Asian Chemical Connections

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.

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

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

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

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

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

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

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

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

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

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

My dear old mother used to often say "what's the world coming to?" as if life was constantly getting worse.

But for South Korean workers - and for workers everywhere in Asia - expectations of employers have long been unreasonable. Tied into this is loyalty, "face", pride and ridiculously long and often unproductive hours that drive workers to breakdown - and sadly suicide.

Click her for a story about an innovative solution from Samsung where employees have signed up in droves (they have overbooked) for courses where they enact their own funerals. The idea is to make stressed workers think through what death means and all the problems they would leave behind if they took their own lives.

Also click here for an extraordinary gallery of pictures from the FT.

All very laudable, but shouldn't employers everywhere kick over the cultural traces, take the pressure off profit growth and reduce the constant pressure on workers to run ever-harder just to stand still? Is it up to ethical shareholders to also take a haircut and demand better working conditions?

Take a leaf from Google where the freedom to relax, to enjoy and to think - the result of a relaxed workplace environment where people are not obliged to sit around in suits terrified to speak out of turn - has led to one of the world's most creative and successful companies.

This could lead to higher rather than lower earnings and not just in the trendy IT sector where relaxed work culture is the norm. As climate challenges multiply, the chemicals industry will need to be just as innovative to prosper - a theme I'll be touching on constantly over the coming months.

But can you magine any Asian CEO using a slide - such as the one in the picture above from the Google offices in Zurich - to descend to a meeting?

Or is there a new guard of younger Asian executives ready to take over who regard employee welfare, creativity and profitability as interconnected?

Herein begins an occasional series where I offer advice on how to make a little cash.

By the way, is it me or do I get the sense that a lot companies haven't woken up to the severity of the crisis we are in? A recovery this, and I think quite probably next year, is out of the question. We need to find new sources of growth to replace the US consumer who isn't going to start spending money again in the same volumes as before for a good many years.

Anyway, here is my handy tip: purely by coincidence discover one day that quite fortuitously you have priced your local product so high - way above international levels - that this has attracted competitively priced imports. Take advantage of this wonderful, joyouous happenstance, this glorious instance of serendipity and lodge an antidumping petition.

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?

Confidence along all the chemicals value chains is always a key issue because of the ability to aggressively manage inventories, according to the London-based chemicals analyst Paul Satchell.

So there's the ever-present risk of sudden and very disruptive de-stocking. The longer the current rallies in commodity prices and stock markets continue, the greater might be the risk that confidence becomes excessive and mistakes made last year are repeated.

If the events of last year have taught is anything it's that markets don't behave rationally.

Those who arrive late for the party just as the punch bowl is taken away might suffer the most - along with those who've been there for a while but don't make an exit before the bar closes.

Inventory rebuilding
There's plenty of evidence of inventory building in Asia which might not always in response to strong underlying demand. For example:

*Polyethylene (PE) inventories in China at the second and third distributor levels were at very high levels in June, according to one industry report. Polypropylene (PP) inventories were, however, at normal levels.

*Benzene, toluene and monoethylene glycol (MEG) inventories were said by several sources to be also very high in July. Hydro-dealkylation (HDA) and toluene disproportionation (TDP) operating rates were also reported to have been raised - a long with benzene production from coal-based steel plants. Strong overall reformer economics, up until the end of the first half of August, could have lead wrong decisions on production levels

Polyester operating rates were said to be on the rise from H2 July as producers tapped into ample bank lending in order to increase rates. This was on the assumption that the September buying season for textiles and garments would be strong, leading to a big improvement in exports. The next Canton Trade Fair will also be a major indicator (the textile and garments phase of the fair takes place between 31 October-4 November). But there are already signs of improvement: The textile and garment industry exported $14bn goods in June, up 13% from the previous month, said the National Development and Reform Commission. But this was still 10% down on a year ago.

A big influence on confidence will be whether China can be successful in taking the air out of its current real-estate and stock market bubbles.

Supply of new loans in July dropped to $52bn from $197.5b in June - a 77% reduction.

(China might not want to do anything more to spoil the mood of the party before the 60th anniversary of the Revolution, which takes place on the 1 October).

But this bubble has yet to reach the scale of the last one which went pop in October 2007.

At its peak so far this year the Shanghai Composite Index has traded at 3.8 times its book value, barely half the 7.2 book multiple in October 2007, according to the Financial Times newspaper.

There's also plenty of caution
The inventory building we talked about earlier only applies to China and traders in just about every commodity everywhere in the world.

Chemicals companies outside China seem to be exercising extreme caution because of the huge inventory losses incurred in Q4 last year.

"Inventories are being kept low because there is very little visibility down the value chains," said a UK-based chemicals consultant.

"The credit crunch means that it remains difficult to finance inventories.

"Chief financial officers have just spent months explaining away large inventory losses from the fourth quarter. They are unwilling from a career point of view to risk having to go through the same performance again. "

The focus is cost control with market share taking second place.

As one Asian industry source put it: "Sixty per cent of our focus used to be winning on business in a broad range of markets and 40% on cost efficiency; now these percentages have been reversed and we would rather lose sales than break our tighter budgets."

The same applies to operating rates. US and Europe have maintained deep operating rate cuts - and have idled or permanently closed many plants - with the Northeast Asians also said to be showing very good discipline at the cracker level.

Middle Eastern players were in contrast reported to be running flat out in August following production problems in H1. These prevented them from taking full advantage of strong Chinese import demand.

The main focus in polyolefins is on selecting which grades to be produced based on pure economics rather than, again, on winning or maintaining market share.

But will this type of caution be enough to prevent a sudden reversal in petrochemical pricing?

The Oil Factor
The big danger is that any retreat could be driven by an unwinding of heavy speculation in crude.

At the moment the market remains in full-carry contango, meaning the combined cost of storage and borrowing (the full-carry cost) is below the futures price.

If this changes - or quite simply storage space runs out - there could be a sudden stampede for the exit.

What seemed counter-intuitive is that oil prices were at mid-August levels when estimates of demand kept falling.

This is unless you accepted that the oil market was again being speculator-driven.
Petroleum demand would be 1.8m barrels of oil per day lower than it had forecast in June, said oil, gas and refining consultancy Purvin & Gertz.
OPEC said in a report in August that the "market remains fundamentally weak". And it noted that US consumption is "still showing a massive reduction."

Could it all happen at the same?
This big worry is that Chinese growth could fall on less economic stimulus as oil prices collapse and much-delayed new Middle East petrochemical capacity hits the markets.

China is also due to start-up several major cracker projects in the second half of this year.

But the first half of this year was far better than anyone dared to expect. There was a strong recovery in petrochemical pricing with some reasonable spreads at the polyethylene end of the chain as this chart shows (the same applied to PP)

View image

Let's just hope that the traders in all the commodities, including chemicals, don't spoil the recovery before real demand has the chance to catch up with the improved confidence.

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.

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

Source of picture: www.whipnspurs.co.nz

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

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

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

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

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

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

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

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

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

Another concern is unwinding government subsidies.

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

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

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

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

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

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

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

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

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

Source of picture: wartakota.co.id

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 But does the Pertamina plan really add up?

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

South Korean petchem majors are expected to post another quarter of bumper earnings thanks to high operating rates and strong sales volumes.

A Seoul-based equity research analyst think this year could well turn out to be a bonus. He expects the fourth quarter to be tougher with operating results likely to be lower than Q3, partly because of the negative impact of new capacities flooding the market. But strong results in the first three quarters of the year should help the companies post favourable numbers for the full year.

This was evident in LG Chem's recent announcement of an 83% year-on-year increase in Q3 net income. Operating profit for the petrochemicals division was up 63% from the same period last year but down 2% from the second quarter (see slide). The big gains came in from the LCD and battery businesses on the back of rising mobile handset and notebook sales. Other South Korean companies are due to post their results in the next few weeks.

LG's success in diversifying its portfolio has caught the attention of other South Koreans.

SK Energy is set to challenge LG in the battery business. It was recently selected to supply lithium ion batteries to Daimler AG's Japanese unit. LG Chem has already signed a contract to supply batteries for a new hybrid car to be launched by General Motors.

And Hanwha announced yesterday that it would invest $673m in the solar energy business. It plans to start a new plant in Ulsan for producing solar batteries capable of generating 30megawatts of power annually. Hanwha's ambition is to become one of the top ten global manufacturers of solar batteries by 2015 with a worldwide market share of 5% and revenue of approximately $841m. To achieve this number, annual production would be raised to 330 megawatts in 2012 and 1 gigawatt in 2015.

Given the growing competition in petchems it makes sense for the Korean companies to branch out. But the analyst is not convinced that they are all moving in the right direction. For instance, the solar energy space is already crowded and he is not sure if Hanwha will be able to make money in solar batteries.

The odd one out is Honam Petrochemical which has not yet diversified from petchems. The only announcement by the company this year was a decision to merge affiliate KP Chemical. It is said to be looking at acquiring a stake in downstream engineering plastic and speciality chemical businesses in South Korea. But it will have to act faster to reduce its exposure to commodity petchems.

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)

China's immense appetite this year for all petrochemicals has been puzzling many of us. This blog has been regularly asking questions and some answeres for the polyester and PTA markets were provided by YJ Kim of PCI Xylenes & Polyesters at the Indian Petrochem 2009 conference earlier this week.

Kim pointed out that preparatory work for the Shanghai Expo in May 2010 was a major demand driver. The budget for the Expo is twice that of the Beijing Olympics in 2008.

The Olympics is estimated to have created nearly 1m tonnes of polyester demand. So if you double the budget then surely polyester demand would be way above 1m tonnes.

If this is true for polyester I think it is also safe to assume that the Expo is also a major driver for polymer consumption.

Kim also observed that the a fall in transaction volumes at the Shaoxing textile market should not be interpreted as a decline in overall business as six more wholesale markets have sprung up in China, and there is even one in Xinjiang. The average daily trading volume at Shaoxing has fallen to 4-5m metres this year from a peak of 6m metres.

Here are a few other highlights from Kim's very good presentation.

• China's 2nd 10-Year West Development Plan will create another polyester boom. Production growth is likely to be around 7% for the next three years but will swing to double digit post 2011 once demand explodes in western China. Polyester production forecast for 2009 is 21.8m tonnes.
• Global PTA inventories are very low and the industry needs to build up stocks. In China, 18-21 days is the normal PTA stock level. But the market is currently living on less than two weeks inventory. If China rebuilds stocks by 500,000 tonnes over the next six months it could swing global operating rates by 2%.
• Firm PTA prices this year have been driven by a recovery in demand and involuntary production cuts due to shortage of paraxylene. PTA margins have been exceptionally strong this year
• China is likely to import nearly 6.5m tonnes of PTA in 2009 and would need to import around 6m tonnes annually for the next three years. The trade grid for PTA could change once China complete its antidumping investigation into PTA exports by South Korea and Thailand. A review has been completed but it appears that Korean and Thai producers are individually negotiating with the Chinese commerce ministry. If Korea is hit by antidumping duties it will be forced to look for new markets. India, the Middle East and Europe would be the likely targets. The Korea-EU free trade agreement is due to start from July 2010 which would allow for zero duty imports.

Reliance Industries has made an offer for LyondellBasell says an official statement released yesterday on the LyondellBasell website:

"LyondellBasell has received a preliminary non-binding offer from Reliance Industries Limited to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter 11 reorganization.

"This offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganization previously filed by the company."

This confirms months of rumours to this effect. According to an unnamed merchant banker quoted by the Times of India, Reliance would have to pay at least $12bn - double an earlier estimate by the Economic Times.

India could be playing a major role in the shift of basis chemicals ownership from West to East - along with the Middle East

After failing in its efforts to capture Innovene and then Dow Chemical's commodity petchems unit, this is Reliance's fresh attempt to move into the global top league. The ICIS top 100 places LyondellBasell at the No 4 slot of top chemical companies globally.

A marriage of the two companies would result in a formidable giant with an annual turnover in excess of $75bn, including Reliance's earnings from its growing oil, gas and refining portfolio. It would also create the largest PP producer and also a top player in PE and give Reliance access to LyondellBasell's profitable technology portfolio.

Reliance's offer is subject to due diligence and sufficient credit support. The company issued a very cautious statement: "This review is ongoing and there can be assurance of the outcome with respect to any of the opportunities under review."

Reliance, it appears, is evaluating other opportunities too in its core businesses.

LyondellBasell's statement confirms that Reliance had earlier placed non-binding equity financial proposals and the latest offer represented was a 'potential alternative to the initial plan of reorganization'.

LyondellBasell was the first petrochemical giant to stumble at the start of the crisis last year. And it looks like it could well be the first big ticket M&A deal in what promises to be a busy season ahead.

We have already heard of IPIC on the prowl for European and US chemical assets and then Mitsubishi Chemical confirmed that it is looking to acquire Mitsubishi Rayon for $2.5bn.

An investment banker said last week that it was only in the last few months that he has seen an interest in boards and ceos. Capital market conditions have improved substantially and money will not be a deterrent, especially for companies like Reliance which are already sitting on huge piles of cash.

Relaince's biggest problem in the past has been its conservative valuations which have seen the company lose out to other global bidders, except in a few instances (Trevira and Hualon). There are already reports of rival bids emerging for LyondellBasell from Chinese companies and private equity investors. And ICIS news reported last week that analysts believe that LyondellBasell would also be a good fit for IPIC.

So will Reliance change its mindset and be bolder this time?

Reliance Industries - which is attempting to buy LyondellBasell - is offering $10-12bn, according to this report from Reuters quoting two sources with direct knowledge of the deal. 

This would be one of the biggest-ever acquisitions by an Indian company. In 2007, Tata Steel bought Corus for $13bn.

Reliance raised $660m through a share sale in September.

It has $4bn in cash, $8bn in treasury stock that can be sold and if it doubles its current net debt-to-equity of 0.35x it can borrow another $10bn, the Reuters report adds - quoting a recent Macquarie research note.

By Malini Hariharan

Qatar has reconfirmed its commitment to build more petrochemical plants including a new worldscale cracker.

At a ceremony to mark the start of construction of Qapco's new ldPE project, the deputy premier and minister of energy and industry said Qatar was launching an aggressive plan to achieve optimal utilization of the country's natural resources.

Pic source: The Peninsula

"We are working very hard to expand our petrochemical industry. Every year we are trying to add a project. We have now several projects under discussion to expand our petrochemicals and develop another world scale ethylene cracker," he said.

However, as reported by this blog, Qatar is facing a shortage of ethane which has affected Shell's plans for a cracker.

Other cracker projects that have been under study/discussion for a few years include one by ExxonMobil and the other by Honam Petrochemical.

All the three projects have been planned as joint ventures with Qatar Petroleum.

I have heard that Qatar has enough ethane to support one worldscale cracker project of at least 1.3m tonnes/year capacity. This project could be onstream in 2013-14. There is no confirmation yet on who will be the lucky recipient of this ethane but it could be ExxonMobil as its project is the most advanced.

By Malini Hariharan

The financially troubled Kumho Asiana group, with assets stretching from petrochemicals to airlines, has finally been able to work out a plan that should satisfy its creditors.

The Korea Herald reports that the group plans to raise $1.13bn by selling assets as part of a restructuring programme. Kumho Tire and Kumho Industrial have been placed under a debt workout programme. Kumho Tire will be selling its stake in its Hong Kong unit.

Korea Kumho Petrochemical, the holding company of the group, will raise $233m by selling treasury shares. Kumho Petrochemical, which manufactures synethetic rubber, polymers, speciality chemicals and electronic chemicals, may also have to sell a power plant.

Asiana Airlines will have to sell stakes in a software company and in Kumho Investment Bank, the financial unit of the group.

The Korean Development Bank, the main creditor, has allowed Kumho Petrochemical Co. and Asiana Airlines more time for debt repayment in return for their pledges to restructure themselves.

But creditor banks have warned that the two units could be put under debt workout if their voluntary restructuring program fails to meet expectations. And the group also risks losing managerial rights if it fails to normalise operations over the next five years.

Kumho Asiana's restructuring can begin if approved by three fourths of its creditors.

A Seoul-based analyst says he has read a news report that Kumho Asiana may also sell its stake in Kumho P&B, the phenol, bishpenol-A, MIBK and epoxy resin producer. The company is a 78:22 joint venture between the Kumho Asiana and Japan's Nippon Steel Chemicals. The stake is likely to be offered first to the Japanese partner.

Financial problems at Kumho Asiana, South Korea's eighth-largest conglomerate, started after a heavily leverage purchase of Daewoo Engineering & Construction in 2006 and Korea Express in 2008.

By Malini Hariharan and John Richardson

Expect the unexpected and you probably stand a good chance of making money in the polymer market.

Defying expectations of a slowdown in demand ahead of the Chinese new year in February markets have started 2010 with a bang - material is short and prices are steadily moving up.

Prices have risen by $50-170/tonne from early December. LdPE is now being talked about at $1450/tonne cfr China, lldPE at close to $1400/tonne cfr China while hdPE at $1350-1450/tonne. PP has hit $1300/tonne in China and one trader thinks that it will cross $1350/tonne by the end of the week.

"I bought a load of material in December and so I am delighted. Everyone else was being bearish, but I thought with the economy doing so well, why not [buy]," says a second trader

The first trader describes the markets as "being on fire" supported by the strength in crude oil prices ($81/bbl today) and tight availability because of plant problems in the Middle East and Asia.

Supplies from new plants (Sharq, Yansab, Fujian Petrochemical and Dushanzi Petrochemical) are still not arriving as expected, says a third trader. And if you add turnarounds and operating problems to the equation buyers face a very tight market.

However, there is still not much confidence that the bull run can be continue after operations at new plants stabilize. Concerns about the health of the global economic continue to cloud the picture. There is nervousness in some quarters that very high prices will only lead to a steep fall in the future. "Remember 2008? Everyone is scared of a repeat," says one producer.

But leave room for the unexpected to create surprises at least in the short term. For instance, severe winter conditions across most of the northern hemisphere are affecting petrochemical production.

Pic source: Xinhuanet

Our colleagues at ICIS news have reported that naphtha is short in Asia as a result of reduced shipments from Europe. This has forced lower operating rates at some aromatics units and Formosa's three crackers in Taiwan.

There have also been unconfirmed reports of a reduction in operating rates at some crackers in Europe.

In China, heavy snow in the northern provinces has closed expressways and affected movement of products, reports ICIS news. Chemical producers were also facing power shortages and they do no expect the situation to ease before March.

And China's cold spell could also affect start up of new plants. The second trader says Tianjin Petrochemical's new cracker complex is likely to start only after the Chinese new year, a delay from the earlier target of end-2009.

We have also heard that start up of new methanol-to-propylene (MTP) projects in the north, such as the Datang Power project, could be delayed to the second quarter.

