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?
Paul Cherry of Basell gave an excellent paper at the recent ICIS Olefins Conference - Download file
Paul offers some hints on how to survive the next downturn, and provides some sobering predictions on operating rates.
I bet that after 2009-10, or whenever the next downturn arrives, South Korea, Taiwan and Japan will further restructure. And what about Thailand? Is it building too much capacity based on the mistaken belief that it can become a major finished-goods manufacturing hub?
And as for China, its dominance will grow and returning a profit from China will not become any easier.
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.
An interesting debate is emerging over the growth of the recycled polymer market in China. Sinodata, the Beijing-based consultancy, estimates that 5.8m tonnes of all types of recycled polymers were imported into China last year, an 800,000 tonnes increase over 2006. Five years ago, recycled imports totalled less than 500,000 tonnes.
With domestic recycling also estimated at 7-8m tonnes/year by Sinodata, this is creating a big dent in virgin resin demand. Demand growth for polyolefins is expected to be as low as 5% this year as against more than 10% in 2002-04.
If your glass is half full you can interpret the rise in recycling as a reflection of high virgin resin prices, meaning that once resin prices fall so will recycling.
But what about China's perrenial push for resource efficiency, given further official backing by Premier Wen Jiabao in a speech this week?What about the margin pressure on the downstreamers?
And, if you've found a cheaper way of doing things, why go back to more expensive raw material?
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?
We heard about this rumour last year, but it's emerged again - Reliance is now said to be in advanced discussions for acquiring Nova Chemicals. Nova's Alberta-based cracker and PE production might be attractive because of pretty competitive, locked-in gas prices, but would Reliance really want its styrenics business - the asset that's officially on the block?
And surely, a tie-up with Dow would be a much better proposition.
At the rate that things are going, India, the Middle, and possibly China, could own nearly all the western petrochemical majors in 10 years time.
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......
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.
I am at logistics conference at the moment where the major theme is a chronically tight global container shipping market because of booming exports from China. Ports are congested, waiting times are increasing, freight rates have in some cases doubled in the last two months(for example, the Middle East-Asia route) and there is no immediate sign of new container freight capacity easing the crisis.
And across the globe there is an imbalance between rapidly growing economies such as China and exports back out of some receiving countries in the same container vessels.
This result is lots of re-positioning or backhaul i.e containers moving out of the receiving countries empty. Countries such as Russia, for example, have small manufacturing industries and therefore need to import far more than they are able to export.
So if you are a polymer producer, there are savings to be made by scouring the globe for supplies of these empty containers.
What you do is you move your polymers to the country where the empty containers are sitting and fill those containers to move back to China, India etc. The shippers are delighted because they earn guaranteed extra revenue and the exporters in China are are dead chuffed because they don't have to haggle with the shippers over re-positioning fees (compensation for moving the containers empty back to China).
Now I cannot name the company I was speaking to fear of losing a good contact, but a polyolefins producer said to me over lunch over how he could be moving his product from his plant in central Asia to St Peterburg in Russia, via rail.
And then from St Petersburg, the polyolefins might move by sea all the way to China!
This is being repeated across the industry because supply chain effiiciency is so important for overall competitiveness.
The point of my headline is this - what will happen if the regulators start clamping down on this in a bid to tackle a producer's overall emissions, from the efficiency of his plant to final delivery to the customer?
Producers may not necessarily have to stop the use of convoluted shippings. If the economics still add up, they might buy carbon credits or find other ways of offsetting their responsibility for these extra emissions.
The producer I was speaking to believes it is possible that legislation to this effect will be introduced over the next two years.
Standing in the queue for Starbucks (not McDonalds - no way, and my son's going nowhere near that place) it's so easy to opt for the half bucket-sized Grande option because, after all, we are all rich these days and anyway it costs hardly anything to "Upsize". Walk around Starbucks and you'll notice numerous Grande Lates have been left only half-drunk.
And why not buy yet another car, an even bigger one, or an even bigger house (maybe one that's been repossessed in the US?).
Also, thanks to the ferocious cost-cutting efforts of the likes of Walmart - made possible by the developing world's hugely competitive textile industry - clothing has become incredibly cheap.
Move upstream from your wrack after wrack of cheap shirts and the feedstocks - crude oil, heavy naphtha. mixed xylenes (MX) and paraxylene (PX) - are becoming tighter and tighter.
Oil is at record highs, new refinery building has been delayed by soaring construction costs and MX is becoming an increasingly attractive blend into gasoline.
The picture for plastics might be slightly different because of all the gas-based capacity being brought on stream over the next few year.
But the polymer still has to be shipped and/or trucked, meaning yet more pressure on crude-oil pricing.
"Governments should try to limit the amount of synthetic fibres and plastics being consumed through taxation because there simply aren't enough raw materials around," said a delegate at the ICIS/International eChem Asian Aromatics Conference which took place in Singapore this summer.
This would be political suicide, of course, and so what seems more likely is that only inflationary pressures can produce the desired moderation in consumption.
But what if inflation gets out of control - perhaps more likely after the recent interest rate cuts in response to the credit crisis?
Back to bell bottoms, Ziggy Stardust And The Spiders From Mars, Ted Heath and the three-day week and football tackles that were really tackles - meaning, greivous bodily harm. God bless you, good Old Norm'.
......how long will it last is the inevitable question. Demand growth has been so strong so far this year with very little new production coming onstream that while crude oil and the price of monomers have set a floor for pricing, they no longer appear to be the main drivers behind fluctuations and increases; in other words, supply is so tight that it is the demand pull rather than the cost push that's the dominant factor behind pricing this year. The attached slides from Chow Bee Lin, Senior Editor at ICIS pricing, illustrate this point - Download file
But Chinese inflation is rising. This has led to negative real interest rates on savings, leading to money being poured into ever-more frothy (remember, lots of froth makes one giant bubble) local equity and real estate markets.
Inflation everywhere could be back with avengeance - made worse by the US interest rate cut that has led to more hot money flowing out of the US into China, India and other developing countries.
Plus there are the long term implications of the global credit crisis beyond. A lot of the polymers being shipped to China and elsewhere are for re-export to the US and Europe as finished goods.
And, of course, the second half of next year marks the beginning up the big new capacity upsurge.
But the doommongers, including myself, have been calling time on the industry upcycle for three years now.
Maybe the super-cycle, as it is now lovingly called, will continue if demand growth in Asia continues to accelerate.
This was the warning from Bob Bauman of Nexant ChemSystems at last week's 25th Annual Petrochemical Conference in Houston, Texas.
Read below for some rather gloomy predictions of where markets could be heading in 2011-12
The article below, from Sean Milmo of ICB, makes the case that the Middle East will not be able or willing to lead pricing in Europe during the next downturn because of the control that European producers will be able to exert on their home market.
Maybe Singapore airlines has got the wrong end of the stick by trying to ban first class passengers in their new cabins in the sky from indulging in a little hanky panky.
Perhaps the answer is to equip the walls of these private cabins with super sound-absorbing polymers (polyurethanes, maybe?).
Any suggestions from polymer experts out there would be gratefully received and I'll pass them onto the airline.
Maybe I've been to too many conferences this year, and indeed over the last decade, and have seen too many forecasts go wrong.
Call me cynical, or plain wrong, but...........
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.
India is already being held back in mass manufacturing by restrictive labour practices and poor infrastructure - meaning the answer to the above question is already a resounding no in some sectors.
The rise of the rupee is also a concern, as this article from The Economist highlights .
The problem for India is because it has spent the last 15 years gradually opening its capital account and liberalising its financial market, it cannot do what the Chinese do so effectively - intervene to keep its currency competitive.
Export markets are going to get a great deal tougher next year as the US, and probably Europe, enter recession.
And so how will Indian manufacturers cope in these tougher markets versus their Chinese competitors, given the handicaps of the rupee that could remain high and weak infrastructure etc? The answer is likely to be not particularly well.
Reduced export sales will weaken the stellar petrochemical consumption growth we've seen over the past few years.
It will be interesting to see the effect that this will also have on polypropylene. Reliance Industries is due to commission its 900,000 tonne/year plant in Gujarat in mid-2008.
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 could easily be accused of ceaseless pessimism, but growth in China is moderating - regardless of what your view is of the extended article below on the impact of the bad-weather crisis.
Slowing exports were already eating into estimates of GDP growth, and these estimates surely what companies can expect in chemical export volumes to China, before the arrival of the worst snow storms in 50 years.
.......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.
The mood at the recent NPRA International Petrochemical Conference in San Antonio, Texas, was mixed, despite all the economic gloom.
Some producers said they were still making money - especially those selling into manufacturing sectors benefiting from a rise in exports due to the weak dollar.
What's certain, of course, though is that things will get worse regardless of the health of the global economy. The down cycle is just around the corner.
But we could quite easily see, as this extended article below speculates, another period of under-investment following all the over-investment that markets will need to absorb over the next 3-4 years.
Plus ca change, plus c'est la meme chose.
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.
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.
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?
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?
As delegates gather for this year's European Petrochemical Association meeting in the unreal world of Monaco (unreal for the 99.9 per cent recurring of us who don't own Ferraris), I thought it was worth summarising some of the issues discussed on this blog over the last few months.
We've dealt with:
*Oil-price volatility and the likelihood that high and volatile crude is here to stay. Crude at or around $100 a barrel seems to be a new long-term level with the strong possibility that geopolitical shocks could send costs much higher. Supply and demand balances remain tight and as soon as global economic growth recovers we will see much higher prices - meaning that the recovery could be nipped in the bud. Are we heading for a new economic climate where recoveries are constantly set back by rising energy costs? For every one barrel we are discovering, we are consuming three.
*The new credit environment that might well emerge from tougher banking regulations. No longer will it be possible for a truck driver from Iowa earning $20,000 a year to borrow at ridiculous multiples of his salary and at "teaser" interest rates. How these regulations will effect emerging markets his harder to read as Asian governments and consumers are in far better financial shape than those in the West. Many of the banks in Asia have been more prudent. But the events in the US will surely lower the appetite for risk globally - and there is no guarantee that the financial-rescue package will work. Ask your consultants or inhouse researchers you use whether their demand-growth predictions factor in the possiblility of lower growth because consumers no longer have access to as much credit.
*Innovation will be the key as the environment becomes a bigger and bigger issue for the chemicals industry. You need right technologies and the right kind of staff. As there is a possibility of a global carbon tax or carbon cap-and-trade system, do estimates of what this might cost need to be factored into feasibility studies? How feasible will it therefore be - given both high energy costs and the possibility of a price on emissions - to continue building plants long distances from major consumption markets?
*One of the big areas of innovation will be attempts to break the link between the refinery and petrochemical industries. BASF is claiming it could be as little as five years away from breakthroughs in catalyst technology that could change the industry forever, enabling highly competitive petchems to be produced from biogass, natural gas or coal.
And finally, other theme I haven't blogged on yet but will do are plant and energy efficiency. Some very interesting research projects are taking place at the National University of Singapore chemical engineering department into monitoring the exact output of plants in differennt climate conditions and a model that might enable producers to much more accurately predict changes in yields from switching feedstocks. Much more later...
Meanwhile, have a great meeting - and let's hope the economic conditions improve.
As if the problems confronting China's polyolefin markets were not enough, sales have apparently been further hit by the tainted food scares which began with baby's milk.
A wide range of products are now affected with Cadbury becoming the latest global confectionary brand to withdraw some of its products.
The China market was already facing the potential for negative or even flat polyethylene and polypropylene growth in 2008 because of the collapse in export trade to the West due to the global financial crisis.
The problem now, according to a leading Western PE producer, is that just about every exported Chinese food product is being subject to closer scrutiny by regulatory authorities - along with the negative impact on sales of all the product withdrawals. This is making China's converters even less willing to buy resin.
Long term, lower growth in China means it will of course take longer to absorb the new capacities.
The Chinese government also faces the task of rebuilding confidence in its food industries - not only for the sake of export trade but to also tackle local anger. Civil unrest over health concerns surrounding air and water pollution is already a major threat to social stability.
But for those focusing on immediate prospects, the good news is that there are strong rumours of substantial delays to the start-up of two major PE plant sin the Middle East.
The longer that late equipment delivery and technical (or maybe market?) issues push back start-up, the more likely it is that the global economic downturn will at least have reached the bottom of the trough before the big flood of volumes hits supply.
The industry has been very lucky. First came the Iranian delays, which in effect mount to the cancellation of 3-4 crackers all due on stream in 2010-12.
Then we have seen up to three crackers in Qatar delayed to beyond 2012.
And for those projects where building work is almost complete, continued technical and equipment delivery issues have left buyers with the same feeling that Manchester Utd fans had during the 1980s and early 1990s, which was: "Maybe we'll win the championship next year." Sadly, or rather tragically, things changed.
This year was supposed to mark the big ramp-up in PP production, but it hasn't happened.
I grew up in a small town called Bingley in West Yorkshire in the UK, where there are two major employers - the head offices of a building society (or what was once a building society, but became a failed bank - see picture above) and a clothing business.
My late parents worked most of their working lives for the B&B and I worked there during the summer when I was student, to pay off debts built up through excessive drinking (I was an arts student, thank goodness - none of this obsessive "grow old too young" nonsense of MBAs and other business degrees that are serving very little purpose at the moment. You'd be better staying at home and writing poetry).
In the financial maelstrom, you might have noticed that the B&B has been partially nationalised by the British government.
This used to be a dull but worthy lender that became more aggressive and, like most of the rest of us, didn't believe that there was a down as well an upside when we were all caught up in the economic supercycle.
Before the nationalisation occurred 370 jobs were axed last week - which will greatly affect Bingley's economy, from the direct job losses, of course, to the shops and the restaurants. More jobs are at risk among the remaining 3,000 employees.
My dad worked down a coal mine, fought in the Second World War in North Africa and Italy in an artillery regiment, returned from the war to work on the railways and then spent the rest of his working life as a caretaker (or a janitor as the Americans have it) at the building society. If he had been still around, he could have been out of work - but exactly what portion of the blame for the crisis would you have apportioned to him, Mr Paulson?
Multiply the impact of job losses around the world as other banks and businesses fail and this means much less chemicals demand - from the plastic packaging used in restaurants to cancelled bigger ticket purchases such as automobiles and TVs. Again, we need to be looking hard at demand-growth numbers in an attempt to contemplate what this will mean for all our businesses - whether we work directly in the chemicals industry or as service providers.
But the bigger tragedy is that real people, not those with fantastic salaries and parachute payments who are responsible for this financial mess, will suffer greatly.
These are real people who deserve protecting because they had no idea, and had no chance of gaining any kind of idea, of the potential scale of the crisis we are now confronting.
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
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.
OK, this blog is supposed to focus on the long term, but in line with just about everybody else, all I can think about is the immediate and my collapsing share portfolio and the value of my home.
As a bit of light relief (and also, by the way, because it's my job) I've been taking a close look at polyoefins markets over the past week. More to follow on aromatics later.
It does appear as if current price levels are unsustainable, that buyers know it and that some modest further price gains are possible.
Some modest re-stocking was inevitable after the inventory-loss disaster of H2.
And the world economy hasn't completely stopped. Maybe we are only (?!) talking about 10-20% of lost demand into mainly consumer durables.
Perhaps also crude can't fall that much further, providing a floor for polyolefin pricing.
But the question now is how long pricing will remain around this new level, fluctuating by small increments with buyers maintaining an incredibly cautious approach.
If quarters turn into years, who will be left to pick up the pieces when the economy finally recovers?
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.
India has launched a petition for PP anti-dumping action against Saudi Arabia, Singapore and Oman. This is the first case of this type in India.
Producers, as we predicted on this blog earlier on, will be increasingly attempting to protect their home markets as everyone searches farther and farther afield to place distressed volumes.
Expect also that countries such as India - which much more lower applied than bound tariff rates under its WTO agreement,- will seek to raise tariffs to maximum levels predicted by the international trade body.
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.
Comparatively stronger exports to China, as my fellow blogger Paul Hodges points out on his Chemicals & Economy blog, is also evidence that this is happening.
This is understandable given that by some estimates as many as 30m migrant workers have lost their jobs.
But there is a threat of deflation being exported if all these finished goods end up flooding overseas markets. In such an event, petrochemical pricing can surely only head in one direction.
It is time to think hard about your business, plan for the worst and hope for something slightly better.
This excellent article from The Economist about vertical integration got me thinking that if, say, auto makers start buying up parts suppliers in developed markets (in developing markets the plastics processing industry is too fragmented) we could end up facing a whole new set of industry dynamics.
Buying up your supplier, or at least offering them strategic advice and financing in the way that Toyota does, could end the days of the poor and relatively small converter squeezed between the big petrochemical producers and the giant finished-goods manufacturers. Resin producers might suddenly find themselves facing heavy rather than lightweight opponents.
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.
Could the chemicals industry be in danger of wanting to believe something so much that ignores overwhelming evidence to the contrary?
The widespread perception is that China's economy has reached a turning point.
"The worst of the crisis is over and the world is entering the time when things will gradually get better," wrote former US presidential adviser John Rutledge in an article on the Chinese news service, Xinhua.
According to The Economist, it wasn't the collapse in exports that triggered slower growth in China.
It traces the origins of the downturn to tightening of credit in 2007 that led to a collapse in property prices in China's first-tier cities and a decline in construction.
"If the collapse in domestic demand led China's economy down, it can also help lead it up again. Not only is China's fiscal stimulus one of the biggest in the world this year, but the government's ability to 'ask' state-owned banks to spend and state banks to lend more means that the government's measures are being implemented more rapidly than elsewhere," writes the magazine.
The huge spending on infrastructure will hugely benefit rural communities as two-fifths of villages lack a paved road to the nearest market, it adds.
A large increase bank lending also appears to be behind a 36% rise in housing sales by value in the year to March after sharp falls in 2008.
If construction picks up this should help reduce unemployment as half the job losses among migrant workers have been in the building industry, the magazine continues.
But The Economist concedes that a misallocation of capital is a concern.
However, the article continues: "China is one of the few countries in the world where bank credit has fallen relative to GDP over the past five years. Banks have an average loan-to-deposit ratio of only 67%, low by international standards, and less than 5% of banks' loans are non-performing, down from 40% in 1998."
So in other words because the Chinese banks are awash with cash a major Western-style financial crisis seems unlikely, no matter how much money is wasted.
But if money is being misallocated, the boost to growth might be less than some people are forecasting.
There are strong rumours that easy bank loans have fuelled speculation.
"When we are selling to a trader in China they have no interest in our letters of credit because they can borrow so cheaply and so easily from their local banks. They are even prepared to pay 20% up front by telegraphic transfer," said a Singapore-based polyolefins trader.
"I used to sell 80% to end-users and 20% to other traders in China, but now those percentages have been reversed.
"I think a lot of traders in China have taken risky long positions because lending terms were so easy."
Money has even been borrowed and then made or lost on domestic stock markets, some sources claim.
The same might apply to the Dalian Commodity Exchange, which has seen a huge increase in trading in linear-low density polyethylene (LLDPE) over the last few weeks.
Large of inventories of steel, aluminium and concrete are being built as a result of speculation and perhaps an anticipation that demand will get better in H2. The same might apply to chemicals and polymers.
It is worth reading the lengthy posts for 20 April and 13 April.
In summary, he talks about:
*Private companies - the main engine of economic growth - struggling to get financing as the state-owned enterprises receive a flood of loans
*A poor return on money spent versus jobs creation - for example, CNY1trillion which is being spent in Henan province to create 650,000 jobs. He has calculated that if this same sum had been spent on giving workers salaries of CNY3,000 a month (more than twice the average salary of migrant workers) this would have been enough to pay the wages of 650,000 people for 43 years
*A boost in industrial production, "leaving the unresolved question of who is going to absorb the excess capacity if the US is no longer willing to play the role"
*Signs that China is trying to export its way out of oversupply. The trade surplus was $62.6bbn in Q1 this year, up from $41.7bn for the same period in 2008. "Although lower than the astonishing heights of January and late last year, the trade surplus is still much higher than this time last year. That means China's export of overcapacity is increasing," he writes
*A much larger vulnerability of GDP (gross domestic product) to exports than some economists have calculated. He quotes a Wall Street Journal article, quoting a working paper prepared for the International Monetary Fund. The paper estimates that for every 10% fall in exports, GDP will decline by 2.5%. Exports fell by 20% in the first quarter
*Government subsidies and tax distorting demand - for example, state-owned enterprises bringing forward vehicle purchases which was of the major reasons why auto sales rose by 10% in March. JD Power, the car consultancy, is forecasting flat Chinese passenger car sales in 2009
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.
My current favourite blogger is Michael Pettis, professor at Peking University's Guanghua School of Management, who, in his latest post, makes a very worrying point below.
As an aside, and without wanting to take the 1930s analogy too far, this debate in China is a little like the split in the 1930s between the internationalists in the US who favored hard money (incorrectly, I think) and a rapid liquidation of overcapacity (painful but probably correct), and who vehemently opposed measures, including tariffs and competitive devaluations, to boost employment via boosting the export of overcapacity, versus the large and powerful constituencies, dominated by local congressmen, miners, farmers and many industrialists, who stressed immediate moves to weaken the currency, boost production, and resolve US unemployment even at the expense of the global system. In part because the 1929 stock market collapse thoroughly discredited bankers and economists, and in part because politicians are always more likely to be influenced by large domestic constituencies than by internationalists, the latter group pretty resoundingly won the debate, at least in the early part of the crisis, and clearly not to the US's obvious benefit.
