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 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

Alan Greenspan refused to categorise conditions in the US housing market as a bubble when he was chairman of the Fed.
But now he's retired and while plugging his memoirs, he admitted in a TV interview the other day that lots of froth in different parts of the US made up what was, in reality, one giant bubble - similar to the one that went pop in 2001 with the collapse of the dot com shares.
Take a look at this article from The Economist which suggests that there are six countries - Belgium, Britain, Denmark, Greece and Spain - where a housing market crash is even more likely than in the US. In these countries, the article suggests, average house price inflation is 47% above what is justified by fundamentals.
And then look at Asia. In Singapore, property prices have doubled - even tripled in some cases - over the last two years. Speculation reached fever pitch until an increase in government taxes and the global credit crunch brought sanity to the market a few weeks ago. Now there is talk is of another property price collapse similar to the 1997 meltdown.
Then there are the property booms in India and China.
You can argue, as the Asian Development Bank does, that Asian fundamentals are so strong that the continent can ride out a US credit-crunch driven recession.
But what goes up has to eventually, surely, come down and bubbles have historically always gone pop.
And so from this calculate how many polymers and chemicals go into the construction industry - from PVC to formaldehyde - and think of a worst-case scenario for your business. This could be the froth being taken out of the market - meaning property prices falling back to where they should be based on the fundamentals. But as is often the case when sentiment turns bearish, prices could collapse below their real value. Fantastic news for bargain hunters with nerves of steel, but not much use if you're operating a PVC plant.
The global property bubble could pop as early as next year, if the Fed 50 basis point cut and any future measures fail to bring the credit crisis under control.

According to this article from The Economist, total China exports account for less than 10% of China's GDP when "value add" is stripped out - much less than the headline 40% figure for 2007, which includes imported and domestic inputs.

Good news as we enter the New Year, given that a US recession now appears almost certain.

But what about Singapore and the other more export-dependent economies in Asia?

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.

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......

I am afraid I do when it comes to climate change and, as a result, don't always switch off lights when I leave rooms, don't always say no to unnecesssary plastic bags when I buy anything and will happily (and this could be the worst damage of all) jet anywhere in the world either for business or pleasure.

I am feeling guilty today for accepting a 20 minute speaking engagement in Hong Kong which won't generate any direct revenue for our training business.

Of course it might create that intangible benefit of goodwill plus I can also do some other meetings while I am there.

But is this the kind of marginal trip that businesses should cut back on and if this happens, what will be the effect on bottom lines as building goodwill is so important?

Equally important in Asia are all those face-to-face meetings. Relationships can have more value than sometimes even the quality of the product you provide.

How do you decide as a company, therefore, what is essential and what is unncessary travel?

And as an individual, what about those flights at the weekend for short breaks? I've often jetted off to Phuket in Thailand because I've been tired from travelling too much for work!

I was glad to discover I am not alone about my sense of the enormity of it all, for feeling that turning the odd light bulb off is not going to make a jot of difference in the great scheme of things - and for feeling trapped by the corporate machine that so voraciously consumes carbon.

This was thanks to yet another excellent article in the New Scientist on a meeting of the American Psychological Association which took place in Boston, Massachusetts, last month.

"It's easy to feel overwhelmed and think: 'What can little me do?' ", said David Uzzel at the University of Surrey in the UK during the meeting.

Paul Stern of the US National Research Council said a key deterrent was a lack of guidance on which actions would have the greatest impact, and feeling paralysed by the size of the task.

His research paper on this subject provides more detail - and to my great relief tells me that switching light bulbs off when you leave the room doesn't do that much good.

Some impractical suggestions he quotes from the Live Earth Global Warming Handbook include composting household waste, building a bat house or if all else fails, buying a camel.

I can just imagine the reaction of my neighbours, and I am sure the authorities, if I attempted these measures in Singapore. And anyway, my balcony isn't quite big enough to accommodate a camel - although my 20-month-old son would enjoy the rides around the condo.

Enough of the fatalism. I am going to get off my backside and do something practical.

The old saying "there's no such thing as a free lunch" has at last been proved true with the virtual collapse of the global financial system - and with it, quite possibly, the world's economy.

But for the last decade or more, the chemicals industry, like every other industry, gorged itself on an easy credit-fuelled property boom that's swept the globe.

In Singapore until very recently, real estate was red hot. Surprise, surprise, oversupply beckons, the market is flat and a pricing collapse cannot be ruled out.

Property bubbles come and go and so cyclical downturns were inevitable in Singapore, Thailand, India, China and Australia.

But perhaps the long-term fallout of the crisis - a much more prudently managed banking sector - might have negative implications for chemical demand-growth multiples over GDP.

As the problem rests mainly with US lenders, though, it's hard to say whether credit will also become much harder to obtain for good in Asia and other emerging markets.

But the appetite to lend money to average and below-average earners at high multiples of annual incomes - and with incredibly low "teaser" interest rates - will at the very least take a few years to recover.

Mohamed El-Erian, co-CEO and co-chief investment officer for Pimco, analyses the implications of this tighter credit climate in today's Financial Times.

It is worth asking your friendly neighbourhood consultant or in-house researcher whether any of their growth scenarios take into account the possibility of much tighter lending conditions for many years to come.

As the American Chemistry Council points out, $16,000 of chemicals are consumed when an average home is built in the states.

On a global basis, this alone means an awful lot of demand without counting consumption by real estate in other countries.

Yes, indeed, with all the talk of the collapse of capitalism and with liberal economists running for cover, dear old Karl might once again be the flavour of the month.

Oh how I remember those dewy-eyed days, standing on the picket lines in the pouring rain during the 1984-1985 Miner's Strike in the UK, believing passionately in the noble cause of the downtrodden working man as he (and she, of course - sorry sisters for putting you second) fought against the evil forces of Thatcherism.

Oh how I remember on one such occasion, a miner asking me what I did, to which I replied "a student in English Literature", to which he replied "what do you produce? Essays? You useless............(followed by two unmentionably rude words).

And how I remember when the forces of Thatcherism won and the miners were forced to march back to work I waited for some noble and great workers' song as they marched, some stirring ditty speaking of the struggle against the oppressor and the honour and dignity of honest toil as opposed to the grubby and slimy pursuit of evil money.

Instead all I heard coming out of the TV during the Look North programme was a rendition of that great brain-dead football chant, "here we go, here we go, here we go".

How our illusions can be shattered and how the illusion that pure capitalism works is also now in ruins.

This is still not The End of History as history never ends.

So why not a sensible compromise between socialism and capitalism - a workable system of regulations versus freedom to innovate? How about the Japanese model, may be, or that which is pursued in Singapore?

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.

...why not forgive debts as Nail Ferguson suggested in his article in the Financial Times last Friday.

His suggestion about giving those in mortgage arrears a break by converting their loans to longer term durations with fixed interest rates is backed up economist Nouriel Roubini. We've let the bankers off so why not Joe Public?

Without debt forgiveness for the like of you and I, the danger is that the dreaded downward spiral in chemicals demand will continue.

The housing crisis could get a great deal worse before it gets better - and might become a global rather than just a western problem. In Singapore, for example, 10,450 homes could be returned to developers after being purchased under a deferred payment scheme.

India has launched a petition for PP anti-dumping action against Saudi Arabia, Singapore and Oman. This is the first case of this type in India.

Producers, as we predicted on this blog earlier on, will be increasingly attempting to protect their home markets as everyone searches farther and farther afield to place distressed volumes.

Expect also that countries such as India - which much more lower applied than bound tariff rates under its WTO agreement,- will seek to raise tariffs to maximum levels predicted by the international trade body.

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This excellent article from The Economist about vertical integration got me thinking that if, say, auto makers start buying up parts suppliers in developed markets (in developing markets the plastics processing industry is too fragmented) we could end up facing a whole new set of industry dynamics.

Buying up your supplier, or at least offering them strategic advice and financing in the way that Toyota does, could end the days of the poor and relatively small converter squeezed between the big petrochemical producers and the giant finished-goods manufacturers. Resin producers might suddenly find themselves facing heavy rather than lightweight opponents.

"Nobody can see until the end of the month - never mind into the third quarter," commented an olefins trader recently.

"The reason is that very senior managers are too busy micro-managing everything, from getting involved in trying to track commodity chemical price direction to insisting on signing off every expenditure over a few hundred dollars.

"The problem with these senior guys when they track markets is that they are so out-of-the-loop - assuming that they have ever actually been in the loop - that they don't know what they are doing."

I heard of one big company where the CEO has even insisted on signing off travel authorisation to next week's APIC conference in South Korea.

In these days of tight credit and collapsed sales, it's understandable that much tighter control on spending is essential.

And during the boom years, can we all honestly say that every single trip we made was entirely commercially justified - and that we were always sufficiently foused on the bottom line to get maximum value out of each trip? Look back at your old expenses forms and count up the number of genuine "drinks with Mr Kim" entries.

It will be interesting to see how the lessons being learnt today will be remembered when the economy has fully recovered.

But from a HR perspective, a tough sign-off regime needs to be well-communicated.

So does the senior guys tracking shifts in chemicals pricing - whether competently or incompetently - otherwise the workers on the ground are likely to become demoralised.

They are unlikely to be able to leave in this current climate, but will surely perform far worse if they feel their opinions are being ignored for no good and well-explained reasons.

Off-the-record, of course, how does your company measure up?

And did you fiddle your expenses during the good times?

Picture: The Daily Mail

Ok, I lied - I am having trouble getting back into my petrochemicals bubble and so this post is not about polypropylene. Apologies to all those disappointed C3 H6 molecules out there.

I was sharing lunch with a highly demotivated Singapore-based chemicals industry employee recently and the great British 1970s sitcom, The Good Life, came to mind (see above picture for the full cast - don't you just love the clothes?).

In that sitcom, Tom Good, played by the actor Richard Briers, is meeting "Sir", the boss of the plastics processing company where he works as a draftsman. The company specialises in desiging and molding those little plastic toys you used to get (or might still get - I am not sure) free in your breakfast cereal.

"Sir" puts his arm around Tom, who he has noticed for the first time because he has been introduced by his friend Jerry, played by the late and great Paul Eddington, as "our top designer". Jerry is a monumental crawler and, as a result, is in an executive position.

Anyway, "Sir" says to Tom, or roughly words to this effect: "A new bubble has just come off the top of our think tank and I want you to take charge of this project - plastic hippopotamuses (or was it giraffes? Couldn't find on Google). Are you excited? Do you think you are the man for the job?". He is speaking in one of those annoyingly enthusiastic voices you may have heard in meetings and wished "if only I could have the presence of mind to fake it that well".

Tom, is of course, supposed to show enthusiasm in order to crawl up the slippery corporate ladder, but instead bursts out laughing, goes home, quits his job, and decides to become self-sufficient by growing all his own food - and keeping lifestock - in his suburban back garden.

To return to my lunch with the unhappy chemicals-industry employee, he had been ground down by having to bite his tongue in so many long and dull meetings that when his boss asked for ideas for a new corporate slogan, he replied: "How about 'The Relentless Pursuit of Mediocrity?' ".

He lives in a condo with a window box as a back garden and so growing fruit and vegetables for a new career is not option.

Anonymous contributions would be gratefully received for comments you would have liked to have made in company meetings, but felt unable to do so. This is your chance to let off some steam.

Source of Picture: www.autospies.com

Not an easy answer and not one much suited to a few paragraphs of blogging.