"This season is not good to start up; companies would not like to take the risk," says a Beijing-based industry source.

More delays would tighten supplies further. And if demand holds up the bull run may not end very soon.

By John Richardson

CHINA'S capacity expansions in industries including steel, aluminium and petrochemicals continue to astound.

Take polyvinyl chloride (PVC) for example., where, according to a new report by ChemSystems, "capacity (in China) has expanded from 5m tonne/year in 2003 to over 15m tonne/year in 2009, almost 90 percent of total global capacity expansion over the period.

"Despite legitimate environmental concerns, relating both to massive carbon emissions and mercury pollution, the development of acetylene-based capacity in China shows no sign of slowing.

"The government's effort to restrict the construction and expansion of less efficient, environmentally hazardous plants has had little impact on the overall pace of development, although has perhaps prevented some sub-scale projects from moving ahead."

 This makes one wonder whether the huge increase in bank lending in 2009 and the first few weeks of this year has further added to the capacity-building momentum.

As China's coal/acetylene feedstock advantage is mainly located in under-developed Western China, it hardly requires an enormous leap of imagination to figure out that local authorities will have cashed-in on the opportunity while they had the chance.

                                                       Regional PVC Capacity Additions

.

Source of graph: ChemSystems

The consequences of big feedstock and capital-cost advantages will be felt very keenly in Japan, South Korea and Taiwan. If these projects in China couldn't repay their loans would anyone have the ability or desire to attempt foreclosures?

Japan, South Korea and Taiwan have a collective PVC surplus of 2.4m tonne/year which used to be shipped to China, said ChemSystems.

The search for other overseas markets - where greater distance is likely to create freight-cost and delivery-time disadvantages - could be made extra difficult by ongoing North American capacity expansions.

New projects in North America will be targeted for exported as, of course, the region's construction industry is in major crisis, the consultancy added.

Shintech, part of Japan's Shin-etsu Group, Westlake Chemical and Georgia Gulf were all scheduled to have expanded capacity by this year, according to ICIS news.

Taiwan's Formosa Plastics Corp is due to bring on-stream an 180,000 tonne/year capacity increase in Point Comfort Texas in Q1 2010, says the ICIS Plants & Projects database.

US PVC exports were 202,438 tonnes in November, more than double the 91,859 tonnes a year earlier, ICIS news reported yesterday - quoting the United States International Trade Commission (ITC).

For the first 11 months of 2009, US PVC exports were up 54% from the year-earlier period at 1.914m tonnes, the ITC added.

There are yet more problems for Japan, South Korea and Taiwan: Natural gas prices which remain very low relative to naphtha could give ethane-based US ethylene-to-PVC producers an export edge, along with further weakness in the US dollar.

South Korean producers have for long been dependent on the Chinese market to absorb a large percentage of their output. So it is perhaps not surprising to read that SK Energy plans to move the headquarters of its chemicals division to China. It is also said to be looking at hiving off the chemicals business into a separate unit.

This report says that the relocation is likely to be completed by 2015.

The company's official line is that the move to China is one of many options being considered for globalisation of SK Energy and that nothing has been decided as yet. No deadline has been set for a decision.

But the possibility is quite high as China already a major market for the chemicals division.

Plus SK is pursuing a joint-venture 800,000 tonnes/year cracker and derivatives project with Sinopec at Wuhan.

Progress has been slow and the last reported completion date for the project was 2012-13. A company source says talks have started with the main contractor. But he was unable to give a firm start up date for the project.

By John Richardson

MORE evidence that China will not remain as easy a sink for surplus polyolefin volumes - especially in the case of the higher-cost importers - is emerging.

"There are plans to open a bonded warehouse in Guangdong province to sell RMB material converted into US dollar product," a Singapore-based polyolefin trader told me yesterday.

Those who want to buy polyolefins for re-export as finished goods always prefer to buy overseas material priced in US dollars, as this is exempt from the full 17.5% rate of value-added tax (VAT).

The importers deliver this stuff into bonded warehouses ahead of collection for processing and re-export.

"If the manufacturers involved in the re-export trade were to buy RMB material they would only be exempt from 13 percentage points of the VAT," the trader added.

"As a result, it's always more expensive to buy local material for this purpose."

But if there are now plans to deliver Sinopec and PetroChina-sourced product into a bonded warehouse, the competitive landscape might have started to shift.

"How it works is once you have converted RMB-priced product into resin priced in US dollars, which has to involve the use of a bonded warehouse, it becomes exempt from the full rate of VAT - the same as the imports," continued the trader.

"The only drawback is that you cannot then re-price the polymer back into RMB."

China is rapidly increasing its polyolefin capacity, therefore making the option to supply into this re-export market more viable as it is no longer as dependent on overseas suppliers.

The country's polyethylene (PE) capacity is due to increase by 1.99m tonne/year in 2010 to 11.1m tonne/year, while its ability to produce polypropylene (PP) is to set to rise by 2.74m tonne/year to 12.7m tonne/year, according to Shanghai-based commodity information service, CBI.

It's easy to imagine much more local volume being delivered into bonded warehouses as China's capability to produce polyolefins continues to improve.

China's producers are able to minimise costs in ways not open to some of the higher-cost importers, such as those in South Korea and Japan who operate sub-world-scale naphtha-based cracker and derivative complexes.

Some exporters from Europe would also be vulnerable, while the US ethane gas advantage might be able to buy a number of its PE players a little more time.

The commodity-grade end of the business could end up even more firmly in the hands of the local Chinese producers and the Middle East players.

By Malini Hariharan

India will soon initiate an anti-dumping investigation into polypropylene (PP) imports from South Korea, Taiwan and the US. This follows an application made by Indian PP producers last year.

A couple of market sources have forwarded the letter that has been issued to the embassies of the three countries and a government notification will be issued soon.

PP imports during July 2008-June 2009 will be investigated.

Meanwhile, the Indian government has yet to present its final findings on an anti-dumping case that was launched last year on PP imports from Saudi Arabia, Singapore and Oman.

Provisional duties for six months were announced in July last year.

"Technically there should be no provisional duties; but the final findings are likely to be presented only in mid-March," said a trader.

He also highlighted that importers were facing problems in clearing material sourced from producers hit by provisional anti-dumping duties.

"The customs department is not releasing material and asking for a bond," he said.

A second market source said a notification on extension of provisional duties by two months was likely to be released soon.

By Malini Hariharan

The China market appears to have started the year of the tiger on a strong note. We are not yet hearing a roar but at least it is not a whimper.

Pic source: Xinhua

A polyolefin market participant says that traders have started making enquiries after the Lunar New Year holidays. End-users are not yet coming up to buy but there has been a recovery in exports. "The order book scenario is getting better," he says.

There were some concerns before the holidays that inventory levels may be too high but he believes that they are not alarmingly so especially with the first line traders. "They look high considering the reduced number of working days [in February] but on a volume to volume basis they are at a normal level," he says.

Another polyolefin trader described the market as stable to tight. "International producers are waiting and watching. But the feeling is that local prices are getting better."

And there was positive news from the Dalian lldPE futures market which delivered a surprise yesterday moving by up 3%. The rise was attributed to higher crude oil values and a firm physical market. The rise in values contradicted earlier expectations that China PE prices would collapse after the holidays, market participants told ICIS news.

ICIS news also reports that offers for PVC edged up by $20/tonne after the holidays. While buyers had expected a fall in offer levels given the recent decline in feedstock costs producers said that strong seasonal demand would exert upward pressure on prices.

In a report released today Woori Investment & Securities says that prices of PE, PP, MEG and PTA moved up yesterday as the Chinese market reacted to the rise in crude prices during the holidays. And demand was firm on concerns of a supply shortfall due to maintenance shutdowns South Korean and Japanese plants over February-April. It has forecast petrochemical prices to remain solid through April.

It might still be too early to draw a clear picture of the next few months. Turnarounds will certainly constrain availability but a lot will also depend on the volumes that come out from the Middle East, especially from the plants that had faced operating issues in December-January. And not to forget there is also the influence that China's recent credit tightening moves will have on speculative activity and demand for petrochemicals.

By 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.

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.

By Malini Hariharan

August could well be the time for some tough decisions by Asian polyethylene (PE) and polypropylene (PP) producers. Demand has languished for the last three months and although many are hoping for a recovery at the end of this month or in early August, there are as yet no signs of this.

The China market is still very soft and producers have no choice but to sell material at whatever price is available. There is strong pressure from buyers to breach the psychologically important $1000 mark.

"We are being pushed to reduce prices below this level for hdPE but we are resisting for the time being," says one South Korean producer.

He admits that there are no positive signals in the China market. Manufacturing in segments such as household appliances usually picks up in July-August but that has not yet happened.

Government efforts to control the country's real estate boom are slowly having an impact. The construction segment, says the producer, is in poor shape with companies holding high stocks of materials such as pipes.

Positive margins have helped polyolefin producers across the region maintain operating rates but they may be running out of time.

"Asia will have to rationalise production in August; the market is fundamentally weak and directionally not looking very good," says an industry analyst.

Even if demand does return next month, the additional requirement can be met through inventories.

He predicts that it will take a few more quarters for the market to digest stocks and volumes from new plants. "I do not see a light at the end of the tunnel until the end of the year," he warns.

The layout of the Pasir Gudang complex

Source of picture: Titan Chemicals

By John Richardson and Malini Hariharan

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

News is trickling in on Honam Petrochemical's plans for Titan Chemicals once it completes the acquisition at the end of the year.

A source close to the company said that revamping of Titan's two crackers have been evaluated including expansion of derivatives and building new downstream units at Titan's Pasir Gudang complex in Malaysia.

Titan's No1 cracker has a capacity of 285,000 tonnes/year while the second cracker is of 435,000 tonnes/year. Its derivative slate includes polyethylene (PE), polypropylene and aromatics.

An industry analyst thinks that expanding both crackers to 600,000 tonnes/year is possible and the figure was confirmed by the source close to Honam.

Pic source: Titan Chemical

But expanding the cracker beyond this level could be challenging given the size of the Southeast Asian market and capacities of competitors in Singapore and Thailand,

"Honam has considered this and will do things their way based on their expertise in experience in the business; they will realise higher competitiveness. Also synergies are possible in management of the Titan complex and in marketing and sales," said the source.

The acquisition, he added, fits in with Honam's strategy of boosting domestic and international competitiveness in petrochemicals by securing economies of scale.

As for the price of the acquisition, Honam could have got the asset cheaper if it had waited for the bottom of the petrochemical cycle. "But it has been pursuing Titan with a long-term view; they are confident that the cycle can be managed," he added.

More details on Honam's global strategy tomorrow.

By Malini Hariharan

Honam Petrochemical's plan to acquire Malaysia's Titan Chemical could well be the start of the South Korean major's foray overseas.

"Honam will keep looking for other M&A opportunities in the chemicals space," said a source close to the company.

Their interest is not only in basic chemicals but also intermediates and speciality chemicals. Target segments include olefins, polyolefins, ethylene oxide (EO) derivatives and environmentally friendly chemicals.

The priority will be to pursue opportunities in Asia.

Honam has also not given up hopes of establishing a presence in the Middle East. Its planned cracker and derivatives joint venture in Qatar is still in cold storage but the company wants to expand in the region, especially Saudi Arabia and Qatar, by establishing other joint ventures.

Honam's overseas ambitions are evident in its list of projects. Besides expanding a cracker in South Korea it has taken a stake in a joint-venture 400,000 tonnes/year cracker and derivatives project in Uzbekistan that is due to be completed in 2013. And it is participating in an ethylene oxide (EO) and ethanolamines project in China for completion in 2012.

Honam is also interested in integrating its South Korean petrochemical operations with a refinery.

"But I think there no opportunities right now to enter the refining market in South Korea," the source added.

By Malini Hariharan

Excess availability of product continues to trouble Asian aromatics markets. Commissioning of new plants and reluctance to cut operating rates has resulted in a steady build up of stocks over the last few months.

Take the case of paraxylene (PX). The spread between naphtha and PX prices has been running below $250-300/tonne, which is usually needed to cover operational costs. But margins for producers integrated to purified terephthalic acid (PTA) have been positive. And it has made sense to operate PX units linked to refineries because of strong reformer economics.

At today's ICIS Asian Aromatics webinar, Bohan Loh, ICIS pricing editor for PX and mixed xylenes, estimated that South Korean PX plants ran at 95-100% in July. Elsewhere in the region operating rates were in the 80-95% range with minor cutbacks only at some plants in China and Southeast Asia.

The market is also seeing volumes flow from 4.52m tonnes/year of new PX capacity commissioned in 2009 (2.9m tonnes/year in China and 1.62m tonnes/year in the Middle East).

In benzene, growing supply in the China market is a key concern, pointed out Mahua Chakravarty, ICIS pricing editor for BTX.

China's dual role as an importer and exporter is further complicating the market. China imported about 621,839 tonnes of benzene last year and exported 278,111 tonnes. Imports in H1 2010 have amounted to 119,051 tonnes while it exported 55,489 tonnes.

Demand has not been too bad. But there is simply too much being produced.

Cuts in operating rates will be needed. The question is who will move first and when.

In the words of one market analyst: "No one wants to be first as they don't want to give their competitor an advantage."

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.

Another excuse for a Dylan picture - ref "Shelter From The Storm"

Source of picture: www.israbox.com

By John Richardson

WEST EUROPEAN polyolefin markets remain tight thanks to the lingering effects of lack of spending on maintenance, several market sources have told the blog.

"Companies were so short of cash from late 2008 that they began to delay maintenance work such as furnace re-tubing," said one source yesterday.

"You normally start to experience production problems 6-9 months after this happens and we have seen this recently with the high number of outages.

"This also happens in really tight markets where nobody wants to be the first one to shut down because everyone is making so much money. So in 2005 we saw a raft out outages."

Tightness in Europe is just one of the consequences of the Lehman Bros-triggered crisis that have created a "New Normal" for markets, to borrow a phrase from my fellow blogger Paul Hodges.

Confusion continues among some industry observers who are familiar with looking at average operating rates and concluding that low average rates indicate poor overall profitability.

Average H1 operating rates for ethylene in Europe were just 82%, but some crackers were running at more than 90% while others were operating at much-lower rates or were shut down, we understand.

This was the result of both technical problems and lack of naphtha from local refiners.

The ICIS pricing European cracker and PE margin reports have consistently shown (here's a report on the 17 September issue) that variable cost margins in Europe remain an awful lot better than many people had dared to expect this time last year.

The overall "New Normal" for markets, including all the other the factors behind tight supply that we've detailed before, is leading to the view that we might just be bumping along the bottom of the cycle right now.

This is slightly earlier than the Q4 low point than had been forecast earlier this year, and, as we said, margins are in a lot healthier shape than had been predicted in Asia and the US as well as Europe.

"It is our view that we might be at the bottom, or close to the bottom, of the cycle as most of the new capacity in this current wave is already on-stream," said a Hong Kong-based chemicals analyst today.

"But most companies are only being cautiously confident because of all the risks ahead - not least, of course, the economy. Only the South Koreans are being very bullish over the prospects for 2011."

This could all still end in tears.

By John Richardson

The consolidation talked about in Indonesia for more than ten years - that between cracker operator and polyethylene (PE) producer Chandra Asri and polypropylene (PP) producer TriPolyta - is finally set to happen by January next year.

Now it will be up to the companies to make the synergies work with the most obvious big question - which we will seek to answer on the blog - how this might bolster plans for new olefins capacity.

Indonesia's ethylene deficit is set to rise from 533,000 tonnes in 2008 to 561,000 tonnes by 2013, according to Japan's Ministry of Economy, Trade and Industry (METI).

The propylene deficit is to rise from 517,000 tonnes in 2008 to 587,000 tonnes in 2013, again according to METI.

                                            Chandra Asri

Source of picture: www.barito-pacific.com

This big import dependence has long been a drag on the economics of the Indonesian industry with an overall lack of integration another big problem.

Lack of integration is still an issue, of course, as PT Titan - the former BP-owned PE plant - is under the ownership of Malaysia's Titan Chemicals.

So if Chandra Asri were to go ahead with a new cracker investment this might well - under the current ownership structures - only benefit the economics of its own PE production and the cost and availability of propylene supplied to TriPolyta.

Titan was recently bought by South Korea's Honam Petrochemical and the South Korean major has told us of its plans to expand cracker capacity at Titan's Pasir Gudang site in Malaysia.

Will this extra ethylene be used to also improve the economics of PT Titan, a big buyer of C2s, or could it be kept at the Pasir Gudang for downstream expansions there?

Could further ownership changes be on the cards?

Watch this space.....

By Malini Hariharan

The blog was able to talk to a Korean polyolefins producer who was not perturbed by the recent weakness in Chinese demand and was fairly confident of selling October volumes.

"It's the holiday season so converters do not want to buy. But I see no reason to lower prices. We have sold more than 50% of our October shipments. I think the Chinese buyers will return in the second week of October and we will still have enough time to receive orders and make shipments," he said quite confidently.

But he was cautious enough to encourage his sales team to become more active in other markets around the world.

"I could manage some deals with some longstanding customers; we have some good markets in the Middle East and Africa," he added.

With October out of the way, producers have only two more month to close the year. And it looks like 2010 will not be a bad year. Integrated margins could have been better but they were not in negative territory as had been widely feared by the industry.

"I think the market will remain stable to weak in the fourth quarter; I do not expect prices to crash but there are also not likely to rise very fast. There will be increased supply from the new Saudi plants and also Borouge. These volumes will not crash the market but it will soften a bit," the Korean producer predicted.

With one year out of the way the blog is now accepting predictions for 2011.

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.

By John Richardson

A GREAT deal more polyolefins supply is expected to hit the Asian markets over the next few months resulting in what two chemicals analysts tell the blog will be depressed margins up until March next year.

After that the analysts - one in Singapore and the other in South Korea - predict that we will begin to climb towards the sunny uplands of the supercycle, justifying the already very-high share prices of petrochemical companies, especially those in South Korea.

By the way, the blog is in Seoul at the moment and we will be talking a great deal more about the South Korean industry over the next week or so.

Returning to the supply issue, we were told a couple of weeks ago that the giant 800,000 tonne/year Borouge polypropylene (PP) plant at Ruwais in Abu Dhabi had achieved commercial production. This was confirmed to ICIS news by a source close to the project late last week.

Source of picture: marketoracle.co.uk

Qatar Chemicals (Q-Chem) was reported to be in the process of starting up its 350,000 tonne/year high-density polyethylene (HDPE) plant at Mesaieed in Qatar two weeks ago - with a big new linear low-density (LLDPE) facility in Asia also said to have recently achieved commercial runs.

