Jubail or any other destination, as it would be very expensive to bring refinery feeds to the facility via pipeline from Ras Tanura," said one source.
But the dilemma is that if the project stays at Ras Tanura heavy investment would also be needed in infrastructure, he added.
"The proposed shift of location makes no sense, as the integration with Saudi Aramco's Ras Tanura refinery is the main impetus behind the project," said a second source.
"This would be negated if they shift it to Al Jubail, which is already clogged with projects."
Upon completion, the complex is projected to produce 8m tonne/year of petrochemicals and gasoline products.
The current plan is for feedstock to be at least partly provided by the expansion of Aramco's existing Ras Tanura refinery, which will add 400,000 bbl/day of capacity.
The blog also understands that the project may have received an ethane gas allocation.
The refinery and petrochemical projects are expected to cost around $25bn and Dow's involvement would be the biggest foreign investment ever to take place in the Kingdom.
By Malini Hariharan
The Asian olefin and polyolefin markets have softened in recent weeks but the US market remains on a different track, as seen in these reports filed by my colleagues on ICIS news.
Ethylene prices are still firm on tight supplies. Spot ethylene for March/April was at 61-63 cents/lb, up from 42.5-43.0 in January. Availability has been hit as a result of a number of unexpected cracker shutdowns which started in early January after Texas experienced unusually cold weather.
The high prices mean that US PE exports are likely to drop in the coming months. A trader estimated that ethylene would have to drop to 40cents/lb for PE to be competitive in the export market.
Ethylene prices are expected to correct in the coming months as the supply situation is easing with crackers resuming operations. But one producer was not too worried and said that margins would be at acceptable levels even if ethylene dropped by 20cents/lb as ethane prices were also weakening, said one producer.
Many of the US companies including Shell, have prepared themselves for an extended period of low ethane prices. An executive from the company said that investments made at its crackers in the US over the last few years have given Shell the capability to crack 70% gas feedstock. The earlier configuration was 70-75% liquid cracking.
The shift to a lighter feedstock slate has been one of the factors supporting a surge in propylene prices. The situation has also been aggravated by unexpected cracker shutdowns and a decline in US operating rates due to weak demand for fuels.
Around two-thirds of US propylene now comes from refineries, due to declining output from crackers.
Meanwhile, Nova expected the second quarter to remain strong with continued growth in PE demand. And although the US-Asia arbitrage window has closed, Nova has been able to export from its Joffre operations in Canada because of freight advantage. PE is put in bulk rail containers and sent to Vancouver port from where it is shipped to Asia.
By John Richardson
IT IS always dangerous to assume that the future will be exactly the same as the past - a big lesson from the recent financial crisis.
But so seems to have been the assumption amongst China's polyolefin traders late last year as a close look at import statistics for December and January, supplied to us by the New York-based International Trader magazine, reveal.
In December 2007, for example, 251,600 tonnes of high-density (HDPE) arrived at Chinese ports compared with 292,664 tonnes in December 2009.
January 2010 arrivals totalled 363,129 tonnes against 223,456 tonnes in January 2008 (a "normal" year as there was no economic crisis) and 227,818 tonnes in January 2009.
December 2009 polypropylene (PP) shipments totalled 373,669 tonnes as against 251,179 tonnes in December 2007 (again a more valid comparison than Dec '08 - just about the high-point of the recent crisis, when arrivals were 266,463 tonnes).
"We all thought that credit in China would remain as ample as before, supporting demand and polyolefin pricing," a Shanghai-based trader said today, echoing comments made by a Singapore competitor last week.
Polyolefin pricing has since slipped in Asia (see chart below) because of reduced lending by local banks, labour shortages in Guangdong province and new capacities.
Source of graph: ICIS pricing
"Interestingly, the new restrictions in local credit might actually provide some support for imports over the next few months as the overseas traders can more easily lay their hands on LCs from international banks," said an industry observer.
"But on a net basis imports are still likely to be down this year over 2009 on slower growth in China and new capacities."
Consultancy Nexant ChemSystems wrote in a Q1 review released earlier this week: "At least five new crackers (in China), with a combined capacity totalling more than four million tons per year of ethylene achieved commercial production in the first quarter. Most crackers are integrated with further new derivative capacity on site."
By 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.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 Malini Hariharan
Commissioning activity at Indian Oil Corp's (IOC) new cracker and derivatives complex at Panipat, India, is progressing well, according to a company source. Operations at the new 857,000 tonnes/year cracker have started.
"Onspec propylene is in the storage tank and ethylene is expected in a day or two," he said.
Among the derivative units, the polypropylene (PP) plant with a total capacity of 600,000 tonnes/year is due to start first and should be up by end of the week. Next in line are the 350,000 tonnes/year swing high-density polyethylene (hdPE)/linear-low density PE (lldPE) and 325,000 tonnes/year monoethylene glycol (MEG) plants. Operations at the two plants are expected to commence from mid-April.
A 300,000 tonnes/year standalone hdPE plant is currently scheduled to start at end-April.
The start up has been quite smooth so far with commissioning of derivative units delayed only by a few weeks. IOC had said in early March that the PP, MEG and swing PE plant would start operations by the end of that month.
Source of picture: www.thewecc.com
By John Richardson
Confusing messages continue to emerge from Beijing over whether a revaluation of the Yuan is imminent, a debate that has major implications for the chemicals industry.
The Financial Times reported this morning that senior government economist Ba Shusong had said that China could widen the currency's daily trading band and allow it to resume its gradual appreciation that was halted in July 2008 due to the credit crisis.
But Bloomberg quoted Jiang Yu, spokeswoman for China's foreign ministry, yesterday as saying that a rise in the value of the Yuan would not help correct China's trade imbalance with the US. This perhaps suggests that the Chinese government will argue the case for no revaluation during important meetings in Washington later this month.
Nevertheless, the same article quotes Stephen Roach - Morgan Stanley Asia chairman - as predicting that a US decision to delay a verdict on whether or not Beijing is a "currency manipulator" has eased tensions and made it more likely that a managed float will be resumed. The Treasury's verdict had been due on 15 April.
As we pointed out in late March and yesterday, the irony of the extraordinary rise in exports to China of chemicals and plastics during 2009 was that these volumes probably helped to further undermine the domestic consumption base of the US and European exporters. A lot of the increased volumes went into filling the inventories of new partly export-focused manufacturing plants built as a result of China's huge economic stimulus.
If the value of the Yuan does rise then how hard will some of these new manufacturing plants run - particularly the ones making low-value products where the current currency advantage is crucial for maintaining thin margins?
If their operating rates are forced lower as these factories lose competitive advantage, this might contribute to lower chemicals and plastics import volumes.