But here's one thought as the competitive environment becomes a great deal more difficult due to new Middle East capacity and the potential for China to move towards self-sufficiency in polyethylene and polypropylene: Have a chat with one of those poor old European refiners facing big naphtha surpluses.

Perhaps the refiners will be willing to do deals on long-term offtake deals at very preferential rates in order to keep operating. While gasoline might be falling in value in Europe for both local consumption and exports, diesel certainly isn't.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

September volume was down by 63% from April.

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

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

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

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

The Indian government has announced 17 November as the date for a public hearing to discuss the provisional anti dumping duties that it had imposed in June on imports of polypropylene (PP) from Saudi Arabia, Singapore and Oman.

The hearing will give a chance to all affected parties to present their case. Such hearings are usually a formality and do affect the end result which is a confirmation of the provisional duties.

But I have been told that it may be different this time as the Saudis, led by Sabic, are likely to put up a spirited defense. The Saudis have been busy pulling lots of government strings for the duties to be revoked.

Sabic and Advanced Polypropylene were hit the hardest - duties on their PP exports range from $440-$820/tonne. I was told that one of the reasons for the high level of duties was 'the lack of cooperation in sharing data' when the Indian government had sent its questionnaire earlier in the year. However, this attitude appears to have changed.

There's a lot at stake here and this is why the 17 November hearing is crucial. India is already in surplus and looks likely to be in this position for the next couple of years. So there's every reason for Indian PP producers, Reliance Industries and Haldia Petrochemicals, to check competition. On the other hand, many Indian processors are unhappy as the duties would force them to rely on local supply.

For the Saudis, and also other Middle Eastern producers, India is not such a big market for PP. But the ADD threat is a worrying global trend that they want to ensure does not take off.

Besides India, China is investigating methanol and 1,4-butanediol (BDO) imports from Saudi Arabia. And the European Union (EU) is investigating on polyethylene terephthalate (PET) imports from United Arab Emirates (UAE) and Iran.

The growing protectionist measures have provoked a long chain of protests with the most recent one being in October by the Gulf Petrochemicals and Chemicals Association (GPCA).
The GPCA Secretary General Dr. Abdulwahab Al-Sadoun has said that the association will strengthen coordination with Gulf Cooperation Council (GCC) Governments to ensure that exports of petrochemicals and chemicals from the Gulf region are not restricted by anti-dumping regulations and other trade restrictions
"The GCC industry and our governments will not accept the application of anti-dumping regulations against exports of petrochemicals and chemicals from the Gulf. We have seen a surge in protectionist actions brought by countries to block imports. These cases are baseless and violate international rules," he said.
The investigations may not sound fair to GCC producers but they face an uphill task in convincing the Indian and Chinese governments to ease protection to local producers. A lot will depend on what the GCC governments can offer or withhold.

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.

Stay cool and don't panic!

Source of picture: www.wired.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

An ethane shortage is slowing Shell Chemicals' ambitions for building at least one cracker complex in Qatar, Ben van Beurden, executive vice-president of the company said last week.

"Ideally, we'd like to build two crackers and two OMEGA process plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane," he added.

"There are only so many allocations of ethane available from Qatar at the moment and plenty of interested parties."

Van Beurden was speaking on the sidelines of the official opening of Shell's 750,000 tonne//year OMEGA process MEG plant at Singapore's Jurong Island, which came on-stream last month.

Shell, ExxonMobil and Honam Petrochemical are three foreign companies known to be pursuing cracker projects in Qatar as joint ventures with Qatar Petroleum.

Both the Shell project - said to be delayed beyond 2015 - and that of ExxonMobil would run 100% on gas, whereas Homan's proposed plant would be mixed liquids and gas feed.

Qatar recently extended a moratorium on development of all types of new gas-fed industrial projects from 2012 to 2014 in order to further study the reservoir behaviour of its North Field gas reserves.

Van Beurden also said that using naphtha from the Pearl Gas-to-Liquids (GTL) project in Qatar wasn't a viable economic alternative as feedstock for a Shell cracker complex in the country.

"The numbers don't work compared to the economics of gas cracking, and to the alternative value from shipping the naphtha to where the demand is strong - for example, to Asia."

The Pearl GTL project - a joint venture between Qatar Petroleum and Shell - will produce high-paraffinic naphtha, along with gasoil, base oils, kerosene and normal paraffin.

Mechanical completion is due in Q4 next year with production ramp-up expected to take place from late 2010 into 2011, according to a Shell statement.

Last month, Shell further cemented its relationship with Qatar when it sold some its shares in cracker operator Petrochemical Corp of Singapore (PCS) and polyolefin producer The Polyolefin Co (Singapore) PTE Ltd to Qatar Petroleum.

"We have a long relationship with Qatar and this was one of several options we have been pursuing with them, both in Qatar itself and overseas.

"We are continuing to look at a cracker project on the eastern seaboard of China with Qatar Petroleum."

Shell, PetroChina and Qatar Petroleum announced in August that they were planning to build a refinery and petrochemical complex in Zheijiang province.

The implementation of a zero-tariff regime in Asean from 1 Jauary 2010 has raised concerns among polymer producers in Indonesia and the Philippines about intense competition from Singapore and Thailand leading to a erosion in market shares.

Producers from these two countries are lobbying to defer or block implementation of zero tariffs. But a trade lawyer says the going will be difficult.

"I have heard that Indonesia is pushing for a postponement of the new duty structure. Even if the government agrees the customs department is not prepared as [new] forms are not ready," says one Singapore-based exporter.

But Edmund Sim, partner with Appleton Luff, points out that it would be difficult for Indonesia to renegotiate as the agreement has already been ratified. "It is pretty much impossible," he says.

Pic source: Fotopedia

"What is allowed under the free trade agreement (FTA) terms is for a country to suspend tariff concessions if it can be determined that increased imports have caused injury or economic damage to local companies. But in the history of FTAs this has very rarely been implemented. And even if this is put place it would be a temporary measure - say for a period of 3-5 years," says Sim.

The second option is to go for antidumping action.

"If the industry is worried about a flood of imports they can go in for this option by proving that pricing was unfair and that the local industry suffered material injury. This type of action is possible and can be extended for an indefinite period," says Sim.

But this is an expensive option because of high legal fees and it takes time to enforce. Companies also have to wait for a few months before they can initiate action.

"You have to build a record. You cannot say on 2nd January that there is dumping. You need time to build the case; usually 6-8 months is enough to get data to make a claim," he points out.

"The simple option [of raising import duties] ended when the FTA was signed. Now they have the safeguard option, which is untested, or antidumping, he adds.

Besides the Asean FTA, Indonesian media has reported that companies are also asking for a delay in the implementation of the Asean-China FTA, which comes into force from 1 January 2010.

There is a provision in the Asean-China FTA for a temporary delay in tariff reduction by reclassifying goods as 'sensitive' and 'highly sensitive' products. The duty elimination could then be delayed to 1 January 2015.

But the problem for Indonesia is that there are limits on the number of 'sensitive' and 'highly sensitive' products and the deadline for classifying goods was back in 2004, points out Sim.

It is also uncertain whether China and other Asean countries will allow Indonesia to deviate from the FTA.

"Either way, for Indonesia to delay tariff elimination will require some agreement by the other Asean members and China [in the case of the China-Asean FTA] otherwise Indonesia will be in breach of its legal obligations," says Sim.

By Malini Hariharan

Eight years after agreeing to the Asean-China FTA (ACFTA) and a few days after its implementation the Indonesian government has succumbed to industry pressure to ask the Asean Council to renegotiate tariff reductions on 228 categories of goods across eight industrial sectors. In return, it has offered to accelerate implementation of tariff cuts on 153 tariff categories.

The 228 tariff categories include steel, iron, textiles, electronics, basic inorganic chemicals, petrochemicals, furniture, footwear, machinery, cosmetics and herbal medicines.

The government has been facing intense pressure from local companies who fear that competitive imports from China will force closure of their businesses.

Last month, a senior official at the Indonesian Employers Association (Apindo), warned that as many as 7.5 million workers (about a quarter of the country's 30m strong formal sector workforce) could lose jobs. He predicted that layoffs would begin gradually in about eight months' time.

But Indonesia had sufficient time to prepare the domestic industry for the rigours of Chinese competition. And if this was impossible the government could have approached the Asean Council much earlier.

"What were you waiting for?" questions the Jakarta Globe in this report and blames the government and industry for failing to anticipate consequences.

Anwar Suprijadi, former chief of the country's customs and excise office is reported to have said that he had warned colleagues in the Trade Ministry as well as those on the House of Representatives budgetary commission two or three years back about the problems the country would face once the Asean-China trade pact was implemented. "I warned that this [pact] should be reviewed," he said.

Pic Source: Jakarta Globe

Edmund Sim, Singapore-based trade lawyer with Appleton Luff, points out in this excellent analysis that other Asean members may be tempted to follow Indonesia.

"That Indonesia and the Philippines, with active business lobbies and media, reacted so strongly was somewhat predictable. Nevertheless, that business interests in those countries and elsewhere in ASEAN waited until the last minute, months and years after the negotiation, ratification and implementation of the FTAs, reflects fundamental deficiencies within the region's operating system. Clearly ASEAN governments and institutions such as the ASEAN Secretariat did not adequately prepare the business sector for trade liberalization. The corporate sector should have been more involved in the process from the earliest stages," he writes.

It is still early to say if Indonesia will be successful. The Jakarta Globe states that the Asean FTA council has 180 days to make a decision. Meanwhile, the trade deal will be implemented as planned.

A clause in the deal states that the council can reject Indonesia's request if other Asean countries oppose it. However, if the council sees Indonesia's offer as reasonable, it will represent the country in new negotiations with China.

But the Indonesian government has indicated that it will maximise the use of safeguard duties. A senior government official said recently safeguard measures would be used as soon as 30% of the domestic market for any product was controlled by China.

By John Richardson

CHINA'S decision yesterday to increase the amount banks must set aside as reserves and two interbank interest rate rises in the space of a week are designed to tighten monetary conditions as worries grow over overheating and inflation.

Lending reached Yuan 600bn ($88bn) in the first week of this year, not far short of the full-month average last year.

The New Year fresh-loans surge was noted by a Singapore-based source with a North American polyolefin producer earlier this week, when he commented that recent price rises were partly the result of "an even greater ability by traders to speculate".

We pointed out last year that easy credit appeared to be enabling China's many thousands of traders and distributors to buy, hold and sell stock - distorting the true demand picture.

This could have been a significant factor behind the big increases in polyolefin imports, despite an overall demand picture that should have been weaker when you took into account the decline in re-exports.

The credit surge has made it easier to trade not only in chemicals and polymers but also in other commodities, real estate and equities during a period when maximising Yuan revenue has been the focus - ahead of a possible revaluation of the currency at some point this year.

"There's a lot of talk about hot money flowing in from overseas, but most of this is locally-held money being shifted from dollars into Yuan," said a Shanghai-based US expat.

"Because bank deposit rates are negative in real terms and financial markets are undeveloped, the only ways to make money are in real estate, equities and commodities."

And amazingly, we also discovered that the same trader can switch between chemicals, polymers, real estate and equities with such carefree abandon that the underlying motive for a purchase can be obscured.

Sometimes buying a chemicals cargo is all about getting the 90 days' credit to gamble and make money somewhere else, for example, in the stock market. If the resulting profits are big enough a trader can be quite happy to dump a chemicals cargo at a loss.

The easy credit might well have also encouraged overproduction of finished goods with reports that textile mills were told to keep operating via soft loans in order to keep people in jobs.