Bangkok Polyethylene has started test runs of its delayed 250,000 tonne/year HDPE facility at Mab Ta Phut in Thailand, again according to ICIS news

Several PE plants have come back from turnaround or are about to do so, including Titan Chemicals in Malaysia and SK Energy in South Korea.

But we have been here before, of course, many times over the last 18 months.

Who can really guarantee, given the plethora of technical problems that have plagued recent start-ups, that further problems will not be encountered?

As for demand, well, that depends on reliable economic forecasts and as a chief executive officer interviewed by the blog caustically remarked yesterday "the more economists are wrong the more their views are in demand - so it perhaps helps them that they keep getting it wrong."

By John Richardson

SOUTH Korea is set to raise its ethylene and propylene capacities by 700,000 tonne/year and 740,000 tonne/year by 2013, Seo Kyung Sun, executive director of the consulting business of Seoul-based Chemical Market Research Inc (CMRI) told the blog last week.

Downstream expansions in polyethylene (PE), polypropylene (PP) and ethylene vinyl acetate (EVA) are also due to take place.

This is further evidence of the optimism - driven by the supercycle theory - which is sweeping through the petrochemicals industry.

The blog visited Seoul last week and came across widespread support for the Morgan Stanley view that market conditions will tighten in 2012-14, leading to historically strong profitability.

Not so long ago South Korea was picked out by consultants as one of the countries which would have to further consolidate, rather than expand, in the face of a flood of new lower-cost Middle East capacity.

But that capacity has been drip-fed into markets, due to all the production and feedstock issues we have documented many times on this blog before, as demand growth has also exceeded all expectations.

South Korean companies - as we will detail later this week - are cash-rich thanks to excellent 2009 and 2010 financial results and soaring share prices, and so funding these expansions will be not be a problem.

Source of picture: noonablog.com

And we understand that in addition to the already-announced projects we are going to detail below, several more expansions - postponed as a result of the 2008 global economic crisis - are being re-evaluated.

We have also been told that one of the South Korean companies we met with last week is considering an investment in a cracker project in China with a Middle East partner that would supply imported liquefied petroleum gas (LPG) feedstock.

South Korea's current ethylene nameplate capacity stands at 7.6m tonne/year with Yeochun Naphtha Cracker Centre (YNCC) the country's biggest cracker player, added CMRI's Kyung Sun.

"YNCC, a joint venture between Daelim and Hanwha Chemicals, has expanded ethylene capacity by 50,000 tonne/year this year and will add a further 300,000 tonne/year in 2012. All the additional ethylene will be for export," she said.

Honam Petrochemical is scheduled to raise its ethylene capacity by 250,000 tonne/year in 2012 while also increasing high-density PE (HDPE) by 250,000 tonne/year, she continued.

And next year will see LG Chem expand ethylene by 100,000 tonne/year. No details were immediately available as to what these extra C2s would be use for.

The country's current propylene capacity is 5.7m tonne/year with expansions set to come via steam cracking (410,000 tonne/year) and fluid catalytic cracking (330,000 tonne/year), said Kyung Sun.

Honam will use its additional propylene output to add to 200,000 tonne/year of PP, she added.

SK Energy is set to increase its linear low-density PE (LLDPE) capacity by 20,000 tonne/year with Hanwha planning a 40,000 tonne/year EVA expansion.

Let us hope, as we've said before, that all this confidence doesn't end in tears.

By John Richardson

THE potential returns from LG Chem's electric battery and electronic materials are tremendous and are leading to some bullish forecasts from analysts as to future earnings.

What will be interesting, though, is what will be the main driver of profitability for the South Korean major over the next few years - its newer businesses or good old-fashioned petrochemicals.

LG is now the biggest polyvinyl chloride (PVC) and acrylonitrile butadiene (ABS) player in China, and is set to raise its ABS capacity at its Ningbo site in China by 100,000 tonne/year.

"China has closed down a lot of its less efficient carbide-based PVC plants during a period when demand growth has remained exceptionally strong," an industry source told the blog today.

"The closures had been on the cards for a long time, but were delayed by at first vested local interests and then the economic crisis. But now they have happened, and with the economics of the carbide process always questionable, the ethylene-based producers have a big opportunity."

Adding further petrochemicals capacity might seem more of a sure-fire bet - especially given all the talk of a supercycle - compared to the constantly shifting world of electric batteries and IT-related materials.

And so it will be interesting to see how the company, which won our Top 100 award for 2009, will develop over the next few years. (The blog met with Peter Ban-suk Kim, LG Chem CEO and vice-chairman, last week to present the award).

Analysts at South Korean-based Shinhan Investment Corp take a positive view of the companies' prospects in all its business areas.

In an investment note released late last week, Shinhan wrote:  "LG Chem's operating profit is forecast to increase 6.5% YoY to W2.9548tr for 2011. The petrochemical division will continue to expand on favourable market conditions.

The information and electronic material business, which turned sluggish in 2H10, will regain momentum in 2011.

The IT industry is showing signs of bottoming out in 4Q10 and smart phone market growth will boost the demand for LG Chems' small-size rechargeable batteries.

High expectations for mid- and large-size rechargeable batteries LGChem is strengthening its position in the EV (electrical vehicle) battery market after a battery supply deal with Renault. Its guidance for 2015 sales of rechargeable batteries has been revised up from W2tr to upwards of W3tr.

The company is also making a push into the energy storage system (ESS) market by winning contracts from the U.S. utility industry. Rechargeable battery earnings growth will likely outpace the market's expectations.

Commercialization of LCD glass plates LG Chem's LCD glass circuit board business will soon begin to make earnings contributions. The company's No. 1 glass circuit plant is scheduled for completion in 2H11 and will begin commercial production within the year. LCD glass circuits will contribute more to earnings than mid- and large-sized rechargeable batteries.

LG Display, a captive customer, is expected to purchase W4tr worth of glass circuits in 2010. If 70% of

LG Display's glass circuit demand is supplied by LG Chem, similar to its polarizing film supply to LG Display, it alone generates W3tr in sales and W1.2tr in operating income with an operating profit margin of 40%."

By Malini Hariharan

Qatar Petroleum seems to be in no rush to sign up a foreign partner for its next cracker project. With doubts about ExxonMobil's participation, the field has narrowed to Total Petrochemicals and Shell.

Total's proposal for a mixed-feed cracker 'was still in the very early stages,' said Graeme Burnett, the company's senior vice president for Asia and the Middle East, in an interview with my colleague Anna Jagger.

"We hope to have some clarification by early next year," he said.

Burnett also disclosed that the company was looking "to develop projects [in the Middle East] that add something to a particular country's current product portfolio". For instance in Qatar Total would consider investing in products in the C3 chain such as polypropylene (PP) or even styrenics.

"I'm not saying that's in our scope right now. But those are the kind of developments we're looking at," he added.

And he confirmed that the Ras Laffan Olefins Co cracker would reach full operating rates only early next year because of "mechanical" constraints. The 1.3m tonnes/year cracker started in April and has gradually raised operating rate to 60%.

As for Asia, Total's South Korean joint venture with Samsung has started looking at a new worldscale aromatics facility. But details of the project have yet to be finalized.

By Malini Hariharan

Predictions about a steady recovery in petrochemical margins from financial analysts have multiplied in recent weeks and producers too have turned bullish with many expecting to sail through 2011 without any major difficulties.

But in the midst of this optimism a few cautionary voices can still be heard.

Analysts at South Korea-based Woori Investments predicted in a recent report that petrochemical margins would continue to decline in 2011 as utilization rates at new plants in Southeast Asia and the Middle East pick up gradually. This would coincide with a slowdown in Chinese import growth due to a rise in local production.

Pic source: www.egmcartech.com

"We believe that [global ethylene] supply will rise 10m tonnes over the next year, topping our global demand growth estimate of 5m tonnes over the same period," the analysts estimated. Their forecast was based on the assumption that commercial production would start at new facilities with a total capacity of 6.2m tonnes/year and higher utilization rates at plants that were expanded in 2010.

However, this should not pose much of a problem for hybrid South Korean companies such as LG Chem which should benefit from strong growth potential in the battery business.

The analysts were more bullish on the refining sector with projections of high oil prices and strong refining margins in 2011.

"We expect Asian refining margins to expand from an average $4 in 2010 to $6 in 2011, and that oil prices and refining margins will increase further if the US and European economies recover quickly," they said.

Global oil demand has risen rapidly on growing consumption in developing countries, including China. This has led to most refining facilities ramping up utilization--leaving little room for additional increases as of Oct 2010, they added.

Among the South Korean refiners, their top pick was SK Energy although S-Oil could become attractive if paraxylene (PX) prices continue to rise after the company completes a capacity expansion in Q2 2011.

Patrick Thomas

Source of picture: Bayer Material Science

By John Richardson

SUCCESS in chemicals - whether you are into commodities or specialities - is largely about eking out maximum value from every single molecule in all the important markets.

The almost obsessive focus on China and other emerging markets might give the impression that "all the important markets" relegates the economically ailing West to the second or third division.

But any truly global chemicals company worth its salt needs to balance investment across each of the big consuming regions.

And so, after all the fanfare of last month's announcements by Bayer Material Science (BMS) of a further $1bn of capital spending in China, the company has also been keen to stress what it is doing in Germany and the US.

The chemicals major plans to invest a total of €3.5bn ($4.5bn) in these three countries over the next five years. This will involve commercialising a new technology, upgrading existing plants, building new production facilities and a lot more work on research and development (R&D).

"Our further expansion plans in Germany include growing our coatings facility in Leverkusen that produces aliphatic isocyanate, hexamethylene di-isocyanate (HDI) and isophorone di-isocyanate (IPDI) coatings," said the company's chief executive officer, Patrick Thomas, in an interview.

"This investment should be sanctioned by the board in the next 12 months and completed in two years."

Next he detailed an example of molecule-value stretching: plans to build a commercial-scale demonstration plant that will use the company's oxygen depolarised-cathode technology for producing chlorine. Start-up is scheduled for later in 2011 or the beginning of 2012.

This will involve the conversion of BMS's last remaining mercury cell chlor-alkali process unit in the world, which is located at Uerdingen in Germany, and result in big savings on electricity costs and reduced CO2 emissions.

In effect, hydrogen fuel cells are integrated in the chlorine cell as part of this new process, lowering electricity consumption (the main cost component in chlor-alkali production) by 50% compared with mercury or diaphragm cells.

Thirty per cent less electricity is required when facilities are converted from the membrane technologies.

The company will eventually convert all of its plants to this new breakthrough process, Thomas added.

And he said: "We have signed a memorandum of understanding (MOU) with China BlueStar (the mainly state-owned Chinese speciality chemicals giant).

"BlueStar, which is the technology supplier and builder of just about all the chlor-alkali units in China, plans to use our new technology across the country. The first step is to build a pilot unit in Caojing."

BMS will also invest in Baytown, which is near Houston, Texas, and the site of company's largest US production facility.

Polycarbonate, methyl di p-phenylene isocyanate (MDI) and toluene di-isocyanate (TDI) facilities will be upgraded at the site, involving debottlenecking and technical improvements to boost reliability.

Work will also be carried out on improving logistics, such as building a chlorine pipeline from feedstock supplier Oxyvinyl, which is 20km away. This will take chlorine transportation off roads and railways.

"These investments in both the US and Germany illustrate that they are still very important markets for us," said Thomas.

In volume terms, the US and Germany remain as big as China for BMS - even if they are eclipsed in terms of percentage growth-rates.

So, of course, because growth is booming in China, the big investments in new plants are taking place in that country.

Thomas provided a great deal more detail about what BMS wants to build at its big production site in Caojing, Shanghai, compared with what was reported last month.

"Our plan for MDI is to reach 1m tonne/year of capacity between now and 2016," he said
"This will involve a debottlenecking of our existing plant to 500,000 tonne/year from 350,000 tonne/year and building a new unit of 500,000 tonne/year."

The new polycarbonate plant being evaluated for Caojing will be an "economic copy paste" of the existing 200,000 tonne/year facility at the same site.

So it will initially also be 200,000 tonne/year and then the company wants to debottleneck both the old and new plants by 50,000 tonne/year to get to a total capacity at the site of 500,000 tonne/year.

"Capital equipment for the new plant has already been pre-ordered and our target is to bring the new plant on-stream in 2013. The debottleneckings will then take place 12-18 months after that."

Thomas stressed that the decision to move the BMS polycarbonate global headquarters to Shanghai from Germany would not mean any redundancies.

The company also wants to build a new coatings plant in Shanghai. Like the coatings investment in Germany, this new facility will produce solvent-free, water-based aliphatic coatings.

Capacity of this new plant would be 50,000 tonne/year with start-up scheduled for 2013-2014.

The existing 30,000 tonne/.year plant at Caojing is to also be debottlenecked.
"All our projects at Caojing have reached the Memorandum of Cooperation (MOC) phase," said Thomas.

"The MOC phase is a step along from an MOU and means that the local Shanghai authorities will now move on to studying our proposals.

BMS is to begin environmental impact assessments and feasibility studies as part of a local approvals process that involves about 20 different steps.

"Once these steps have been completed, some aspects of our overall plan for Shanghai will need to be submitted to the central government's National Development and Reform Commission (NDRC) for final approval.

"Other elements of the expansions can go ahead with only local government backing."
Further product development work in China includes building a large-scale PC automobile-glass demonstration hall in Shanghai.

R&D development work in the auto and appliances industries mainly occurs in China, as does manufacturing.

But the electronics industry is slightly different.

"The know-how is in the US, Japan, South Korea and Taiwan with the manufacturing - because of the low labour costs - in China," said Thomas.

This is why BMS opened a functional films research centre in Singapore in June last year as the city state is "an international hub for the development of technology, drawing on expertise for the whole region".

The functional films centre focuses on research into coated high-tech films and nanotechnology for electronics.

Stand still in this business and you end up being overtaken, and, quite probably, kicked off the running track altogether.

The opportunities are huge, but as the BMS announcements indicate, so are the difficulties in making sure you both keep pace with competitors in China while not losing focus on all the important markets.

     "Only another thousand or so years to go....."

      Source of picture: Atlantic Council

By John Richardson

HERE we go again, eh? Yes, as rising crude-oil prices and overall inflation pose a major threat to the petrochemicals industry.

Nothing the blog has read or heard over the last two weeks has given us any great confidence that the fundamentals in polyolefin markets (the market we track most closely) have changed for the better since December to support rising raw-material costs.

And you can make an argument that the fundamentals look weaker than they did in late 2010.

The Chinese New Year (CNY) is, of course, on the way and this year it falls on 3 February.

How will buyers of resin effectively estimate their purchases ahead of the holiday period as during that period they - and the rest of China - will not be around to assess the feel of markets in general, from crude through to polyolefins? In other words, they might over or under-stock and be hit by an unanticipated shift in feedstock prices.

This fear, very evident from our discussions with a couple of converters this week, is based on the idea that if you are in the market you are able to predict what is going to happen. Sure thing....

The other big worry is on China growth, as we discussed yesterday in terms of the impact of a major government policy shift ahead of the official start of the 12th Five-Year Plan in March.

GDP (gross domestic product) and export growth is expected to slow down during the period of the plan. This would be the result of policies designed to switch the economy away from over-reliance of exports and investment and towards more domestic consumption.

The other big issue in China, across Asia, and also in the EU and the UK, is inflation in general

Are the inflationary pressures mainly core (excluding energy, other commodity and food costs) or non-core?

In China the inflationary pressures seem to be very-much core, despite the big contribution that rising oil and food costs have played in the recent surge in the consumer-price index.

Too much money is still sloshing around in the system following the late 2008 economic stimulus package, a symptom of which is the continued increase in property prices.

So China keeps on raising its bank-reserve requirements. Several more interest-rate increases seem to be on the cards for this year.

The rise in the cost of living sets back the government's agenda of reducing dependence on exports and investment as drivers of GDP growth towards increased domestic consumption, as higher costs are hurting the "sandwich generation". These are the young people too rich to qualify for the limited social housing available in the major cities, but also too poor to afford the now astronomically high costs of private accommodation.

An email that went viral just before Christmas, written by disgruntled Bejingers, calculated how long peasant farmers, blue-collar workers and prostitutes would have to work to afford a condo in the city.

As long as there were no natural disasters, a peasant farmer working an average plot of land would just have been able to afford an apartment if he or she somehow had worked since the Tang dynasty, which ended in 907AD, until today, the email calculated.

In another popular e-mail, an anonymous author describes the misery facing ordinary people in China's increasingly unequal society.

"Can't afford to be born because a Caesarean costs Rmb50,000; can't afford to study because schools cost at least Rmb30,000; can't afford to live anywhere because each square metre is at least Rmb20,000; can't afford to get sick because pharmaceutical profits are at least 10-fold; can't afford to die because cremation costs at least Rmb30,000," the e-mail reads.

Social stability is crucial for continued strong economic growth and for the Communist Party to remain in power, both of which, some would argue, are connected.

Inflation across Asia, driven by, as we've said, higher crude and also higher commodity prices in general, have prompted recent interest-rate rises in South Korea and India.

And as we said at the beginning, quite possibly here we go again as inflation is arguably being largely drive by speculative funds pouring into oil and other commodity futures markets.

 This year is to date is reminding everyone of 2008 when oil and crop prices surged to record highs and then collapsed.

There are two radically opposed schools of thought about the role of speculators rising commodities prices.

"I feel it is a combination of both speculation and stronger demand, but the essential danger remains a sudden unwinding of the price if the speculators head for the exit," said a Singapore-based oil and refining consultant earlier this week.

"As of a few weeks ago, there were far more non-commercial contracts (the quant funds, the hedge funds and the pension-fund managers etc) open on the NYMEX compared with June 2008, when oil reached its peak of $147/bbl.

"This suggests a huge increase in speculative money and in my view poses a significant risk.

"As I said, though, there are strong demand factors behind the price - for example, the recent minus 15 degrees temperatures in South Korea that have raised heating-oil demand. There has been the drive to hit emissions targets in China that resulted in a big surge in demand for diesel.

"But on the supply side there is a lot of surplus capacity still around - 6m bbl/day of crude, for example - and crude and crude-product inventories are high.

"This suggests that to some extent OPEC is deliberately keeping the market tight by keeping supply off the market, and that speculators are able to keep crude and oil products in inventory because interest rates remain low.

"And so nothing really has changed. The big concern remains what will happen if and when interest rates rise in the US and easy lending conditions disappear.

"My feeling is that a crude price of $80-85/bbl is justified based on demand and so an unwinding from current levels is possible."

Our fellow blogger Paul Hodges pointed to the extent of the oil oil-product inventory overhang in a post earlier this week.

OPEC seems to be happy provided prices don't consistently move above $100/bbl - good news in a way because it doesn't seem to have any immediate plans to raise output. Thus there is no risk of more associated gas increasing polyolefin supply. But supply could still increase substantially in 2011 if plants operate more smoothly.