Economic stimululs packages the world over seem to be attempting to turn the clock back to 2007 - thus adding to the imbalances that caused the crisis in the first place.
In the case of China, short-term political expediency might be causing more damage to the global economy as the country tries overproduce its way to higher growth.
Overproduction in China might be the reason why polyolefin prices continue to defy reason.
Despite a fall in naphtha prices on what we earlier predicted on this blog - a big increase in naphtha supply in Asia - polyolefin prices continued rising last week.
Naphtha had fallen by $13/tonne to $437.25-438.25/tonne CFR Japan while polyethylene prices rose by $20-70/tonne in Northeast and Southeast Asia and polypropylene by $30-60/tonne.
......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.
The timing of when to strike the ball is everything in the wonderful sport of cricket - and also, apparently, in the American pastime of baseball.
An Australian banker is fond of reminding the English how much better his country is at playing cricket.
But his gloating doesn't extend to how well he's been timing dipping in and out of equity markets of late. Like a lot of other "cashed up" people he is suffering from the "if only" syndrome.
"A lot of money seems to be pouring into stock markets because it has nowhere else to go. I didn't expect this run to last as long," he said.
All the moving indicators are pointing upwards with crude above $55/bbl on Thursday where he thought there would be very tough resistance.
"There's so much crude in storage which has been acquired by the financial traders who perceive the economic recovery is just around the corner. This is a big risk.
"Equity markets are also responding as if a recovery is only three months away. They usually price in a recovery about a quarter ahead of when it actually happens, but I believe that the recovery - or rather the bottom of the market - is at least six months away."
And in his view, you have to be very careful how you measure "recovery" in the context of the worst economic downturn since possibly the Great Depression.
The first important measure is the effect of inventory adjustments on GDP (gross domestic product) growth.
In the US, for example, total inventory reductions subtracted $50bn from growth in the fourth quarter of last year, he said.
The first quarter adjustments will see a further $100bn or so of production cuts and the second quarter possibly in excess of $150bn.
The collapse of liquidity in Q4 2008 forced companies across all sectors to make much quicker operating-rate cuts and plant closures than occurred at the start of previous recessions.
"There was simply no re-financing available so the companies had no choice."
BASF has reduced is global production by 25%, Bayer Material Science has taken 300,000 tonne/year of polycarbonate (PC) capacity temporarily off-line and Dow Chemical's average operating in the fourth quarter was just 64%.
"I expect some inventory replenishment down many of the production chains in Q3 in the US, and probably elsewhere," he added.
"This could give the false impression that we have reached the bottom of this crisis and recovery has begun."
Inventory building in Q3 would need to be measured against consumer spending, he said.
Retail sales on big-ticket durable items such as autos and homes might take longer to bounce back in the West than in Asia. Cost consciousness could also extend for some time to clothing, food and tourism.
Individual wealth has been badly dented by the fall in stock markets relative to their peak and the collapse in housing.
"Savings rates are likely to continue increasing as a result of this loss in wealth - even more so if unemployment keeps on rising."
Recoveries in GDP growth in the third quarter of this year would also need to be measured against the same period in 2007 rather than 2008, he added.
"This will give us a measure of how far we are away from returning to the boom conditions of 2004-07."
The crisis began in the third quarter of 2008.
Any comparison between Q4 2009 and Q4 2008 would be even more misleading as the global economy ground to a virtual halt during the last quarter of last year.
Comparing 2007 with 2009 is crucial for the chemicals industry as new capacity was planned on the belief that growth would continue at levels close to the great boom years.
"Even if were still in a global boom we would still need capacity to shut down," said Paul Hodges, chairman of UK consultancy International eChem.
"In most building block products we are now faced with 20% oversupply."
It could be a very long time before the world economy enjoys another period like 2004-07.
Consumer and corporate credit is likely to remain much more restricted because of financial-sector reforms.
"You also have to look at the potential for credit-card debt going bad to undermine consumer spending and the stability of the banks," the banker added.
"The first quarter results of the Western banks were very misleading. They looked good because of a reduction in competition due to consolidations and bank failures.
(Also, the banks could hardly fail to make money as governments were practically giving money away)
"But behind the numbers you could see warnings over just how much bad debt could result from credit-card defaults.
"As much as 25% of the revenues of some commercial banks come from credit-card transactions."
Consumers who are not in danger of default will be eager to pay off their plastic debts rather than incur 20% interest charges, he said.
The other big risk is the rate of recovery on corporate debt that's gone bad. Optimists think it could be as high as 40%, whereas others are warning of returns of as low as just a few cents on the dollar.
There appears to be the risk of a least a double-dip recession - perhaps even three dips.
Commodity chemicals prices started going up before the current equity-market rally.
This followed the deep global production cuts in aromatics, olefins and derivatives and a rebound in feedstock costs.
It's a moot point whether the cuts, combined with delayed start-ups in the Middle East, created genuinely tight markets or just the perception that they were tight.
In the end, though, the result was the same - raising the age-old conundrum of whether sentiment or fundamentals are driving markets.
A danger is that rising crude prices and the stock-market rally could lead to chemicals production being ramped up (if it hasn't happened already), despite the uncertain outlook for consumption.
Confidence can be a dangerous thing.
It's a great deal easier to off-load shares when you think the market has turned than a warehouse full of polyolefins.
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.
Consensus opinion tends to swing firmly in one direction and then the other.
For example, in the good old days of 2007 you would have been pretty hard-pressed to find many in the chemicals industry who saw anything but a mildly cyclical downturn.
But the widely-held view now - that we are facing five years of incredibly tough times, the first period of this length in the history of the business - might also not come true.
"In 1992, the same was being said but then within 12 months the industry was in recovery," said an old industry hand.
"I don't know what the macroeconomic factors might be on this occasion. If I did I could make a fortune. In 1992, it was the unexpected emergence of very strong Asian demand.
"But even if the economic news keeps getting ever-gloomier, the industry itself might make yet more adjustments to bring supply much more in line with demand."
He cited the sweeping production cutbacks that have already taken place as evidence that the will to make the necessary changes exists.
"Leveraged and private-sector companies will just not sit on their hands. In the distant past, action was slow because the industry was mainly state-owned."
These included Dow Chemical reducing operating rates to a 63% average in Q4 last year, BASF shutting down 25% of capacity in Q1and Bayer Material Science idling 300,000 tonne/year of polycarbonate (PC) capacity - again in the first quarter.
The cutbacks seem to have been more extensive than in a recession of this comparable severity - the one which occurred in the early 1980s.
"Chemical companies had no choice because raising working capital through re-financing was simply impossible," says a Singapore-based banker.
Maybe if cash flow remains constrained by ever-weaker revenues - even if the financial system is repaired - companies will face no option but to permanently shut down capacity and definitively cancel projects.
The extent of the capacity closures to date suggests that markets being brought back into balance is possible far more quickly than the doom-mongers (including myself) expect.
A few major bankruptcies might make this process very rapid indeed through closure of a large amount of a capacity in one fell-sweep.
It's easy to get caught up in the excitement over the rebound in the Chinese economy and miss underlying weaknesses which point to some major problems ahead.
To some extent, in a desperate effort to compensate for collapsing export trade, China might have borrowed from the future in order to achieve a swift recovery.
"The (Chinese government's economic) stimulus programme borrows from a future investment cycle," writes the online research publication, the China Economic Quarterly (CEQ), in its Q2 report.
"Since 1978 China has run relatively regular five-year investment cycles followed by five years of retrenchment."
Spending by the State on infrastructure and industry boomed in 2003-07 and so the following five years were supposed to involve the reductions in expenditure necessary to repair a big hole in the national balance sheet.
But, of course, the reverse has happened with infrastructure and industrial projects scheduled for the next 5-10 years now set to be completed over the next 3-4 years. This includes speeding up investments in the refinery and petrochemical industries.
"China could be in for some rough times after the stimulus money runs out in 2011," the CEQ adds.
Repair work to the national budget might not be the only reason why longer-term prospects could be a lot bleaker than many expect.
China might also fail to boost domestic demand sufficiently to compensate for export trade which might take many years to recover.
"For the first time in the 30-year reform era, China faces an extended period - five years or perhaps longer - in which exports will provide no significant contribution to growth," says the CEQ.
The reason is the well-documented collapse in the West's debt-financed consumption binge.
On the surface, it looks as if China is making great headway towards realising more of its enormous domestic-growth potential: retail sales grew by 16% in Q1 this year, up from 15% in the first quarter of 2008.
If you dig deeper, though, as the CEQ again does, you discover that retail sales include many "institutional" purchases, meaning those by state-owned enterprises (SOEs).
The government has increased military salaries by 50% and is providing rebates of 13% and 10% respectively off rural purchases of household appliances and automobiles.
Despite all this cash sloshing about, however, when you take away the institutional purchases from the retail sales figures, the CEQ concludes that there is little evidence of a pick-up in consumption.
Longer term, this can be fixed if efforts to create much better pension and healthcare systems lead to more spending and lower savings levels.
Compared with the West, and particularly the US, the Chinese keep an awful lot more of their money bank deposits.
But here's another potential pitfall: all that money sloshing around (the CEQ estimates the total stimulus will be worth Yuan5-6 trillion, or 15-18% - much bigger than the originally announced Yuan4 trillion) could end up creating another non-performing loans crisis similar to that of the early 1990s.
This could force China's banks to lower interest rates on deposits in order to repair their balance sheets, warns Peking University finance professor Michael Pettis on his blog, China Financial Markets.As bank deposits are such an important method of saving money in China, lower interest rates could lead to more money being saved as compensation, leading to damaged consumer growth, he adds.
Numerous economists are also warning that too much of the stimulus is in the form of loans to the SOEs, which can be less efficient in boosting the economy than private companies.
The private sector, hammered by the collapse in export trade, is in contrast reported to be struggling for finance.
An inevitable slow down in bank lending, the result of the huge rise in loan growth during Q1, could also be put yet another brake on the economy.
"RMB (Yuan) net lending fell sharply to YuanB592bn in April from YuanMB1.9tn in March, broadly consistent with our expectation," writes Jun Ma, Chief Economist Greater China for Deutsche Bank, in a report.
"We believe this reflects the success of the window guidance by the PBOC (People's Bank of China) and the CBRC (China Banking Regulatory Commission) 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 Yuan300-400bn per month in the remainder of this year."
A further worry remains the potential global deflationary effect in H2 of China stockpiling raw materials, including perhaps chemicals and polymers.
Imports of polyethylene (PE) and polypropylene (PP) have, for example, been at record levels in Q1.
However, it's impossible at this stage to say whether this involves major stockpiling or is more the result of better demand and big production cutbacks by Sinopec and PetroChina earlier this year.
In the case of iron ore and copper, though, the steep rise in Q1 imports (iron ore was up by 33% and copper by 62%) are being widely attributed to state-backed inventory building and strong investment demand.
"China is stock piling commodities - everything from metals to oil," said a chemicals industry source.
"The argument is that it's better to store financial reserves in commodities rather than US dollars."
"There has also been some stock piling of gasoline and diesel in anticipation of price increases by the government."
Gasoline and diesel prices were indeed increased from early June - the first time since March.
But if you put five economists in a room, goes the old adapted saying, you are likely to get at least ten different opinions.
It can be just easy to interpret some of the recent data in a much more positive way, and it might just be possible that the current euphoria will create a self-fulfilling prophecy of a sustained recovery.
It's worth being aware, though, that a 50% rise in the local stock markets since the start of the year and lots of positive macro-economic news might not tell the full story.
Cartoon: Peter Brookes, The Times
Yes, this blog has gone staggeringly quiet over the last few weeks as I gained a life: I went home to the UK and mixed with some people who had no interest in or desire to know anything about polypropylene. Do you realise that there are some people out there who have never even heard of catalytic reformers? Amazing....
Anyway, before I return to my sad little petrochemicals bubble, here are some reflections on the political chaos gripping good old Blighty caused by MPs' expenses.
The pleasure the Brits are deriving from their fuming indignation over some upper-class twit claiming the cost of cleaning out his moat, and other such extraordinary fiddles, almost makes up for the misery inflicted by collapsing house prices.
But as I kept saying over many a pint of wonderful British real ale during my leave: "Corruption? Call this corruption. If you want real, decent corrupt politicians then go to India or the Philippines, to name but two Asian countries affected by this problem.
"The good people there would be delighted if all that their political leaders did was claim the odd household plant or a bit or mortgage tax relief off the State."
It's good fun to have a go at politicians, though - God knows they all deserve it.
And there is never any excuse to fiddle your expenses and quite obviously, all the journalists enjoying the hunt have never, ever over claimed or falsely claimed for anything (you can be probably tell, except if you are American that is, that this is intended to be sarcastic).
I had a friend many years ago who worked on a national newspaper who received a major telling off for not claiming enough fraudulent lunches, dinners and gallons of alcohol, the reason being that if the accountants saw one person managing on less everyone else might have been forced to follow suit.
Most national newspaper journalists, certainly in the 1990s anyway and so this may have changed, could double their salaries by being on the fiddle.
But in the row over MPs' expenses perhaps not enough focus is being placed on a much bigger issue. This is how Britain is going to repair its government finances without creating major inflation problems or interest-rate hikes that will limit inflation but nip the recovery in the bud. The same applies, of course, to the US.
I don't pretend to understand Bond yields etc.
Perhaps nobody understands, nobody has control, nobody has a flipping clue and so in the absence of any clarity the only debate worth having is over why the former Home Secretary's husband, working as a government-paid political assistant, claimed porn movies on his expenses (still my favourite of all the scandals).
Toodle pip. I promise you in my next post that I'll write about polypropylene for all you fellow sad people out there.
Picture: The Daily Mail
Ok, I lied - I am having trouble getting back into my petrochemicals bubble and so this post is not about polypropylene. Apologies to all those disappointed C3 H6 molecules out there.
I was sharing lunch with a highly demotivated Singapore-based chemicals industry employee recently and the great British 1970s sitcom, The Good Life, came to mind (see above picture for the full cast - don't you just love the clothes?).
In that sitcom, Tom Good, played by the actor Richard Briers, is meeting "Sir", the boss of the plastics processing company where he works as a draftsman. The company specialises in desiging and molding those little plastic toys you used to get (or might still get - I am not sure) free in your breakfast cereal.
"Sir" puts his arm around Tom, who he has noticed for the first time because he has been introduced by his friend Jerry, played by the late and great Paul Eddington, as "our top designer". Jerry is a monumental crawler and, as a result, is in an executive position.
Anyway, "Sir" says to Tom, or roughly words to this effect: "A new bubble has just come off the top of our think tank and I want you to take charge of this project - plastic hippopotamuses (or was it giraffes? Couldn't find on Google). Are you excited? Do you think you are the man for the job?". He is speaking in one of those annoyingly enthusiastic voices you may have heard in meetings and wished "if only I could have the presence of mind to fake it that well".
Tom, is of course, supposed to show enthusiasm in order to crawl up the slippery corporate ladder, but instead bursts out laughing, goes home, quits his job, and decides to become self-sufficient by growing all his own food - and keeping lifestock - in his suburban back garden.
To return to my lunch with the unhappy chemicals-industry employee, he had been ground down by having to bite his tongue in so many long and dull meetings that when his boss asked for ideas for a new corporate slogan, he replied: "How about 'The Relentless Pursuit of Mediocrity?' ".
He lives in a condo with a window box as a back garden and so growing fruit and vegetables for a new career is not option.
Anonymous contributions would be gratefully received for comments you would have liked to have made in company meetings, but felt unable to do so. This is your chance to let off some steam.
As I've been warning on this blog for some time, the explosion of credit in China has created a great deal of paper-bottomed optimism over the recovery.
Fitch, the ratings agency, has just raised its macro-prudential risk indicator ffor China from category 1 (safe) to category 3 (Iceland et al) because of the lending surge and public debt.
China's Banking Regulatory Commission warned last week: "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy."
And Andy Xie, the often-quoted Sino-bear, says in the same article I've linked to above from The Daily Telegraph: "Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation."
This is probably one of the main factors behind the boom in speculation in linear-low density polyethylene (LLDPE) futures on the Dalian Commodity Exchange. PVC futures were also recently launched on the exchange.
As my fellow blogger Paul Hodges points out on his blog, Chemicals & The Economy, China is at risk of repeating the mistakes of the West: an unsustainable rise in credit.
The obvious danger, as has been flagged up before, is a sudden collapse in chemicals demand and pricing as inventories are unwound (built up with too-easy) as tougher lending conditions are imposed. This could be an even more dramatic bursting of the current equities and commodity price bubbles if it occurs at the same time as sharp fall in crude (which seems likely if equities are hammered.
Have you ever been away on holiday and have cut yourself off from from work, only to return and find that nothing has changed?
So it seems in polyolefin markets. As this blog has been writing about for several months, the recovery in pricing seems to have been mainly feedstock-driven as this article from ICIS news points out.
Demand from converters in south China is reported to be weak; hardly surprising given the chart below from The Wall Street Journal which indicates that China's economy is 36.5% dependent on exports with south China the heartland of China's export sector.
No matter what the wisdom of the Chinese government's huge fiscal stimulus aimed at boosting local demand, a sustained recovery in Western consumer spending remains crucial for China's economic health over the next few years.
You have to doubt the wisdom of the stimulus packages because China could well be borrowing from the future to pay for growth today. And secondly, as we discussed earlier this week on this blog, the enormous increase in loan growth will put China's banking system under pressure.
Chemical prices have risen in tandem with crude prices and with the broader sense of optimism - reflected in equity markets - that the worst of global economic crisis might be over.
True, the rate of declines in the real economy might have slowed down but as Mohamed El-Erian, chief executive and chief investment office of Pimco, argues in this Financial Times article "it is going to take time to restructure an economy (the US) that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers."
This could mean US unemployment will only peak at 10.5-11% and not until 2010. Yesterday saw the release of jobless figures for June which indicated a 467,000 drop in employment, raising the current jobless rate to 9.5% from 9.4%,.
I am sticking to my belief that a sharp correction in polyolefins pricing is likely very soon with markets set to get a dreal longer when the Asian turnaround peak season ends - and when new capacity comes online in China and the Middle East
Evidence of this is clear from the monthly ICIS Ethylene Worldwide Report, which was relaunched in May.
As this slide shows detailing China alone (and the picture looks equally disturbing for the rest of the world, also of course including the Middle East), available capacity is set to increase sharply as maintenance work tapers off and some of the new plants are commissioned.
But there might be more start-up delays and of course we don't know the maintenance schedules for next year.
Clearly the risks are high, though, for any petrochemicals producer or buyer (I think what I've said for olefins and polyolefins applies to many other products) that has swung from the fear of Q4-Q1 last year to over-optimism.
If production or buying have been ramped up by too much and inventory levels have once again been badly managed, the risk of heavy losses from the bursting of this mini-price bubble remain high.
For the cautious and prudent company - and for the likes of Ineos and Dow Chemical that have taken opportunities to refinance during the current stockmarket boom - though, the prospects might not be that bad.
But for everyone, evidence of a real improvement based on stronger global consumer spending has yet to emerge.
Indeed, if El-Erian's analysis is correct overall consumer spending on the things made from chemicals might get worse in H2 this year and throughout 2010.
And as foor beyond the end of next year, again, since I've been away nothing has really changed.
This comment from the economist Nouriel Roubini - although a bit dated as it's from May - still rings true:
"We cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures."
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: The Earth Institute at Columbia University
I was speaking to a Singapore-based trader this morning over the reasons behind the polyolefin price rally.
Here are his views:
"A maor factor has been a lack of availability of recycled material. This is because people in the West are buying less durable consumer good, for example electronics, which arrive wrapped in plastic.
"During the economic mega-boom lots of this plastic was collected in the States and Europe and exported to China to be recycled back into film for wrapping durable goods. For hygiene reasons you can't use recycled material for food wrappiing.
"Stricter government regulations have also reduced the trade in recycled material. The new rules were introduced because of environmental concerns.
""A lot of the traders who were handling recycled material went bust because of the great petrochemical price collapse last year. T
"hey were left holding high stocks of recycled stuff they couldn't sell. Factories were no longer interested because they could buy virgin material and very-much reduced prices.
"Last year was also very good for selling fillers to make virgin polymer go further. For example, I was able to sell lots of calcium carbonate at $900-1,300/tonne. This year I haven't sold a single tonne."
Very interesting stuff - especially when you consider that in the last few years imports of scrap plastic have taken around 4-5 percentage points of China's polyolefin demand growth.
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.
Source of Picture: Chinasnippets.com
Perhaps this post will help explain why a perplexed Hong Kong-based financial analyst wrote to me the other day, in response to my probably failed efforts to adequately explain rising chemicals demand in China:
"I stilll don't understand why polymer imports from PP, PE, PVC, and even SM (+15% per month avg) are up by so much this year."