True, growth in retail sales seemed spectacular. But a Singapore-based oil and gas consultant told me this today: "What's going on? I still don't get. Despite the record-high auto sales in China last year gasoline and diesel demand only increased slightly and so are a lot of new vehicles that have been recorded as sales actually sitting in showrooms somewhere?"

This would be consistent with the analysis of one of the China sceptics, Michael Pettis - and also the China Economic Quarterly which tends to take a more positive view.

Both told this blog last September that retail sales were a bad proxy for real consumption growth because China's retail sales figures include government purchases and shipments to shopkeepers.

If the steps taken by the government to reduce credit are successful, chemicals demand will therefore go down as speculation abates and surplus industrial production is reduced.

But these measures might not be enough to take the air out of frighteningly big asset bubbles.

"The average real-estate price in Beijing is Yuan 20,000/sq metre. That is a 30% increase in one year," said a Beijing-based chemicals consultant.

"But if you look at salaries, a fresh graduate gets Rmb2000-3000/month. This is causing a social problem. 

"Shenzhen (in southern China) has seen a 90% increase house prices."

And the Shanghai- based US expat added: "It doesn't feel right - it still feels like a bubble economy.

"I have an apartment on the outer ring road of Beijing which is 130 square metres and is right on the flight path from the airport and yet it's more expensive than downtown loft apartments in many US cities.

"With property so expensive here average salaries are still only a quarter of US levels in major wealthy cities such as Shanghai, and even less elsewhere as you move further inland.

"A lot is made of the fact that the average price of an auto is only $17,000 here compared with $30,000 in the US, but direct comparisons are not valued because very cheap local cars - some of which might come with brakes as optional extras - drag the average price down. Foreign-branded autos in China cost 50% more than in the US.

"Gasoline prices are now only $3.71 a gallon as against $2.54 a gallon because of fuel-price liberalisation and there are other signs of inflation. This place is getting expensive."

The danger is that if further measures are taken to deflate the economy, the end-result could be the same as in December 2007 - a housing slump with an overall severe economic decline.

Such is the delicate state of the world's recovery with the rest of Asia increasingly dependent on trade with China ("the second decoupling"), that decisions taken in Beijing over the next few months are going to be of huge importance.

Or, perhaps, the momentum generated by policy steps already taken means that bubbles will keep on inflating and inflating - making the disaster, when it comes, of even greater magnitude 

As famous investor James Chanos, who is shorting China, is quoted as saying: "This could be "Dubai 1,000 times over".

By John Richardson

Linear-low density polyethylene (LLDPE) pricing in China has become increasingly divorced from industry fundamentals as a result of the growing role of the Dalian Commodity Exchange's futures contract, claimed a Singapore-based polyolefin trader late last week.

And the contract is setting the physical market, resulting in Dalian performing a similar role that of NYMEX on the price of crude as result of very easy lending conditions, a petrochemicals consultant added today.

Financial as well as polyolefin industry players have become heavily involved in Dalian, the trader added.

The big growth in LLDPE volumes traded last year -as this chart from my fellow Paul Hodges illustrates - was supported by the huge surge in banking lending in China.

The contract is also being used by polyolefin traders to make money through pure one-way speculation and as a means to hedge risk in the physical market, the trader said.

"Buyers are using the contract to hedge, although I have seen little evidence of producers trading on the exchange.

"Everybody seems to be using the exchange as an indication of sentiment and if they are not actually setting pricing off Dalian, they are using it as a guide."

But the consultant added: "I believe that Dalian is, in fact, setting the physical market as PE becomes more speculative.

"It has come to play the same role as NYMEX for crude oil, meaning that the contract often moves on sentiment and speculation rather than on fundamentals."

Assessing the pricing outlook for PE now involves looking at comparative margins on real estate, equities and other futures contracts in metals and agricultural commodities, the trader continued.

"It's not just about looking at supply and demand fundamentals anymore," he said.

"Financial and chemicals industry player will look at margins across all the different futures contracts, and in equities and in real estate, to decide where the best returns lie and flip their money accordingly. I have to do the same to figure out PE price direction."

China's huge increase in lending has had comparable effects on the physical market with polyolefin traders, and traders in other chemicals and polymers, sometimes only buying a particular cargo in order to get their hands on credit in order to speculate elsewhere.

This has led to some chemicals and polymers cargoes being sold at below cost because sufficient profits have been made in other commodities.

"It's also worked the other way round - i.e. somebody raising credit through buying another commodity because his main objective has been to speculate in polyolefins," added the trader.

So go figure this: You have an increasingly speculative physical PE market which is so divorced from the fundamentals that there's a bigger need to hedge. The problem is that one of the major hedging mechanisms - the Dalian contract - is also highly speculative!

The multi-million dollar question now is whether China's decision to tighten liquidity through raising the reserve requirement for commercial banks will reduce the amount of froth in the PE market and across commodities in general - both for physical cargoes and on futures exchanges.

As Paul Hodges also noted last week, several fiscal tightening measures have already taken place which could reduce trading volumes in both the Dalian LLDPE and polyvinyl chloride (PVC) futures contracts. We will look at relationship between physical PVC pricing and the futures contract in a later post.

LLDPE trading volumes so far this year are down by 27.77% on January 2009, according to the exchange's website today.

This might make a successful launch of a major futures contract in polypropylene (PP) - rumoured to be under evaluation in China this year - problematic.

PP producers are reportedly jostling for position to get their grades accepted under this planned contract in order to support physical sales.

If a grade made by only one producer is traded through a PP contract, a hedger could be more likely to also buy physical volumes of that grade as, in theory, hedging should work more efficiently.

But China constantly loosens and tightens credit and so, even if Dalian becomes less relevant this year, it might well come back.

There are also indications that the Chinese government wants to make exchanges such as Dalian more sophisticated in order to set its own global benchmark prices for commodities.

"It no longer wants to be just the price taker from exchanges such as NYMEX. It also wants to be the price setter," said a Shanghai-based chemicals industry observer late last year.

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

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

A remarkable feature of early 2010 has been the tremendous margins enjoyed by Asian ethylene producers.

Profitability in February, up until the end of the second week, had been the strongest since 2001, according to my colleagues who produce the weekly Asian Ethylene and Polyethylene (PE) Margin Reports. We will provide some graphs illustrating their findings a little later.

Reasons include:

A dip in exports from Iran as all gas streams have been diverted to power and domestic consumption during the winter months

*Strong co-product credits from benzene in early January. These fell back, but then recovered late last week

*Shell Chemicals buying ethylene to run its new monoethylene glycol (MEG) plant at Jurong Island in Singapore

PE profitability, too, has been good - although the stand-alone players have inevitably come under a lot of pressure of as C2 prices have soared.

It's been so easy over the last 18 months to paint many gloomy pictures of the future that haven't come true for all sorts of reasoj.

And right now in the case of ethylene, Iran might be in a position to export more C2s as the weather gets warmer.

Shell is reported today to be buying more ethylene - but this time to test-run its new Singapore cracker.

When the cracker comes on-stream, which could occur in March, the global oil and petrochemicals major will be exporting around 115,000 tonne/year of ethylene from Singapore.

And perhaps needless to say, there are the threats to olefins and polyolefins in general from tighter credit in China and new capacities yet-to-arrive in the market.

This slide, from the re-launched ICIS global ethylene capacity tracker, illustrates the flood just around the corner:

By Malini Hariharan

Just when Asian propylene prices started easing comes news of disruptions in production and price hikes in the West.

Propylene availability in Europe was hit after a strike by Total's refinery workers early in the week resulted in the closure of 36% of France's C3 capacity. This forced Total to declare force majeure on propylene supplies. Then Shell Chemicals declared force majeure on ethylene and propylene supplies from its Moerdijk cracker in the Netherlands due to reduced operating rates.

The strike at Total has been called off and production at the refineries will be restarting soon but the developments helped tighten an already short European market and supported an increase in the March propylene contract price, reports ICIS news.

The US too is expected to see increases in propylene prices with one producer nominating a $110 increase for March.

Asian propylene prices have yet to react strongly to these developments although sellers are trying to raise prices. They will of course be supported in this endeavour by upcoming cracker turnarounds.

"Some traders are also trying to take Asian propylene to the West; we had an offer. But the arbitrage window is not big. Asia appears to be adequately supplied," says a source from a major Asian cracker operator.

Meanwhile, the propylene situation has started to impact PP markets. European buyers are bracing for PP price hikes in March while offers in the Middle East have already risen by $30/tonne, reports ICIS news. Availability from this region is likely to be constrained in March as Oman Polypropylene and Advanced Polypropylene will be carrying out maintenance shutdowns in March.

"Polymer markets opened with a bang after the Lunar New Year; prices went up yesterday. There are the Asian turnarounds and people are still struggling with new plants," the source points out. This is certainly creating room for optimism, he adds.

By John Richardson

THE whinging is getting almost unbearable in Southeast Asia over the Asean-China Free-Trade Agreement (ACFTA).

The deal was under discussion for EIGHT years and yet chemicals and polymer producers and customers seem to have left it until after-the-fact to start raising objections.

Indonesian industry association representatives have gone as far as to suggest that 7.5m out of the country's total of 30m manufacturing jobs are under the threat as a result of ACTFA.

And at a conference in Singapore today I had to endure polymer producers from Southeast Asia moaning about not being able to compete with big bad China.

"There's no point in complaining now. What needed to happen was for industry representatives to take an active interest in negotiations for these free-trade deals right from when they first began," said a well-informed source.

"But instead this was pushed to the back of the collective mind. Clearly, China's competitive position has improved greatly since the talks started eight years ago, which is exactly why producers should have been constantly engaged in the debate.

"It will be very, very difficult to change the terms of ACTFA now because of the level of politics involved."

The approach of the Southeast Asian industry players was in stark contrast to that of their counterparts in India who managed to get petrochemicals excluded from an India-South Korea free-trade deal a few years ago, he added.

Have the lessons being learnt? Let's hope so as discussions take place for Singapore-European Union (EU), Thailand-EU, Vietnam-EU, Indonesia-EU and Malaysia-EU free-trade deals.

More on these negotiations later on.

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.

.....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.

Singapore's container port

Source of picture: www.gcaptain.com

By Malini Hariharan and John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By John Richardson

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."

Ben van Beurden of Shell Chemicals

Source of picture: Shell.com

By John Richardson

SINGAPORE looks set to soon make some further announcements on high-value investments downstream of the new Shell Eastern Petrochemical Co (SEPC) cracker.

The complex - which comprises an 800,000 tonne/year mixed-feed cracker and a 750,000 tonne/year OMEGA process monoethylene glycol (MEG) plant - was officially opened yesterday.

SEPC already has a contract in place to supply raffinate 1 and 2, after butadiene has been extracted, to Lanxess's 100,000 tonne/year butyl rubber project, said Ben van Beurden, executive vice president of Shell Chemicals, in an exclusive interview.

SEPC is a wholly-owned subsidiary of Shell Chemicals.

Lanxess, the German speciality chemicals major, is due to hold a groundbreaking ceremony for its project this month.

The start-up date for the planned facility was advanced to Q1 2013 in January this year, after being earlier delayed by the global economic crisis.

Butadiene sales from SEPC (it has a 155,000 tonne/year capacity) were a mixture of over-the-fence and exports, van Beurden added.

And he said: "We also have surplus propylene and ethylene (from the new cracker) and we are in advanced discussions on an array of options to make use of these feedstocks. Announcements will be made in the coming months."