In a worrying echo of 2008, purchasing managers down all the petrochemical chains could be tempted to chase higher oil prices. A sudden collapse in crude could, as we have warned many times before, lead to inventory losses similar to those in Q4 of that year.

Chasing higher oil prices is a huge risk in such an uncertain, and potentially a lot weaker, demand-growth environment.

By Malini Hariharan

South Korea's Lotte Group, parent company of Honam Petrochemical, is making yet another bold move. After acquiring Malaysia's Titan Chemicals last year, Lotte has set its sights on a major petrochemical project in Indonesia.

"We will start the feasibility study to develop a petrochemical project in Merak, Banten province, this year. The investment is estimated to cost between $3 billion to $5 billion," said Shin Dong-bin, chairman of the Lotte Group, after a meeting with the Indonesian president.

Construction of the project is expected to start next year with completion within four to five years.

Lotte already has a presence in the Indonesian polyethylene (PE) market with Honam operating two plants that it obtained via the Titan acquisition.

The Titan acquisition gave Lotte a presence in Indoneisa in the form of a polyethylene (PE). Moving upstream to build a cracker to secure feedstock would appear to be a logical move.

The project appears to be part of a wider Lotte strategy that involves an expansion in the Indonesian retail sector. And Lotte is likely to receive plenty of incentives as the Indonesian government is keen to attract foreign investors.

This will be needed as Indonesia has been a difficult place to justify a petrochemical investment with competition from established players in Southeast Asia and also the Middle East. Chandra Asri, the country's sole cracker operator which relies on imported naphtha, has struggled ever since it commenced operations more than ten years back. The environment has become even more difficult after the implementation of the Asean FTA and the China-Asean FTA this year.

Details of Lotte's planned project are not yet available. It is also not clear if this is in addition to an expansion of Malaysian crackers that Honam had talked about at the time of the Titan acquisition.

And can Indonesia support multiple projects? Chandra Asri is once again talking about expanding its cracker by 400,000 tonnes/year to 1m tonnes/year and debottlenecking its PE and polypropylene (PP) plants. It also plans to diversify its feedstock slate to include liquefied petroleum gas (LPG). The company has tied up with Vopak to start construction of a terminal at the end of this year with operations to being in 2014.

By John Richardson

ASIAN ethylene markets appear to be in a muddle over the Middle East supply picture.

Click here for a graph of the latest pricing - EhylenePrices1March2011.ppt 

A shipping industry source we spoke to recently insisted that more rather than less C2s were being exported from the region as opposed to the reduced volumes being claimed by Japanese traders.

One reason being put forward for the lack of clarity is how Iranian volumes are being reported, given sensitivities around compliance with sanctions.

The upcoming Asian cracker turnaround season and production problems at the YNNC No 1 cracker in South Korea, reported by my colleagues at ICIS news, lend support to the tight-market argument.

But it is fathoming the Middle East situation that remains crucial as the region is the swing producer for ethylene. Iranian volumes are the most volatile on a month-by-month basis.

The 300,000 tonne/year Ras Lanuf cracker in Libya was thought to have been down earlier this month due to the unrest. About half of the C2s are exported to destinations such as Italy, Turkey, Algeria and North Africa with propylene and butadiene shipped out of the complex, we understand

But even if Ras Lanuff were still down at the moment this wouldn't amount to much more than a tiny hill of beans in the overall picture.

"I really don't know for certain if there is less ethylene coming out of the Middle East but I suspect so," an industry source told us last week, reflecting the extent of the uncertainty.

"I don't think the Iranians are exporting as much, although how this is being exported might be obscured for sanctions reasons.

"What I do know is that the Saudis were approaching their contract customers in December to try and get back into old contracts that had been brought to a halt by the shortage of feedstock. In January and February, the Saudis don't appear to have had the extra export volumes that they expected."

This might be the result of less associated gas being available than had been expected, we both speculated.

The question now, following the apparent decision by Saudi Arabia to raise crude-oil production, is whether this will lead to more associated gas being supplied to petrochemicals. We then need to fathom whether this will work its was into more C2s or derivatives exports.

A further factor behind the tight-market view is unconfirmed reports of recent production problems at a major Saudi complex resulting from a flash flood and a power failure.

"I think ethylene will definitely stay tight for the rest of H1 but the second half is anyone's guess," our industry source added.

The blog feels that ethylene might have been talked-up a little last month in an effort to compensate for the flat polyethylene (PE) markets we referred to yesterday.

Right now, though, the uncertainty could well be a symptom of a wider lack of clarity there as fear and caution start to eat into confidence. The obvious catalyst for this is the Middle East.

By Malini Hariharan

With naphtha crossing $1000/tonne yesterday Asian petrochemical producers reliant on this feedstock remain caught in a tight spot. Costs are continuously rising while market direction for key derivatives is uncertain.

Ethylene and propylene prices are holding firm at around $1,350/tonne CFR Northeast Asia and $1,500/tonne CFR Northeast Asia respectively, supported by a cracker outages and upcoming turnarounds in South Korea and Japan. And aromatic prices are tracking developments in upstream markets with benzene at around $1,180/tonne FOB Korea.

But the Chinese polymer market continues to trouble producers. As explained by the blog earlier, demand is weak as credit tightening has affected traders and end-users.

"It is a difficult market. Looking at crude oil and naphtha, we need a price increase of over $100/tonne for polypropylene (PP) in April; but we will probably have to start with $30 and if successful, ask for more. The big constraint is weak Chinese demand," explained one South Korean producer.

As for polyethylene (PE), he thinks it is better to forget exports and instead focus on the Korean domestic market.

His only hope is that turnarounds in Q2 will keep supply tight. Additionally, spiraling naphtha prices should force at least some Asian producers to cut output. And eventually, the sentiment of rising crude oil prices should trickle down to the polymer markets.

Crude oil prices declined by a few dollars yesterday after news emerged of a possible peace plan for Libya. However, the situation is still very fluid and there is every possibility for a rebound.

Not surprisingly then, some cracker operators are looking at propane/butane as an alternative to naphtha. The Saudi Aramco March contract price for propane is at $820/tonne FOB Arabian Gulf while butane is priced at $860/tonne FOB Arabian Gulf.

The premium on spot propane is now $15-20/tonne but the delta is still lucrative, pointed out one industry source.

While Asian naphtha-based producers are struggling, their counterparts in the US are well placed.

In a recent report Alembic Global Advisors sees a scenario beneficial to US ethane-based producers.

"US ethane based producers would continue to enjoy very healthy margins benefiting from the pricing umbrella provided by high cost naphtha based producers. It is worth noting that if crude oil prices continue their ascent the US ethane based cost advantage may widen further."

As a rule of thumb if natural gas prices remain flat while crude oil prices rise by $10/bbl, US ethane based ethylene margins should expand by around $120 per tonne, the analysts estimated. And the key beneficiaries would be Dow Chemical, LyondellBasell and Westlake Chemical.

By Malini Hariharan

A question that every butadiene buyer has been asking for a long time is when will prices ease?

There are no signs yet although buyers are threatening to cut production.

Butadiene rose by more than $200/tonne last week to $3,080-3,120/tonne CFR Northeast Asia, reports my colleague Helen Yan on ICIS news.

Prices have been driven up by a number of cracker outages and turnarounds in Asia, Europe and the US. Butadiene supplies have tightened over the last year and the more recent shutdowns at two Iranian plants (Jam Petrochemical and Amir Kabir) and Shell's cracker in Singapore have not helped matters.

Butadiene prices have risen by around 50% since January.

But buyer resistance is on the rise and some are planning cuts in production.

Kumho Petrochemical, Asia's largest synthetic rubber producer, will shut a 70,000 tonnes/year styrene butadiene rubber (SBR) plant and cut operating rates at a second 100,000 tonnes/year plant in May.

Other SBR producers in Asia too are reportedly contemplating production cuts. Additionally, a few SBR producers have planned maintenance shutdowns in the coming weeks.

However, the production cuts may not materialise if high butadiene costs can be passed on. And there are signs that this is happening.

SBR prices in India have crossed $4000/tonne and are likely to remain firm in May, reports ICIS news.

Tyre producers are willing to pay high prices as they expect SBR availability to remain constrained because of production disruptions in Japan.

"We have received enquiries from some tyre producers in Japan. Their suppliers in Japan were not able to deliver their contract cargoes because of power outages and extensive damage to infrastructure after the earthquake," said a Korean SBR producer.

If this continues, SBR and butadiene can continue their upward march and provide much -needed relief to Asian cracker operators who have been hit by weak pricing for other derivatives.

By Malini Hariharan

The blog has been scanning equity analyst reports of South Korean companies and has noticed that earnings expectations for the year are being revised upwards despite market uncertainties.

Companies such as S-Oil are expected to benefit from a recovery in refining and paraxylene (PX) margins. Woori Investment & Securities has raised its estimate for complex refining margins in Asia from $8 to $9 for 2011 and from $9 to $10 for 2012.

S-Oil's results will also be boosted from increased volumes of PX available from a new 900,000 tonnes/year plant that it started up in April. PX margins are expected rebound in the second half of this year on strong demand.

Start up of a new 12,000 tonnes/year ethylene vinyl acetate (EVA) sheet plant and a 20,000 tonnes/year high-end film line in the second quarter is forecast to support SKC.

The strength in caustic soda and polyvinyl chloride (PVC) margins is expected to help Hanwha Chemical post strong numbers this year starting from the first quarter. Hanwha's 50% stake in Yeochun NCC (YNCC) means that the company will gain from strong ethylene, propylene and butadiene prices.

But in line with what the blog has been writing about Asian markets, analysts at Woori are cautious on Honam Petrochemical, South Korea's largest petrochemical producer, as second quarter earnings are likely to be affected by weak margins for polyethylene (PE), monoethylene glycol (MEG) and polypropylene (PP).

"Product margins for its major offerings have fallen steadily since March, and
2Q11 earnings are likely to plunge quarter on quarter. In fact, demand for Asian petrochem products has slowed sharply from China, presumably due to the Chinese government's tightening measures and the limited power supply for the polyester industry. We expect the country to continue its tightening policy in the near term," they said.

Honam with its exposure to commodity petrochemicals remains in a vulnerable position unlike other Korean companies with a diversified product portfolio.

By John Richardson

THE article of faith publicly expressed at last week's Asia Petrochemical Industry Conference (APIC) in Fukuoka, Japan, was that the current problems with demand in China and India were only temporary.

Discussions the blog held were packed with the conventional wisdom that not enough capacity would be built over the next few years. For example, one estimatewe heard was that there was the need for 35 crackers to be built to meet global ethylene equivalent demand growth over the next decade; so far only 24 had been announced.

But as we mentioned last week, Singapore-based PNB Parabis chemicals analyst Kunal Agrawal estimates that 11m tonne/year of yet-to-be-disclosed ethylene capacity could be built by 2015, based on available refinery feedstock. This could be on addition to the 16-17m tonne/year of capacity already announced fed by these same refineries.

One has to also worry about Sinopec's propensity to add capacity for self-sufficiency reasons, regardless of the economics.

A lot of talk at the conference was about China's potential to make use of coal for this purpose.

But the blog feels that because the environmental and economic problems of the coal-to-mono-ethylene glycol (MEG) and methanol-to-olefins (MTO) processes are so huge, the advent of a large amount of coal-based capacity will not happen during the next wave of overbuilding. If Sinopec announces firm new projects for start-up during the upcoming cycle, they will be based on refining.

We will discuss the environmental issue surrounding coal-to-chemicakls in more detail later on, but here is a rather worrying statistic: According to the consultancy Tecnon Orbichem it takes seven tonnes of coal and 2.5 tonnes of methanol to produce one tonne of olefins. When the blog asked a senior chemicals industry executive where all this carbon disappeared to, he pointed his finger upwards.

If we had $50 every time we heard mention of shale gas during the conference the blog would be very rich. Sadly we are not, which is why we have written this post.

Sufficient ethane would be available for an additional 8m tonne/year of ethylene capacity in the US over the next 20 years, according to IHS director Russell Heinen in a paper he gave during the event.

In an interview with the blog, two senior executives of Shell Chemicals said that their company was studying North American expansions based on low-cost ethane.

"We have 700,000 acres of shale gas assets in the US and Canada and so we feel we are in a good position," said Iain Lo, Shell's vice president, business development and ventures.

The focus would initially be on additions to existing plants in Louisiana and Texas, but Sven Royall, Shell's vice president for global intermediates, said that "everything was on the table" - when asked about the possibility of a greenfield cracker.

Mention of Canada was interesting. With all the focus on US shale gas the blog had missed the possibility that shale assets in Alberta might also be exploited for petrochemicals.

Shell's comments come after a raft of announcements over the last few months of studies into new crackers and debottleneckings of existing facilities by other US majors, such as Dow Chemical, ChevronPhillips Chemicals and LyondellBasell.

One of the ethylene derivatives anticipated to be in tight supply over the next few years is MEG, given feedstock shortages in the Middle East.

Saudi Arabia in particular has met most of the demand growth over the six or so years. Now, though, it seems unlikely that it would be allowed to add more capacity in the Kingdom for strategic reasons, even if it could get its hands on more gas allocations.

Returning to coal-to-chemicals in China, there has therefore been a lot of excitement over the syngas (made from coal) to oxalic acid and then on to MEG process, bypassing the need for ethylene.

It takes 4-5 tonnes of coal to make one tonne of MEG via this route, said an industry observer. While not as bad as MTO this is still pretty grim.

So the conventional ethylene route seems the likely means of meeting perceived future demand over the next 5-6 years.

Shell, in the same interview with the blog, disclosed plans to add two OMEGA process MEG plants in Qatar (each 750,000 tonne/year) by 2016-2017.

The industry observer also told us: "It makes sense to build MEG capacity in the US to serve the local purified terephthalic acid (PET) and textiles industries, which are mainly based in South and North Carolina.

"The US is a significant net importer of MEG and so this new capacity would be backing-out exports.

"As far as ethane supply goes, it is not rocket science to reverse the flow of pipelines that currently go from the south to the north. Ethane could be made to flow from the Marcellus shale-gas fields to new crackers that may be built in Texas and Louisiana. These facilities would then supply the MEG to the Carolinas."

This entire post has talked about capacity. We have not discussed why the industry believes in the doctrine of a continued global economic boom.

The reason for this is that we are journalists and so always endeavour to faithfully report what people tell us.

What APIC told us was that the delegates we spoke to, and listened to during presentations, were either unaware - or didn't want to publicly discuss - profound changes in the global economy.

These are detailed in our new e-book - 'Boom, Gloom and the New Normal: how Western BabyBoomers are changing global chemical demand patterns, again.'

Changes in demographics in the West - and a major shift in both demographics and government policy in China - need to at the very least be discussed openly by the industry.

There may be good reasons to discount what we argue in our book, but we have yet to hear them.

By Malini Hariharan

Government measures across Asia to ease inflationary pressure are finally yielding results. The latest economic indicators from China and India confirm a loss in manufacturing growth momentum which is likely to put further pressure on troubled polyolefin markets.

In China, the official Purchasing Managers Index (PMI), from the China Federation of Logistics, declined to 52.0 in May from 52.9 in April, the second consecutive month of decline.

An alternate index from HSBC and Markit fell to a 10-month low of 51.6 from 51.8.

Although a reading over 50 indicates economic expansion it is worth noting that the PMI is at a 9-month low.

The PMI's input-prices subindex, an indicator of inflation pressures, declined to 60.3 from 66.2 but this is unlikely to push the government to relax its monetary policy.

The news from India is also not promising as GDP growth in January-March slowed to 7.8%, down from 8.3% recorded in the previous quarter.

The HSBC Markit PMI fell to 57.5 in May from 58.0 in April, weighed down by a slower expansion rate for new orders and a labour shortage.

And South Korean manufacturing growth also slowed to its slowest pace in six months, with HSBC's PMI falling to 51.2 from 51.7.

Economists are optimistic that China will see a gradual correction rather than a hard landing. But credit policies across the region are likely to remain tight as inflation is still a concern for many countries.

This is of course bad news for polyolefin producers. Demand has been weak since the start of the year and chances of an early recovery are receding.

"The China market situation has worsened after Chinaplas; buyers in other Asian markets have also take a wait and watch position," explained a producer from Northeast Asia. He was particularly pessimistic about the polypropylene (PP) market as buying ideas have steadily declined.

"The Middle East, Singapore and Thailand are supplying more but the critical factor is the demand slowdown in China," he added.

By John Richardson

THE consequence of either a failure by the US to raise the debt ceiling and/or a downgrading of the country's Triple A debt rating would have obviously have serious consequences for the Asian and global chemicals industries.

Just how serious nobody really knows as we are in uncharted waters.

At the very worst we could be talking about a global recession, even a multi-year depression, according to this excellent article from my ICIS news colleague Joe Kamalick.

"A short suspension of principal or interest payments on the Treasury's debt obligations would cause severe disruptions in financial markets and the payments system," Daniel Meckstroth, chief economist at the US Manufacturers' Alliance, was quoted as saying in the article.

Banks, money market mutual funds and many other financial institutions use the liquidity of short-term Treasury securities to manage cash needs.

"A default would (therefore) suddenly make the market value of Treasury securities difficult to determine, potentially destabilising the financial sector and creating panic", he added.

Even if a default is avoided at the 11th hour, and depending on how the debt limit is raised, the US government's credit ratings may very well be downgraded. Mekstroth warned that this "would hasten the decline of the dollar's role in the international financial system".

A ratings downgrade or an outright default would "call into question the status of Treasury securities as a safe haven for foreign investors", he said, noting that more than one-third of Federal debt is held by foreign governments, the largest being China and Japan.

Analysts at High Frequency Economics (HFE) have warned that a US default or credit downgrade would sharply reduce the value of Beijing's Treasury securities holdings.

If the US - China's top trading partner - had to as a result drastically cut spending, China too could slip into recession.

"We have no doubt the world economy would fold with it," HFE said.

A credit downgrade would drive interest rates up globally, reducing business investment - and in the US, deepening economic problems left over from the sub-prime crisis.

"This debt debate is already further entrenching the pressured US consumer," a US-based chemicals analyst told the blog.

"Businesses aren't hiring and consumers aren't spending.

"The global economy is largely based around the developed world's consumption of goods. Asia is seen as the growth market while the developed nations are the foundation.

"You take away more consumer spending, which would happen if there is a default or downgrade, and it is just a ripple-down to Asia.

Demand for Asian products would drop significantly from US consumers."

China is due to enter its peak manufacturing season in August - when factories making finished goods traditionally ramp-up production ready for the Christmas sales season in the West.

