Asian Chemical Connections

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

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

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.

A huge amount of petrochemical capacity - some $12bn worth - is being built in Thailand, way in excess of the quantity added before the Asian financial crisis.
This is all predicated on Thailand becoming a manufacturing hub for Southeast Asia with, for example, huge ambitions to grow auto production.
But can Thailand attract the FDI it needs for this industrial growth, given lack of confidence in the government? If it fails to attract this FDI, then most of its new petrochemical capacity could end up flooding overseas markets, just as in 1997-98.
The latest blow to the credibility of the government is the potential collapse of a Thai-Japan Free Trade Agreement due to pressure from environmentalists.

I had a feeling in my bones that Reliance was laying the groundwork for a major project announcement with its endlessly bullish forecasts about the Indian market (see my earlier blog 'Is India about to crash?').
And low and behold, last week we saw the Indian major firm up its long-rumoured plans for a new cracker and derivatives complex at Jamnagar. The cracker is due on stream in 2010-11, using off-gas and other refinery by-products from its new refinery as feedstock.
Commentators say feedstock costs will be low. The petrochemical giant is already said to be producing some of the most competitive propylene in Asia. If its growth projections prove too bullish, Reliance will need to focus very hard on costs.

A guest blog - see Vanishing Post Boxes on this great blog by the authors of the book Freakonomics put me in mind of all those demand and supply forecasts that are invariably wrong.
Yes, I know I've written about this ad nauseum - see my last article on this subject.But surely, there has to be a better way of reaching investment decisions, a method that doesn't just cover your backside by using a consultant as a convenient whipping post.

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.

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 United Nations report on climate change, released last Friday, warned of 50 million made homeless as a result of global warming by as early as 2010.
Reports such as this will serve to pile even more pressure on the big polluters including, of course, China - the mothership of chemical demand growth.
Any investor who doesn't have a Plan B, factoring in a much harsher regulatory climate in China, is burying their heads in the sand.
China's government will have to introduce new legislation, and more effectively implement existing rules, because of rising international pressure.
This LA Times article provides a neat summary of the scale of the problem.

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.

Maybe, if the mystery blogger at the excellent http://www.theoildrum.com/ site knows what he is talking about. I've pasted in his arguments below.
You need to register at this site, which takes only a few minutes, if you want to get into the wider debate about how energy issues will have a critical bearing on all those wonderful demand and supply predictions available at a high premium from petrochemical consultants.
And while we are on that subject, just how many of those predictions take into account a sharp decline in Chinese growth on the failure of its energy policy combined with the inability of the world to meet its crude oil import needs? This could occur as soon as 2010, say some crude oil exports, the year when Peak Oil is forecast to finally arrive.
Once you've registered at the oil drum, go to http://www.theoildrum.com/node/2270 for some miserable reading on this very topic.
Happy 'Depression Economics' - a new concept I think I've just invented.

There's been a lot of talk about the next wave of Middle East capacity being too great for Asia to absorb all the Asian volumes. Indeed, estimates abound over western growth being satisfied by the M-E over the next 3-5 years.
But here's a thought: what if China's capacity build-up leads producers elsewhere in Asia to increasingly target western markets.
A case in point are these claims from expandable polystyrene producers that they even expanding to serve the European market, never mind just shifting volumes that used to go to China.

The former trader turned professor, Nassim Nicholas Taleb, in his new book The Black Swan: The Impact of the Highly Improbable warns against the danger of forecasting. Forecasting is, obviously, always based on what he know and not what we don't know. A Black Swan, by the way, is an earth-shattering event we didn't predict eg, 9/11 (until Australia was discovered everyone believed that only white swans existed).
On my way to work this morning, I heard an interview with Taleb on the BBC World Service where he said that 25 year forecasts, used to justify new projects in any industry sector, were worthless.
He added that the only forecasts of any value were those for 12 months because of a reduced chance of innacuracy.
And he added: "You can guarantee that the cost of a project will be far more than you've estimated."
So sack the consultants and trust in your judgement - provided, of course, you can convince the banks.

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

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

The consultants, traders and producers I spoke to last week insist that the current wave of new Chinese ethylene capacity due on stream in the current Five-Year Plan (2006-10), Download file
is more or less on track to be completed on schedule. Also see on these slides the ICIS insight Asia list of crackers after 2010 and the major PE and PP projects.
Unlike the Middle East, where project delays can run into several years, the Chinese have abundant manpower, engineering resources and cash to keep to their petrochemical time table.
There has been a lot of optimism from western CEOs recently, most notably Jeff Lipton of Nova Chemicals, over how delays to Middle East projects could extend the cycle.
But what will be the impact of timely start-ups in China? To what extent will these commissionings further erode the imports that have buoyed exporters for so long?
Sinopec and PetroChina is, apparently, discussing with the government over the next wave of crackers due on stream after 2010. Announcements are expected within the next 12 months.
On paper, the high density polyethylene deficit is due to remain at 2.5m tonnes up until 2012 with the polypropylene shortfall set to rise to 3.5m tonnes by 2011 from the current 2-3m tonnes/year. Will this prompt more investment by China or will the Chinese decide to let the Middle East meet the deficits? The Middle East is no longer just a PE player as the switch to mixed-feed crackers and the increasing use of the PDH process raises PP output.
What could this mean for global balances? Answers, please - and perhaps we can generate the world's first user-generated consultants report. All hail to Web 2.0....

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.

Methanol producers have been enjoying the best of times, but to paraphrase good old Charles Dickens, they may not necessarily be heading for the worst of times.

There is a staggering amount of capacity due on stream by 2012. By that year, global capacity will stand at 66m tonne/year according to
Mark Berggren of consultancy, MMSA. . This compares with his estimate of global demand of only 50m tonne during that year. 10.58m tonne/year of this capacity will be in the Middle East - representing 25% of the current global total - with China accounting for an even bigger slice of the pie. For more a detailed analysis of methanol see the latest ICIS insight Asia Middle East report Download file

But as Mark and the whole of the methanol world concedes, it is hard to estimate what consumption will be from a whole raft of new end-uses. These include direct blending of methanol into gasoline, dimethyl ether and fuel cells for both cars and computers.

But still, if demand growth is insufficient, you have to pity the smaller, higher cost producers .

In the case of the Chinese coal-based producers, they will be towards the bottom of the cost curve because of low feedstock costs and will increasingly be able to compete with the Middle East.

To carry on with the Dickens quote, from A Tale of Two Cities, he talked of the French Revolution as being "the age of foolishness" and "the age of wisdom".

Perhaps the wonderful world of methanol will also represent such divergent fortunes, with the poor foolish US and European producers facing Madame Guillotine.
I

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.

Paul Hodges, in his excellent chemicals and the economy blog, talks about the recent Shenhua Energy listing on the Shanghai stock exchange and how it shares jumped by 93% following the IPO.
Now it has ample cash to pursue its ambitions.
Shenhau is just one of numerous companies involved in coal-to-liquids projects in China which will provide transportation fuels and also methanol-to-olefins production through to polymers. Cash will not be an objective for a sector which is expected to see Yuan60bn worth of investment in 2006-10
The US is also looking at making much more use of its coal reserves to boost energy security and reduce carbon dioxide emissions.
But just how environmentally friendly are coal-to-liquids technologies? According to the non-profit organisation, the Natural Resources Defense Council, it makes more CO2 sense to refine oil - Download file
However, in the end will the solutions we seek to the peak oil crisis be driven more by energy security issues than environmental concerns?
And when the Greenland ice sheet has collapsed into the ocean, Shanghai has been submerged and hundreds of millions of people have been displaced by the global rise in sea levels, how secure will we feel?

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

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

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

Quite possiby says International e-Chem and Wood Mackenzie in a new study which predicts that by 2015, China could have a deficit of as much as 35m tonnes.

When you consider that total global output is around 300m tonne/year, this is quite staggering.

On paper, China should be balanced on naphtha because of a huge refinery construction wave. However, the consultants argue that the refineries will be run primarily to make gasoline. The importance of gasoline supply to China as a means of stimulating economic growth, thereby maintaining social stability, was illustrated yesterday when the government raised fuel prices by 10%. The hope is that the price hike will end shortages through boosting refinery production as a result of improved refinery margins.

And globally, will there be enough naphtha to supply China? Many of the 700 or so refinery projects being built could be delayed or cancelled because of rising construction costs and tight contractor and raw material markets.

Even if there is enough supply on paper, will refiners want to make the naphtha that China and the rest of the world needs? Quite possibly not as naphtha only accounts for around 5% of total refinery output.

Therefore, globally, as in China, refineries exit primarily to maintain supply and make money from the transportation sector.

After all the optimism, all the hype and a lot of investors' money, the industry has shot itself in the foot by failing to build demand ahead of supply.

Plus the negativity caused by food versus fuel and environmental counter-arguments to supporting this current generation of technologies is making some Asian governments hesitate on providing the support needed to bolster demand......

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.

Two books, The Cult of the Amateur by Andrew Keen and The Long Tail by Chris Anderson, present opposite extremes of opinion over the merits of Web 2.0

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.

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.

What Andrew Liveris didn't address when interviewed over the Dow/PIC deal is what the $19bn olefins and polymers deal could mean for Asia, the Middle East and commodities.

All the talk was of specialities with speculation sure to be rife over the next few months over how the US major will use its now substantial war chest to boost its presence in performance products.

But when it comes to commodites, Kuwait is not blessed with abundant supplies of natural gas.

Although the Equate joint venture (the jv between Dow and PIC) has sufficient gas to build and supply a second complex, which is due on stream next year, talk of a third cracker in Kuwait has gone quiet. There were reports late last year of a significant new gas find in the north of the country, but apparently the new field is not ethane-rich.

And so if Dow/PIC can't further expand in Kuwait, where might they build?

Perhaps in Egypt where discussions have been taking place with the Egyptian government for an ethane cracker.

And PIC, through its parent company Kuwait Petroleum Co, has access to crude oul supplies. This could get Dow/PIC into China, where future foreign participation in future integrated refinery and petrochemical projects might only be possible if the foreign partner brings oil supply into the deal. This is a commodity of which China is in desperate shortage.

Dow has also been pursuing a coal-to-chemicals project in China. Will its interest in coal-to-chemicals persist now that it is better able to build oil-based petrochemicals in the world's most-important market?

Finally, though, it's worth noting that there has been a lot of talk, and hints from those in the know, about further pipeline links across the Middle East.

On of the places with lots of gas in the region (excluding Iran, which has too many other issues to worry about than pursuing regional co-operation) is Qatar. Linking Kuwait into future spurs of the Dolphin pipeline might not be beyond the realms of possiblity - thereby, making Kuwait a place for further expansion.

Or what about moving gas from Iraq, if that country ever becomes politically stable enough? Or maybe even Dow/PIC could co-operate on eventually even building a cracker together in Iraq?

Talk of building petrochemicals in Iraq re-emerged a few months ago.

Worth ringing Mr Liveris and asking him these questions. I will ask my colleagues to help out.

Yet more gloom - the world's second-biggest economy appears to be slowing down as the effects of the sub-prime crisis spread.

What will this mean for Japan's chemical industry, which in the first half of the current financial year suffered badly from the highly cylical electronic chemicals sector?

All will, of course, hinge on the extent of the slowdown in the US economy.

What's clear is that nobody will envy Shinetsu's position next year, when it's due to bring on stream new PVC capacity in Louisiana.

With naphtha prices so high, heavy aromatics and pygas feedstock for producing benzene are not only expensive but are also in tight supply due to operating rate cutbacks.

Longer term also, as we've already discussed here, there are major doubts over whether China will produce enough naphtha to operate all the petrochemical projects it is building when the priority is gasoline and diesel production.

The economics of naphtha and pygas-based benzene look seriously challenged, therefore, both in the short and long terms.

And as the extended article below warns, watch out for King Coal as China ramps up exceptionally economic coal-to-benzene production

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.

In the good or maybe the bad old days depending on your standpoint, methanol was a fairly straightforward product.

You had chemicals demand and that was more or less it. But as the extended analysis below explains, chemical producers who use methanol as feedstock have to factor in direct blending of gasoline into methanol, DME, biofuels and fuel cells as shapers of demand.

Direct blending of gasoline into methanol and the use of DME as a transportation fuel are the biggest of these two new sources of demand in China. Expect a big increase in consumption from these two applications over the next few years.

Whereas the US has opted for ethanol in order to increase energy security (and for bogus environmental reasons), China has chosen the methanol route based on its big coal reserves.

The $64,0000 question is what this wil mean for the affordability and pricing of methanol for chemical consumers.

.......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

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.

If the refining industry is the tail that certainly does not wag the dog of oil exploration, where does that leave aromatics? Quite probably, the flea on the coat of the dog.

And it gets ever-more complicated and the risks keep multiplying for the industry

What would be the effect on aromatics if the Goldman Sachs prediction of $200/bbl crude over the next two years becomes true?

Benzene could face the twin squeeze of even higher feedstock costs and a big slug of new capacity.

The waning interest in biodiesel in Europe and ethanol in the US could also have implications for aromatics supply.

Perhaps in the case of the US, mixed xylenes and toluene supply won't end up being as long as had been predicted if there is a retreat from ambitious targets to boost ethanol production.

These are the kind of issues that will be examined during the DeWitt Asian Aromatics Conference in Singapore on 25-26 May.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Fair or unfair?

Anybody who has had the misfortune to have to listen to me ranting on about Peak Oil of late might have heard - if they managed to stay awake long enough - that I predicted crude could not fall below $100 a barrel because of the fundamentals.

I must admit my first reaction when I heard on the radio this morning that Brent crude had slipped to $99.30 a barrel was "damn".

A calmer, more measured and sensible reaction came later - that this might be good news for my battered, bruised and badly depleted shares, most of which are on Asian markets.

Weaker crude might also help us all keep our jobs. Falling oil prices are occurring as reports of project delays, or even cancellations, in the Middle East and China keep emerging - meaning that the chemicals industry might get some relief from the twin squeeze of higher feedstock costs and oversupply. I'll be dealing with these reports on this blog in the next few days.

"Here's some news for you - you're often wrong and so get used to the idea," said my wife. She's very direct, being Scottish.

But still - and here goes the rant again - I still feel that the long-term fundamentals are of a tight market as we accelerate towards Peak Oil, possibly by as early as the middle of the next decade.

Maybe a persistent bout of lower oil prices would be bad news as this would make us conserve less and lower investment in renewables (which, admittedly, are only ever likely to provide a small percentage of our total energy needs. Hence, we need to conserve!)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Middle East producers face:

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

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

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

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

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

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

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

For many years, many an Asian country has wanted a petrochemical industry as much as car or a textile industry.

Some of those countries have pursued investment even though their competitive advantages in petrochemicals have been somewhat dubious.

Singapore can argue that - because of its very efficient ports and corrupt-free politics - it is a good location for petrochemicals.

Shared and efficient utilities and feedstock advantages tied to mixed-feed cracker technologies by ExxonMobil, and soon Shell Chemicals, add to the argument. In the past, the case has been won by very strong profitability.

But what kind of growth will lift the West out of recession? Will it be the new-energy New Deal proposed by Obama?

Is this the only kind of growth possible, given that US and the UK consumers are leveraged up to their eyeballs and bankers will remain exceptionally cautious in lending?

In other words, no matter how many tax breaks are thrown at consumers, they might well be unable or unwilling to rush out and buy yet more junk that they do not need - made from petrochemicals shipped from Singapore to China to be manufactured into finished goods for re-export to the West.

The other danger, if the International Energy Authority is right, is that we run the risk of another crude-oil price surge if growth in the conventional economy returns to previous levels.

It seems unlikely, therefore, that we will see further crackers in the foreseeable future (beyond those already under construction) in an Asian country without a home market for petrochemicals big enough to result in only marginal export volumes.

Paul Hodges, my good friend and colleague in his excellent Chemicals & The Economy blog describes the "Minsky moment" for the global economy, when deleveraging accelerates. Hyman Minsky, the famous old economist, described how long periods of stability were followed exactly what we were seeing at the moment.

One former investment banker once said of my articles, "if you predict the end of the world for long enough, it will eventually happen".

In a petrochemicals context, though, I've been worried that the more that things went up - including pricing and a flood of investment predicated on a very simplistic view of growth - the greater the fall. At last May's APIC, somebody very senior in the industry was virtually saying that down cycles were no more. His company is now sitting on a huge inventory loss and depressed local and export demand as it prepares to bring on stream a huge slug of new capacity.

Let's hope that the same irrational idiocy doesn't take hold of the industry ever again.

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.

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.

......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.

One of the new skills being learnt in this current crisis is how to run plants efficiently at low operating rates.

"It's funny that for years now, we've worried about how to scale up profitably. Now industry is faced with just the opposite, how to scale down profitably," says Mark Matzopoulos, chief operating officer at UK-based Process Systems Enterprise in this article in ICIS Chemical Business.

A friend of mine has just graduated from university with a very good degree in chemicals engineering and has managed to land a job with an engineering company. His fellow graduates have not been as lucky in their search for jobs with chemical companies.

At least somebody is making money out of this crisis

Source of Picture : purchasing.com

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

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

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

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

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

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

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

"Excuse me, are you sure about that?"

Source of Picture: bshort.org

A wise man said to me recently: "All data is wrong; all you can do is make sure you are consistently wrong".

Now this is absolutely not meant to be any criticism whatsoever of what consultants or other market observers do for a living. They are the hand that feeds me and I've never wanted to come across as critical, it's just I wish we could all get it more right sometimes.

Just to emphasise that we can all be fallible - including this particular idiot journalist - here's a story from a long time ago.

I was visiting a certain company somewhere in China with a former colleague of mine with a rather large ego (not sure why this is relevant, other than my amusement at his flustered and blundering excuse-making when we were caught out, rather than the honest and straightforward admission that we'd dropped a huge clanger).

Anyway, we were in the midst of one of those interminably long lunches when an official from the company told us that they had completed a new purified terephthalic acid (PTA) plant in the next field. He added that it was due on-stream in three months' time.

We duly travelled back to Singapore in a state of joy at our "scoop" and published the exclusive story in our magazine.

The following week a consultant called us and said: "Do you know that they haven't even started building the plant yet? They were just putting out a statement to deter others from building - all utter nonsense. Didn't you think to double check?"

I admitted no and he pointed out that one of us should have stood up to pretend to want to stretch our legs or go the bathroom and glance out of the company dining room window at the adjacent field.

Sure enough, the plant didn't start-up three months later and so we had to do some serious humble-pie eating.

You live and learn.

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.

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

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

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

Pic source: Wikimedia Commons

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source of picture: wartakota.co.id

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 But does the Pertamina plan really add up?

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

Chinanewcapacitytable.doc

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

A Famous Ditherer

Source of picture: sarafinewordpress.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Singapore's Jurong Island

Source of picture: www.pcs.com

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

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

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

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

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

There are several options for LPG.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pic source: Saudi Aramco

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

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

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

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

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

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

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

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

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Is history about to repeat itself?

Source of picture: www.vietbao.vn

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

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

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

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

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

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

After the October break prices bounced back.

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

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

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

Looking pretty - the new Shell plant at night:

Sourceof picture: Shell Chemicals

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

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.

By John Richardson

THE increasing use of non-recourse financing has raised the cost of projects financed since 2007 in a very difficult economic climate, warns a senior industry source.

"I look at how some recent projects have been financed and worry,' he adds.

"Until 2007 money was plentiful, making it very easy to get board approval. Now you have a new generation of project financing where a project is treated as a purely separate entity, with financing the entire responsibility of a particular joint venture.

"As a result, anything financed since 2007 is Libor plus a great deal rather than the old days of Libor plus a minimum.

"The added problem is if a project gets into trouble a lender is unlikely to offer much flexibility because there is no head-office support.

"A further problem is national debt positions. Governments have been facing downgrades on their debt ratings - or in some cases have already been downgraded - because of the huge amount of money spent in fiscal stimulus. This is further adding to the cost of financing in certain locations," he says

In the final analysis it will be interesting to see whether head offices always will keep their distance in the event of major financial problems with projects.

Perhaps shareholders need to start asking tough questions ahead of H2 2010 - when lower growth in China could combine with the long-awaited great supply flood in polyolefins.

By Malini Hariharan

There is some good news for chemical companies affected by the Map Ta Phut crisis. The Thai cabinet will ask the Administrative Court to remove 19 projects from the list of 65 projects that had been ordered to stop work.

PTT's No 6 gas separation project and PTT Chemical's phenol and polyethylene projects are among the lucky 19. A full list is available here.

In another major development yesterday, the Central Administrative Court has allowed construction to resume on a steel plant as the environmental impact assessment report for this project had been approved before the 2007 Thai constitution came into effect on 24 August 2007. It had also received an operating license prior to this date.

Abhisit Vejjajiva, the Thai prime minister, has said that five or six more may be given the go ahead as they fall in the same category. And he has also reiterated the government's commitment to find an early solution.

But Map Ta Phut is just the start of a bigger movement.

In this blog report, Srisuwan Janya, a lawyer fighting on behalf of Map Ta Phut residents, disclosed that he was investigating as many 181 projects all over Thailand.

Pic source: Nation Multimedia

"The whole country will have to change," he said. "From now on, industry will have to worry about the environment and take care of the people. The government will have to also be much stricter about this."

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

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.

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

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.

By John Richardson

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

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

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

The chart shows announced new ethylene additions for the region: 

Source: ICIS

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

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

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

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

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

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

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

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

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

I have been doing my annual exercise of compiling major petrochemicals projects in India and as usual there not too many.

Making a case for investing in a cracker in India has never been easy and the task continues to be difficult despite the demand growth experienced in the last few years.

Lack of competitive feedstocks remains a main issue. Building a naphtha cracker based on imported raw material makes little sense and will not be viable till the government continues with the current import duty of 5%. And the country does not have gas to develop a gas-based project.

Refiners are looking at integrating with petrochemicals to add value to the naphtha that they are currently exporting. Naphtha surplus has been increasing because the power and fertiliser sectors are switching to gas.

Indian Oil Corp's naphtha cracker at Panipat, which is currently under commissioning, is one example.

Economics of projects such as this one, which is located in a landlocked part of the country, are favourable as the domestic market is the primary target for end products.

"But if you are investing for exports there are better places than India. Besides lack of raw materials poor infrastructure is a major problem," points out one industry player.

And with the fall in import duties and the numerous free trade agreements a company can even invest in places like Singapore and bring in product to service the domestic market although there is a risk of anti-dumping duties.

There are many products where Indian imports are steadily rising. PVC imports are expected to cross 600,000 tonnes in 2009-10 which translates to two world scale plants.

Imports account for over 50% of Indian methanol demand of around 1.15m tonnes. Demand is growing by 10-11%/year and the share of imports is projected to rise as there are no new projects in the pipeline.

"There is a fear factor," explains one Indian methanol producer. "Indian gas prices are increasing and we will be hit if we invest. We would rather have a relationship with a Middle East producer and bring in product," he adds.

In the case of PVC, high power costs is a deterrent for some companies while others face problems in tying up ethylene and chlorine.

Will the projects scenario change?

There is a possibility, says a second industry source. India will see more projects if it delivers the kind of demand growth seen in 2009 for a few more years, says another source.

Then proximity to the market rather than feedstocks would be a key factor.

.....but time to party for some thanks to re-exports to Brazil

Source of picture: edgsgonesouth.com

By John Richardson

It's a funny old world - or so it seems in poylolefins at the moment as traders re-export resin from China to Latin America and elsewhere.

"I phoned up a trader in China the other day and asked if he wanted to buy some consignments of polyethylene (PE)," said another trader, based outside China.

"He asked me whether I would instead like to buy material for re-export."

And yet another trader - who is based in Singapore - added yesterday: "A lot of the re-exports have gone to Latin America, but I have also sold material to Bangladesh and Israel.

"Some of the shipments have made money. For example, I bought Linear-low Density PE (LLDPE) from Brazil at $1,170 CFR China a few months ago. Last week, I sold the same cargo back to Brazil at $1,450. With freight at $170/tonne I made a decent profit.

"Other re-exports have lost money, though, as traders have cut their losses due to high inventory levels in China.

"I estimate around a total of 10,000 tonnes has been re-exported over the last few weeks.

"This is a very small amount when measured against the huge volumes traded, but it seems to have helped sentiment a little. Confidence has slightly picked up in the Chinese trading community as a result of the re-exports easing inventory pressures."

Bonded warehouses in the south, the east and the north of China were, however, still close to full, he added.

"The problem is that traders purchased a lot of material in November and December because confidence at that time was high.

"They underestimated the risks of weakening monomer prices undermining support for both PE and polypropylene (PP) pricing, and measures the Chinese government has taken to slow the economy down."

Successful start-up of the new 800,000 tonne/year Shell cracker in Singapore took place on 22 March, according to an official announcement.

And in Thailand, Mab Ta Phut Olefins was heard to have achieved on-spec production at its 900,000 tonne/year naphtha cracker, ICIS news reported yesterday.

Shell was expected to export around 150,000 tonnes of ethylene and 250,000 tonnes of propylene on an annual basis, while Mab Ta Phut Olefins would ship out more than 100,000 tonnes of propylene a year, the same news report added.

But the blog has been told that much more than 100,000 tonne/year of extra propylene will be available for export from Thailand over the next 12 months.

And returning to ethylene, exports are expected to increase from Qatar and Saudi Arabia.

The mood among poylolefins buyers has shifted in China towards one of much-greater caution, added the Singapore-based trader.

"I recently visited five factories where all the factory owners knew that resin was long and didn't feel in a hurry to buy beyond their immediate needs.

"They can smell blood in the air as new capacities are coming on-stream and plants that have already started up are ramping-up production.

"The buyers also know that the traders are coming to the end of their 90-day credit terms and so are desperate to sell stuff out of the bonded warehouses.

"End-users are also becoming much more cautious because of the uncertainty over government economic policy and a potential Yuan revaluation. And they are struggling with the labour shortages."

The good news, though, seems to be that overseas producers are in comfortable positions due to their low stock levels.

"We are in no hurry to sell as we continue to manage our production very prudently," said a Singapore-based source with a global polyolefin producer.

The trader said that this was a comment that had been made by many of the big Asian ex-China and Western producers

"One of these producers has been offering PP homopolymer grade at $1,350 CFR China, which is completely unworkable as the current China price is $1,310, suggesting a comfortable position."

But the longer-term issue remains the strength of growth in China this year (to repeat, we think it's bound to be lower than 2009) as all the new capacities start-up.

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

Aramco and Dow have not made any comment.

Singapore's container port

Source of picture: www.gcaptain.com

By Malini Hariharan and John Richardson

A big challenge facing many companies that have built large polymer plants that are located far from key markets is how to move product most efficiently.

These facilities have been built to take advantage of competitive feedstocks in regions such as the Middle East, rather than proximity to customers, which are mainly in the Asia-Pacific region.

Companies have approached this problem in different ways. Some have stuck to the traditional model of producing, packaging and storing product at site and shipping it to the market once orders have been received.

The problem with this is the delivery time, as it can take up to two months to ship product from the Middle East to Asia, by which time prices could have changed two or three times.

Other companies have developed distribution hubs at strategic locations, or hired warehouses at multiple locations to minimise shipment times to customers.

But more innovative solutions are now being adopted. An example is the model that Borouge has developed.

Polyolefins that are produced at Borouge's plants in Abu Dhabi, United Arab Emirates, and destined for the Asia-Pacific region will not be packed at site, but instead shipped in sea-bulk containers to hubs at Singapore and the Chinese cities of Guangzhou and Shanghai, where third-party service providers will handle packaging, warehousing and onward shipment based on sales orders.

All three hubs will become officially operational in mid-2010 and will handle material from the Borouge 1 and Borouge 2 facilities, which have a total polyolefins capacity of 2m tonnes/year. Borouge 2 will be commissioned over the next few months.

"Other petrochemical companies are looking at what Borouge is doing, which is unique, and trying to decide whether to take this type of visionary concept or gamble their existing supply chain models will keep them competitive in the changing environment," says Eric Herman, CEO of CWT Logistics, which is handling Borouge's southeast Asian logistics hub in Singapore.

This is the first time that CWT is going beyond traditional logistics services.

For the Borouge project, it has built an integrated solution, including packaging lines, a container yard and a warehouse designed to handle 330,000 tonnes of polyolefins annually.

The Singapore facility has no silos and will instead rely on gravity to discharge product from the sea-bulk containers - which are regular 20-foot or 40-foot containers lined with polyethylene (PE) or polypropylene (PP) film - to the packaging line.

This gravity system reduces product handling as well as the chances of contamination, Herman points out.

CWT's overall model allows for shorter delivery time, and there are potential savings of up to 30% on ocean-freight costs from shipping product in bulk containers rather than as packaged goods in containers, he adds.

The decision on how to package products can be decided closer to the point of the order from the final customer, avoiding the need for costly repackaging as is often seen in European logistics centres, he says.

In addition, having a packaging and distribution hub in a location such as Singapore means a Middle East-based company can deliver to China or other Asian markets in shorter lead times, enabling it to compete with South Korean and southeast Asian companies that have always had a delivery-time advantage.

"The strategy is to position products closer to the main markets and reduce the overall time it takes to deliver to the end-users," says Herman.

This is possible from Singapore, which is one of the busiest container ports in the world. The heavy traffic also means there is less pressure to return containers and the free time offered by shipping companies before containers must be returned can be maximised.

"It can be seen as expensive to outsource the supply chain. But, firstly, you are only talking about a fraction of overall product costs," he adds.

Secondly and much more importantly, in increasingly volatile markets a shorter lead time preserves cash flow and hedges your bet on product price fluctuations, Herman says.

"You can say that it is cheaper to pack product at the plant itself, but customers are demanding a shorter lead time, similar to the just-in-time concepts developed in the auto industry by the Japanese."

A source from a polyolefins company with joint ventures in the Middle East thinks the model will work.

"Outsourcing of packaging and warehousing reduces capital costs and improves the project's return on investment, which is important when you are fighting with other divisions within the company for investment dollars," says the source.

CWT's Herman adds that outsourcing of packaging and warehousing also allows companies to save land for future plant expansions.

However, another Middle East producer thinks the model will work only for companies that manufacture huge volumes.