He was unable to disclose any details.

My colleagues at ICIS pricing estimate that Shell has 150,000 tonne/year of ethylene for export at the moment with van Beurden adding that some surplus C2s are being sold to domestic customers.

Some of the propylene produced by the cracker (450,000 tonne/year) is being sold to the Shell Singapore-based styrene monomer/propylene oxide subsidiary, Seraya Chemicals, with exports also taking place, he added.

The cracker also has the capability to produce 230,000 tonne/year of benzene.

(Shell Chemicals' mixed-feed technology gives it the ability to cracker very light to very heavy feedstock, including hydrowax. The hydrowax is being supplied from a modified hydrocracker on Bukom Island in Singapore, where the cracker is located. Shell's MEG plant and the rest of Singapore's petrochemicals industry - and where the new investments will take place - is just across the water in neighbouring Jurong Island)

Van Beurden was keen to stress that SEPC's surplus products are all being sold on long-term contracts.

But Singapore is clearly looking to use the new complex as a basis for much greater and wider value-addition: The SEPC complex was expected to lead to a new wave of high-value downstream investments in Singapore, the country's Prime Minister Lee Hsien Loong said in a speech to mark the official opening.

.

Gillian Tett: Worth Listening To

Source of picture: afponline.org

By John Richardson

The excellent journalist Gillian Tett, whose book on the financial crisis - Fool's Gold is well worth a read - again hits the nail on the head in this piece in today's Financial Times.

She says that if the whole of Greece suddenly vanished into the ocean it wouldn't make that much of a difference to the global economy in terms of demand for tangible things, real things - including chemicals, of course.

But she argues that what matters is how Greece interconnnects with bond and banking markets, with signs emerging that banks across Europe are once again becoming reluctant to lend.

It is the lack of understanding of these interconnections that's perhaps creating the fear factor behind the falls stock markets in Asia and the West.

Bear Stearns was just one bank that failed, but it was its connections with the wider financial system that  ended up mattering . Its collapse also pointed to rot throughout the system

The same could apply to Greece if Portugal, Spain, Italy Ireland - and even the UK - follow.

Chemicals company CEOs were careful to point out on the release of strong Q1 results that there were lots of risks ahead, including what BASF's Jurgen Hambrecht warned was the likely withdrawal of national goverment stimulus from the second half of this year.

Peter Voser, CEO of Shell, highlighted this same risk during a press conference earlier this week to mark the offiical opening of the company's new cracker complex in Singapore.

But if the Greek crisis spreads, more not less government money might be needed to shore up developed-world economies.

Just where is that money going to come from?

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?

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

India's long-running investigation into dumping of polypropylene (PP) from Saudi Arabia, Singapore and Oman is inching to a close. Final anti-dumping duties (ADD) are expected to be announced soon, say industry sources.

Affected producers have made their case but are unlikely to escape from ADD. Provisional duties, ranging from $44.40 to $1033.65/tonne, were announced in July 2009.

Some industry sources say that while the upper limit is likely to be brought down, duties would be extended to all Saudi producers. Interestingly, the Indian government is said to have examined the discount that Saudi Arabia offers on feedstock propane supplies while formulating final duties on PP exports from the Kingdom.

After completion of this case, Indian officials are expected to focus on investigating another claim of PP dumping, this time by producers from South Korea, Taiwan and the US.

Meanwhile, Indian polyolefin demand remains firm and is projected to have grown by around 5% in the last quarter. The number could have been higher but falling prices dampened buying activity in the last couple of months.

And sentiment continues to be weak with market players uncertain if the bottom has been reached.

The layout of the Pasir Gudang complex

Source of picture: Titan Chemicals

By John Richardson and Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

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.

Singapore's Marina Bay Sands complex

Source of picture: Washington Pos

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Biomass is another option being evaluated.

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

Pic source: Focus Taiwan

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

Just when polyolefin markets have started recovering operating issues are cropping up at plants in Asia.

ExxonMobil was forced to shut its 600,000 tonnes/year polyethylene (PE) plant in Singapore on Tuesday for two weeks due to undisclosed problems. The PE plant had faced problems in early July when it was shut down for about a week.

Shell Chemical's 800,000 tonnes/year cracker in Singapore was shut down on Tuesday evening and it is likely to take 1-2 days for operations to resume, market sources told ICIS news.

"The flare system at Shell's Pulau Bukom manufacturing site was activated in the afternoon of 3 August 2010 due to an unplanned disruption to a process unit," a Shell spokesperson said.

"The rest of the operations [were] not affected," said the spokesperson, without elaborating on the current status of the cracker.

There are now polyolefin plants downstream of the cracker but Shell has a surplus of ethylene and propylene at the site.

In Taiwan, Formosa Petrochemical plans to make a 30% operating rate cut at its PE plants in August and September due to shortage of ethylene. Supply of the monomer has been affected as the company's No1 cracker has been shut down after a fire in early July.

The company has a 350,000 tonne/year high density PE (HDPE) plant, a 264,000 tonne/year linear low density PE (LLDPE) unit and a 240,000 tonne/year low density PE/ethylene vinyl acetate (LDPE/EVA) swing plant

A planned shutdown at its No2 cracker has now been deferred from late August to end-September or early October. But the company also indicated that the operating rate cut could extend to October.

And Formosa Chemicals & Fibre Corp (FCFC) is likely to cut production at its 450,000 tonnes/year polypropylene (PP) plant as Formosa Petrochemical will not be able to supply full volumes of propylene.

Formosa Petrochemical has yet to restart an olefins conversion unit (OCU) and two residual fluid catalytic crackers (RFCC) after a fire at its refinery last month.

"We'll have to cut PP production in August but we don't know yet how much to cut back," an FCFC source told ICIS news.

Another group company, Formosa Plastics Corp (FPC), faces a similar situation.
We don't plan to cut [PP] production yet because we still have propylene in storage. But we may experience feedstock shortage in September and October when Formsoa Petrochemical shuts its No 2 cracker for maintenance," an FPC source said. FPC runs a 350,000 tonnes/year PP plant.

The blog has been highlighting some of the factors behind the recent recovery in prices. The trend continues - PE prices have already inched up by $50-100/tonne this week while PP prices have risen by $40/tonne. Ethylene prices have risen by $20/tonne over the last four weeks led by strong crude and naphtha values.

But the new round of operating problems is likely to create room for producers to push through more price hikes.

By Malini Hariharan

Indian polypropylene (PP) demand continues to remain strong with most end-use sectors showing good growth and it is local producers who are catering to the additional requirement.

Polypropylene (PP) demand is estimated to have expanded by 13% to 809,000 tonnes during April-July, reports my colleague Prema Viswanathan on ICIS news.

But import volumes have dropped to 114,000 tonnes from 182,000 tonnes during the same period last year.

Reliance's new 900,000 tonnes/year plant at Jamanagar has no doubt boosted domestic supply. But exporters to the country pointed out that provisional anti-dumping duties (ADD) on product from Saudi Arabia, Singapore and Oman had been a major deterrent.

With final duties due to be announced very soon (possibly next Monday) import volumes are likely to fall further during the rest of the year.

Besides these three countries India is also investigating PP exports from South Korea, Taiwan and the US. Provisional ADD against these three countries are likely to be announced in September, said an industry source.

And domestic supply will be even higher this year with the start of Indian Oil Corp's (IOC) 600,000 tonnes/year plant. The company has yet to fully stabilise operations at its new cracker and derivatives complex but volumes have started flowing into the market. The company has also exported small volumes to Pakistan across the land border. If this proves to be successful Pakistan would give a ready outlet for the surplus PP that has been added to the Indian market this year.

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.

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.

"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.

Michael Corleone once told his fiancee, "The old way of doing things is over - even my father knows that. In ten years time, the Corleone family will be entirely legitimitate" and ten years later he was still killing lots of people. So beware of what follows...

Source of picture: www.i-italy.com

By John Richardson

IT has been a remarkable year, one that has exceeded just about all expectations in Europe, the US and Asia as my colleague Nigel Davis wrote in an ICIS news Insight piece yesterday.

Confidence remains high that we could even be though the bottom of the cycle, as we said on Monday.

We have talked at length about the supply issues that continue to keep markets tight in certain grades of polyolefins. While overall profitability, as this Nexant ChemSystems report points out, might have been down very sharply in Q3 over the second quarter, this doesn't reflect persistently strong pockets of profitability.

On Monday we also referred to how excellent demand growth in certain geographies - most obviously, of course, in India and China - might be distorting what on a global basis remains a very shaky outlook.

But the doom-mongers, including us until the first quarter of this year when we started questioning our old assumptions, keep being wrong. What if the old ways of measuring demand growth are no longer good-enough because of an historic shift in the way the emerging-market economies are behaving?

"Look at India, China, Indonesia and Vietnam. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," a Singapore-based oil and gas consultant told the blog yesterday.

This got us thinking that the gizmos that people want today are creating much-greater chemicals and polymer demand than a macro analysis of the fundamentals might indicate.

Clever marketing campaigns and technology innovation are creating more wants that at any other time in history (in the West, though, the focus has switched back to needs).

"The standard approach is you take an estimate of GDP (gross domestic product) growth for a particular country and use that to calculate the rise in consumption of plastics and chemicals," continued the consultant.

"This has been the traditional base method, with varying degrees of further sophistication, that companies, consultants - everybody - and you as journalists have slavishly reported these numbers as if they were the gospel truth - have used in the past."

The blog now wonders whether we need deeper analysis further downstream into different end-use applications to understand the impact of emerging market growth - that stimulation of greater wants - on demand. What, for example, will be the consumption of polymethyl methacrylate into flat-screen TVS and polypropylene (PP) into autos?

"I read recently that Indian auto sales have risen by 30%. This is probably why India is reporting such strong demand-growth numbers for random co-polymer PP as you wrote about in Monday," said the consultant, who agreed with our above point.

One assumption we used to hold was that all investment bubbles had to eventually burst.

But could emerging markets behave differently because of demographic, resource availability and government policy differences with the West?

For example, property prices have increased three -to four fold in Mumbai over the past five years.

The city is short of housing (even the middle classes are being forced to live in poor-quality housing or even slums because of this shortage), and so why shouldn't price rises continue at around the same pace?

In Singapore, the property market is going sideways following government tightening measures - but limited land availability and population pressures might guarantee long-tem inflation, albeit at more moderate rates than recently.

As we said, we need more detail - more granularity - as you go further downstream which requires deeper study into the opportunities and also the risks of the emerging-market boom.

The most obvious risk is the impact on energy costs if this boom continues. Are there enough resources to meet these levels of growth?

How will making better use of resources, through dealing with issues such as water pollution and all the challenges of urbanisation, benefit the chemicals industry?

But returning to the here and now, there seems to be a deep mistrust of the conventional top-down way of looking at things.

As a result, the pessimists are not being believed as they have long been predicting another post Lehman Bros collapse, but it has yet to happen.

This represents a danger in itself in that just because a lot of the commentators have been wrong so far doesn't necessarily mean they will continue to be wrong.

But month after month when sales figures keep exceeding budget targets that have been based on some of the gloomier forecasts, what is the chemicals corporate world supposed to think?

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.

Cloth nappies?....you have to be kidding

Source of picture: babygavin.com

By John Richardson

IT IS the biggest transformation that the global economy has probably ever undergone, resulting in numerous opportunities and challenges for the chemicals industry as emerging markets continue to boom.