But the bigger deal for the chemicals industry would be an easing of trade tensions between the US and China, thanks to the resumption of a manged float and a clear policy for gradual appreciation. Increased trade tensions and resulting sanctions could otherwise severely damage the fragile and uncertain economic recovery.
US chemicals producers might also benefit if their local customers enjoy an improved competitive position as a result of a stronger Yuan.
But this will only occur if other lower-cost manufacturers don't step in to gain any market share lost by the Chinese!
Jim Chanos gets it right more than 70% of the time (unlike Alan Greenspan)
Source of picture: New York Post
Somebody has to play the devil's advocate, but having just finished reading Gillian Tett's excellent Fool's Gold about the financial crisis, this is about more than just trying to provoke a response; it's about challenging the dangerous assumption that the future will always be the same as the past.
Here's an article about the dangerous assumptions surrounding China which are accompanied with a dangerous amount of complacency.
By John Richardson
"WE are often derisive towards the ability of governments to do what markets do better," said Jim Chanos, the famous investor, in a recent lecture.
"When it comes to China, though, everybody is willing to bet that nine guys in a room [the country's top leadership] will get it right all the time. I am willing to bet this is not the case."
You hear the same level of confidence from chemicals company executives that Beijing will skilfully engineer persistently high levels of economic growth, both in the short and long term.
"Because of good government control - and because one party dictates all - the economic prospects remain very good," said one Singapore-based senior executive with a global commodity and speciality chemicals giant.
And a source with an oil-to-chemicals major, who we considered naming but decided it was unfair to single him out as this view is so commonly expressed, added: "Nobody doubts that China's long-term economic prospects are good."
He clearly hasn't listened to the likes of Chanos, who made a fortune from short selling ahead of the global economic crisis and sees similar opportunities presenting themselves in and around China.
He was widely quoted in the financial press in February as saying that China is going to crash.
But if you watch the video of his lecture, he says he was misquoted and instead argues that he meant that there are pockets of overheating and overcapacity in the Chinese economy.
He recommends shorting companies that have heavy exposure to China's property sector - including western building-material suppliers and property developers. You could put many chemicals and polymers companies into this category.
His longer-term view is that China's growth model - rapid urbanisation accompanied by heavy fixed-asset investments - needs to change.
Urbanisation is reaching a demographic peak, as are the economic benefits being delivered by providing basic education, he argues.
State-directed lending is inefficient by nature as the inputs into the economy (the costs) are greater than the outputs, as was proven by what happened in the former Soviet Union, adds Chanos.
He accepts that as innovation improves and as the focus moves away from state-directed and therefore inefficient lending - and as latent domestic consumption is further unlocked - China's potential is enormous.
But he makes the valid point that getting from A to B won't always be a smooth process. This will mean frequent periods of uncertain growth and a great deal of volatility.
There also has to be a chance that China doesn't make the transition.
This makes the claim we quoted earlier - about the country's undoubted strong long-term prospects - a little like the view expressed before the economic crisis: that there would never be a US nationwide house-price collapse.
A period of uncertain growth in China appears to be taking place right now.
Earlier this week, for example, Guo Shuqing, the chairman of China Construction Bank, reportedly warned about the danger of GDP expanding by more than 9.5% in 2010.
"It [too-rapid growth] will mean more duplication of construction, more excess capacity and higher waste of capital," he was quoted as saying.
Many analysts believe growth will exceed 9.5% this year, and estimate that in the first quarter the economy expanded by 11-12%.
Oversupply of money and increased liquidity leading to inflation and asset-price bubbles were further problems, the bank chairman was also reported to have said.
This latest official warning about overheating - one of many over the past few weeks - might indicate further economic-tightening measures are being considered.
His comments also support some of the inefficiencies in China's growth model highlighted by Chanos - most notably, money being poured into new industrial capacity that has added to further overcapacity in many industries.
Urban fixed-asset investment rose by more than 40% last year and by 28.6% in January-February 2010, according to official data.
"The strong import volumes we saw for a wide range of chemicals and polymers in 2009 were partly the result of this rise in investment in new industrial capacity," said a UK-based chemicals consultant.
"As big amounts of new capacity came on stream, inventories had to be filled with raw materials, including chemicals and polymers."
Western chemicals companies benefited from this inventory building.
US linear low density polyethylene (LLDPE) exports to China rose to 318,369 tonnes in 2009 from 183,293 tonnes in the previous year, according to data from China Customs.
US polypropylene (PP) exports increased to 493,381 tonnes from 117,673 tonnes.
Overall LLDPE imports jumped by 49% to 2.2m tonnes and PP imports by 57% to 4.2m tonnes, according to the New York-based trade data and analysis service, International Trader.
Just one of the many complications exporters to China are contending with is how all these new plants will run now that inventories have been filled.
One factor is the shortage of labour in Guangdong province, an unintended consequence of government efforts to boost economic conditions in western and northern China. This has reduced migrant-labour supply in Guangdong, the export-processing heartland.
Returning to the Chanos theme, inefficient investments in too much industrial capacity could mean greater exports of finished goods from China at a time when trade tensions over the value of the dollar versus the yuan are already very high.
If trade barriers are erected in response to a rise in low-priced exports of finished goods, this will add yet another degree of uncertainty to chemicals and polymer import volumes.
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.
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
If you are moving a project to a new location then why not take some time to re-examine its configuration?
That appears to be the thinking at Saudi Aramco and Dow Chemical for their proposed cracker and derivatives complex in Saudi Arabia. As reported on this blog recently, the mega petrochemical project is likely to be moved to Al Jubail from Ras Tanura.
But along with this shift the two companies are now said to be re-examining the product slate. Zawaya reports that the sponsors are trying to decide if it would be better to source some intermediate products from other companies located at Jubail. This would mean fewer units and therefore lower costs for a project that was initially estimated at over $20bn.
The news report also states that while a final decision on the move to Jubail has yet to be made the companies are in discussions with the Royal Commission for Jubail and Yanbu. The project is likely to be based in Jubail II as all plots in Jubail I are occupied. It would be housed next to a joint-venture refinery being built by Aramco and Total which can supply feedstocks to the cracker.
Pic source: Kentz
By locating the project at Al-Jubail, Dow and Aramco would also save on infrastructure development costs as this location is better developed than Ras Tanura. And sources close to the project have also said that contrary to expectations the relocation would help speed up project execution.
But with contracts yet to be awarded completion of the project could easily take another 4-5 years.
By Malini Hariharan
Chinaplas has just concluded and my colleagues have filed some great reports from Shanghai.
Worries about a margin squeeze in the second half of the year persist but polymer producers seem to be increasingly confident about long-term growth prospects.
The chairman of the China Plastics Processing Industry Association (CPPIA) talked of the endless potential of China's domestic market and confidently predicted that the country would have no problems in delivering a 10% growth in demand for polymers and rubber.