To make this model more accessible, CWT is also establishing a multi-user packaging and distribution centre in Singapore, where a company can experiment with, say, 50,000 tonnes/year, says Herman.

He is convinced that now is the time for the petrochemicals industry to learn to outsource.

"You look at Nike - it has outsourced its entire logistics. Most industries have learnt to outsource. The petrochemicals industry is changing fast, and logistics is going to be a key component as more products need to be moved closer to the market," says Herman.

Logistics could well become the next platform for companies to differentiate themselves in the market.

Here's a post from a guest blogger, my good colleague Prema Viswanathan - Deputy Managing Editor of ICIS pricing in Asia.

Ras Tanura and Al-Jubail

Source of picture: www.absoluteastastronomy.com

By Prema Viswanathan

A Saudi Aramco official has confirmed a Reuters report earlier this week that a change of location for the giant Ras Tanura petrochemicals project is under consideration. The project would be a joint venture between Aramco and Dow Chemical.

Al-Jubail is one alternative location being evaluated, which, like Ras Tanura, is a port city on the Saudi east coast (see map above). Other media reports suggest that Ras al-Zour is also being looked into, which is 80km north of Al-Jubai. 

The Aramco official told us that the review into where to build the complex would only result in a slight delay to the start-up - currently targeted for 2014 - and not five years, as was suggested by the Reuters report. He added that this review would lead to the project being improved.

Sources we spoke to in Saudi Arabia this week nevertheless claim that it won't be easy to sort out either keeping the planned complex at Ras Tanura or shifting it elsewhere.

"The project would have to be reconfigured if they shift it to Al-Jubail or any other destination, as it would be very expensive to bring refinery feeds to the facility via pipeline from Ras Tanura," said one source.

But the dilemma is that if the project stays at Ras Tanura heavy investment would also be needed in infrastructure, he added.

"The proposed shift of location makes no sense, as the integration with Saudi Aramco's Ras Tanura refinery is the main impetus behind the project," said a second source.

"This would be negated if they shift it to Al Jubail, which is already clogged with projects."

Upon completion, the complex is projected to produce 8m tonne/year of petrochemicals and gasoline products.

The current plan is for feedstock to be at least partly provided by the expansion of Aramco's existing Ras Tanura refinery, which will add 400,000 bbl/day of capacity.

The blog also understands that the project may have received an ethane gas allocation.

The refinery and petrochemical projects are expected to cost around $25bn and Dow's involvement would be the biggest foreign investment ever to take place in the Kingdom.

By John Richardson

IT IS always dangerous to assume that the future will be exactly the same as the past - a big lesson from the recent financial crisis.

But so seems to have been the assumption amongst China's polyolefin traders late last year as a close look at import statistics for December and January, supplied to us by the New York-based International Trader magazine, reveal.

In December 2007, for example, 251,600 tonnes of high-density (HDPE) arrived at Chinese ports compared with 292,664 tonnes in December 2009.

January 2010 arrivals totalled 363,129 tonnes against 223,456 tonnes in January 2008 (a "normal" year as there was no economic crisis) and 227,818 tonnes in January 2009.

December 2009 polypropylene (PP) shipments totalled 373,669 tonnes as against 251,179 tonnes in December 2007 (again a more valid comparison than Dec '08 - just about the high-point of the recent crisis, when arrivals were 266,463 tonnes).

 "We all thought that credit in China would remain as ample as before, supporting demand and polyolefin pricing," a Shanghai-based trader said today, echoing comments made by a Singapore competitor last week.

Polyolefin pricing has since slipped in Asia (see chart below) because of reduced lending by local banks, labour shortages in Guangdong province and new capacities.

Source of graph: ICIS pricing 

"Interestingly, the new restrictions in local credit might actually provide some support for imports over the next few months as the overseas traders can more easily lay their hands on LCs from international banks," said an industry observer.

"But on a net basis imports are still likely to be down this year over 2009 on slower growth in China and new capacities."

Consultancy Nexant ChemSystems wrote in a Q1 review released earlier this week: "At least five new crackers (in China), with a combined capacity totalling more than four million tons per year of ethylene achieved commercial production in the first quarter. Most crackers are integrated with further new derivative capacity on site."

By Malini Hariharan

In a research note released today, UBS has highlighted plans by Formosa Chemical and Fibres (FCFC) for major expansions at Ningbo, China.

The Taiwanese petrochemicals major is in the process of getting Chinese government approval for a new 1.5m tonnes/year PTA plant, a 200,000 tonnes/year PS unit and a 150,000 tonnes/year ABS plant, said UBS. There is also the possibility of a 200,000 tonnes/year phenol plant at the site.

These projects would further build FCFC's presence in China where it currently has capacities for around 600,000 tonnes/year of PTA, 300,000 tonnes/year of ABS and 200,000 tonnes/year of PS.

It looks like the company is moving ahead with downstream investments first rather than waiting for the Chinese and Taiwanese governments to lift restrictions on refinery and cracker investments on the mainland. The Formosa group of companies has for a long time been lobbying for a removal of this ban as they would like to create an integrated refining and chemicals hub in China along the lines of what they have at Mailiao in Taiwan.

Expansions have also been lined up by FCFC in Taiwan for which the company expects environmental clearance by the end of this year, said UBS but did not provide any further details about the project.

Heading West,,Jeddah's container port

Source of picture: http://ofwngayon.com/home/?p=257

By John Richardson

SABIC has increased its exports of PE to the US in response to high pricing and what could be weaker demand in China, a source with a North American producer told the blog earlier this week.

"I have heard of more linear-low density PE (LLDPE) cargoes in particular being shipped from Saudi Arabia, the source added.

The graph attached - View image shows the surge in US PE on the back of more expensive ethylene during Q1.

What does this trade - apparenly via both bulk containers to the bigger inland US converters and in bags to the smaller, coastal processors - also tell us about the China market?

PE indigestion in China seems high as a result of overstocking late last year and in early 2010.

"I remember that you had asked me where all the heavy imports in Q4 and January this year were going," added the source with the North American PE producer.

"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."

China's PE buyers have appeared to be standing on the sidelines over the last few weeks at a time when Saudi capacity is ramping. YanSab is apparently back at 100% after electrictiy-supply problems caused an outage earlier this year and the the second Sharq complex has just come on-stream.

But as we heard yesterday, a rise in oil prices might have brought China's PE buyers back into the market in significant numbers.

By Malini Hariharan

After a decade of inactivity since the Asian financial crisis, Indonesia is once again drawing attention. Two news reports indicate that companies are evaluating major investments in refining and petrochemicals.

Taiwan's Chinese Petroleum Corp (CPC) is said to be planning a $2.8bn petrochemical complex at Kalimantan in Indonesia.

Indonesia's Coordinating Ministry for the Economy told the Jakarta Globe that Kalimantan was selected because of the availability of raw materials. He added that CPC planned to team up with a local partner, either a private company or a state-owned enterprise such as oil and gas major PT Pertamina. Teaming up with Pertamina would ensure feedstock supply to the project.

The interest in Indonesia comes amidst strong demand growth in the country and the constraints that Taiwanese companies face in executing large refinery and cracker investments in China. Given a choice, Taiwanese companies would rather put their money on the mainland but government restrictions, on both sides, prohibits this.

The Taiwanese have been waiting patiently for a relaxation in the rules but it appears that they are now losing patience.

But whether CPC will actually execute this project remains a question. It had looked at a similar investment in Indonesia back in 1996 but abandoned the plan after the economic crisis.

The second project relates to Chandra Asri, the country's sole cracker operator, and Pertamina joing hands for a refinery project.

Chandra Asri is said to be looking at teaming up with Pertamina for one of the three refinery projects that it has planned.

Pertamina has received a government directive to team up with other companies build three refineries within 10 years, which would reduce the country's dependence on imported naphtha.

Shortage of local naphtha has been one of the biggest problems for the country's petrochemical producers. It has affected their ability to compete with other regional players and made expansion projects unviable.

Each refinery is estimated to cost up to $5 billion, with a total combined capacity of 900,000 bbls/day of naphtha, reports the Jakarta Post.

The first refinery project would commence this year at Cilegon while the other two would be at East Kalimantan's Bontang and East Java's Tuban.

Other Indonesia petrochemical producers, such as Titan Petrochemical, Trans Pacific Petrochemical Industry, Tri Polyta and Polytama Propindo, are also said to looking at investments.

The refinery-petrochemical integration plan looks good on paper and is one that the industry has been lobbying for a very long time. But what is uncertain is whether there is sufficient commitment and if smaller players have the money.

Many of the petrochemical producers have other long-standing projects. For instance, Chandra Asri has been talking of a cracker expansion and an aromatics unit. Polytama is said to be looking at the expanding its polypropylene (PP) capacity from 280,000 tonnes/year to 440,000 tonnes/year.

Indonesia needs more capacities. Inaplas estiamtes that local PP capacity is able to meet only half of the country's demand of about 800,000 tonnes/year.

But any Indonesia project would also need to take into account the recent start of the Asean free trade area which ensures duty free flow of material from neighbouring Singapore and Thailand. Both countries have already built export-oriented capacities.

Additionally, the implementation of the China-Asean FTA is also threatening the health of the downstream sector. Many Indonesian plastics producers have already expressed concerns their future in the face of low cost Chinese competition.

Does it make sense to build in Indonesia given these uncertainties?

It just might. Feedstock availability is becoming an issue in the Middle East and there are not many projects lined up for the next 5-10 years. In such a scenario companies may well have to look at the next best alternative - building projects where markets are located.

By Malini Hariharan

Reliance Industries is moving ahead with its Jamnagar cracker project and is looking at completing it in 2014, reports ICIS news.

Preliminary activity on the project, which was put on hold after the 2008 economic crisis, has resumed. Discussions are on for technology selection and a firm start up date will be set after contracts have been awarded.

The cracker, which would have a capacity to produce 1.3m-1.6m tonnes/year of ethylene and small volumes of propylene, would use offgases from Reliance's two refineries at the same site as the primary feedstock. Other refinery feeds would also be cracked.

The derivative slate includes mono ethylene glycol (MEG), low-density polyethylene (ldPE) and linear-low density polyethylene (lldPE).

It is not only the cracker project that is being revived. Reliance is also refreshing plans for new capacities in purified terephthalic acid (PTA), polyester, styrene butadiene rubber and butadiene rubber (BR).

The company had said last year after the completion of its second refinery that it would renew its focus on the olefins and derivatives project.

With Indian petrochemical demand showing very healthy growth prospects it makes sense for Reliance to expand in the country. And as its effort to grow the petrochemicals business inorganically by acquiring LyondellBasell has failed its time for Reliance to return to something that it is very good at - building mega projects.

By Malini Hariharan

If you are moving a project to a new location then why not take some time to re-examine its configuration?

That appears to be the thinking at Saudi Aramco and Dow Chemical for their proposed cracker and derivatives complex in Saudi Arabia. As reported on this blog recently, the mega petrochemical project is likely to be moved to Al Jubail from Ras Tanura.

But along with this shift the two companies are now said to be re-examining the product slate. Zawaya reports that the sponsors are trying to decide if it would be better to source some intermediate products from other companies located at Jubail. This would mean fewer units and therefore lower costs for a project that was initially estimated at over $20bn.

The news report also states that while a final decision on the move to Jubail has yet to be made the companies are in discussions with the Royal Commission for Jubail and Yanbu. The project is likely to be based in Jubail II as all plots in Jubail I are occupied. It would be housed next to a joint-venture refinery being built by Aramco and Total which can supply feedstocks to the cracker.

Pic source: Kentz

By locating the project at Al-Jubail, Dow and Aramco would also save on infrastructure development costs as this location is better developed than Ras Tanura. And sources close to the project have also said that contrary to expectations the relocation would help speed up project execution.

But with contracts yet to be awarded completion of the project could easily take another 4-5 years.

Too good to be true?,.,,,,,

Source of picture: http://www.arico.tw/en/index.php

By John Richardson

I VISITED the Chinaplas plastics exhibition in Shanghai late last month and was greeted with a wall of unremitting optimism.

Here are a few samples of the incredibly bullish comments from senior industry executives (a fuller version of what was said during the event - which attracted around 75,000 visitors over just four days - will appear in next week's ICIS Chemical Business).

"Just before I put my head on the pillow the other night, it occurred to me that China is now entering a second phase of development in its plastics processing sector," said the vice-president of a major Asian polyolefin producer.

"At first they built conversion capacity on the edges of cities and towns because they wanted to take advantage of cheap loans and to acquire land that would appreciate in value.

"As a result, they often didn't care that much about the quality of the finished products. So in the case of biaxially oriented polypropylene (BOPP) finished-film producers, they would often run cheaper yarn grade rather actual BOPP film grade resin through state-of-the-art machinery.

"But now many of these processors are cashing in on land values and moving to the countryside, where they are placing much more focus on the quality and the range of what they actually make."
.
.And an Asia-Pacific commercial manager with a US plastics major added: "Even in the depths of any economic crisis, no matter how poor you become you are not going to stop wrapping your food in plastic or using synthetic polymer-made diapers.

" Ten years ago the middle classes in India earned an average of $300 a year which meant that they couldn't afford washing machines and refrigerators, never mind autos, added one of his colleagues.

"Now middle-class incomes have risen to $2,000 a year and this has put the 200m who make up the Indian middle classes over the threshold into the category of developing-world consumers of the low-end finished goods that we take for granted in the West," he said.

"Chinese growth remains strong and will be further boosted by the Expo 2010 in Shanghai."

He added: "China's government will get it right. They haven't made any major errors since the Cultural Revolution and if they do make a mistake with the economy, they are capable - unlike in a democracy - of adjusting policies extremely quickly."

Even the prospects of imminent oversupply in commodity polyolefins didn't seem to worry almost universally-upbeat senior industry executives.

"My feeling is that this trough will not be as deep as previous ones because of Asian demand," said another vice-president, this time with a leading US and European producer.

"There has been too much writing and excitement about overcapacity, but it is not as extreme as people say because of Asian demand, projects coming on-stream more slowly than expected and capacity rationalisation in the West.

"We see margin depression over the next few years, but we don't believe it will be as bad as 2002-03.

"What we've seen before during periods of oversupply in Asia is higher volumes of resin consumption. We are seeing this right now with a lot more processing capacity being added in Malaysia, Indonesia and Thailand," continued the commercial manager with the US plastics major.

"The converters are very smart. They will buy more resin and push for application development when their raw materials are cheap. In previous periods of oversupply, polyethylene (PE) demand has grown at 1.2-1.4 times GDP (gross domestic product) rather than the usual flat rate.

"This will push Asia-Pacific consumption to a new level, after which there is no going back."

The enthusiasm, the optimism, was almost overwhelming in its intensity and relentless consistency.

But was this partly because they were spinning a good story to a journalist with private discussions a little more tempered?

Or is there really no going back for Asia and for emerging markets in general, and should cynics and sceptics except that they were wrong?

By Malini Hariharan

Ras Laffan Olefins Co (RLOC) is studying an expansion of its new cracker by using propane as a feedstock.

At a recent news conference, Mohammed Yousef Al Mulla, general manager of Qatofin, the Qatar Petroleum-Total joint venture downstream of the 1.3m tonnes/year cracker, said that while the cracker was currently running at 100% ethane a change of feedstocks was possible in the future.

"There is a study going on, maybe in the future we will use propane with mix feed of ethane, but we don't know how much it will produce. We may reach 1.6m, but for the time being we will produce 1.3m, there is a study to increase to 1.6m utilising propane in the future," he is reported to have said.

Propane is probably the only route available in the near term for RLOC to boost capacity as Qatar is running short of ethane.

Also at the news conference, Qatar's minister of energy and industry reiterated the country's commitment to petrochemicals and using propane as a feedstock.

"In this business you always try to be innovative and bring new ideas. Mix feed of propane. All these assumptions are in our agenda," he said.

And Qatar should have plenty of propane available as it is poised to become one of the world's largest producer of liquefied petroleum gas (LPG) by 2010/11 with production of around 14m tonnes.

Goodbye to all of that

Source of picture: www.gas2.org

By John Richardson in Mumbai for the Asia Petrochemical Industry Conference (APIC)

EXISTING Saudi Arabian crackers will continue to run at less than 100% until the Kingdom's oil production returns to 10m bbl/day - and that's not going happen for some considerable time, an industry source told the blog earlier this week in the build-up to APIC.

"I visited Saudi recently and discovered with oil production hovering in the region of 8m bbl/day (it was 8.26m bbl/day in April) there's not enough associated gas around to generate the ethane necessary for these established crackers to run at full rates," he added.

"Until production returns to 10m bbl/day ethane will remain tight for these crackers.

"For Saudi Arabia, maintaining the oil price at $70-80 bbl/day has bigger financial and geopolitical considerations than helping petrochemicals out. 

"I think the US is happy with $70-80 bbl/day as oil is expensive-enough to deter the wasteful consumption of earlier this decade that contributed to spiralling crude prices. The days of the gas-guzzling SUVs (and similar vehicles such as the disgusting Hummer - pictured above) need to be over for good.

"I don't think global oil demand is going to return to 2006 levels for a long while, and so this means Saudi will have to stick to its OPEC production quota - which is around 8m bbl/day - to keep crude within the $70-80 bbl/day price-range."

There might be enough propane and butane available, but as downstream plants in these existing complexes produce mainly polyethylene (PE) and mono-ethylene glycol (MEG), this is unlikely to be of much help.

As for the new wave of crackers being brought on--stream at the moment, there is, as you would expect, also not enough ethane gas to go around.

"If a new cracker has an ethylene nameplate of above 1m tonne/year it is not going to be able to produce more than a million tonnes in the foreseeable future," said a second industry.

Saudi Aramco is making strenuous efforts to boost natural-gas production, but there doesn't seem to be any great confidence among the industry sources I have spoken to that this will lead to a big easing of the ethane supply shortage.

More immediately, the feedstock issue is combining with problems in starting up and stabilising production at new plants to keep PE - and also polypropylene (PP) markets tight.

It's not the same story for MEG if China inventory levels are anything to go by as we will discuss later on.

And returning to the feedstock issue, the blog will canvass more views among the delegates gathering for APIC.

Mumbai at night

Source of picture: travelygan.wordpress.com

By John Richardson in Mumbai

POLYOLEFINS will not see a margin collapse this year due to persistently strong demand growth and continued problems with new-capacity start-ups, said numerous industry sources on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Mumbai.

The belief seems to be growing that barring another catastrophic global economic crisis, the industry should be fine.

It is interesting that sources are expressing bigger fear of a demand rather than a supply-side shock. This is the result of the belief that associated gas shortages in Saudi Arabia, problems in starting-up new plants and operating-rate discipline among western producers will continue.

Booming Asian demand has created a lot of confidence. Is this misplaced?

China's apparent polyethylene (PE) consumption grew by 36.9% in 2009 over the previous year and polypropylene (PP) demand by 29.1%, according to the petrochemicals consultancy, DeWitt & Co.

"On scrutiny, much of the 2009 growth was due to replenishment of stocks after massive de-stocking at the end of 2008 and also reduced use of recycled material by converters," said Mazlan Razak, Kuala Lumpur-based consultant with DeWitt & Co.

But growth remains strong so far this year and is likely be above 10% for the whole of 2010, estimated several sources.

In India, polypropylene (PP) demand grew by 27% in 2009, according to India's Chemicals & Petrochemicals Manufacturers' Association (CPMA).

PP will grow by 12%, reaching apparent demand of 2.462m tonnes, the CPMA adds.

Overall PE growth was 7.6% in 2009 but is expected to accelerate to 10.5% this the year, the CPMA continued. This would leave India's apparent demand for all grades of the polymer at 2.879m tonnes.

A Chinese coalminer

Source: www.guardian.co.uk

Over the next week, as well as keeping track of more immediat events, we will be reviewing and analysing what was said in and around last week's Asia Petrochemical Industry Conference (APIC) in Mumbai.

One of the most-interesting stories to emerge was a clear message from close to Total Petrochemicals, the French producer, that it's forging ahead with methanol-to-olefins (MTO) see below.

Here's the story:

By Joseph Chang, John Richardson and Malini Hariharan

Total Petrochemicals aims to fully prove its methanol-to-olefins (MTO) technology this year, leading to a potential $5bn-7bn (€4bn-5.6bn) worldscale project in China in the coming years, a source close to the company said on Friday.

"The economics of our MTO technology will be very competitive. We would look to partner with anyone with access to stranded coal," said the source on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Mumbai.

"This project would be very capital intensive at a cost of around $5bn-7bn," he added.
Total Petrochemicals is actively developing its MTO technology, having completed a pilot plant at Feluy in Belgium in October 2008.

The technology, jointly developed with UOP, converts methanol into light olefins (ethylene and propylene) and heavier olefins. The heavy olefins are then converted into light olefins using the UOP/Total Petrochemicals Olefins Cracking Process (OCP).

"It is a combination of UOP's process and Total's OCP technology; the olefin yield is higher than other MTO technologies," the source said.

The company plans to prove commercialisation of its technology this year, said the source.

And Total's MTO technology could provide an entry into large-scale petrochemical and plastics production in China, as foreign companies must bring more to the table compared with a decade ago, the source said.

"China has less and less need for IOCs [international oil companies] to come in and invest in projects in the conventional way. They have to bring more to the table, whether it's technology or feedstocks," said the source.

A big concern over the coal-gasification route to methanol is high water consumption. China's stranded coal reserves are in western and northern China, where water is in short supply.

Total believes it has a solution to the water issue; it is working to reduce water consumption during coal-gasification of methanol, the step before conversion of methanol to olefins, the source added.

Coal gasification plants also generate more carbon dioxide (CO2) emissions than refining, according to some estimates.

The Total process would employ carbon capture and sequestration technology to minimise CO2 emissions, the source noted.

The economics of MTO plants have been questioned because of high logistics costs.
This is because a large proportion of the polyolefins produced downstream of these facilities would have to be shipped from western or northern China, where demand is weak, to the big consumption markets in eastern and southern China.

"But a study has been done and compared to naphtha crackers it would be economic," said the source.

As part of Total's strategy of growing in Asia and the Middle East, "it would be nice to have production in China - nice, but not necessary", the source said.

Total currently supplies the growing Asian market through major production sites in Ras Laffan, Qatar, and Daesan, South Korea.

The company on 4 May inaugurated its 1.3m tonne/year joint venture Ras Laffan Olefins Cracker (LROC) in Qatar. The facility will supply its Qatofin joint-venture linear low density polyethylene (LLDPE) plant, which was inaugurated in November 2009.

Around 40% of the LLDPE would go to the Asia market, with the rest going to Europe and Africa, said the source.

Total owns 22.2% of LROC through its joint ventures Qapco and Qatofin with partner Qatar Petroleum.

Source of picture: omniglobal.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Despite the uncertainty surrounding markets prospects and the risk of another demand-led downturn, petrochemical producers are busy planning expansions and new investments.

At last week's Apic conference in Mumbai, a source close to Total Petrochemicals revealed that the company was looking to produce more petrochemicals downstream of its joint-venture refinery project in Saudi Arabia.

The 400,000 bbls/day refinery project, executed by Saudi Aramco Total Refining and Petrochemical Co (Satorp), already includes 700,000 tonnes/year of paraxylene (PX), 200,000 tonnes/year of polymer-grade propylene and 140,000 tonnes/year of benzene.
The project is progressing well and was expected to be completed in 2013.

All the PX would be exported at the beginning until derivative plants were built in Jubail, said the source.

"The propylene and benzene are destined to stay in Jubail and Satorp has been through a bidding process to find local consumers," he added.

Satrop is also expected to supply refinery feedstocks to a cracker project being developed by Saudi Aramco and Dow Chemical. The project - initially planned for Ras Tanura - is likely to be moved to Al-Jubail.

The blog had earlier reported that Total's cracker joint venture in Qatar, Ras Laffan Olefins, would also be expanding its capacity. The source clarified that the expansion would initially be based on ethane.

"The company sees a bubble of ethane availability from the Pearl gas-to-liquids (GTL) project which will be about 1m tonnes/year. They are looking to take that and expand the cracker from 1.3m tonnes/year to 1.6m tonnes/year," he said.

As the ethane would not be available to RLOC for the long term, the company was also looking at cracking propane, he added.

If the expansion is feasible, RLOC would do it by 2011-2012.

The additional ethylene would be used by Q-Chem and Qatofin to debottleneck their derivative plants, he added.

Other newly commissioned crackers are also likely to be expanded in the next couple of years.

Indian Oil Corp (IOC) plans to soon start expanding its newly commissioned cracker at Panipat by 25%.

"We will immediately take up the expansion proposal after stabilization of operations at the cracker; we have already made provision for a 25% capacity expansion," said a company executive said on the sidelines Apic.

After the expansion, the cracker would be able to produce 1.2m tones/year of ethylene and propylene. The cracker currently produces 857,000 tones/year of ethylene and about 500,000 tonnes/year of propylene.

The company would either debottleneck the exisiting deriviative plants or look at new derivatives such as low-density polyethylene or ethylene oxide.

A senior executive at ExxonMobil said in an interview with ICIS news at Apic that a study was on to expand its joint-venture cracker in Fujian, China. The Fujian complex includes a 240,000bbl/day refinery and an 800,000 tonne/year ethylene steam cracker with downstream plants.

Its downstream plants include an 800,000 tonne/year polyethylene unit, a 400,000 tonne/year polypropylene unit and a 700,000 tonne/year paraxylene unit.

And also in China, the National Development and Reform Commission (NDRC), has issued an initial permit for a joint-venture refinery and petrochemical complex between Sinopec and Kuwait Petroleum Corp (KPC) in Guangdong province, reports ICIS news.

The $9b joint-venture project - which includes a 15m tonne/year refinery, a 1m tonne/year cracker and other chemical units - was forced to relocate to Zhanjiang from the earlier planned site in Nansha, also in the province, last year because of environmental concerns.

The project in the south of Guangdong province is expected to come on stream in late 2013. A clearer picture on the completion date is possible only after the companies get the final approval.

Earlier this week, India's Reliance Industries announced it has signed an agreement with Sibur to produce butyl rubber at Jamnagar. Reliance is planning a number of petrochemical projects in India including a huge cracker and new plants for polyethylene, monoethylene glycol, purified terephthalic acid, polyester and other synthetic rubbers such as styrene butadiene rubber and polybutadiene rubber. Details are still awaited.

Out of the investment deep-freeze?

Source: tehrandaily.wordpress.com

By John Richardson

A VERY interesting story from my colleague Bee Lin Chow on ICIS news today reports the signing of a memorandum of understanding (MOU) between Sinopec and Iran's National Petrochemical Co (NPC).

The agreement will explore joint- venture opportunities in petrochemicals and related businesses in the two countries.

China needs oil and has the political muscle and pragmatic mindset to in some cases place energy security above geopolitical concerns such as alleged nuclear proliferation and human-rights abuses.

Hence, it is now talking to Iran about petchem and associated investments.

And it has done energy deals in the past with Sudan and other countries with dubious human-rights records.

Iran, as we reported on the blog last October, is finding it increasingly difficult to get the foreign investment it needs to develop iits refining, gas-processing and petrochemicals industries. Even obtaining catalysts to run plants has reportedly become difficult.

New investment is sorely needed to shore up the economy. Value is, for example, being given away as Iran exports crude and imports gasoline with domestic pricing of the fuel heavily subsidised.

And in petrochemicals, limitations on gas extraction can cause erratic operations at existing crackers.

Lack of feedstock supply and an inability to source foreign investment and technologies have also stymied growth in petrochemicals capacity.

The scope of the MOU between Sinopec and NPC also involves joint marketing of products.

This might help Sinopec limit price disruptions in the Chinese market that might occur at times of sudden influx of Iranian petrochemical products.

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

By John Richardson

DOOM-MONGERS are scratching their heads as to why the global petrochemicals industry has remained in such a healthy state over the past 18 months.

Old assumptions are, as a result, being challenged. It would be a painful irony if these assumptions are changed just as a new global economic crisis creates yet another set of realities.

Right now, it is far too early to say that the end is nigh.

Sure, we have seen Asian ethylene margins take a hammering over the last couple of weeks - but all that seems to have happened is that they have gone from obscenely good to still pretty good in historic terms.

The correction was always going to take place as the full impact of Shell Chemicals in Singapore switching from a major net buyer to a net seller of ethylene was felt by a thinly-traded spot market.

The fall in oil, polyethylene (PE) and mono-ethylene glycol (MEG) prices on the escalation of the euro crisis for the week ending 21 May were obvious other factors.

Last Friday (28 May), ICIS pricing reported no further reductions in PE values, whereas ethylene had tumbled a further $160/tonne to $980-1020/tonne FOB Korea.

But the decline in ethylene came before the end-of-the-week rebound in crude to around $75/bbl.

This reaffirmed that the weakness in petrochemicals pricing is all about the euro crisis, China's economy, geopolitical tensions in Korea and their impact on confidence across many economies and industries.

To get back the original point of this article, just why therefore have the doom-mongers been proved wrong - and why do the optimists believe that this will continue to be the case?

"I think it could be because petrochemicals demand-growth in the four biggest emerging economies in Asia - China, India, Indonesia and Vietnam - is much-higher than many of us had expected," said a former doom-merchant.

"I think we need to go back and re-examine our assumptions and re-crunch our data. Maybe, for example, we are no longer looking at growth multiples of 1.2 times GDP (gross domestic product); perhaps they should be more like 1.5 times."

The other big factor we've well-documented on this blog is delays in project start-ups.

These look set to continue because of a myriad of issues including manpower, technologies and the use of inferior equipment when building costs were at their peak.

The iron operating-rate discipline of Western producers also looks likely to persist.

Highly-nervous shareholders will accept nothing less and for private equity companies such as LyondellBasell and Ineos, cash-flow remains King.

My London-based colleague Nigel Davis, editor of the Insight section of ICIS news, reports that inventory management in Europe remains exceptionally rigid down all the value chains.

"European crackers are running at an average operating rate of around 80%", added a source with a North American PE producer.

So if the euro crisis does escalate, resulting in damage to strong Asian economic fundamentals and the moderate improvement in the US, production is likely to be cut even further. This might be enough to bring markets back into balance, provided this new economic crisis isn't worse than the last one.