The obvious opportunity is for those who can meet voracious demand growth. But where will the supply of affordable commodity chemicals and plastics come from to prevent this remarkable transformation from stalling?

Innovation will be the key at the higher end of the business, as resource constraints create the need for new technologies.

Breakthroughs will be needed, for example, to raise energy efficiency and provide clean and safe water for the tens of millions of people who every year are migrating to ever-more overcrowded cities.

But while the long-term upward trajectory seems assured as the developing world displaces the West as the main global economic driver, medium and short-term dangers abound; the most obvious one right now is a currency war.

"Look at India, China, Indonesia and Vietnam alone. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," said a Singapore-based oil and gas consultant.

"Traditional spreadsheet-based methods of measuring growth are no longer good enough by themselves. Some amazing disruptions are taking place that you need to be aware of in order for your old models to be thrown out so you can start again."

Take India as a good example, where the local polyolefin industry is working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper carriages to bedding made from non-woven polypropylene (PP).

Arguments being used include reducing what must be the enormous laundry bill incurred by the state-owned Indian Railways. And as the non-woven PP sheets and pillowcases are disposed of after one use, passengers would be guaranteed a clean bed.

Furthermore, it makes it very economically viable to recycle PP-made bed clothes, as there is only one collection point: The train's terminus.

An estimated 6bn people travel in India by rail every year. Nobody has calculated how much extra PP demand this could amount to.

But it has been estimated that if India switched entirely from sacks made of jute, a natural material, to those made from raffia-grade PP, this would create the need for an extra 1m tonnes/year of the polymer.

End-users in India and other emerging markets are incredibly cost-sensitive, however.
And in many cases, these disruptive changes are not about sophisticated polymers, as in the case above with efforts to replace sacks made from jute.

The Gulf Cooperation Council (GCC) countries in the Middle East will not supply the huge new volumes required because of a shift in strategy and feedstock availability.

Producers in India, such as Reliance Industries Ltd (RIL), and those in China are in a great position to meet the demand. Sometimes they have both location and feedstock cost advantages.

In the case of RIL, it has a strong raw materials position thanks to its huge refinery capacity at Jamnagar, in India's Gujarat state.

As for China, "the focus has swung back from refinery-based petrochemicals to adding more coal-to-olefins and also coal-to-monoethylene glycol (MEG) capacity, due to the recovery in oil prices", according to a senior source with a US polyolefins major.

"We are spending a lot of time studying the economics of our coal-to-olefins process, while also evaluating the efficiency of competitors."

It might not be too far a stretch to suggest that the US might see expansions to meet the demand for commodity plastics, thanks to shale gas.

But 45-degree straight-line growth was never going to happen.

"In Singapore, Hong Kong and across Asia, the rich investors with money to spare have been pouring too much money into property and equities," continued the above source. "They have been followed by those who are now highly leveraged, who have borrowed at extremely low interest rates."

Property-market restrictions in Singapore and China have already slowed price rises, with some early signs of reductions in China.

Inflation, however, was still a big problem in Asia, the source added.

"Official inflation rates don't always reflect what's really happening because baskets of goods included in measures of inflation haven't been adapted to reflect changes in economies.

"Governments across Asia might have to raise interest rates and if they get the timing and scale of the rate rises wrong, this could cause investor panic. Other policy decisions are possible and these carry equal risk.

"The temptation may instead be to carry on with ultra-loose monetary policy in order to prevent currencies from rising too much, as everyone struggles to deal with the weak US dollar. This will cause bubbles to inflate even more.

"A full-scale currency war is my biggest fear, accompanied by increased trade protectionism - for instance, the recent US House of Representatives vote on the Yuan. This vote sends an important signal, even if it doesn't get past the Senate or a veto by the president."

The dreaded double-dip recession might be almost upon us, unless we are lucky enough to escape for now thanks to an exceptional amount of inter-governmental coordination and compromise.

Whatever the number and the extent of the dips in growth over the coming decades, though, the overall dynamics seem irreversible.

One Singapore-based PP sales executive put it very neatly when he said: "Once you've got used to using stuff made from chemicals and plastics, you are not going to turn back, no matter what your economic problems.

"If you have young children, why on earth would you want to switch back to using cloth diapers from disposal diapers?"

By John Richardson

In theory there should be an additional 20-30m tonne/year of liquefied petroleum gas (LPG) coming on-stream between 2008-2012, according to Petrochemical Corp of Singapore (PCS) - the Singapore Jurong Island-based cracker operator.

This could lead to 5-10m tonne/year more LPG being cracked if the pricing incentives are right, added PCS in a recent presentation.

But as the blog has discussed before, LPG has been much-tighter this year than anyone had expected as a result of the associated gas issue, delays to liquefied natural gas (LNG) projects and reduced refinery operating rates. A further factor has been the increased use of LPG for petrochemicals in Saudi Arabia.

As a result of the lingering impact of the above, it therefore seems questionable whether the PCS prediction that LPG markets will be long in 2011-12 will come true.

Firstly, as we've discussed on many occasions before on this blog - but it is worth re-emphasising because of its importance to global petrochemical balances - world oil demand is being forecast not to return to 2007 levels for a couple more years.

This will mean OPEC will have to manage this lower demand to attempt to prevent a price decline, resulting in Saudi Arabia's oil-production quota being maintained at a level that will limit its propane, butane and ethane production.

LNG projects have been postponed or even cancelled due to the economic crisis. And commissioning continues to be affected by the old chestnut also harming the start-up of on schedule of new petrochemicals facilities - the shortage of qualified engineers, said a Singapore-based oil and gas consultant.

"More than 30 LNG ships are standing idle at the moment out of a global fleet 370. This is an indication of project delays and weaker-than-expected demand," said an industry source.

Some 12m tonnes of LNG that should have been delivered to the US this year will instead to diverted to Asia because of the country's weak economy and the rise of shale gas, said Jason Feer, Vice President and General Manager Asia Pacific for the Argus Media Group, in a speech during last week's APPEC oil and gas conference in Singapore.

The shale gas boom, that has dramatically improved the economics of US petrochemicals producers, might in itself lead to more LPG availability.

But this is not part of the PCS estimate we gave above and outside the US, extra LPG volumes from LPG remain highly speculative as projects are at a very early stage.

Further - a global shale-gas boom could put paid to more LNG projects!

And then, of course, refinery operating rates remain under pressure due to factors including new capacity arriving just as the economic crisis occurred - and the peaking of US gasoline demand due to increased fuel efficiency and ethanol blending.

The jury is out over whether refinery margins have bottomed out with maybe only the complex, modern refiners set to prosper.

And then finally in this long list of reasons why we are not drowning in a flood of LPG, petrochemicals consumption has risen in Saudi due to more cracking of propane and butane and the start-up of several propane dehydrogenation (PDH)-to-polypropylene (PP) projects.

Saudi Aramco recently cut export allocations by 20% because of the associated gas problem and increased demand from petrochemicals, said an LPG trader.

BUT - according to the industry source we quoted above - two gas projects in the Middle East, due on-stream over the next few years, have 7-8m tonne/year of LPG of co or by-product LPG "that they don't know what to do with".

As PCS points out, in a world of more competitive gas-based cracker capacity and increased China petrochemicals import self-sufficiency, feedstock flexibility for the higher-cost Asian (ex-China) and European crackers will be essential to survival.

So making investments in the right separation facilities, in furnace adjustments and LPG storage could be worthwhile - especially as LPG yields a higher percentage of propylene than naphtha, and could therefore help solve a potential long-term C3s shortage.

But the key issue, as we have pointed above, is going to be timing!

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

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

By John Richardson

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

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

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

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

 Source of picture: Bombayharbor.com

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The shortage of C3s is seen by some industry sources as a serious and long-term problem. Unless it is addressed they worry that PP could suffer from demand destruction.

Source of picture: anahoyhanioblogspot.com

By John Richardson

THE blog will be taking a few days off this week as 'tis the season to be Merry', regardless of what you may think is our rather cynical and often-times pessimistic view of the chemicals industry.

We will come roaring back towards the end of this week by the 28th European time and the 29th in Asia to tackle more on the extent of the US shale gas advantage. In the meantime, happy festive season to all our readers as we look forward to what we hope, despite or cynicism and occasional pessimism, will be another prosperous year.

By the way, 50% of the blog (John Richardson) is in the process of relocating to Perth, Western Australia - hopefully in time to gloat about England retaining the Ashes.

Source of picture: 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 John Richardson

CHINA'S polyethylene (PE) market - a reasonable proxy we often use for the chemicals and polymer industries as a whole - remains worryingly weak, according to several traders and producers interviewed by the blog this week.

Modest restocking did take place last week, leading to a very slight improvement in sentiment and an edging up in pricing, but as one trader told us: "All this probably amounted to was end-users hedging against further hikes in raw-material costs."

But while import prices might have edged up for some grades, domestic prices remained flat or declined.

A Southeast Asian end-user asked us the question, after looking at the cost pressures from crude upwards and the rally in polyolefins prior to the current lull: "Could this be a repeat of 2008?"

We think quite possibly, yes. On a wider basis this is a concern we have raised before.

The rally in crude, now driven by a supply (Libya etc) rather than a demand story, as was the case last year when it all about a booming China, could cause significant macroeconomic damage. Our advice to the end-user was to be very cautious over trying to hedge raw material costs by stocking-up on resin.

"We continue to see quite significant re-exports from China because PE inventories remain pretty high," added the trader.

A producer concurred and pointed out that the underlying cause of the current lull in the market is different from that which occurred in Q2 last year.

Click here for a pricing graph - PEpricingMarch42011.ppt

At that time speculative imports of resin, resulting from lax lending conditions, resulted in a steep fall in pricing as traders off-loaded their high stocks.

This time around there seems to be a genuine slowdown in demand taking place as a result of government measures aimed at taking the heat out of the economy. My fellow blogger Paul Hodges points to the fall in the Baltic Dry Goods Index and a recent OECD report as indicating this slowdown.

"End-users remain short of credit because of the new restrictions on lending. It is very quiet out there," a second trader told us.

On this occasion, unlike in Q2 last year, pricing has yet to fall off a shelf.

The reasons include an extensive cracker turnaround season which is restricting supply. This includes a nine-week turnaround that was begun at the ExxonMobil complex in Singapore earlier this week.

Another factor is the obvious cost-push from higher naphtha.

We made the point a couple of weeks ago that crackers mainly exist to convert ethylene into PE and that therefore co-product credits (strong propylene, benzene and butadiene) could only support margins for a limited period.

The March 4 ICIS Weekly PE Margin Report for Asia supported this view.

"Integrated PE margins in northeast Asia nosedived this week by around $155/tonne on a 7.0% rise in naphtha feedstock cost," wrote my colleagues.

"Naphtha prices are the strongest since August 2008. Co-product credits rose by 3.2% on firmer butadiene and propylene prices; polymer prices were unchanged.

"Integrated low-density PE (LDPE) margins are the lowest since July 2010 and integrated high-density PE (HDPE) margins are in negative territory and are the lowest this decade."

Standalone margins, however edged up slightly as ethylene prices declined.

The Ras Laffan cracker in Qatar was reported to be again exporting C2s after resolving technical problems. This might have been a factor behind weaker ethylene.

More ethylene could be on the way from the Middle East if the decision first by Saudi Arabia - and now apparently by other OPEC members - to increase crude output results in more associated gas feedstock.

Alternatively, the ethylene could be converted into more resin and/or monoethylene glycol (MEG).

Higher-cost producers in Asia might have to respond with production cutbacks that could well include extended turnaround periods.