Polyolefin traders have partly justified recent prices rises, and their long positions, on the manufacturing season.

A US default and/or downgrade could therefore lead to a much-weaker manufacturing season and end the polyolefin price recovery, as we have discussed before.

At the very least, until or unless the debt crisis is resolved, the converters are likely to stay largely on the sidelines, leaving the traders with substantial stocks of resin.

"Asian petrochemical producers are high cost producers," continued the chemicals analyst.

"What will US producers do with all their excess material as local demand weakens? Shipping the product to Asia and cratering the market sounds likely."

The US polyethylene (PE) sector has benefited enormously from cheaper feedstock, as a result of shale gas, and the weaker dollar.

A debt default or downgrade is likely to weaken the dollar further, as well as, as we've already said, seriously weakening local demand.

"I don't think the US PE industry has yet to fully realise the opportunity it has to take market share away from their higher-cost Asian competitors," a senior executive with a global polyolefins producer told the blog late last week.

The obvious losers in Asia will be the South Koreans, who, according to a recent Nexant ChemSystems report, are already suffering from margin compression.

Other losers will include the Japanese and non-integrated producers which buy ethylene.

The debt crisis - along with the problems we have highlighted in China - should lead to a re-evaluation of the "2014-2015 peak of the cycle" theory.

Some of the numerous shale gas-based petrochemicals projects that have been recently announced in the US might, as a result, be delayed or even shelved (an industry euphemism for "cancelled").

The good news is that US politicians might have a little longer to reach a deal beyond the widely-publicised 2 August deadline, according to US-based wealth management and private equity company Robert W Baird & Co.

Inflows to the Treasury have been greater than forecast with expenditure lower than anticipated, said Robert W Baird in a fixed income investment note released earlier this week.

"The August 10 date (when it expects the Treasury to run out of money) is not much of an extension but it could provide the White House and Congress valuable additional time to come to an agreement," continued the note.

"However, we do not feel it will be enough to allow the 'warring parties' to come to an agreement on deficit reduction to avoid a ratings downgrade."

A downgrade would raise US long-term interest rates by 25-50 basis points and would also cut GDP growth by 25-50 basis points, it added.

The vast majority of analysts agree with Robert W Baird & Co that a default is unlikely because politicians realise the consequences would catastrophic.

"It would be Lehman Bros crisis times five," added the chemicals analyst.

But, as we have said, a downgrade is bad enough.

"My guess is that they have a triage plan to cut some less consequential payments in the short-term to avoid a default," added a UK-based chemicals consultant.

"But what does this say to the rest of the world about the dysfunctionality of the system?

"It is no longer just waiting weeks to find out who's been elected because Florida couldn't count its hanging chads.

"This is being unable to write a simple letter to the bank manager, asking for the loan to be extended. They've spent the money, so they have to have the loan.

What kind of planet do they think they are living on?"

Hear hear......

By Malini Hariharan

The margin pain experienced in Asia in the last quarter is clearly evident in the recently released results by South Korean majors Honam Petrochemical and LG Chem.

Honam's operating profit for Q2 declined 36.8% from the previous quarter to Won36.1bn. LG Chem's operating profit was down 7.2% at Won775.4bn while its petrochemical segment saw a 11.9% decline in profit to Won642bn.

High butadiene and acrylontirile prices and weak demand from the information technology industry hit LG's key acrylonitrile butadiene styrene (ABS) business which accounted for 30% of the petrochemical division's operating profit in the second quarter. Contribution from the naphtha cracker and polyolefins business remained stable at 26% despite weak product prices and LG attributed this to the special grades that it offers.

Honam's results were dragged down by the poor performance of affiliate companies KP Chemical and the recently acquired Titan Chemicals.

Analysts at Woori Investment & Securities estimate that earnings at KP declined 50% due to a sharp narrowing of the spread between purified terephthalic acid (PTA) and mixed xylenes (MX). KP is a standalone PX, PTA and polyethylene terephthalte (PET) producer and has to buy MX feedstock for its operations.

Earnings at Titan also declined mainly because of inventory valuation losses.

Honam was saved by the strength in butadiene and monoethylene glycol (MEG) markets. Butadiene prices have been in the $2,750-4,150/tonne range because of a structural shortage of the product globally.

Woori estimates that Honam's per tonne EBITDA from butadiene was ten times the average EBITDA for polyethylene (PE), polypropylene (PP) and MEG. With butadiene projected to remain short for the next couple of years Honam will continue to benefit and butadiene's contribution to the company's EBITDA is likely to touch 50% in 2012.

Both LG and Honam have predicted a stronger Q3. The price increases seen since the beginning of July certainly point in this direction and many market players are fairly confident that markets will remain firm in August and September supported by plant turnarounds and shutdowns like the one at Formosa Petrochemical in Taiwan.

But the consensus for the fourth quarter is that there is still too much macroeconomic uncertainty to make a prediction.

By John Richardson

Fifty per cent of the blog (John Richardson) is on leave for the next two weeks.

Next week Paul Hodges will be posting on Asian Chemical Connections. Paul runs the ICIS Chemicals & Economy blog.Then from the week starting 22 August my fellow ACC blogger, Malini Hariharan, returns from her leave and will be posting articles.

Before I sign off here are some thoughts on events over the last week.

It has been the kind of week the blog has been expecting for two years or so, ever since the recovery from the late 2008 global financial crisis.

The recovery was based on hugely increased liquidity via the Fed and the Chinese government - but all this extra money flowing around the world merely papered over the cracks. And as we discuss in Chapter 3 of our e-book, 'Boom, Gloom and the New Normal - how the Western BabyBoomers are changing chemical demand patterns, again', one of the consequence of the Fed's largesse has been oil prices out-of-line with underlying demand. You can download a copy of the chapter for free here.

The loss of the US triple A debt status and fears over the Eurozone, which have now even spread to France, point to the deep, fundamental problems with the global economy that are going to take a generation or more to fix. This is something we discuss in Chapter 4 of our book, due to be published at the end of this month.

One of the big themes we have covered this week is China and what it might do to protect its economy from weaker demand in the West.

Premier Wen Jiabao said earlier this week that it was important to balance growth and inflationary expectations. He noted that price rises had to be slowed, but his statement omitted the previous emphasis on tackling inflation as being a top priority.

"I think we might see targeted measures in certain regions to help the small and medium-sized enterprises," a senior executive with a major polyolefins producer told us this week.

"But the government will have to be careful to structure these measures so that the money goes to SMEs and not to the bigger companies and the speculators."

This article from the China Daily suggests that help for the SMEs is probably on its way.

And perhaps interest rates and liquidity restrictions will be eased across-the-board because, a we have said, dealing with inflation appears to no longer by China's number one priority.

Beware of misleading reports of all being right in the chemicals world as a result of China adjusting economic policy to support is manufacturing industry.

Chemical prices might temporarily recover, as will commodity prices in general and stock markets, but this will constitute nothing more than a collection of bouncing dead cats. China cannot stimulate its economy on the same scale as 2008 because of the problems left behind by this earlier huge injection of cash into its economy, as we discussed earlier this week.

And every measure taken to help China's manufacturers will only weaken manufacturing industries in the West as China seeks to export its way out of trouble.

This could create trade tensions, even tariff barriers.

Exporters of chemicals and polymers to China might enjoy temporary benefits from new measures to support manufacturing industry.

But chemical manufacturers in their home markets will lose out as China floods Western countries with cheap, government-subsidised manufactured goods. An example could be a sharp rise in auto exports from China, as Paul Hodges discusses in this post from his blog. 

The unavoidable problem is that total global demand for chemicals and polymers is down and will remain depressed for many years.

By Malini Hariharan

Indonesia's sole cracker operator Chandra Asri faces yet another ownership change with Singapore's Temasek Holding reported to be looking at divesting its stake in the company.

The news report in the Wall Street Journal said several companies from Thailand, South Korea and Japan have shown interest in Temasek's stake, including Thailand's PTT Chemical and Siam Cement and South Korea's Honam Petrochemical Corp.

The Thai companies have yet to confirm their interest but a Honam source admitted that Chandra Asri is one among various foreign companies being studied for possible investment.

Acquisitions are an important part of Honam's expansion strategy and company sources have in the past confirmed that opportunities are being studied.

Taking a stake in Chandra Asri makes sense as the cracker already provide some ethylene to its two polyethylene plants in Indonesia. These plants came to Honam via the Titan Chemical acquisition that it completed last year.

It would also strengthen Honam's position in the Indonesian industry. Earlier this year, the chairman of the Lotte Group, parent company of Honam, had announced plans for new $3-5bn cracker project in the country.

But Honam is likely see competition from the Thai players. Speaking to a Thai newspaper the PTT Chem's ceo did not confirm interest in Chandra Asri but acknowledged that Indonesia is an important target market.

In an interview to the blog earlier this year, PTT Chem's ceo had said that the company was keen to expand its regional presence via acquisitions. It had last acquired a 50% stake in Cognis Oleochemicals in 2008.

Replacing a financial investor with an experienced petrochemical producer should help Chandra Asri quickly implement its expansion plans. It operates a 600,000 tonnes/year cracker at Cilegon. Downstream facilities include two PE plants, three polypropylene (PP) plants and two units for styrene mononer.

The company, which merged with Tripolyta in January this year, has announced plans for expanding the cracker to 1m tonnes/year and adding to its PE capacity. It also recently issued a contract for construction of a 100,000 tonnes/year butadiene plant.

Temasek had acquired a 50% share in the Chandra Asri back in 2006 from several shareholders, including trust fund Commerzbank International Trust Singapore. But it has since then diluted its stake to 22.9% and is said to be expecting $400m for this. The rest of Chandra Asri is in the hands of Barito Pacific.

By John Richardson

Confidence among Middle Eastern petrochemical producers remains high because they obviously now that as long as oil prices do not collapse they will continue to make excellent money, said a chemicals analyst.

The blog believes that there is a very strong chance that crude will collapse to as little as $25 a barrel as we enter a new global recession. This would result in even the likes of SABIC being forced to think again as petrochemical pricing in turn collapses.

The mood in the Middle East is not only being buoyed by good margins.

"Market share is being gained thanks to the ironing-out of production problems," the analyst added.

As we have reported before on the blog, frequent technical issues at new plants is one of the reasons why petrochemical supply was tight in 2009-2010. New supply was drip-fed into markets rather than arriving in a sudden flood as many observers had predicted, with demand during the recovery from the late 2008 crisis bolstered by government stimulus packages.

Many of the technical problems look as if they have been resolved, resulting in a substantial surge in exports from the Middle East, the analyst added

"Overall petrochemical exports from the port of Dammam in Saudi Arabia were substantially higher in August compared with July," he said.

"We have seen a steady improvement in output throughout 201l with no one notable exception - Saudi polypropylene (PP).

Technical problems at the 450,000 tonne/year Al-Waha Petrochemical plant forced a shutdown on 1 July with production resuming in August, according to our colleagues at ICIS news.

Operating rates at National Petrochemical Industrial (NATPET), a 400,000 tonne/year operator, were reduced in July in order to resolve problems at the plant.

And Petro Rabigh - the 700,000 tonne/year producer - underwent an extended turnaround in an effort to resolve issues at its deep catalytic cracker that ended in August, ICIS news was also told.

PP output is up at all three plants as demand in China takes a battering from a sharp slowdown in auto sales.

An overall increase in Middle East petrochemical output is occurring as governments pull back on economic stimulus - most importantly in China.

Polyethylene (PE) trade data from China for H1 of this year show the big gains made by the Middle East as overall demand fell by 2.5 per cent.

The rest of this year does not look good for the higher cost producers in Japan, South Korea and elsewhere as there are no indications of China easing back on its battle against inflation,

And for everybody, including even the Middle East, it is hard to find reasons to be optimistic about 2012.

By Malini Hariharan

A spurt in polyethylene (PE) and polypropylene (PP) buying in China over the last few days has raised hopes among sellers that the market has bottomed out and prices should rise in the coming weeks.

After hand-to-mouth buying for the last three months buyers are said to be replenishing stocks which should enable producers to tide through November and December.

However, sustainability of a recovery is still doubtful given rising polyolefin exports from the West and macroeconomic developments.

The latest data from Asian countries indicate weak manufacturing activity with exports hit by poor demand from the West.

China's official purchasing managers' index (PMI) for October fell to 50.4, its lowest level since February 2009 although the HSBC index came in at 51, up from 49.9 in September.

The new export orders index dropped by 2.3 percentage points from September to 48.6 in October. The new orders index fell by 0.8 percentage points to 50.5, while the production index dropped by 0.4 percentage points to 52.3.

The PMI, which is a measurement of the monthly performance of China's factories, is based on a survey of 820 manufacturers across 20 industries. A reading below 50 indicates contraction in manufacturing activity while a reading above that level indicates an expansion.

Analysts interpreted the data as yet another sign of moderation in China's economic growth. But some also predicted that the government would not hike interest rates further as it attempts to balance conflicting objectives of controlling inflation and maintaining growth.

Among the other Asian countries, Taiwan was the worst performer with the October PMI touching 43.7, the lowest level since January 2009. South Korea's PMI for October was at 48, the third straight month of contraction although at a slower pace than September.

Restocking activity is likely to provide some respite to producers for the rest of this quarter but it is probably too early to predict that prices have hit the floor.

By Malini Hariharan

News of operating rate cuts is pouring in. Crackers in Japan, Taiwan and parts of southeast Asia have been running at reduced rates of 80-90% in October. But now there is also talk of rate cuts at crackers in South Korea.

More importantly, a Sinopec source confirmed yesterday that the Chinese major would be running its crackers at around 90% in November, down from an average 95% in October, writes the Peh Soo Hwee on ICIS news.

The company operates 13 crackers either on its own or through joint ventures.

Besides weak markets the rate cuts are also because Sinopec is under pressure to increase production of diesel which is running short in China. The company will be producing more diesel at its refineries which would result in lower production of naphtha and other middle distillates.

The cuts come at a time when naphtha-based ethylene margins in northeast Asia entered into negative territory for the first time since October 2009.

And the rate cuts are also extending to polymer plants.

Korea Petrochemical Industry Co has already decided to cut production at its polyethylene (PE) and polypropylene (PP) plants because of squeezed margins.

In Thailand, PTT Global Chemical is said to be considering shutting a 400,000 tonnes/year linear low density PE (LLDPE) plant for two weeks because of weak domestic demand.

Producers in Europe too are on the same road.

Ineos will be joining Dow Chemical to run all its low density PE (LDPE) and LLDPE plants at minimum rates for the rest of the year, reports Linda Naylor on ICIS news. Production of high-density PE (HDPE) will also be cut to 'meet the reality of demand', said a company source.

Whether these operating rate cuts in Asia and Europe will be sufficient to push markets into balance remains to to be seen.

By Malini Hariharan

It is not surprising to read that at a time when many producers around the world are cutting production, cost-advantaged producers in the Middle East will be maintaining operations at their polyethylene (PE) and polypropylene (PP) plants.

Producers in the region with access to cheap feedstockts are expected to run their plants at full for the rest of the year, writes Ong Sheau Ling on ICIS news.

Producers are instead cutting prices to move volumes, especially for polyethylene (PE), posing a big problem for high-cost producers in Asia.

Linear low density polyethylene (LLDPE) film of Saudi origin is reportedly being sold at $1,140-1,160/tonne CFR China, $20-40/tonne cheaper than South Korean product.

A weak home market has also not dampened producers' enthusiasm. November polypropylene (PP) prices have fallen by around 7% in the Gulf Cooperation Council (GCC) market to match those in China.

This move on part of Middle East producers raises question on how quickly markets will return to balance. Unless there is a significant recovery in buying, especially in China, deeper cuts might be needed in Asia and elsewhere in the world.

By Malini Hariharan

China is preparing to bring onstream huge capacities for aromatics this year.

Nearly 1.7m tonnes/year of  toluene capacity is due to be added, writes Dolly Wu in the latest issue of ICIS Chemical Business.

The major projects to keep an eye on are Dragon Aromatics (350kta), Jilin Petrochemical (350kt), PetroChina Sichuan Petrochemical (280kts) and Jiujiang (250kta).

Some of the toluene will be utilised captively at new toluene disproportination (TDP) plants to feed the country's booming demand for paraxylene (PX). TDP and hydroalkylation (HDA) applications accounted for 44% of toluene demand in 2011.

Additional toluene supply means that import volumes are likely to remain stable at around 600,000 tonnes. Demand for the full year is projected to hit 7.4m tonnes, up from nearly 6m tonnes in 2011.

Toluene demand for gasoline blending, the highlight of the local market for the last couple of years, will remain strong. But volumes are not projected to rise significantly, given ready availability of alternatives such as MTBE and mixed xylenes (MX).

China is already self sufficient in benzene and is heading in the same direction for toluene.

By John Richardson

CONFIDENCE can be very relative. So, compared with late Q4 last year when global cracker and derivatives markets ground to a virtual halt, perhaps it was inevitable that January would see some kind of rebound in the industry's mood.

Deep operating rate cuts in Northeast Asia have been a factor behind this return in confidence. In late December, Northeast Asian crackers were said by one chemicals analyst to be running at 85 percent, including most significantly some of Sinopec's ethylene plants. If Sinopec had indeed cut back to such a level, this would represent a radical change in approach for a company that has always previously run at 100 percent, regardless of market conditions, in order to keep its customers adequately supplied.

"Rate cuts to the mid-80 percent range would give the Northeast Asians considerably market muscle as we enter the post-Lunar New Year period. Once you get below 90-92 per cent, this is when producers begin to wield control over markets," said a senior executive with a global polyolefins producer.

Producers need a strong price recovery to regain margins that slumped very badly last year, mainly because of a very bad Q4. Polyolefins demand in China was weak from March-April. However, margins were held-up by strong butadiene and propylene co-product credits until the fourth quarter, when butadiene and propylene prices declined very sharply. High crude oil prices have added additional pressure.

This "needs must" situation could therefore be behind the apparent improved confidence among producers.

Modest pre-Lunar New Year polyethylene (PE) and polypropylene (PP) price rises are also said to be mainly the result of increased buying by local traders in China. This suggests that the traders also have a motive to "talk" up the market.

Chemicals analysts are playing their part as they talk about strong price recoveries in China, resulting from restocking and the Chinese government's "pro-growth" approach. But while this might result in an improvement in chemical stock prices, this will not necessarily mean that their arguments stack-up.