One reason is a property boom that has some scary long-term implications (all the SM for EPS for insulation, for example, and PVC. Despite China's self-sufficiency in PVC local carbide plants suffered when oil prices collapsed.)
"I thought I'd seen insane excess in the past - 200 thousand square meter malls completely empty next to apartment complexes with 40 thousand units and 30% occupancy rates, etc. etc.
"But what we saw over there is rather hard to fathom. It seems the Guiyang city mayor had the same idea as the Shenzhen mayor - to move the old downtown to a piece of undeveloped land.
"Of course Guiyang has a quarter the population and probably a quarter the per capita income of Shenzhen.
What was most distressing was that the (recent) development has been totally uncoordinated - a project with 15 buildings here, in another field two miles away a project with one building, another mile in another direction three buildings, sprawled over what was easily over 30 square kms. of farmland well north of town.
" We conservatively guesstimated that we saw US$10bn of NPLs in one afternoon. The only buildings that were occupied were six-storey towers built to accommodate the peasants who had been displaced by the construction."
Michael Pettis, author of the blog, later in the same post repeats his prediction that China could suffer a Japanese-style long period of slow growth rather than a dramatic crash - because of China's control over the banking system.
But he warns that this could be at the expense of consumer growth, as I had written about earlier on this blog, if the cost of cleaning up the banks is forced onto the public.
And he adds that the current property boom is being driven by:
*Buying sentiment returning to levels of the last boom - 2007
*Developers buying land again, resulting in land prices once more skyrocketing
*Negative real interest rates on bank deposits and, as mentioned many times before on this blog, the explosion in liquidity
*Construction industry loans being rolled over from short into long-term liabiltiies
"If a meaningful portion of Chinese household savings is in real estate that never will be occupied or won't transact for the next decade (and then transacts at a potentially lower rate 10 years out given that the building has been rotting for ten years and the construction quality sucks), are those savings really there?," he writes.
"China needs to increase domestic consumption for stable internally driven growth. You can't increase domestic consumption if you're buying real estate. So this is yet one other way that this whole liquidity injection is preventing a transition to a consumption-based economy. You really do wonder how long the Chinese will keep up this level of "pump priming". If they realize how much they're screwing themselves for the next decade, the central government might just tighten liquidity.'
If and when liquidity is tightened signifcantly in China, a major support to global chemicals pricing and demand wil have been removed.
Michael's blog is currently being blocked in China, he says.
"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.
Source of Picture: http://backincccp.blogspot.com/
Peter Seeger's most-famous song (being performed here by Pete, Bob Dylan, Judy Collins and Arlo Guthrie) was "Where Have All The Flowers Gone?"
Perhaps a new version should be cut entitled, "Where Have All The Polymers Gone?" when you start to piece together China's imports during the H1 2009 versus plastic-production sales and exports.
There have been some quite staggering year-on-year percentage increases in imports
High-density PE (HDPE) was up by 64%, low density PE (LDPE) by 94%, linear-low density PE (LLDPE) by 52% and polypropylene (PP) by 50%.
Chow Bee Lin of ICIS news reported on Monday that plastic end-product output in January-May this year rose to Yuan (CNY) 382 trillion ($56 trillion), a 7.46% increase over the same period last year, according to the Ministry of Industry and Information Technology (MIIT).
But the production/sales ratio was at 97% - 1.46% lower.
Overall plastic-product exports declined by 12.13% in value terms to Yuan 40 trillion.
PE film and sheet exports fell by 10.1% during January-July over H1 last year with PP film and sheet exports tumbling by 37%
Toy-industry output rose 7.78% and so unless the economic stimulus has led to the Chinese buying more toys, this might be a problem.
Hardly surprisingly, more than 60% of local plastics consumption went into the construction industry as a result of all the infrastructure spending. Polyvinyl Chloride (PVC) imports rose 142% in the six months to June because of this strong demand and low operating rates among local producers. The domestic carbide-based players have seen their economics eroded on falling oil prices.
The home appliance subsidy scheme boosted plastics consumption in the washing machine and refrigerator application sectors, local appliance makers said.
China produced 16.9m units of washing machines and 24m units of refrigerators in the first five months of this year, which were 2% and 5.5% higher compared with January-May 2008, the MIIT add
BUT it was still unclear how much of this extra production has been absorbed by increased
The government has mobilised around 10,000 students from seven universities in order to raise awareness of the subsidy scheme and to assess how much the consumers have actually spent, again according to the MITT.
It's interesting to note from this graph that, month-on-month declines in PE and PP imports since May.
Strong PP imports up until as late as May interest were being driven by optimism over the impact on demand of the subsidy scheme and the peak turnaround season, which ran from April to June - according to an earlier story by Bee Lin of ICIS news.
Until firm evidence emerges that most of the washing machines and refrigerators haven't ended up some warehouses somewhere, interest in imports may stay weak.
And for both PE and PP, the buyers know that supply has increased due to the end of the turnaround season with the prospect of some major start-ups of new plants in H2.
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."
A Mars Bar feast in store if crude hits $30/bbl again
Source of Picture: Amazon.com
Polyethylene (PE) inventories in China at the second and third local distributor levels are at very high levels, two reliable industry sources have told us.
This has led to some confusion in the market as earlier reports indicated that inventories were in fact low - but this referred to stocks in bonded warehouses (imported material) and the first level of local distributors.
Speculating in polyolefins has been made a great deal easier by lax bank lending - contributing to a 51% rise in imports during January-May 2009 over the same months last year.
The US was able to raise low-density PE (LDPE) exports to China by 27% in January-May and HDPE by a staggering 65% (up until end-March shipments were actually down by 3%, indicating how strong the buying spree has been since then on greater macroeconomic confidence, tight supply on shutdowns and rising oil prices).
Strong end-user has also added to the momentum.
The booming construction sector consumed lots of high-density PE (HDPE) pipes.
We are also hearing reports of government investment in better disaster-preparedness - after the mistakes exposed by last year's Sichuan tragedy - as being partly behind very tight HDPE yarn grade markets. Yarn grade is used to make tarpaulin for tents with the surface of the tents laminated by linear-low density (LLDPE) and LDPE.
Demand for agricultural film (LDPE and LLDPE) has received a boost from government initiatives to raise output on farms. One of the peak seasons for agricultural film demand is also about to start.
Lack of availability of recycled plastic is another major factor in the surge in demand for virgin resins.
Recently, though, markets have become becalmed due to a classic buyer and seller stand-off.
Are we at one of those inflexion points or could the rally be sustained for some time yet?
I still think this won't be a V-shaped recovery so it's only a question of when there is another severe correction in pricing (of course, the same applies to the other polymers. I will look at PP over the next few days).
New supply will become the biggest factor in directing markets, but, according to some sources, perhaps not until as late as Q4 due to continued start-up delays.
But even if the new-output glut doesn't hit the market until the fourth quarter -or perhaps even late - a collapse in crude might have already flushed the true level of Chinese inventories out of the system.
Or could more air be first of all pumped back into the crude bubble?
Premiums for long-dated US crude futures have grown dramatically since mid-July, according to this report from Reuters.
"The discount for front-month to second-month oil futures has nearly doubled since July 13, to $1.75 from 89 cents," the report continues.
This shift in the forward curve might be big enough to trigger a new round of buy and store programmes for offshore vessels that were off-loaded in May when the curve moved in the opposite direction.
Bargain prices for very chartering Very Large Crude Carriers (VLCCs), which can help store up to 2m barrels of oil, could revive the offshore storage trend.
But the danger is that one day storage space might simply run out - or before that the cost of storage rises above that of finance. Cheap and easy lending, the result of the US government's rescue of the banks, is one of the main reasons behind the rise in oil.
Before any of the above happens, the weak state of demand might be enough to topple the market.
OPEC is predicting a sharp drop in oil prices over the next few weeks because of the huge build inventories of crude products, according to this report in the Wall Street Journal.
Stockpiles of diesel and heating oil are at 24-year highs, leading to the possibility of more crude oil production cuts being announced at the next OPEC meeting on 9 September.
Venezuela, Iran and Angola are already apparently exceeding existing quotas, raising doubts over whether any additional cutbacks would work.
Further demand destruction seems likely because - as we've written about before - defaults on unsecured consumer debt, such as credit cards, could result in a second wave in the financial crisis.
"The real unknown is to what extent a recession on par with the 1930s will be turned into something much worse by consumer debt," writes the FT in this article.
As this chart shows UK household debt has risen steadily over the last nine months to stand at 170% of disposable income with the US at 140% - well ahead of levels during the early 1990s recession.
Peering through the fog
On the theme of data again, in the ideal world it might be possible to send thousands of hardworking foot solders out into the field in China to chase down every warehouse of polymers and count every single pallet of polyolefins.
Not not really - don't talk nonsense; in reality, this is far too big a job for anyone.
But why not some kind of inventory survey to help pierce the gloom? If it works it could be extended to other products.
There clearly is a need as this paragraph from an excellent Insight piece on the Q2 chemicals results by Nigel Davis indicates:
"The impact of the recession has been widespread and deep. There is so much talk about the apparent end to de-stocking but inventory levels are still low. BASF said that its customers were ordering at very short notice and only in small volumes. The inventory situation is opaque. There are no reliable figures."
Chemical companies as a whole displayed "dangerously complacent" views about second-half 2009 prospects when they released their Q2 results late last week, argues chemicals analyst Paul Satchell in his blog.
"They believe that demand has bottomed. Although they can't see the upturn yet they believe the worst is definitely behind us," writes Satchell.
"This blog sees this as dangerously complacent, particularly as analysts and investors have returned to a positive stance on the sector."
When you look at the results themselves, the numbers look better but only on a sequential basis (and watch out for some misleading year-on-year numbers in H2 when performances are very likely to be better than the disastrous second half of 2008. A more useful comparison might be with H2 2007).
Most companies reported year-on-year volume declines in the low 20% range - better than reductions of more than 30% in the first quarter of 2009.
Margins were again lower than in the same quarter last year but up on Q1 2009.
In the case of basic upstream petrochemicals, producers have largely been playing catch up with higher crude prices in this year's second quarter.
The overall margin improvements are likely to be the result of stronger returns further down the product chains.
These relatively better downstream performance could well be the result of extraordinary increases in apparent demand for polymers and other commodity chemicals. These have occurred at a time of tight global supply (the result of market-driven deep production cutbacks after the Q4 2008 price collapses and turnarounds).
The true nature of the demand increases is at the heart of the complacency Paul is worried about.
Numbers emerging from China remain counter-intuitive.
In January-May over the same period last year high-density PE (HDPE) general trading was up by more than 130%, even though re-exports were down by 16%.
To repeat yet again, how can this happen while China remains so heavily dependent on exports and the global economy remains weak?
BASF, when it disclosed its Q2 results, said that it expected global chemicals output to fall by 8% this year.
This would mean that by the end of this year, production would be back to 2005 levels.
In other words, the global chemicals industry will have lost three years of growth.
The broad-based chemicals giant is signalled out by Satchell as one of the few companies that has acknowledged the risk of another downturn caused by overcapacities, bankruptcies and growing unemployment.
The end of the bubble in oil and oil-product prices might cause severe problems in H2 this year. This could be before new petrochemical capacities and/or a winding down of speculation in China start directing markets.
"The risk from a potential fall in oil is only being thought about in terms of raw materials pricing. People seem to have already forgotten what triggered the de-stocking from last summer," adds Paul Satchell.
How will this one run?
Source of Picture: chemicals-technology.com
In the 12 years I've been covering the chemicals industry I don't think I have come across a time of such exceptional market muddle.
The traders love it. As a wise man said to me the other day, "When I was a trader I only cared about the price today if I was cashing in and not tomorrow."
But for the producers and buyers there are so many more factors that will shape the outcome of the second half, requiring fortunately for me hopefully some more business for ICIS training (one should always live in hope)
Here is Part 1 of what I plan to try and piece together over the next few months. Let's try and keep cooperating on data and analysis - but at the outset, does this make sense to you?
The Impact of Operating Rates, Plant Closures and New Petrochemical Capacities
Production from existing plants
This will be determined by overconfidence versus realistic confidence in the economy. This comes down to your view on the sustainability of the rebound.
To what extent have operating rate and inventory-management lessons been learnt from the oil collapse of H2 last year?
How are imminent new capacities affecting the behaviour of producers and buyers? In the first half, the tightness in some markets (for example, PP and PE) was partly the result of producers and buyers maintaining low stock levels because they expected new-capacity start-ups that didn't happen. To what degree has this experience made them less cautious?
It might be helpful to analyse Q2 chemical company results to get a feel for what production levels might be for the rest of this year.
Do the numbers add up and do the content and tone of what's been said sufficiently take into account all the risks? (Note: there are some individual company numbers on plans for overall average operating rates in H2).
The pace of permanent shutdowns in the West to reduce domestic oversupply and weaker exports positions also needs to be tracked.
Last year sudden decisions to temporarily or permanently close whole complexes - which were not necessarily entirely loss making - were forced on companies.
This was the result of the collapse in oil, the credit crisis and steep falls in demand.
To use PP as an example again, 500,000 tonne/year of US capacity-closure announcements were made in 2008 to take effect in the first half of this year.
Oversupply is still big: US PP consumption totalled just above 7m tonnes in 2008, 8% lower than the previous year with capacity still at 9.4m tonnes. So far this year (as of July) there have been no further announcements of closures.
Further factors affecting the pace of permanent closures could be divestments.
Trade buyers for distressed Western assets now seem much more likely than further private equity players and so attitudes to running marginal, or clearly uneconomic, plants might be different.
You also have to take into account environmental clean-up costs and regulations - and contractual and labour commitments.
And next: How will petchem operating rates be affected by refinery economics?
Dealing with the US refineries first:
How will refinery economics affect availability of PP and aromatics in H2? In the first half we saw a big increase in shipments from the US to Asia due to the global rate cuts, production problems in the Middle East, the peak of the Asian refinery and petrochemical turnaround seasons between April-June and the unexpectedly strong Chinese demand.
But since May/June, PP arbitrage from the US has closed on lower refinery operating rates resulting from weak gasoline demand. Benzene trade flows seem to have also reversed - in July we have heard of cargoes moving from Asia to the US, whereas in H1 there were record-high shipments the other way.
What's the outlook for gasoline, middle distillate etc demand for the rest of the year? (gasoline and middle distillate stocks are high on speculation and weak demand)
Some of the same questions need to be asked about Europe with a few
important differences, which are:
*Europe is a major exporter of gasoline to the US and so the price and availability of naphtha, and therefore petchem economics, will also be affected by US demand for the fuel
*Fuel demand in Europe is heavily weighted towards diesel and how will the European economies perform in H2 and what affect will this have on demand for gasoline, more importantly diesel, and how the refineries run? (Note: most propylene in Europe is produced from steam crackers because of the lower gasoline demand. But there is still a big link as naphtha is the main steam cracking feedstock in Europe).
I don't follow currency or shipping and other logistics markets, but these are obviously also critical factors.
Next question: How will the new petrochemical capacities run?
It's worth considering that there could be many more start-up delays, and
problems with operating new plants already on-stream, because resources were so stretched when these projects were planned and they remain stretched.
There is a shortage of engineers with the right levels of experience. Many of the projects were also planned when raw material, equipment and other costs were sky-high.
Budgets were stretched and so choices had to be made - for example, "Do I focus on my PE debottlenecking using ethylene from my new cracker or do I prioritise starting up the cracker and its new plants on time?"
Another problem is "project bunching". There seem to have been attempts to start up too many projects at the same time, further stretching already-scarce resources (a few years ago there was a lot of fevered excitement over the global economy. There was a rush to take advantage of financing while it was available in order to cash in on this growth and to maintain economies of scale).
There is, reportedly, a lack of the right kind of experience. Even companies with long track records in petrochemicals are confronting start-ups of projects bigger in scale and more complex than ever before.
Source of picture: waittilnextcentury.blogspot
Back to an old theme, the Dalian Commodity Exchange, this story from ICIS news talks of how physical cargoes are being bought and then sold at a price fixed now for November delivery. At the time of writing this was realising a $169/tonne profit.
This could be old news, but I had only been really thinking about paper trade - i.e. the practice of dipping in and out on a daily basis to make a quick buck with only cash settlements taking place.
If this is widespread this is altogether different. It raises the possibility that if a lot of these types of trades take place and there is a sudden fall in the price, those left holding the contracts close to or at maturity might panic. You then could have the classic self-perpetuating downward price spiral in the market as a whole.
And if physical deals like this on the exchange increase, it would be harder to say that the market has no relevance to determining real-world pricing.
Arbitrage like this also might have the obvious effect of forcing increases in off-exchange PE prices (and posssibly all polyolefins as the exchange is apparently being watched by producers every of grade).
As any such increases in the regular market would not be the result of fundamentals, wouldn't this add to volatility?
Or alternatively I suppose, if enough physical cargoes were delivered through the exchange, supply might tighten sufficiently to maintain strong prices in the regular market!
"Reports of my death are greatly exaggerated," Mark Twain once famously said after his obituary was published before he had died.
Similarly, the US polypropylene (PP) industry had been virtually written off late last year after a calamitous collapse in pricing resulted in inventory losses totalling a staggering $700m in November alone.
But the day of reckoning has been postponed by numerous project delays and a big recovery in Chinese demand.
US PP exports to China more than tripled in the first five months of this year compared with January-May 2008, according to the US Department of Commerce.
Of the extra 2.77m tonnes/year of Middle East capacity due on stream by now, only around 1m tonnes/year has hit the market.
"What also happened from mid-November was that buyers globally, and particularly in China, recognised that prices had hit rock bottom," says Joe Congdon, a consultant with Townsend Solutions.
"And then you had the Chinese stimulus package boosting confidence with the recovery in oil prices from around February, adding extra momentum."
Other export markets were far weaker, however, for US producers - their shipments to Mexico were down by 20% and to Canada by 25%.
Not surprisingly, sales to Brazil tumbled by 43% as a result of a 350,000 tonne/year plant that started up there last year.
Total US PP exports in January-May of this year were 4% lower, and, as the accompanying chart from the American Chemistry Council (ACC) shows, production was substantially down during the whole of the first half of 2009.
But without the surge in shipments to China, which perhaps bought more time for some tough decisions, the overall picture might have been a lot worse.
Nobody had the luxury of time late last year when announcements were made about closing 500,000 tonnes/year of capacity in the first half of 2009. Some of the plants being shut down are part of integrated complexes that are not necessarily entirely loss-making.
Oversupply is still big. Consumption totalled just above 7.4m tonnes in 2008, which was 8% lower than the previous year, with capacity still at 9.4m tonnes.
No further announcements about capacity closures have been made so far this year.
"What needs to happen to bring supply more in line with demand is further closure announcements. Another 500,000 tonnes/year of shutdowns would bring capacity utilisation to 85%, Congdon added.
Townsend Solutions is currently forecasting North American rates at less than 80% for the next five years.
"We are predicting global growth of 3.7%/year in 2008-13 compared with last year's forecast of 4.9% for 2007-12. The future of PP has changed dramatically in just one year," Congdon added.
The US domestic market looks likely to be difficult. Exports will also be hit much harder as a result of the new capacity.
And as for the more immediate prospects, current exports were characterised as "lousy" by a US industry source - the result of the high cost of feedstock.
Monomer supply has been reduced by refinery operation rate cutbacks due to weak gasoline demand. Fluid catalytic crackers (FCCs) are running at around 85%.
But if PP export opportunities existed, enough propylene could be found, according to market sources.
"The market will pay maybe 47-48 cents/lb for bagged homopolymer free on board (FOB) exported from Houston," said a trader.
"But with a potential 4-cent spike in monomer contracts this month, PP producers are looking 53-54 cents/lb FOB Houston in a bag."
The US PP industry has become more heavily dependent on refineries for feedstock supply. Naphtha cracking has suffered as a result of the fall in natural gas prices relative to crude, and ethane cracking is now far more economic.
"Around 70% of C3s are being sourced from refineries and 30% from crackers. The split used to be 50/50," said a US PP producer.
Gasoline demand isn't expected to improve due to the weak US economy.
Another factor behind the weak PP export trade is a steep fall in buying interest in anticipation of the further new volumes.
These include the recent start-up of a 350,000 tonne/year line by PetroRabigh in Saudi Arabia, which is supplied by propylene from a deep catalytic cracker.
Output from Saudi Arabia's new propane dehydrogenation (PDH)-to-PP complexes is also expected to increase, with several start-ups set to take place in China during the second half of the year.
Mark Twain was twice feared dead before he finally passed away of a heart attack in 1910.
And, of course, the US PP industry isn't going to really expire. This is a huge market with very sophisticated distribution and marketing networks.
A lot of acquisition interest seems likely to emerge very soon.
David Barry contributed to this article.
Garbage out, garbage in
Source of Picture: The Daily Telegraph
Here goes for the second part of this series.
Is there anybody out there who can help?
How will the ongoing availability of recycled material affect the pricing power of virgin resins? (We have the data to show that imports of scrap polyethylene (PE) and polypropylene (PP) fell in Nov-Feb, but have since heard anecdotal evidence that they have increased again. If so why?