By John Richardson

OUR sympathies again go to the people of Japan. The main focus should be on providing as much support as possible to the rescue efforts and let's hope that petrochemical companies globally step forward.

But as we said yesterday, life goes on. The Japanese stock market was down around 5% this morning in early trading, suggesting fears about serious damage to the economy. There is anxiety that another earthquake could occur over the next few days.

Here is a research note from UBS, which as you can see, estimates that 20% of Japan's refining capacity and 27% of its ethylene capacity and 30% of its aromatics production is shut down.

As we said in our post on Sunday, Japan is a major importer of naphtha and so some refiners will struggle to place their volumes. However, UBS sees an upside for Asian refining margins.

In the immediate term Formosa Plastics Corp, Formosa Chemicals & Fibre and LG Chem are expected to benefit the most from the outages as a result of their product mix, adds UBS. They should be able to gain market share in China.

The lost production might also help to rebalance what has been a weak polyolefins market in China.

The supply disruptions, which seem very likely indeed to be long-term .In the confused situation at the moment seems possible that major structural damage has been caused to refineries and petrochemical plants.

This is the UBS note in full:

Impact on Japan refining industry
The devastating earthquake and tsunami in Japan that took place on 11 March has resulted in 20% of refining capacity loss in Japan (900-950K bpd) or 3.5% and 1%of Asia and global refining capacity respectively. While some refineries are shut for safety concerns, Cosmo Oil has shut its 220K bpd refinery in Chiba due to fire

.

Implications for Asia refining market
Singapore complex refining margin jumped from US$7-8/bbl to US$15/bbl after
Hurricane Katrina hit the US Gulf coast in late Aug 2005, which resulted in 1.4mn bpd refining capacity loss. We believe Asia refining margin should see more upside in the near-term and major refiners in the region such as GS Holdings, SOi and Thai Oil are best-positioned in Asia.

Impact on Japan petrochemical industry
Around 2mn tpa ethylene capacity in Japan have been affected by the earthquake,
which translates to 27% of total ethylene capacity in Japan or 4% and 1.4% of Asia
and world ethylene capacity respectively. It has been reported that total aromatics
capacity being affected should be around 5.7mn tpa, or 30% of Japan production.

Implications for Asia petrochemical market

We believe any supply disruption in Japan could potentially impact South Korea and
Taiwan as these two are the main competition in China petrochemical market.
Looking at Japan's major export products, we believe FPC and FCFC in Taiwan and
LG Chem in South Korea are best-positioned to gain market share in Asia.

By John Richardson

LUNCH with a chemicals analyst yesterday, during the blog's latest trip to Singapore, gave an intriguing glimpse into the world of those who invest in the chemicals industry.

"The Morgan Stanely "Supercycle" report (which the blog wrote about late last year) seems to be on every fund managers desks," he said.

"These are long-only funds in that while they might trim their positions if markets turn bearish, they remain committed to petrochemicals for several years and therefore believe the Morgan Stanley argument about supply becoming very tight beyond 2012."

The blog believes that the famous report's argument - that Asia alone can carry the global chemicals industry to a new sunny upland of sustained profitability - doesn't stand up. The US and Europe remain too important for consumption.

But the accepted wisdom among these fund managers seems to be that nothing can go wrong, the analyst added.

All the risks we highlighted on Monday - and those further detailed by Paul Hodges in his  blog posting on that same day - point to grounds for serious concern.

"What is interesting is that the confidence in petrochemicals has been so great that the sector's share prices are outperforming overall Asian indices so far this year," the analyst continued (data to support his argument will follow a little later).

Now what if the short-term investors, those in it for a quick gain, have helped pump-up chemicals share prices by spinning a highly calculated, misleading story about the health of the industry? They may suddenly exit petrochemicals, and lots of other investments, when the punch bowl is finally taken away from the party - leaving "long only" investors severely burnt.

 DSM's Dyneema replaces steel in offshore ropes

Source of picture: offshore-technology.com

By John Richardson

THE polyethylene (PE) shopping bags that get thrown away in their millions every day are some considerable distance down the value chain from DSM's Dyneema ultra-high molecular weight PE (UHMWPE for short).

Applications for Dyneema® include stopping bullets (it is used to make bullet-proof vests and protective panels for military vehicles, for example), and manufacturing ropes that moor oil tankers.

Understandably, therefore, the Dutch life sciences and material sciences company is keen to stress the amount of research and development and technical service that goes into Dyneema®, as attempts are made to both grow existing markets and develop new applications.

"It is 15 times stronger than quality steel, and 40% stronger than aramid fibres, on a weight-by-weight basis," said Marco Kleuters, vice president, DSM Dyneema Life Protection, APAC.

Other qualities highlighted by Kleuters include its cost effectiveness compared with steel and synthetic rope, its chemical resistance and, despite Dyneema's strength, the fact that it is light in weight.

How exactly it is manufactured is obviously a closely-guarded secret, given the high value nature of its applications.

Manufacturing involves a proprietary gel-spinning process.

Dyneema® is produced by DSM Dyneema at three locations, namely Heerlen, the Netherlands; Greenville, North Carolina, United States and Flaach, Switzerland. It is also produced in Japan under a joint venture with Toyobo.

DSM Dyneema's production base was recently extended to China following its successful completion, on 30 September, of the acquisition of a 91.75% in Shandong ICD High Performance Fiber Co. Ltd. (ICD), based in Laiwu, Shandong province, China. The takeover was first announced in February.

ICD produces a high-performance fibre for the local Chinese market.

Where the discussion gets more revealing is the development of the existing and new uses for Dyneema® that will take place at DSM's APAC Technical Centre in Singapore. The company announced plans to invest in the centre in early October. It will become fully operational in the fourth quarter of next year.

"The centre will house Singapore's first independent ballistic firing ranges (i.e. not part of a military facility)," added Kleuters.

The technical centre's 2,500 squares meters of floor space includes two ballistic testing ranges, as well as high tech equipment and testing laboratories. This will enable comprehensive testing to be carried out on the full range of Dyneema's personal and vehicle protection applications.

The centre will also be involved in R&D work into fibre applications for Dyneeema® (personal and vehicle protection applications involve UHMWPE tape woven into sheet structures), and fibre solutions in general.

Fibre applications include those in the renewable energy sector - for example, wind propulsion systems for the marine industry, which are based on large, automated towing kites.

DSM Venturing - DSM's corporate venturing unit - made an investment in the German-based manufacturer of these towing kites, SkySails GmbH & Co, in January of this year. The size of the investment wasn't disclosed.

"Under optimal wind conditions, fuel consumption on ships can be reduced by 50% through using these towing kites," Kleuters added.

Other applications for Dyneema® include:

*High Protective Textiles: Lightweight safety gloves and garments containing Dyneema® offer higher levels of cut protection, flexibility and comfort. With high abrasion resistance, gloves and garments can be washed and re-used several times, increasing their shelf-life

*Sports: Dyneema® gives yachting lines, sail cloth and rigging the same strength but up to half the weight of traditional materials such as polyester and aramid fibers. Fishing lines are easier to cast and retain their original shape. Kite lines made with Dyneema® have a higher stiffness combined with low elongation make steering easier.

PE has clearly come an awful long way from the 1930's, when the former UK company ICI brought the first-ever commercial-scale plant on-stream, primarily for only one application area - wire and cable.

And for a thermoplastic that is often derided as "throwaway rubbish" and bad for the environment, DSM can justifiably argue that this is a gross over-simplification.

By John Richardson

UNDERSTANDING the Dalian Commodity Exchange's futures contract in RMB-priced linear low-density polyethylene ((LLDPE) requires an understanding of what the traders are up to at any particular point in time, as this is almost entirely a speculators' market.

So, what happened late last year is very illuminating. The chart below shows a sharp spike in traded volumes, even though the physical market was exceptionally weak due to tight lending conditions, macro-economic uncertainties and the usual end-year destocking in order to beautify financial results.

A Singapore-based polyolefins trader told us at that time that traders were very active on the Dalian, while their physical positions had been almost entirely closed-off. 

"When bank lending was plentiful in 2010, nobody thought twice about buying local physical cargoes, even though the requirement was - and remains - 100% upfront cash deposits," he said.

"On the Dalian, the margin call is only 20% of the cost of each contract, and so your ability to leverage is automatically five times higher.

"Plus, if you close your position on [the] Dalian before a contract matures, as most people do, you don't have to take physical delivery of PE that these days would be very hard to sell.

"The futures exchange is giving traders something to do, somewhere to make money, as there is so little real business out there."

This tells us that a surge in Dalian activity should not necessarily be interpreted as an improvement in the physical market - in fact, very possibly, the opposite.

And, as this is a traders' market with very few if any producers taking part, increases in Dalian contract pricing should also not automatically be seen as a sign of a better physical market. The Dalian tends to move on every piece of good or bad economic news, the oil price and the local stock market, and so is often purely a barometer of extremely short-term movements in sentiment.

How we should interpret this week's events is therefore a challenge of detailed, thorough analysis versus getting carried away with the excitement of stories about a recovery in the physical market.

Domestic linear low-density PE (LLDPE) offers were increased by Yuan 50-100/tonne ($8-16) on Monday, following a rise in the Dalian.

Were these higher offers the result of further intra-trade deals, which were said to be the main reason for price increases before the Lunar New Year?

Or were they local traders' offer prices to end-users?

Perhaps they were higher producers' offers, suggesting that the producers have on this occasion taken a lead from the Dalian. That can happen when an improvement in sentiment, registered by the Dalian, spreads beyond the trading community.

The reason for the higher offers might, of course, be a combination of all the above, with the weighting between each of these factors of importance to anyone who cares about "real" analysis.

Will the recovery last? That, actually, might not be the relevant question here.
Perhaps more relevantly is, "Will the recovery last long enough for you to make money?"

This, of course, depends on your time frame, from the one extreme of Dalian day traders to producers trying to estimate demand patterns for the rest of this year.

What is crystal clear is that for any producer trying to plan for the remainder of 2012, the Dalian is a hindrance rather than aid.

From their perspective, it is therefore probably good news that the launch of a Dalian contract in RMB-priced homopolymer polypropylene (PP) has reportedly been delayed by a year.

Pity the traders, though: If the PP contract has been delayed, they will have less to occupy themselves with when physical markets go quiet - which they will definitely do in a few weeks when economic realities once again become clear.

Our hearts go out to them......

By John Richardson

NEW banking regulations could severely restrict the ability of small and medium-sized (SMEs) companies to access trade finance. This would hit Asia particularly hard, as the majority of chemicals and polymer business involves SMEs.

Under the Basel III regulations, due to be phased in from next year, a three-month trade finance loan will be treated the same as a one-year loan. This will force banks to hold more top quality capital against this type of lending, according to the Financial Times.

This is deterring some banks from staying in the trade-finance business and could increase the cost of letters of credit by 300 percent or more, adds the newspaper.

Some French banks have already decided that the extra regulatory burden is not worth it, and so they have withdrawn from the trade-finance business, says the FT.

"Basel III's implementation could have unintended consequences for trade financing through the proposed leverage ratio, which would require banks to set aside 100 percent of capital for any off-balance-sheet trade finance instruments, such as letters of credit," says the World Bank.

"This is five times more than the 20 percent credit conversion ratio used for trade finance in Basel II. New capital regulations would also require banks to set aside capital for one year for any instrument, even though that security may carry a maturity of under a year. Most trade finance instruments have maturities of about 90 days; this would triple the capital cost of such instruments."