"Last year, people were uncertain about what the long term market outlook would be. But the situation looks very positive now," said William Yau, chief executive officer (CEO) for Borouge's marketing arm (see video interview below*).
But in the short term, although demand and supply were normal, there could be ups and down, he admitted.
Yau also said that Borouge II would start up in mid-2010 but the full polyolefins output of 2m was likely to be achieved only by the end of the year or early next year.
The PP industry should be able to escape from another round of restructuring, said Anton de Vries, senior vice president for Europe, Asia and international olefins and polyolefins at LyondellBasell.
"I personally don't expect to see major consolidation in the PP sector. I may be wrong, but I think it's going to be limited, more limited than what we saw in the downturn (in early 2000s)," he said.
The PP sector had gone through a major rationalisation process in the previous downturn in the early 2000s, and further consolidation would be "more difficult," he said.
He also expected LyondellBasell to exit Chapter 11 bankruptcy protection as early as next month and list on the New York Stock Exchange (NYSE) in Q3.
Jamail Malaikah, president and chief operating officer of National Petrochemical Industrial Co (Natpet), the Saudi PP producer described the outlook for the PP industry as excellent.
Not surprisingly, he was not worried about the overcapacity that has been built up in PP and expected Middle East plants to run at full rates.
"We believe most of these plants will be running at a good operating rate in the second half [of] 2010. But I think the impact of the overcapacity on price will not be of high magnitude," he said.
He was also optimistic that the upcoming propane price revision in the Kingdom would turn out to be favourable for producers.
And he also talked about the reasons for the frequent operating problems in the Middle East.
Malaikah said the quality of engineering materials used in building petrochemical facilities may have deteriorated due to mass production necessitated during the plant construction boom in 2005.
"There was a lot of pressure on services, EPC (engineering, procurement and construction) contractors, on vendors, on engineering manpower. The pressure caused some vendors to produce more than their capacity, at the expense of quality," he said.
In other production news, Qatofin is likely to achieve commercial production at its new 450,000 tonnes/year lldPE plant in May or June.
Siam Polyethylene, the Dow Chemical and Siam Cement lldPE joint venture, expects to start operations at its delayed 350,000 tonnes/year plant in the H2 2010.
"We have been given clearance to resume construction which is excellent news as this product is much-needed by the market," said Peter Wong, Commercial Vice-President, Asia-Pacific Basic Plastics, at Dow.
The project had been due on-stream in the first half of year, but work was temporarily halted by a court injunction that have affected numerous other projects at the Mab Ta Phut site in Thailand.
And Siam Cement's president also revealed that the company is looking for acquisition opportunities in Asia.
"We believe that [Asia's petrochemical sector] will go through more acquisitions and we're now looking for acquisition opportunities as well," said Cholanat Yanaranop.
(More videos from Chinaplas are available here)
By Malini Hariharan
After seeing very strong pricing for the last few months US propylene and polypropylene (PP) buyers have started talking of imminent correction.
PP buyers expect a 7-10cent/lb ($154-200/tonne) drop in May prices, reports ICIS news.
The prediction is based on improved propylene availability.
Earlier this week the US Energy Information Administration (EIA) released data that showed a 12% increase in propylene stocks for the week ended 16 April. The increase came amid higher US refinery operating rates - 85.9% compared with 78.4% in the second week of January.
And the US is now even looking at exporting propylene with one cargo reportedly settled for early May shipment to Europe.
Propylene contract prices had moved up by over 50% in the last six months but a significant drop in May contracts is now being predicted.
Flagging-up the dangers...
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 extraordinary China import story continues, raising yet more questions about where all these volumes are going at a time when the government is trying to cool the economy down.
Does this mean that speculation continues apace because of all the money still sloshing around the economy thanks to last year's record levels of bank lending, and/or that bank lending and the economic stimulus package have created a real growth momentum that policy changes are unable to slow?
What might this mean for inflationary pressures and the danger of more drastic action by the government to control excessive growth?
Or is this data from March very much historic, reflecting the peak of the boom? As my fellow blogger Paul Hodges pointed out yesterday, a steep fall in trading on the Dalian Commodity Exchange has been accompanied by a dip in physical pricing for linear-low density polyethylene (LLDPE).
Here are some of the details of the March import surges, provided by my good contact and friend Jean Sudol of International Trader Publications Inc in New York:
"With the Chinese New Year national holiday over, China's imports soared in March, with the volume of nearly every major commodity polymer, engineering polymer and organic chemical up from February. Although China's imports generally pick up each March, the magnitude of the increases this year indicates continued strong demand for many products.
New records were set in March on imports of LLDPE, 273,000 tons, LDPE, 225,000 tons and mono-ethylene glycol (MEG), 689,000 tons. Imports of other products also were heavy, some near record levels: propylene, styrene, methanol, HDPE, EVA, polypropylene, propylene copolymers, ABS, SAN, polyacetals and polycarbonates.
For a number of products, percentage changes for the first quarter of 2010 reflected both the continued strength in demand and low volumes early in 2009. The highest percentage gains for the quarter, between 50%-125%, were on imports of polyacetals, polycarbonates, LDPE and propylene copolymers. Moderate gains, between 12%-18%, were seen on imports of SAN, polypropylene, LLDPE, HDPE, styrene and MEG. Imports were up by 2%-8% for EVA, ABS, propylene and DEG.
First quarter imports of a few products, however, were down sharply from last year, despite increases for most in March. Year to date, imports were down by 19%-87% for benzene, EDC, VCM, methanol and uncompounded PVC. Imports of each of these products had soared to record highs early in 2009, but volumes slowed markedly in the second half of last year and most continued relatively low into 2010. China's methanol imports were an exception, posting strong gains in both February and March of this year."
By Malini Hariharan
The blog has been writing about the softening in olefin and polyolefin prices in the US. But the European market presents an interesting contrast offering arbitrage opportunities for those willing to take the risk.
Operating rate reductions have been reported at crackers in Priolo, Italy; Tarragona, Spain; Carling, France; Cologne, Germany; and in the UK at Grangemouth, writes Nel Weddle the ICIS pricing olefins editor.
However, none of these have been officially confirmed by the companies concerned. But operating issues have been confirmed at Borealis' cracker at Porvoo, Dow Chemical's No 2 cracker at Terneuzen and LyondellBasell's plant at Berre in France.
Enquiries for spot ethylene have increased but propylene remains soft as problems at derivative plants has freed up supplies.
Linda Naylor, the ICIS pricing editor for polyoelfins, reports that tight supplies have forced some PP buyers to agree to a price hike of Euro30/tonne (about $38/tonne) for May shipments.
Buyers had hoped that the tightness experienced since January would ease in May. But the situation has not eased because of operating issues at plants around the region.