Questions worth asking on recycling:
a.) Has there been a recovery in availability of recycled material? If so why? Is this because of stronger demand in the West for durable consumer goods wrapped in plastics, which are recycled and sent back to China?
b.) And/or is this the result of the rise in virgin resins since March. Has this resulted in a much harder global search for and new sourcing of the scrap material that is available?
c.) And/or has there been a relaxation in the govt regulations covering recycled material that's made imports easier?
d.) If recycled material is now more readily available, has this set a new pricing cap on virgin resins? At what price is it now economic for converters to switch to recycled material?
e.) Has the rise in virgin resins also led to more fillers being used again?
f.) What's the current state of distribution networks for recycled material? We have heard that lots of traders in recycled material went bust during the big price collapse last year as they were left holding high stocks of material that was more expensive than virgin resin. We also understand that remaining traders in recycled material were interested in trading in virgin plastics in Jan-May because the profits were greater. A further factor to consider might be that the Dalian Commodity Exchange (where linear-low density PE and polyvinyl chloride futures are traded - see later notes) is a lot quicker and less risky way of making money than trading in scrap. This might have also hampered the rebuilding of the scrap-supplier network
g.) We have focused on China. Is recycling also a major issue outside China?
All the questions above could equally apply to some of the other polymers. PS is hard to recycle, but what about the impact on, say, PET resin water bottles? We are not sure if this has even been economic, but could this be a factor behind the lack of an automatic recycling price cap down the fibres chain - or any other chains for that matter?
"Here's your entire allocation for this month"
Source of Picture: Adammakwright.wordpress
In the words of a plastics converter from the Philippines: "Markets are so tight at the moment that we are left to pick up the crumbs. Suppliers are concentrating almost entirely on China."
The converters have been waiting for so long for the great supply surge to tip markets in their favour that forecasting is becoming a joke.
"You told me last year that by now I'd be in heaven," added the same converter.
But surely sometime soon it must change.
This converter and many thousands more like him will then enjoy the sweet taste of revenge (that's, of course, as long as China doesn't go belly up. In such an event the last company left standing wiill need to swtich out the lights on the way out of the proverbial room.
Source of Picture: www.autospies.com
Not an easy answer and not one much suited to a few paragraphs of blogging.
But here's one thought as the competitive environment becomes a great deal more difficult due to new Middle East capacity and the potential for China to move towards self-sufficiency in polyethylene and polypropylene: Have a chat with one of those poor old European refiners facing big naphtha surpluses.
Perhaps the refiners will be willing to do deals on long-term offtake deals at very preferential rates in order to keep operating. While gasoline might be falling in value in Europe for both local consumption and exports, diesel certainly isn't.
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.....
MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)
Source of Picture: www.autospies.com
The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.
But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.
Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).
So what might this mean for the polymer industry? Here are a few thoughts:
*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines
*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed
*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains
*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues
*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)
Source of picture: Chinaenvironmentallaw.com
Talk around the water-cooler in Shanghai offices at the moment is the fall in the cost of a car-license plate in September to a lowest bid of Yuan 27,000 ($3,953) from around Yuan 36,000 in August.
"It surprised everyone because the forecast had been for the price to actually go up to Yuan 42,000," said an ex-pat based in Shanghai.
This has created one of those agonising "if only" moments as he registered his car last month.
But more importantly, the surprise reduction might be an indication of softening auto demand after months of heady growth.
Domestic sales rose by 29.18% during the first seven months of this year over the same period in 2008 to 8.33m units, according to the China Association of Automobile Manufacturers.
The monthly price for license plates is set by auction so this could be an early pointer of the effect of reduced bank lending.
Instead, though, it might be merely a lull ahead of the long Chinese national holidays, which take place on 1-8 October.
"The decline in the price happened despite new regulations making it harder to buy a cheaper plate from outside Shanghai for use in the city," the ex-pat worker added.
"There were around 13,400 bidders for 8,500 license plates this month as against 18,000 for 8,000 plates in August."
Petrochemical prices are also on the slide, according to ICIS pricing.
Fibre intermediates had fallen for four weeks in a row as of last Friday.
Raffia-grade polypropylene (PP) was at $1080-1120/tonne CFR China main port compared with $1130-1200/tonne CFR China a month earlier.
Again, though, it's hard to discern to what extent these falls are due to a pre-holiday business wind-down against something much deeper and more fundamental.
"There are a lot of official statements in the local press about how too much lending went into speculation in real estate, in stock markets and in commodity markets in general. Lending rules are getting tougher," the office worker continued.
"I think there's also a danger of China following the US by enjoying a dangerous 'wealth-effect' from rising property prices. This seems unsustainable as real-estate costs are rising much faster than incomes.
"As was with the States again, leverage is on the rise through grey loans. State-owned enterprises (SOEs) borrow from the banks at preferential rates and then re-lend to less creditworthy companies and individuals."
Even pig farmers are involved in speculation through stockpiling copper and nickel, according to this article from Bloomberg.
Should we now be searching pig sties and farmers' fields for bags of polyethylene (PE) pellets?
A bit like the fund managers who are anxious to keep the equities rallies going until the end of the year in order to protect bonuses, there must be a lot of petrochemicals people hoping pricing in our sector will stay equally firm.
Perhaps, though, these hopes will be more inspired by job preservation rather than fat bonuses - yet another indication of how financial-world reality has become divorced from the demand for actual stuff out there.
Apart from presenting a relentlessly upbeat face in an effort to sway sentiment, there is little any one of us can to do influence petrochemical pricing.
So anxiety is building as to exactly what will be the level of demand after the long Chinese holidays, which take place from 1-8 October.
"I am not expecting demand to fall off a cliff in Q4, as stocks are not that high, relative to the position last year," said Paul Hodges of International eChem.
"There may be some destocking if the oil price does slip back towards $40/bbl, but really it's a question of what happens next, now that restocking is coming to an end.
"My view is that its not going to be 'onwards and upwards' in a V-shaped recovery, but a more muted outlook where the environment is characterised by higher savings, lower consumption, and global GDP growth of perhaps 2.5% rather than the historical 3.5%."
China's economic stimulus will continue, but perhaps at a slower pace.
And no government in the West will be willing to jeopardise the fragile recovery - although temporary stimulus measures, such as cash-for-clunkers, are coming to an end.
In Asia we have now seen a month of falling prices in polyolefins with the declines in benzene and fibre intermediates lasting even longer.
This slide, from ICIS pricing, illustrates the point:
This indicates that however confident people might feel about the overall economy, chief financial officers and traders are playing it cautious.
Chemical companies don't want to risk high inventories in case demand falls of a cliff in late October, assuming they want to keep their jobs.
You are also likely to see similar wind-downs towards the end of the year in order to preserve cash.
De-stocking by traders in China seems to be another factor behind the recent price falls, a clear indication that the 7-8 straight months of record-high polymer and chemicals imports into China involved considerable speculation.
Operating rates new plants are also reported to be stabilising.
Polypropylene (PP) has already seen a big increase in output from the Middle East and elsewhere.
Now a wave of new polyethylene (PE) and monoethlyene (MEG) capacity is expected.
"And what's an interesting challenge in balancing inventories for producers is that these new plants are a lot bigger," said my colleague Malini Hariharan, India country manager for ICIS (She will soon join this blog as a full-time commentator - more details later).
"This means if that there is a sudden unanticipated correction in demand you could be left with very high stock levels."
Asian cracker operators are talking about rate cuts in October after three months of running at 100% in many cases.
How much of the improved demand was down to re-stocking after historically high de-stocking and rate cuts in Q4 last year and the first quarter of 2009?
All should become clear very soon.
The views of two Singapore-based chemicals traders explain some of the fundamental shifts in production, logistics and demand since the economic crisis began.
"I have done reasonable business this year and made quite good returns, but volumes are way down," said the first of these two traders, who deals in toluene and mixed xylenes (MX).
"Cracker-based aromatics producers are being exceptionally cautious and are very unwilling to risk building inventory.
"Whereas I used to get, say, 5,000 tonnes a month from a particular company it's a maximum of 2,000-3,000 tonnes and sometimes none at all."
Reformer-based output in China has been heavily influenced by liberalisation of government restictions of fuel prices, he added.
This has led to sudden and sharp increases in output that markets have, at times, found hard to absorb.
"Aromatics pricing has recovered, of course, It's been either firm or rising for most of the last eight months, " he continued.
"But the end-user demand hasn't really responded in the same way. All we've really seen is some re-stocking, the cost-push from higher crude and a lot of speculation by Chinese traders.
"Weaker volumes are making it really hard for the shippers.
"There's a lack of small vessels of below 5,000 and up to 10,000 tonne in capacity. A lot of the ones out there are close to being scrapped because they are old.
"A customer in China, say, might only want less than 5,000 tonne but it's not economic to ship such a small cargo from Southeast Asia to China.
"So even if I can find a supplier it can be difficult to find a ship, despite a big surplus of tonnage.
"A lot of new vessels are being delivered which will keep freight rates down for some time. These are either medium-sized ships at 20,000 tonnes or large vessels between 60,000-80,000 tonnes."
He was worried about recent price corrections and believed that "a lot of unsold inventory in China has yet to work its way into the market."
But the trader was confident that crude would remain at $65-70 a barrel for the rest of the year.
"I don't see a problem with storage," he said, disagreeing with the forecast of $45 a barrel.
"The crude price will obviously set a floor for toluene and MX.
"Even if everything goes into free-fall the crude traders are likely to come in and buy-up surplus aromatics.
"This happened last year when they set a floor for toluene and MX at about $400/tonne.
"I think the floor will be higher this time because crude will remain relatively stable."
The second trader - this time in polyolefins - agreed that oil would stay at $65-70 a barrel for the rest of this year.
"But we are facing a lot of indigestion. China has imported a huge amount of polyethylene (PE) and polypropylene (PP).
"Since September the market has been very quiet. This always happens after a strong buying spree.
"The Dalian Commodity Exchange futures contract in linear-low density PE (LLDPE) has collapsed.
"This is a sign of weak overall sentiment. Traders have also suffered heavy losses and so they have less cash to spend in the physical markets."
Volume and pricing on the exchange have fallen very steeply as this chart from Paul Hodges shows:
September volume was down by 63% from April.
"What we have to wait for is end-November when pricing (in the physical markets) should pick up as manufacturing increases ahead of the next Chinese New Year (February 2010)," the second trader added.
"If it doesn't this is a sign of some big supply imbalances."
But even if there was a brief rally at the end of November, he predicted that afterwards there would be a prolonged trough on new capacities and a fall in Chinese bank lending.
....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?
At an investors conference call yesterday, Indira Nooyi, the chief executive of PepsiCo, said she expects the 'age of thrift' in consumer spending to continue into next year.
As consumers in the developed world are placing value at the top of their agendas, the company's efforts in the future will be on developing lower priced products. Pepsi has, in the past, been quick to spot and adapt consumer trends such as the introducing healthy snack food. And if it now believes that consumers will not be interested in pricey products, others too will follow.
So what does this mean for the chemical industry? Will companies such as Pepsi move to cheaper packaging formats? Will these companies be less interested in packaging innovations?
Picture source: PepsiCo
This will have implications for innovation in the chemicals industry - especially development of value added grades/products? Many of the leaders in the industry have been using innovation as a platform to differentiate themselves. Is it time to reconsider this strategy?
Or will consumer product companies simply use this trend to drive an even harder bargain when purchasing raw materials?
"Take it from me, peripheral vision isn't all it's cracked up to be, especially if you want to get a decent annual bonus...."
Source of picture: www.whipnspurs.co.nz
Here's a rant for Tuesday - with thanks to Paul Hodges for informing some of the thinking (I'd like to lay credit to certain parts of this...)
Purchasing managers are professionally required to wear blinkers. All they care about is making sure that they are ahead of the game because of the way their performances are measured.
So up until Q4 2008 they ignored headlines such as "US auto demand slumps on surging gasoline costs and slowing economy" and "western house prices plummet on sub-prime mortgage crisis."
Oil prices seemed to be on the forever-up and liquidity was abundant. The result was purchasing in big volumes ahead of anticipated further price rises until the great unravelling post-Lehman Brothers.
Senior strategists - whose job it was to worry about the big picture - were also wearing blinkers, deluded in the belief that 2006-07 demand levels would go on forever.
Cracker operating rates were going to remain comfortably above 80% during the coming down cycle, was the consensus view in the first half of last year.
Now the industry is going to have to live with global averages of between 60-70% over the next few years.
The chemicals industry has lost three years of demand growth as global production is now back to early 2006 levels. It is unlikely to budge much in a favourable direction until at least 2011.
The reason is that real western growth, minus all the froth of commodity and equity markets, is going to remain weak on unemployment and high personal debt problems.
Another concern is unwinding government subsidies.
Too many people might have been misled by Chinese imports over the last 7-8 months.
The strength of these imports wasn't sustainable and was due to temporary factors that have now come to an end.
Banking on China as the leader of a global recovery is utter nonsense when you look at the country's low per capita chemicals consumption and its heavy export dependency.
Any Northeast or Southeast Asian producer high on the cost curve is likely to find it harder to penetrate western markets in 2010.
How can these producers - when they import crude oil - export, say, PE to Europe at fair market prices in the face of much-stronger Middle East competition?
Trade lawyers should do very well from anti-dumping cases in 2010.
This is a protracted supply-driven U-shaped downturn, and we are only just getting towards the bottom of the U.
Lots of Middle East capacity has been delayed - and the next big wave of Chinese start-ups is only just beginning.
Studying the tone of Q3 results statements will be a good indication to what extent senior execs have taken on board this new reality (actually it's not that new - we've been waffling on about this on this blog for months).
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.
More of the cheap stuff?
Source of picture: www.thelocal.de
Some of the China import data for September is now available - showing record-high imports of monoethylene glycol (MEG), ethylene vinyl acetate (EVA), polyacetal, polycarbonate (PC).
"I have given up trying to figure this out. There is not sufficient accurate information anywhere to read a trend. Reality is that they continue to buy to put SOMEWHERE," said a senior polyolefin industry source last week.
"Physical and future markets are continuing to show strength, but export and domestic consumption data continues to be weak."
Now he is beginning to think, like this blog, that a lot of these extraordinary volumes have to do with China making gains in specific finished-goods export markets. A lot more data-crunching is needed to stand this up.
A note of caution and context - a lot of these September imports might have been booked in July/August before the recent price declines.
There could have also been some stock building ahead of the long October holidays (when we get the October figures any dips will also need to take into account the holidays).
If China is making big gains in finished-goods export markets thanks to all of its competitive advantages, you can read the latest US Conference Board confidence index results either way.
The failure of US consumers to respond to better equity and housing markets could indicate a deeper shift in the way Americans spend, said Ian Shepherdson, chief economist at High Frequency Economics - in this FT article on the last Conference index.
More thrift might give the Chinese the ability to cost-cut their way into bigger slices of export markets.
Such a weak level of confidence, though, points to a poor Christmas sales season. This would leave a lot of goods left stacked on US shop shelves, pointing to a big New Year dip in commodity chemical exports to China.
But again - this would have to be put in the context of the Chinese New Year in February!
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.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
It helps to have a commodity bull on your side and that's just what the Dalian Commodity Exchange (DCE) has succeeded in doing. Jim Rogers, the noted investment guru, will be a senior advisor to the exchange.
Jim Rogers is, as always, positive on the future of China and also commodities (see TV interview below).
It is not yet clear what Rogers will be doing in this new role but his appointment will help DCE realise its ambition of becoming a leading commodity exchange in the world. The Futures Industry Association (FIA) says that the DCE is the largest futures exchange in China and is ranked ninth in the world. It has the world's biggest trading market for plastics (lldpe and PVC) and the second-largest for agricultural products.
This blog has been regularly highlighting the growing volumes of lldPE and PVC transactions on the DCE. Lldpe contracts totalling 75.719m tonnes have been traded on the exchange so far this year, up 185.67% from last year. PVC contracts, which were was introduced in May, totalled 21.829m tonnes.
And the exchange could see more action in the coming months. China Daily reports growing interest from major foreign traders to participate in Chinese exchanges. They will have to work their way around government regulations but leading banks such as Goldman Sachs, JP Morgan and Barclays Bank have compelling reasons to invest in China. The paper says that the Shanghai exchange's copper futures now rivals that of the LME while DCE's soyabean volumes already exceed that of CBOT.
A Famous Ditherer
Source of picture: sarafinewordpress.com
Chasing higher oil prices and/or a response to the now long-running recovery in Chinese demand that's become sustainable?
Not wanting to sound too much like the start of a famous Shakespeare soliloquy, these are the questions that should be wracking everyone's brains as they try to figure out price rises, which continued last week.
Ethylene rose again and low-density polyethylene (LDPE) was up by $50 a tonne to $1,235-1,300 tonne CFR China, according to ICIS pricing.
The polyolefin was at $1,130-1,180/tonne CFR China four week. Click here for a graph showing the price history for all the PE grades since January last year - Olefin-PEprices.ppt.
But interestingly, while the sentiment in the China market was described as bullish due to stronger crude and second and third tier traders and distributors were stocking up, actual end-user demand was characterised by market players contacted by ICIS as weak.
This suggests stocking up ahead of the assumption that oil prices will go higher, even though the outlook for the next few weeks is mixed given recent negative reports over the US economy.
It then comes down to the sustainability of the eight-month long rebound in demand from China. Head-scratching continues as to where all this stuff is going, more of which later this week.
Asian cracker operators, according to my colleague Peh Soo Hwee, ICIS pricing's ethylene editor in Asia, seem to believe its worth running hard for the time being at least.
"Some of the cracker operators, notably in Japan, had reduced production to below 90% in September-October, partly due to turnarounds at derivative plants," she said in a recent note to one of our customers.
"Most of them now expect to increase rates to close to 100% next month (November)."
"So far, with the exception of a few crackers in the region running at lower rates - Chandra Asri in Indonesia at 75% and South Korea's YNCC at 90% - the bulk of producers aim to keep ethylene production at 90-100% in November."
Supporting these decisions were improvements in margins last week. Ethylene margins rose for the second week in a row as a result of the pace of C2 price increases outpacing those for naphtha, according to the ICIS weekly Asian Ethylene Margin Report.
But still, October ended up as the worst month for ethylene margins since June.
PE margins also rose on a better spread between C2s and the polymer and improved co-product credits, according to our Asian PE Marging Report - also weekly.
Again, though, overall margins were down in October over the previous month. Stand-alone players did better than integrated operators.
Plan cutbacks and/or sell November stocks early and you miss the potential of better returns. Some polyolefin producers sold October volumes earlier than they should have done because they expected prices to fall.
The flipside of the risk is being left holding overpriced inventory as oil prices fall and more new polyolefin capacities hit the market.
Nothing new in having to make these decisions, of course; the difference is the absence of any consistent and reliable patterns from all the data to support planning.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
It pays to have a domestic focus and Reliance Industries has shown this again in its results for the first half of fiscal 2009-10.
Its petrochemicals division delivered Rs43bn in earnings before interest and taxes (EBIT), a 23.8% growth over the same period last year. The company attributed this to higher margins on improved domestic realisation. The concentration on India helped the company maintain nearly 100% utilisation and hold inventory at low levels.
The Indian market often gets lost in the larger Asian/global picture which is very much dominated by China. But this market has been seeing steady demand growth since last year and it is one of the few markets to have expanded despite the economic crisis.
Reliance estimated PP demand growth at 28% in the last six months; PE at 15%; PVC at 36% and polyester at 15%. Packaging, infrastructure and auto sectors were the key drivers.
The company anticipated a stable margin environment in 2010 as India is expected to keep growing. It also emphasised that it would continue its 'predominantly domestic market orientation in order to sustain high operating rates' - a plan that will no doubt be helped, in the case of PP, by hefty anti dumping duties imposed on imports from Saudi Arabia, Singapore and Oman. A second investigation on PP imports from South Korea, Taiwan and the US is due to be launched soon and there have also been reports of producers asking for an investigation into PE imports.
Expanding the domestic focus will not be easy. India is oversupplied in PP and likely to remain so for another couple of years despite the high demand growth numbers. PE would also be oversupplied once Indian Oil Corp starts its new cracker complex.
IOC expects to achieve mechanical completion of the cracker by the end of this month and start commissioning activity in December. The derivative plants (PE, PP and MEG) are likely to start at end-March or early April.
This is the schedule on paper. But given the many project delays around the world, don't be too surprised if this one also slips.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
The Indian government has announced 17 November as the date for a public hearing to discuss the provisional anti dumping duties that it had imposed in June on imports of polypropylene (PP) from Saudi Arabia, Singapore and Oman.
The hearing will give a chance to all affected parties to present their case. Such hearings are usually a formality and do affect the end result which is a confirmation of the provisional duties.
But I have been told that it may be different this time as the Saudis, led by Sabic, are likely to put up a spirited defense. The Saudis have been busy pulling lots of government strings for the duties to be revoked.
Sabic and Advanced Polypropylene were hit the hardest - duties on their PP exports range from $440-$820/tonne. I was told that one of the reasons for the high level of duties was 'the lack of cooperation in sharing data' when the Indian government had sent its questionnaire earlier in the year. However, this attitude appears to have changed.