Trade finance volumes could fall by 6 percent, representing a $270bn a year reduction in global trade and a 0.5 percent decline in global gross domestic product, the World Bank adds.

'Eighty-five per cent of all letters of credit will have Asia at one end or the other," said Andy Dyer, managing director of transaction banking in Asia Pacific for ANZ, in this article in Singapore's Business Times.

By John Richardson

The 6% decline in apparent polyethylene (PE) demand in China from January to April this year, compared with the same periods in 2011 and 2010, underlines what market participants have been telling the blog for many months.

The above chart also further emphasises how, in a weak market, the Middle East is gaining a bigger market share.

Its 33% increase in exports to China occurred as hard-pressed Northeast Asian (NEA) naphtha cracker operators saw their share of exports fall by 40%.

This was the result of:

*Increased Middle East production. What is worrying is that there is even more on the way.

*The ability of the Middle East, because of its tremendously strong feedstock-cost position, to cut prices sufficiently to meet the demands of China's struggling plastic converters. Meanwhile, of course, NEA competitors, confronted with high oil and therefore naphtha costs, have been unable to compete.

Further evidence of just how difficult life has become for China's small and medium-sized enterprises, which make up the majority of chemicals and polymers buyers, emerged late last week. Bloomberg reported that China's biggest banks may fall short of central government-directed lending targets for the first time in at least seven years. Last month, total bank lending declined by 33 percent compared with March, and May could be even worse.

The problem isn't the availability and cost of credit, but rather the unwillingness of businesses to borrow money. This suggests that unless business confidence improves, further reductions in the bank-reserve requirement and cuts in interest rates may not make much difference. Right now, it is hard to see how confidence can improve.

Interestingly, Southeast Asia, which is, of course, mainly a naphtha-cracker region, saw its PE exports increase by 16 percent. This is likely the result of the ASEAN-China Free Trade Area.

And very interestingly, North American Free Agreement (NAFTA) exports were down by a full 61 percent. To what extent was this the result of supply and demand being well-balanced in the US and Canada versus exceptionally weak markets in China? If the latter turns out to be the main factor behind the decline this just shows how bad conditions are, as NAFTA should on paper be in a very strong position because of very-low ethane costs.

Meanwhile, macroeconomic conditions just keep getting worse.

For example, real estate prices are now falling in more than half of China's top 70 urban areas. Fixed-asset investments have increased so far this year at their slowest pace since 2001.

The fall in fixed-asset investments supports our belief that major structural changes in China's economy are a significant drag on growth.

A Chinese cabinet adviser admitted, again late last week, that "a sharp slowdown in the economy" was taking place.

Asian PE prices were down by $10-60/tonne and polypropylene (PP) $20-50/tonne lower for the week ending 25 May, according to ICIS pricing.

By John Richardson

ASIAN polyolefin traders have little else to do apart from betting on the Euro 2012 soccer championships because of dismal demand, said a Singapore-based trader.

"This is the worst I can remember in 10 years in this business, and it is definitely now worse than in 2008," he added
.
"The shock of 2008 was more sudden, more dramatic, but more short-lived. What we have seen in 2011-2012 has been longer periods of depressed demand where prices have been flat or declining, with very brief periods of recovery. These recoveries have followed improvements in equity markets and crude oil.

"Take the last few days as an example. Last Friday morning, after China had announced its 25 basis points cut in interest rates, the Dalian Commodity Exchange rallied and there was a slight uptick in interest for physical cargoes."

(The Dalian Commodity Exchange operates a futures contract in linear low-density polyethylene).

"But by the afternoon, people were asking themselves 'will the interest rate cut make that much of a difference?' They decided no, and so the Dalian retreated again and what appetite there was for acquiring physical cargoes disappeared.

"On Monday this week, the recovery at least lasted all day, thanks to the rescue package for the Spanish banks. But on Tuesday, the futures and physical markets fell back again.

"The problem is that there is absolutely no visibility out there - nobody knows when the market will bottom out, and nobody is prepared to take any risks."

During 2011, lack of liquidity held the market back as the Chinese government increased bank-reserve requirements and raised interest rates, he added.

This forced polyolefin buyers to either cut back on activity or turn to the shadow-banking system, where they paid very high interest rates.

"Over the last couple of months there has been a very significant sea change," the trader added.

"Our customers no longer want to borrow money, even though financing is more available and cheaper. There is no demand out there, so why would they borrow money?"

The market was so bad that the prospect of new supply, from start-ups in Saudi Arabia, Qatar and Singapore, had not caused panic, he added.

"The attitude towards this new supply is, 'bring it on because it, surely, cannot make the demand any worse.' "

By John Richardson

MONO-ETHYLENE glycol (MEG) exports to China rose to 4.12m tonnes in the first half of this year from 3.38m tonnes during the same period in 2011, according to data from Global Trade Information Services (GTIS).

The main beneficiary of the export surge was the Middle East as H1 2012 exports from Kuwait surged by 74% with Saudi shipments 22% higher.

And as you can see from the chart above, again thanks to data supplied by GTIS, Middle East first-half 2012 exports were up by 45% compared with H1 2010 and H1 2011.

China's MEG market was oversupplied because of "huge imports" from the Middle East, Singapore and Taiwan, Thailand's PTT Global Chemical said last week, as it announced a 90 percent drop in its second-quarter net profit.

In actual fact, Singapore's exports fell in H1 2012 over the same period in 2011 by 8 percent with Taiwanese shipments 4% lower.

Nevertheless, PTT Global's overall argument is backed up by reports that in May of this year, coastal storage tanks in China held a total of 860,000 tonnes of MEG. Normal inventory levels are 400,000 tonnes.

Their oversupply argument is further supported by the decline in pricing, as the chart below illustrates.

The Middle East has been able to gain market share in a weak market because of its unbeatable feedstock-cost position, as has been the case in polyethylene (PE).

If PTT Global, an ethane-based cracker operator, was unable to make money from MEG and other petrochemicals, this indicates just how bad market conditions have become.
Naphtha-based producers in Taiwan and South Korea must, obviously, be in an even worse position.

Last week, MEG prices increased as a result of turnarounds at plants in Saudi Arabia and Singapore and an outage caused by a fire at an EQUATE facility in Kuwait . A total of 2.77m tonne/year of capacity is idled, according to ICIS pricing fibre intermediates editor, Becky Zhang.

We are also about to enter the peak manufacturing season for China's textiles and garments industry, giving some traders further hope that the price rally will last.

In addition, China is due to add 8.3m tonne/year of purified terepthalic acid (PTA) capacity in the second half of this year with a total of 18.5m tonne/year set to be commissioned by 2015, according to ICIS data. (PTA producers need MEG to make polyester resin - polyethylene terephthalate).

But, as we keep saying, demand is the thing, and demand is exceptionally weak in China. This suggests that the peak manufacturing season will be very disappointing.

And do high inventory levels in Q2 indicate that China bought ahead of its second-half requirements?

 By John Richardson

NEW infrastructure projects in China (see above chart from Rio Tinto) might deliver a boost to chemicals and polymer demand growth in Q4 this year and into 2013.

But doubts are being expressed about whether some of these projects can be funded, given the build-up of bad debts in China's financial system since the late 2008 economic stimulus package.

"Banks' exposure to local government borrowers is greater than we anticipated," said Yvonne Zhang, a Moody' analyst in a statement last month, as the ratings agency raised its estimate of local government debt by Yuan3.5 trillion ($540bn).

China's National Audit Office says that local governments had amassed about Yuan1.7 trillion in debts by the end of 2010, about 25 percent of China's GDP. But Victor Shih, professor at Chicago's Northwestern University, puts the figure at 40-45 percent of GDP, in this interview with Credit Suisse.

Shih uses the example of the city of Tianjin, which has borrowed $64bn for the Binhai New Area, as the most extreme example of a local authority in deep water.

Investments include a $22bn Sino-Singaporean joint venture Eco City, an exhibition hall, an artificial beach, a stadium and, of course, a shopping mall, according to Foreign Policy magazine. Tianjin's debts are in excess of 47 percent of the city's GDP.

Shih believes that the bad-debt problem is more of a long than a short-term issue.

But Patrick Chovanec argues that most loans made by banks so far this year have been short term, points out Gordon Chang in this article in Forbes.

And Chovanec warns that lenders will soon need to use remaining liquidity to refinance wealth management and property trust products. In other words, they will be scrambling to find enough money to cover existing liabilities.

Chang draws a connection between Chovanec's views and the 41.3 percent fall in July bank lending.

Local authorities, as they struggle for new lending, are also facing a fall in revenues due to the economic slowdown, continues Chang.

This has resulted in new taxes being levied in an effort to balance the books.

"Taizhou, in prosperous Jiangsu province, has imposed an illegal 5 percent tax on rentals and has sent collectors door-to-door to demand the levy," he writes. 

"Fifteen cities and counties in Hainan, the island province, have collected only 17 percent of the budgeted land sale revenue.

"Hangzhou's tax revenues are down 2.7 percent this year. This figure does not include revenue from land sales, down more than 50 percent in the first six months.

"Xiangtan in Hunan has missed salary payments to teachers and not made pension contributions.

"It is rumoured that Wuxi could not pay salaries in May and that Ordos, the infamous ghost city, had to borrow from a state coal company to meet operating expenses."

Perhaps local governments, which are bearing the brunt of new stimulus efforts because of Beijing's political impasse, will somehow scramble enough money together to fund most of the infrastructure projects.

But that doesn't solve the problem of whether in the long term, China actually needs all these sports stadiums (some of which are being blown up!), artificial beaches and shopping centres.

China's bad debt crisis is at the very least, as Shih says, a longer-term threat to the economy.

 By John Richardson

LET'S put this into context: China's polyethylene (PE) demand grew by 53 percent in 2008-2010.

Growth during the first seven months of this year was just 1.7 percent over Januuary-July 2011, according to Global Trade Information Services (GTIS).

And when compared with the same seven months in 2010 growth was flat, as the above chart illustrates.

Also compared with 2010:

*Middle East shipments to China surged by 40 percent, The big winners in the region included Iran (up 24 percent as more ethylene has been polymerised to avoid sanctions) and Saudi Arabia (23 percent higher). Saudi production has increased on greater availability of associated gas.

*New capacity in Thailand resulted in a 131 percent rise in the country's exports, as Southeast Asia as a whole gained 27 percent.

*South Korean exports were down by 21%, which further underlines the problems confronted by the region's higher-cost exporters. Overall Northeast Asian exports were down by 32%. 

There is something seriously wrong when demand is so much below GDP growth, which was 7.6 percent in Q2.

This reflects lingering inventory problems in all the synthetic resins (the demand growth story is likely to be very similar for the other resins).

And, as we discussed on Monday, stockpiles of finished goods are increasing as the economy slows down.

A further problem for the poylolefins business is that supply is set to increase next month, when the first on-spec shipments from the Saudi Polymers plant in Saudi Arabia are expected. The facility includes two 550,000 tonnes/year high-density PE (HDPE) units and one 400,000 tonne/year polypropylene (PP) plant.

THIS blog was once criticised for devoting too much time to the big picture - e.g. politics, economics and demographics - one of the major themes of our free e-book, Boom, Gloom & The New Normal.

By John Richardson

Demographics determine savings rates, drive investments and economic growth, while also affecting wealth distribution through the generations, says Julia Wang, Hong Kong-based economist with HSBC, in a 14 November report.