In Asia, you need to also consider the following:

1.) The risk that hard-pressed naphtha-based crackers producers will, at the first sign of a strong price surge, rapidly increase operating rates to well above 90 percent. There is talk about a "new realism" among the Northeast Asians, but they might quickly return to the old approach of fighting to regain lost market share.
2.) Global capacity additions in the biggest of all the cracker derivatives, polyethylene (PE), are few and far between in 2012 - potentially below demand growth. But there is a substantial amount of new capacity due on-stream in Saudi Arabia in H1, and this year's Asian cracker turnaround season is lighter than in 2011
3.) "Pro-growth" in China will also be relative to 2011, when the government was forced to drastically restrict bank lending. As we have said many times before, Beijing has very little freedom to boost liquidity anywhere close-to the misleading levels of 2009-2010. This year's official bank lending is expected to be 5 percent higher than in 2011, but it also worth noting that most bank lending tends to take place during the first half of each year. And the export environment for manufactured goods looks set to remain weak.

In Europe, too, the cracker business benefited from deep operating rate cuts. Rates were as low as 75 percent in Q4 and have since returned to 85-90 percent, in response to stronger buying by end-users.

But in the European polyolefins business, there is no firm evidence that this stronger buying represents a real demand improvement versus restocking in anticipation of further price increases. February ethylene contract prices have been settled €99/tonne higher than in January, with propylene contracts up by €90/tonne. Attempts at further increases seem likely if the current mood persists.

By John Richardson

AS the US contemplates raising its ethylene capacity by up to 29 percent by 2017, we would be fascinated to know whether the companies involved in these proposed expansions, and the "cheer leader" chemical industry observers spurring them on, have ever considered a chart such as the one below: 

First used in workshops during our New Normal seminars last year, the slide illustrates the point that petrochemical projects outside the West are not always only about economics. They are also about the Michael Porter concept of  'Shared Value', which we discuss in our e-book, involving delivering wider benefits to society.  

The Japanese built petrochemical plants in the 1960s onwards to achieve security of supply of raw materials for auto and other downstream industries. Building these plants was not always, therefore, only about the economic efficiency of the plants themselves.

Then came the South Koreans who followed the same model, and to some extent Thailand through its petrochemical master plans in the 1980s and 1990s.

Now we have a new wave of projects, which are also at least partially "social and political" - i.e. they have a wider agenda beyond just making money.

China has aggressively expanded its petrochemical industry, again for security of supply reasons. Sinopec has a poor rate of investment return from it petrochemicals business, as making money is not its main objective. Instead, it has been tasked by the government with once again guaranteeing supply of plastics etc to the country's vast manufacturing industry. This is why, even when market conditions are bad, Sinopec still tends to run its plants flat out.

The Middle East petrochemicals industry has, up until now, been a license to print money, thanks to feedstock-cost advantages. But its new agenda is also social and political through cracking heavier feeds, including naphtha, enabling downstream diversification, as the region seeks to create jobs to deal with the challenge of youthful populations.

And finally, there is Petronas and its $20bn Refinery and Petrochemical Integrated Development (RAPID) project, which is set to include a 300,000 barrel a day refinery, a worldscale cracker and a wide range of derivatives, including speciality chemicals. We are not saying that the project, due on-stream at end-2016, will not make money. But is the objective entirely about profitability, or is this again partly to do with nation building? Strong government support might be one reason why foreign investors are reportedly queuing up to invest in RAPID.

If you are sitting in Houston, contemplating an expansion based on low-cost shale gas-based ethane, you need to think about how many of these social, or semi-social, projects will be built over the next decade. The assumption that you will always be able to export your surpluses to an ever-hungry booming Asia - and to Latin America where "nation building" is also on the agenda - has to be questioned.

Your assessments of whether or not a rival project is going to be built cannot just take into account supply and demand analysis.

Evaluations will have to be also based on your relationships with senior government officials, and other policy and agenda setters, and your understanding of what is driving their decision-making. If you don't develop this type of market intelligence, you are in for some nasty surprises when uneconomic projects go ahead. These are global markets, of course, and so what happens in Guangdong can matter as much, or even more, than what happens in Louisiana.

Further, when your new plant is up and running there will obviously be periods when markets are bad, leading to pressure for operating rate cuts.

How do you respond when your competitors in Asia, and in Latin America, are still running at 100 percent?

And in a broader sense, what does it mean to be confronting competitors who don't care about losing money?

Perhaps everyone in Houston has thought this through, but none of our discussions, and nothing that we have read, points this way. Apologies if we have missed something.

By Malini Hariharan

Analysts are predicting a quick recovery for South Korean petrochemical companies after a dismal performance in the last quarter.

Honam Petrochemical's Q4 2011 sales were down 14.7% quarter on quarter at Won3,488 bn. Operating profit declined 59.8% to Won158.4bn.

LG Chem's sales dipped 4.8% at Won5,602bn while operating profit slipped 30% to Won506bn.

Among the other South Korean companies, S-Oil saw sales decline 18.7% in Q4 2011 to Won9,264bn while operating profit was 11.6% at Won411.8bn. SK Innovation saw sales decline 1.6% while operating profit was down 60.2% at Won 343.1bn

But analysts at Woori are predicting a sharp correction in earnings in profits in Q1 2012. Honam is expect to post a 78% quarter on quarter growth in operating profit to Won282.2bn thanks to strong butadiene prices.

Butadiene prices have crossed $3,500/tonne cfr Asia in response to maintenance shutdowns at Asian crackers.

LG Chem's 2012 sales and operating profit are projected to rise as the company is due to add volumes from new plants for acrylic acid (190,000 tonnes/year), superabsorbent polymer (72,000 tonnes/year) and bisphenol A (150,000 tonnes/year).

And they are also confident of a continued recovery in fortunes as petrochemical prices are likely to steadily improve through 2014 on tight supply conditions.

"We anticipate Honam enjoying long-term growth potential from both domestic cracker capacity expansion and its planned overseas business ventures in Indonesia and Uzbekistan," they said.

Honam has a stake in a joint-venture cracker project in Uzbekistan that is due to be completed in 2013.

S-Oil's operating profit is projected to climb 18.0% to Won485.8bn in Q1 2012 on strong oil prices and refining margins.

"With the Dubai crude oil price remaining strong in response to Middle
Eastern geopolitical risks, high oil prices have spurred petroleum product demand--the Asian complex margin now stands at around $12/bbl versus $8.2/bbl in Q4 2011," they said.

The strength in refining margins should also benefit SK Innovation. The company's operating profit is expected to rise 113% quarter on quarter to Won730.6bn.

Current market conditions support the positive view taken by analysts. But whether the conditions will last for the rest of the year is still open to debate.

By Malini Hariharan

Honam Petrochemical's plans for Indonesia appear to be progressing.

Company sources told ICIS news yesterday that a feasibility study is underway for a $4-5bn petrochemical complex in Southeast Asia with Indonesia the most likely location. The study is likely to be completed by early 2013.

Meanwhile, Indonesia media quoted senior managing director of business development, Kim Gyo-hyun, as saying that Honam, part of the Lotte Group, has selected a site at Cilegon in Indonesia. The report also said that the complex would include a 1m tonnes/year naphtha cracker and plants for 600,000 tonnes/year of polyethylene (PE), 600,000 tonnes/year of polypropylene (PP), 700,000 tonnes/year of monoethylene glycol and 140,000 tonnes/year of butadiene. He expected the project to be completed by 2016.

But company sources that ICIS spoke with declined to confirm project details.

Feasibility studies for the project are ongoing and the company has not decided on the configurations of the new complex, which will likely include a cracker and other downstream units, the Honam official said.

"The specifications for the new complex will highly depend on EPC [engineering, procurement and construction] contract costs as well as governmental tax benefits," the official added.

A project in Indonesia makes sense given the country's growing deficit for petrochemicals, especially polymers. But government support, which has been missing in the past for petchems, is important.

By John Richardson

EXACTLY the same scenario is playing out in European polyolefin markets, as in Latin America and possibly the US, my ICIS colleague Linda Naylor reported last Friday.

High polyethylene (PE) and polypropylene (PP) prices in Europe have led to increased offers for re-exported material from China, according to Linda - our European ICIS pricing polyolefins editor.

"Yes, there are imports at present, but I don't think they will ruin the European market," said a European PE producer in the same article. "It won't be European prices falling, but Asian ones going up. Chinese PE producers can't survive at this level. They will have to cut production."

Reports from one chemicals analyst, of heavier naphtha purchases by Asian cracker operators during January, which we discussed last week, suggest more rather than less supply.

Perhaps the naphtha cracker players believed stories of a strong post-Lunar New Year Chinese rebound, and/or stronger butadiene and the prospect of stronger propylene and PP on resumed auto production in Thailand persuaded them to buy more naphtha.

Whatever the reasons, the extra naphtha cannot sit in tanks forever and so, if our analyst is correct, Asian cracker operating rates might be set to increase.

On paper, we noted last Thursday that the Middle East, despite market comments to the contrary, was not undergoing a heavy turnaround season.

Now we understand that a high number of outages in January and February helped support pricing, as this article from another of my ICIS colleagues, Ong Sheau Ling, illustrates. These technical problems have come to an end, removing that support.

Plus, as we again said last week, the start-up the ChevronPhillips joint venture high-density PE (HDPE) and polypropylene (PP) plants in Saudi Arabia are imminent. Distributors and end-users are also aware that around 1m tonnes/year of PE from the new ExxonMobil complex in Singapore is scheduled to hit the market at some point this year.

As supply lengthens, the China market is still showing no signs of the strong post-Lunar New Year rebound that so many people had predicted. ICIS assessed pricing as flat last Friday, other than low-density PE (LDPE) which declined by $20/tonne. Labour and credit shortages, and concerns over the global economy, continued to affect sentiment.

Meanwhile, margins came under further pressure, according to the ICIS pricing Weekly PE Margin Report. Integrated HDPE margins for the typical Asian naphtha cracker in our model fell by $73/tonne for the week ending 17 February, on flat HDPE pricing and a rise in naphtha costs.

Eventually, perhaps, the European PE producer might be proved right once the Asian cracker operators have used-up their extra naphtha supplies. They might then make deep reductions in operating rates to bring the market into better balance.

But even during Q4 last year, when markets were exceptionally bad, Northeast Asian rates were only lowered rates to around 85 percent compared to 70-75 percent in Europe.

The Northeast Asians have a long history of chasing market share rather than keeping a tight lid on production during periods of market weakness - and in China, producers there tend to run for social as much as economic reasons. We have picked up no indications that this has changed.

The $64,000 question right now is whether European and US prices might be dragged down by Asia, rather than the other way around.

By John Richardson

A NEW report by the World Bank on China, summarised on the slide below, supports what we argued in chapter 6 our e-book, Boom, Gloom & The New Normal: That without the success of efforts to reform the economy, the country risks a significant slowdown.

Those reform efforts, detailed in the 12th Five-Year-Plan (2011-2015), involve tackling vested interests, such as local government officials and executives of the state-owned enterprises (SOEs), who could fight tooth and nail to keep the current system in place.

A further problem is that as global economic problems jolt China, the temptation is to revert to the tried-and-tested method of guaranteeing social stability in the short term, which is state-funded investment in infrastructure and in new industrial investment, which we saw on an enormous scale in 2009-2010. The problem is that this worsens China's imbalances by widening the gap between those with access to capital during these stimulus packages - the SOEs and the speculators who drive-up assets prices - and those without access: The 96 percent of Chinese who are forced to live on 20 dollars a day.

Pouring money at the problem also places more strain on the banking system, due to misallocation of capital as political connections can be more important in lending decisions than proper due diligence.

The World Bank also cites the need to foster greater commercialism and entrepreneurship in China, which would involve reducing the influence of the SOEs.

These are some of the themes chapter 10 of our e-book, published in March. The chapter also looks at government policy challenges in the West, as well as China.

Part of the 12th Five-Year-Plan is raising minimum wages while making huge investments in "higher-value" industries, such as electric battery-driven cars.

The aim is to justify these higher wages, and thus avoid the "middle-income track" mentioned by the World Bank, in the way that South Korea has managed.

But can this be achieved through central-planning alone in the case of China? Or is more openness required? Is a bigger role for private industry needed at the expense of the SOEs?

South Korea's history suggests that the answer to all of these questions is "yes".

China, however, has to date been hugely successful thanks to an economic model that is often compared favourably with that of the US. In the US, lack of government involvement in developing new industries is part of the problem.

By John Richardson

LAST week we discussed how inland markets in China - which are booming thanks to government efforts to raise rural income levels - offer huge opportunities for petrochemicals producers.

Here are a few further reasons to believe that it will be local rather than overseas producers which benefit the most.

Beijing has been building big, new worldscale crackers in order to help satisfy demand in western markets, including the 1.2m tonne/year PetroChina facility at Dushanzi in Xinjiang province, north western China. It is the country's biggest cracker, is integrated with a 10m bbl/day refinery and is located within a gas-processing hub.

China also plans to increase the average size of existing and future crackers to 700,000 tonne/year from just over 540,000 tonne/year, as part of the 12th Five-Year-Plan.

The plan also stipulates that the percentage of non-naphtha feedstock used in the country's C2 plants should rise to 20% by 2015 from 5% in 2010. If forecasts of a global oversupply of liquefied petroleum gas (LPG) come true, this might help Chinese producers better compete with low-cost Middle East imports.

Another concern for importers is the scale of China's petrochemical ambitions. It wants to raise total C2 production to 24m tonne/year by 2015 from 15.2m tonne/year in 2010.

"Projects are sure to be delayed, and perhaps even reduced in scale, but nobody doubts the central government's determination to boost petrochemical self-sufficiency in the long term," said a polyolefin industry source

"I actually think that at the commodity end of the business, even with strong inland growth, it is going to be very hard for overseas producers to compete, unless they are located in the Middle East.

"The higher-cost guys are going to be caught between the rock of the Middle East and the hard place of bigger domestic capacities. The answer, if you have the technology, is to focus on value-added polymer grades for the developed eastern and southern markets in China."

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By Malini Hariharan

The drama continues in the Asian butadiene market. Bids this week are about $100/tonne lower than sellers' price ideas, writes Helen Yan in an ICIS news report. Buying indications have dropped to $3,350-3,400/tonne CFR Northeast Asia.

Butadiene prices appear to be going through another downcycle, reflecting the fundamentals of a market that it is structurally tight over the long term.

Spot butadiene prices have fallen steadily, from a peak of $3,900-4,000/tonne in early February, on strong resistance from buyers who have been unable to pass on the price hikes.

The average butadiene price in February was $3,800/tonne CFR NE Asia, as against $3,700/tonne for polybutadiene rubber (BR). BR producers usually need a price delta of $600-700/tonne for profitable operations.

Several downstream styrene butadiene rubber (SBR) and BR producers in China, Japan, South Korea and Taiwan have already cut production, and this has started to affect butadiene markets.

Traders are also holding back purchases in anticipation of further decline in butadiene prices. A sale tender for a 2000 tonne butadiene cargo for March loading is said to have drawn little buying interest.

The shift in the butadiene market comes at the worst possible time for Asian naphtha cracker operators, as their margins have been squeezed by the rapid rise in feedstock costs.

As we discussed earlier this week, Northeast Asian integrated high-density polyethylene (HDPE) margins have fallen to their lowest levels since ICIS records began. Low-density PE (LDPE) margins in Northeast Asia slipped into negative territory for the first time since we started tracking the data.

The cost push has even forced Sinopec to trim operating rates at its crackers.

Polyethylene (PE) prices have inched up this week in China on improved buying sentiment. But the margin squeeze is unlikely to ease if naphtha continues to climb.

By John Richardson

THE big US petrochemicals story at the moment is, of course, shale gas and the potential it offers for the local industry to substantially expand capacity.

This would, in theory, give producers a strong position to export to South America, Asia and Europe. Exports are going to be essential as the US market, no matter how well it grows, will not be able to absorb anywhere close-to the amount of new polyethylene (PE) capacity being planned.

The polypropylene (PP) story is a little more complicated. Propylene availability is being reduced as a result of existing cracker operators switching to lighter feeds and supply of C3s from refineries being reduced. New cracker projects are also mainly ethane-based.

The US has the potential to go some distance towards compensating for any PP shortfall by investing in propane dehydrogenation (PDH)-to-PP facilities. Shale gas is also yielding big increases in propane and butane supply, as well as ethane.

But while new US PDH production will be advantaged, it will not be advantaged enough to offer a platform for exports, said Stewart Hardy, the UK-based consultant with ChemSystems.

Returning to PE as the big potential "export story", therefore, the blog remains sceptical over whether the US would be able to find easy markets. Global growth prospects are fragile and China might well become far-more self-sufficient.

Turning the story on its head, the US might also become an export target for producers unable to sell into China.

An interesting ICIS Insight article by my colleagues Chow Bee Lin and Michelle Klump discusses how the South Koreans could take advantage of the US-South Korea Free-Trade Agreement that comes into force on 15 March. This will allow the South Koreans to export PP to the US with reduced duties, they point out.

The US-South Korea FTA also involves a reduction in PE import duties.

Exporters to the US have traditionally faced an additional "non-tariff barrier": US converters take delivery of polymers via railcars and then store their inventory in large-scale silos, whereas exporters mainly move product around the world in plastic bags, which are stored in container ships. 

Anybody wanting to penetrate the US market has had to bear the extra labour cost of taking the pellets out of bags and placing them in railcars, after arrival at US ports.

It also takes around two months to ship polymers from South Korea to the US, my colleagues also point out.

But an industry source believes both these additional barriers to trade are now avoidable.

"The South Koreans can ship in bulk containers, allowing polymers to go directly into the US silos system," he said.

They can also deliver into local distribution hubs and then agree on pricing, rather than set pricing before delivery, or while cargoes are at sea, he added.

Customers would, as a result, not have to wait two months for delivery as they would be able to place their orders directly with these local distribution hubs.

By Malini Hariharan

The polyester chain is feeling the strain of poor Chinese demand.

Weak export demand and Chinese government policy are also impacting this sector, as is the case in polyolefins.

A further factor behind the problems in the polyester chain is the fall in cotton prices, as fellow blogger Paul Hodges points out.

Monoethylene glycol (MEG) spot prices have plunged this week to a 15-month low to $1,015-1,020/tonne cfr China Main Port on panic selling.

Traders have been rushing to offload cargoes to make room for new arrivals, reports Becky Zhang on ICIS news. Chinese tanks are running full with total MEG stocks in the country estimated at nearly 800,000 tonnes.

The volumes would probably have been digested easily in a good month. But demand has fallen in recent weeks, as Chinese polyester producers have cut production on weak margins.

The average sales-to-output ratio for polyester producers has been at 50-70% since early February, as the textile industry is seeing fewer domestic and export orders.

Falling spot MEG prices have had an impact on contract numbers with MEGlobal lowering its April nomination by $20/tonne to $1,200/tonne.

The scene in purified terephthalic acid (PTA) markets is equally serious. Producers are facing a persistent squeeze on margins.