There's a lot at stake here and this is why the 17 November hearing is crucial. India is already in surplus and looks likely to be in this position for the next couple of years. So there's every reason for Indian PP producers, Reliance Industries and Haldia Petrochemicals, to check competition. On the other hand, many Indian processors are unhappy as the duties would force them to rely on local supply.
For the Saudis, and also other Middle Eastern producers, India is not such a big market for PP. But the ADD threat is a worrying global trend that they want to ensure does not take off.
Besides India, China is investigating methanol and 1,4-butanediol (BDO) imports from Saudi Arabia. And the European Union (EU) is investigating on polyethylene terephthalate (PET) imports from United Arab Emirates (UAE) and Iran.
The growing protectionist measures have provoked a long chain of protests with the most recent one being in October by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA Secretary General Dr. Abdulwahab Al-Sadoun has said that the association will strengthen coordination with Gulf Cooperation Council (GCC) Governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by anti-dumping regulations and other trade restrictions
"The GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules," he said.
The investigations may not sound fair to GCC producers but they face an uphill task in convincing the Indian and Chinese governments to ease protection to local producers. A lot will depend on what the GCC governments can offer or withhold.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Talk of Reliance Industries acquiring LyondellBasell is once again gaining momentum. A report in today's Economic Times says that the company is close to announcing a major overseas acquisition with the target being part of the assets of LyondellBasell. The announcement is likely to be made on or before Reliance's annual general meeting on 17 November. Reliance shares rose 3.1% in morning trade.
Citing a banking industry source the report states that the transaction could be around $6bn, nearly double the estimate made by another media report in September.
One my industry sources says that something is brewing and Reliance is on a shortlist of companies that will be participating in LyondellBasell's reorganisation. The source was unable to give names of others on this shortlist.
Details about the proposed buy are still sketchy and today's media report, like the previous one, raises more questions than answers. In what form is Reliance likely to participate - will it be by acquiring an equity stake that LyondellBasell's creditors will soon get through the company's rights offer? Or will it be an outright purchase of some/all assets? Can it happen before LyondellBasell completes its reorganisation or will Reliance be participating in the reorganisation by buying assets/equity?
One analyst thinks that today's report of an imminent announcement is a little premature and a major development is likely only after LyondellBasell emerges from Chapter 11.
It is difficult to evaluate how beneficial the deal would be to Reliance without knowing much of the details. There are certainly parts of LyondellBasell that would be a good fit for Reliance - its PP assets, a global marketing and distribution network and the technology portfolio.
Reliance certainly has the cash for a big ticket acquisition. But the company is not known to be very aggressive when bidding for overseas assets and this is one of the reasons why it lost out on acquisition opportunities in the past. Will it be the same story this time?
Shelf-space to be in short supply again?
Source of picture: www.zrdata.com
ASIAN naphtha prices hit their highest level for more than a year yesterday - reaching $701/tonne CFR Japan for second-half December open-spec material on "improved market conditions".
Earlier this week we picked up more reports of bleak demand in styrenics and fibre intermediates that countered continued optimism in equities and crude markets.
This is also usually the quiet season as petrohemical production declines on weak seasonal demand.
Is the Asian petrochemicals industry ramping up production because it thinks crude is going to get stronger and the real economy is set to improve?
Oil fell to below $77 a barrel yesterday on evidence that US motorists and businesses were cutting back on energy use, according to this Associated Press report.
Have we returned to the demand destruction which caused the economic downturn in the first place?
Despite soaring auto sales in China, there are reports that gasoline consumption is being affected by higher crude, the impact of which is being more keenly felt this year as a result of fuel-price liberalisation.
The Energy Information Administration (EIA) said in its weekly report that US oil and gas supplies grew more than expected last week, even though many oil companies have shuttered refineries as fuel consumption slumps.
US refineries had slowed production to the lowest levels since September 2008 and they were importing nearly 15% less crude than last year, the report added.
This is worying when you think of the state of the economy this time last year. Most other comparative numbers are showing improvements.
What perhaps helps to explain the 15% decline is big new refinery capacities in India and China etc putting pressure the developed-world players.
With refinery runs reduced everywhere in the world except China (where the Chinese refineries are enjoying improved profitability as a result of the fuel-price liberalisation), reduced supply could be another factor behind the rise in naphtha.
But let's take it as read that better demand from petrochemicals is the main driver behind the increase in naphtha.
It would be a very risky business to build inventories right at this moment - given all these uncertainties and the big surge in new petrochemicals capacity.
Stay cool and don't panic!
Source of picture: www.wired.com
By John Richardson
THE growth of the carry trade US dollars - leading to a sharp depreciation of the greenback and possibly of many other unintended consequences - represents a major threat to the chemicals industry in 2010.
Any corporate planner with her or his salt should factoring in, and hedging against, the danger that the many warnings about the damage from this trade come true.
Economist Nouriel Roubini, who accurately predicted the current economic crisis, has been proclaiming loudly from every available rooftop that this is the "mother of all of carry trades".
He believes that, potentially, it could cause even more damage to the financial system than the crisis from which are still struggling to recover.
Just as a reminder, the carry trade involves borrowing at zero interest rates in dollars (because of the ultra-loose Fed monetary policy) - and also shorting the US currency on the assumption that it will depreciate.
As the dollar has tumbled - creating extremely good returns - investors have also piled into equities and commodities, incurring very high leverage.
Oil increasingly moves in inverse correlation to the dollar these days so, I suppose, this whole business has gained its own self-perpetuating momentum: The more that investors short the dollar, the more it goes down and the more crude goes up. Sounds like daylight robbery.
Stronger crude - which we've frequently said doesn't reflect current supply and demand - is seen as a false sign that the world economy is in firm recovery.
And so, hey presto, equities rise in response to higher oil prices, resulting in yet more fat profits for the speculators.
The dollar could appreciate by as much as 25% if, all of a sudden, traders are forced to cover their shorts (a phrase that, I am afraid never ceases to appeal to my puerile sense of humour), warns Roubini.
He predicts that one of four events could trigger this new financial calamity:
*The dollar value cannot fall to zero and at some point it will stabilise. The cost of carry would then become zero rather than negative (no more money being made on shorting the greenback)
*The Fed cannot suppress volatility forever. Its $1,800bn purchase plan of mortgage-backed securities and government agency debt such as Fannie Mae's etc will be over by the Spring
*If growth is on the upside in the third and fourth quarters, markets may start to expect Fed tightening sooner rather than later
*A flight from risk could occur due to concerns over a double-dip recession or a geopolitical crisis - e.g. a US/Israel and Iran conflict
Before listing some of the possible implications for chemicals, it's worth adding the following context.
Big increases in Asian property prices (for example, Hong Kong's are up by 28% this year) start to add up in light of the Fed's ultra-loose monetary policy that's prompted the carry trade.
Asian countries have been forced to follow the Fed in order to prevent their currencies from appreciating too much.
This is creating dangerous real-estate bubbles in Singapore and South Korea as well as Hong Kong, with all the associated higher levels of consumption which come with the property wealth-effect.
China is different as it's re-pegged the Yuan to the dollar.
But the country's huge economic stimulus package has created the well-documented big rise in property prices and a boom in auto, home appliance and other retail sales.
Meanwhile, China is also benefiting from improved export competitiveness as a result of its currency being reconnected to the weaker greenback.
So those chemicals corporate planners worth their salt should be worrying about:
*The risk of being on the wrong side of overbuilt inventories, or even just the normal 45-60 days of working capital tied up in raw materials, when and if crude takes a tumble
*Confusion over sustainable levels of chemicals demand-growth in housing, autos etc in Asia. If the Fed tightens in response to worries over the impact of excess liquidity so will the rest of the world
*Damage to underlying, or fundamental, demand caused by crude being too high at this point in the economic recovery. My fellow blogger, Paul Hodges, points out that this concern is high within OPEC.
*Chemicals import volumes into China destined for re-exports as finished goods have been supported by the weaker Yuan. These imports could obviously decline if the dollar lurches upwards
*US petrochemicals producers have benefited from dollar weakness and the fall in natural-gas prices relative to crude (70% of US ethylene is derived from natural-gas liquids). Thermoplastic exports are up 16% in the year-to-date with domestic sales down nearly 14%, according to the latest American Chemistry Council (ACC) weekly report. So, again a surge in the greenback would threaten this much-needed compensation for a weak home market.
When might the carry trade unwind? Nouriel Roubini is not prepared to offer any prediction, but warns that the longer this bubble inflates the worst the consequences will be when it deflates.
"They are so cheap, I might even buy one as a hedge against global warming"
Source of picture: www.formalwilderness.blogspot.com
This blog has spent a lot of time tormenting itself over the sustainability of China's extraordinary economic rebound during 2009.
"Just where are all those imports of chemicals and polymers (polymers up 50% year-to-date) going?" we keep on asking.
Perhaps we've got completely the wrong end of the stick, a source politely suggests.
"There's no real need to worry about where this stuff goes because as long as the government is solvent - and it still has massive cash reserves - it will keep GDP (gross domestic product) growth at a minimum of 8-9% per year. The reason is the need to create enough jobs to maintain social stability.
"Quite frankly, if they had to they had to bury polymers and unsold washing machines, fridges and autos etc in landfills, they would do it to keep industrial production moving along at the right level.
"And quicker than you imagine, they will wean the country off too much depedence on industrial production and exports towards better local consumption."
But in the meantime, he has heard of Chinese refrigerators, which contain polymers including polycarbonate (PC), acrylonitrile butadiene styrene (ABS) and polypropylene (PP), flooding export markets.
"It seems that some refrigerators were manufactured for domestic sales and so benefited from government subsidies - but still found their way on to container ships."
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
The 17 Nov public hearing arranged by the Indian government at Delhi to discuss provisional anti dumping duties levied on PP imports from Saudi Arabia, Singapore and Oman was postponed at the very last minute causing a great deal frustration among lawyers and industry executives who had flown in from out of the country.
The hearing was postponed because of bereavement in the family of the government bureaucrat heading the hearing. Efforts to get another bureaucrat proved to be futile. A new date has yet to be set but I am told it should be soon.
And I have received some information from Japan on the likely candidates for the Rabigh party. One of the products being considered by Petro Rabigh for its second phase is superabsorbent polymers (SAP). As Sumitomo Chemical does not have technology for this product, it is rumoured that Nippon Shokubai or Sumitomo Seika could be joining Petro Rabigh for this project.
Abu Dhabi ahead in the race?
Source of picture: www.gulftrackservices.com
By John Richardson
The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.
"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.
"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.
"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."
The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.
But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.
"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.
"But it is true that we have already seen transfer of very valuable polymer technologies."
SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.
The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.
These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.
But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."
IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.
It also has a 64% of Austria-based polyolefins group Borealis.
"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.
"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."
And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.
Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "
The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.
And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.
With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.
"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.
"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."
Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.
SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.
There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.
Source of picture: www.managingthedragon.com
By John Richardson
I love the phrase used by Andrew Peaple of the Wall Street Journal in this article on China's property "bubble": Getting a straight answer is like "nailing jelly to a wall", in other words xxxxxx impossible. I will be in Shanghai next week on a business trip so will attempt to do some first-hand nailing.
The World Bank, Peaple points out, says that income growth in China is keeping up with price rises. This is a view supported by the China Economic Quarterly, which also makes the point that there remains a lot of pent-up demand for housing.
Property prices rose by 3.9% in 70 of China's large and medium-sized cities, but there does seem to be the possibility that highly localised much bigger bubbles are being inflated. Housing affordability in Beijing looks to stretched and prices in October rose by 13.8% in Shenzhen.
Still, in three of the 70 cities surveyed property prices actually fell.
The again, though, Zhang Xin, chief executive of Soho China - one of the country's most successful privately owned property developers - was quoted in several media reports as saying that a big bubble was, indeed, being pumped up. She blamed this on the big increase in bank lending, the cornerstone of the government's economic stimulus.
"Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real-estate segment," she was quoted as saying.
Vacancy rates in the Pudong district of Shanghai are as high as 50% as more buildings keep going up, Zhang added.
"In Manhattan they have vacancy rates of 10-15% and they feel like the sky is falling."
The danger for chemicals consumption is that changes in government policy for the property sector could have a big detrimental effect.
Tax breaks, low interest rates and smaller down-payment requirements have fuelled this year's boom - along with the plentiful bank lending.
Another connected issue is assessing how much chemistry goes into China's construction sector.
In the US, for example, the American Chemistry Council (ACC) assesses that the construction sector purchases $8 of every $1,000 of chemicals output.
"A big problem in China is the huge variance on what people do to their homes, from very basic equipping of steel and concrete box-like apartments to, of course, the super-rich who are ripping out tiles and refitting kitchens almost as often they change their underwear," said a Shanghai-based office worker.
Nailing jelly to the wall would no doubt have been a fair description of getting reliable data out of the US economy during the early part of the last century.
But back then it mattered far less to the rest of the world.
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?
This would be one of the biggest-ever acquisitions by an Indian company. In 2007, Tata Steel bought Corus for $13bn.
Reliance raised $660m through a share sale in September.
It has $4bn in cash, $8bn in treasury stock that can be sold and if it doubles its current net debt-to-equity of 0.35x it can borrow another $10bn, the Reuters report adds - quoting a recent Macquarie research note.
He's not bad at making money
Source of picture: www.dealbreaker.com
SOME of the logic behind Reliance Industries' bid for LyondellBasell could be a recognition that the globalisation of petrochemicals markets may have gone into partial reverse.
A climate bill passed by the House of Representatives has a provision for taxing imports from countries where emissions standards are more lax than the US.
This defensive measure, no doubt the result of pressure from heavily polluting industries such as refining and chemicals, recognises that the business-as-usual scenario outlined by the International Energy Agency in its World Energy Report 2009 won't come true.
The scenario involves no significant improvements in energy conservation and no great shift to renewables, leading to a rise in global temperatures of 6 C.
Even if an international carbon tax and/or cap-and-trade system isn't established, individual countries seem likely to step up their efforts to lower hydrocarbons consumption.
Whether or not global warming is man-made, energy security is by itself a big enough reason to boost energy efficiency and develop green technologies.
Then there is what Nubuo Tanaka, Executive Director of the IEA, calls "the silent revolution" since 2007 of increasing US gas supply.
Breakthroughs in shale-gas technology and very long global liquefied natural gas (LNG) supply are contributing to what the IEA describes as a worldwide supply glut that could have "far-reaching consequences for the structure of gas markets".
This will put LyondellBasell's US polyethylene (PE) assets in a strong position in the medium and possibly even the long term.
It has long been assumed that when the US polyolefin market is eventually in deficit, the shortfalls will be supplied by the Middle East and Latin America - notwithstanding extra logistics costs that amount to effective trade barriers.
But a sufficiently high price on carbon would undermine this assumption, along with cheap US natural gas.
This is still the world's biggest economy and therefore the world's biggest chemicals and polymer market when all the hot air about China has been expelled.
What was right for Warren Buffett could prove to be right for Reliance.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Reliance's bid for LyondellBasell is likely to be a long drawn out affair with potential for complications from competitive bids.
I talked to some sources familiar with the transaction and they say that Reliance is unlikely to be the only company interested in LyondellBasell. There is no official confirmation yet but some obvious names are being suggested -IPIC, Sinopec and Saudi Aramco.
One source says that the strongest contender would be Len Blavatnik of Access Industries who is trying to regain control of LyondellBasell.
This report also talks of offers by private equity players too though these are in the form of equity financing proposals to LyondellBasell's plan of a rights issue and not a cash offer like Reliance. The rights issue is part of the company's proposed reorganisation plan.
But Reliance still stands a good chance as some of the other probable contenders are likely to be busy working on other acquisition opportunities, he adds.
One opportunity is Dow Chemical's basic chemicals and plastics unit. Andrew Liveris, CEO of Dow, recently said that the company is in talks with two potential partners, although no timeframe has been set for striking a deal.
Dow's senior vice-president of hydrocarbons and basic plastics has also said that Dow's partner would have substantial hydrocarbon and refining assets.
Any company that is successful in partnering Dow would have to forego the LyondellBasell opportunity because of antitrust issues in the US and Europe. It would not be possible for a single company to own all the assets of Dow and LyondellBasell.
Then there is IPIC's stated interest in Bayer MaterialScience. Although the company has said that it is evaluating other opportunities it might be preoccupied in seeing this through, says the source.
He also adds that there are not too many companies globally that can prove that they have the capacity to run LyondellBasell.
Meanwhile, there are already indications that the transaction could stretch through 2010. LyondellBasell asked the bankruptcy court yesterday for time until 6 September 2010 to get sufficient creditors to vote for its reorganisation plan. The current deadline is 15 December.
Until the deadline, LyondellBasell has sole right to file a reorganisation plan. Once it expires, creditors can file their own reorganisation plans for the company.
Creditors, who are keen to recover as much money as possible, would be keen to see alternatives to the company's plan.
Will growth spread quickly enough?
Source of picture: www.oraclemarketplace.co.uk
By John Richardson
Worldwide chemicals growth rates might not return to 2008 levels until 2012, Jurgen Hambrecht, CEO of BASF, warned on the release of the company's Q3 results.
The overall picture is being made to look bad by structural overcapacities and deep-seated economic problems in Europe and the US.
Booming emerging markets, particularly China, matter more than ever to Western chemicals producers.
So the big question being asked as we approach the New Year is whether China's almost hard-to-believe growth in chemicals demand in 2009 - reflected in a big surge in imports - can be maintained.
High-density polyethylene (HPDPE imports rose by 73% with low-density (LDPE) imports up by 85% in January-September, according to Shanghai-based commodities information service CBI.
Total PE imports in 2008 were 4.5m tonnes, but had China imported 3.75m tonnes by the end of H1 of this year alone, added CBI.
"China will enter a long period of slower and more volatile growth in probably 2-3 years when fiscal stimulus runs out", warned Michael Pettis, former Wall Street trader and professor at Peking University's Guanghua School of Management
This would force the country to make adjustments it had so far tried to avoid, added Pettis on his blog, China Financial Markets.
These adjustments, accordinng to a Shanghai-based expatriate, involve a major shift away from export and industrial investment-led growth to a more broad-based rise in consumer spending.
"What's holding back consumption is the lack of a decent welfare system, forcing people to maintain high savings levels to cover education and health costs," he added.
A lot of the wealth generated by China's growth was concentrated in the hands of the state-owned enterprises, Pettis added.
Higher dividend payments to company shareholders (sometimes no dividends are paid at all) and broader financial sector liberalisation were needed, said the professor.
China's critics argue that the response to the global economic crisis has so far been mainly more of the same: Providing a huge increase in funding for a big build-up industrial capacity and infrastructure.
The infrastructure, including 120,000 kilometres in high-speed rail lines, has the potential to accelerate urbanisation.
"There is little doubt that China's hope for prosperity in the long run lies in transferring the majority of farmers into higher-productivity jobs in the cities," wrote the well-respected Beijing-based economic research publication, the China Economic Quarterly, in an article earlier this year
"But simply moving a farmer into a city does not make him an economically significant consumer."
Chinese households with annual expenditure of below $5,000 - i.e. about 90% of the population - spent most of their money on housing, food and clothing, the CEQ added.
Those with income levels high enough to be able to spend more than $5,000 per year, the so-called "consumption households", mainly live in three regions - the Yangtze River Delta, The Pearl River Delta and the Beijing-Tianjin corridor, the article continued.
Each of these regions surrounds megacities, whereas other "consumption households" are more thinly scattered across the rest of China.
"Although there are a growing number of these households dispersed across the rest of the country, they are not concentrated enough to justify a sales and distribution presence for many products and services," the research publication added.
"Research my MasterCard suggests that multinational consumer-goods companies require a concentration of at least 20,000 consumption households to establish a viable market."
Distribution costs remain a barrier for setting up in the hinterland, despite big improvements in transportation over the last decade, said the CEQ.
"Logistics costs account for 20% of average goods prices in China compared to 10% in the US, according to the US Department of Commerce," the CEQ added.
Plenty of reasons, perhaps, for chemicals companies to be a little cautious over their forecasted growth rates in China over the next few years.
By John Richardson in Shanghai and Malini Hariharan
China is set to see polyolefins demand growth of 30% or more this year, depending on the which particular grade, according to preliminary estimates prepared by companies and market analysts.
Even if you take into account last year's relatively low growth rates (I say relative because despite the economic crisis, demand for some grades of PE grew by as much as 7% - which by itself would be the envy of most other countries), the 2009 forecasts take your breath away.
We will give you more details of the numbers next week.
As always with unexpected events, the search for after-the-facts reasons has begun.
One factor is the sharp drop in availability of recycled material that has forced converters to concentratre more on virgin resin.
A further reason is, of course, China's enormous economic stimulus.
This has included a big rise in bank loans, a factor behind the third explanation behind the forecasts: A sharp rise in speculation.
"Non-traditional traders entered the market who only wanted to get their hands on polyolefins in order to use the 90 days' credit for something else," said an industry source.
"They would take the credit and use it to speculate on say equities. Sometimes they made such big profits out of the stock market that they were willing to sell PE and PP at a loss."