Firm European prices should tempt traders to bring in product from other regions. But no deals have been reported as a weak Euro coupled with expectations of a price slide in the second half of the year has made traders reluctant to take a position in the market.
By Malini Hariharan
Ras Laffan Olefins Co (RLOC) is studying an expansion of its new cracker by using propane as a feedstock.
At a recent news conference, Mohammed Yousef Al Mulla, general manager of Qatofin, the Qatar Petroleum-Total joint venture downstream of the 1.3m tonnes/year cracker, said that while the cracker was currently running at 100% ethane a change of feedstocks was possible in the future.
"There is a study going on, maybe in the future we will use propane with mix feed of ethane, but we don't know how much it will produce. We may reach 1.6m, but for the time being we will produce 1.3m, there is a study to increase to 1.6m utilising propane in the future," he is reported to have said.
Propane is probably the only route available in the near term for RLOC to boost capacity as Qatar is running short of ethane.
Also at the news conference, Qatar's minister of energy and industry reiterated the country's commitment to petrochemicals and using propane as a feedstock.
"In this business you always try to be innovative and bring new ideas. Mix feed of propane. All these assumptions are in our agenda," he said.
And Qatar should have plenty of propane available as it is poised to become one of the world's largest producer of liquefied petroleum gas (LPG) by 2010/11 with production of around 14m tonnes.
Mumbai at night
Source of picture: travelygan.wordpress.com
By John Richardson in Mumbai
POLYOLEFINS will not see a margin collapse this year due to persistently strong demand growth and continued problems with new-capacity start-ups, said numerous industry sources on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Mumbai.
The belief seems to be growing that barring another catastrophic global economic crisis, the industry should be fine.
It is interesting that sources are expressing bigger fear of a demand rather than a supply-side shock. This is the result of the belief that associated gas shortages in Saudi Arabia, problems in starting-up new plants and operating-rate discipline among western producers will continue.
Booming Asian demand has created a lot of confidence. Is this misplaced?
China's apparent polyethylene (PE) consumption grew by 36.9% in 2009 over the previous year and polypropylene (PP) demand by 29.1%, according to the petrochemicals consultancy, DeWitt & Co.
"On scrutiny, much of the 2009 growth was due to replenishment of stocks after massive de-stocking at the end of 2008 and also reduced use of recycled material by converters," said Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co.
But growth remains strong so far this year and is likely be above 10% for the whole of 2010, estimated several sources.
In India, polypropylene (PP) demand grew by 27% in 2009, according to India's Chemicals & Petrochemicals Manufacturers' Association (CPMA).
PP will grow by 12%, reaching apparent demand of 2.462m tonnes, the CPMA adds.
Overall PE growth was 7.6% in 2009 but is expected to accelerate to 10.5% this the year, the CPMA continued. This would leave India's apparent demand for all grades of the polymer at 2.879m tonnes.
A Chinese coalminer
Over the next week, as well as keeping track of more immediat events, we will be reviewing and analysing what was said in and around last week's Asia Petrochemical Industry Conference (APIC) in Mumbai.
One of the most-interesting stories to emerge was a clear message from close to Total Petrochemicals, the French producer, that it's forging ahead with methanol-to-olefins (MTO) see below.
Here's the story:
By Joseph Chang, John Richardson and Malini Hariharan
Total Petrochemicals aims to fully prove its methanol-to-olefins (MTO) technology this year, leading to a potential $5bn-7bn (€4bn-5.6bn) worldscale project in China in the coming years, a source close to the company said on Friday.
"The economics of our MTO technology will be very competitive. We would look to partner with anyone with access to stranded coal," said the source on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Mumbai.
"This project would be very capital intensive at a cost of around $5bn-7bn," he added.
Total Petrochemicals is actively developing its MTO technology, having completed a pilot plant at Feluy in Belgium in October 2008.
The technology, jointly developed with UOP, converts methanol into light olefins (ethylene and propylene) and heavier olefins. The heavy olefins are then converted into light olefins using the UOP/Total Petrochemicals Olefins Cracking Process (OCP).
"It is a combination of UOP's process and Total's OCP technology; the olefin yield is higher than other MTO technologies," the source said.
The company plans to prove commercialisation of its technology this year, said the source.
And Total's MTO technology could provide an entry into large-scale petrochemical and plastics production in China, as foreign companies must bring more to the table compared with a decade ago, the source said.
"China has less and less need for IOCs [international oil companies] to come in and invest in projects in the conventional way. They have to bring more to the table, whether it's technology or feedstocks," said the source.
A big concern over the coal-gasification route to methanol is high water consumption. China's stranded coal reserves are in western and northern China, where water is in short supply.
Total believes it has a solution to the water issue; it is working to reduce water consumption during coal-gasification of methanol, the step before conversion of methanol to olefins, the source added.
Coal gasification plants also generate more carbon dioxide (CO2) emissions than refining, according to some estimates.
The Total process would employ carbon capture and sequestration technology to minimise CO2 emissions, the source noted.
The economics of MTO plants have been questioned because of high logistics costs.
This is because a large proportion of the polyolefins produced downstream of these facilities would have to be shipped from western or northern China, where demand is weak, to the big consumption markets in eastern and southern China.
"But a study has been done and compared to naphtha crackers it would be economic," said the source.
As part of Total's strategy of growing in Asia and the Middle East, "it would be nice to have production in China - nice, but not necessary", the source said.
Total currently supplies the growing Asian market through major production sites in Ras Laffan, Qatar, and Daesan, South Korea.
The company on 4 May inaugurated its 1.3m tonne/year joint venture Ras Laffan Olefins Cracker (LROC) in Qatar. The facility will supply its Qatofin joint-venture linear low density polyethylene (LLDPE) plant, which was inaugurated in November 2009.
Around 40% of the LLDPE would go to the Asia market, with the rest going to Europe and Africa, said the source.
Total owns 22.2% of LROC through its joint ventures Qapco and Qatofin with partner Qatar Petroleum.
Source of picture: omniglobal.com
By John Richardson
A FASCINATING theme to emerge from last week's Asia Petrochemical Industry Conference (APIC) in Mumbai was a growing belief in refinery integration in Asia as a means of being able to compete with the Middle East.
Reliance Industries is planning a giant cracker complex based largely, if not entirely, on off-gases from its Jamnagar refineries. These off-gases will come from fluid catalytic crackers and delayed coking units. This is the first time an investment of this kind has ever been tried.
Shell Chemicals officially opened its new Singapore cracker two weeks ago. It can crack very light feeds all the way to the very heavy feeds.
Shell has adapted its hydrocacker, which is part of the company's existing refinery in Singapore, to supply hydrowax as a cracker feedstock.