"That Europe is slowly ageing is well-studied. However Asia is also undergoing an especially big turn. Populations are ageing in Asia far more rapidly than anywhere else in the world," she adds.

The chart below, from the HSBC report, shows that the ratio of over 65s is set to triple in Asia, with the exception of Australia, New Zealand and Japan (in Japan, the ratio is already high).

In China for example, this ratio will rise from 9.9% to 30.8%, less than elsewhere, but still a significant increase, thanks to the disastrous one-child policy.

In South Korea, the over 65 ratio will jump from 13.8% currently to 40.2% in 2050. This implies that nearly one in two South Koreans will be over the age of 65, says Wang.

"Bear in mind that demographic projections are based on parameters such as fertility, mortality and life expectancy, which are largely known and unlikely to change short of major catastrophes or scientific breakthroughs," she adds.

We argue the same in our e-book, and believe that chemicals companies have to, as a result, run their businesses in very different ways.

"Across the region, including Australia and New Zealand, in less than four decades the number of people aged 65 and over will jump from the 300 million currently to 960 million. Forty five percent of them will be in China. The ratio of over 65 year olds to total population will rise from 1:14 currently to 1:6," she continues.

"Incidentally, the Chinese population will start to decline in 2035 as will its share of the Asian population. India will replace China as the most populous country in Asia."

The result of rising median ages (see the chart below) is a much larger elderly population dependent on an ever-shrinking workforce, says Wang.

"Over the next four decades, dependency ratios will more than double in Hong Kong, Japan, South Korea, Singapore and Taiwan," she adds.

"The ratio will be higher than 1:1 in Hong Kong, Japan, South Korea and Singapore. This will have a major impact on savings, consumption patterns and government finances," adds Wang.

"Currently, the region vastly under-spends on age-related social security and healthcare compared to developed markets, reflecting the relatively young populations and less comprehensive social safety nets."

This enables governments to prioritise other types of spending, such as infrastructure, she adds.

"However this advantage will disappear quickly. As working populations get older, richer and scarcer, demand for more comprehensive healthcare and social security will arise.

"Take pensions. In most Asian economies, coverage ratios are still low. This suggests that most governments have not yet adequately prepared for the rising tide of retirees in the coming years."

Pension coverage is 92% in Western Europe, but only 30% in China and 20% in Thailand. This will need to rise, and quite quickly in order to deal with ageing populations, she believes.

"Some governments are already starting work on this, most notably China. But there is still a long way to go. If coverage is expanded, this will likely push-up wage costs still further," she says.

"If coverage is not expanded, governments will suddenly be saddled with huge liabilities that are inadequately provisioned for."

.....For Now 

By John Richardson

RELATIVE to most of 2012 - when China's polyolefins market was in dire straits - November, December and early January have been excellent for traders who took the right positions. At least one producer has also reporting a strong recovery in sales.

"I thought there would be a mini-rebound in early November, and I was correct," said a Singapore-based trader.

"Prices then retreated slightly before a stronger rally began in late November (see chart below)."

The latest recovery is being driven by:

*Shutdowns in the GCC. The estimated production loss as a result of the confirmed plant turnarounds is 118,000 tonnes of linear-low density polyethylene (LLDPE), 353,000 tonnes of high-density PE (HDPE) and 238,000 tonnes of polypropylene (PP), according to ICIS.

*Outages at the PetroRabigh and Daqing petrochemical complexes in Saudi Arabia and China, respectively. The Daqing outage is expected to last until around February and includes the company's 300,000 tonnes/year HDPE/LLDPE swing plant and its 250,000 tonnes/year HDPE facility. The PetroRabigh complex is expected to restart in late January. Offline at the moment are the producer's 600,000 tonnes/year LLDPE plant, its 300,000 tonnes/year HDPE unit and its 700,000 tonnes/year PP facility.

*Reports that Northeast and Southeast Asian cracker operators have cut capacity utilisation from more than 90% in November to around 85% in December/January. But, as we have just said, these are just reports, and there are suspicions that some South Koreans are continuing to run hard.

*Confidence amongst converters that China's new leaders mean business on economic reform.

*Low stocks amongst the converters, especially those who need to fulfil orders before the Chinese New Year, which falls on 10 February.

*The fiscal-cliff fudge. This has caused a rally in stock markets, in oil (Brent crude was up by $3 a barrel last week) and commodity prices in general. Iron ore, for instance, is now more than $153 a tonne. "Prices are up by around 70% over the last four months, and the rally gained extra momentum in December. This is mainly the result of misplaced confidence in a sustainable Chinese recovery," said a Perth-based investment analyst.

"Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?" queried the Singapore trader.

"Quite frankly, I don't really care as I've made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further."

Reasons to be cautious about the sustainability of the recovery include:

*The end of turnarounds in the GCC in February-April and the resumption of production at PetroRabigh and Daqing.

*Substantial amounts of new capacity. ExxonMobil is expected to ramp up production at its two 650,000 tonnes/year metallocene LLDPE plants and its 450,000 tonnes/year PP facility in Singapore, now that its 1m tonnes/year cracker is being commissioned. China is also set to bring on-stream significant amounts of polyolefins capacity this year, including Sinopec Wuhan Petrochemical Co at Wuhan in Hubei. "We have heard that the complex's 300,000 tonnes/year LLDPE plant and its 400,000 tonne/year PP plant will start-up in early Q2," the trader added.

*The fact that stock and commodity markets also rallied in 2009, 2010, 2011 and 2012, only for the rallies to peter out.

A key question for the blog is: When will stock and commodity markets start worrying about the likelihood of a bitter and prolonged fight between Republicans and Democrats over the need to raise the US debt ceiling?

The fiscal-cliff fudge has left the two political parties even further apart, with the Republicans also blighted by deep internal divisions.

By late February or early March, the Treasury Department will run out of options to cover US debt and could begin defaulting on government loans unless Congress raises the legal borrowing limit - the debt ceiling. Economists warn that a default could trigger a global recession.

As far as China's new leaders go, the blog feels they will attempt a "steady as she goes" policy over the next few months, possibly even the rest of this year, as they try to shore up their support.

Modest stimulus, along with more of the right noises about economic reform, might well be the desired approach. This doesn't necessarily mean that genuine reform will be sufficient to put China on the right economic path.

If the external environment weakens substantially, however, (for example because of a US debt default or a new crisis in Europe), Beijing may be forced into a big new stimulus package - adding to concerns about inefficient investments and bad debts.

More immediately, factor in a possible bounce in confidence when the official purchasing managers' index for January is announced in early February, as the December PMI is said to have been manipulated downwards in order to store up some more good news.

Returning to polyolefins, a source with a global producer told us: "From late February/early March, when the Chinese New Year is over, plants have returned from turnarounds and new capacities start to come on-stream and the debt ceiling issue has come to a head, we should get a real idea about the strength of demand."

Note that markets in China are expected to quieten down from 15 January, ahead of the New Year, until late February.

So far so good...lack of arbitrage in 2012

By John Richardson

Despite a strong recovery in China's polyethylene (PE) prices and sales over the last month-and-a-half, producers are viewing the coming year with great trepidation.

One of the wild cards is how the US producers behave in 2013, as we also discussed in November.

Faced with weak demand in their own market as a result of a failure to negotiate an increase in the debt ceiling, will US producers seek to export their way of out of difficulties?

While the Middle East sharply increased PE exports to China in January-October on new start-ups and more stable production at plants brought on-stream in 2010-2011, North American Free Trade Agreement exports declined by 42% on US production losses and a stronger home market.

"That pretty much saved us. I am worried about this year, though, as, of course, US producers have a big feedstock advantage," said a Singapore-based source with a global producer. 

My colleague Nigel Davis, in this ICIS news Insight article, neatly summarised the US outlook when he wrote "Olefins prices in the US rose towards the 2012 year end on a series on unplanned cracker outages.

"And planned maintenance shutdowns in the first months of 2013 are expected to underpin the higher prices.

"(But) North America's ethylene producers are planning significant new capacity additions to take full advantage of increased ethane supplies from shale gas extraction and a mood of optimism prevails in the sector.

"In 2013 more than 2bn pounds (more than 900,000 tonnes/year) of ethylene capacity will be added to the US total (a significant proportion of which could be turned into PE).

"This 3.3% increase in the US ethylene capacity total is expected to help stabilise prices which fluctuated wildly in 2012, as the impact of numerous scheduled maintenance shutdowns was amplified by a string of unplanned outages.

"Cracker operators are keen to take full advantage of North America's ethane advantage which has put the region second only to the Middle East in terms of feedstock cost competitiveness.

"Capitalising on that advantage, however, is causing disruption in a low demand-growth environment.

"US cracker operating rates have been estimated at 85% in 2012 compared to closer to 92% in 2011 but rates could push back up to above 90% this year with fewer turnarounds putting some downward pressure on prices."

If the US does export bigger quantities of PE to China, the losers will, of course, be the higher-cost naphtha cracker operators in Northeast and Southeast Asia.

By John Richardson

EVIDENCE that China is no longer acting as the growth engine of the world, because it is too busy dealing with internal adjustments, is mounting.

For example, on Tuesday of this week Taiwan announced that its year-on-year Q1 2013 GDP growth had fallen to just 1.5%. This was less than half of the 3.7% growth recorded in the previous quarter and well below forecasts of 3.1%.

As this Beyondbrics blog post points out: "By global standards, Taiwan is a smallish economy. But with its trade links to the rest of the world, it serves as a useful harbinger. And this is not good news.

"Taiwan's economy is heavily reliant on trade, particularly of electronic goods, leading many economists to worry about the impact of recent disappointing growth in China, where economic growth slowed to 7.7% [again in the first quarter].

"Taiwan's first quarter stumble follows weaker-than-expected production and export figures that show demand for Asia's exported goods is unsteady. Taiwan's export orders, which include orders for goods to be exported from Taiwanese-owned factories in mainland China, fell 6.6% in March."

The chart above illustrates how Taiwan's export-vulnerable economy serves as a very good indicator of changes in global economic growth patterns.

Yesterday, we discussed Southeast Asia. Despite the economic boom in that region, some of its heavily trade-exposed economies, such as Singapore's, are likely suffering from the slowdown in China.

What worries the blog is that many chemicals companies may have assumed much-higher growth rates this year for demand, based on misplaced confidence in China's willingness to sustain its Q4 2012 rebound in growth.

The 2013 Asia Petrochemical Industry Conference (APIC) takes place in Taipei on 9-10 May next week. We will be there and will be keen to observe if a more realistic view of the world now prevails.

Realism isn't the same as pessimism. In the long term, the opportunities in China remain enormous for chemicals companies with the right strategies.

By John Richardson

A MAJOR Southeast Asian polyethylene (PE) producer has reduced its percentage of exports to China from 30-40% in 2012 to just 10% so far this year, a source with the producer told the blog on the sidelines of the Asia Petrochemical Industry Conference (APIC) in Taipei.

This is further confirmation of the huge long-term changes taking place in China's economy as its government forges ahead with rebalancing.

"We have managed to compensate for the drop in business to China by raising our intra-ASEAN [Association of Southeast Asian Nations] exports," said the source.

Demand growth in the ASEAN region remains strong. For example, PE consumption in Thailand is expected to expand by around 5% this year, in line with the growth in overall GDP. In Indonesia, demand is expected to increase by more than the anticipated 6% rise in the country's GDP.

But the question on the minds of several delegates at the event was to what the extent the ASEAN economies would be impacted by the slowdown in China, particularly heavily trade-exposed Singapore.