The strong growth - combined with big cuts in production by Chinese producers in Q4 last year and early 2009 - help to explain the surge in polyolefin imports.
HDPE imports were up 73% in January-September and LDPE by 85%, according to China Customs.
The question now, obviously, is whether this great performance will be repeated in 2010.
We've been saying this so many times this year, but new capacities are a threat.
They keep getting delayed, but on paper China is set to increase PE capacity by more than 40% next year.
And will the Chinese government, worried about asset -price bubbles, reduce economic stimulus?
By John Richardson
A lot of the projects which have pushed the world into severe overcapacity were based on the assumption that China would remain in big deficits for many basic commodity chemicals and polymers.
It was thought that the world's most-important market would remain a sink for surpluses for a very long time at a time when tough questions over financing were rarely asked.
But it's become clear over the past few years that many of the assumed deficits won't be there.
China is seeking very high levels of self-sufficiency through building a big wave of new refineries integrated downstream with crackers, polymers and other derivatives.
Now the search for what to build - and what to provide storage and other support services for - outside China to supply China is likely to be a great deal more rigorous and selective.
The usual approach to this problem would be to conduct a study looking at the announced projects while also examining where China lacks the economics and the technology in a particular product.
"I am afraid this won't work in the political context of this country," a Westerner based in Shanghai told me last week.
"If a chemical looks like being in big deficit and even if China has no obvious competitive advantages or technology to start production, this doesn't mean it won't be built.
"The government would rather haemorrhage money than be dependent on imports for anything they regard as strategic."
Those able to read the minds of China's senior leadership should therefore be able to do very good business.
Another approach might be one of bitter regret if you haven't already got substantial capacity on the ground in China.
More constructively, if you have missed the boat what would be better is to take China's demand largely out of the equation when deciding your strategy for basic chemicals.
Source of picture: www.americanprogress.org
By John Richardson
China's high-density polyethylene (HDPE) demand is expected to grow by 38% to around 7m tonnes forecasts CBI China, the Shanghai-based commodity information service.
Linear-low density (LLDPE) is expected to rise by 30% to 4.6m tonnes and low-density polyethylene (LDPE) will increase by 20% to 3.4m tonnes, adds CBI.
Polypropylene (PP) demand is expected to 24% to 13m tonnes, the company also predicts.
"This would be all-time high level of PE growth," said an Singapore-based polyolefins trader.
Booming domestic demand and a decline in recycling appear to be the major drivers of this extroardinary growth.
Can it continue? Perhaps, yes, as speculation grows that the Yuan will be revalued - leading to more hot money pouring into the economy
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."
It can be a dirty business....
Source of picture: www.China-environmental-news-blogspot.com
By John Richardson
THE sharp drop in plastics recycling in China has added 8-10 percentage points to virgin polyolefin demand growth in 2009, estimates a major Asian producer.
"It's a much bigger than we had anticipated and we're of course evaluating whether recycling will remain at the same depressed level next year," the producer added.
This appears to further confirm the impact of the recycling dip which we first recognised as important to the China growth story back in July.
Polyethylene (PE) demand is expected to grow by 31.5% in 2009 with polypropylene (PP) rising by 24%, according to Shanghai-based commodity information service CBI.
A second producer gives the following four explanations for the dip in recycling:
1.) Tougher regulations governing imports. "Legislation was made more rigorous because of environmental protests over water supply being polluted during the scrap cleaning processes," said this second producer. But interestingly, he added: "The central government faces the problem that tougher regulations are threatening the livelihood of millions of people. For example, in one inland province some 500,000 were employed in the re-processing industries, earning 4,000-5,000 Yuan a month compared with just a few hundred Yuan before the growth of recycling. Beijing is under a lot of pressure from local authorities to relax the rules." Clearly, this is a situation that needs to be monitored
2.) Less availability of scrap-plastic imports as a result of reduced exports of finished goods from China. During the global economic boom years, huge quantities of refrigerators, TVs etc were shipped to the West from China wrapped in plastic which was then returned to China
3.) The bankruptcy of a lot of traders in Q4 last year who dealt in scrap plastic and a reluctance of those still in the business to take the plunge again. Credit in China has also been so abundant that it's been very easy to borrow money to buy cargoes of freshly-manufactured resin
4.) The Delta between recycled and virgin material not being wide enough for most of this year to justify using the second-hand stuff (it has to be at least $400/tonne)
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.
The implementation of a zero-tariff regime in Asean from 1 Jauary 2010 has raised concerns among polymer producers in Indonesia and the Philippines about intense competition from Singapore and Thailand leading to a erosion in market shares.
Producers from these two countries are lobbying to defer or block implementation of zero tariffs. But a trade lawyer says the going will be difficult.
"I have heard that Indonesia is pushing for a postponement of the new duty structure. Even if the government agrees the customs department is not prepared as [new] forms are not ready," says one Singapore-based exporter.
But Edmund Sim, partner with Appleton Luff, points out that it would be difficult for Indonesia to renegotiate as the agreement has already been ratified. "It is pretty much impossible," he says.
Pic source: Fotopedia
"What is allowed under the free trade agreement (FTA) terms is for a country to suspend tariff concessions if it can be determined that increased imports have caused injury or economic damage to local companies. But in the history of FTAs this has very rarely been implemented. And even if this is put place it would be a temporary measure - say for a period of 3-5 years," says Sim.
The second option is to go for antidumping action.
"If the industry is worried about a flood of imports they can go in for this option by proving that pricing was unfair and that the local industry suffered material injury. This type of action is possible and can be extended for an indefinite period," says Sim.
But this is an expensive option because of high legal fees and it takes time to enforce. Companies also have to wait for a few months before they can initiate action.
"You have to build a record. You cannot say on 2nd January that there is dumping. You need time to build the case; usually 6-8 months is enough to get data to make a claim," he points out.
"The simple option [of raising import duties] ended when the FTA was signed. Now they have the safeguard option, which is untested, or antidumping, he adds.
Besides the Asean FTA, Indonesian media has reported that companies are also asking for a delay in the implementation of the Asean-China FTA, which comes into force from 1 January 2010.
There is a provision in the Asean-China FTA for a temporary delay in tariff reduction by reclassifying goods as 'sensitive' and 'highly sensitive' products. The duty elimination could then be delayed to 1 January 2015.
But the problem for Indonesia is that there are limits on the number of 'sensitive' and 'highly sensitive' products and the deadline for classifying goods was back in 2004, points out Sim.
It is also uncertain whether China and other Asean countries will allow Indonesia to deviate from the FTA.
"Either way, for Indonesia to delay tariff elimination will require some agreement by the other Asean members and China [in the case of the China-Asean FTA] otherwise Indonesia will be in breach of its legal obligations," says Sim.
By John Richardson
China's capacity to produce polyethylene and polypropylene will expand at a double-digit pace next year, while demand growth is expected to ease, says Longston Li, analyst at Shanghai-based CBI.
CBI expects China's polyethylene (PE) capacity would jump by 1.99m tonnes in 2010 to 11.1m tonnes, while its polypropylene (PP) capacity would increase by 2.74m tonnes to 12.7m tonnes.
"This will include not only new capacities due to start next year, but the impact of plants that were commissioned in the second half of 2009. Many of the players in the China market believe there will be great supply pressure in 2010," says Li.
China's PP output could rise by as much as 2.6m tonnes next year when plants commissioned in the second half of this year were taken into account.
While demand for PE and PP will continue to increase the extraordinary growth witnessed this year (see this entry) may not happen again.
Li expects PE demand to rise 7.1% next year to 16.27m tonnes in 2010, while PP demand would grow 12% to 14.55m tonnes next year, moderating from the projected 31.5% surge in demand for PE and 24% jump for PP in 2009.
The following excel file has a list of Chinese PE and PP projects due to start next year.
China 2010 projects.xls
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.
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
The Wednesday post on this blog highlighted some of the unexpected turns that the Asian polyolefins market has been taking.
There have been more developments over the last two days that are likely to influence markets in the short term.
• ICIS news reports that Sabic will significantly cut its January and February polyethylene (PE) allocations to China and Southeast Asia due to some production problems. The company's buyers have confirmed this. One Chinese buyer said that his allocation has been cut by as much as 60-70%. PE prices had not reacted to this news today and were still weighed down by Thursday's sharp fall in lldPE futures on the Dalian Commodity Exchange, said traders.
• Ineos was forced to shut its 320,000 tonnes/year lldPE plant in the UK due to problems caused by cold weather. This could further tighten the European market.
• An explosion in a naphtha storage tank at Lanzhou Petrochemical killed five people. The company, a subsidiary of PetroChina, has shut down a 240,000 tonnes/year cracker and associated PE and PP plants at the site as a precautionary measure. Its other 460,000 tonnes/year cracker, in the same area but at another site, has not been affected.
Pic Source: Xinhuanet
• And petrochemical production at Texas in the US could be affected by unusually cold weather. Temperatures in the region have hit a 14-year low and are expected to remain at current level for the next three days. Companies have started taking precautionary measures but some traders fear the weather could trigger outages.
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 BIG gap in credit growth between China and the developed world has been thrown into further relief by recently released data - raising inflationary concerns in the world's most important economy, while emphasising how rich-world countries remain on government life-support systems.
Broad money supply growth was a huge 30% in China in the ten months to November 2009, according to The Economist.
This compares with a fall in money in supply in the Euro area over the past year with US money supply only increasing by 1.2% in the six months to November last year.
In Australia, lending to the business sector declined by 8.2% in November 2009 year-on-year, said the Reserve Bank of Australia (RBS).
A strong indication of the importance of government life-support is that thanks to low interest rates and Canberra's tax credits for first-time buyers, credit to the real-estate sector grew by 8.2% in November over the same month in 2008, the RBS added.
This supports the anecdotal stories I keep picking up of credit remaining very tight in the developed world, particularly for small -to medium-sized chemicals companies, end-users and traders. While banking systems might have been rescued from financial collapse, the surviving banks are too busy rebuilding capital to take the risk of increasing lending to businesses - and perhaps also because they fear another bust could be around the corner.
It also seems likely that even where banks are more relaxed about credit, rich-world companies in certain sectors - certainly including chemicals - are maintaining very tight cash-management policies because of this same fear of another bust.
"In this financial environment no-one is holding more than 2-3 weeks inventory cover," said an Australian plastics processor.
"Who could finance it and take the risk in (such) a volatile market?"
Some converters have, according to one Singapore-based polyolefins trader, been constantly caught out by new supply that hasn't arrived due to all the project delays -and now most recently production problems in Saudi Arabia.
This forced them to restock when low inventory levels became quickly depleted during several supply-side shocks in 2009 and into the first weeks of this year. This has made an awful lot of money for the traders.
The converters - and also many of their suppliers who also continue to exercise careful cash-management - appear to be aware of the risk of a sudden collapse in crude and other commodity prices.
The danger of a mini-repeat of H2 2008 lingers. Everyone down all the chemicals chains could again be left with big inventory losses if the bull-runs in crude, commodity and equity markets suddenly come to an end at a time when stocks are high.
But as Paul Hodges, chemicals consultant with International eChem has pointed out, rising crude and chemicals prices automatically increase potential losses - no matter how strict your inventory management.
Watch out for much more on all these themes (and a great deal more) throughout this week.
Sky-high living costs?
Source of picture: www.shanghaiist.com
By John Richardson
CHINA'S imports surged by 55.9 per cent last December, raising concerns among chemicals traders and producers that this points to increasing inflationary pressure and a possible interest-rate hike later this year.
The country's current official borrowing rate stands at 5.31%.
"The government has indicated in several official statements that it's concerned about inflation. If borrowing costs go up we would very likely see a dip in activity in sectors such as real estate that hugely buoyed chemicals and polymers demand in 2009," said a Singapore-based source with a leading global polyolefin producer.
"Pro-active" fiscal policies and "moderately loose" monetary policies would, however, be maintained in the near-term said China's president Hu Jintao at the weekend.
Real-estate construction is nevertheless up by more than 50% from a year ago, according to the same article from the Sydney Morning Herald which we quoted in our blog post earlier today.
Property prices have surged over the last 12 months, raising apparent government concerns over an asset bubble and affordability for average earners.
The same article, quoting the Beijing-based Institute of Population and Labour Market Economics at the Chinese Academy of Social Sciences, said that the labour markets were now once again tight after the big migrant-worker layoffs in 2008 and early 2009.
So is inflation really that much of a threat?
Expectations of inflation matter a lot as these drive consumer behaviour, leading to pre-buying of everything from oil and chemicals to food.
Prices of garlic and dried chili peppers have already been driven up in China by speculators anticipating price rises, said Alaistair Chan, Sydney-based associate economist for Moody's Economy.com, in this Los Angeles Times blog piece.
The price of food is vital for social stability in China. The wider threat of rising food prices across Asia - because of poor harvests and increasing energy costs - is a subject we will revisit in more detail in later posts on this blog.
The same LA Times blog posting - and again the article in the Herald - point out that The People's Bank of China began selling its three-month bills at a slightly higher interest rate last Thursday for the first time since August.
This was aimed at mopping up excess liquidity brought on by the $1.35 trillion in new loans issued between January and November last year - and could indicate less new loan-growth in 2010 as part of efforts to tackle inflation, the blog added.
"There is good reason to view the rise (in the sale price for the three-month bills) as a precursor to further tightening," said Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland in the same posting.
Consumer price index inflation (CPI) reversed from a 2.0% drop year-on-year to a 0.5% increase during the first three quarters of last year, he added.
Inflationary pressure will not be as great as some market participants expect because the growth in money supply - which we referred to earlier today as proxy for credit and spending growth - is to some extent misleading, the bank added.
Strong M2 growth failed to take into account the change in M2 caused by the shift in asset allocation by households between cash and stocks, said Morgan Stanley.
As equities or so unstable, therefore, a rise in share prices won't necessarily mean a big jump in consumer spending.
The other reason given by Morgan Stanley for inflation remaining under control as current conditions stand - meaning a low risk of an interest rate hike later this year - is what it forecasts will be a weak export market in 2010.
In the same set of official government data that indicated the steep rise in December 2009 imports, a 17.7% rise in exports was reported for the same month.
This was the first time in 14 months that China's exports had increased, according to this piece from the Financial Times.
If a strong export recovery is sustained during the next few months, this might raise pressure on the Chinese government to return to its policy of gradual Yuan appreciation, said Andy Rothman, CLSA's chief China economist, in the same article. CLSA is a Hong Kong-headquartered investment and brokerage firm
He believes a sustained recovery would give China's government the political cover to raise the value of the Yuan against the dollar by 3% in 2010.
A real recovery in exports would be a return to the volumes China enjoyed in 2007 and the first half of 2008.
(A return to dollar values wouldn't be necessary as China's exporters have received boosts from tax rebates and the fall the value of the Yuan against currencies other than the dollar because its been re-pegged to the greenback)
I am with Morgan Stanley on this as I cannot see how China's exports can recover to pre-crisis levels in 2010 because of deep-seated problems with Western economies.
So the odds seem to be long on a rate rise.
But if loan growth is reduced this year, this will still have a negative effect on chemicals demand.
What's hard to gauge is the impact on chemicals of a widespread belief that Yuan appreciation will not take place this year - the result of exports failing to rebound sufficiently.
(The more that exports recover the greater the pressure from the West on China to raise the value of the Yuan. Higher interest rates - the result of the inflation we've been talking about - might also be accompanied by a stronger local currency)
As we've written about before, the prospect of a 2010 appreciation led to lots of strange speculative trading in chemicals in 2009.
This added to the optimistic mood, but didn't always necessarily represent real (whatever "real" means!) demand growth.
Yuan appreciation will have to resume at some point.
So those in for the long term would continue to maximise their local currency revenues, while those with a shorter horizon would cut back on their exposure.
By Malini Hariharan
Eight years after agreeing to the Asean-China FTA (ACFTA) and a few days after its implementation the Indonesian government has succumbed to industry pressure to ask the Asean Council to renegotiate tariff reductions on 228 categories of goods across eight industrial sectors. In return, it has offered to accelerate implementation of tariff cuts on 153 tariff categories.
The 228 tariff categories include steel, iron, textiles, electronics, basic inorganic chemicals, petrochemicals, furniture, footwear, machinery, cosmetics and herbal medicines.
The government has been facing intense pressure from local companies who fear that competitive imports from China will force closure of their businesses.
Last month, a senior official at the Indonesian Employers Association (Apindo), warned that as many as 7.5 million workers (about a quarter of the country's 30m strong formal sector workforce) could lose jobs. He predicted that layoffs would begin gradually in about eight months' time.
But Indonesia had sufficient time to prepare the domestic industry for the rigours of Chinese competition. And if this was impossible the government could have approached the Asean Council much earlier.
"What were you waiting for?" questions the Jakarta Globe in this report and blames the government and industry for failing to anticipate consequences.
Anwar Suprijadi, former chief of the country's customs and excise office is reported to have said that he had warned colleagues in the Trade Ministry as well as those on the House of Representatives budgetary commission two or three years back about the problems the country would face once the Asean-China trade pact was implemented. "I warned that this [pact] should be reviewed," he said.
Pic Source: Jakarta Globe
Edmund Sim, Singapore-based trade lawyer with Appleton Luff, points out in this excellent analysis that other Asean members may be tempted to follow Indonesia.
"That Indonesia and the Philippines, with active business lobbies and media, reacted so strongly was somewhat predictable. Nevertheless, that business interests in those countries and elsewhere in ASEAN waited until the last minute, months and years after the negotiation, ratification and implementation of the FTAs, reflects fundamental deficiencies within the region's operating system. Clearly ASEAN governments and institutions such as the ASEAN Secretariat did not adequately prepare the business sector for trade liberalization. The corporate sector should have been more involved in the process from the earliest stages," he writes.
It is still early to say if Indonesia will be successful. The Jakarta Globe states that the Asean FTA council has 180 days to make a decision. Meanwhile, the trade deal will be implemented as planned.
A clause in the deal states that the council can reject Indonesia's request if other Asean countries oppose it. However, if the council sees Indonesia's offer as reasonable, it will represent the country in new negotiations with China.
But the Indonesian government has indicated that it will maximise the use of safeguard duties. A senior government official said recently safeguard measures would be used as soon as 30% of the domestic market for any product was controlled by China.
By John Richardson
CHINA'S decision yesterday to increase the amount banks must set aside as reserves and two interbank interest rate rises in the space of a week are designed to tighten monetary conditions as worries grow over overheating and inflation.
Lending reached Yuan 600bn ($88bn) in the first week of this year, not far short of the full-month average last year.
The New Year fresh-loans surge was noted by a Singapore-based source with a North American polyolefin producer earlier this week, when he commented that recent price rises were partly the result of "an even greater ability by traders to speculate".
We pointed out last year that easy credit appeared to be enabling China's many thousands of traders and distributors to buy, hold and sell stock - distorting the true demand picture.
This could have been a significant factor behind the big increases in polyolefin imports, despite an overall demand picture that should have been weaker when you took into account the decline in re-exports.
The credit surge has made it easier to trade not only in chemicals and polymers but also in other commodities, real estate and equities during a period when maximising Yuan revenue has been the focus - ahead of a possible revaluation of the currency at some point this year.
"There's a lot of talk about hot money flowing in from overseas, but most of this is locally-held money being shifted from dollars into Yuan," said a Shanghai-based US expat.
"Because bank deposit rates are negative in real terms and financial markets are undeveloped, the only ways to make money are in real estate, equities and commodities."
And amazingly, we also discovered that the same trader can switch between chemicals, polymers, real estate and equities with such carefree abandon that the underlying motive for a purchase can be obscured.
Sometimes buying a chemicals cargo is all about getting the 90 days' credit to gamble and make money somewhere else, for example, in the stock market. If the resulting profits are big enough a trader can be quite happy to dump a chemicals cargo at a loss.
The easy credit might well have also encouraged overproduction of finished goods with reports that textile mills were told to keep operating via soft loans in order to keep people in jobs.
True, growth in retail sales seemed spectacular. But a Singapore-based oil and gas consultant told me this today: "What's going on? I still don't get. Despite the record-high auto sales in China last year gasoline and diesel demand only increased slightly and so are a lot of new vehicles that have been recorded as sales actually sitting in showrooms somewhere?"
Both told this blog last September that retail sales were a bad proxy for real consumption growth because China's retail sales figures include government purchases and shipments to shopkeepers.
If the steps taken by the government to reduce credit are successful, chemicals demand will therefore go down as speculation abates and surplus industrial production is reduced.
But these measures might not be enough to take the air out of frighteningly big asset bubbles.
"The average real-estate price in Beijing is Yuan 20,000/sq metre. That is a 30% increase in one year," said a Beijing-based chemicals consultant.
"But if you look at salaries, a fresh graduate gets Rmb2000-3000/month. This is causing a social problem.
"Shenzhen (in southern China) has seen a 90% increase house prices."
And the Shanghai- based US expat added: "It doesn't feel right - it still feels like a bubble economy.
"I have an apartment on the outer ring road of Beijing which is 130 square metres and is right on the flight path from the airport and yet it's more expensive than downtown loft apartments in many US cities.