And if the oil price was to fall to the low $60s/bbl and stay there, a further output cut by OPEC is likely to happen in attempt to get the crude price back up to the target range of $70-80/bbl.

This would mean even less associated gas for Saudi Arabia's crackers. They are already operating at below 100% because of feedstock supply reductions resulting from the current OPEC production quotas. 

A further factor behind strong margins has been the steep drop in ethane-gas prices in the US thanks to the rise in overall gas supply.

We all knew that butadiene, and C4s in general, would become tight because most of the new cracking capacity is gas-based. What nobody had predicted was the big switch to lighter feeds in the US by existing cracker operators.

So anybody operating a liquids cracker with butadiene extraction is enjoying excellent returns.

As we said, it is still very possible that we will get through this current crisis intact with margins remaining very strong.

And with so little new capacity planned for post-2011, what are the odds against another fly-up sooner than is expected by the pessimists?

By Malini Hariharan

A few weeks back the blog had reported that Total was interested in producing more petrochemicals downstream of its refinery joint venture with Saudi Aramco at Al Jubail in Saudi Arabia.

And yesterday, Michel Govaerts, general manager of business development for Middle East and Asia at Total Petrochemicals, confirmed that the company was in talks with Aramco to build a multi-feed cracker capable of producing 1.5m tonnes/year of ethylene and 500,000 tonnes/year of propylene.

Govaerts said the partners began talks more than a year ago about building a cracker that could use byproducts from the joint refinery. He also said that financing for the project is being finalised.

However, he did not give a timeline for the project or derivatives that are being planned. But with construction tenders yet to be issued the project is unlikely to come up before 2014.

And in any case the 400,000 bbls/day refinery, executed by Saudi Aramco Total Refining and Petrochemical Co (Satorp), is due for completion in 2013.

This is the second Aramco joint-venture cracker that is being planned at Jubail. It follows the Aramco-Dow Chemical cracker project which is likely to be moved from Ras Tanura to Jubail.

Total's proposed cracker confirms the growing trend in the Middle East to link petrochemical projects to refineries on diminishing availability of gas feedstocks.

But it looks like there will be competition for refinery feeds as well as Dow and Aramco were said to be looking at getting some products from the Satorp refinery.

Never look on the bright side of life...

Source of picture: thescratchingshed.com

By John Richardson - fresh back from a long break in Europe (more on this later).

"If you keep predicting a catastrophe, John, you will eventually be proved right," a senior executive from a major Asian petrochemicals producer told me in mid-2007.

At that time it seemed as if the industry would be undone by a huge increase in supply which would be way in excess of demand.

This correspondent got the timing of a downturn roughly right - sometime in H2 2008 - but was completely wrong about the cause. As we all know it was the collapse of Lehman Bros and the subsequent global economic crisis.

But I didn't see the 2009 recovery coming and keep being amazed by the resilience of growth in Asia.

I come from a part of the world - the county of Yorkshire in the UK - where people have a reputation for being gloomy, stubborn, cussed and taciturn. This is probably to do with the awful weather and food (with the exception of outstanding Indian food), and so perhaps it's not surprising that I have often taken the negative view.

In contrast, the senior executive quoted above has always been optimistic and to date his projections for stellar petrochemicals demand growth in Asia have been proved correct.

He was originally a salesman, as were or are many of my other contacts who share similar sunny dispositions, and so their persistent optimism is hardly surprising; have you ever met a miserable, nay-saying sales executive who was also successful?

The perhaps laboured point I am trying to make here is that how you view the world is crucial in interpreting the myriad, complex signals that can point to either a rosy view of the economic future - or one that would make a Yorkshire man who enjoys wallowing in misery truly happy.

And let's take this a step further: If the dominant view is optimistic right now, when there are as many reasons to be positive as negative, perhaps we will get out of this current euro-inspired crisis unscathed.

But if the overriding opinion becomes the opposite, this will amplify the flight from risk and the short-selling in oil, stock and other markets to create a self-fulfilling prophesy of economic implosion.

I am hardly in a position to give advice on positive thinking, given my background. I will leave this to my ever-sunny American friends.

What I can suggest, though, is that you MUST NOT under any circumstances visit Yorkshire - other than to watch the greatest soccer team on earth, Leeds Utd.

Petronas seeks to scale new heights

Source of picture: www.mir.com

By John Richardson

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

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

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

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

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

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

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

By John Richardson

Bayer Material Science (BMS) has announced plans for a new polycarbonate ((PC) plant in Asia in another sign of confidence that the chemicals industry, despite major macro-economic threats, is continuing to benefit from the continent's soaring growth.

BMS will make a decision on whether to build a new polycarbonate plant either in Thailand or China by the end of this year, said the company's CEO, Patrick Thomas

Start-up would be in 2013-14 and the capacity would be 200-300,000 tonne/year, said Thomas, who was speaking at the official opening of the German major's functional films research centre in Singapore.

                                                      Patrick Thomas

                                       Source of picture: Bayer Material Science

"Our global PC capacity is now fully occupied. We have brought back on-stream 120,000 tonne/year of capacity which we idled 12 months ago during the economic crisis," he added.

"Asia dominates the market and accounts for around 65% of worldwide demand compared with 50% before the crisis."

He confessed that BMS had been surprised by the resilience of the optical data storage market for PC.

"We had expected a collapse, but what we have instead seen is strong growth in emerging markets such as Latin America, the Middle and India for back-catalogue films on CDs."

He added that PC demand was also benefiting from a boom in electronics, office equipment and flat-screened TV panels.

"In America, we have received a boost thanks to increased sales in office automation machine.

"Office machines, which combine functions such as photocopying, faxing and emailing into one unit, have replaced people since the economic crisis began.

"The casing for these units is made from acrylonitrile butadiene styrene (ABS)/PC composites.

"But replacing jobs with machines means that the unemployed will stay unemployed and, of course, that's a big problem for the US market."

Thomas said that despite Thailand's recent political problems, the country's sovereign risk was low.
.
He also believes that environmental problems that have halted investments at the country's Map Ta Phut petrochemicals complex will be resolved.

Europe and China: A two-tier market is hard to bear...

Source of picture: blog.pinkcakebox

By John Richardson

CHINA'S polyolefin pricing is likely to remain under downward pressure over the next few months as a result of a persistent inventory overhang, new supply and weak construction and auto markets, two traders and one producer have told the blog.

And as we reported earlier this month, falling US PE prices are raising concerns over very competitively-priced imports from the States.

The weakness in the Chinese market is in contrast to Europe, where tight supply is keeping prices firm and is attracting imports.

A further negative factor in China might be a stronger Yuan, which could encourage price-cutting by local suppliers, the producer said.

But so far this week the local currency has both weakened and strengthened against the US dollar following the weekend announceement that it would be allowed to trade in a wider daily band across the US dollar.

One argument is that the government's decision was designed to engineer more volatility in order to discourage currency speculation and not a stronger Yuan.

Reports that the Yuan will definitely strengthen therefore seem premature.

"The polyolefins inventory overhang is still the result of the surge in bookings from overseas in late November and early December," said the first of the two traders we spoke to, who is based in Guangzhou, Guangdong, China.

"We are also seeing the affects of new supply, in both China and the Middle East.

"A symptom of the downward pricing pressure has been the recent re-export of Iranian material.

"As was the case when the re-export market opened-up on the last occasion, we are not talking about big volumes and the size of the total trade has been exaggerated. However, the shipments are hurting sentiment."

The second trader, who is based in Hong Kong, concurred and added: "There is going to be no relief on stock levels from local construction and auto markets that have slowed down considerably.

"Construction is being affected by all the government measures to cool the property sector, whereas tighter credit conditions are hurting autos.

"Auto manufacturers are telling us that they also have high inventories as a result of vehicles manufactured earlier this year on the assumption that extremely strong growth levels would be maintained.

"I am hearing that tighter credit is reducing private purchases, with many of the entire 2010 fleet orders by government companies brought forward in to Q1 because they anticipated that credit would be reduced."

A source with a major Western producer agreed with both traders and added: "I am concerned that we might have seen the best of Chinese demand for imports for this year in the first half.

"China's new plants are running reasonably well and we are seeing stabilisation of production at some recently started-up Middle East facilities.

"The positive news, though, is that OPEC oil quotas continue to limit production at established Middle East plants and we are definitely going to see more delayed start-ups."

The weekend announcement over the Yuan led to sharp fluctuations in its value in both directions on Monday-Wednesday.

"It is early days yet, but if the Yuan was to show consistent greater strength this is likely to create a further negative for pricing," added the first trader.

"Greater local currency strength would give buyers more ability to buy overseas material - i.e. they would need fewer Yuan to buy dollar-priced imports.

"The priority right now at Sinopec is to maximise the off-take from newly-commissioned local plants.

"So watch out for active centralised downward-management of pricing, plus more aggressive discounting by individual producers, in order to gain market share.

"A forward indicator of this would be reliable reports of rising Sinopec inventories following a sustained period of Yuan strength."

A stronger Yuan would also weaken the competitiveness of local finished good exporters, such as the auto makers, thereby providing a further motive for Sinopec to manage polyolefin pricing to the benefit the local industry.

By John Richardson

THE steep decline in Asian ethylene margins - detailed in the chart below from the ICIS pricing weekly margin report - seems to be largely the result of the worrying state of China's polyethylene (PE) market, which we discussed yesterday.

"The Saudis have reduced their PE operating rates, resulting in an increase in the availability of merchant ethylene," an industry observer told the blog today.

A longer-term factor is the surplus from the Shell Chemicals complex in Singapore. Shell switched from being a net buyer to being a net seller of C2s earlier this year when its 800,000 tonne/year steam cracker was commissioned.

Ethylene margins in Northeast Asia (NEA) had recovered to $161/tonne on 25 June from $101/tonne on 18 June on cheaper naphtha, according to the ICIS report.

(Note that PE margins look far better - for example, NEA integrated high-density injection-grade PE margins were $262/tonne on 25 June, again according to ICIS, but still down on a first-quarter average of $357/tonne. But the crucial issue right now for PE is volumes due to the inventory overhang in China)

Despite the recovery in ethylene margins on 25 June, the NEA average for Q1 was $474/tonne with the downtrend ominously paralleling that which occurred in 2001.

"We saw a similar steep decline in that year, ahead of an extended period of poor returns on oversupply," said Larry Tan, Director, Data & Analytics (Asia) for ICIS pricing.

"The nameplate capacity due on-stream for the remainder of this year is in excess of likely global growth."

He, of course, accepted that - as we have seen repeatedly over the last 18 months - start-up delays and OPEC oil output restrictions that have reduced feedstock supply to existing Saudi Arabian plants - could change the picture.

Operating rate discipline in the West has also been ferocious.

But many senior industry sources at last month's APIC conference in Mumbai warned the blog that the bigger danger was the economy - which is proving to be the case.

A plethora of economic problems have combined over the last few days to suggest that we could be heading for a douple-dip global recession.

These include growing concerns over whether China is suffering a significant slowdown on government economic cool-down measures.

The Conference Board, the New York-based research organisation, yesterday downgraded its economic indicator for China on falling construction activity and export orders.

"The rising trend of the [index] has been moderating since the middle of last year, suggesting there is no strong basis for assuming accelerating growth," Bill Adams, resident economist for the Conference Board China Center in Beijing, said in a statement.

"The majority of [index] components have been increasing, but consumer expectations fell in April, and new export orders have been weakening for most of the previous six months."

Source of picture: irantrip1wordpress.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

Qatar Petroleum and ExxonMobil have delayed the start-up of their 1.6m tonne/year cracker and derivatives project in Qatar, my colleague Anna Jagger reported on ICIS news yesterday - quoting sources familiar with the project.

This confirms an earlier media report to this effect - and adds the extra details that start-up of the project could have slipped from 2015 to 2016 due to the possibility of Qatar Petroleum needing to search for a new partner.

Interestingly, Graham Hoar of Nexant is quoted in the ICIS news article as saying that the project's "gas (feedstock) is not as cheap as you might think and the economics are not as attractive as you might expect."

He doubts whether either Shell Chemicals or Total Petrochemicals - both rumoured in the earlier media report to be interested in the project - would rush to replace ExxonMobil due to the questionable economics.

The blog had been told last December by Ben van Beurden, executive vice-president of Shell Chemicals, that "ideally, we'd like to build two crackers and two OMEGA process plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane.

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

We gained the impression at that time that it was the lack of availability of gas rather than the price which was the problems.

The cost of gas might hinge on whether Qatar is keen, for national strategy reasons, to add more petrochemicals.

The recent cancellation of Qatar Petroleum/Hanwha Chemicals cracker project appears to fall into another category as around 70% of it feedstock was due to be naphtha.

Later on we discovered that about 1m tonne/year of by-product ethane is available from the Pearl gas-to-liquids (GTL) project, a joint-venture between Shell and Qatar Petroleum. This could, perhaps, help make the economics of another gas cracker in Qatar work better, given what seems  to be increased ethane gas costs from its huge North Field reserves.

Clearly, we need to do some more work on this story and will keep you informed.

Jurgen Hambrecht

Source of picture: www.wiwo.de/unternehmen-maerkte

By John Richardson

BASF'S Jurgen Hambrecht has made highly critical and extremely high-profile comments about China's business environment, according to the Financial Times.

The CEO of the German chemicals giant is quoted as saying over the weekend - during a four-day visit to China by German chancellor, Angela Merkel - that foreign companies were being forced to transfer business and technological know-how to their Chinese counterparts in exchange for market excess.

"That does not exactly correspond to our views of a partnership," Hambrecht apparently told Chinese premier Wen Jiabao.

Wen is quoted as responding by telling Hambrecht to calm down, while dismissing allegations that China's investment climate had worsened.

Assuming Hambrecht has not been misquoted, these seem extraordinarily strong statements to make by the head of one of the major direct and indirect investors in China.

Directly, BASF's stake in includes the BASF-YPC Nanjing petrochemicals complex and indirectly, it supplies lots of the chemicals to Germany's booming engineering companies. These companies, boosted by a weaker Euro, have helped Germany post a strong export-led recovery.

The expansion of the Nanjing complex, a joint venture with Sinopec, interestingly includes some of BASF's high-value technologies. The ten new chemicals plants, due for start-up in 2011 and beyond, include a 60,000 tonne/year super-absorbent polymer (SAP) plant, a 2-propylheptanol unit, a non-ionic surfactants unit and an amines complex.

As my fellow blogger Paul Hodges points out in a post on this same subject, Hambrecht's apparent comments follow those of General Electric CEO Jeff Immelt, who was reported to have told an audience at a private dinner two weeks ago: "I really worry about China. I am not sure that in the end they want any of us to win, or any of us to be successful."

The next Doha round isn't going to happen anytime soon and so a great deal depends on strong bi-lateral trade relationships between countries with, of course, China at the centre of many bi-lateral initiatives.

So why rock the boat with the world's most-important growth market unless frustration got the better of Hambrecht (again if we was quoted accurately)?

Or is there a sub-text to these comments that we are not aware of - i.e. a calculated exertion of pressure in an effort to achieve results?

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

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson and Malini Hariharan

CHINA'S polyethylene (PE) and polypropylene (PP) production surged in January-June this year as imports remained strong and demand growth declined, according to the Shanghai-based commodity information service, CBI.

Hopes being expressed that pricing might have bottomed-out therefore seem a tad premature - especially as Asian cracking operating rates are reported by ICIS pricing to still be at 90-100%.

The graph below shows the steep increase in polyolefin production as new Chinese capacity came on-stream.

Domestic production was up by 30% with total polyolefin imports rising by only 1%.

You can argue, though, that there should have actually been a substantial fall in January-June imports - given the much-stronger local production.

In addition, 2009 import levels reflected an exceptionally strong market: 2009 PE demand growth was 30.3% and PP 26%, said CBI.

These extraordinary increases were the result of a temporary boost given to demand by re-stocking, the decline in recycling and huge and unsustainable government economic stimulus.

It has been clear from January of this year that growth in bank lending in China would be reduced, with restrictions introduced since then that have successfully cooled-down the real-estate sector.

In January-June, apparent demand growth (domestic production plus imports) for polyolefins was 20%, according to CBI.

But the information service estimates that actual demand growth - when you remove stock building - was no higher than 10%.

Despite what are arguably very strong imports in the context of higher local production, overseas shipments have fallen for three consecutive months since they peaked in March - a clear indication of inventory indigestion.

Low-density PE (LDPE) imports fell to 91,000 tonnes in June from 116,000 tonne in May, according to the New York-based trade data and analysis magazine, International Trader Publications.

Linear-low density PE (LLDPE) shipments slipped to 151,000 tonnes from 162,000 tonnes.

High-density PE (HDPE) imports declined to 245,000 tonnes from 267,000 tonnes.

PP imports, however, rose slightly to 303,000 tonnes from 292,000 tonnes. This suggests that a long-term decline in propylene availability, which we discussed last week, could be helping to prop up the market slightly.

The question now is whether the overall Chinese market is about to recover.

Cautious optimism was evident this morning as a trader told the blog that he believed prices might have bottomed out. This was in line with what my colleagues at ICIS news were told late last week.

But he was unable to offer a clear view as to whether the inventory overhang - which as we've said is likely to be particularly acute in PE - has been consumed.

The trader was basing his optimism on a recovery in crude-oil pricing and a corresponding rebound in the Dalian Commodity Exchange LLDPE futures contract. Crude could easily decline again on the uncertain economic climate.

Operating rate cuts at Asian liquids cracker are still being discussed, which, in the end might be the only way to bring the market back into balance.

Permanent and substantial shutdowns of high-cost Asian capacity, talked about for so many years, might now have to take place.

Jurong Island

Source of picture: www.pcs.com.sg

By John Richardson

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

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

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

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

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

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

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

Source of picture: anirudhsethireport.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Singapore's Marina Bay Sands complex

Source of picture: Washington Pos

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Biomass is another option being evaluated.

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

CHINA'S domestic linear-low density polyethylene (LLDPE) prices have rebounded by as much as Yuan 1,000/tonne ($147.5./tonne) or 8% over the last two weeks, according to this ICIS news article from my colleague Rainy Ma.

As these graphs show (click below) there is now a significant gap between more expensive domestic material and cheaper imports.

ChinaLLDPEAug2010.ppt

This has led to a rise in imports as traders place the cheaper overseas material into storage in order re-sell in to the Dalian Commodity Exchange's LLDPE futures contract.

The price spike in the physical market has come at the same time as prices have also risen on Dalian, with the increases on the exchange apparently driven by higher crude.

An important question in these circumstances (This has happened before: A rise in the Dalian last November/December attracted a surge in imports) is to what degree the local physical market is being influenced by Dalian and vice-versa.

I suspect the physical market is being Dalian-driven because all the indications are of a poor H2 on weaker demand and increased supply.

Import prices for all grades of PE also edged-up last Friday, according to assessments by my colleagues at ICIS pricing. For example, high-density PE (HDPE) increased by $10/tonne to $1060-1110/tonne CFR China.

The justification for higher import prices was that domestic inventories had been depleted - and that the peak buying season was just around the corner. August is when China's manufacturing industry ramps-up to meet demand from the West for goods for Christmas.

But there is clearly a need to separate the imports that have gone into storage to speculate on the Dalian and those that have been delivered to converters to meet real demand - in order to get to the bottom of the real reason for higher import prices.

The hopes of a strong peak buying season seem a little forlorn, given slowing growth in the US and also in China.

In addition, the market is going to take considerably more time to absorb increase Chinese and Middle East production.

So while any price recovery has to be welcomed following a couple of months of declines, this rebound looks as it might well be driven by the traders after a quick buck from Dalian.

The exchange is therefore - as we've mentioned before - making the market more opaque.

"It used to be that we had two markets in Asia - China and the rest of Asia, but now we have three - Dalian, China and the rest of Asia, which is causing a lot of confusion," a source with a global polyolefin producer told the blog.

"What I am really worried about is the 100,000 tonnes of LLDPE that is in Dalian warehouses right now, which has to be delivered into the physical market when the September contract closes.

"If activity on the Dalian remains strong beyond the September contract then that's fine, but if not and people start bailing-out, there could be a lot of negative pressure from this 100,000 tonnes."

By Malini Hariharan

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

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

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

Pic source: Focus Taiwan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

Qatar Petroleum's (QP) ambition to extend its global reach has taken the company to Algeria.

QP is reported to have picked up a 10% stake in the Total-Sonatrach joint-venture petrochemicals project at Arzew, Algeria.

The entry of QP would result in a dilution of Total's stake in the project to 41% with the balance held by Sonatrach. But it would help Total meet a government regulation that requires the majority share in a joint venture to be held by an Algerian company.

A Total source had told ICIS news last year that the new law was one of the reasons for a delay in implementing the project, scheduled for completion in 2013.

The project involves a 1.2m tonnes/year cracker with downstream polyethylene (PE) and monoethylene glycol (MEG) units.

Technology license for the proposed 550,000 tonnes/year MEG unit was recently awarded to Scientific Design.

The ethane cracker would reportedly obtain ethane from two liquefied natural gas (LNG) plants.

The Algerian development comes after QP acquired a part of Shell Chemical's stake in Singapore's Petrochemical Corp of Singapore (PCS) and The Polyolefins Co (TPC) in November 2009.

That deal is expected to help QP expand its presence in the Far East with Singapore as a base. Additionally, the deal could help QP market liquefied petroleum gas (LPG) and liquefied natural gas (LNG) into Singapore

And QP also has a presence in China through a joint venture with Shell and PetroChina for a petrochemical project at Taizhou, Zhejiang.

Qatar Builds Its Future

Source of picture: The New York Times

By John Richardson

EXXONMOBIL and Qatar Petroleum have formally ended their agreement to build a $6bn petrochemical complex in Qatar, says a report by the Middle East Economic Digest.

This follows the earlier MEED report that discussions to break-up the JV had begun.

Several other international oil and petrochemicals companies have entered into talks with Qatar Petroleum - with more details expected to emerge when Ramadan ends in mid-September, this latest report continues.

An ICIS news article, quoting a consultant, had suggested - when the first MEED story broke - that the higher cost of gas meant that if ExxonMobil wasn't interested, then quite possibly nobody else would be.

But from recent discussions the blog has had with senior company officials, we feel this isn't the case.

Feedstock costs for petrochemicals have certainly increased in Qatar as a result of the need to bid the gas away from perhaps more important liquefied natural gas (LNG) projects.

But even though the price of ethane seems likely to have gone up in Qatar, this doesn't necessarily make the country a bad bet when measured against the economics elsewhere. Ethane would have to rise by a great deal to wipe out the big advantages of making basic derivative such as polyethylene (PE) and mono-ethylene glycol (MEG) in the Middle East.

And one gets the feeling - given the recently extended moratorium on new gas-based projects in Qatar - that the feedstock parcel for this particular project might be the last for a while.

Ethane in general is in tight supply in the Gulf Co-operation Council (GCC), making the number of future ethane crackers few and far between (i.e. future projects with a very high percentage of ethane as feedstock, with a top-up from less-advantaged propane and butane).

So, in other words, get in while you have the chance!

By Malini Hariharan

The first of China's major coal-based chemical projects has finally started trial operations.

ICIS news reports that methanol has been fed at Shenhua Baotou's 600,000 tonnes/year methanol-to-olefins (MTO) plant at Baotou, in inner Mongolia. The unit can produce 300,000 tonnes/year each of ethylene and propylene. But the downstream polyethylene (PE) and polypropylene (PP) units have to start and the company is said to have set a September target for achieving on-spec PE and PP production.

Pic Source: National Research Center for Coal and Energy

The Shenhua Baotou unit is said to be the first large-scale demonstration plant for the MTO technology that has been developed by the Dalian Institute of Chemistry and Physics.

There are two more projects that are likely to start later this year - Datang Power's 450,000 tonnes/year methanol-to-propylene (MTP) and PP project and Shenhua Ningxia's 500,000 tonnes/year MTP/PP project.

Successful operations at these plants is likely to trigger a fresh wave of coal-to-chemical projects.

Consultants AsiaChem expect 2010 to be a critical year for the development of China's coal-based chemicals industry.

The three MTO/MTP projects are likely to be finally completed and evaluation of coal-to-liquids (CTL) plants that started last year would be possible.

Additionally, a demonstration plant for the new coal to monoethylene glycol (MEG) technology is also likely to be completed this year. The plant, which is being built by Tongliao GEM Chemical, will produce 150,000 tonnes/year of MEG and also 100,000 tonnes/year of oxalic acid.

And Anhui Huaihua Group is cooperating with Shanghai Pujing Chemical Technology to build a 1000 tonnes/year syngas-to-MEG demonstration plant. The unit is likely to enter testing stage in September this year and preparation for a scaled-up plant is expected to be complete before the year end.

The consultancy estimates that China has nearly 20 other coal-based MEG projects at the preliminary planning stage.

Nexant Chemsystems estimates that plans for nearly 1.8m tonnes/year of MEG capacity have been announced with four projects, each of 200,000 tonnes/year, already under construction and schedule to start operations in Q3 2011.

The interest in MEG and the new production route makes sense as China imported around 5m tonnes last year and the government has a clearly stated objective of reducing the country's dependence on petrochemical imports.

Its early days yet especially as we don't know the cost competitiveness of the new coal-based technologies but they could well pose a threat to companies relying heavily on exports to the Chinese market

By John Richardson

EXXONMOBIL is insisting that its cracker and derivatives project with Qatar Petroleum is still on despite a media report to the contrary.

It certainly seems as if there are several suitors for this particular bride - perhaps the last major feedstock parcel available for petrochemicals in Qatar for some time.

The economics of this project don't seem to be the issue here, more whatever the truth is behind the politics.

We will endeavour to find out for you.

The major long-term shift in US refinery economics and C3s

Source of picture: blueplanetgreenliving.com

By John Richardson

CHINA will account for around one-third of global polypropylene (PP) consumption by the middle of this decade, up from the current 25%, as domestic demand continues to grow at more than 10% a year, said Mike Smith, consultant with DeWitt & Co.

This will be fed both by new capacities in China itself and the rapid rise in output from the Middle East.

New capacities will outpace demand growth for the next few years with global average operating rates below 90% up until 2014, Smith warned.

The Middle East is set to be able to produce 8-9m tonne/year of PP in 1-2 years' time (most of this will be associated with propylene), placing it "in the same ball-park as the US," added Smith, vice-president for propylene and derivatives.

The US and Europe are losing ground in PP export markets as a result of the new capacities, he said.

Exports helped support a rapid recovery in the US and European industries last year, with re-stocking in the US continuing to offer support, he added. Inventory rebuilding is being boosted by improved demand from the consumer electrical goods automobile sectors.

The US exported 600,000 tonnes of PP in 2009 - 8% of production - with European exports at 282,000 tonnes accounting for 3% of output, to China thanks to its unexpectedly rapid economic rebound.

North America has already seen PP capacity reduced by a net 700,000 tonne/year (closures in the US and start-ups in Mexico), said Smith. Europe has seen 1m tonne/year of closures since 2006 with 400,000 tonne/year of start-ups and a further 245,000 tonne/year earmarked for shutdown.

Europe is facing particular pressure from the Middle East in the key Turkey export market, but further announcements of capacity closures were possible in both regions, he warned.

And while there was good demand growth in Central and Eastern Europe (C&E) that was supporting the western European producers, Smith warned that capacity in C&E would also eventually rise.

The decline in the US and European polypropylene industries has occurred in parallel with dramatic changes in feedstock availability and economics.

The US has seen a 25% fall in C3 availability from steam crackers as a result of the drop in natural gas prices relative to crude and subsequent drop in ethane, which has widened the advantage of ethane over naphtha cracking.

Plus US refinery C3s availability has been reduced as a result of weaker gasoline demand and will continue to be constrained from greater use of biofuels and tougher fuel-efficiency standards, say industry sources.

There has been a lot of talk about the influence of Petrologistics' 544,000 tonne/year propylene facility on US supply. The propane dehydrogenation-based facility, which is located in Texas, is due to come on-stream in late August this year.

But Smith said that the plant will add only 3.5% to total US C3s supply.

US propylene export availability has been reduced to such an extent that the country was "no longer the flywheel provider of C3s to the rest of the world", said Smith.

European refinery propylene availability should improve as the economy picks up, but Smith warned that this could be offset by weaker gasoline exports to the US. Europe has seen its shipments to the States decline for reasons we've already highlighted.

Steam cracker operating rates in Europe could also come under downward pressure from ethylene derivative- imports from the Middle East, he added.

And the further bad news for PP producers in all regions is the supply surge.

Twelve million tonnes per year of capacity is due on-stream in 2009-11 in the Middle East and Asia, comprising 4.2m tonne/year in the Middle East, 5m tonne/year in NEA, mostly in China, and 2.8m tonne/year in Southeast Asia, he said.

The Risk Of Exhausted Optimism

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Source of picture: keplarllp.com

By John Richardson

It always seemed as if the Asian polyethylene (PE) price rebound was built on a house of cards.

The Chinese economy is slowing down, the country's domestic production has greatly increased and new capacity in the Middle East - though still plagued by start-up and operating problems - is now starting to arrive in much bigger volumes.

Hence the Asian PE report released by ICIS on 13 August, which revealed that, despite further moderate price rises, Asian producers were, at best, "cautiously optimistic".

This followed the previous week's bigger price surge on temporary production issues. 

These included ExxonMobil's outage at its 600,000 tonne/year PE plant in Singapore and the impact of the fire and shutdown at Formosa Petrochemical Corp's No 1 cracker at Mailiao, Taiwan, on ethylene and derivative markets. The cracker is not expected to be back on stream until late September or early October.

A collection of other temporary factors could play a big role in supporting ethylene and therefore PE markets over the next few months - or could swing the other way and make conditions a lot worse.

First, with ethylene, the spot market in Asia has, on paper, become a great deal longer because of a 150,000 tonne/year surplus at Shell Chemicals in Singapore. The Shell cracker, which came on stream in March, is structurally long on C2s.

Lengthy problems in stabilising production of new derivatives capacity from crackers in the Middle East could also lead to more merchant ethylene.

Reasons for the six to nine months it can take to stabilise operations include manpower shortages and the huge scale and complexity of what's being commissioned.
Iran is also structurally long, by as much as 40,000 tonnes/month.