ExxonMobil is also due to bring on-stream its second mixed-feed cracker complex in Singapore in 2011-12.
"This current new wave of Middle East projects is not as competitive as the last wave because firstly, capital costs are higher and secondly, they are cracking a higher percentage of propane and butane due to the ethane-gas shortage," said an industry source
"Propane and butane doesn't deliver as stellar margins as ethane as the local liquefied petroleum gas (LPG) price formula is linked to the naphtha price in Japan minus a 28% discount.
"I would also argue that the new Saudi propane dehydrogenation-to-polypropylene (PP) complexes face the problems of a capital-intensive technology and a technology that's difficult to operate.
"Plus conversion of propane to propylene is only 15% per pass and a lot of energy is needed to heat and cool these plants."
Ethane gas-supply is so limited in Saudi Arabia that there are very few new crackers due on-stream in the Kingdom post-2012
Liquids cracking in Saudi Arabia - or anywhere in the Gulf for that matter- makes little economic sense, according to some consultants.
Do you agree that Asia has an opportunity to work the refinery-petrochemicals integration even more to its advantage in the future?
Or have we fallen victim to a load of company flannel?
By Malini Hariharan
The weakness in Asian markets is spreading with steep drops also being reported in olefin prices.
Ethylene prices dropped by $160-170/tonnes last week while propylene declined $90-110/tonne, writes my colleague Soo Hwee, ICIS pricing editor for olefins.
The poor market conditions were attributed to softness in crude oil and naphtha prices as well as lack of support from polyolefins that are also under pressure. Nervousness about Europe and the impact of credit tightening in China have also played a role.
Buyers have strategically moved to the sidelines in anticipation of further reduction in prices while cracker operators have started talking about operating rate cuts if economics continue to weaken.
What happens in the Chinese polymer market over the next few days will be crucial. As reported by the blog last week, stocks with major producers have climbed close to record levels. And export offers are still being heard.
An Indian trader said this morning that he has received offers from China for high-density polyethylene (hdPE) at $1200/tonne cfr India, $1230/tonne cfr India for linear-low density PE (lldPE) and $1430/tonne cfr India for low-density PE (ldPE).
The trader has not yet signed any deals but the offers have turned out to be useful for bargaining with his regular suppliers.
"They [traders] know they can always manipulate prices the moment something goes wrong. The events of 2008 has spoilt the market; producers could earlier take a firm stance but that does not work now," said a frustrated international producer.
The Indian polymer market is broadly following the direction set by China but price drops so far have not been as substantial.
"Arrivals [of imported cargoes] have been low and producers do not have much stocks," explained the trader.
But it could just be a matter of time before Indian prices catch up with those in China.
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.
"Demand is weak in Europe, but this hasn't changed from a few weeks ago - we have known that to be the case for a long time. And with about 50% of the Euro zone economies dependent on government spending we always knew that cutbacks would have to happen in H2. What is new is the extent of these cutbacks.
"But the outlook for the US and for Asia hasn't changed in the last few weeks. Some people are characterising the price falls as price collapses, but that's not the case.
"In the US, ethylene had long been over-priced on on reduced production and so the steep price falls were inevitable as outages came to an end.
"And similarly, the falls in US PE are in line with what we had expected. I think there will be a further 6 cents/lb contract-price reduction in May.
"But the overall US economy remains on a moderate recovery path. I expect the numbers indicating recovery to moderate in H2, but this is going to be partly due to year-on-year comparisons - i.e. the economy began to pick-up in the second half of last year.
"However, I agree that the housing and employment markets will remain big problems, but until the Euro crisis erupted, there was greater confidence out there. This had translated into stronger sales right down all the US chemicals and polymers value chains, and therefore increased production for the industry.
"By using the past tense above I don't mean to say that the situation has definitely changed, but rather the mood music has shifted thanks to the financial markets. Whether this will have an effect on real demand we will have to wait and see, but the longer this financial crisis goes on, of course, the greater the danger.
"As for China, we are certainly seeing a lot of panicky unwinding of PE by traders. For a long time they were able to hold inventories at no risk because of ample liquidity, low interest rates and stable or rising oil prices.
"This price correction in China is the result of the oil price and traders panicking, but again it's too early to say that it will affect fundamental demand.
"I am not surprised at all that the Chinese government is giving indications that it will not withdraw stimulus anytime soon. It is not going to be rushed into anything.
"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?
By John Richardson
A VERY interesting story from my colleague Bee Lin Chow on ICIS news today reports the signing of a memorandum of understanding (MOU) between Sinopec and Iran's National Petrochemical Co (NPC).
The agreement will explore joint- venture opportunities in petrochemicals and related businesses in the two countries.
China needs oil and has the political muscle and pragmatic mindset to in some cases place energy security above geopolitical concerns such as alleged nuclear proliferation and human-rights abuses.
Hence, it is now talking to Iran about petchem and associated investments.
And it has done energy deals in the past with Sudan and other countries with dubious human-rights records.
Iran, as we reported on the blog last October, is finding it increasingly difficult to get the foreign investment it needs to develop iits refining, gas-processing and petrochemicals industries. Even obtaining catalysts to run plants has reportedly become difficult.
New investment is sorely needed to shore up the economy. Value is, for example, being given away as Iran exports crude and imports gasoline with domestic pricing of the fuel heavily subsidised.
And in petrochemicals, limitations on gas extraction can cause erratic operations at existing crackers.
Lack of feedstock supply and an inability to source foreign investment and technologies have also stymied growth in petrochemicals capacity.
The scope of the MOU between Sinopec and NPC also involves joint marketing of products.
This might help Sinopec limit price disruptions in the Chinese market that might occur at times of sudden influx of Iranian petrochemical products.
Source of picture: http://www.andrewgriffithsblog.com/
By John Richardson
DOOM-MONGERS are scratching their heads as to why the global petrochemicals industry has remained in such a healthy state over the past 18 months.
Old assumptions are, as a result, being challenged. It would be a painful irony if these assumptions are changed just as a new global economic crisis creates yet another set of realities.
Right now, it is far too early to say that the end is nigh.
Sure, we have seen Asian ethylene margins take a hammering over the last couple of weeks - but all that seems to have happened is that they have gone from obscenely good to still pretty good in historic terms.
The correction was always going to take place as the full impact of Shell Chemicals in Singapore switching from a major net buyer to a net seller of ethylene was felt by a thinly-traded spot market.
The fall in oil, polyethylene (PE) and mono-ethylene glycol (MEG) prices on the escalation of the euro crisis for the week ending 21 May were obvious other factors.
Last Friday (28 May), ICIS pricing reported no further reductions in PE values, whereas ethylene had tumbled a further $160/tonne to $980-1020/tonne FOB Korea.
But the decline in ethylene came before the end-of-the-week rebound in crude to around $75/bbl.