Spot paraxylene (PX) prices were at $1,650-1,660/tonne CFR Taiwan and/or China Main Port on 12 March, while PTA prices were at $1,180-1,195/tonne CFR China Main Port, ICIS data showed.

Assuming a conversion cost of $120/tonne, non-integrated PTA producers were incurring a loss of around $41/tonne on a spot basis.

This has forced some producers such as South Korea's Samsung Petrochemical to bring forward a turnaround of its 700,000 tonnes/year plant by two weeks to 24 March.

Market players in the polyester chain are now anxiously waiting to see if demand will pick up by end-March or early April, when the textile manufacturing season usually starts.

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 majority of chemicals analysts have yet to wake up and smell the coffee, according to an industry observer.

"South Korean stocks have come off by 15-30% since their big recovery in January, but it is only the timing rather than the overall sentiment that has changed," said the observer.

"The theory had been, and this is clearly not going to happen, that there would be strong restocking immediately after the Lunar New Year.

"Now the expectation is instead for a strong second half of the year. This sentiment, ironically, improved when the Q1 GDP number was released. Because this was the lowest growth that China had seen in nearly three years, everyone is assuming that more economic stimulus, through interest rate and bank-reserve requirement cuts, and more bank lending, is on the way.

"They have also interpreted the rise in March bank lending as an indication that more stimulus is already happening.

"But I think there is more downside yet, before any potential upside.

"If you look at a lot of the chemicals analysts, their earnings forecasts for a lot of the Northeast Asian stocks remain very bullish despite a disappointing first quarter and what seems likely to be a fairly weak Q2.

"The assumption among these analysts is that there will be a very strong pick-up in earnings during the second half that I just don't see happening.

"All the upbeat earnings estimates for Northeast Asia are based on synthetic resins demand growth in China of 8-12 percent for 2012.

"But up until end-February, the latest figures I have, growth was only 3 percent. This was a slight improvement on the 2% growth in January-February 2011, but still a long way short."

An indication of just how bad economic conditions have become came with the release of LG Chem's first-quarter results yesterday.

The South Korean company reported a 42 percent decline in net income. Operating profit, or sales minus the cost of goods sold and administrative expenses, dropped 45 percent to Won459.5 billion The petrochemical division, which accounts for 78 percent of sales, had an operating profit of Won369 billion, half that of a year earlier.

LG, which is major acrylonitrile butadiene styrene (ABS) and polyvinyl chloride (PVC) producer, has been hurt by what's happening in the China market.

The blog believes that some analysts, and companies, have yet to factor in the major structural changes taking place in the Chinese economy, which will dampen growth for the rest of this year at least.

There is also the political challenge, and the weakness of the export environment for manufactured goods.  

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

EARNINGS estimates for South Korean petrochemical companies will have to be cut by 50 percent for the full year 2012, said an industry observer.

"It is quite clear that the first quarter was dreadful for the South Koreans and the second quarter will probably be even worse," he added.

There was a brief flurry of excitement on Tuesday of this week, which no doubt made some short-term financial market speculators some money. This was the result of rumours of a big new economic stimulus package in China on the scale of the 4 trillion Yuan ($585bn) that was pumped into the economy from late 2008 onwards.

"The rumour was clearly a load of nonsense as the government is still struggling from the fall-out of that earlier stimulus package, including a steep increase in non-performing loans," said the observer.

The rumour was confirmed as nonsense on Wednesday when Xinhua, the official news agency, published an article saying that the government had no plans for economic stimulus on the scale of 2008.

The article was also in line with the views of mainstream policymakers, quoted in other Chinese publications, who dismissed the possibility of any repeat of the post-Lehman Bros rescue act.

Another 4 trillion Yuan, or anywhere close to that figure, of additional stimulus would have been almost equivalent to scrapping the 12th Five-Year-Plan (2011-2015).

Did anyone really think that policy abandonment on this scale was possible in a year when China is undergoing a leadership transition?

China's new leaders need social stability in order for them to be able to establish their authority.

Another gargantuan dose of stimulus would, once again, mainly benefit China's rich minority because of the way the banking system works. This would increase income inequality, giving rise to social instability.

"It was a good story while it lasted and was a classic case of buy on the rumour and sell on the fact," said the observer.

South Korean petrochemical stock prices rose by 5-10 percent when the rumour broke, but then declined again when it was rubbished, he added.

The South Korean industry is worth keeping a close eye on as it is one of the big losers in the current climate.

Its poor health, along with other Asian naphtha-based petrochemical industries, is an indication of just how bad demand is.

"The only producers making money right now are those in the Middle East, and even they have had to frequently reduce polyolefin and other prices to shift volumes," said the observer.

There is, perhaps, some good news, however: A stimulus package does appear to be in the process of being introduced, even it is likely to be far smaller than the one launched in late 2008. 

It includes building more roads and airports, and more investment in advanced equipment manufacturing and energy conservation.

There is also talk of another cash-for--clunkers programme, where auto owners would be given incentives to swap their big cars for small cars. In addition, some reports suggest that home appliance subsidies, introduced with such a dramatic effect in 2009, might once again be on the cards.

But it is a moot point as to whether such a package will be good for the Chinese economy in the long term, as Michael Pettis, finance professor at Peking University's Guanghua School of Management, argues in the article we linked to directly above. 

And equally debatable is whether the package will be sufficient to achieve the much-anticipated H2 recovery in petrochemical markets.

By John Richardson

ASIAN naphtha cracker operators have cut production in response to the exceptionally weak China market, according to ICIS.

Yeochun Naphtha Cracker Centre (YNCC) has, for instance, lowered operating rates to 90 percent from 100 percent at its three crackers in Yeosu. South Korea, from the end of May. The total capacity of its three crackers is 1.9m tonne/year.

The last time YNCC had cut production was during the global financial crisis in late 2008, added ICIS.

And in May, Taiwan's Formosa Petrochemical Corp cut the operating rate of its three naphtha crackers in Mailiao to 80 percent from 90 percent.

But when you still hear senior sales and marketing executives with Asian polyolefin producers talking as if this is just a brief tactical retreat by Chinese buyers from the market, one wonders whether some companies are sufficiently prepared for the hard times ahead.

A couple of weeks ago, it dawned on the blog just how serious conditions have become following a discussion with a sales and marketing executive who works for a Western polyolefin producer.

He described how business confidence had declined in China, resulting in reluctance among small and medium-sized enterprises to borrow money.

This suggests to us that unless confidence can be restored, the much-discussed new round of economic stimulus will have a limited effect. In our 15 years of covering the petrochemicals industry, we cannot recall a previous occasion when China's downstream industries lacked the conviction to borrow money.

And returning to the supply side of the story, operating issues in Saudi Arabia prevented the country's cracker complexes from running at high rates during Q1, said an industry observer.

These issues included a power failure at the Al-Jubail site in late January.

"Production was down by only a few percentage points in the first quarter, but, when you are as big a producer as SABIC, that is a lot of lost volume," he added.

If these problems are resolved, more shipments from the region to the key China market might well be the result, exerting further pressure on the Asian producers.

More volumes are also expected to soon hit the market from polyolefin start-ups in Saudi Arabia and Qatar.

The Saudi Polymers plant in Saudi Arabia was scheduled to be on-stream by the end of May. This comprises two 550,000 tonne/year high-density polyethylene (HDPE) plants and a 440,000 tonne/year polypropylene (PP) facility.

QAPCO was due to bring on-stream a 300,000 tonne/year low-density PE (LDPE) facility in Qatar by the end of May.

"We expect production at the QAPCO plant to be ramped up over a six-week period from early June," said the observer.

And Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE plant is scheduled to start-up in Saudi Arabia in Q3.

ExxonMobil is also due to commission its two new 650,000 tonne/year metallocene grade linear low-density (LLDPE) plants in Singapore in 2012, with some of this capacity already on line, said ICIS.

Source: ICIS pricing Weekly Asian PE Margin Report

By John Richardson

The slide above shows how Northeast Asian naphtha-based polyethylene (PE) producers are struggling as a result of the weak China market (dark blue bars).

And it confirms what we were discussing yesterday: The US, with its ethane advantage and with reportedly high producer inventories, is in a very strong position to export to China (light blue bars).

Northeast Asian operating rate cuts have clearly not been enough to restore profitability.

"One Japanese producer, for instance, is talking of overall PE production cuts of as much as 30 percent, but I still feel that this is not enough," said an industry source.

"Formosa closed its No3 1.2m tonne/year cracker down for market reasons, but that was only for a couple of weeks. I feel we need long-term closures," he added.

And he said that Chinese state-owned producers continue to lose money.

"They are still running their plants as utilities to guarantee supply to downstream industries and are, thus, matching Middle East import prices at $300-400/tonne beneath their costs."

The chart also shows the improving margins of European producers (purple bars).

"European margins are good on low naphtha costs and favourable exchange rates for exports," said the ICIS European polyolefins editor, Linda Naylor.

"A lot of PE and polypropylene (PP) is being exported - for example, one producer plans to double its PP exports.

"Some producers have been considering production cutbacks, but for most of the producers, margins are too good to curtail production.

"But everyone is expecting a fall in July ethylene and propylene contract prices, which, I think, will impact margins and prompt cutbacks.

"Buyers are concerned that production cuts in July/August, along with increased exports, will tighten the market and drive prices up again in September and October."

By John Richardson

A management consultancy has gone on the record to warn about what the blog has been warning about for months: That the US petrochemicals industry is in danger of pushing itself into oversupply.

KPMG, in a report released late last month, said that the success of planned US expansions, including as much as a 33 percent addition to existing ethylene capacity by 2017-2018, was almost entirely dependent on the ability to export.

"Failing that, the US [chemicals] market is destined to fall back into the historic cycle of oversupply followed by rationalisation," said KMPG.

"This (need to focus on exports) will require a significant transformation of operating models for US chemical companies who have traditionally been focused on the US marketplace," it continued.

"Success in the emerging markets will also require a very sophisticated understanding of the pros and cons of each individual market. This must include considerations such as growth prospects, business environment, infrastructure maturity and tax implications, as well as a slew of regulatory and legal considerations such as investor protection, contract enforcement and ease of doing business."

As we discussed last week, successfully navigating the China market requires an intimate understanding of the needs and objectives of customers.

One senior business manager we know has built-up this understanding over more than 20 years.

He has stayed close to customers who he has watched, and helped, grow from small businessmen struggling to survive to multi-millionaires, and even billionaires. Such relationships matter as much, if not more, than technical service and the ability to compete on price with the lowest-cost producers.

Sure, many US producers have vast experience in selling into markets such as China.

But will they have enough of the right people in place to deal with the large volume of ethylene derivatives that will likely have to be exported?

In addition, building capacity on the assumption that demand will always eventually catch up is no longer the right approach, given all the macro-economic uncertainties, as the senior business we referred to above told us in a recent discussion.

He said: "China's economy could go either way. Contradictions in the system could tip it the wrong way - including the local authorities that don't want the system to be reformed because they make money from land sales, and the state-owned enterprises that get preferential loans.

"For petrochemicals, this means that all the projects being planned in the US should and hopefully will not go ahead.

"There are too many uncertainties over China for every company to take the risk, and if they do all commit to their planned investments, by 2016-17 we are going to see a big oversupply problem.

"The US will not be able to export all the volumes that are being planned. They are already facing tougher competition in Latin America from displaced Middle East and South Korean volumes from China, and this is going to get worse."

By John Richardson

THE economic slowdown throughout Asia became more apparent last week with the release of disappointing data, prompting interest rate cuts in China, Vietnam and South Korea.

China's key polyethylene (PE) market responded as trading volumes fell and sentiment weakened for the week ending 13 July, according to ICIS.

Market participants, however, expressed hope that in the case of China, the economy had bottomed out following the release of first half GDP growth of 7.6 percent.

But:

*Can anyone trust that 7.6 percent was the real number, given that Chinese officials are encouraged to under-report growth during boom times and over-report GDP when the economy is struggling? "Out of the black box comes a number, and that number doesn't always line up with the other numbers," Andrew Batson, Beijing-based research director at macroeconomics consultant GK Dragonomics, told Bloomberg. "I wouldn't be surprised if the GDP numbers this year are smoothed," he added. 

*Electricity consumption is seen as a much more reliable measure of real economic activity. The chart above shows that it rose by only 7 percent in H1 this year over 9 percent during the same period in 2011. 2010 growth was 21 percent, at the height of the economic stimulus package.

*Bank lending jumped by 16 percent in H1 as the government attempted to re-stimulate the economy, as the above chart again shows. But, as we have discussed over the last week, this could add to China's bad debt and deflation problems. And it seems likely that most of the lending has been taken up by the big corporations. The small and medium-sized enterprises, which make up the bulk of China's chemicals and polymers buyers, seem hardly in a mood to lend. This is the result of rising labour costs, less labour supply, weak exports and now the pressure from deflation.

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?

Source: ICIS

By John Richardson

CHINA'S fibre intermediates industry could end of being a game of two halves in 2012, to use an old football (or soccer for the benefit of our America readers) cliché.

The reason is that the first half of the year was characterised by very weak demand as the overall economy slowed down.

And yet traders still kept buying lots of mono-ethylene glycol (MEG) to ship to China during H1, contributing to a steep rise in imports

"Coastal inventories at one point totalled 900,000 tonnes during the first half, more than enough to meet average monthly demand of around 800,000 tonnes," said Becky Zhang, ICIS pricing's Asian fibre intermediates editor.

The same applied to purified terepthalic acid (PTA) and polyester. Everyone had underestimated the extent of the economic slowdown and so inventories down the chain were around one month.

Now inventories down the fibres chain are at two weeks or less as a result of stronger demand growth in Q3.

The market has picked up a little on the build-up to the next peak textiles and garments manufacturing season, which takes place in Q4.

There has been a lot of talk about textile and garment mills being badly affected by a slowdown in exports to Europe during this year.

But Zhang made the point that the mills have been dealing with this problem since 2009 and that, to some extent, they have found compensation through improved domestic sales.

Nevertheless, despite the Q3 pick-up, Zhang now expects that China's 2012 polyester demand growth will be in the region of 8 percent compared with her earlier estimate of 10 percent.

The Q4 peak season might also turn about to be damp squib, given all the macroeconomic problems.

And in a sign of just how volatile the fibre intermediates business has become, sentiment turned bearish during the week ending 17 August, after several weeks of recovery, added Zhang.

This was the result of a two-day increase in average polyester yarn raw-material inventories in China.

PTA and MEG pricing also declined in response to a weaker PTA futures contract on the Zhengzhou Commodity Exchange.

The futures contract has become an increasingly important guide to short-term physical pricing movements since it was launched in 2006. Every scrap of macroeconomic and oil-market news move the contract.

MEG producers are, however, laughing all the way to the bank because of production problems at several major Middle East plants that have significantly tightened supply.

Zhang added that a reason MEG shipments from the Middle East to China were so high in H1 was that plants were running flat-out on the greater availability of associated gas. More associated gas has become available due to higher OPEC oil output quotas introduced in an attempt to put a cap on expensive crude.

Profitability in the purified terephthalic acid (PTA) business is something altogether different - or to be more precise, it has been non-existent for some producers since late 2011, said Zhang.

The reason is chronic oversupply as a result of new capacities being brought on-stream in China. Eleven new plants are due to start-up over the next three years, with a total capacity of 18.5m tonnes/year. The country's total PTA capacity is due to reach 39m tonnes/year in 2015 - double that of 2011, according to ICIS.

A further factor is lack of sufficient paraxylene (PX) to supply a lot of these new plants.

"Chinese PTA producers are in a better position than their overseas competitors because they depend mainly on domestic supplies of PX which are more affordable than imports," said Zhang.

China's PTA producers have the market muscle to set domestic prices for PTA at levels that further help to guarantee profitability, it has been claimed.

Not so the Thais, Taiwanese and South Koreans who will likely continue to struggle.

China's PTA industry serves as an example of of two aspects of the New Normal, which are:

*Constant increases in Chinese petrochemicals self-sufficiency, beyond the range of some estimates.

*New producers in China enjoying strong advantages in domestic markets, enabling them to always run at high operating rates.

 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.

Source of graph: http://www.businessspectator.com.au/ 

By John Richardson

"Candide, the classic novel of the great French writer Voltaire, is a satirical description of a young man who has been taught that 'everything is for the best in the best of all possible worlds'," wrote Paul Hodges in this blog post last week.

Thus, we have been told while the world looks gloomy right now, China's average polyethylene (PE) growth rate from 2008 until 2012 has been excellent.

And we keep being reassure that China will return to trend-growth next year and beyond, thanks to rising urbanisation and the growth in the country's middle class.

Dr John Lee, Michael Hintze Fellow and adjunct associate professor at the Centre for International Security Studies, Sydney University, wrote in this article:

"Much of the optimism is based on the decade-long orthodoxy - popular with executives and investment analysts hardwired into talking up the China story - that Chinese urbanisation has a long way to go. As China-bulls point out, half of the population is still classified as rural and will need modern housing and other infrastructure over time. According to the narrative, this effectively guarantees strong demand for commodities such as iron ore for the next couple of decades, while Beijing has several economic tools with which to arrest any immediate dramatic slowdown.

"All of this is true, but the analysis is still incorrect. Timing for dramatic changes in commodity prices is impossible to predict. But the reality is that China's voracious consumption of commodities over the past decade has remarkably little to do with the genuine demands of urbanisation, makes little economic or commercial sense, and cannot continue.

"Since the mid-1990s, urbanisation has been advancing at the rate of less than 1.5 per cent each year. Yet fixed investment has been growing at 20 to 40 percent each year for the past decade. Fixed investment as a proportion of GDP increased from 38 percent in 1999 to 45 per ent in 2003 and over 50 percent currently.

"During the periods of rapid industrialisation in Japan, Taiwan and South Korea, fixed investment did not rise above 33 percent of GDP. That China is dangerously embarking on a unique and unprecedented economic path is further confirmed by the fact that formal bank loans increased from $750 billion in 2008 to $1.4 trillion in 2009. In the two years from 2008-2010, the amount of outstanding loans on the books of the country's banks increased by 58 per cent.

"Obviously, and much to Australia's delight, fixed investment needs steel, and steel making needs iron ore. Chinese steel production jumped from about 100 million tonnes in 2000 to over 400 million tonnes in 2005, to around 850 million tonnes currently. Analysts and forecasters need good data - which isn't available in China - and rely on models based on key assumptions about economic rationality. The problem then is that these dramatic increases make no sense.

"Since governments cannot force their populations to consume, and Beijing has little direct control over consumption levels for its exports in advanced American and European Union economies, the only available policy response to a slowdown was to ramp up fixed investment levels - in short encouraging eager state-owned-enterprises to build things for the sake of it.

"In other words, Chinese levels of fixed investment, and levels of steel production specifically, over the past decade have been predominantly driven by politically-motivated stimulus policies rather than market-determined demand.