A further difficulty is that plants can, of course, suffer outages. This was the case with the recent report of a big, high density PE (HDPE) facility in the Middle East, which was brought fully on stream last year.

The producer in question was forced to sell 30,000 tonnes/month of ethylene for three to four months - a big reason for the ethylene price declines before the Mailiao outage, an olefins trader said.

The perception is that this current wave of capacity from the Middle East is more susceptible to outages than the previous one, for reasons that are best not to go into in print.

Spot pricing in Asia helps set what consumers pay on contract for their ethylene (term or contract sales account for well over 90% of the region's total consumption), and there are only a handful of spot deals in this region each week. So an extra few cargoes can make a great deal of difference to ethylene pricing.

But feedstock shortages in Saudi Arabia have greatly reduced the country's merchant ethylene sales.

February was the last time ethylene was loaded from the Al-Jubail site in Saudi Arabia, and even then it was only 5,000 tonnes, according to Joe Duffy, petrochemicals consultant with DeWitt & Co.

"Historically, Al-Jubail has been exporting 20,000-40,000 tonnes/month. Essentially, 500,000 tonnes/year of exports have gone to zero," he added.

Iran's ethylene shipments can also dip very sharply when the power sector and the country's other users of natural gas leave petrochemicals short of feedstock.

Whether Iran can achieve the investment in gas infrastructure to solve this problem is a moot point, given the current issues surrounding sanctions.

Another negative - or positive, depending on which side of the fence you sit - is that increasing demand for long-haul cargoes is creating repositioning problems for ethylene vessels.

Lack of sufficient vessels is also expected to result in higher C2 freights until the end of next year, limiting arbitrage.

"Freight rates are on the rise and could go a lot higher. The Singapore-to-Taiwan rate was, for example, $100/tonne (€78/tonne) in June and has risen to $125/tonne in August," added the olefins trader.

The long-running butene-1 shortage continues to significantly restrict linear low density polyethylene (LLDPE) supply

A wider disparity in container freight rates is benefiting the European PE industry, while hurting Asia.

"We usually see around 30% of Middle East polyolefins moving to Europe with the rest to Asia, but a bigger gap in rates to Europe is resulting in a higher percentage heading this way," said a Singapore-based source with a global polyolefins producer.

"Because of the dramatic recovery in global trade, the gap between freight rates on the European routes to the Middle East compared with China has widened," he added.
"This is the result of China's dominance in low-end manufacturing, creating more fully occupied container space to and from the Middle East and China."

The outlook for European polyolefin demand remains uncertain, but supply has long been tight.

Limited PE and polypropylene (PP) supply was at first the result of deep operating rate cuts when the 2008 financial crisis began - and then also the rapid Chinese economic recovery, which enabled Europe to export significant volumes.

European polyolefin exports to China have since fallen due to displacement by new capacity from the Middle East and China.

But Europe remains tight because of continued operating-rate discipline and the high freight rates that are discouraging buyers from acquiring Middle East material, an industry observer said.

"European PE prices were recently as much as $400/tonne above those in Asia, but that was still not enough to attract Middle East shipments," he added.

The longer all these temporary factors continue the longer producers might be able to squeeze out decent returns.

But the problem remains that an awful lot of surplus capacity still needs to be absorbed by a stuttering global economy.

"We haven't seen the worst of things yet. More permanent shutdowns by higher-cost Japanese and other producers are clearly needed," said a second source with the same global polyolefins producer we referred to earlier on.

People have been saying this for years, though, and plant closures are easier said than done for a myriad of reasons.

The source made a good point, though, when he added: "Rate cuts and permanent closures might occur if price reductions are $50-100/tonne per month rather than the increases we have seen of late.

"Otherwise, we could be struggling with fundamentally long markets throughout next year, with a recovery only occurring in early 2012."

However, if you are higher cost, why not limp through until 2012, given that you might well have loads of money in the bank from the boom period?

The Indo-Pacific Humpback Dolphin

Source of picture: townsvilledolphins.org

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

Every dark cloud has a silver lining...

By John Richardson

GLOBAL polyolefins markets are being kept very tight be a collection of what might seem like only temporary factors.

But in the case of the butene-1 shortage, for example, (see below) this has been restricting linear-low density polyethylene (LLDPE) for more than a year.

And many of the other reasons for supply restrictions have been dragging on for a long time now, enabling Asian consumption to grow - thus making it easier to absorb new capacities.

This is all well and good provided there is no double-dip recession, of course.

Here's our list for the reasons for persistent tightness, resulting in unexpectedly strong margins for those able to operate:

1.) Reduced feedstock availability in the Middle East. This includes both ethane and also liquefied petroleum gas (LPG). LPG has been tight because of, among other factors, reduced refinery operating rates and increased demand from petrochemicals in the Middle East.

2.) Plants keep falling over in the Middle East and new plants are taking a long time to stabilise because of manpower, technical issues etc.

3) Logistics factors which include port congestion, repositioning problems with ethylene vessels (see the link to the first article above), lack of sufficient ethylene vessels and not enough container vessels. Shortage of enough shipping space is also placing a cap on operating rates because this prevents arbitrage (e.g. polyolefins to Europe from the Middle East).

4) Europe's inability to sell gasoline in big volumes to the States anymore. When the US was enjoying an economic boom, ethanol blending wasn't as big and fuel-efficiency regulations were more relaxed, Europe was able to export its gasoline surpluses to the States. But now that cannot happen, this is forcing operating rates at refineries down, thereby restricting the availability of feedstock to petrochemicals, according to my fellow blogger, Paul Hodges.

5) In the US, the drop in gasoline demand is restricting the availability of propylene; in Europe most of the propylene comes from steam crackers so the lack of naphtha is the problem here. Also, the increased demand for polypropylene) PP due to innovation is another factor behind propylene becoming more expensive than ethylene.

6) Lack of spending on maintenance is reportedly the cause of numerous outages in Europe. Lack of maintenance spending is also a problem for PP production in the US, we have been told

7) In Europe also, the product managers are maintaining margins rather than market share (unlike the state-run companies, such as Sinopec, and the South Koreans). This is further restricting production.

8) Lack of enough low-density PE (LDPE) capacity, with the plants that do exist being pushed so hard to meet demand that outages are occurring very frequently.

9) The butene-1 shortage limiting LLDPE production.

Downtown Riyadh

By John Richardson

As my fellow blogger Malini Hariharan wrote last week "the projects environment in the Middle East has irrevocably changed" and with it the rather glib and outdated assumption still being frequently made that building capacity in the region represents a licence to print money.

First of all, as Malini pointed out, further supplies of advantaged gas feedstock are no longer available with high sulphur content meaning that extra processing costs could push non-associated prices to $4/mmBTU and above.

And as we reported earlier on, the issues around associated gas supply include exactly when we can expect world oil demand to return to normal. Plus there is the more long-term concern about existing associated gas supply becoming drier as it matures.

One well-placed industry observer told the blog over the weekend about another problem: Diminished revenues as a result of the ownership structure of projects in Saudi Arabia.

"These days you get to own only one-third of a project with the rest of the equity split between SABIC or Saudi Aramco and the general Saudi public (every new project has to these days undergo an IPO on the local bourse).

"So as a foreign investor you end up stomaching a large proportion, if not all, of the construction costs with a much smaller percentage of the revenues. Before IPOs were stipulated, projects were split 50:50 between the state-owned companies and overseas investors.

"At one time it was, indeed, a licence to print money if you had very cheap ethane feedstock and built only monoethylene glycol (MEG) and commodity grade polyethylene (PE) downstream of your cracker.

"But it's been well-documented that governments across the region want diversification. The problem is that if you go for a wider range for derivatives, especially if these derivatives are based on liquids cracking, rates of return are dramatically lower.

"Building these kinds of derivative makes more sense closer to big consumption markets - i.e. in Asia.

"Governments might provide big incentives to lure foreign investors into 'value-added derivatives', but in Saudi Arabia's case how will this fit with wanting to maximise returns for investors in IPOs?

"Investment incentives are one thing, but operating margins are entirely another matter - not only for stock market investors but, of course, also the foreign companies." 

Source of picture: the truth about cars

By John Richardson

WHEN my fellow blogger Malini Hariharan once asked a particularly unhelpful individual who used to track polyethylene (PE) markets what was going on, his only response was "conditions are volatile".

And so as you kick-off this fine and sunny morning (at least it is here in Singapore), here is some further useful advice for you: Conditions are becoming even more volatile.

But unlike the individual referred to above, in a series of blog posts over the coming weeks we will endeavour to explain exactly why pricing markets have become even harder to predict. We believe that old tools of analysis need to be revised and old assumptions challenged.

We are going to start with liquefied petroleum gas (LPG) and how unexpected shortages have curtailed the length of the usual propane and butane "cracking season".

Every summer, when demand for LPG for heating in the northern hemisphere falls, cracker operators that have invested in the flexibility to change feeds often reduce naphtha consumption in favour of LPG. Cracker operators in Japan, South Korea and Singapore have, for example, invested in this flexibility.

But as these two recent graphs from the ICIS pricing Ethylene Margin Report show (click below to view), earlier this summer LPG cracking didn't make economic sense

LPGslide.ppt.

So we talked to oil, gas and refining consultants Purvin & Gertz and they gave us the following reasons why this happened:

1.) Refinery operating rates globally are constrained due to weak oil-product demand, despite the story the financial industry is spinning about booming demand
2.) Asian refineries were undergoing heavy maintenance programmes
3.) The economic crisis resulted in delays to liquefied natural gas (LNG) projects, thereby reducing the extra availability of propane and butane co or by-product that needs to be extracted from the LNG before it is shipped
4.) The well-documented OPEC oil quotas that have limited availability of associated ethane gas have also done the same for associated propane and butane
5.) Petrochemicals demand for LPG has increased due to the increased cracking of propane and butane resulting from ethane shortages, and the start-up of the three propane dehydrogenation (PDH) to polypropylene (PP) projects in Saudi Arabia. This is only a small part of the overall picture, BUT constrained LPG supply in Saudi Arabia - evidence of which came from a recent analysts report about Yansab - is one reason why it is over-simplistic to talk about new supply flooding the market without adding a few important qualifications

The LPG season has belatedly begun thanks to Asian refineries returning from turnarounds and LPG exports from a new gas-separation plant in Abu Dhabi, which is feeding the Borouge II cracker complex with ethane, add Purvin & Gertz.

But clearly there are some new variables for flexible-feed cracker operators that look as if they are here for the long-term and therefore need further study.

Tougher sanctions set to reduce Iranian exports

Source of picture: amix.dk/blog/post/19116

By John Richardson

I met a hedge-fund manager yesterday who wanted a straight answer as to why he felt that ethylene, propylene and polyolefin margins are holding-up relatively well, despite an apparent flood of new capacity.

"The margins, particularly for polyproplyene (PP), are much better than we had expected at this stage in the cycle," he said.

Interestingly, though, the ICIS Pricing Margin assessments for ethylene and polyethylene (PE) paint a different picture. We have calculated that from Q1 this year, spot cracker margins have declined by 66% in Asia, by 50% in the US - but by only 2% in Western Europe. Logistics and feedstock availablility have kept Western Europe very tight.

But even in Asia and the US, the general margins picture - although very useful in pointing towards overall direction - doesn't deal with contract prices as opposed to spot, of course.

And for specific smaller-volume grades where tightness is great, for example, low-density PE (LDPE) extrusion grade, the story seems to be very different. 

The hedge fund manager wanted simple answers in line with the history of the industry - that supply is repeatedly built way ahead of demand and that therefore, an inevitable across-the-board collapse in profitability must occur over the new few months. 

On paper, yes, if you look at the nameplate capacities that have been started-up so far this year - and those still due on-stream - and measure this against likely demand-growth rates, a collapse does seem inevitable. 

It is certainly true that Chinese production at new plants brought on-stream in H1 has quickly been stabilised, which is a significiant negative for supply and demand balances.

But I bored the hedge-fund manager, who I think wanted a good argument to short all petrochemical company shares, why supply constraints elsewhere might just mean that certain areas of the industry will get through this crisis without a collapse in margins to levels seen during previous downturns.

It will be about, I think, analysing companies based on their exposure to particular products. For example, anyone heavily into LDPE in general and linear-low density PE (LLDPE)  - for reasons we have already given on this blog many times before over the last year - might well ride out this crisis without major pain.

But PLEASE - there is a major caveat here: This all depends on no double-dip global economic recession. My good friend and fellow blogger Paul Hodges remains firmly of the view that there is a major risk of a double dip. His views are worth listening to and building into scenario plannning.

In a conversation with an industry observer today, the blog picked up some further perspectives on why history may not repeat itself on this occasion (and even if the margins collapse to previous levels, it seems likely that the explanation will be demand rather than supply-driven).

In his own words, this is what the industry observer told us:

"We need to re-examine our assumptions and maybe lower effective available capacity from Saudi Arabia and Iran.

"Propylene and C4s availability have passed tipping points and so there is a need for a very hard look at more on-purpose production."

By Malini Hariharan

Jurong Aromatics Corp (JAC), part of a rare breed of standalone aromatics projects, is finally seeing some progress.

At a time when most new aromatic projects are integrated with refinery operations, JAC plans to build a condensate splitter and an aromatics facility to produce 800,000 tonnes/year of paraxylene (PX), 450,000 tonnes/year of benzene and 200,000 tonnes/year of orthoxylene in Singapore.

Financing of the much-delayed $1.5bn project, first mooted in 2007 but held up by the 2008 financial crisis, is now likely to be completed by end-2010 with support coming from two South Korean government export agencies.

The Export-Import Bank of Korea is expected to provide a direct loan of $330 million and a 100 percent guarantee for a further $270 million. Another $600 million tranche will be fully guaranteed by Korea Trade Insurance Corp.

The project is now targeted for completion in 2014.

South Korean major SK Energy and Chinese polyester maker Jiangsu Sanfangxiang Group are the key promoters of JAC. The other major shareholders are Vijay Goradia and M Y Ling, founding members of the Continental Chemical Group, Swiss oil trader Glencore, Singapore's EDB Investments, and downstream petrochemical player Thai KK Industry Co Ltd.

JAC has already awarded a construction contract to SK Engineering & Construction Co.

It has also committed to take space at the Jurong Rock Caverns, the 1.48 million cubic metre underground oil storage facility that is due to launch the first two of five caverns in 2013.

The aromatics project, another example of Singapore's success in attracting investors, will be geared to meet Chinese demand. Offtake of the PX output is likely to be guaranteed by promoter Jiangsu Sanfangxiang which is building a 600,000 tonnes/year purified terephthalic acid (PTA) plant in Jiangsu, China.

The project is a rare combination of Korean, Chinese, Swiss, American and Thai investors coming together. Trust Singapore to provide fertile ground to make this happen.

By Malini Hariharan

More details have emerged on Petro Rabigh's second phase which conforms to Saudi Arabia's product diversification strategy.

The Kingdom is steadily expanding its presence in the aromatics chain and Petro Rabigh's plans include 800,000-850,000 tonnes/year of paraxylene (PX) and 200,000-400,000 tonnes/year of benzene.

The PX is likely to be consumed locally as Petro Rabigh plans to support a third party for construction of a 500,000 - 700,000 tonnes/year purified terephthalic acid (PTA) plant and a 200,000-400,000 tonnes/year polyethylene terphthalate (PET) unit.

Petro Rabigh has secured additional ethane allocation to enable it to debottleneck its cracker and add 300,000 tonnes/year of ethylene. But interestingly, the company has planned a 250,000-350,000 tonnes/year metathesis unit to produce sufficient propylene to meet the requirements of derivatives such as cumene and acrylic acid.

A feasibility study on the second phase is due to be completed in the third quarter of this year and if viability is confirmed the projects will start up in Q3 2014.

The report also highlighted that PetroRabigh has attracted 10 companies to invest in the Rabigh Plus Tech Park, a petrochemicals conversion zone that includes plastics processing. While the company might be happy with this number it only shows the difficulty that Saudi Arabia faces in attracting derivative investments as the Rabigh Park is designed for 50-60 petrochemical conversion industries.

Petro Rabigh

Source of picture: arabianoilandgas.com

By John Richardson

Petro Rabigh's attempt to move further down the value chain raises interesting questions over exactly how successful the Saudi joint venture will be in attracting the necessary investment.

As my fellow blogger Malini Hariharan wrote earlier this week, plans for the second phase of Petro Rabigh include paraxylene (PX) to be consumed locally in downstream purified terephthalic acid (PTA) and polyethylene terephthalate (PET) plants.

Other proposed investments include a methyl tertiary butyl ether(MTBE)/isobutylene facility.

Another project in Saudi Arabia was also originally scheduled to include an MTBE/isobutylene plant as part of an integrated C4s derivatives complex. However, the prospective investor in the complex withdrew when it calculated a rate of return of below 10%, the blog was recently told.

"A leading management consultancy recently conducted a study which showed that rates of return decline progressively the further you move downstream from the cracker in all of the Gulf Co-operation Council (GCC) countries," an industry source told us yesterday.

"It still makes a lot of sense to build basic polyethylene (PE) and mono-ethylene glycol (MEG) facilities in the region, if - and this is a big IF - you can get access to attractively-priced ethane," he added.

GCC governments might be able to lavish generous investment incentives on companies in order to encourage the kind of downstream petrochemicals investment (all the way down to the processor level) that helps to alleviate high levels of unemployment.

But as we've mentioned before investment incentives are one thing and efficiency of operations are entirely another. Investors face the choice of building in the GCC or in Asia - which is much-closer to final consumption markets where labour costs are also a lot lower.

By Malini Hariharan

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

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

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

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

Source: Petronas Chemicals

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

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

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

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

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

All our yesterdays... the ICI Runcorn site in its heyday

Source of picture: Chesterchronicle.co.uk

By John Richardson

Yesterday's blog post on Petronas illustrates once again how the state-owned giants, albeit in this case one that is about to undergo a partial IPO, are increasingly dominating the global petrochemicals industry.

The history of the European industry - with the now effectively defunct Imperial Chemical Industries (ICI) as a prime example - was one of government-directed and/or government-owned champions providing the basic raw materials - i.e. petrochemicals - for overall industrial development, says my fellow blogger, Paul Hodges.

But some of the old Western majors are increasingly being pressured by feedstock-advantaged or strategically-driven state-owned Middle East and Asia majors, such as Petronas, Sinopec, PetroChina and SABIC. By "strategically-driven", I mean that making a profit is not necessarily the major motive.

In theory, as we've written many times before on this blog, we should see more consolidation in Western Europe in particular (the situation on the ethylene derivatives side of the business in the US seems to have changed for the long-term because of the ethane-gas advantage. As my colleague Nigel Davis suggested in a recent ICIS news article, the US might even see capacity additions that would serve Latin American growth).

Thanks to a discussion with Paul yesterday, here are a few questions to ponder over your morning coffee:

*Can European countries afford to see too much capacity closed down if this jeopardises security of vital raw-material supplies to all those downstream industries so important to their economies?

*At what point should governments step-in (what constitutes too much capacity closure?) and save companies?

*Given that Western European companies are democracies, and, as a result, are often run by politicians with the attention span of hyper-active two-year-olds, is it realistic to expect coordinated and commonsense intervention?

Answers must be no more than 3,000 words, please, on lined paper and in legible handwriting, and NO chewing gum...

Source of picture: ICIS

By John Richardson

ICIS has just published its Top 100 listing for 2009, which, not surprisingly, reveals the nothing-short-of devastating impact of the global economic crisis on chemical company financial performances.

"Unprecedented operating and financial conditions helped drive annual sales for industry giants down more than 30%," writes my colleague Nigel Davis, in an ICIS news article yesterday about this year's Top 100.

The danger, as Nigel also points out, is that - to use a cliche from football or soccer - 2010 could be a game of two halves. Withdrawal of stimulus programmes in a new age of austerity has the potential to severely dent the remarkable rebound in chemicals demand that continued until at least June of this year.

My fellow blogger Paul Hodges has also written extensively about changing demographics and consumer behaviour (the result of the debt-fuelled pre-crisis spending binge) as major long-term threats to the chemicals industry. This includes a recent article in the Financial Times.

And in a series of blog posts over the next few weeks we will examine the Chinese government's ever-more difficult balancing act as it seeks to cool down overheated sections of the economy, while still stimulating domestic growth by a sufficient amount to replace lost exports to the West.

But that's the demand story. On the supply side, as we've written about before here, some polymer and chemicals markets remain remarkably tight because of the lingering impact of the Lehman Bros-triggered financial crisis beginning in September 2008.

For example, oil demand remains below pre-crisis levels - resulting in reduced associated gas supply to Middle East petrochemicals.

Lack of investment in maintenance in an effort to preserve cash might also be keeping petrochemical markets tight as plants seem to be breaking down with greater frequency.

Supply of certain petrochemicals is being constrained by factors relating both to the crisis and big shifts in consumption and production patterns over many years that have now gone beyond "tipping points" - most notably in the case of propylene.

And so if I were to be looking to pick winners and losers from the ICIS Top 100 for 2010 - which we will be publishing this time next year - I'd be looking closely at a company's product portfolio.

Key data to mine are what percentage sales a particular company derives from each of its products.

If I were looking for winners I would, for instance, be focusing on anybody with a heavy exposure to merchant sales of propylene and C4s.

Low-density polyethylene (LDPE) is an example of a polymer that's benefited both from a plethora of production problems (provided, of course, your plants are not down!) and resilient popularity that has confounded demand-growth forecasts. There has, as a result, been insufficient investment in new capacity.

A big challenge to LDPE's position in Asia is the increase in metallocene production in this region.

But metallocene-grade linear-low density polyethylene (LLDPE) is more expensive per tonne than LDPE. It goes further - allowing down-gauging - but you have to persuade converters very comfortable with LDPE to make the switch.

Major Middle East start-ups during 2010 will inevitably result in big increases in sales for producers such as SABIC.

But assessing just how big will require close monitoring of feedstock availability - and logistics - issues.

The region also seems likely to continue to suffer from more than its fair share of production problems.

This is the kind of depth of analysis we offer to our ICIS training customers during our training events and our Asian Markets Seminars.

We raise awareness of the key changes in the industry over the last two years (and keep regular and close track of how these changes are evolving) in order to help you plan for the future.

We don't claim to have all the answers, but we never assume that history will repeat itself in exactly the same fashion.

A-Jubail in Saudi Arabia

Source of picture: www.chemicals-technology.com

By John Richardson

SOME of the privately-owned Saudi Arabian petrochemical producers could well be forced to consolidate as a result of lack of feedstock for expansions, an industry source told the blog yesterday.

The private players in Saudi Arabia are listed on the local stock exchange, but the majority of ownership is in the hands of private individuals or companies as opposed to state-owned SABIC and Saudi Aramco.

"Mergers are on the cards, but don't ask me to guess on the time-scale. What is likely to hold things up is that some of these companies are controlled by very proud owners," said the source.

The dilemma faced by a number of the private players, which by definition are therefore small, is the Kingdom's well-documented shortage of further supplies of stranded or cheap natural-gas feedstock.

The commodity petrochemicals business is all about running faster to stand still - meaning a constant need to improve economies of scale to match similar efforts elsewhere as the volume of demand, particularly in Asia, grows ever-larger.

Absent the raw materials for new capacity and the logic is that companies could be compelled to merge, thereby gaining greater market muscle and synergies.

But cost savings would be fairly minimal, perhaps about 1-2% of the combined companies' overall expenditure, the source added.

"Even if, say, two companies are co-located at Al-Jubail they might still be a considerable distance apart, making it difficult to share utilities. You are therefore left with just a small saving on marketing, sales and distribution.

"Nevertheless, the pressure will be there to merge in order to better-compete with the big producers."

The good news for these small players was that they were likely to continue to generate strong earnings, he added.

"Polyolefin margins are a lot better than people had expected at this stage in the cycle - and there could be a supply shortage post-2011.

"And so these companies are unlikely to be short of cash - making overseas acquisitions another option.

"A third way would be to go downstream into the plastics processing industry. But I see the processing sector as growing very slowly in Saudi Arabia because of poor economics. This is the least attractive route to growth."

By Malini Hariharan

The much talked about revision in Saudi ethane prices may not take place in 2012. In a recent report on the Middle East petrochemical sector analysts from Nomura expected the current price of $0.75/mmbtu to continue until 2015.

They pointed out that there has been no official update from the Ministry of Petroleum over the last year.

"While changes can occur at short notice (for example, gasoline pricing in 2006), we believe the limited official update points to keeping the status quo for ethane pricing until 2015, with perhaps only minor changes to propane, naphtha and butane pricing," they said.

The analysts also confirm to the blog's view that the revision is unlikely to be significant as the Kingdom is still interested in promoting the petrochemical industry. Additionally, lenders to many of the new petrochemical projects would not welcome an abrupt price change that would adversely affect profitability.

The analysts also pointed out that several chemical projects in Saudi Arabia were being restructured as the industry was under pressure to justify to lenders that new projects met internal profitability hurdle rates at higher feedstock prices.

As for propane butane and naphtha pricing, Nomura expected the conversion factor to continue to rise modestly in line with the increases seen between 2002 and 2011.

"We assume that propane, butane and naphtha conversion continues to
gradually liberalise to approximately a 20-25% discount to international prices by 2020."

Another excuse for a Dylan picture - ref "Shelter From The Storm"

Source of picture: www.israbox.com

By John Richardson

WEST EUROPEAN polyolefin markets remain tight thanks to the lingering effects of lack of spending on maintenance, several market sources have told the blog.

"Companies were so short of cash from late 2008 that they began to delay maintenance work such as furnace re-tubing," said one source yesterday.

"You normally start to experience production problems 6-9 months after this happens and we have seen this recently with the high number of outages.

"This also happens in really tight markets where nobody wants to be the first one to shut down because everyone is making so much money. So in 2005 we saw a raft out outages."

Tightness in Europe is just one of the consequences of the Lehman Bros-triggered crisis that have created a "New Normal" for markets, to borrow a phrase from my fellow blogger Paul Hodges.

Confusion continues among some industry observers who are familiar with looking at average operating rates and concluding that low average rates indicate poor overall profitability.

Average H1 operating rates for ethylene in Europe were just 82%, but some crackers were running at more than 90% while others were operating at much-lower rates or were shut down, we understand.

This was the result of both technical problems and lack of naphtha from local refiners.

The ICIS pricing European cracker and PE margin reports have consistently shown (here's a report on the 17 September issue) that variable cost margins in Europe remain an awful lot better than many people had dared to expect this time last year.

The overall "New Normal" for markets, including all the other the factors behind tight supply that we've detailed before, is leading to the view that we might just be bumping along the bottom of the cycle right now.

This is slightly earlier than the Q4 low point than had been forecast earlier this year, and, as we said, margins are in a lot healthier shape than had been predicted in Asia and the US as well as Europe.

"It is our view that we might be at the bottom, or close to the bottom, of the cycle as most of the new capacity in this current wave is already on-stream," said a Hong Kong-based chemicals analyst today.

"But most companies are only being cautiously confident because of all the risks ahead - not least, of course, the economy. Only the South Koreans are being very bullish over the prospects for 2011."

This could all still end in tears.

By Malini Hariharan

Sabic's Saudi Kayan appears to be heading down the same road as other recent Saudi petrochemical projects.

After starting up a 1m tonnes/year cracker and a mono ethylene glycol (MEG) facility, a local media report states that commercial production is likely only in late 2011 and not mid-2011 as was widely expected in the market.

The report, which quotes a senior company official, did not give reasons for the late start of commercial production.

The blog had heard a few months back that the Saudi Kayan needed another couple of years to complete the entire project and that plans for a 2010 start were too ambitious but this news was dismissed after the company's announcement of a successful start of the cracker. It appears we were a little premature.

Source: Saudi Kayan

Saudi Kayan has been a troubled project right since its inception in 2003. First conceived by a private-sector company, it did not progress as there were difficulties in putting it together because of its size and the breadth of the product slate which ranged from polyethylene to ethylene oxide derivatives and polycarbonate (PC). This was of course necessary as the Saudi government was putting pressure on companies to add value to base petrochemicals.

The project was finally rescued by Sabic in 2006 and was initially targeted for completion in 2009 and then pushed back to 2010.

It has turned out to be an expensive project. The company said in July that it was 24% over budget after having spent about $9.4bn till the end of March. It has since then secured a loan of $1.2bn and is in talks to obtain the balance amount.

"To us this start up delay and financing issues clearly signifies deteriorating economics for mixed feed facilities in Saudi Arabia," pointed out Ahmed Hassan of Alembic Global in a recent report on the company.

He estimated that ethylene production costs for a mixed feed facility like Saudi Kayan were in the $450-500/tonne range, significantly higher than pure Saudi ethane facilities with production costs of $200/tonne.

"If I didn't care what happens to you...."

Source of picture: www.sydbarrett.com

By John Richardson

AS many as 25 new ethylene vessels could be in operation by 2013 as a result of what one shipping industry source told the blog was "irresponsible shipping brokers and consultants talking up the market".

He predicted that the end-result would be a steep fall in freight rates if anywhere close to this number of ships actually ends up in service.

The good news is that some of the vessels on order represent options that can be cancelled if the market starts to turn pear-shaped well before 2013.

Those who have taken out the options might alternatively demonstrate a little vision if the immediate outlook for rates remains firm. Pigs could also take flight - or is that a tad too cynical?

Right now, as we have reported  several times during the last few weeks, ethylene freight rates are high as a result of a shortage of ships and repositioning problems.

"The shortage is the result of some orders for vessels being cancelled at the height of the recent economic crisis," the source adds.

And he further helped explain the repositioning problem as being the result of a greater amount of tonnage being tied-up on long-haul journeys due to increased surpluses in the Middle East.

Numerous difficulties with starting-up new complexes in a coordinated fashion and last month's steep rise in exports from Iran - a consequence of the knock-on effect of diverting benzene into gasoline production - have added to Middle East volumes.

As a result, more ships are plying the Middle East-to-Asia and Middle East-to-Europe routes than was the case before. This is creating longer lead times to get ships back in place to work short-haul routes - for example, Southeast Asia to Northeast Asia.