"With property so expensive here average salaries are still only a quarter of US levels in major wealthy cities such as Shanghai, and even less elsewhere as you move further inland.
"A lot is made of the fact that the average price of an auto is only $17,000 here compared with $30,000 in the US, but direct comparisons are not valued because very cheap local cars - some of which might come with brakes as optional extras - drag the average price down. Foreign-branded autos in China cost 50% more than in the US.
"Gasoline prices are now only $3.71 a gallon as against $2.54 a gallon because of fuel-price liberalisation and there are other signs of inflation. This place is getting expensive."
The danger is that if further measures are taken to deflate the economy, the end-result could be the same as in December 2007 - a housing slump with an overall severe economic decline.
Such is the delicate state of the world's recovery with the rest of Asia increasingly dependent on trade with China ("the second decoupling"), that decisions taken in Beijing over the next few months are going to be of huge importance.
Or, perhaps, the momentum generated by policy steps already taken means that bubbles will keep on inflating and inflating - making the disaster, when it comes, of even greater magnitude
As famous investor James Chanos, who is shorting China, is quoted as saying: "This could be "Dubai 1,000 times over".
The figures may not be as impressive as China but India too has been churning out some good growth numbers.
The Index of Industrial Production was up 11.7% in November, the fastest pace of growth in more than two yeas. While growth was broad-based the consumer durables sector was a major contribution as production expanded by 37.3%.
Pic Source: Livemint
The auto sector too has recovered with this report estimating a 17% growth in 2009.
The fast moving consumer goods sector expanded by 12% in 2009 and major players expect growth to be higher this year.
Polymer demand was robust in 2009 and the last quarter was especially good.
"We saw a resurgence in demand since November. Q3 [October-December 2009] was superb; it was strong across all polymers," says one market player.
"PVC growth should be more than 20% in 2009-10 as pipe demand has been going up regularly. The infrastructure and agriculture sectors are the key drivers," says a source from a local PVC producer.
Will this trend continue? There are as yet no signs of a slackening in fundamental demand although any fall in prices from the current high levels should result in inventory correction.
The economic outlook too is positive with the government increasingly confident of achieving GDP growth of 8% in the year ending 31 March 2010.
But there is also pressure on the government to act fast to tame inflation. Spiralling food prices pushed the wholesale price index up 7.31% in December strengthening the case for the government to tighten liquidity and withdraw stimulus measures introduced during the crisis period.
India is not the only country facing this problem. The Asian Development Bank has warned that while Asia, excluding Japan, will expand by 6.6% this year (up from 4.5% in 2009) led by China and India inflation is a major threat for both countries.
Quick action will certainly be needed to keep the growth story intact.
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.
Source of picture: www.forums.comicbookresources.com
By John Richardson
I loved the analogy in yesterday's Lex column in the Financial Times, comparing the objectives of any central bank to those of Kaa, the python in Jungle Book (nice excuse for a picture to brighten up the blog).
The serious point is that while issuing assurances that overall policies supporting growth remain in place, the job of any central bank is to at the same time gradually stifle signs of overheating without alerting the rank-and-file noticing.
China failed in late 2007 to lull the average girl or guy in the street to sleep - as we've noted before - through introducing overly harsh slowdown measures that caused the country's last big economic contraction.
The raising of the reserve requirement ration to 15.5% from 15% for big commercial banks - which was announced last week and came into effect yesterday - was hardly likely to go unnoticed.
As a senior contact we spoke to yesterday commented, polyolefin prices "paused for breath" at the end of last week on the news as other commodity and equity markets slipped very slightly.
But nobody is pressing the panic button as yet.
Lex adds, though, that fourth-quarter GDP (gross domestic) numbers are due out on Thursday.
If these indicate what the government agrees are more signs of dangerous overheating, then other measures might be taken sooner rather than later - perhaps interest and/or deposit-rate rises.
Previously, we had been told that further tightening using one of the three big economic sticks (bank reserve requirements, deposit or interest rates) was unlikely over the next few months - and possibly not until the second half of the year.
The risk of investor panic might cause hesitation, though, despite the data meriting swift measures; it's very hard for China to do anything these days without what seems like infinite scrutiny.
In other words if China fails to act soon - because it's caught in the global economic headlights with no chance of escape - it could be storing up bigger problems for the future.
By John Richardson
Linear-low density polyethylene (LLDPE) pricing in China has become increasingly divorced from industry fundamentals as a result of the growing role of the Dalian Commodity Exchange's futures contract, claimed a Singapore-based polyolefin trader late last week.
And the contract is setting the physical market, resulting in Dalian performing a similar role that of NYMEX on the price of crude as result of very easy lending conditions, a petrochemicals consultant added today.
Financial as well as polyolefin industry players have become heavily involved in Dalian, the trader added.
The big growth in LLDPE volumes traded last year -as this chart from my fellow Paul Hodges illustrates - was supported by the huge surge in banking lending in China.
The contract is also being used by polyolefin traders to make money through pure one-way speculation and as a means to hedge risk in the physical market, the trader said.
"Buyers are using the contract to hedge, although I have seen little evidence of producers trading on the exchange.
"Everybody seems to be using the exchange as an indication of sentiment and if they are not actually setting pricing off Dalian, they are using it as a guide."
But the consultant added: "I believe that Dalian is, in fact, setting the physical market as PE becomes more speculative.
"It has come to play the same role as NYMEX for crude oil, meaning that the contract often moves on sentiment and speculation rather than on fundamentals."
Assessing the pricing outlook for PE now involves looking at comparative margins on real estate, equities and other futures contracts in metals and agricultural commodities, the trader continued.
"It's not just about looking at supply and demand fundamentals anymore," he said.
"Financial and chemicals industry player will look at margins across all the different futures contracts, and in equities and in real estate, to decide where the best returns lie and flip their money accordingly. I have to do the same to figure out PE price direction."
China's huge increase in lending has had comparable effects on the physical market with polyolefin traders, and traders in other chemicals and polymers, sometimes only buying a particular cargo in order to get their hands on credit in order to speculate elsewhere.
This has led to some chemicals and polymers cargoes being sold at below cost because sufficient profits have been made in other commodities.
"It's also worked the other way round - i.e. somebody raising credit through buying another commodity because his main objective has been to speculate in polyolefins," added the trader.
So go figure this: You have an increasingly speculative physical PE market which is so divorced from the fundamentals that there's a bigger need to hedge. The problem is that one of the major hedging mechanisms - the Dalian contract - is also highly speculative!
The multi-million dollar question now is whether China's decision to tighten liquidity through raising the reserve requirement for commercial banks will reduce the amount of froth in the PE market and across commodities in general - both for physical cargoes and on futures exchanges.
As Paul Hodges also noted last week, several fiscal tightening measures have already taken place which could reduce trading volumes in both the Dalian LLDPE and polyvinyl chloride (PVC) futures contracts. We will look at relationship between physical PVC pricing and the futures contract in a later post.
LLDPE trading volumes so far this year are down by 27.77% on January 2009, according to the exchange's website today.
This might make a successful launch of a major futures contract in polypropylene (PP) - rumoured to be under evaluation in China this year - problematic.
PP producers are reportedly jostling for position to get their grades accepted under this planned contract in order to support physical sales.
If a grade made by only one producer is traded through a PP contract, a hedger could be more likely to also buy physical volumes of that grade as, in theory, hedging should work more efficiently.
But China constantly loosens and tightens credit and so, even if Dalian becomes less relevant this year, it might well come back.
There are also indications that the Chinese government wants to make exchanges such as Dalian more sophisticated in order to set its own global benchmark prices for commodities.
"It no longer wants to be just the price taker from exchanges such as NYMEX. It also wants to be the price setter," said a Shanghai-based chemicals industry observer late last year.
By Malini Hariharan
After experiencing steep price hikes over the last few weeks should seller start preparing for a fall? Signs of resistance and a slowdown in buying are being seen across a few products suggesting that price corrections may be imminent.
ICIS news reports today that the price rally in PE and PP in South Asia and the Midle East may reverse as buyer resistance is building up. The supply situation is also improving as plants in the Middle East have started ramping up operating rates.
Buyers in these markets are also taking cues from the Chinese market where buying is slowing down ahead of the Chinese new year holidays in mid-February.
And another ICIS news report yesterday talked of paraxylene (PX) markets turning bearish in the short-term as supply has lengthened following an easing of demand.
A Sinopec source is reported to have said that despite production issues in the Middle East and China and the heavy turnaround schedule in Japan, end-users were not buying as they did not have any immediate requirement to cover.
But the one factor that could halt or ease price corrections is naphtha which is running strong at around $750/tonne cfr Japan on tight supply.
By John Richardson
CHINA'S 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
IT is always useful to make a note of both what economists are saying and where they are coming from.
To give you an example, I was at a conference last year when I heard a ridiculously rosy outlook for both emerging and developed economies, delivered by an economist working for a certain bank.
This bullishness remains in stark contrast with a refinery industry grappling with overcapacity in the US, for example, resulting in the need to close operations down.
The same will eventually have to happen in petrochemicals in higher-cost countries such as Japan and South Korea when big volumes of much-delayed polyolefin capacity finally hits the market, according to Mazlan Razak, Kuala Lumpur-based petrochemicals consultant with DeWitt & Co.
True, returns from petrochemicals - a very real industry that makes stuff that is tangible and worthwhile (quite often a perquisite in recent times for actually losing money) - were much better in 2009 than anyone had expected.
How good margins exactly were on a genuinely-valid comparative basis (with 2007 during the economic boom) is something we will look at on this blog a little later.
What we can say for certain right now, though, is that volumes on a global basis were way down as Western companies kept overall operating rates at very low levels. I suspect that those who made the best returns were the chemicals traders who guessed the right way during an unexpectedly strong rebound.
Back to my original point, the banks and other financial institutions have a vested interest in talking up this recovery, potentially creating false and harmful optimism among chemicals and other manufacturing companies.
The weight of evidence remains overwhelming to support the view that in the developed world, recovery is anaemic and far from complete.
China is another story which we have dealt with many times before on this blog. It emerged more clearly last week that inflation followed by interest-rate rises are big threats to China maintaining the sort of growth we saw in 2009.
Back the developed world and a new report from the McKinsey Global Institute (see chart below) - Debt and De-leveraging: The Global Credit Bubble and its Economic Consequences.
Most rich countries have seen huge increases in their ratios of debt to GDP (gross domestic product) over the last ten year, according to a summary of the report in The Economist.
Britain and France are the most extreme with increases in their ratios by more than 150 percentage points each, to 465% and 365% respectively.
Financial sector debt increased hugely, in line with the big rise in household debt (it was all the exotic financial instruments which caused the economic crisis that enabled household debt to increase so sharply).
In America middle-income families built up most of the debt whereas in Spain it was poorer families, an example of a lack of uniformity in how household debt was built up across the developed world.
Deleveraging has barely started.
The composition of debt has shifted, however, from the private sector to governments with the financial sector cutting back the most.
Half of the ten rich countries in the survey have one or more sectors that are "highly" vulnerable to debt reduction.
These include households in America, Britain and Spain and to a lesser degree, Canada and South Korea - as well as commercial property in America, Britain and Spain.
The survey looked at 32 examples of sustained deleveraging in the past where the debt/GDP ratios have fallen by at least 10% after financial crises.
Typically, deleveraging began two years after the beginning of a financial crisis and lasted six-to-seven years.
In almost every case, output shrank for the first two or three years of the process.
McKinsey identified reasons why this current period of deleveraging could be more protracted than in the past, which include:
*The scale of indebtedness is higher. The highest previous ratio was Britain at 286% after the Second World War, but on this occasion more than half the countries in the McKinsey survey have debt totalling more than 300% of GDP
*The number of countries afflicted simultaneously is a lot greater, meaning that rapid expansions of output through exports is not easy on this occasion (plus, the export competition from China has increased enormously since the 1980s and 1990s recessions)
*Big increases in public debt, while cushioning the declines in demand in the short term, increase the overall debt reduction that will eventually have to take place. Once private sector deleveraging is done then the public-sector wind-down will have to begin
A further problem is that investors might worry about public-sector debt levels before the private sector deleveraging has been completed, pushing up bond yields - for example, the recent concerns over Greece.
The result could be a cut back in public debt before the private sector has completed its own reduction, damaging growth by far more than if an orderly wind-down takes place.
By Malini Hariharan
There is no light yet for companies whose projects have been suspended at Map Ta Phut. Last Friday, Thailand's Central Administrative Court rejected 30 petitions submitted by companies looking to resume work as their projects had received environmental clearance and would not create pollution.
"The outlook is not promising," says a Bangkok-based analyst. He is also not surprised by last week's court ruling. "Nothing has changed for the court to change its mind. All the petitions had information already seen by the court. The court wants companies to follow the constitution," he adds.
And article 67 of the Thai constitution requires health impact assessment studies to be conducted and approved by an independent committee.
The government is still struggling to put together the regulation to implement article 67 and also an independent committee.
Earlier this month, a four-party panel, headed by the country's former prime minister Anand Panyarachun, prepared and submitted a new regulation which was approved by the cabinet. And a 19-member coordinating committee was also appointed to advise the government on approval of projects at Map Ta Phut.
But an environmental group, Stop Global Warming Association, is now seeking to block implementation of the regulation and has filed a petition with the administrative court. The NGO says that no public hearings were held while drafting the regulation despite the fact that it would affect a large number of people and organisations.
Pic Source: Pattaya Daily News
Affected companies are still trying out all options to resume work at Map Ta Phut. Siam Cement said in a statement today that it has already started to comply with the new regulations invoked by the state in accordance with article 67. The compliance process is expected to take between 8-12 months, it said.
And Siam Cement is also trying to "expedite a conclusion through consultation and coordination with official agencies concerned as well as investors to find solutions."
Eighteen projects run by both Siam Cement subsidiaries and its joint-venture companies are among the 64 projects affected by the Supreme Court's order to halt construction. The investment cost of these 18 projects is worth over Baht57.5bn ($1.74bn).
Siam Cement did not identify the 18 projects but according to one industry source the company's joint-venture cracker, hdPE and PP projects are not on the list but a lldPE project is stuck. The blog has not yet been able to confirm this with the company.
Meanwhile, PTT Chem has started its new 1m tonnes/year cracker and expects to achieve on-spec production by the end of this month, reports ICIS news. But sustaining full operations at the new cracker would depend on when parent company, PTT, is allowed to commission its No6 gas separation project at Map Ta Phut.
A PTT source says that the project was 99.8% complete at the end of last year and that construction work is almost over. But after last week's court ruling the company is not able to provide any clarity on when work can resume at the project.
PTT, says the source, plans to work with government agencies and ask them to file a fresh petition in the Administrative court. It is also evaluating approaching the Supreme Court directly. And it also working on a health impact assessment study which should be ready for evaluation by April.
"In the worst case we are looking at a one year delay in the commissioning of the gas plant," says the source.
To keep the new cracker running, maintenance shutdowns will be carried out at PTT Chem's two existing crackers. A 460,000 tonnes/year cracker is due to be shut in mid-February for 35 days while a 515,000 tonnes/year cracker will be shut for 30 days in June.
Extra ethane (around 600,000 tonnes/year) would also be available once PTT completes revamping two of its existing gas separation plants. The revamp project is not the list of affected projects and test runs are due in February.
But even these arrangements may not provide sufficient ethane to the new cracker. "We believe we cannot run it at 100%. We have to wait and see when we finish commissioning of the gas separation plant," says the source.
The delay in the new gas separation plant has implications that go beyond petrochemicals as Thailand will have to import huge volumes of LPG.
"It will be around 100,000 tonnes/month and the government will have to subsidise this. They [the government] are under a lot of pressure. International prices of LPG are in the $700-800 range while the local price is around $330. The government subsidy would be around $1.5bn every month," says the source.
But this is something that the government has known since September last year when the administrative court made its first ruling on Map Ta Phut, points out the analyst.
The Map Ta Phut mess is just one of the many problems that the beleaguered government is facing. The stock market has fallen to a seven-week low on concerns about political uncertainty.
Investors appear to be increasingly worried about an impending collapse of the current coalition government. The Bangkok Post also reports about discontent in the armed forces and rumours of a coup which have spooked the business community.
"Any Old Iron?"
Source of picture: http://www.investorfsbo.com/refinery.html
By John Richardson
A LONG-TERM shift in refinery economics is posing a major threat to petrochemical margins - along with the delayed supply crisis that's likely to hit the industry at some point over the next year.
"Refiners, when the global economy was booming and particularly after the Hurricane Katrina gasoline supply shock, were pushing out naphtha to achieve balance across the barrel," said Paul Hodges, chemicals consultant with the UK-based International eChem.
"But now you have worldwide oversupply in refining with US gasoline demand peaking in 2007.
"You have ethanol as a percentage of total fuel consumption in the States already having doubled from 5% to around 10% and likely to go to 15%.
"The new auto fuel-efficiency regulations, announced last year, require big improvements in vehicle efficiency - another drag on demand."
And then there is the US economy, which, as we've said before on this blog, faces deep-seated long-term problems, including a far-from-complete deleveraging process.
US refineries ran at 78.4% of capacity in the week ended 22 January, steady with the prior week but down from 82.5% a year earlier, according to data from the Energy Information Administration (EIA), which was reported by ICIS news yesterday.
In the US, naphtha supply is unlikely to be the main issue for petrochemical producers as the big natural gas advantage over naphtha has led to a heavy switch to gas cracking. Instead, it's the availability of propylene from Fluid Catalytic Crackers (FCC) that's the big issue
Proof of this pudding came yesterday when US propylene producers nominated increases of up to 14% for February contracts on lack of availability from refineries, according to the same report already linked to above from ICIS news.
"In Asia, where gasoline demand growth is stronger, refiners outside China are being squeezed by the Chinese who have added so much capacity that they have swung into a gasoline export position," continued Hodges - a fellow blogger.
N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz, agrees.
Low refinery operating rates on poor gasoline and middle distillate markets - along with high Asian cracker operating rates - were likely to increase the East of Suez naphtha deficit in March and April, he recently predicted.
"A couple of recent, seemingly incongruous, headlines caught our eye," wrote the authors of the daily energy and shipping report, The Schork Report, yesterday.
They were referring to the Bloomberg story on January 24 - headlined "Morgan Stanley Expects Oil to Rise to $95 (in 2010) on Demand" and one the next day on the same wire service, which was titled: "Refining Profit Stays Weak on Overcapacity, Ernst & Young says".
"Ninety-five dollars on 'strong demand'....huh? Did anyone on Wall Street see Valero's earnings yesterday," continued yesterday's Schork Report.
But as we pointed earlier this week, you have to be aware of why someone might be making bullish growth forecasts.
"Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446mbbl/d of European and North American refining capacity was closed permanently in the fourth quarter (2009) and why another 663m bbl/d was shut down indefinitely and 560m bb/d partially shut down," the report added.
This amounted to lost oil demand of 1.7m bbl/d by the end of last year, the Schork Report calculates.
But this doesn't mean it's ruling out the possibility of $95/bbl by the end of this year.
If the financial speculators continue to spin their "sustained global economy recovery" story successfully while credit remains cheap and plentiful on continued strong worldwide government stimulus and China doesn't come off the rails, conceivably, yes. Why not?
But this would mean more pressure on refiners margins because even crude around $70/bbl is too expensive given the current economic fundamentals, never mind $95/bbl.
Petrochemicals would be squeezed from both ends of the product chain as refiners cut back even further, thereby reducing feedstock availability - with the firmer crude setting a higher floor for raw material costs.
Producers could also soon face, as we've already said, the long-awaited petrochemicals supply surge and damage to economic growth caused by the higher crude.
I am often accused of being overly pessimistic, but I really do believe petrochemical and chemical companies in general need to plan for a very difficult few years. It would be in everyone's best interests to plan prudently.
We should have originally written 'integrated low-density polyethylene (LDPE) in paragraphsix, but instead wrote linear-low density PE (LLDPE). It's now been corrected and apologies for the error - we will be buying some better glasses (less of this "we" - it's actually "me"!)
By John Richardson
The rise in ethylene prices to what ICIS pricing says is a 17-month-high has created the widest spread between naphtha and ethylene since 2007.
As of last Friday (29 January), the spread was $620/tonne, based on ethylene at $1,310/tonne FOB Korea -and naphtha at $690/tonne CFR Japan. This compares with a spread of $627/tonne on 17 August 2007 and a tremendous $667/tonne on 5 January of the same year.
In 2007, the world was vastly different as it was in the midst of the highest economic growth in a generation.
Interestingly, despite the inevitable complaints of squeezed margins by PE producers - and anecdotal reports of market-driven rate cuts and plant-idling - the latest weekly ICIS pricing margin reports tell a more nuanced story.
"Naphtha-based ethylene margins in Northeast Asia rose by $37/tonne due to weaker naphtha prices," said The Ethylene Asia Margin report for 29 January.
Naphtha costs had fallen by 4.8%, offsetting a 4.6% dip in co-product values, the report continued.
Integrated low density PE (LDPE) and high-density PE (HDPE) margins also increased - by $30/tonne and $39/tonne respectively - said The Weekly Margin - PE Asia report.