"The result of the unprecedented reliance on fixed investment to maintain jobs, stimulate economic growth in urban areas (which is vital for regime security) and as a way for ambitious provincial officials to exceed growth targets in a personal quest for political promotion are the increasingly well-documented ghost cities, tens of millions of uninhabited high-end apartments that are bought as speculative capital assets rather than as investments based on rental yield, and world class infrastructure projects that will be never be adequately utilised. Estimates by Chinese state-backed researchers suggest that still empty apartments built over the past four years could house over 200 million Chinese."

Voltaire's Candide found that the world was, after all, not the perfect place that he had imagined.

By John Richardson

SINOPEC's remarkable rise in the petrochemicals business continued in 2011 as it jumped two places in the ICIS Top 100 ranking, compared with 2010, to finish second overall, behind BASF. This was the result of a 28.9% rise in chemicals sales in local currency and a 34.9% increase when sales were measured in US dollars.

The steep rise in sales reflects the Chinese government's strategy of boosting petrochemicals self-sufficiency. New cracker and derivatives capacity was commissioned by Sinopec in 2011. Between 2000 and 2011, the company's total production in all chemicals rose from 2m tonnes to 10m tonnes - a 14% increase per year.

Sinopec's operating profit also almost doubled in 2011 compared with the previous year.
But the problem is that this reflected a strong first half of 2011. By Q4 of last year, markets had weakened.

And 2012 has been an immense disappointment. Chinese demand growth in all the major synthetic resins is likely to be in the low single digits.

Doubts are also growing over the long-term health of the Chinese economy. GDP (gross domestic product) growth could call to as low as 3% per year over the next few years, as China undergoes a painful rebalancing from investment to domestic consumption-led growth.

If it fails to rebalance quickly enough, there is a risk of a major non-performing loans crisis as a result of continued investment in unneeded infrastructure and industrial capacity.

This doesn't mean, however, that Sinopec will necessarily delay capacity expansions. The main role of the company , which is still 76% owned by the government, is to guarantee supply of raw materials to domestic downstream industries even if, at certain times, this means losing money.

China as a whole is scheduled to increase its ethylene capacity from around 15m tonnes/year in 2011 to 27m tonnes/year in 2015, according to ICIS data.

This puts some of Sinopec's overseas competitors, which have to answer to shareholders, in a very difficult position if the worst fears over China's economy are realised.

South Korea's Honam Petrochemical, however, had a tremendous 2011 as a result of a 47.6% increase in sales.

But the South Korean companies in general are expected to struggle to achieve full-year 2012 financial targets because they are so heavily dependent on China for exports.

At least in the case of Honam, though, its position has been strengthened by its 2010 acquisition of Malaysia's Titan Chemicals.

This has given it better access to the booming ASEAN (Association of Southeast Asian Nations) markets, and an edge in exporting to China through the ASEAN-China Free Trade Area.

The challenge for Thailand's PTT Global Chemical, also, of course, within the ASEAN region, is to maintain its 2011 progress in 2012. In 2011, it leapt into the top 30 of the ICIS ranking, thanks to its emergence from the merger of the former PTT Chemical and PTT Aromatics.

India's Reliance Industries, which saw its 2011 petrochemicals sales jump by 28.2%, faces the very different challenge of effectively executing the biggest "off-gas" cracker project of all time.

It is due to bring on-stream a cracker, which could eventually produce 1.6m tonnes/year of ethylene, and associated downstream capacities at its Jamnagar complex in Gujarat in 2015

The cracker will be entirely fed by off-gases from Reliance's 1.24m tonnes/year refinery capacity at the same site.

"The biggest previous cracker to run solely on off-gases had an ethylene capacity of only 100,000 tonnes/year," said a source familiar with the Reliance project.

Reliance is to spend a total of $12bn on new petrochemicals capacity, including not only the cracker complex, but also on new paraxylene (PX), purified terephthalic acid (PTA) and polyester plants.

This is a major play on a domestic Indian market that, even if GDP growth slows quite dramatically, should be able to absorb all of the new Reliance capacities.

This time last year, most people would have said the same thing about all the capacities added to serve China, but maybe not now.

Graph prepared by The Economist

By John Richardson

INDONESIA has enjoyed eight consecutive quarters of 6% GDP growth and so - along with several other mainly domestically-demand driven Asian economies - is viewed as a haven of stability in an increasingly uncertain world.

The country's 2012 demand growth for polyethylene (PE), polypropylene (PP), polystyrene (PS), polyvinyl chloride (PVC) and acrylonitrile-butadiene-styrene (ABS) will be 7.5%, according to the Indonesian Olefin & Plastics Industry Association (INAPLAS).

Around 50% of Indonesia's polyolefins demand is covered by imports, with substantial imports of ethylene and naphtha also needed to meet the very steady, and very strong, demand growth, says ICIS.

Hence, notwithstanding problems with bureaucracy and an unclear regulatory environment, Chandra Asri plans to build an $8bn refinery and expand ethylene capacity, while also adding a butadiene extraction unit. Honam Petrochemical, which owns PE assets in Indonesia, has plans for a 1m tonne/year grass-roots cracker, adds ICIS. 

Indonesia has done a fantastic job to recover from the economic misery inflicted by the 1997-1998 Asian Financial Crisis. Along with Thailand and South Korea, it suffered enormously from the collapse of its currency against the US dollar. This led to soaring inflation and unsustainable debts dominated in the greenback.

Since the crisis, the affected countries have switched from dollar debt to investment by foreigners in local equity markets and lending in domestic currencies.

There is also talk of "macro-prudential policies" smoothing out the peaks and troughs of economic cycles.

But, as The Economist writes: "Wise monetary policy was also one of the reasons cited for the Great Moderation enjoyed by the G7 economies.

"Another was the supposed depth and sophistication of the rich world's financial systems, which, it was said, allowed households to smooth their spending, firms to diversify their borrowing and banks to unburden their balance-sheets.

"Both of these pillars of stability proved false comforts. Economists had not quite settled on an explanation for the Great Moderation before it inconveniently ceased to exist."

Hyman Minsky believes that drops in volatility allows firms and households to borrow more of the money they invest, the magazine continues.

"Stability, in Minsky's formulation, eventually becomes destabilising. Over-leverage does not require excessive optimism, merely excessive certitude; not fast growth, merely steady growth," it adds.

According to Fred Neumann of HSBC, Asian leverage is now higher than at any time since the Asian Financial Crisis (see the above chart).

Excessive exuberance might also be driven by possibly misplaced confidence over China's economic future.

The Indonesian manufacturing sector faces the additional problem of very competitive imports from China, including of finished BOPP film, as a result of  overcapacity in China and the Asean-China Free Trade Agreement.

These imports could well increase as China's economy further decelerates and it attempts to unburden itself of huge inventories of finished and semi-finished goods.

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."

By John Richardson

BEFORE we look at last week's political handover in China in more detail tomorrow, while on Friday we will return to our theme of Asian demographics, the above slide illustrates what the big picture has meant for the polyethylene (PE) industry.

As you can see, variable-cost margins for Northeast Asian producers fell into negative territory in September-October and have only slightly recovered in November, according to the ICIS Asian PE Margin Report.

"All of Asia's naphtha-cracker operators are losing money," said a PE industry source.

China's plastic converters ran their factories at low operating rates and were reluctant to invest in new capacity immediately ahead of the handover. This, of course, also applied to many other industrial sectors. This has been one of the reasons for the weak market.

A theory being put forward was that if the right "pro-growth" leaders were selected, China would return to its previous strong growth trajectory by as early as Q2 next year (once the new president and prime minister have formally taken office).

Traders live and die by volatility and so this kind of story can serve their short-term objectives.

But the long-term reality is that regardless of the composition of the new Standing Committee, we had long felt that China faced a protracted period of much-lower GDP growth because of its economic imbalances.

Nothing has therefore, of course, changed followiing last week's political transition.

And, as we shall discuss tomorrow, many commentators worry that China's new leaders will fail to deliver.

The country's ageing population is one of the new Standing Committee's many challenges.

This is one of the factors behind rising wage costs that have led to a low-value manufacturing drift away from China, thus weakening PE consumption.

Higher-cost producers always suffer in a weak market, as the chart above indicates. China's PE demand growth was just 4% in January-September this year.

We can see no reason why next year will be any better.

By John Richardson

SOUTH Korea serves as another example of how demographics are reshaping Asian economic prospects.

"By 2018, 14% of its population will be over 65, making it officially an 'aged society.' That is six years sooner than Japan and more than a century before France, according to the Samsung Economic Research Institute," writes Reuters.

The above slide places South Korea in the context of the rest of the G20. By 2030, its total number of retirees is forecast to be approaching 40% of the population. Only Spain, Italy, Germany, and, of course, Japan are expected to have older populations.

The extraordinary increase in South Korea's retirees compared with 1970 illustrates how, as countries become rich, people stop having enough babies. China's problem is that it is ageing before it becomes rich.

South Korea's demographics will have severe implications for its healthy state finances, says Reuters in the same article 

"A report released by the Ministry of Strategy and Finance in July (2011) warned the national debt would jump to 138% of gross domestic product (GDP) in 2050 as pension and health insurance expenditures skyrocket, from around 34% last year," the wire service continues.

The labour intensive South Korean economic model is under threat from labour shortages and poor productivity.

Productivity is at risk of getting worse as the workforce ages and, as a result, slips further behind in IT and other modern manufacturing skills.

Training will have to be improved, retirement ages raised and women will need to be more readily accepted in the South Korean workplace.

This emphasises the key role that governments need to play in addressing demographic challenges, as we argue in chapter 10 of our e-book, Boom, Gloom & The New Normal.

The good news for South Korea is that has a tremendous record of economic transformation.

"In 1948, per capita income in South Korea was US$86, on par with Sudan's.'(South) Korea can never attain a high standard of living,' wrote a US military official," the blog said in a 2003 tribute to the country's transformation.

This far-sighted US official added that there were virtually no South Koreans with the technical knowledge and skills to take advantage of the country's natural resources.

In 2011, South Korea's per capita GDP was $31,220, according to the International Monetary Fund (IMF), just behind the European Union and Israel and ahead of countries such as Spain, Italy and New Zealand.

South Korea is, of course, the home of many world-beating brands following its successful escape from the "middle-income trap".

It also seems to have at least recognised that it faces a demographic problem.

We worry that in the West, policymakers have yet to even recognise their demographic crises.

South Korea and its consumer-driven economy

Source of picture:  KeystoneUSA-ZUMA/Rex Features

By John Richardson

MEASURING demand growth cannot involve merely assuming that the future will be the same as the past, as this increasingly complex world continues to tell us.

There are a myriad of social, political and environmental factors that will determine the rate of chemicals and polymer consumption-growth, now that the Supercycle is over.

In chapter 10, of our e-book, Boom, Gloom & The New Normal, we compared 1960s-1980s South Korea with China. Back then, South Korea used investment as a driver of growth.

It limited freedom of expression, the development of a civil society, and the innovation crucial for any country to escape the middle-income trap.

It wasn't until the election of Roh Tae-woo in 1987 that South Korea removed the last remnants of authoritarian rule. This seems to have been a significant in South Korea becoming a consumer-driven economy, and in being able to manufacture world-beating branded goods.

Support for our arguments is provided by an article by Tom Miller, managing editor of the China Economic Quarterly (CEQ) and author of China's Urban Billion (Zed Books, 2012). 

China could be at a similar crossroads today, but as Miller points out in the December issue of the CEQ: "Investment's share of GDP (in China) shot up from 35% in 2000 to 49% in 2010, while household consumption's share shrank from an already measly 46% to just 34%.

"No other country has ever grown with such a high share of investment and such a low level of consumption - not even South Korea or Taiwan, whose experience of economic take-off China most resembles.

"China's investment-driven model of economic development is widely viewed as wasteful, and even the country's leaders agree that it is unsustainable. Over the coming decade, investment growth must slow."

Miller's comparison is with how Taiwan has developed over the last two decades.

He writes: "For all its enormous development, China still lacks genuine civil society - a space where people can form associations and, should they so wish, spend their money together.

 "Public events in China, such as music festivals, are routinely cancelled because they fail to meet official stipulations. "Chinese cinema is bland and unappealing because films must pass the censor.

"Private charities do not exist, because they are deemed a threat to government authority. In Taiwan, by contrast, citizens may associate freely.

"In October 2012, 50,000 people marched through Taipei in support of gay rights; the city has many bars and shops, even bookstores, specifically catering to gay customers.

 "In China, non-mainstream interests--especially those without official approval--struggle to exist at the margins.

"Taiwan's experience shows how political liberalisation helps to nurture private consumption. China's rigid political system is no barrier to much greater consumption: as its citizens grow wealthier, they will spend more.

"But by reducing the opportunities to consume, social repression is a drag on consumption's full potential. Like self censorship, it is insidious and hard to spot--yet the economic impact is considerable. China's consumer economy will remain stunted."

.....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

SAUDI ARABIA'S National Petrochemical Industrial Co (NATPET) has gone public over an issue that has worried Gulf Co-operation Council (GCC) petrochemical producers for several years now: The erosion of the GCC's competitive advantage over the US.

"There has been a migration of investment to the US that is a very clear threat to the growth of the [GCC] petrochemical industry," Jamal Malaikah, chief operating office and president of NATPET (see picture) told the UAE's National newspaper. NATPET is a Yanbu-based polypropylene (PP) producer.

And in what might be a hint that the long-delayed rumoured increase in Saudi gas costs could still happen, he added: ""We believe this is the wrong time to do that because of the shale gas. We still have an advantage in Saudi Arabia but we believe that advantage will be affected by the sheer volume of shale gas in the United States."

Gas costs were, reportedly, supposed to be increased early last year in the Kingdom.

Ethane costs just $.075c/mmBTU in Saudi Arabia.

In the case of propane, which is relevant to NATPET, Saudi Arabia provides discounts  on propane costs to local consumers of around 28% off prevailing CFR Japan naphtha prices, as naphtha is viewed as a comparable market to that of liquefied petroleum gas (LPG).

(NATPET operates a propane dehydrogenation (PDH) plant and a 400,000 tonnes/year polypropylene (PP) unit, and plans to raise its PP capacity to close to 1m tonnes/year by 2015.)

The motive behind the reported plans to raise gas prices in Saudi Arabia is the well-documented overall gas shortage, driven by soaring power-generation demand.

Interestingly, when it comes the new generation of mixed-feed crackers in Saudi Arabia that came on-stream in 2010-2011, an industry source believes that existing propane price arrangements have already significantly shifted the competitive position.

"These crackers are making use of a much-bigger percentage of propane versus ethane feedstock than is the case with the previous generation crackers," he said.

But, as we discussed last month, Saudi Arabia could find much-bigger volumes of ethane supply in the future, thanks to the heavy focus by Saudi Aramco on gas exploration.

If the shale-gas revolution has taught us anything, it is to anticipate constant change in feedstock advantages between different regions.

By John Richardson

THE latest Northeast Asian high-density polyethylene (HDPE) chart from ICIS (see above) hardly suggests a tremendous increase in profitability, despite the improvement in sales volumes and sentiment in China that we first highlighted in December, and provided more details on last week.

At least the Northeast Asian producers have moved into slightly positive territory, though, and so they should probably be grateful for small mercies.

What might have limited their gains are reports that US PE producers shifted more export material in November and December in an effort to push through domestic January price increases.

We continue to worry that US PE capacity creep in 2013 might exert further pressure on the higher cost Northeast Asians as the year progresses, particularly, of course, if the China demand recovery proves to be short lived.

The overall increase in PE capacity, and also polypropylene (PP), capacity is another concern.

By John Richardson

JUST about every Asian cracker operator is losing money right now, according to a polyolefin industry source.

And the above chart indicates that margins are wafer-thin in Northeast Asia because of the unexpected weakness in the China market, where polyethylene (PE) demand growth is forecast to either be flat or in negative territory during 2013.

"The South Koreans are still running at 87-90%. And now we are about to enter the peak production season in Asia and they will raise rates to 90-92%," added the source.

"This 5-7% capacity increase will need a 5-10% pick-up in demand to be absorbed. This is not going to happen and so Q2 will be a disaster for smaller players."

Plus, ExxonMobil is widely expected to raise output at its two 650,000 tonnes/year metallocene linear-low density PE (LLDPE) plants in Singapore.

But it is not all doom and gloom, insists a second polyolefin industry source.

"The state of demand really depends on what application you are talking about," he said.

"For example, diaper film and food packaging applications are going extremely well, but the garbage bag sector in China is still undergoing consolidation as converters in the higher labour cost coastal provinces relocate to countries such as Vietnam.

"The really smart converters are those who have focused on internal Asian markets where demand is unaffected by the problems in the West. They are doing well and are still buying good volumes. It's the less clever processors which are really struggling and are, thus, buying resin on hand-to-mouth basis.

"There are still a lot of people in Asia who are the first time shopping in supermarkets as lifestyles change, and so there is still plenty of room for growth in low-value packaging applications in, for instance, inland China, away from the developed coastal provinces and in many parts of Indonesia.

"A lot of the family-owned converters are going through a transition period, as sons and daughters take over. These sons and daughters have often been to top business schools in the West and so are making the right investment decisions."

But still, the overall margin picture in Asia gives the impression that the number of downstream customers struggling in a weak demand environment exceeds the quantity of "smart converters".

By John Richardson

ASIAN higher cost polyvinyl chloride (PVC) producers are facing the twin squeeze of increased electricity costs and very competitive exports from the US, according to an industry source the blog met with in Taipei, ahead of tomorrow and Friday's 2013 Asia Petrochemical Industry Conference (APIC).

Such is the pressure on the Japanese, and perhaps even the South Koreans, that rationalisation of capacity might have to take place, he added.

"Electricity costs are 3 cents a kilowatt in the US because of shale gas, making chlor-alkali units there exceptionally efficient. And, of course, the US has very cheap ethylene, thanks again to shale gas, for ethylene dichloride (EDC) production," said the source.

"This compares with 10-12 cents a kilowatt power costs in Japan - much higher than used to be the case before the 2011 tsunami forced Japan to import much more liquefied natural gas (LNG) to meet its electricity generation needs."

This is illustrates why three major themes look set to dominate this year's APIC conference: US shale gas, US shale gas and more US shale gas.

"A couple of years ago, coal-to-olefins (CTO) in China were heavily featured in the discussions at APIC, but now people seem to recognise that CTO will have a limited impact," said a petrochemicals consultant, again in Taipei ahead of APIC.

Returning to the subject of PVC, we might perhaps see a great deal of overseas interest in investing in the US chlor-alkali and vinyls sector, which again of course would be linked to the foreign interest in building steam crackers in the States.