So the brokers and consultants have been conducting road shows on the wonderful long-term returns that the ethylene freight market promises based on what are only short-term issues, says the source.

Eventually the new complexes in the Middle East will fully stabilise production by sorting out technical problems, reducing volumes from the region, he adds.

Restructuring at SABIC might also encourage greater internal use of ethylene (perhaps more of this later when we have asked more questions).

Feedstock shortages in Saudi Arabia resulting from the OPEC oil quotas are also likely to last for several more years, maintaining downward pressure on shipments out of the Al-Jubail site. We will discuss this in detail in another post later this week.

It also seems inevitable that project announcements will be made in Singapore sooner rather than later which will consume some, if not all, of Shell Chemicals' 150,000 tonne/year surplus. This might include a 200,000-300,000 tonne/year metallocene linear-low density PE (LLDPE) plant by Japan's Prime Polymer.

And the Ras Laffan Olefins Co cracker in Qatar, currently long by an estimated 100,000-150,000 tonne/year, is set to become balanced when a low density polyethylene (LDPE) project starts-up. The plant is due to be brought on-stream in Q1 2012, according to ICIS Plants & Projects.

And in a further post this week we will explore opinions on future ethylene trade from Iran as new sanctions are more rigorously applied. There is a significant risk of a sharp fall in exports.

But even if all of the sources we have spoken to on the merchant ethylene trade are wrong and volumes do not dip in a big way, our shipping industry sources makes the point that 25 ships would still be far too many.

It would represent around 125,000 tonnes of additional tonnage into a market, which, we think, totals very roughly 450,000 tonnes (sorry, but this is very rough: Our estimate is based on 90 ships in service at maybe an average of 5,000 tonnes each - please correct us if we are wrong).

So why is the ethylene shipping industry in this position?

"As I said, it is irresponsible brokers and consultants who have persuaded mainly fund managers with big resources to place orders for new ships," continues our source.

"The managers have been tempted not only by high freight rates but also the fall in the cost of building vessels because of the financial crisis - from $55-60m each to around $40m.

"The theory is that they order the vessels and re-sell them at a profit before delivery."

The money is a drop in the ocean (sorry for the horrible pun) for these managers of sometimes multi-billion dollar funds.

But the impact on the relatively tiny ethylene trade - and on any owners who buy these vessels - could be quite nasty.

"The petrochemical industry might have had a good year but owners across all the sectors - liquids, gases, dry bulk and containers - are struggling," he says.

Rates have only gone up 3-4% since the steep rises in bunker-fuel costs on higher oil and in labour costs on the shortage of qualified crew, he adds.

"Most owners are already defaulting on their original repayment terms. The banks have been willing to reschedule many of their loans because some repayments are better than none and, if they foreclose, they wouldn't get anything."

The arrival of these new ethylene ships runs the risk of making a bad situation even worse.

By John Richardson

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

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

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

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

                                            Chandra Asri

Source of picture: www.barito-pacific.com

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

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

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

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

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

Could further ownership changes be on the cards?

Watch this space.....

The goat has been got 

Source of picture: michaelscomments.wordpress.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

Nothing new there then.....

Here's the stereotype....

Source of picture: www.watblog.com

By John Richardson

WE talked last week about how emerging markets continue to astound when it comes to demand, meaning that we might have to take a long and hard look at the parameters used to measure growth.

Further support for this argument came from a visit the blog paid last Friday to Reliance Industries' Jamnagar refinery and petrochemicals complex in Gujarat, India. Many thanks to the good people at Reliance Industries Ltd (RIL) for arranging the trip at very short notice - particularly Kamal Nanavaty, president of the company's crackers and polymers sector, and his team.

Anyway, during the trip it was pointed out to me that the first 1m tonne/year of polypropylene (PP) capacity at Jamnagar - which was brought on-stream in 1999 and integrated with the first refinery - is produced via four reactors.

The additional 900,000 tonne/year of PP of nameplate capacity is produced via just two Unipol reactors. This facility, fed by the second refinery at the site, was started-up in 2008.

Never before had a single Unipol reactor been designed to produce 450,000 tonne/year. The design has been replicated at the Yansab petrochemicals complex in Saudi Arabia, which was commissioned earlier this year, the blog understands.

The reason for the scale of the reactors at the second Jamnagar PP plant is the rapid growth in the Indian market. Demand is of a much-bigger volume than most commentators had expected and so it made economic sense to build reactors on this scale to produce single grades for extended periods of time.

Opportunities abound for further game-changing growth. For example, the Indian industry is reported to be working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper-carriages to bedding made from non-woven PP.

Arguments being used include reducing what must be the enormous laundry bill incurred by state-owned Indian Railways. And as the non-woven PP sheets and pillowcase are disposed-of after one use, passengers would be guaranteed a clean bed.

Further - it makes it very economically viable to recycle PP-made bed clothes as there is only collection point: Where a train journey terminates.

An estimated six billion people travel by rail in India every year.

On a global basis, challenges still abound for the petrochemicals industry.

Perhaps the biggest current macro-economic threat at the moment is the eruption of an all-out currency war followed by waves of trade protectionism.

But for those on the ground with local knowledge of the changing characteristics of emerging markets, strong returns could continue.

Or has the blog abandoned its useful cynicism?

The brightest and the best, but will there be enough of them?

Source of picture: schoolsinnewdelhi.com

By John Richardson

EDUCATION, education and education are three of the biggest challenges facing developing countries over the next 10-20 years.

This will determine overall growth of economies. Without the right skill sets the rapid rates of growth we have seen over recent years might not be maintained, resulting in social and political pressures.

And at a petrochemical industry level, a shortage of engineers isn't just a developed-world phenomenon as the blog discovered when it talked to the Singapore Chemical Industry Council (SCIC) earlier this year.

In the Middle East, the challenge is to provide the right kind of education as it seeks to move downstream from oil, gas, refining and petrochemicals. Success is crucial in tackling high youth unemployment.

"The region is riding a wave of demographic changes - high birth rates, declining mortality rates and a young population," wrote HSBC in a recent report on Middle East petrochemicals.

"Government estimates place more than half of the Middle East's population under the age of 20, meaning that they will join the workforce over the next decade."

The problem is at its most acute in Saudi Arabia, where, according to HSBC "over half the population of 18.5m is under 20 years old and only 3m, or 16% of the population, are in the workforce.

"Around 2m Saudis are between the ages of 20 and 24, and in this age range only 0.5m are employed, including expats.

"Of the 1.8m Saudis between the ages of 15 and 19, few have jobs. All this suggests that around 1.7m jobs must be found in the next 10 years - more if women are to play a greater role in the workforce."

This helps to better-explain the drive to go downstream into manufacturing components of finished goods, and even the finished goods themselves, in the three plastic processing parks being developed in the region - two in Saudi Arabia and one in Abu Dhabi.

On a straight cost-competitiveness basis, it seems to make little to build manufacturing industries Gulf Co-operation Council (GCC) region. Arguments against include low domestic consumption due to low population levels, lack of sufficient local skill sets and therefore expensive labour.

You can perhaps make a stronger argument for Iran because of its much-higher population, notwithstanding the sanctions issue.

But demographic pressures in the GCC make it likely that manufacturing industry will be made to work, even if heavy subsidies are needed.

Local people will still have to be educated to the right levels to work in these industries, though, and so can the biggest of the GCC countries - Saudi Arabia - deal with this issue?

"My colleagues and I were joking a few years ago about Saudi Arabia having a car components business but no longer, as in around four years time we now think they will have one. One day they might even build their own autos," a petrochemicals industry source told the blog recently.

"It is a huge challenge for the Saudis, but I am convinced they will get there. A patronising view from the West is that they spend all their time sitting on proverbial camels staring into proverbial sunsets.

"But these are extremely bright senior people who have been to INSEAD, Harvard etc and are determined to put the education system right from the bottom-up.

"They are looking at the Singapore system and trying to copy it from the Kindergarten level upwards. I know of one Singaporean guy who is talking about franchising a whole series of Kindergartens in Saudi.

"And at the top end of the education system they are looking to partner top Western universities with their own universities - again following the example of Singapore."

India faces the risk that if it fails to reform its education system, growth could hit the buffers.

The top universities are excellent, but places at the Institutes of Technology and Institutes of Management are incredibly scarce, said this article from Amy Kazan in the Financial Times.

This same article - and one in The Economist - also argued that below the top universities, education was poor and in need of major reform.

India, like Saudi Arabia, has a highly youthful population. This will only be a competitive advantage over China - where the population is ageing - if the education problems can be solved.

"The (Indian) workforce may be young and growing, but 40% are illiterate and another 40% failed to complete school," wrote The Economist.

"The Boston Consulting Group sees a shortfall of 200,000 engineers, 400,000 other graduates and 150,000 vocationally trained workers in the coming years. Meanwhile, there are 62m surplus workers in agriculture, most of them barely skilled."

On our trip to India last week, Reliance Industries Ltd (RIL) expressed its concern over the domestic shortage of chemical engineers.

RIL has to battle hard to find enough of the brightest and the best to run its plants due to fierce competition from the tax-free Middle East.

Like everywhere else in the world, India also faces the problem that chemicals engineers are often lured into information technology or finance.

Chemical companies and industry associations in developing countries are going to have to continue to work hard and smart with governments in an effort to tackle these education challenges.

Over the coming weeks and months the blog will be talking to the industry about initiatives already taking place and those being planned.

Will enough be done? We certainly hope so and if we have any bright, or more likely otherwise, ideas of our own we will let you know.

By Malini Hariharan

Shenhua Ningxia has finally produced onspec propylene at its new 470,000 tonnes/year methanol-to-propylene (MTP) plant after starting trial operations last month.

This marks the successful start of China's first MTP project, which is also the world's largest. There is one more due by the end of the year -Datang Power's 450,000 tonnes/year MTP plant.

Pic source: CCPECO

Shenhua Ningxia plans to start trial operations at the downstream 500,000 tonnes/year polypropylene (PP) plant in the next two months with commercial operations scheduled for early 2011.

Meanwhile, the country's first methanol-to-olefins (MTO) plant operated by Shenhua Baotou has been taken offline and is likely to restart at the end of the month.

A company source said the shutdown of the whole complex, including utilities, was to prepare the site for the winter months. It would also allow the company to assess operating problems discovered since commissioning in xxx.

A second maintenance shutdown has also been planned for next April.

The Shenhua Baotou complex includes 1.8m tonnes/year methanol unit, 600,000 tonnes/year MTO facility and plants for 300,000 tonnes/year of polyethylene (PE) and 300,000 tonnes/year of polypropylene (PP),

There is a great deal of interest in China on developing coal-to-chemical projects. And as highlighted by the blog earlier, successful commissioning of the first few projects is likely to trigger a new construction wave.

By Malini Hariharan

Nearly two years after SABIC and ExxonMobil signed an agreement for a multi-billion dollar 50:50 joint-venture elastomers complex iin Saudi Arabia, the two majors have yet to take a final decision on the project.

At last year's GPCA forum in December, Mohamed Al-Mady, SABIC's CEO, had indicated that the two companies were waiting approval from their respective management boards while work was on with contractors for detailed engineering and cost estimation.

And there has not been much progress since then.

Pic source: www. tv.ae

Talking to reporters on Sunday after announcing the company's results for the third quarter, Al-Mady confirmed that a final decision has yet to be taken.

"We are moving to the detailed feasibility study ... we have not reached final decision ... (It is expected) some time early next year," he said.

The blog has already written about weak economics for derivative projects in the Middle East. Could this be a reason for the hesitation on part of the two majors to quickly implement this project?

Another downstream project being pursued independently by SABIC's fully owned affiliate Petrokemya is also moving slowly.

Following SABIC's acquisition of GE Plastics, Petrokemya had revealed in early 2008 plans for the Kingdom's first acrylonitrile butadiene styrene (ABS) plant with a capacity of 200,000 tonnes/year.

Al-Mady said on Sunday that the project has not been cancelled. But it appears that the capacity of the project is being reviewed.

Meanwhile, Ibn Rushd, another Sabic affiliate, is expected to finalise bids for expansion of capacities for purified terephthalic acid (PTA) and polyethylene terephthalate (PET).

Progress may be slow but with gas in short supply SABIC has no alternative but to persist in its efforts move downstream and this was confirmed by Al-Mady.

"We have to be realistic. The investment cycle takes time to find the gas ... SABIC is a global company we cannot wait for the gas to come we have to do business either in downstream, in innovation ... until the gas is available."

By John Richardson

In theory there should be an additional 20-30m tonne/year of liquefied petroleum gas (LPG) coming on-stream between 2008-2012, according to Petrochemical Corp of Singapore (PCS) - the Singapore Jurong Island-based cracker operator.

This could lead to 5-10m tonne/year more LPG being cracked if the pricing incentives are right, added PCS in a recent presentation.

But as the blog has discussed before, LPG has been much-tighter this year than anyone had expected as a result of the associated gas issue, delays to liquefied natural gas (LNG) projects and reduced refinery operating rates. A further factor has been the increased use of LPG for petrochemicals in Saudi Arabia.

As a result of the lingering impact of the above, it therefore seems questionable whether the PCS prediction that LPG markets will be long in 2011-12 will come true.

Firstly, as we've discussed on many occasions before on this blog - but it is worth re-emphasising because of its importance to global petrochemical balances - world oil demand is being forecast not to return to 2007 levels for a couple more years.

This will mean OPEC will have to manage this lower demand to attempt to prevent a price decline, resulting in Saudi Arabia's oil-production quota being maintained at a level that will limit its propane, butane and ethane production.

LNG projects have been postponed or even cancelled due to the economic crisis. And commissioning continues to be affected by the old chestnut also harming the start-up of on schedule of new petrochemicals facilities - the shortage of qualified engineers, said a Singapore-based oil and gas consultant.

"More than 30 LNG ships are standing idle at the moment out of a global fleet 370. This is an indication of project delays and weaker-than-expected demand," said an industry source.

Some 12m tonnes of LNG that should have been delivered to the US this year will instead to diverted to Asia because of the country's weak economy and the rise of shale gas, said Jason Feer, Vice President and General Manager Asia Pacific for the Argus Media Group, in a speech during last week's APPEC oil and gas conference in Singapore.

The shale gas boom, that has dramatically improved the economics of US petrochemicals producers, might in itself lead to more LPG availability.

But this is not part of the PCS estimate we gave above and outside the US, extra LPG volumes from LPG remain highly speculative as projects are at a very early stage.

Further - a global shale-gas boom could put paid to more LNG projects!

And then, of course, refinery operating rates remain under pressure due to factors including new capacity arriving just as the economic crisis occurred - and the peaking of US gasoline demand due to increased fuel efficiency and ethanol blending.

The jury is out over whether refinery margins have bottomed out with maybe only the complex, modern refiners set to prosper.

And then finally in this long list of reasons why we are not drowning in a flood of LPG, petrochemicals consumption has risen in Saudi due to more cracking of propane and butane and the start-up of several propane dehydrogenation (PDH)-to-polypropylene (PP) projects.

Saudi Aramco recently cut export allocations by 20% because of the associated gas problem and increased demand from petrochemicals, said an LPG trader.

BUT - according to the industry source we quoted above - two gas projects in the Middle East, due on-stream over the next few years, have 7-8m tonne/year of LPG of co or by-product LPG "that they don't know what to do with".

As PCS points out, in a world of more competitive gas-based cracker capacity and increased China petrochemicals import self-sufficiency, feedstock flexibility for the higher-cost Asian (ex-China) and European crackers will be essential to survival.

So making investments in the right separation facilities, in furnace adjustments and LPG storage could be worthwhile - especially as LPG yields a higher percentage of propylene than naphtha, and could therefore help solve a potential long-term C3s shortage.

But the key issue, as we have pointed above, is going to be timing!

Watch out for the charging bulls...

Source of picture: sbynewsblogspot.com

By John Richardson

A FEW senior industry executives told the blog as long as a year ago that a petrochemicals supercycle was on the way as a result of lack of new supply post-2011 and booming emerging markets demand growth.

The babble of optimism has built-up steadily over the past few months.

Because profitability has remained robust for such an unexpectedly long period, this seems to have undermined the credibility of those who have been predicting a disaster that has yet to happen.

So a new consensus seems to be forming - that we are indeed heading for a supercycle in a few years.

But the herd can be wrong, as the collapse in financial markets so amply demonstrated in September 2008. It could all still end in tears.

A new Morgan Stanley report adds big analytical weight, though, to those confident that we are heading the sunny uplands.

Here follows the executive summary from the report, which argues for:

An inflection point in the global plastics market, driven by China and India: After a recent period of slower growth and a decoupling from global GDP growth, we now expect the strongest period of ethylene demand growth in the past 20 years. We forecast that in the next five years, incremental annual consumption in China and India alone will equal the total current consumption in the US, until recently the world's largest ethylene consumer, and still responsible for 15% of the market.

Our global supply/demand model suggests ethylene utilization rates will tighten. We forecast strong demand growth, averaging 5.6% in 2009-14, and also expect the supply outlook to improve. The credit crunch has halted infrastructure investment by industry titans, and the Middle East appears to be exhausting feedstock quotas. Thus, global capacity should grow at just 2.3% in 2011-14. Utilization rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally.

Implications: In the US, with its advantaged natural gas-based feedstock, cash margins in the next cycle should be 2.4x the average of the past 20 years. Dow and LyondellBasell should be the main beneficiaries. Asian utilization rates are set to tighten the most from current low levels. In Asia/Middle East, we prefer companies with exposure to gas-based feedstocks such as PTT Chemicals and SABIC. Europe should remain structurally weak due to low demand, high feedstock costs, and proximity to potential Middle East imports.

By Malini Hariharan

With Indian polyester demand growing steadily at 10%/year Reliance Industries has renewed its focus on expansions along the chain.

Projects that were put on hold after the 2008 economic crisis have been revived and deadlines set.

The company's plans include two new worldscale purified terephthalic acid (PTA) plants and investments in paraxylene (PX), polyester and polyethylene terephthalate (PET).

"The first PTA plant of 1.1m tonnes/year at Dahej, Gujarat, is scheduled to start up in the first quarter of 2013, and the second one will start 6-12 months later," said a source close to the company.

Invista would supply technology for the first plant, which would have a single reactor, while Reliance was still evaluating technology options for the second plant, he added. This is a bit of a surprise as Reliance is known to fall back on tried and tested technologies. But the company would obviously like to see what else is on offer.

Part of the feedstock requirement for the PTA plants would be covered by Reliance's 1.7m tonne/year PX plant at Jamnagar. The rest would come from a new 1.3-1.5m tonne/year PX train, also at Jamnagar, which was scheduled to start operations in 2013, the source added.

The new PTA volumes would feed the company's downstream polyester investments at Silvassa, Gujarat, which included a 560,000 tonne/year PET plant and a 360,000 tonne/year partially oriented yarn (POY) unit.

Pic Source: Beautytwist.com

The POY project was already under implementation and should be completed in the next two years while the PET plant would be commissioned in the first quarter of 2013.

"Silvassa is a texturising hub and Reliance already has a unit there which will be integrated with the new POY unit," he said.

The projects reaffirm the optimism seen in the Indian polyester industry - a result of steady economic growth and the untapped potential of the large rural population.

The country is still a distant second to China in terms of numbers but polyester fibre and filament capacities have grown by 30% in the last four years to around 4.3m tonnes/year while demand is expected to hit 3m tonnes this year. India is already a large exporter, pushing out about 70,000 tonnes every month and this is expected to continue.

By John Richardson

THE Morgan Stanley Supercycle report, which we first blogged on last Friday, has created a big stir among the blog's contacts.

 Click herefor a copy of the report RI_PETROCHEM_BLUEPAPER2010.pdf   

As we said in this ICIS news article on both the Morgan Stanley report, and one from Merrill Lynch which is in a similar vein, the paradigm seems to be shifting away from a supply-driven collapse in margins.

Certain senior industry executives have been telling us for a long while - some claim for several years - (maybe we were not listening hard enough?) that any crisis would not be supply-driven.

But now the majority of people we talk to are climbing on board the same argument - along with the belief that emerging-market demand-growth will be more than good enough compensate for a new recession in the West.

But an industry analyst we talked to earlier this week holds a very different view.

"Think about it - the US consumes around 21m tonne/year of ethylene or ethylene equivalent a year, Europe 24m tonne/year and Japan 7m tonne/year and so you are talking about a total of around 52m tonnes from global consumption of approximately 120m tonnes," he said.

"So I don't think it is right to suggest - as Morgan Stanley does in its much talked-about report - that Chinese and Indian demand alone, never mind the rest of the emerging markets, can compensate for weakness in the West.

"The bank's own data shows a decline in Western consumption in 2000-2009.

"If the US and Europe fall back into recession, and with the energy conservation and environmental pressures growing ever-stronger, their ethylene equivalent consumption is going to decline even further."

This would place even more pressure on China and the other emerging nations to carry the load - but recent evidence suggested that the Chinese economy was slowing down, he added.

Operating-rate problems that have constrained production this year would eventually be resolved leading to oversupply, he said

But he admitted that the associated gas issue was the wild card in the pack. The lack of petrochemicals feedstock via oil wells is likely to constrain production at Saudi crackers for several more years until global oil demand returns to pre-crisis levels.

Research by Kunal Agrawal, Asia Energy Analyst at BNP Paribas in Singapore, supports the oversupply argument.

"In 2009-2011, we see more than 21m tonne/year (30% of 2010E installed capacity) of new ethylene capacity in the Middle East and Asia," he wrote in a recent report.

This will lead to surplus capacity of 11.1m tonnes in 2009-2011 and 12.1m tonnes in 2010-11, he warned.

Operating rates would, as a result, decline to 83% in 201011 compared with the average 96% over the past five years.

The BNP Paribas research - taking into account all the project delays - estimates that while 5.1m tonne/year of ethylene came on-stream in Asia and the Middle East last year, this will have risen to 8.8m tonne/year in 2010, and will climb to 8.5m tonne/year in 2011.

The good news is that if the optimists are wrong this should become apparent over the next few quarters - thereby postponing any rash of new projects.

The bad news is that 2011 budget expectations may have already been raised, leading to another ferocious round of cost-cutting in the petrochemicals industry as margins and share prices tank.

By John Richardson

A GREAT deal more polyolefins supply is expected to hit the Asian markets over the next few months resulting in what two chemicals analysts tell the blog will be depressed margins up until March next year.

After that the analysts - one in Singapore and the other in South Korea - predict that we will begin to climb towards the sunny uplands of the supercycle, justifying the already very-high share prices of petrochemical companies, especially those in South Korea.

By the way, the blog is in Seoul at the moment and we will be talking a great deal more about the South Korean industry over the next week or so.

Returning to the supply issue, we were told a couple of weeks ago that the giant 800,000 tonne/year Borouge polypropylene (PP) plant at Ruwais in Abu Dhabi had achieved commercial production. This was confirmed to ICIS news by a source close to the project late last week.

Source of picture: marketoracle.co.uk

Qatar Chemicals (Q-Chem) was reported to be in the process of starting up its 350,000 tonne/year high-density polyethylene (HDPE) plant at Mesaieed in Qatar two weeks ago - with a big new linear low-density (LLDPE) facility in Asia also said to have recently achieved commercial runs.

Bangkok Polyethylene has started test runs of its delayed 250,000 tonne/year HDPE facility at Mab Ta Phut in Thailand, again according to ICIS news

Several PE plants have come back from turnaround or are about to do so, including Titan Chemicals in Malaysia and SK Energy in South Korea.

But we have been here before, of course, many times over the last 18 months.

Who can really guarantee, given the plethora of technical problems that have plagued recent start-ups, that further problems will not be encountered?

As for demand, well, that depends on reliable economic forecasts and as a chief executive officer interviewed by the blog caustically remarked yesterday "the more economists are wrong the more their views are in demand - so it perhaps helps them that they keep getting it wrong."

By John Richardson

SOUTH Korea is set to raise its ethylene and propylene capacities by 700,000 tonne/year and 740,000 tonne/year by 2013, Seo Kyung Sun, executive director of the consulting business of Seoul-based Chemical Market Research Inc (CMRI) told the blog last week.

Downstream expansions in polyethylene (PE), polypropylene (PP) and ethylene vinyl acetate (EVA) are also due to take place.

This is further evidence of the optimism - driven by the supercycle theory - which is sweeping through the petrochemicals industry.

The blog visited Seoul last week and came across widespread support for the Morgan Stanley view that market conditions will tighten in 2012-14, leading to historically strong profitability.

Not so long ago South Korea was picked out by consultants as one of the countries which would have to further consolidate, rather than expand, in the face of a flood of new lower-cost Middle East capacity.

But that capacity has been drip-fed into markets, due to all the production and feedstock issues we have documented many times on this blog before, as demand growth has also exceeded all expectations.

South Korean companies - as we will detail later this week - are cash-rich thanks to excellent 2009 and 2010 financial results and soaring share prices, and so funding these expansions will be not be a problem.

Source of picture: noonablog.com

And we understand that in addition to the already-announced projects we are going to detail below, several more expansions - postponed as a result of the 2008 global economic crisis - are being re-evaluated.

We have also been told that one of the South Korean companies we met with last week is considering an investment in a cracker project in China with a Middle East partner that would supply imported liquefied petroleum gas (LPG) feedstock.

South Korea's current ethylene nameplate capacity stands at 7.6m tonne/year with Yeochun Naphtha Cracker Centre (YNCC) the country's biggest cracker player, added CMRI's Kyung Sun.

"YNCC, a joint venture between Daelim and Hanwha Chemicals, has expanded ethylene capacity by 50,000 tonne/year this year and will add a further 300,000 tonne/year in 2012. All the additional ethylene will be for export," she said.

Honam Petrochemical is scheduled to raise its ethylene capacity by 250,000 tonne/year in 2012 while also increasing high-density PE (HDPE) by 250,000 tonne/year, she continued.

And next year will see LG Chem expand ethylene by 100,000 tonne/year. No details were immediately available as to what these extra C2s would be use for.

The country's current propylene capacity is 5.7m tonne/year with expansions set to come via steam cracking (410,000 tonne/year) and fluid catalytic cracking (330,000 tonne/year), said Kyung Sun.

Honam will use its additional propylene output to add to 200,000 tonne/year of PP, she added.

SK Energy is set to increase its linear low-density PE (LLDPE) capacity by 20,000 tonne/year with Hanwha planning a 40,000 tonne/year EVA expansion.

Let us hope, as we've said before, that all this confidence doesn't end in tears.

Source of picture: tycoonreport.com

By John Richardson

This is a very dangerous time for petrochemicals producers as they attempt to separate real, sustainable demand from feedstock-cost related price rises and speculation.

A bubble - as we discussed yesterday - seems to have formed in purified terephthalic (PTA) and, according to ICIS news, in caprolactam.

The surge in cotton prices is a factor behind the price rallies in both these production.

You need to ask yourself: To what the extent is the rise in the price of cotton driven by fundamentals versus speculation on the cotton futures markets, and so what's the risk of a collapse?

PTA also has its own future market in China - the Zhejiang Commodity Exchange, where, as we have also reported, trading was suspended this Tuesday because prices rose beyond their daily limit.

And as we also blogged about earlier this week, another inventory-related crisis could hit the chemicals industry if oil prices retreat - along with other commodities and equities - if there is a sudden change in the overall macroeconomic mood.

A few extra servings of scepticism about what chemicals and polymers traders are saying about demand and supply are therefore necessary in order to prevent inventory overbuilding. And my, as we shall detail later on, there are some nonsense stories out there.

This is the fourth quarter when chemicals and polymer demand in Asia usually slows down, and yet price rises in the polyethylene (PE) market continue, as my colleagues on ICIS pricing have been reporting. Click here for a slide illustrating this point:

ChinaImportPEPrices12November.ppt

Last Friday's price increases seem to have been mainly driven by crude and what was happening on the all-important Dalian Commodity Exchange. This points to the very-strong likelihood that recent price rises have been mainly feedstock-cost and sentiment driven.

And yet, in conversations with traders this week the blog has heard a couple of curious stories to support the notion that the rallies are about real supply and demand.

For instance, one Hong Kong-based trader told of us of further production cutbacks in the Middle East as a result of more reductions in feedstock supply to crackers that are dependent on associated gas.

He justified this by claiming that OPEC has further reduced Saudi Arabia's oil quota on weaker global crude demand.

But as we will post next week, the reverse is likely to soon be the case as global oil demand is on the up (there is still a strong argument, though, that the more-bullish forecasts on crude demand do not entirely justify the recent spikes in crude. These appear to have been mainly driven by QE2 and, as a result, what's happening with the US dollar).

The same trader cited further outages in the Middle East, whereas other sources tell us of no major new production problems - and of output being ramped-up at the recently commissioned Borouge complex in Abu Dhabi. There is also more output from Thailand following the recent start-up of linear-low density PE (LLDPE) plant.

(Also watch out next week for a post on how financial analysts may have got ahead of themselves in predicting market-tightening from next year. There is a strong argument to be made that as rising production in the Middle East will make 2011 a more difficult year as extra output is absorbed).

Now let us look about what is being said about demand in the fourth quarter in China.

As my colleague Nigel Davis wrote earlier this week in an ICIS news Insight article, linear LLDPE and low-density PE (LDPE) are benefiting from this being an agricultural film-buying season.

I was highly amused a couple of weeks when a trader told me of how exceptionally cold weather in China had already added a further boost to agricultural film demand as farmers sought to better-protect their crops.

At that time, though, it was the expectation of very cold weather that had driven-up all sorts of commodity prices, including steel - indicating yet again the speculative influences on PE.

Since that time there have been a few days of very cold weather, but now forecasters are expecting milder-than-expected conditions across the south and east of the country. This has led to a slight retreat in oil futures pricing.

The key thing to remember here - as we said before - is that this the fourth quarter when demand traditionally slows down in Asia.

In China we are also well-beyond the peak manufacturing season for finished goods for Christmas.

There are claims out there that PE end-users in China are already ramping-up production of packaging material ahead of next year's Chinese New Year (CNY).

But as CNY 2011 doesn't fall until 3 February this seems exceptionally early to the blog - and any increase in packaging-related demand will not be enough to compensate for the end of the manufacturing season.