And so the incentive for integrated producers to increase ethylene sales at the expense of PE didn't seem to be that strong as of last week, despite reports to the contrary.
On a non-integrated basis, however, standalone LDPE margins fell to their lowest level since July 2008, the report continued.
Average January HDPE margins were the worst since way back in September 2004, it added.
I would strongly suspect that converters, who, like the standalone PE producers, lack market muscle because of their scale, are also being squeezed; the few who I have spoken to since the start of the year certainly claim this.
Ethylene-PE margins have been strong because of temporary supply issues.
"Some ethylene traders have a sense that C2 prices will decline from March because of increased supply," said an industry source today.
"For example, a large amount of ethylene is expected to hit the market when the 800,000 tonne/year Shell cracker in Singapore starts up."
Shell is expected to have 180,000-200,000 tonne/year of ethylene to export when its cracker is commissioned in Q1.
The remaining surplus from its cracker (it's only associated plant is the 750,000 tonne/year Shell monoethylene glycol plant which came on-stream late last year) will be sold to other producers on Jurong Island, say market sources. How this will affect the market's net balance is uncertain.
"Another factor to consider is that Shell has actually been buying ethylene in order to run its MEG plant. So you have a buyer who helped tighten the market becoming a significant seller of ethylene," the source continued.
A further reason for the ethylene rally has apparently been tight supply from Iran as a result of unconfirmed cracker outages.
Polyolefin supply has also been immensely tight since December on a host of production problems.
Recent supply issues seem likely to be resolved over the next few months with a great deal of new capacity yet to come on-stream.
By Malini Hariharan
Less then a week after the blog had highlighted Braskem's plans for global growth through acquisitions the company has announced that it will buy the polypropylene (PP) assets of US-based Sunoco.
The $350m deal, still subject to regulatory approvals, gives Braskem 950,000 tonnes/year of US capacity and makes it the third largest PP producer globally, ahead of Asian heavyweights such as Reliance Industries Formosa and PetroChina. Reliance is of course looking to become the largest PP producer by acquiring LyondellBasell.
Returning to Braskem, its chief financial officer Carlos Fadigas said that the acqusition makes the company the eighth largest resins producer globally and the aim is to be among the top five producers by 2010.
He also highlighted that the Sunoco deal was aimed at opening doors for other acquisitions in the U.S. Analysts expect Braskem to be looking at more PP and also PE assets in the US.
And analysts see Braskem using US plants to tap Asian markets.
In an ICIS news report Walter de Vitto, oil and gas analyst for Tendencias Consultoriaa said: "Braskem's strategy is to use Brazil as its base and produce resins in the US at lower costs compared with Brazil, which would make its products more competitive in the international market and could open other doors in Asia."
"By entering the US market, Braskem would have cheaper natural gas as feedstock, which would make access to Asian markets more feasible," de Vitto said.
Braskem did point out yesterday that the Sunoco buy makes it one of the most competitive PP producers in the US as two of Sunoco's plants are located outside the US Gulf giving it access to refinery propylene at a discount.
The feedstock advantage stems from reduced logistics costs, said Fadigas, adding that 60% of US refineries are located outside the US Gulf area.
Sunoco has 70% of its feedstocks on contract and relies on the spot market for the remaining 30%, reports ICIS news.
By Malini Hariharan
I have been reading a transcript of Dow Chemical's Q4 2009 earnings call and here are some interesting comments made by Andrew Liveris, the company's ceo.
Despite recording revenue and volume growth in 2009 Liveris was cautious on the outlook for 2010 citing an uncertain economic environment.
But constraints in Middle East supplies could lead to an early recovery.
"Even though there will be capacity adds, it won't come on when people think it will come on. We are one of the best operators out there and we had a slow start up of our Kuwait assets and we are very good at this. So I would tell you, you have not as much supply coming on as people think."
On the demand side, if global GDP expands at around 3% this year it would result in polyethylene (PE) demand growth of 4.5%. As global inventories are low across the chain restocking would push growth above this level, he said
Add to this 6-9m tonnes of high cost liquids cracking capacity rationalisation, 3m of which is already permanently down, gas not as freely available in the Middle East as people think and ethane cost advantage in the US which is now the second lowest cost producer on ethane.
Pic source: ICIS
"So when you put all that together, I think there is a case for a trough-like environment in 2010 with the excess capacity, a recovery in 2011 and a peak environment in the 2013 timeframe," he said.
He pointed out that Dow had effectively capitalised on its flexi-feed crackers and 20% of its US production in Q4 2009 was exported to China.
On implementing the asset-light strategy for basic chemicals, Liveris stressed that he was "not in a hurry to get it done at the wrong valuation" especially as the business generated an EBITDA of 1.7 last year.
"That is in a trough, demand led trough and great recession of all time. So we know we have a very high performing asset. The partners we are talking to are all strategic. There is three of them," he said.
And Dow was keen to implement the asset-light strategy for its chlorine business after completing ethylene-PE and styrenics.
"Today a good chunk of our chlorine capacity in Louisiana and Texas will feed our downstream chlorine envelope for performance businesses and be advantaged because it is integrated. You can expect us though to continue to find meaningful partnerships with people who want to be in PVC. So in essence, we will use our competitive advantage to partner with others because you have to have scale in the chlorine side. That should help us create an asset-light strategy for chlorine. We are determined to do that."
ICIS news also reports that Dow still plans to start up the first units at its Ras Tanura joint venture with Saudi Aramco in 2014 or 2015.
Prices have fallen for Middle Eastern engineering, procurement and construction (EPC) contracts and this has given a reason for Dow to delay releasing contracts.
But Liveris said Ras Tanura was moving ahead 'nicely on its milestones" and Dow would have more to say on the project by the middle of the year.
By John Richardson
Polyolefin shipments have been held up in ports by lack of awareness among customs officers at some ports in Southeast Asia over how to implement new free-trade deals, an industry source told us.
It seems highly likely that the same applies to other chemicals and polymer cargoes.
The Association of Southeast Asian Nations Free Trade Area or AFTA agreement came into force on 1 January, as did the China-ASEAN deal or ACFTA deal.
They involve zero import tariffs on shipments of most goods between ASEAN's founding members - Indonesia, Thailand, Singapore, Malaysia the Philippines and Brunei, and between these same six countries and China.
"Lots of containers of polyolefins have been stuck in ports because customs officials are not aware of how the new trade agreements work," claimed the industry source.
"The muddle over how the new trade-agreements are supposed to work does, on the face of it, seem extraordinary when you are consider that they have been many years in the making. For example, the terms of the ACTFA were agreed eight years ago.
But a well-informed source told us: "What is needed is more well-trained staff to help with the implementation, but the budget for the ASEAN Jakarta-based secretariat is only $15m a year.
"The reason it's so low is that contributions are pegged for each country at what can be afforded the poorest members, such as Laos and Cambodia."
Equally strange seems to be the complaints from Indonesia's polymer producers and from the country's manufacturers in general over the impact of the agreements.
"The industrial sectors in Indonesia and the Philippines, and to a lesser extent Malaysia, vehemently objected to greater market access and greater competition - not when the agreements were being negotiated but during the waning days of 2009," wrote Edmund Sim, a Singapore-based trade lawyer, in a recent article.
In an interview, Sim - partner with the Singapore branch of international law firm Appleton Luff - added: "The delays were partly because all the details of the deals are easily available on the internet.
"Government officials therefore assumed that industry executives would be fully across the implications.
"This wasn't the case until the actual effects of the FTAs became more apparent as the implementation date drew near.
"Another problem in Indonesia was that people were distracted by the presidential and legislative elections, which took place last year."
Sim had told us before that those who are complaining will pretty much have to, as we say in Britain, "like it or lump it", because the likelihood of these deals being renegotiated is very low.
And so, as he explains in this ICIS news article from yesterday , we can expect more antidumping cases in 2010 from disadvantaged countries such as Indonesia and the Philippines.
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 John Richardson
MORE evidence that China will not remain as easy a sink for surplus polyolefin volumes - especially in the case of the higher-cost importers - is emerging.
"There are plans to open a bonded warehouse in Guangdong province to sell RMB material converted into US dollar product," a Singapore-based polyolefin trader told me yesterday.
Those who want to buy polyolefins for re-export as finished goods always prefer to buy overseas material priced in US dollars, as this is exempt from the full 17.5% rate of value-added tax (VAT).
The importers deliver this stuff into bonded warehouses ahead of collection for processing and re-export.
"If the manufacturers involved in the re-export trade were to buy RMB material they would only be exempt from 13 percentage points of the VAT," the trader added.
"As a result, it's always more expensive to buy local material for this purpose."
But if there are now plans to deliver Sinopec and PetroChina-sourced product into a bonded warehouse, the competitive landscape might have started to shift.
"How it works is once you have converted RMB-priced product into resin priced in US dollars, which has to involve the use of a bonded warehouse, it becomes exempt from the full rate of VAT - the same as the imports," continued the trader.
"The only drawback is that you cannot then re-price the polymer back into RMB."
China is rapidly increasing its polyolefin capacity, therefore making the option to supply into this re-export market more viable as it is no longer as dependent on overseas suppliers.
The country's polyethylene (PE) capacity is due to increase by 1.99m tonne/year in 2010 to 11.1m tonne/year, while its ability to produce polypropylene (PP) is to set to rise by 2.74m tonne/year to 12.7m tonne/year, according to Shanghai-based commodity information service, CBI.
It's easy to imagine much more local volume being delivered into bonded warehouses as China's capability to produce polyolefins continues to improve.
China's producers are able to minimise costs in ways not open to some of the higher-cost importers, such as those in South Korea and Japan who operate sub-world-scale naphtha-based cracker and derivative complexes.
Some exporters from Europe would also be vulnerable, while the US ethane gas advantage might be able to buy a number of its PE players a little more time.
The commodity-grade end of the business could end up even more firmly in the hands of the local Chinese producers and the Middle East players.
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
India will soon initiate an anti-dumping investigation into polypropylene (PP) imports from South Korea, Taiwan and the US. This follows an application made by Indian PP producers last year.
A couple of market sources have forwarded the letter that has been issued to the embassies of the three countries and a government notification will be issued soon.
PP imports during July 2008-June 2009 will be investigated.
Meanwhile, the Indian government has yet to present its final findings on an anti-dumping case that was launched last year on PP imports from Saudi Arabia, Singapore and Oman.
Provisional duties for six months were announced in July last year.
"Technically there should be no provisional duties; but the final findings are likely to be presented only in mid-March," said a trader.
He also highlighted that importers were facing problems in clearing material sourced from producers hit by provisional anti-dumping duties.
"The customs department is not releasing material and asking for a bond," he said.
A second market source said a notification on extension of provisional duties by two months was likely to be released soon.
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.
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 Malini Hariharan
The China market appears to have started the year of the tiger on a strong note. We are not yet hearing a roar but at least it is not a whimper.
Pic source: Xinhua
A polyolefin market participant says that traders have started making enquiries after the Lunar New Year holidays. End-users are not yet coming up to buy but there has been a recovery in exports. "The order book scenario is getting better," he says.
There were some concerns before the holidays that inventory levels may be too high but he believes that they are not alarmingly so especially with the first line traders. "They look high considering the reduced number of working days [in February] but on a volume to volume basis they are at a normal level," he says.
Another polyolefin trader described the market as stable to tight. "International producers are waiting and watching. But the feeling is that local prices are getting better."
And there was positive news from the Dalian lldPE futures market which delivered a surprise yesterday moving by up 3%. The rise was attributed to higher crude oil values and a firm physical market. The rise in values contradicted earlier expectations that China PE prices would collapse after the holidays, market participants told ICIS news.
ICIS news also reports that offers for PVC edged up by $20/tonne after the holidays. While buyers had expected a fall in offer levels given the recent decline in feedstock costs producers said that strong seasonal demand would exert upward pressure on prices.
In a report released today Woori Investment & Securities says that prices of PE, PP, MEG and PTA moved up yesterday as the Chinese market reacted to the rise in crude prices during the holidays. And demand was firm on concerns of a supply shortfall due to maintenance shutdowns South Korean and Japanese plants over February-April. It has forecast petrochemical prices to remain solid through April.
It might still be too early to draw a clear picture of the next few months. Turnarounds will certainly constrain availability but a lot will also depend on the volumes that come out from the Middle East, especially from the plants that had faced operating issues in December-January. And not to forget there is also the influence that China's recent credit tightening moves will have on speculative activity and demand for petrochemicals.
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.
Source of picture: Dachangplastic.com
By John Richardson
WHAT a difference ten years have made in the plastics processing industry, according to a Southeast Asian converter who sees China's machinery=manufacturing prowess as an opportunity and threat.
"Ten years ago I considered buying a process machine from the US for $300,000 but it was just too expensive," said the processor.
"I recently purchased two machines from China - which are of better quality than the one I could have bought ten years ago -for only $100,000. This is great news for me.
"But I think the ease of availability of capital combined with the big improvements in China's capability to build processing machines for certain plastics processing sectors is contributing to the strong demand growth.
"It has been easy, particularly over the last year, to add processing capacity on the assumption that strong continued government stimulus will mean a sufficiently strong market."
So if the government withdraws stimulus in the wrong kind of ways as it tries to cool the economy down, the processing sector could be one more industry in China increasing its exports of surpluses. We are already seeing this in finished baxially oriented (BOPP) film.
By John Richardson
THE whinging is getting almost unbearable in Southeast Asia over the Asean-China Free-Trade Agreement (ACFTA).
The deal was under discussion for EIGHT years and yet chemicals and polymer producers and customers seem to have left it until after-the-fact to start raising objections.
Indonesian industry association representatives have gone as far as to suggest that 7.5m out of the country's total of 30m manufacturing jobs are under the threat as a result of ACTFA.
And at a conference in Singapore today I had to endure polymer producers from Southeast Asia moaning about not being able to compete with big bad China.
"There's no point in complaining now. What needed to happen was for industry representatives to take an active interest in negotiations for these free-trade deals right from when they first began," said a well-informed source.
"But instead this was pushed to the back of the collective mind. Clearly, China's competitive position has improved greatly since the talks started eight years ago, which is exactly why producers should have been constantly engaged in the debate.
"It will be very, very difficult to change the terms of ACTFA now because of the level of politics involved."
The approach of the Southeast Asian industry players was in stark contrast to that of their counterparts in India who managed to get petrochemicals excluded from an India-South Korea free-trade deal a few years ago, he added.
Have the lessons being learnt? Let's hope so as discussions take place for Singapore-European Union (EU), Thailand-EU, Vietnam-EU, Indonesia-EU and Malaysia-EU free-trade deals.
More on these negotiations later on.
Source of picture: www.turkeytravel.com
By John Richardson
THE economic crisis continues to force the global chemicals industry to think on its feet due to, among many other things, persistently tight credit in some regions.
China has also become even more of an important market with every rumour and counter-rumour about levels of demand there influencing sentiment throughout the world - including, as we'll talk about in a moment, Turkey.
This almost obsessive focus on in China is a reflection, I think, of weak growth fundamentals in the US and Western Europe. The flawed hope remains that China and other emerging markets can return the chemicals industry to the same level of health it enjoyed in 2003-07 without a developed world recovery.
"Banks in Turkey are less willing to lend to the basic plastics business because of the experience of Q4 2008 when prices collapsed and many producers were left with large inventory losses," said a Turkish polyolefin trader who I spoke to earlier this week.
"The good news is that because our mortgage sector is less developed than in some other places, our banks are not burdened with large debt.
"But they are still cautious and this caution means that as a trader, you have to marshal credit very carefully and, wherever possible, help your customers. The distributors we deal with are now keeping around 5-10% of their annual revenues as stocks compared with 10-15% before the crisis."
The oversupplied container-shipping industry has also rationalised vessel availability, resulting in a steep rise in freight costs from Asia to Turkey, he added.
"This has forced us to look elsewhere for supplies and so now we are sourcing more from Turkmenistan and Bulgaria."
Ten years ago if you had asked anyone in the Turkish chemicals industry about the state of demand in China, you might have been asked why on earth you thought this was relevant.
But in the same interview, the Turkish trader gave me a full run-down of post Chinese New Year demand conditions in China, thanks to his discussions that same day with contacts in Shanghai and Beijing.
Given what he agrees are weak long-term fundamentals in Western Europe, he is as anxious as anyone over whether recent polyethylene (PE) and polypropylene (PP) price declines in China will persist.
He forecasts that overall polymer demand-growth in Turkey, which averaged 17% per annum in 2001-07, will return to double-digit levels by 2011. Growth was minus 6% in 2008 and only 3% positive last year.
But is it realistic to expect this to happen without a recovery in the developed world which seems unlikey to occur until after next year?
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.
Heading for the high jump
Source of picture: www.commons.wikemedia.,org
By John Richardson
CHINA'S polyethylene (PE) market looks as if it has gone a little pear-shaped as a result of high inventory levels and buyers anticipating the long-awaited flood of new supplies.
Further factors are labour shortages affecting processors and manufacturers and anxiety over whether the government will take more economic cool-down measures.
Before the Chinese New Year (CNY), I was told by a couple of global polyolefin producers and a Singapore-based trader that stock levels were high in China.
Immediately after the holidays there were reports of low stock levels as prices rose.
The price recovery lasted only a few days and now we are into the third week of falling prices.
Last Friday, ICIS pricing assessments showed further declines across all grades of polyethylene.
Low-density polyethylene (LDPE) film-grade prices were down by a further $30/tonne to as low as $1,350/tonne CFR China, for example. HDPE film had slipped by $10/tonne to $1,300-1,390/tonne CFR China.
The truth about inventories might be that they were high after all before the CNY if you counted cargoes already booked that had yet to arrive.
Now, in a sign of what might be harmful trader panic, we are seeing resin that had been shipped to China re-exported to destinations as far away as Latin America.
"I'm told there are large inventories of resin in China that are now being re-exported to Latin America," said my colleague David Barry, who is our Houston-based US PE editor.
"This type of trade could last a few more weeks or it could last until May, depending on who you ask. "
China often re-exports resin at times of market stress, but the fact that large volumes of shipments are being reported is worrying.
"The traders involved are going to lose money as container freight rates have recently risen on ship owners taking smaller and older vessels off-line in order to make the economics of big, modern ships work," said a source with a North American polyolefin producer.
"But even without higher freight rates, this kind of trade is about minimising losses."
Resin buyers in China have recently cut back on orders because they believe that the long-delayed new capacity surge is finally picking up momentum, according to several traders interviewed by myself and follow ACC blogger, Malini Hariharan.
"The sentiment has changed. Although many of the new plants in the Middle East and China have yet to stabilise production, they are selling more cargoes," said a Hong Kong-based trader with a major Japanese trading house.
A further factor behind the drop in resin sales seems labour shortages.
Processors and finished goods manufacturers are reported to be unable to run at high rates because migrant workers have yet to return from the countryside following the CNY.
The debate is over whether this is a temporary problem or long-term - the result of government economic stimulus in western provinces raising incomes and creating more job opportunities.
As for fears over the economy affecting the mood of the PE market, this seems to be result of last week's announcement that house prices had surged by 10.7% in February, the biggest increase in the last 20 months, as the inflation rate also rose.
Watch out for a closer look at China's property market later this week.
Suffice to say here, concerns expressed by PE market players to our ICIS pricing team of imminent interest rate hikes seem a little overblown.
While the high house-price inflation number is a concern, the number of properties sold fell in January-February, suggesting measures already taken to slow the sector down - such as higher land sales taxes - are working.
Economists I have either spoken to, or whose reports I have read, including the authors of the excellent China Economic Quarterly, think a rate hike won't occur until Q2 or the second half of the year.
But, of course, if you are trader looking to acquire inventory, rather than one of the poor mugs trying to flog the stuff to Latin America, it's always worth seizing on another reason for bearish sentiment.
China's migrant workers - a risky game...
Source of picture: China Daily
By John Richardson
THIS very disturbing Op-Ed piece by Paul Krugman in the New York Times argues that the US needs to impose a 25% tariff on Chinese imports in response to the value of the Yuan being held at an artificially low level.
In 1971, the States placed a 10% tariff on Germany and Japan, forcing both to revalue their currencies.
As one of the comments posted in response to the piece points out, such a high tariff would leave millions of migrant workers in China out of work, thereby creating the potential for politically de-stabilising social unrest. China, unlike the US, doesn't have an unemployment benefits system that would keep people above the bread, or rather rice, line.
The Krugman piece suggests - if his figures about the swelling China current account surplus are to be believed - that it's the country's ability to export its surpluses which is providing perhaps the biggest support to the economy.
In other words, China's recovery, and the corresponding rise in chemical and polymer imports, might be more the result of an export boom than strong local growth
When I say export boom, this has to be qualified by the likely deflationary impact of the recovery in China's exports. Pricing per unit is liikely to be down, but volumes are up. This is a trend being encouraged by the big Western retailers in response to weak consumer spending.
And, ironically, as Western chemicals and polymer producers export every one of their spare molecules to China as welcome relief from moribund home markets, they could well be further damaging customers back home - their local manufacturers!
The article also points to rising trade tensions and an increase in protectionism.
A date to watch is 15 April, when the US Treasury Department is scheduled to announce whether it has classified China as a currency manipulator.