This reaffirmed that the weakness in petrochemicals pricing is all about the euro crisis, China's economy, geopolitical tensions in Korea and their impact on confidence across many economies and industries.
To get back the original point of this article, just why therefore have the doom-mongers been proved wrong - and why do the optimists believe that this will continue to be the case?
"I think it could be because petrochemicals demand-growth in the four biggest emerging economies in Asia - China, India, Indonesia and Vietnam - is much-higher than many of us had expected," said a former doom-merchant.
"I think we need to go back and re-examine our assumptions and re-crunch our data. Maybe, for example, we are no longer looking at growth multiples of 1.2 times GDP (gross domestic product); perhaps they should be more like 1.5 times."
The other big factor we've well-documented on this blog is delays in project start-ups.
These look set to continue because of a myriad of issues including manpower, technologies and the use of inferior equipment when building costs were at their peak.
The iron operating-rate discipline of Western producers also looks likely to persist.
Highly-nervous shareholders will accept nothing less and for private equity companies such as LyondellBasell and Ineos, cash-flow remains King.
My London-based colleague Nigel Davis, editor of the Insight section of ICIS news, reports that inventory management in Europe remains exceptionally rigid down all the value chains.
"European crackers are running at an average operating rate of around 80%", added a source with a North American PE producer.
So if the euro crisis does escalate, resulting in damage to strong Asian economic fundamentals and the moderate improvement in the US, production is likely to be cut even further. This might be enough to bring markets back into balance, provided this new economic crisis isn't worse than the last one.
And if the oil price was to fall to the low $60s/bbl and stay there, a further output cut by OPEC is likely to happen in attempt to get the crude price back up to the target range of $70-80/bbl.
This would mean even less associated gas for Saudi Arabia's crackers. They are already operating at below 100% because of feedstock supply reductions resulting from the current OPEC production quotas.
A further factor behind strong margins has been the steep drop in ethane-gas prices in the US thanks to the rise in overall gas supply.
We all knew that butadiene, and C4s in general, would become tight because most of the new cracking capacity is gas-based. What nobody had predicted was the big switch to lighter feeds in the US by existing cracker operators.
So anybody operating a liquids cracker with butadiene extraction is enjoying excellent returns.
As we said, it is still very possible that we will get through this current crisis intact with margins remaining very strong.
And with so little new capacity planned for post-2011, what are the odds against another fly-up sooner than is expected by the pessimists?
By Malini Hariharan
A few weeks back the blog had reported that Total was interested in producing more petrochemicals downstream of its refinery joint venture with Saudi Aramco at Al Jubail in Saudi Arabia.
And yesterday, Michel Govaerts, general manager of business development for Middle East and Asia at Total Petrochemicals, confirmed that the company was in talks with Aramco to build a multi-feed cracker capable of producing 1.5m tonnes/year of ethylene and 500,000 tonnes/year of propylene.
Govaerts said the partners began talks more than a year ago about building a cracker that could use byproducts from the joint refinery. He also said that financing for the project is being finalised.
However, he did not give a timeline for the project or derivatives that are being planned. But with construction tenders yet to be issued the project is unlikely to come up before 2014.
And in any case the 400,000 bbls/day refinery, executed by Saudi Aramco Total Refining and Petrochemical Co (Satorp), is due for completion in 2013.
This is the second Aramco joint-venture cracker that is being planned at Jubail. It follows the Aramco-Dow Chemical cracker project which is likely to be moved from Ras Tanura to Jubail.
Total's proposed cracker confirms the growing trend in the Middle East to link petrochemical projects to refineries on diminishing availability of gas feedstocks.
But it looks like there will be competition for refinery feeds as well as Dow and Aramco were said to be looking at getting some products from the Satorp refinery.
By Malini Hariharan
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.
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.
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.
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.
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.
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 on lower PE operating rates due to the weak Chinese demand and an outage at a PE plant.
Cargoes are also being lifted from Abu Dhabi, where Borouge is in the process of commissioning its new 1.5m tonne/year cracker and associated downstream plants.
It is therefore to very hard to work out to what extent this latest ethylene price decline (four weeks ago pricing was at $900-650/tonne FOB Korea) is the result of weak demand versus these other factors.
By John Richardson
Qatar Petroleum and ExxonMobil have delayed the start-up of their 1.6m tonne/year cracker and derivatives project in Qatar, my colleague Anna Jagger reported on ICIS news yesterday - quoting sources familiar with the project.
This confirms an earlier media report to this effect - and adds the extra details that start-up of the project could have slipped from 2015 to 2016 due to the possibility of Qatar Petroleum needing to search for a new partner.
Interestingly, Graham Hoar of Nexant is quoted in the ICIS news article as saying that the project's "gas (feedstock) is not as cheap as you might think and the economics are not as attractive as you might expect."
He doubts whether either Shell Chemicals or Total Petrochemicals - both rumoured in the earlier media report to be interested in the project - would rush to replace ExxonMobil due to the questionable economics.
The blog had been told last December by Ben van Beurden, executive vice-president of Shell Chemicals, that "ideally, we'd like to build two crackers and two OMEGA process plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane.
"There are only so many allocations of ethane available from Qatar at the moment and plenty of interested parties."
We gained the impression at that time that it was the lack of availability of gas rather than the price which was the problems.
The cost of gas might hinge on whether Qatar is keen, for national strategy reasons, to add more petrochemicals.
The recent cancellation of Qatar Petroleum/Hanwha Chemicals cracker project appears to fall into another category as around 70% of it feedstock was due to be naphtha.
Later on we discovered that about 1m tonne/year of by-product ethane is available from the Pearl gas-to-liquids (GTL) project, a joint-venture between Shell and Qatar Petroleum. This could, perhaps, help make the economics of another gas cracker in Qatar work better, given what seems to be increased ethane gas costs from its huge North Field reserves.
Clearly, we need to do some more work on this story and will keep you informed.
Source of picture: www.en.cn.national
By John Richardson
THE decline in China's GDP (gross domestic product) growth from 11.9% in Q1 to 10.3% in the first quarter is, no matter how you try to dress it up, bad news for the chemicals industry.
Government officials and some economists are arguing that the moderation is not that dramatic and indicates success in taking heat out of the economy.
But this ICIS news article points out that further growth contractions are ahead with third-quarter growth expected to slip to 9.8% and Q4 to 9.4%.
Interestingly, government efforts to achieve emissions targets are expected to damage industrial production - still by far the biggest contributor to growth - through the closure of energy-inefficient chemicals and other plants.
The drop in Q2 GDP confirms what has been evident in chemicals markets for several months now as demand from key end-use sectors such as construction has slowed.