Further, it will be interesting to see if overall industrial production in China dips in Q4 as the government continues to strive to meet its 2011 emissions targets.

There are reports that electricity-supply reductions that have already taken place - aimed at achieving the emissions target - have led to a shortage in diesel fuel due to industrial users switching to diesel-powered generators.

This could exert further margin pressure on converters who might be already struggling to cope with higher resin prices.

A question the blog will attempt to explore is to what extent the converters have been able to pass-on these recent resin price increases. This might give us a firmer indication about the real state of demand.

By Malini Hariharan

India's Reliance Industries is evaluating investments in a number of chemicals including olefins and derivatives, acetyls, elastomers and fibre intermediates to increase its petrochemicals production from crude, a senior company executive has told the blog.

"We would like to maximise petrochemical production from our refineries, swing product slate from fuel to petrochemicals and eliminate low value products such as petcoke and fuel oil," said Partha Maitra, president of petroleum business at Reliance at the Indian Petrochem-2010 conference in Mumbai.

Maitra said the new petrochemical investments would result in deeper integration with refinery operations and reduce fuel exports from Jamnagar on the west coast of India - where the company operates two huge refineries with a combined capacity of 1.23m bbl/day - by about 8%.

Currently about 12% of crude is converted to petrochemicals and this percentage would increase to 21.3%, he added.

Reliance was studying opportunities along the entire carbon chain, he said.

This includes an acetyl complex of 790,000 tonnes/year of acetic acid and 150,000 tonnes/year of acetic anhydride based on carbon monoxide from syngas via petcoke gasification.

Acetic acid derivatives such as vinyl acetate monomer (VAM), vinly acetate ethylene (VAE), polyvinyl alcohol (PVA), ethyl vinyl acetate (EVA) and acetate esters are being studied.

"We are still deciding which derivative [to produce]," added Maitra.

Also on the cards is Reliance's fifth cracker in India with a capacity of 1.365m tonnes/year based on refinery offgases.

The cracker will also yield 150,000 tonnes/year of propylene and 90,000 tonnes/year of C4s.

Derivatives being planned downstream of the cracker include 730,000 tonnes/year of monoethylene glycol (MEG), 500,000 tonnes/year of linear-low density polyethylene (LLDPE) and 400,000 tonnes/year of low-density polyethylene (LDPE).

In the aromatics business, the company is considering production of 1.5m tonnes/year paraxylene (PX) and 300,000 tonnes/year of benzene.

"This would be the largest single train PX facility in the world," said Maitra.

The PX will be used captively to feed two new purified terephthalic acid (PTA) units; the PTA will be used for new investments in polyester filament yarn (PFY and polyethylene terephthalate (PET).

As part of a new elastomers complex, Reliance has also identified investments in 100,000 tonnes/year of butyl rubber, 40,000 tonnes/year of poly butadiene rubber (BR) and 75,000 tonnes/year of styrene butadiene rubber (SBR).

Earlier this year, Reliance signed a joint-venture with Russia's Sibur for a butyl rubber plant at Jamnagar.

Also on the cards is a new linear alkyl benzene (LAB) plant with a capacity of 250,000 tonnes/year and a 800,000 tonnes/year carbon black unit.

"This would be the world's largest carbon black plant," he added.

Maitra did not disclose timelines for the various projects but we reported earlier this year that the cracker complex is due onstream in 2914.

Work has started on the PTA and polyester projects which are scheduled to be completed during 2013.

Perhaps not just yet....

By John Richardson

COULD it be that some chemicals industry players and observers, in the great galloping rush to join the supercycle stampede, have got ahead of themselves in predicting that we are already through the bottom of the margins trough?

This distinct possibility was raised by Joe Duffy, consultant with DeWitt & Co, in a discussion with the blog.

"I always get nervous when people talk about 'floods' and 'tsunamis' of new supply. What matters is not the absolute volume as much as whether or not it exceeds expectations," he told us.

"At the start of this year people were extremely pessimistic and maybe going into next year they are a little too optimistic," added Duffy, who is the petrochemical consultancy's vice-president for ethylene, polymers and derivatives for Europe and the Middle East.

"The market can turn the wrong way if supply exceeds expectations by as little as one tonne.

"I am a bit concerned that the growing supercycle consensus is confusing the short and the long-term.

"You can make a case that based on announced capacity that things will tighten a lot in 2014-2015 - and perhaps as early as 2013 if people buy ahead.

"But we at DeWitt still think that next year will be a year of absorption as the plants in the Middle East that are already on-stream run better."

The YanSab and Sharq complexes in Saudi Arabia have yet to maximise production and the recently commissioned giant Borouge complex in Abu Dhabi will take around 18 months to be fully stabilised, several industry sources have told us.

Production downstream of the new Ras Laffan Olefins Co facility in Abu Dhabi is nowhere close to being maximised.

Plus one would have thought the myriad technical problems confronting the PetroRabigh plant in Saudi Arabia will eventually be rectified.

Another factor pointing to further year of absorption is more bullish forecasts about global oil demand for 2011, including one issued by OPEC recently.

"We are assuming that oil demand will be slightly better next year and so there will be more associated gas available for the older, more established crackers," said Duffy.

He explained that older and newer complexes have seen their feedstock allocations reduced to only being sufficient to supply their original design capacities.

An excess of optimism might lead to some major disappointments next year as financial performances and earnings per share fail to live up to expectations.

This could be the case even if the bubbles in commodity prices, driven by too-much easy money, haven't inflicted long-lasting damage now that the air has started to escape.

By Malini Hariharan

The blog is hearing about fresh delays at ONGC Petro-Additions Ltd's (OPaL) cracker project at Dahej on the west coast of India.

Conceived a few years back, the dual-feed 1.1m cracker project, based on ethane separated from LNG and naphtha supplied by parent ONGC, has been jinxed from the start. There have been plenty of delays in issuing tenders and awarding contracts as well as a sharp rise in project cost.

The gas separation plant was completed in 2008 well ahead of the cracker.

The construction contract for the cracker was finally awarded to Linde and Samsung Engineering in December 2008 and technology for a swing linear-low density polyethylene (lldPE)/ high-density PE (hdPE) and a polypropylene plant was selected in February 2010.

Pic source: Samsung Engineering

Work on the cracker has started but construction contracts for downstream units have yet to be awarded. So the company now faces a situation where the cracker is likely to be completed at least six months ahead of the derivative units.

The company is holding on to a start-up date of Q1 2013 but sources associated with the project believe there is little chance of this deadline being met.

"There is a serious delay," said one source. A tender for the downstream units was issued recently but the earliest that this can be settled is Q2 2011, he said.

"We are approaching the Christmas holiday season; plus there are plenty of questions from potential contractions that need to be answered," he added.

He pointed out that the company has also not completed technology selection for an hdPE plant.

OPaL, which has been promoted by ONGC, Gail (India) and Gujarat State Petroleum Corp (GSPC), is one more in long list of Asian and Middle Eastern projects that are unlikely to meet start-up schedules.

And every delay increases the probability of the supercycle theory coming true.

By John Richardson

The huge and long-lasting impact of the economic crisis on the US chemicals industry is detailed in the excellent Year-End Situation and Outlook report from the American Chemistry Council (ACC), which was released late last week.

Light vehicle sales and housing starts will still be below 2006 levels in 2015 - the final year in the industry advocate group's forecast period.

The number of light vehicles sold in 2006 totalled 16.5m which fell to 10.4m in 2009, the lowest point of the crisis for light vehicles.

A recovery in sales to 15.9m in 2015 is forecast by the ACC.

Source of picture: Theodore's World

Housing starts were 1.81m in 2006, falling to a low point of 560,000 in 2009 and are forecast to gradually increase to 1.51m in 2015.

The housing market - which is crucial for the US chemicals industry as each new home contains around $15,000 worth of chemistry - bottomed-out this year, according to the ACC.

But with the US and global economic recoveries in such a fragile state, with house prices back to 2003 levels, and with an estimated "shadow inventory" of 5m homes waiting to be sold, further downward corrections cannot be ruled out. This shadow inventory represents homeowners on the sidelines waiting to see if and when the market improves.

A further worry is that mortgage defaults are mainly among sub-prime borrowers in 2008, but are now primarily among borrowers with safer loans, who, the ACC says, "have become delinquent due to a job loss or other economic setback".

The unemployment rate rose in the US last week, providing further evidence that this is a jobless recovery.

Employment losses in the US chemicals industry have totalled 180,000 over the last decide with 80,000 of these losses - 40% - occurring since the crisis began in 2007, adds the ACC.

But it is not all doom and gloom: US chemicals exports were up by 16.8% this year over 2009, resulting in a $50.1bn trade deficit switching to a $3.7bn surplus. Plastic resin exports were up by 15% (we will attempt to provide you with more details later on).

The rebound in global trade and the shale-gas story are the factors behind this reversal.

Further shale-gas technology improvements and movements up the learning curve might make US ethane-based ethylene production even more advantageous.

The Marcellus and other shale-gas fields, however, lack infrastructure to deliver natural-gas liquids (NGLs) to petrochemical producers.

Public concerns over groundwater pollution from fracking could result in "ill-conceived" legislation with excessive demand growth a further risk, says the ACC.

Before companies start detailed evaluation of petrochemical investments based on increased US natural-gas reserves, the ACC predicts that further capacity closures are on the cards. This will obviously be of older, higher-cost facilities.

Overall US industry operating rates were only 74.1% in 2010, it says.

(This suggests that the return to profitability enjoyed by producers is as much about carefully matching production to demand as well as feedstock costs)

Capacity utilisation is only expected to edge-up to 79.8% in 2015, pointing to the likelihood that the industry might still be a long way from expansions.

Could it be that by the time investments are being seriously studied, the gas advantage will have significantly eroded? Or might it have even disappeared altogether?

Before you say "nonsense" how many of you predicted the shale-gas revolution and its impact on US natural-gas prices?

By Malini Hariharan

After reading news reports about fresh protests against Kuokuang Petrochemical's proposed refinery and cracker complex in Taiwan the blog is wondering whether the company should be spending time and money in pursuing this ill-fated project.

Kuokuang, a joint venture between state-owned CPC Corp and several Taiwanese private companies, has been unable to secure the mandate of the local people since it was first mooted in the 1990s and has struggled to receive environmental clearance.

This time clashes broke out between hundreds of supporters and opponents at Changhua County, hours before a scheduled hearing on the project by the Ministry of Economic Affairs. The police was able to restore order but the hearing ended without any conclusion.

Pic source: The China Post

The company is now looking at scaling down the project which includes a 300,000 bbl/day refinery, a 2.4m tonnes/year cracker and more than 20 downstream units.

While the government is actively supporting the project, which is expected to generate revenue of NT460bn and generate 18,000 jobs, environmentalists are ramping up their protests as they firmly believe that the project would cause irreversible damage to marine life in Changhua County.

Getting local approval appears to be next to impossible and perhaps it is time for Kuokuang's partners to cut short their losses and focus on investments elsewhere in Asia.

Source of picture: alfin2100blogspot.com

By John Richardson

SINCE when has the truth mattered in the battle between environmentalists and the oil, gas and chemicals industries?

This is a game of perception on both sides as estimates of risk are heavily subject to data that is either biased in the way it is collected or how it is interpreted.

And so the environmental evidence being stacked-up to support further growth in US shale-gas production - crucial to the competitiveness of the country's petrochemicals industry - might not matter a jot of if a major pollution incident occurs.

According to energy industry-backed websites such as this - the "fracking" process has been practised without groundwater pollution in Texas for the past 60 years. The only pollution of drinking water that has occurred has been caused by the secondary recovery process, different from fracking, where water is injected into depleted oil and gas wells.

The energy industry also argues that the bulk of chemicals used in the fracking process in the giant Marcellus Shelf are very small in volume and of the type used in disinfectant, cosmetics and even pharmaceutical production.

Benzene, toluene, ethlybennzene, xylenes and naphthalene can also be used in fracking, but these much-more toxic chemicals are not as economic.

There is also environmental pressure, though, over the large amount of sometimes short-in-supply water used in the fracking processThe debate around shale gas seems sure to intensify now that reserves, production, and perhaps therefore the chance of an accident, are on the increase.

In its annual report released this month , the US Energy Information Authority (EIA) estimates that as of 1 January 2009, the US's technically recoverable shale-gas reserves had more than doubled compared with a year earlier.

Ethane production in the States is set to increase by 30% over the next two years to 850,000 bbl/day, according to industry estimates reported by our colleagues at ICIS news.

This implies that the feared lack of fractionation capacity will not hold the growth of ethane supply back, thanks to drill-to-earn provisions.

But, as we have said, the public mood towards shale gas could turn decidedly negative if there is an accident.

Attitudes towards the industry have recently improved, however, according to Sven Royall, Vice-President for Intermediates at Shell Chemicals.

"Four -to five months ago (after Deepwater Horizon) I would have said that the regulatory outlook looked a lot bleaker for shale gas, but it has since got better," Royall told the blog in a recent interview.

"Preventing groundwater pollution is about making sure that cementing and casing is right because the actual shale gas extraction takes place beneath aquifers."

His colleague Iain Lo, who is Shell Chemicals' Vice-President New Business Development and Ventures, said that he had no concerns about operating reliability when it came to the bigger, more experienced shale gas operators.

"There could be issues with the smaller players, however," he warned.

The other threat to projections of ever-improving economics for US ethane-based petrochemicals is an unexpected surge in natural-gas demand from other industries, such as power generation.

And as we have said before, talk of building a new ethane-based cracker in the US might well be premature given the state of the economy.

Current capacity would a first need to be maxed-out - although there could be further smaller opportunities to debottleneck and switch to lighter feedstocks.

Jim Galloghy, CEO of LyondellBasell, has said that it is too soon to talk about building a new cracker in the US. This is despite an initial economic assessment of doing so in the Appalachians.

But Royall interestingly added: "What you need is confidence about gas prices being at the right level for 25 years - the life of a project. This confidence is not quite there yet, but it is getting closer."

The other opportunity now emerging is the rising value of propylene versus ethylene as a result of the big switch to cracking ethane away from naphtha.

Dow Chemical CEO Andrew Liveris talks about pushing more propane into the US major's domestic feedstock mix in order to resolve the C3s shortage, in the same article we have just linked to immediately above.

The first option is to address the industry-wide propylene tightness would be to crack more propane in steam crackers,

Despite the technical difficulties that can beset the propane dehydrogenation-to-polypropylene (PP) proces - plus the need for guaranteed long-term low-cost propane supply - might we also see more of these units being proposed in the US?

By John Richardson

OVERCONFIDENCE is perhaps the biggest risk for 2011 as a result of sales volumes that have this year exceeded even the most wildly optimistic forecasts.

The danger is that we have yet to see the worst of this current petrochemicals cycle. Companies and chemicals analysts might have got a little ahead of themselves by predicting that a "Supercycle" will begin from as early as the second half of the coming year.

A strong argument can be made that by 2013-2014 lack of investment in sufficient new capacity could lead to record-high margins. This assumes that the world economy doesn't suffer a double-dip recession.

But cautious commentators are warning that a delayed supply-shock is still on the cards in the New Year, thanks to further start-ups and more stable operations at recently commissioned plants in the Middle East and Asia.

"At the end of 2009 the industry was, in hindsight, too pessimistic and this fed through into sales targets for 2010," said a UK-based industry observer.

"I get the feeling that forecasts for 2011 have gone too far the other way and that we are about to go through a period of absorption as operating rates at new plants increase.

"This is where human nature comes into the game. Product managers faced with targets that are too high could end up chasing market share through maximising output. This would make oversupply even worse."

Chemicals analysts at South Korea-based Woori Investments wrote in a November report that 2011 would see a decline in global utilisation rates.

"We believe that [global ethylene] supply will rise by 10m tonnes over the next year, topping our global demand-growth estimate of 5m tonnes over the same period," said the report.

This was based on commercial production starting at new facilities with a total capacity of 6.2m tonnes/year and higher operating rates at plants already on-stream.

Extra capacity absorption that still needs to take place includes Borouge's 800,000 tonne/year polypropylene (PP) and 180,000 tonne/year linear-low density (LLDPE) plants that started up in the third quarter.

"We are not seeing much material from these plants right now and so we are expecting the real impact to occur next year," said a Singapore-based polyolefins trader in early December.

The same can be said for Saudi Kayan Petrochemical's polyolefin capacities, which includes 400,000 tonne/year of high-density polyethylene (HDPE).

Although the SABIC subsidiary's Saudi-located complex has been on-stream since August, the big volumes seen in the market so far have only been of ethylene.

Source of picture: whrbsportsblogspot.com 

Plants in Thailand, delayed by a complicated environmental muddle, have recently been allowed to start-up. These include Siam Cement/Dow Chemical's 350,000 tonne/year LLDPE and PTT Chemical's 300,000 tonne/year HDPE facilities.

Recently commissioned complexes in China are expected to run a little more smoothly next year.

A further danger hanging over the market is an increase in OPEC crude-production quotas.

The oil cartel left its quotas unchanged after it met in Ecuador earlier this month, but if the cost of crude keeps on increasing the pressure for greater output will rise.

Saudi Arabia's current quota, around 8.5m bbl/day, has resulted in a reduction in associated gas supply to many of the country's crackers. Oil production needs to be at 10m bbl/day for the crackers to run at full rates, estimate several industry observers.

Ethylene exports from the Al-Jubail industrial city on Saudi Arabia's east coast have fallen to virtually zero in 2010 from several hundred thousand tonnes in 2009 because of the cut in associated gas.

Higher oil quotas could result in exports returning to 300,000 tonnes or more over a 12-month-period.

Either that or SABIC might successfully push for much-higher downstream operating rates now that the company, in theory, has more control over its subsidiaries thanks to a new corporate structure introduced earlier this year.

From a "value addition" point of view, exporting ethylene can be viewed as making less sense than shipping-out poyolefins or mono-ethylene glycol (MEG).

One would have thought that major technical issues at complexes such as PetroRabigh in Saudi Arabia will have to eventually be resolved. The Saudi Aramco/Sumitomo Chemical joint venture has suffered around five major polyolefin outages during 2010.

Further support to the market has been provided by what have reportedly been delays at the container port in Al-Jubail.

If customs-processing issues said to be behind the delays are resolved, this could mean a smoother flow of volumes into Asian and European markets.

A consensus is building that refinery margins have bottomed-out, meaning that some refiners might push production harder in 2011. This would help solve the butene-1 co-monomer shortage that has restricted LLDPE production.

The growth side of the story can also be viewed as little more negatively.

New plants in China have raised the country's polyolefins self-sufficiency and the country's GDP (gross domestic product) growth is forecast to fall to around 8% in 2011 from approximately 10% this year.

Lower growth in China is expected to be the result of efforts by the government to control inflation.

Inflation is a threat to growth in many major Asian chemicals-consumption markets including India, Indonesia and Thailand.

"The battle against inflation in Vietnam has been lost by the government," added the polyolefins trader we quoted earlier in this article.

"Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation."

The value of the dong (the local currency) has fallen by one-fifth over the US dollar since mid-2008 and last week, Moody's Investment Service downgraded Vietnam's sovereign debt.

All of the above might have sounded a little like the kind of comments that Ebenezer Scrooge would have made if he had been involved in the chemicals industry.

He is instead the lead character in the Charles Dickens' novel, A Christmas Carol.

But being told to cheer up and show a little more generosity of spirit at this festive time of year is hardly the basis of sound planning.

Source of picture: chemindustry.org.sg

By John Richardson

NEW plants could be built in Singapore downstream of Shell Chemicals plans for optimising high-purity ethylene oxide (EO) production in the city state, the blog was told recently by a senior Shell Chemicals executive.

We assume that the new facilities are likely to produce high-value ethoxylates and perhaps ethanolamines. This would fit-in with the Singapore Economic Development Board strategy of going further down the petrochemicals value-chain.

Shell Chemicals acquired complete ownership of Ethylene Glycols Singapore (EGS) in November through buying-out the 30% stake held by a Mitsubishi Chemical-led Japanese consortium.

Following the deal there were media reports that the company planned to both optimise high-purity EO production at the Jurong Island petrochemicals complex and expand EO capacity, including possibly building a new plant.

Our colleagues at ICIS news had reported back in May last year that Shell Chemicals was in the advanced stage of planning for a new high-purity EO plant in Singapore.

But Iain Lo, the company's Vice-President New Business Development and Ventures, told us: "I would rather use the term optimisation than expansion because it's all about looking at the best balance between EO and mono-ethylene glycol (MEG) production."

This balancing-out would involve both the older EGS plant and the Omega-process EO/MEG plant, which was brought on-stream in November last year, he added.

"Our high-purity EO could be consumed by new 'over-the-fence' customers in Singapore. This would fit with the Singapore government's objective of adding value downstream.

"It is a developing story and we expect some announcements in H2 next year."

By Malini Hariharan

After months of talks, PetroChina finally signed a framework agreement with Ineos for partnerships in refining, trading and petrochemicals at Grangemouth in Scotland and Lavera in France. The companies will be working towards the formation of these ventures by end-June 2011.

PetroChina's parent China National Petroleum Corp (CNPC) and Ineos also signed an agreement to share refining and petrochemical technology and expertise.

Pic Source: www.businessinsider.com

For Ineos, Europe's largest independent refiner the deal to partner with one of the world's largest refiner makes a great deal of sense.

It not only secures the future of the two sites but also gives the company an entry into China's lucrative petrochemicals market.

Ineos director Tom Crotty said the agreement to give Ineos the opportunity to lever its polyolefins, polyvinyl chloride (PVC), chlorine, possibly acrylonitirile (ACN) and other technologies into China.

But beyond sharing of technologies, what Ineos should be looking at is a cracker joint venture in China. This has been difficult task for most foreign companies except those that can offer oil. But the planned joint venture with PetroChina gives Ineos a good platform to pursue a cracker and deriviatives project.

Ineos currently has only one project in the country - a phenol and acetone joint venture with Sinopec at Nanjing.

Financially, Ineos will be pleased as a cash injection by PetroChina would help it in its deleveraging efforts. "We are not talking small numbers here," said Crotty in this interview.

As for PetroChina, a deal with Inoes is much more than gaining a foothold in Europe. It would help PetroChina hedge against uncertain product pricing policies in China where the government is working hard to tame inflation, says one analyst in this report. A second pointed out that with a share in a refinery in major trading areas, PetroChina would have a secure supply of oil products and storage capacity for its expanding trading operations.

After expanding in Asia (a stake in Singapore Refining Co and a joint venture with JX Nippon Oil in Japan) and Europe, speculation has mounted that the company will soon turn its attention to the US to achieve its ambition of becoming an integrated international energy company.

And PetroChina has deep pockets - its chairman has said that the company plans to spend $60bn in overseas acquisitions.

But it remains to be seen if the PetroChina can to make a smooth entry into the US as the last effort by a Chinese company (CNOOC's bid for Unocal) to acquire a refining asset was scuttled by political pressure.

By John Richardson

ONE of the many factors behind petrochemicals supply being less than expected during 2010 has been logistics problems in Saudi Arabia.

One trader we spoke to on the sidelines of last month's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai told us that one particular complex was struggling to accurately complete documentation necessary for letters of credit.

"This is down to a lack of experienced staff - a major issue throughout the region," he said.

The trader is now helping the company concerned to complete paperwork in the right way.

An industry observer said that it takes an average of 17 days to clear a container from Saudi Arabia. This compares with an Organisation of Economic Co-operation and Development (OECD) average of ten days.

The container port at Jeddah. Source of picture - Saudi government website.

"Part of the problem is constantly changing rules and regulations leading to confusion over paperwork and lack of system integration for clearance," he added.

Port delays have resulted in on-site storage running out, forcing operators to stack resin in the desert, he added.

Bringing on-stream all the new capacities in the Middle East was always going to be challenge - because of the number and the size of the plants.

But what nobody predicted was the extent of technical problems that have held back production, along with an equally unexpected shortage of feedstock.

Logistics is a further wild card thrown into the pack, making the task of assessing likely volume-flows from the Middle East in 2011 even harder.

By Malini Hariharan

Investment activity is picking up in Qatar. After Total, Shell and ExxonMobil confirmed their interest in new projects, Qatar Petrochemical Co (QAPCO) is talking on expanding its cracker.

The company is working on expanding its 720,000 tonne/year cracker to 900,000 tonnes/year by the first quarter of 2014, said QAPCO's board director and general manager, Mohammed Yousef al-Mulla in an interview with ICIS news recently. But it is not clear where the feedstock will come from.

Pic source: www.arabianoilandgas.com

As reported by the blog earlier, a feasibility study is also underway for an expansion of Ras Laffan Olefins' 1.3m tonne/year cracker to 1.45m-1.6m tonnes/year.

Mulla also disclosed that capacity of Qatofin's 450,000 tonne/year linear low density polyethylene (LLDPE) plant would be raised to 600,000 tonnes/year.

QAPCO is also on track to start commercial production at its new 300,000 tonne/year low density PE (LDPE) plant at Mesaieed by early 2012, raising the company's total LDPE capacity to 700,000 tonnes/year.

Meanwhile Egypt is turning to Sabic to kickstart its ambitious petrochemical programme. An Echem source told ICIS news that the that the two companies are studying a joint venture for an ethane cracker and a 400,000 tonne/year polyethylene (PE) plant in Alexandria, Egypt.

Echem hopes to start the new plants after three years - a very optimistic target as the joint venture has yet to be formed.

Patrick Thomas

Source of picture: Bayer Material Science

By John Richardson

SUCCESS in chemicals - whether you are into commodities or specialities - is largely about eking out maximum value from every single molecule in all the important markets.

The almost obsessive focus on China and other emerging markets might give the impression that "all the important markets" relegates the economically ailing West to the second or third division.

But any truly global chemicals company worth its salt needs to balance investment across each of the big consuming regions.

And so, after all the fanfare of last month's announcements by Bayer Material Science (BMS) of a further $1bn of capital spending in China, the company has also been keen to stress what it is doing in Germany and the US.

The chemicals major plans to invest a total of €3.5bn ($4.5bn) in these three countries over the next five years. This will involve commercialising a new technology, upgrading existing plants, building new production facilities and a lot more work on research and development (R&D).

"Our further expansion plans in Germany include growing our coatings facility in Leverkusen that produces aliphatic isocyanate, hexamethylene di-isocyanate (HDI) and isophorone di-isocyanate (IPDI) coatings," said the company's chief executive officer, Patrick Thomas, in an interview.

"This investment should be sanctioned by the board in the next 12 months and completed in two years."

Next he detailed an example of molecule-value stretching: plans to build a commercial-scale demonstration plant that will use the company's oxygen depolarised-cathode technology for producing chlorine. Start-up is scheduled for later in 2011 or the beginning of 2012.

This will involve the conversion of BMS's last remaining mercury cell chlor-alkali process unit in the world, which is located at Uerdingen in Germany, and result in big savings on electricity costs and reduced CO2 emissions.

In effect, hydrogen fuel cells are integrated in the chlorine cell as part of this new process, lowering electricity consumption (the main cost component in chlor-alkali production) by 50% compared with mercury or diaphragm cells.

Thirty per cent less electricity is required when facilities are converted from the membrane technologies.

The company will eventually convert all of its plants to this new breakthrough process, Thomas added.

And he said: "We have signed a memorandum of understanding (MOU) with China BlueStar (the mainly state-owned Chinese speciality chemicals giant).

"BlueStar, which is the technology supplier and builder of just about all the chlor-alkali units in China, plans to use our new technology across the country. The first step is to build a pilot unit in Caojing."

BMS will also invest in Baytown, which is near Houston, Texas, and the site of company's largest US production facility.

Polycarbonate, methyl di p-phenylene isocyanate (MDI) and toluene di-isocyanate (TDI) facilities will be upgraded at the site, involving debottlenecking and technical improvements to boost reliability.

Work will also be carried out on improving logistics, such as building a chlorine pipeline from feedstock supplier Oxyvinyl, which is 20km away. This will take chlorine transportation off roads and railways.

"These investments in both the US and Germany illustrate that they are still very important markets for us," said Thomas.

In volume terms, the US and Germany remain as big as China for BMS - even if they are eclipsed in terms of percentage growth-rates.

So, of course, because growth is booming in China, the big investments in new plants are taking place in that country.

Thomas provided a great deal more detail about what BMS wants to build at its big production site in Caojing, Shanghai, compared with what was reported last month.

"Our plan for MDI is to reach 1m tonne/year of capacity between now and 2016," he said
"This will involve a debottlenecking of our existing plant to 500,000 tonne/year from 350,000 tonne/year and building a new unit of 500,000 tonne/year."

The new polycarbonate plant being evaluated for Caojing will be an "economic copy paste" of the existing 200,000 tonne/year facility at the same site.

So it will initially also be 200,000 tonne/year and then the company wants to debottleneck both the old and new plants by 50,000 tonne/year to get to a total capacity at the site of 500,000 tonne/year.

"Capital equipment for the new plant has already been pre-ordered and our target is to bring the new plant on-stream in 2013. The debottleneckings will then take place 12-18 months after that."

Thomas stressed that the decision to move the BMS polycarbonate global headquarters to Shanghai from Germany would not mean any redundancies.

The company also wants to build a new coatings plant in Shanghai. Like the coatings investment in Germany, this new facility will produce solvent-free, water-based aliphatic coatings.

Capacity of this new plant would be 50,000 tonne/year with start-up scheduled for 2013-2014.

The existing 30,000 tonne/.year plant at Caojing is to also be debottlenecked.
"All our projects at Caojing have reached the Memorandum of Cooperation (MOC) phase," said Thomas.

"The MOC phase is a step along from an MOU and means that the local Shanghai authorities will now move on to studying our proposals.

BMS is to begin environmental impact assessments and feasibility studies as part of a local approvals process that involves about 20 different steps.

"Once these steps have been completed, some aspects of our overall plan for Shanghai will need to be submitted to the central government's National Development and Reform Commission (NDRC) for final approval.

"Other elements of the expansions can go ahead with only local government backing."
Further product development work in China includes building a large-scale PC automobile-glass demonstration hall in Shanghai.

R&D development work in the auto and appliances industries mainly occurs in China, as does manufacturing.

But the electronics industry is slightly different.

"The know-how is in the US, Japan, South Korea and Taiwan with the manufacturing - because of the low labour costs - in China," said Thomas.

This is why BMS opened a functional films research centre in Singapore in June last year as the city state is "an international hub for the development of technology, drawing on expertise for the whole region".

The functional films centre focuses on research into coated high-tech films and nanotechnology for electronics.

Stand still in this business and you end up being overtaken, and, quite probably, kicked off the running track altogether.

The opportunities are huge, but as the BMS announcements indicate, so are the difficulties in making sure you both keep pace with competitors in China while not losing focus on all the important markets.

By Malini Hariharan

There is finally some movement at Petronas. After last month's joint announcement with BASF on a study for a Euro1bn investment in speciality chemicals, news has emerged that the Malaysian major is also exploring the feasibility of a new petrochemical complex at Kerteh.

The complex would have a 1m tonnes/year ethane cracker and downstream polymer plants, reports ICIS news.

It would include a polyethylene (PE) plant and a polypropylene (PP) unit, said a source close to the company. A second source said the plants would have a capacity of at least 400,000 tonnes/year.

Petronas currently operates two crackers at Kerteh with a total capacity of 1m tonnes/year.

Pic source: Petronas

The sources did not disclose more details about the project and Petronas was also not available for an official comment.

But the information is interesting as Petronas had disclosed in the prospectus issued for its subsidiary Petronas Chemical that it was studying a petrochemical project downstream of a refinery in peninsular Malaysia.
http://www.icis.com/blogs/asian-chemical-connections/2010/09/a-sleeping-giant-awakens.html

But with gas said to be available on the east coast it makes sense to first examine the feasibility of an ethane cracker

Source of picture: Dallhouse University, Canada

By John Richardson

THE incredibly smart way in which polyolefin producers have managed production since the great collapse of September 2008 continues to defy what appear to remain some very uncertain, and some cases weak, macro-economic fundamentals.

As we discussed on Wednesday, China faces a significant demand-growth gap as its economy changes gear. Yesterday we talked about surging crude oil and inflation in Asia, Europe and the US as further big concerns for 2011.

But ever since the great Lehman Bros disaster there have been numerous other macro-economic threats - and constant predictions of new polyolefin supply wrecking the market - that have failed to make life a misery.

A big reason seems to be, as we said at the start of this post and as we've said before, the determination of producers to ration output and control their inventories.

Yes, emerging-market growth continues to surprise on the upside. But as Nigel Davis, editor of the Insight section at ICIS news points out, global production has yet to return to 2007 levels.

Right now the cost-push is intense as olefins, polyolefins and petrochemicals prices in general (we will look at some of the other product chains next week) surge to record levels.

US propylene contract prices rose by a whopping 28% in January with the ethylene contract up by 13% in December compared with October, according to William Lemos, Senior Editor, Manager, at ICIS pricing in Houston.

The European market continues to defy the pessimists. Polypropylene (PP) prices, for example, reached record levels earlier this week as producers were comfortably able to pass on the rise in propylene costs.

The blog began last year in a pessimistic mood, by May felt overwhelmed with the persistent optimism of the industry as it succumbed to a heavy bout of euphoria, felt a little more gloomy by December and now, quite frankly, hasn't got a clue.

Another of my colleagues, Linda Naylor, Senior Editor with ICIS pricing who covers the European polyolefin markets, has also spent a lot of time expecting everything to end in tears.

But she believes that her predictions have floundered largely thanks to production management.

One European PP buyer told her this week that there has always been a crash after a price rally on the lines of the one we are seeing right now.

He believes this time, though, that if volumes continue to be very skilfully controlled, a crash won't happen.

Asian prices have increased in line with those in Europe and the US, but in a sluggish, reluctant fashion due to widespread worries over weaker China growth.

There is talk of prices edging up a little further after the Chinese New Year (CNY) holidays, which fall in the first week of February.

Comments from a Southeast Asian-based sales executive with a leading North American polyolefin producer perfectly describe the nervousness in Asian markets we have been picking up over the past couple of weeks.

"The big question is how much more feedstock cost increases the end-users can take," he told us yesterday.

"They are remaining exceptionally reluctant to buy because they are worried about the direction of crude and the effect of inflation on demand.

"If you can manage to sell to an end-user margins are paper-thin at $20-30/tonne. You really need a minimum of $30/tonne to cover your storage and letters of credit costs.

"What we are seeing, therefore, is not much price movement.

"The Middle East is selling just below market prices and the South Koreans and Taiwanese are seeing their margins squeezed."

(Note - we have heard of one Southeast Asian cracker with poor integration which has cut back on high-density polyethylene production in order to sell more ethylene)

"We have seen in the past few days, though, a moderate increase in buying by traders as they take positions ready for after the CNY," continued the sales executive.

"I am not sure to what extent these purchases have been driven by current arbitrage on the Dalian Commodity Exchange, anticipation of higher oil prices versus estimates of an up-tick in real demand post-New Year.

"For the traders  it can be a no-lose game these days as even if physical prices start falling, they might have already made their money on the Dalian.

"Linear-low densitypolyethylene (LLDPE) domestic prices right are now equivalent to $1,320-1,330/tonne compared with the May contract on Dalian - which is at $1,380-1,400.

(Note - The May contract is seeing the biggest trading-volume at the moment, as is always the case with the contract which closes four to five months out)

"Import prices are, however, at the same level of Dalian so there is no arbitrage to use overseas shipments to back-up deals on the exchange," he added.

"LDPE is kind of stuck at $1,700/tonne and I don't see much room for movement upwards in the short term.

"The good news is that inventories are low across-the-broad. End-users are hand-to-mouth, as they have been since 2008, traders have only 3-4 weeks in stock and producers around a month.

"So far there is not much sign of anybody chasing higher oil prices."

There you have it. Any predictions gratefully accepted.

By Malini Hariharan

Regular readers of the blog will remember a November post that had highlighted delays at ONGC Petro-Additions Ltd's (OPaL) 1.1m tonnes/year cracker project at Dahej on the west coast of India.

This time there is some progress to report. OPaL has finally selected Chevron Philips Chemical to provide technology for a standalone 340,000 tonens/year high-density polyethylene (HDPE) plant. The engineering, procurement and construction (EPC) contract for this plant was awarded to South Korea's Daelim.

The other development is on the financial side with Gail (India) receiving board approval for a 19% stake in OPaL. However, Gail is said to be still negotiating for marketing rights from the project.

"The project is on track now," said a source close to OPaL.

Pic source: www.smu.ca

But it is probably a little early to say this as OPaL has yet to award the lump sum turnkey contract for a swing polyethylene plant and a polypropylene (PP) unit.

"Bids will be submitted this week; 12 contractors have been shortlisted," the source added.

A second source close to developments does not expect the LSTK contract to be awarded before April

What all of this means is that while the project is moving forward it is still very likely that the company will miss its Q1 2013 target date.

By Malini Hariharan

How many projects is Petronas Chemical planning?

Last week the blog had covered an ICIS news report which referred to a study on 1m tonnes/year ethane cracker and derivative units at Kerteh.

Now a report from UBS says Petronas Chemical is looking at making operational improvements at its two existing crackers at Kerteh and building an integrated refinery-petrochemical complex with international partners.

"Petronas Group is taking the lead in evaluating the project, and Petronas Chemical should be more closely involved in examining the project at a suitable juncture. If this project were to proceed and be completed, Petronas Chemical would be able to further diversify its feedstock source and expand its production capacity. We estimate this project has the potential to add 1mtpa cracker, with downstream PE and PP capacity of around 400ktpa," says UBS.

The blog has heard from other sources that a feasibility study on the refinery-petrochemical project has started and that it would be located in southern Malaysia. If the project is approved this year completion is likely in 2015-16.

The naphtha cracker would also provide the feedstocks to support an investment in speciality chemicals that is being studied by Petronas Chemical and BASF.

It is difficult to see Petronas Chemical pursuing two cracker projects simultaneously as this would place a huge demand on the company especially in terms of manpower resources. Then there are doubts on whether sufficient ethane is available. The existing crackers at Kerteh are reported to be facing a shortfall in ethane supplies.

And if the Petronas Group makes investments in upstream gas facilities to improve ethane availability it make more more sense to expand the existing crackers rather than build a new one, points out one source.

Besides new projects Petronas Chemical is also looking at acquisitions, says UBS in its report.

"The company has indicated that it might consider selective opportunities to expand both domestically and overseas through strategic acquisitions that are consistent with its core petrochemical activities or that help Petronas Chemical to gain a foothold in markets where the Petronas Group already has oil and gas operations."

This would allow Petronas Chemical to develop vertically integrated operations.

By Malini Hariharan

A few months back the blog had expressed sceptism on a Chinese company's plans for a methanol-to-olefins (MTO) project based on imported methanol. The economics of such projects appear doubtful but many Chinese companies are looking to go down the same road.

In its annual review on China's coal chemical industry, Consultancy ASIACHEM states that "a number of enterprises in China's coast regions are planning to take the advantages of good logistic conditions and the adjacency to consuming market and invest in MTO projects based on outsourced methanol".

Ningbo Heyuan, Dalian Dahua Fujia, Zhejiang Xingxing New Energy Technology, Jiangsu Shenghong Group and Chia Tai Energy Chemical have announced plans for such projects. And Ningbo Heyuan has even secured financial support and started construction of a 1.8m tonnes/year MTO plant. The project, which would yield 600,000 tonnes/year of ethylene, is scheduled to be onstream by 2012, says AsiaChem.

The successful commissioning of Shenhua Batou's MTO project last year and availability of local technology has spurred interest in MTO projects.

Pic source: Shenhua

Asiachem estimates that more than 20 MTO and methanol-to-propylene (MTP) projects with a total capacity of 10m tonnes/year have been planned. The blog has so far counted 12 projects - details available in this file china coal chemical projects.xlsx.

Interest in coal-based monotheylene glycol (MEG) projects is also picking up with more than 20 projects in the pipeline.

The coal-to-chemicals wave is here to stay.

By Malini Hariharan

The blog has been updating the status of Indian petrochemical projects and has found that many are running behind schedule.

Reliance Industries' mega cracker at Jamnagar has yet to get off the starting block. The company is holding on to an end-2014 start schedule for the 1.4m-1.6m tonnes/year cracker which will be based on offgases and other refinery feedstocks. Sources close to the company said that preliminary work related to technology selection has been completed and the projects team is only waiting for the green signal. Given Reliance's project implementation record it should be able to keep the schedule if a decision is taken soon.

Meanwhile, Reliance has started work on a 1.1m tonnes/year purified terephthalic acid (PTA) project at Dahej on the west coast of India. The project is scheduled to be completed in the second quarter of 2013. Reliance has also planned a second PTA plant of a similar capacity at the same site. Technology has yet to be selected but the target date for completion is end-2013. A new paraxylene (PX) of 1.3m-1.5m m tonnes/year at Jamnagar has also been planned for completion at the same time.

The other big PX/PTA project in Baroda, Gujarat, by Indian Oil Corp (IOC) is unlikely to be completed before Q4 2013 as the company has yet to make a final investment decision.

"A decision should come through in 1-2 months; the company would then need 30-32 months to execute the project," said a source close to developments.

This 370,000 tonnes/year PX and 560,000 tonnes/year PTA project was earlier scheduled for completion at end-2012/early 2013.

IOC is also looking at putting up a PX plant at its refinery in Haldia, West Bengal. A decision on this project is dependent on an offtake commitment by Mitsubishi Chemical which operates two PTA plants at Haldia.

"They have to agree on legal and commercial issues; if they arrive at an agreement this year then we are looking at start up in 2015," he added.

One project that has been progressing is state-owned GAIL's 450,000 tonnes/year expansion of its gas cracker at Pata, Uttar Pradesh. The expansion will feed a new 400,000 tonnes/year swing linear low density polyethylene (LLDPE)/high density polyethylene (HDPE) plant. The blog has heard that Univation is likely to provide technology for this unit and startup is scheduled for 2014.

However, Gail's joint-venture cracker project in Assam in Northeast India has been delayed to beyond 2015, said a source close to the company. The sub worldscale project (cracker capacity of only 220,000 tonnes/year) has been facing many problems including a steep escalation in costs.

Local media reports have estimated that the project cost has nearly doubled to Rs 100bn ($2.2bn).

The government is now examining how to make the project viable; more subsidies will have to be offered, the source added.

The project makes no sense but GAIL has no choice but to implement it as the government is keen to develop this part of India.
And lastly, ONGC Petro-Additions Ltd's (OPaL) 1.1m tonnes/year cracker project at Dahej has seen another setback. A source close to the project have told the blog that Daelim and Chevron Philips Chemical who had bagged the contract for a 340,000 tonnes/year HDPE project have parted ways. As a result OPaL will have to reissue tenders and this could mean a delay of 6 months; the Q1 2013 target looks impossible, said the source.

As reported earlier the company faces a situation where its cracker would be completed at least six months ahead of the derivative units. The blog would like to know if olefin traders have started knocking on OPaL's doors.

By Malini Hariharan

South Korea's Lotte Group, parent company of Honam Petrochemical, is making yet another bold move. After acquiring Malaysia's Titan Chemicals last year, Lotte has set its sights on a major petrochemical project in Indonesia.

"We will start the feasibility study to develop a petrochemical project in Merak, Banten province, this year. The investment is estimated to cost between $3 billion to $5 billion," said Shin Dong-bin, chairman of the Lotte Group, after a meeting with the Indonesian president.

Construction of the project is expected to start next year with completion within four to five years.

Lotte already has a presence in the Indonesian polyethylene (PE) market with Honam operating two plants that it obtained via the Titan acquisition.

The Titan acquisition gave Lotte a presence in Indoneisa in the form of a polyethylene (PE). Moving upstream to build a cracker to secure feedstock would appear to be a logical move.

The project appears to be part of a wider Lotte strategy that involves an expansion in the Indonesian retail sector. And Lotte is likely to receive plenty of incentives as the Indonesian government is keen to attract foreign investors.

This will be needed as Indonesia has been a difficult place to justify a petrochemical investment with competition from established players in Southeast Asia and also the Middle East. Chandra Asri, the country's sole cracker operator which relies on imported naphtha, has struggled ever since it commenced operations more than ten years back. The environment has become even more difficult after the implementation of the Asean FTA and the China-Asean FTA this year.

Details of Lotte's planned project are not yet available. It is also not clear if this is in addition to an expansion of Malaysian crackers that Honam had talked about at the time of the Titan acquisition.

And can Indonesia support multiple projects? Chandra Asri is once again talking about expanding its cracker by 400,000 tonnes/year to 1m tonnes/year and debottlenecking its PE and polypropylene (PP) plants. It also plans to diversify its feedstock slate to include liquefied petroleum gas (LPG). The company has tied up with Vopak to start construction of a terminal at the end of this year with operations to being in 2014.

By John Richardson

"Just when you think it is the right time to make an investment case to a board of directors, the particular opportunity you have been studying has an annoying habit of disappearing," said a business development manager for a global polyolefins producer.

His comments reflect the increasingly complex world in which we live. Interactions between environmental pressures, shifts in government policy and changes in consumer behaviour are just some of the factors that can rapidly result in an opportunity becoming yesterday's news.

A product might very simply also get too expensive, resulting in demand destruction.

A classic case in point about how opportunities can suddenly vanish is the ban by India's Supreme Court from 1 March this year on gutkha - a mix of tobacco, betel and other ingredients - when it is packaged in single-serve polyethylene (PE) pouches.

This sector accounts for about 50,000 tonnes/year of PE demand in India.

The moral case for pushing sales of gutkha, a chewing tobacco, is pretty dubious to say the least.

"Apart from the obvious health risks, what is really sad is that very low-paid workers chew this stuff in order to suppress their appetites. It is cheaper than food," added the business development manager.

So the idea behind banning plastic packaging is to reduce the nationwide scale of the industry, making supply more local and therefore harder to access, he said. PE is used to preserve the shelf-life of the tobacco, increasing availability across the country.

One might think that this is an opportunity well worth losing for the wider good.

The danger now, though, is that the tobacco test case could be used by local non-governmental organisations (NGOs) to attack more defensible areas of India's plastic-pouch industry.

"Today it is gutkha. But there are hundreds of products packed in pouches. Tomorrow an NGO can give reference to this case and say shampoos should not be packed in pouches," said an India-based industry source.

Pouches or sachets have grown to overtake other forms of packaging in many product segments.

Market research firm AC Nielsen estimates that sachets accounted for 74.5% of the 104,000-kilolitre Indian shampoo market in 2008, up from 71% in 2006 and 73% in 2007.

India faces a huge plastic waste-management problem, hence the concern that the NGOs will go after the wider industry.

"True, there is a big waste issue. But these sachets cost just a few cents each and with incomes still very low for most Indians, this pushes a little luxury into hundreds of millions of lives," said a second India-based industry source.

"For the women factory workers who cannot even afford a whole bottle of shampoo, the odd sachet at the weekend with a picture of a Bollywood star on the sleeve makes them feel a little bit like that Bollywood star for a few seconds."

If this is tugging at your heart strings, also think about the economic potential: giving India's vast army of low earners a taste of being middle class raises aspirations, encouraging consumption growth for all manner of products made from chemicals and polymers.

India's polyolefins industry will therefore need to battle hard and battle smart to protect the segment.

This is a good example of how rising public awareness about chemicals and polymers in general makes engagement with governments and NGOs ever-more important.

At a much more prosaic level, a product can quickly become too expensive before an investment opportunity can be pursued.

Low density PE (LDPE) is a case in point, where demand in the Indian market fell by 6% last year due its high cost, according to a local industry estimate.

The cost has soared because of lack of investment in LDPE capacity, once seen as a sunset product because of the development of linear low density PE (LLDPE) - a substitute for film applications.

LDPE has remained popular because it can be very easily processed on what is often very far from state-of-the-art machinery in Asia.

Boosting extrusion- or coatings-grade LDPE consumption has been seen in the growth in the plastic pouches we have just been talking about.

Pouches for food and non-food items are often made from multi-layer structures, including LDPE, LLDPE, metallocene LLDPE and metallised polyethylene terephthalate (PET) film.

Despite this strong source of demand, many LDPE producers have switched their plants to ethylene vinyl acetate (EVA) production, where margins have been better. A booming end-use sector for EVA is to make encapsulants for solar panels.

"Another problem is that you can only make extrusion- or coatings-grade LDPE via the autoclave process," the business development manager added.

"The autoclave process is expensive in energy costs and is difficult to operate. Nobody, as a result, has invested in autoclave capacity for many years."

This might logically lead to full-scale and costly research into new production processes for LDPE extrusion grade - or into other polymers that can do the same job.

But the danger is that an overall ban on plastic pouches in India drives a 500-tonne freight train through demand growth.

Such uncertainties could make incremental changes in technologies and product mixes, rather than any major research and development initiatives, the way forward.

In this ever-more complex and changing world, you would then run the risk of losing the biggest opportunities of all.

By Malini Hariharan

After sorting out their merger, PTT Chem and PTT Aromatics and Refining (PTTAR) are looking at a major new investment to take care of their future.

In an interview with the blog's colleague Tahir Ikram, PTT Chem's president and CEO disclosed that the two companies are jointly studying a cracker project.

"We are exploring the possibility of a new cracker. Whether it is going to be gas or naphtha, or where it is going to be located, it is under study," said Veerasak Kositpaisal.

Details at this stage are sketchy.

It is not yet clear if the project would be at Map Ta Phut, Thailand, which has finally seen the end of a protracted legal battle between environmental activists and the government. The settlement has no doubt given companies the confidence to look at new projects.

But what about feedstock availability? In an interview to ICIS news last year, Kositpaisal had said that while Thailand has gas it was not clear if it would be enough to support a world-scale cracker.

So will the project be located elsewhere in Asia?

Well, China is on the ceo's mind. Kositapaisal said in the recent interview that the company is looking at investment opportunities in the country.

"China is a big market. We think China will continue to grow at least by 8% and with that kind of growth they need new capacity, big capacity," he said.

True, but what can PTT bring to the table to tempt the Chinese to give a share of their market?

By Malini Hariharan

The shale gas based ethane rush in the US continues with Westlake Chemical the latest to announce big expansions at its two crackers in Lake Charles, Louisiana.

Each of Westlake's two light feedstock crackers will be expanded to provide ethylene for existing internal derivatives units and the merchant market, said the producer.

Westlake currently buys ethylene, estimated at around 135,000 tonnes, to support its styrene and vinyls production.

The first cracker expansion will increase capacity by approximately 230m-240m lbs/year (104,000-109,000 tonnes/year), while also increasing feedstock flexibility, Westlake said.

Current capacities of the crackers are 590,000 tonnes/year and 544,000 tonnes/year, according to ICIS. Westlake did not specify which cracker will be expanded first but said that the first expansion will be completed by late 2012 and the second by end-2014.

Westlake is also evaluating conversion of its Calvert City cracker (current capacity of 195,000 tonnes/year ethylene) from propane to ethane. Additionally, expansion options are being evaluated for the site and engineering and design studies are underway, said the company.

Westlake joins a number of other US producers looking to boost ethane-based cracking capacity despite the concerns surrounding the long-term future of shale gas.

The other risk is market related as the most of the ethylene derivative capacity will have to be exported, mainly to Asia.

But the risks are worth taking especially if a company is able to tie up with a gas operator to secure ethane at a cost plus pricing; the other option is to set up a fractionator, points out an industry player.

The opportunity is immense as gas is projected to remain at around $5/mmbtu while crude oil is unlikely to fall below $70/tonne, he points out.

His only worry is whether predictions will go wrong.

"Four years ago this place was dead; North America was written off. Now it has changed, but what is the guarantee that it will not change again?"

By John Richardson

THE refining industry enjoyed a golden era before the global economic crisis thanks to a booming economy and gasoline shortages caused by Hurricane Katrina. Inevitably, therefore, as is so often the case with commodity industries, too much new capacity was planned that came on-stream at the worst possible time.

But recently some financial analysts have been arguing that the worst is over for the industry. This is based on the premise that the world's economic recovery is on solid ground - which we strongly dispute - and less capacity additions over the next few years.

A recent report by Kunal Agrawal, Singapore-based energy and chemicals analyst with BNP Paribas, suggests a more negative longer-term view for the industry.

"We expect global utilisation rates and benchmark refining margins to improve steadily over 2011-12 owing to incremental refined products demand outstripping refining capacity additions, which we believe will result in a sweet spot for refiners and Asian refiners in particular," he writes.

"In our view, it is a good time to have exposure to refining, but a longer-term return to the 'golden period' of impressive refining margins of 2004- 08 is unlikely, as refining supply growth should exceed demand growth beyond 2012.

"We do not foresee global utilisations increasing beyond 85%. The utilisation outlook is healthy - but is unlikely to support a robust recovery in refining margins.

"We believe a longer-term positive sentiment on the sector is being a bit optimistic. Beyond 2012, we expect an excess of 1.8 mbd capacity to be commissioned annually, which would mean that supply will likely be ahead of demand growth. This is an unfavourable situation for a robust refining environment improvement, in our opinion.

"We also anticipate a significant amount of heavy-fuel processing capacities being commissioned over 2010-15, which will increase demand for heavy oil, and pressure the light-heavy spreads to contract. We believe this is negative for highly-complex refiners in the region that had enjoyed superior refining earnings during the refining supercycle of the middle part of the previous decade (owing to extremely strong light-heavy spreads).

"In the next refining cycle, we believe the ability of complex refiners to lock in the incremental dollar margin per barrel will be compromised."

This could have major implications for the availability and affordability of petrochemical feedstocks in different regions.

We can speculate that while older European refineries might be pressured by the overall problem of supply being in excess of demand, they might find themselves in a relatively strong position because of the greater strain on the newer, more complex refiners.

Last month we argued that the push by European refiners to meet strong diesel demand might make light ends, including naphtha, cheap for local petrochemical players.

The BNP Paribas report provides further reasons to believe that these European refiners could run relatively hard, providing advantaged raw materials to highly experienced and fully-depriciated domestic petrochemical industries.

The complex refiners, some of whom are integrated with new or fairly new petrochemicals capacity, might find their competitive positions challenged. They could be forced further to the right of the cost curve.

And overall with a significant oversupply of refining capacity being predicted, there might be plenty of spare naphtha to be traded globally, assuming there is no major consolidation.

What might this spare naphtha mean for the competitiveness of naphtha-based crackers versus the gas-based players?

By Malini Hariharan

Yesterday's announcement by Asahi Kasei, Sabic and Mitsubishi Chemical of a joint-venture acrylonitrile (AN) project in Saudi Arabia fills up one more slot in the kingdom's petrochemical value chain and supports the move downstream.

Sceptics might question the viability of this strategy but Saudi companies are slowly pressing ahead.

Mohammed Al-Mady, Sabic's CEO, said the AN project's key driver was the Saudi National Industrial Clusters Development Program which aims at growing and diversifying the kingdom's manufacturing sector.

The plan is to build plants for 200,000 tonnes/year of acrylonitrile and 40,000 tonnes/year of sodium cyanide at Al Jubail. A start-up date has yet to be confirmed but a final investment decision is due in 2012.

"AN and NaCN are very important chemicals for downstream diversification into acrylonitrile butadiene styrene (ABS), carbon fiber, acrylic fiber and acrylamide," noted Al-Mady.

For Asahi, completion of the project will fulfill its target of becoming the world's largest AN producer with a total capacity of 1.4m tonnes/year. It is currently at No2 with 750,000 tonnes/year of capacity with plants in Japan, South Korea. A new 200,000 tonnes/year unit in Thailand is due to start this year and a 245,000 tonnes/year plant in South Korea due in 2013.

Interestingly, the Saudi project will be based on propylene technology and not on the new propane process that Asahi is using in the Thai project. It's not clear why this is not being pursued, especially as Asahi had in the past talked about using the propane-based process in Saudi Arabia to boost its competitiveness.

                                Jim Gallogly

                               Source of picture: ICIS 

By John Richardson

LYONDELLBASELL has joined the list of US producers that have disclosed ethylene expansion plans as a result of low-cost ethane and the belief that we are heading towards an up-cycle.

Jim Gallogly, LyondellBasell's CEO, said during an earnings call on Monday that debottleneckings are being considered for crackers at Channelview and La Porte, Texas. This could add at least 500m lb/year (227,000 tonnes/year) of ethane-based ethylene capacity

He also said that the company is conducting a study into a new cracker which could be as a joint venture.

Dow Chemical plans to build a world-scale ethylene plant on the US Gulf coast for start-up in 2017.

Chevron Phillips Chemical is studying the possibility of building a world-scale ethane cracker, and INEOS has undertaken engineering studies to debottleneck its cracker in Chocolate Bayou, Texas.

Westlake Chemical is expanding ethylene capacity at its Lake Charles complex in Louisiana.

LyondellBasell's announcement about its capacity intentions came less than a month after it declined to be drawn on the subject during the BB&T Capital Markets Industrial and Commercial Conference in New York last month.

However, Sergey Vasnetsov, the company's senior vice-president for strategic planning and transactions, laid the groundwork during the conference by predicting that the olefins and polyolefins industry was heading for an up-cycle in approximately 2014-16.

Stronger-than-expected GDP growth and/or major production problems could result in the good times occurring earlier than that, he added.

He presented an upbeat view of emerging-market growth without mentioning what we feel is a major risk: Inflation.

The former Wall Street analyst also made no comment on the threat to the fragile US recovery, if one can call it a recovery, of dealing with the budget deficit.

Interestingly, Vasnetsov said that the US ethane premium over natural-gas prices can be as much as 100%, a situation that will perhaps change as new fractionation capacity comes on-stream. He presented a slide during the event forecasting a 53% growth in fractionation capacity by 2015.

Perhaps the prospect of even more competitively-priced ethane is another reason behind all the recent capacity announcements - along with the consensus view that an upswing is on the way.

Consensus views can be very dangerous when they lead to over-investment.

By Malini Hariharan

Malaysia's Petronas is expected to soon announce plans for a new refinery and petrochemical complex Pengerang, Johor, a project that the blog had discussed a few months back.

A report in the Malaysian newspaper Star says the project, named Rapid or Refinery and Petrochemical Integrated Development, would involve an investment of close to $17bn. The Johor government will be a partner in the project and multinational energy companies will be roped in at a later date.

The aim is to replicate Singapore's success in building Jurong island as a refining and petrochemical hub. Pengerang has been chosen as its waters can reach depths of more than 20m, which is what is needed for very large crude carriers (VLCC) and ultra large crude carriers, says the report.

This project will complement plans for a $1.7bn deepwater petroleum terminal at Pengerang.

Details of capacities and start-up dates were not disclosed but the blog had earlier been told that completion of the refinery and naphtha cracker is likely in 2015-16. The cracker would also provide feedstocks for new speciality chemicals planned by Petronas and BASF.

By John Richardson

THE euphoria sweeping through the US petrochemicals industry seems to indicate strong support for the "supercycle" theory.

Some of the comments made during the first-quarter results season certainly point that way, as does the upbeat mood of presentations made to investors over the past few months.

A consensus view appears to have emerged: we are through the bottom of the cycle; that not enough capacity will be added over the next few years; and that, therefore, by 2015-2016 everything will be wonderful.

Morgan Stanley first started talking about the chemicals "supercycle" - a view that has subsequently been supported by several other banks - in a report from October 2010.

"An inflection point in the global plastics market, driven by China and India [has been reached]. After a recent period of slower growth and a decoupling from global GDP growth, we now expect the strongest period of ethylene demand growth in the past 20 years," the report stated.

"We forecast that in the next five years, incremental annual consumption in China and India alone will equal the total current consumption in the US, until recently the world's largest ethylene consumer, and still responsible for 15% of the market.

"Global capacity should grow at just 2.3% in 2011-14. Utilisation rates are set to tighten from 85% today to 92% in 2014, resulting in improving margins and returns globally."

But, as Torsten Penkuhn, the head of BASF's petrochemicals business in Asia, told ICIS news in an interview earlier this month, the industry has a history of shooting itself in the foot by overbuilding capacity when confidence is high.

Where there is cheap feedstock and finance, companies will build. Individual companies are often unaware of the cumulative effect of all their competitors doing exactly the same thing.