In the case of polyethylene (PE), as we wrote yesterday and last week, weaker economic expansion comes at a time of high inventory levels. It could be as late as Q2 2011 before stocks are normalised.
And the price falls across many commodity chemicals that we've seen over the last few weeks are also partly the result of the China slowdown. Other common factors have been a dip in exports of finished goods from China to the West and the volatility in crude, which seems to be resulting in more hand-to-mouth buying patterns among end-users.
A source with a major monoethylene glycol (MEG) producer told the blog earlier this week: "We have actually seen weaker-than-expected demand in China since the end of the Lunar New Year in February.
"Coastal storage tanks are full and with China MEG demand growth this year as 6-7% against a global capacity increase of possibly as much as 10%, we have problems."
To quote an example for another product chain, Asian June toluene diisocyanate (TDI) contract prices fell $350/tonne from May on weak demand and a supply glut.
It is time to take stock of what will be a much more difficult environment over the next few quarters.
By Malini Hariharan
Yansab posted a net profit Saudi Riyal (SR)502.4m ($134.0m) in the second quarter, its first full quarter of commercial operations. However, results could have been better if its plants had run at full capacity.
Analysts at NCB Capital estimate that average utilization rate was below their expectation of 93% for the quarter.
"We had assumed a similar 93% utilization rate for the remainder of the year, however will likely reduce this somewhat as the company ramps up production at a slightly slower pace than our original outlook," said NCB in a recent report.
Yansab's 1.3m tones/year cracker is based on 38% ethane and 62% propane feedstock mix.
In an earlier report this year NCB had referred to problems faced by Yansab in securing its full feedstock allocation.
"Yansab receives 35,000 barrels per day of propane from Aramco, which is actually 10,000 barrels per day below its full requirement. As a result, the ethylene cracker will likely run at a sub-optimal utilization rate. Though Sabic is seeking approval for additional propane from Aramco, we believe it may be difficult to secure this due to rising domestic demand amid limited supply."
Sabic has a 51% stake in Yansab.
It also pointed out that the full feestock allocation (35,000 bbls/day of propane and 80m cubic feet/day of ethane) was sufficient to produce only 1.25m tones/year of ethylene and 325,000 tonnes/year of propylene, which would imply an operating rate of 93%.
The blog has been regularly hearing and reporting about feedstock issues constraining operations at Saudi crackers. It also appears that there is a mismatch in plant capacity and feedstock allocation and achieving 100% operating rate is unlikely to take place very soon.
The layout of the Pasir Gudang complex
Source of picture: Titan Chemicals
By John Richardson and Malini Hariharan
HONAM Petrochemical's plan to buy Malaysia's Titan Chemicals for $1.5bn - which was announced today - is likely to be followed by further buys, including a refiner, an industry observer has told the blog.
"I am neutral on this deal because Titan, like Honam, has to buy in its naphtha feedstock so integration isn't good at the moment," he added.
"But the Lotte Group (Honam's parent company) is looking at a refinery acquisition which would solve the integration problem. They are also looking at more downstream chemicals companies.
"Lotte is very aggressive and wants to raise turnover to Won40 trillion by 2018. Turnover, if you include Titan, will only be Won12 trillion this year and so they have a lot further to go in their acquisitions strategy."
The price for Titan is an average of 5-6 times Titan's EBITDA over the last seven years, he added.
Honam has bought 73% of Titan for major shareholders, which included Taiwan's Chao Group.
"The last seven years were exceptionally good for the industry. Will the next seven years be as good? Possibly not, and Honam might have been able to get a better price by waiting until later this year, when we are likely to be into a severe petrochemicals down cycle," said the observer.
But Honam gets, through Titan, better access to the Association of Southeast Asian Nations (ASEAN) market through the ASEAN Free Trade Agreement. It is also set to benefit from the ASEAN-China free-trade deal.
The acquisition is the first by a South Korean petrochemical company overseas and the biggest so far by Honam. Its previous buys were in South Korea and were of Hyundai Petrochemical and KP Chemicals.
Honam's products include polyethylene (PE), polypropylene (PP), polyethylene terephthalate (PET), polycarbonate (PC) and ethylene oxide/ethylene glycol (EO/EG).
The deal comprises the Titan cracker complex in Pasir Gudang, Malaysia, which sells benzene, toluene, polyethylene (PE), polypropylene (PP) and butadiene and PT Titan - the Indonesian PE producer.
PT Titan, formerly called PT Peni and originally under BP ownership, had been bedevilled by lack of captive ethylene supply until Titan took over and began shipping feedstock from its Malaysian complex.
By John Richardson
ASIAN aromatics producers are struggling from an oversupply driven both by weak demand for their products and strong overall reformer economics, the blog has been told.
As this chart below illustrates for benzene, toluene and xylenes (BTX), the price declines for these base chemicals mirror those we have reported on extensively in the olefins chain.
The weaker demand outlook in China is impacting BTX and its derivatives after the strong growth seen in 2009.
Additionally, weaker naphtha pricing and higher octane differentials between the 92 and 97 grades of gasoline point to strong reformer operating rates over the next few weeks, says N Raviventatesh, Singapore based consultant with Purvin & Gertz in his latest Asian petrochemicals feedstock report.
This report from ICIS news points to a moribund naphtha market dogged by increased supply and weaker demand due to the Formosa Petrochemicals cracker outage, with crack spreads the weakest for all the refinery products.
China has also added a lot of refinery capacity of late and has become a more significant exporter of gasoline as it runs its refineries hard for what my fellow blogger Paul Hodges describes as "social stability and job-creation reasons".
BTX values could therefore suffer further, as has so often been the case in the past, from factors beyond the control of the chemicals industry.
But as Ravivenkatesh points out, his assumption of high reformer operating rates depends on no significant cutbacks in naphtha production.
And with cracker margins still on the decline in Asia, we seem to be getting close to the point of cracker rate cuts - by possibly as early as August. This would further help to rebalance BTX markets through less availability via pygas.
Will this year's K-Fair see some major announcements to take advantage of the relative fall in ethylene costs?
Source of picture; http://www.k-online.de/
By John Richardson
THE rise in the price of propylene relative to ethylene is exercising the minds of senior executives in the polypropylene (PP) industry.
As fellow blogger Paul Hodges highlighted earlier this month in a post on this subject, C3s have moved from being a disposal problems in the 1970s through heavy investment in PP technologies.
Ethylene and benzene were in tight supply, and therefore polyethylene (PE) and polystyrene (PS) more expensive, adding a further push to PP innovation.
This investment led to demand growth for propylene at 1.2 times global GDP (gross domestic product) by the mid-2000s compared with 1.0 GDP for ethylene.
But just as we have seen with the shale-gas revolution in the US that has transformed the economics of the country's PE industry, tipping points can be reached and surpassed before you even know it.