Kunal Agrawal, a Singapore-based chemicals analyst with BNP Paribas, provides some numbers to support this view in a report released last week.

"While we believe the Middle East will find it challenging to approve and commission incremental gas-based crackers, we see significant opportunities globally for continued investments in naphtha-based crackers," he writes.

"We recently conducted a detailed bottom-up analysis on global refining capacity-addition plans during 2010-15. We found that at least 10m bbl/day of refining capacity is scheduled to be commissioned during the period, which, in our opinion, will provide enough feedstock for an additional 16m-17m tonne/year cracker capacity.

"These are projects for which either construction is already in progress or EPC (engineering, construction and procurement) contacts are being awarded.

"Sufficient naphtha and liquefied petroleum gas (LPG) will be produced by the 10m barrels per day of refining additions to supply a further 11m tonne/year of ethylene capacity that has yet to be announced," he adds.

This would be on top of the substantial number of studies into new crackers - and plans to expand existing facilities - that have already been announced in the US over the past few months. The mood of the industry has been transformed by abundant shale gas and confidence in the global economy.

Getting a cracker built by 2015-2016 that isn't already reasonably underway, certainly beyond the initial study phase, would be a big challenge.

But Agrawal adds in the same report: "We also believe the surplus capacity commissions through 2009-11 will require a couple of years of digestion before we see global utilisation rates tightening substantially."

Extra production is being planned during a period of increasing economic uncertainty.

The battle against inflation in China threatens to subdue growth for at least the next few quarters.

And, assuming the Chinese government wins the battle, it faces the huge task of weaning the economy off its addiction to exports - one of the main strategies under its current five-year plan (2011-15).

A period of transition appears inevitable as slower export growth (and therefore growth of chemical and polymer imports) is replaced by domestic consumption.

For the supercycle theory to come true, Asia must continue to do all the heavy economic lifting, as the outlook for the US and Europe is at best fragile.

The Morgan Stanley case was that strong Asian growth would be enough by itself, because the size of the continent's consumption meant that it would drive the global ethylene cycle.

Agrawal disagrees. He writes: "In our opinion, a chemicals bull cycle needs to be supported by robust developed market (48% of demand) and [our italics] emerging market growth.

"Excluding any new capacity expansions, beyond the ones which are already under construction (also excluding the recently announced US shale gas based expansions), we see global ethylene operating rates improving from the cyclical 2010 bottom of 84.6% to 89.7% by 2015," he says. This would be lower than the 91.5% average in 2004-2007.

The risks of rushing into investment look like they are mounting. But the age-old dangers remain for those companies that pause: losing ground on market share and economies of scale.

By John Richardson

THE article of faith publicly expressed at last week's Asia Petrochemical Industry Conference (APIC) in Fukuoka, Japan, was that the current problems with demand in China and India were only temporary.

Discussions the blog held were packed with the conventional wisdom that not enough capacity would be built over the next few years. For example, one estimatewe heard was that there was the need for 35 crackers to be built to meet global ethylene equivalent demand growth over the next decade; so far only 24 had been announced.

But as we mentioned last week, Singapore-based PNB Parabis chemicals analyst Kunal Agrawal estimates that 11m tonne/year of yet-to-be-disclosed ethylene capacity could be built by 2015, based on available refinery feedstock. This could be on addition to the 16-17m tonne/year of capacity already announced fed by these same refineries.

One has to also worry about Sinopec's propensity to add capacity for self-sufficiency reasons, regardless of the economics.

A lot of talk at the conference was about China's potential to make use of coal for this purpose.

But the blog feels that because the environmental and economic problems of the coal-to-mono-ethylene glycol (MEG) and methanol-to-olefins (MTO) processes are so huge, the advent of a large amount of coal-based capacity will not happen during the next wave of overbuilding. If Sinopec announces firm new projects for start-up during the upcoming cycle, they will be based on refining.

We will discuss the environmental issue surrounding coal-to-chemicakls in more detail later on, but here is a rather worrying statistic: According to the consultancy Tecnon Orbichem it takes seven tonnes of coal and 2.5 tonnes of methanol to produce one tonne of olefins. When the blog asked a senior chemicals industry executive where all this carbon disappeared to, he pointed his finger upwards.

If we had $50 every time we heard mention of shale gas during the conference the blog would be very rich. Sadly we are not, which is why we have written this post.

Sufficient ethane would be available for an additional 8m tonne/year of ethylene capacity in the US over the next 20 years, according to IHS director Russell Heinen in a paper he gave during the event.

In an interview with the blog, two senior executives of Shell Chemicals said that their company was studying North American expansions based on low-cost ethane.

"We have 700,000 acres of shale gas assets in the US and Canada and so we feel we are in a good position," said Iain Lo, Shell's vice president, business development and ventures.

The focus would initially be on additions to existing plants in Louisiana and Texas, but Sven Royall, Shell's vice president for global intermediates, said that "everything was on the table" - when asked about the possibility of a greenfield cracker.

Mention of Canada was interesting. With all the focus on US shale gas the blog had missed the possibility that shale assets in Alberta might also be exploited for petrochemicals.

Shell's comments come after a raft of announcements over the last few months of studies into new crackers and debottleneckings of existing facilities by other US majors, such as Dow Chemical, ChevronPhillips Chemicals and LyondellBasell.

One of the ethylene derivatives anticipated to be in tight supply over the next few years is MEG, given feedstock shortages in the Middle East.

Saudi Arabia in particular has met most of the demand growth over the six or so years. Now, though, it seems unlikely that it would be allowed to add more capacity in the Kingdom for strategic reasons, even if it could get its hands on more gas allocations.

Returning to coal-to-chemicals in China, there has therefore been a lot of excitement over the syngas (made from coal) to oxalic acid and then on to MEG process, bypassing the need for ethylene.

It takes 4-5 tonnes of coal to make one tonne of MEG via this route, said an industry observer. While not as bad as MTO this is still pretty grim.

So the conventional ethylene route seems the likely means of meeting perceived future demand over the next 5-6 years.

Shell, in the same interview with the blog, disclosed plans to add two OMEGA process MEG plants in Qatar (each 750,000 tonne/year) by 2016-2017.

The industry observer also told us: "It makes sense to build MEG capacity in the US to serve the local purified terephthalic acid (PET) and textiles industries, which are mainly based in South and North Carolina.

"The US is a significant net importer of MEG and so this new capacity would be backing-out exports.

"As far as ethane supply goes, it is not rocket science to reverse the flow of pipelines that currently go from the south to the north. Ethane could be made to flow from the Marcellus shale-gas fields to new crackers that may be built in Texas and Louisiana. These facilities would then supply the MEG to the Carolinas."

This entire post has talked about capacity. We have not discussed why the industry believes in the doctrine of a continued global economic boom.

The reason for this is that we are journalists and so always endeavour to faithfully report what people tell us.

What APIC told us was that the delegates we spoke to, and listened to during presentations, were either unaware - or didn't want to publicly discuss - profound changes in the global economy.

These are detailed in our new e-book - 'Boom, Gloom and the New Normal: how Western BabyBoomers are changing global chemical demand patterns, again.'

Changes in demographics in the West - and a major shift in both demographics and government policy in China - need to at the very least be discussed openly by the industry.

There may be good reasons to discount what we argue in our book, but we have yet to hear them.

By Malini Hariharan

Petro Rabigh, the Saudi Aramco and Sumitomo Chemical joint venture, has moved to the next round of its ambitious phase 2 expansion which includes a new aromatics facility and a number of value-added derivatives.

Construction tenders for seven packages have been issued and bidding is due to close on 1 October. Tenders for three more packages have yet to be issued.

A final investment decision will be made by the end of this year and contracts are likely to be awarded early next year.

Completion of the project, estimated to cost $6-8bn, is expected in Q1 2015.

The project involves expanding the 1.3m tonnes/year cracker by 300,000 tonnes/year, thanks to an additional 30m scf/day ethane allocation from Saudi Aramco. The aromatics complex, based on 3m tonnes/year of naphtha, will house a paraxylene (PX) plant of 800,000-850,000 tonnes/year and a benzene unit with a capacity of 200,000-400,000 tonnes/year.

Derviative units listed in a memorandum of understanding signed in 2009 included MMA, PMMA, low density polyethylene (LDPE), ethylene vinyl acetate (EVA), caprolactam, polyols, cumene, phenol, acrylic acid, superabsorbent polymers (SAP) and nylon 6. It is not yet clear if Petro Rabigh will pursue all these projects given questions about the viability of downstream investments in the Kingdom.

Meanwhile, Aramco remains focused on expanding its petrochemical reach through Petro Rabigh and its other planned projects with Dow Chemical and Total.

In a speech yesterday, the company's senior vice president of finance, highlighted the economic potential of the Dow joint venture which is expected to enter approval stage in July.

The project is expected to create about 3,000 value-adding direct-hire jobs at the facility, with an equal number of direct jobs likely to be created in the chemicals and plastics value parks associated with the venture, he said.

This is what the Saudi government is looking for as it is under pressure to generate employment opportunities for the country's rapidly growing population. The Saudi labour force is projected to hit 10m by 2030, more than double the number in 2009.

Unemployment is running high at around 10.5%. The number of unemployed Saudis is currently estimated at 500,000 as against 416,000 in 2008.

Aramco's grand vision is to rapidly climb the chemical ranking charts.

"Within the next decade, we aim to launch into the top tiers of the global chemicals business," said.

Investments in new projects are a step in the right direction but a few acquisitions will certainly help achieve this goal faster.

By Malini Hariharan

Is the International Energy Agency (IEA) being extremely bullish in predicting a 'golden age' for natural gas over the next 25 years?

In a recently released report (available here) the IEA forecasts a 55% growth in global demand to 5.1 trillion cubic metre (tcm) in 2035 driven mainly by China, India and also the Middle East. The share of natural gas in the global energy mix is expected to rise to 25%, from the current 21%, during the same period pushing coal's share down to 22%.

Where will the gas come from? Eastern Europe led by Russia is expected to remain the largest supplier followed by the Middle East and North America.

The agency is confident that production in the Middle East, despite political issues in Iran and Iraq, and a gas moratorium in Qatar, will more than double by 2035. But it admits that "an important factor influencing new gas development in the region will be whether domestic gas prices are permitted to rise to a level that stimulates investment".

This is crucial as new reserves, which are not associated with crude oil, are likely to be more expensive to develop.

Interestingly, the IEA also expects China to tap unconventional sources of gas such as coal bed methane (CBM) and shale gas to emerge as a major producer pumping out nearly 300 billion cubic metres (bcm) in 2035, up from 80bcm in 2008.

But the country will still remain a large importer as local production is likely to meet only half of domestic demand which is expected to match that of the entire European Union in 2035.

There are probably not too many questions on the projected demand growth for especially for power generation after Japan's nuclear crisis. The power sector is expected to remain the largest consumer accounting for 24% of total gas demand in 2035.

But perhaps the IEA's predictions on the rise of unconventional sources of gas, which it describes as "key to expanding the long-term role of as in global enery mix" are a little premature. The agency expects the share of unconventional sources to rise to 24% in 2035 from 12% in 2008.

"We project the share of shale gas in global gas production reaches 11% in 2035 while that of CBM reaches 7% and tight gas 6%. Unconventional gas production is currently concentrated in the US and Canada. By the end of the Outlook period, unconventional gas also reaches a significant scale in China (CBM and shale), Russia (tight gas), India (shale) and Australia (CBM)," says the IEA.

The agency is also confident that gas from unconventional sources can be produced at costs similar to those in North America ($3-7/mmbtu). This is debatable as costs are likely to be higher in some location which will have major implications on projected production volumes.

Also the shale gas revolution has yet to take root outside the US. China has only recently opened its doors while in India exploration has yet to start.

The IEA acknowledges the environmental issues surrounding the fracking technique used to get to shale gas but expects these to be resolved once regulatory frameworks are set up.

However, as reported by the blog earlier, the concerns are getting louder and some European countries like France have already taken action to place restricting shale gas drilling.

The world, including the petrochemicals industry, certainly needs more unconventional gas but gaining public acceptance is unlikely to be easy.

By Malini Hariharan

The impending oversupply in purified terephthalic acid (PTA) and likely problems in securing feedstock paraxylene (PX) does not seem to have dampened enthusiasm for new investments,

Around 10m tonnes of PTA capacity is expected to come on stream from the third quarter of 2011 to late 2012, while another 12.9m tonnes of capacity is due to start during 2013-15, according to a recent estimate by ICIS.

China is of course leading the way with nearly 7m tonnes of new PTA capacities due in 2012. By the end of that year, Chinese PTA capacity would total to 32m tonnes/year as against a demand forecast of 23m tonnes. This could result in Chinese PTA exports provided new plants are able to source sufficient PX as capacity additions for the feedstock are taking place at a slower pace.

PX is likely to remain short in Asia until 2013 when five new plants are due to start. But the respite could be shortlived as new PTA projects are once again being lined up post 2013.

The recent entrants to a long list of companies planning new plants includes Ningbo Mitsubishi Chemical which is mulling a 1m tonne/year facility at Ningbo, China. The company has yet to set a start-up date.

Thailand's Indorama Ventures is also studying PTA projects in the Middle East and India, the company's chief executive said recently. These are part of the company's plans to raise its global production capacity, for PTA, polyethylene terphthalate (PET) and fibers, to at least 10m tonnes/year by 2014, from approximately 5.5m tonnes/year today.

Indorama has yet to disclose the location of its proposed Middle East facility but it could be Saudi Arabia where attempts are being made to draw in PTA investments that would offtake PX from a new refinery.

Lotte Pakistan is planning to triple its PTA capacity to 1.5m tonnes/year by late 2014 while Indian major Reliance Industries is working on two new PTA plants with a total capacity of 2.2m tonnes/year for start up in 2013-14. A third plant is also likely although details have yet to be firmed up.

At an industry conference earlier this week, a Saudi Aramco executive confirmed plans for a PTA plant at Al-Jubail based on 700,000 tonnes/year of PX supplied for the new Sartorp refinery. The refinery, a joint venture between Aramco and Total, is due to start operations in H2 2013.

"We've had two players coming forward previously but the negotiations have stopped. We are still looking for people to invest in the PTA unit," said the official, who did not disclose the names of the parties.

Oman and Kuwait, which currently export PX, are also interested in venturing downstream.

India's JBF had announced last year plans for a 1.2m tonnes/year joint-venture PTA plant with Oman Oil in Oman with PX to be supplied by Aromatics Oman. However, the blog understands that JBF has abandoned Oman and is now looking at building a plant in India.

This is likely to be a temporary setback for the Oman Oil which recently integrated its three subsidiaries Aromatics Oman, Oman Polypropylene and Oman Refineries and Petrochemicals into Oman Oil Refineries and Petroleum Industries Co (Orpic). The newly structured Orpic should be in a better position to pursue a PTA project on its own.

The investment wave is no doubt being driven by optimistic projections for polyester and PET and many of the projects probably have sound economics. But the risk of overinvestment needs to be carefully assessed.

By Malini Hariharan

CEOs of Asian petrochemical companies worried about rising feedstock costs, a weak economic outlook and profitability should have been reassured to read over the weekend that even Mohammed Al-Mady, vice-chairman and CEO of Sabic is having sleepless nights.

His chief concern is keeping Sabic's record profits at record levels.

Sabic churned out a net profit Saudi riyal (SR) 8.1bn ($2.16bn) on sales of SR13.2bn in the second quarter of this year beating analyst expectations. Net profit was up 61% while sales rose by 45.3%

"What keeps me awake at night is keeping the successes we have. This is about the 8.1 billion riyals ... How long can we sustain this? It is challenging," Al-Mady said after declaring the bumper results.

Success in the last quarter has mainly been a result of increase in production and sales volume as well higher sales prices for most of its products compared with Q2 2010.

Production volumes are set to grow if Saudi Kayan quickly achieves commercial production. Al-Mady indicated that this was likely to take place only in second half of the year, delayed from the earlier target of H1. But given an uncertain demand outlook, especially in the key China market, placing additional volumes at the best possible price is going to be a challenge.

Al-Mady is of course hoping that crude oil continues to stay firm. In his view today's price range is "quite good for everybody" although some of his Asian counterparts squeezed by high feedstock costs may not entirlely agree.

But Al-Mady's challenge extends beyond the short-term as he has to figure a way to keep Sabic on the winning track. New projects will certainly help and Sabic has 14 of them lined up during 2012-15 including a $1bn expansion at its joint venture with Sinopec in China.

India continues to be on the radar.

"India is a huge market, the (Indian) government is thinking of attracting new investments and SABIC is looking at investments in India -- if there are any good investments in petrochemicals there, products from refineries," said Al-Maady.

But as projects take time to materialize a quicker route to growth will be through acquisitions and Al-Mady is, as always, open to the idea. The issue now is finding the right asset at the right price.

By Malini Hariharan

Dow Chemical appears to be ready to take a final decision on its huge cracker and derivatives joint venture with Saudi Aramco in Al Jubail, Saudi Arabia.

Media reports in the last two days indicate that the $18-20bn project, first announced in 2007, has moved forward with a final decision likely to be announced in the next few weeks.

Contractors have been shortlisted. According to one report, South Korea's Daelim Industrial has been selected as the engineering, procurement and construction (EPC) contractor for the multi-feed cracker while Fluor Corp has been selected for utilities.

Dow or Aramco did not confirm these reports. But the timing seems right as Dow's CEO Andrew Liveris had said earlier this year that the project, which was initially planned at Ras Tanura, would move to the final approval stage in July. Front-end engineering and design work was also expected to be completed in mid-2011.

Both companies have yet to confirm the product slate and start-up dates.

Dow has lined up an impressive list of projects for execution over the next 5-10 years. Besides the Saudi joint venture, it is also has plans for a cracker and two propane dehydrogenation (PDH) plants in the US and then there is coal-based joint venture with Shehua in China. Will it proceed with all or is time to make a choice?

By Malini Hariharan

India's major petrochemical projects are inching forward very slowly and the blog will not be surprised if there are more delays along the way.

Reliance has yet to kick start its 1.4-1.6m tonnes/year cracker project adjacent to two refineries at Jamnagar, on the west coast of India. The cracker will be based on offgases from the refineries. The blog has heard that all is well with the project and final details are being worked out. But then, it has been hearing this for a few months now.

Among the other cracker projects, ONGC Petro-Additions (OPaL), a joint venture between ONGC, GAIL (India) and Gujarat State Petroleum Corp, has finally awarded all major contracts for its 1.1m tonnes/year mixed-feed cracker and derivatives complex at Dahej, Gujarat.

OPaL recently selected technology from Mitsui Chemicals for a 340,000 tonnes/year high-density polyethylene (HDPE) unit, going back on its earlier decision to take technology from Chevron Philips.

And it also selected Marie Technimont as the engineering, procurement and construction (EPC) contractor for HDPE plant, a 340,000 tonnes/year polypropylene (PP) unit and two swing HDPE/linear-low density PE (LLDPE) plants each of 360,000 tonnes/year capacity.

A source close to developments says work on the cracker is 50-60% complete and the company is aiming for mechanical completion in January 2013 while the polymer plants will be ready in the second quarter of 2013.

However, this is an ambitious target and 2014 for full start up of the complex looks more realistic.

Meanwhile, GAIL is confident of completing an expansion of its Pata complex in December 2013. A source close to the company says work on the project, which includes a new cracker of 450,000 tonnes/year, a swing 400,000 tonnes/year HDPE/linear-low density PE (LLDPE) plant and a 20,000 tonnes/year butene-1 unit is progressing well and the company should have no problems in meeting the targeted date for completion.

However, GAIL's second project, a small cracker and derivatives complex at Assam, on the east coast of India will be delayed.

"Work on the project has currently stopped because of the monsoon season and will resume in a couple of months. Completion will be delayed from April 2012 to July 2013," he adds.

On the aromatics side, Indian Oil Corp (IOC) is still waiting for board approval for 600,000 tonnes/year of paraxylene (PX) and 370,000 tonnes/year of purified terephthaic acid (PTA) project at Vadodara, Gujarat. The company hopes to get approval over the next few months and would then look to complete the project during 2014-15, a delay from the earlier target of 2012-13.

Among the projects under implementation, expansion of a fluid catalytic cracking (FCC) unit at IOC's refinery in Mathura, Uttar Pradesh is due for completion in January 2013. The extra propylene will be moved to Panipat where it will be used at an existing PP plant.

And work on a 138,000 tonnes/year butadiene extraction unit at the Panipat complex has started and it is likely to commence production in Q1 2013 along with a joint-venture styrene butadiene rubber (SBR) plant.

Meanwhile, the blog has also heard of Sabic evaluating a polycarbonate (PC) investment on the east coast of India. The company has been eying Indian projects for a few years now and finally seems to have narrowed down on one. However, the fate of this project is uncertain given the tensions between India and Saudi Arabia over the anti-dumping duty that India has imposed on Saudi PP exports. A removal of this duty is likely to be a precondition for any major investment by a Saudi company in India.

By Malini Hariharan

The Taiwanese government is once again talking of removing a ban on cracker investments by Taiwanese companies on the mainland.

The country's minister of economic affairs said late last week that the government is willing to consider lifting the ban provided certain conditions are met.

Taiwanese companies must have a controlling stake in any joint venture and guarantee exports of raw materials back to Taiwan. Companies would also need to upgrade their operations in Taiwan.

The minister disclosed that these conditions would be negotiated with the Chinese government during the next Economic Cooperation Committee meeting likely to take place end of this month.

The minister's statement comes after Sinopec, the Fujian government and a consortium of Taiwanese companies including China Petrochemical Development Corp, Ho Tung Chemical Corp , LCY Chemical Corp and USI Corp, signed a letter of intent for a $4.5bn joint cracker project.

The 1.2m tonnes/year cracker complex, to be located in Gulei, Zhangshou city, will be adjacent to a new 16m tonnes/year refinery. The companies did not disclose their stakes in the venture or provide a timeline for the project which has yet to be approved by the Chinese authorities.

The minister's statement offers hope to private Taiwanese companies that have already invested in derivative plants in China and interested in upstream expansions. An investment overseas, especially in the fast-growing China market, is the only alternative available to these companies as they have been unable to expand at home because of a powerful green lobby.

But it should be remembered that this is not the first time that the government has talked of relaxing the ban. Politics have previously come in the way and although relations between China and Taiwan have improved with the implementation of the Economic Co-operation Framework Agreement (ECFA) the blog thinks the Chinese government may not be willing to concede to all the conditions identified by the minister.

For instance, there is no reason why the Chinese government should accommodate to the the stipulation that Taiwanese companies have a majority stake. Currently foreign shareholding in cracker joint ventures is restricted at 50%.

And rather than ship raw materials such as ethylene and propylene to Taiwan, the Chinese are likely to be keen on capturing all the value addition.

The Taiwanese minister's statement is certainly welcome but companies still have a lot of work to do in softening their government's very rigid position on cracker investments on the mainland.

By Malini Hariharan

After methanol-to-propylene (MTP), Chinese companies are racing to build propane dehydrogenation (PDH) plants with eight new projects announced over the last three months.

The blog estimates that PDH projects with a total propylene capacity of 4.6m tonnes/year have been planned for completion in 2013-14 (a full list is available here China PDH projects.xlsx).

Most of the companies have yet to confirm the derivatives planned downstream of the PDH project and some such as Zhejiang Julong Petrochemical have indicated that some of the propylene will be sold in the local market. The companies have also not said if feedstock propane will be imported or sourced locally.

The interest in propylene is understandable. Chinese propylene demand, which accounts for 15% of global consumption, is estimated to be growing at 5-6%/year. And the country imported nearly 1.5m tonnes of propylene last year.

But can PDH economics be viable in China? Successful PDH operators in the Middle East have access to cheap propane and it is uncertain if this is going to be the case in China, especially if it has to be imported.

Some analysts are predicting ample availability in the country as natural gas is displacing liquefied petroleum gas (LPG) as a domestic fuel. Dimethyl ether (DME) blending with LPG is poised to take off with new national specifications likely to be announced by June 2010. Trials are also being carried out to use pure DME as a household fuel which should release even more LPG for petrochemical use.

On the supply side, the start up of new refineries has resulted in increased LPG capacity and the trend is likely to continue.

An easier approval process is likely another reason for companies to build PDH plants rather than crackers which are firmly in the hands of state-owned companies.

By Malini Hariharan

The gas shortage in the Middle East, especially Saudi Arabia, has been well documented with the situation expected to ease in the longer term once investments in new processing plants have been completed.

But in a recent report on the emerging market for LNG, Facts Global Energy (FGE) points out that more countries in this region are likely to start imports in the future. Middle East LNG imports are forecast to rise from less than 2.2m tonnes in 2010 to 15m tonnes in 2020 with Kuwait, Dubai, the Northern Emirates, Bahrain and Saudi Arabia emerging as the key importers.

Gas production in Saudi Arabia is growing with Saudi Aramco making heavy investments. However, this is unlikely to be sufficient to prevent a shortage by 2017-18. Saudi Arabia, says FGE, has the potential to emerge as the largest importer in the region - up to 4m tonnes/year by the end of this decade.

And if Saudi Arabia does not import LNG then it would need to burn at least 750 000 bbls/day of crude oil by 2020 for power generation on top of significant volumes of fuel oil.

As reported by the blog earlier, the Kingdom's booming oil demand, especially from the power sector where consumption is forecast to rise 7-8% annually for the next ten years, has become a matter of concern for planners.

A critical issue for Saudi Arabia and also for other countries in the region is the low price of gas which has been partly responsible for spiraling demand and the current crisis. But a revision in prices, especially for industrial consumers, is inevitable. LNG imports will have to take place at market prices. Plus new gas production, especially sour gas projects, will need higher prices to justify the investment.

Iran has taken the lead in revising prices upwards as part of a new reform plan approved by the parliament in October 2009.

Starting from December 2010, industrial projects including the petrochemical projects have to pay around $2.0/mmbtu for natural gas for the first year of the reform plan, compared with $0.53/mmbtu in early 2010, says FGE.

The ethane price has been set at US$145.1/tonne for the first year of the reform plan. Previously cracker operators paid less than $75/tonne.

Over the next 10 years Iran plans to increase gas prices for industrial projects to 65% of the average of export gas prices.

Saudi Arabia is also due to revise prices next year with some analysts expecting ethane prices to be raised to around $2/mmbtu from $0.75/mmbtu. But given current international price levels a more aggressive approach will probably be needed if the government is keen to curb demand growth.

By Malini Hariharan

The Chinese government's position on environmental safety has always been difficult to read. The official position for the last few years has been to reduce pollution by closing down old factories and forcing companies to invest in new technologies. But implementation has been sketchy as other priorities such as preserving jobs or boosting provincial economies have on taken precedence.

But is China now getting serious?

Industry sources told ICIS news last week that development of new refineries in the Bohai Bay Economic Region is likely to slow down because of government measures to boost environmental safety.

The move comes after a major oil spill at the ConocoPhilips China operated Peng Lai field at Bohai Bay.

Environmental regulations for petrochemical projects are also likely to be tightened and evaluation of projects would take more time.

Among the projects that could be scrapped are two refineries which are currently in the preliminary feasibility stage. The first is a 10m tonnes/year project by PetroChina and the second a 20m tonnes/year refinery by Shaanxi Yanchang Petroleum Group.

Existing plants could also face a stringent operating environment. The deputy minister of environmental protection recently announced a nationwide safety campaign targeting companies involved in production and use of hazardous chemicals and warned that companies causing pollution "will be severely punished".

"Environmental accidents involving toxic chemicals are on the rise, posing a grave threat to public safety and social stability," he acknowledged. Since January last year, the ministry has dealt with 239 environmental emergencies caused by chemical spills, some of which threatened water safety, he added.

A string of accidents this year and the resulting public outcry suggests that the government may have no choice but to take a hard stance on environment, health and safety issues

By Malini Hariharan

The blog has been trying to get more information on what's driving Chinese interest in liquefied petroleum gas (LPG)-based petrochemical projects.

Plans for eight propane dehydrogenation (PDH) plants have already been announced and more could be in the pipeline as Chinese companies believe the country's propylene deficit will expand in the coming years.

"Globally, LPG is in surplus and propane is abundantly available. There is a huge differential between propane and polypropylene (PP) prices which is driving these projects. Plus given the shortage in propylene companies believe that prices will remain firm," explains the C1 (an ICIS service) LPG analyst at Shanghai.

But although some of the companies have already tied up with international PDH technology providers they have yet to finalise sourcing arrangements for propane.

Most of the projects are in the coastal provinces and companies will be looking to import propane. Some are trying to contact Middle East suppliers for long-term contracts.

The scenario sounds similar to coastal methanol-to-olefins (MTO) and methanol-to-propylene (MTP) projects where companies are looking at importing huge volumes of methanol.

Economics of projects based on imported propane is a big question given the poor track record of many of Asia's PDH plants. But the blog was told a familiar story - Chinese companies are not evaluating profitability or doing a balanced analysis. What they are keen on is riding the latest wave.

By Malini Hariharan

The blog has been scanning ICIS news reports from the 31th Latin American Petrochemical Association (APLA) conference in Buenos Aires to gauge the mood at the event.

Participants appear to be sanguine despite the global economic turmoil with talk focused on upcoming investments.

Braskem is the forefront. Its joint-venture project with Idesa, Ethylene XXI, in Mexico is on track to start up in mid-2015.

Site preparation began last month, and the FEED (front-end engineering and design) work has nearly been completed, revealed Jose Luis Uriegas, CEO of Idesa.

Financing for the project is likely to be secured by Q1 2012.

The size of the project has increased slightly and cracker will now have a capacity of 1.05m tonnes/year, instead of the originally announced 1m tonnes/year.

Downstream production will comprise two high density polyethylene (HDPE) plants with capacities of 350,000 and 400,000 tonnes/year and one 300,000 tonne/year low density polyethylene (LDPE) plant.

In Brazil, Braskem has invited bids for technology and engineering work for a project at the Comperj refinery and petrochemicals complex in Rio de Janeiro.

The project includes a cracker and plants for PE, PP, styrene, ethylene glycol and paraxylene (PX). The plants are expected to start up between 2016 and 2018.

Braskem is also considering investing in a g