So is the case with PP where greater consumption of the polymer, along with other propylene derivatives, and reduced refinery and liquids cracker operating rates have inverted traditional price relationships.
As Paul points out in his article, the solution to expensive C3s relative to ethylene could come from on-purpose propylene, but a senior Singapore-based source with a global poylolefins producer told the ACC blog yesterday:
"A problem with the propane dehydrogenation-to-PP process is that it is extremely difficult to operate and expensive because although propane and butane is supplied at a discount in Saudi Arabia, it is still a discount from a market price (Note from the blog: 28% off the prevailing CFR Japan naphtha price. This is unlike ethane which has been traditionally priced based only on the costs of separation and distribution as it has had no alternative value - although this is changing)
"Bio-based propylene production has yet to be proven and the Chinese government has also closed the door on coal-to-olefins projects (Note again from the blog: over-investment has led to restrictions on new projects. A tougher approvals process is also the result of lower oil prices and concerns over the environment).
"But PP is by far the biggest derivative of C3s and so this will limit the upside for propylene as PP is a pure commodity. Once prices reach a certain level, and we are already seeing this, PP will be replaced by high-density PE (HDPE)."
Right now of the three major grades of PE, HDPE is suffering the most from oversupply because of big new capacities, polyolefin traders tell the blog.
So perhaps we are about to see some major innovations in PE to take advantage of longer ethylene markets.
The blog has heard that big announcements on new PE technologies are expected at this year's K-Fair.
By Malini Hariharan
A source close to the company said that revamping of Titan's two crackers have been evaluated including expansion of derivatives and building new downstream units at Titan's Pasir Gudang complex in Malaysia.
Titan's No1 cracker has a capacity of 285,000 tonnes/year while the second cracker is of 435,000 tonnes/year. Its derivative slate includes polyethylene (PE), polypropylene and aromatics.
An industry analyst thinks that expanding both crackers to 600,000 tonnes/year is possible and the figure was confirmed by the source close to Honam.
Pic source: Titan Chemical
But expanding the cracker beyond this level could be challenging given the size of the Southeast Asian market and capacities of competitors in Singapore and Thailand,
"Honam has considered this and will do things their way based on their expertise in experience in the business; they will realise higher competitiveness. Also synergies are possible in management of the Titan complex and in marketing and sales," said the source.
The acquisition, he added, fits in with Honam's strategy of boosting domestic and international competitiveness in petrochemicals by securing economies of scale.
As for the price of the acquisition, Honam could have got the asset cheaper if it had waited for the bottom of the petrochemical cycle. "But it has been pursuing Titan with a long-term view; they are confident that the cycle can be managed," he added.
More details on Honam's global strategy tomorrow.
By John Richardson and Malini Hariharan
Cautious optimism first gave way to mounting anxiety over the prospects for the second half of this year, but now the mood surrounding China's polyolefins market is downright pessimistic.
"It is going to take a few months to clear up polyolefin inventories and volumes from new plants," Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co said recently. "We are looking at probably sometime in the second half of 2011.
"Asia will have to rationalise production in August. Integrated crackers are still doing OK in terms of margins. But even if operating rates are cut to 85-90% you still have bigger Middle East volumes to contend with. The market is fundamentally weak and directionally it is not looking good."
Northeast Asian cracker operating rates will be cut by 5-6% with overall rates across Asia reduced by 1-3%, estimated N Ravivenkatesh, Singapore-based refining consultant with Purvin & Gertz in his latest Asian petrochemicals feedstock report.
He, like everyone else we have spoken to over the past two weeks, points to a toxic combination of stronger output in China and the Middle East and weak demand in China as being behind expectations of rate cuts.
"Polyolefin markets in China are very soft with producers having no choice but to push material at whatever price," added a source with a major South Korean producer.
"So far there have been no rate cuts in Asia, but at end-July/August it is possible that marginal producers will cut operations."
July-August was normally a hot season for the manufacture of household goods in China, he added - reflecting a widespread hope that demand might be about to pick-up to help consume extreme overstocking in polyethylene (PE).
"So far we haven't seen positive signals. In automobiles in China, inventories are 45-60 days, which is not much," he said.
"But customers in the construction sector have high stocks of pipes as a result of a slowdown in the real estate sector. If this continues, the government may remove controls to boost the construction sector."
Concerns over the success of Beijing's clampdown on the property sector are being widely voiced in the media, with one senior government official quoted as predicting earlier this month a steep property-price fall .
Relaxation of the measures might deliver a vital shot in the arm to the chemicals and polymers sector in general, as real estate in China is so important for the overall economy.
But the risk being apparently debated at senior central government levels is that easing restrictions too soon could create an even bigger property bubble in the future.
Back to the plight of Asia's cracker operators and the ICIS Weekly Ethylene and PE Margin Reports point to a sharp deterioration in variable margins since the first quarter of this year.
Naphtha-based northeast Asian (NEA) ethylene margins were averaging just $209/tonne for the third quarter on 16 July, compared with $378/tonne in the second quarter and $474/tonne in the first, according to ICIS.
Part of the decline is the result of increased ethylene availability in Southeast Asia -the result of the start-up of the Shell Chemicals cracker in Singapore, which is in C2s surplus.
Another factor has been increased spot sales from the Middle East due to production problems at one plant and commissioning of a new cracker ahead of associated downstream start-ups.
But Middle East shipments have also risen due to PE rates being cut in the region due to poor demand in China, added Ravivenkatesh.
And the PE margin story reflects the pressure being exerted upstream on ethylene: Integrated injection grade high-density PE (HDPE) margins in northeast Asia for the third quarter averaged $294/tonne on 16 July as against $377/tonne in the second quarter and $398/tonne in the first.
So why has the outlook become so bleak so quickly, just a few weeks after senior executives were talking at the Asia Petrochemical Industry Conference (APIC) in Mumbai of new levels of demand limiting the downside potential?
With the benefit of hindsight, here are two factors that we are told are behind the about-turn.
The macro-economy was always going to be a threat and delegates at APIC had included the proviso that events out of their control could wreck the rosy outlook. So it seems to have happened with weaker European and US prospects and slower growth in China. Anecdotal reports of the China slowdown were confirmed last week with the release of the second quarter gross domestic product (GDP) growth number
And production at new Chinese polyolefin plants seems to have been stabilised quicker in the first half than Middle East start-ups last year. This stabilisation occured as traders increased imports in March on the belief that crude oil would go higher - a reason for the high stock levels
Last year was also an exceptional year in China because of what Paul Hodges, UK-based chemicals consultants with International e-Chem, called the "desperation of the giant stimulus package".
This brought forward growth from future years, and created the unsustainable inflationary pressures that have led to tighter lending conditions in general, including those affecting property, he added.