Asian Chemical Connections

Imagine having to sack two of your senior management team after unauthorised takeover discussions.
And then imagine just a few weeks later being forced to announce a 20% reduction in first quarter earnings.
Andrew Liveris, Dow CEO (continuing our Dow theme - see below), is having a hard time of it. Mind you, life is supposed to be tough at the top and this is what he is paid for.
The likeable Liveris has come out fighting, as this article illustrates. Shareholders, though, in the US in particular, are not famed for the patience.
I am not sure about the reference to Rugby: Liveris, an Aussie, should remember that England beat Australia in the last Rugby World Cup Final.
Don't mention the cricket......

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

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

The collective sigh of relief was almost audible late last week when the Fed cut its discount rate - the rate banks charge each other for lending.

Action from other central banks, including the European Central Bank, could follow this week. Analysts also rate the likelihood of the Fed cutting its formal interest rate at its meeting next month at 50 per cent or more. This is the rate charged to companies and other non-bank borrowers.

But still, this credit crisis is not going to away that easily. See more detailed analysis below, but in short here, the implications could be:

*A weaker Chinese economy. Roughly one-third of China's GDP is dependent on exports and if the US goes into recession, this is serious. Many overseas chemical projects have been justified by estimates of persistently strong demand from China for imported chemicals that will be re-exported as finished goods. Sales of locally made chemicals would, of course, also suffer

*Unfunded projects backed by smaller private companies being shelved.

But a lot of capacity in the Middle East and China is too far advanced to be cancelled. In the Middle East, many of the projects already under construction might come on stream bang on time because the producers there can make money in any market conditions. Projects under construction in China start up on schedule because the government wants to gain greater independence from imports.

Let's hope this crisis goes away, but if it doesn't why on earth didn't the supposedly smart people who run the global financial system realise the dangers? Joseph Stiglitz, a genuinely smart guy, has been warning for years about the risks, which he outlines in this excellent article

As Paul Hodges notes in his Chemicals and the Economy blog http://www.icis.com/blogs/chemicals%2Dand%2Dthe%2Deconomy/, China's Finance Minister quit this morning - either over his role in a sex scandal or because inflation and the stock markets are out of control.
Petrochemical demand growth has been booming in China because, as a bureaucrat put it shortly after WTO entry, "China is like an elephant riding a bicycle".
By that comment he meant that China had to achieve growth of at least 10 per cent year (peddle hard) to avoid a heavyweight crash. High growth has been viewed as essential to maintain social stability through creating sufficient new jobs to replace those lost by WTO accession and the constant drift of migrant workers from the impoverished countryside to the towns and cities.
But perhaps now, with inflation rising alarmingly and the stock market in the midst of an enormous bubble, the government really does want to cool the economy down instead of just paying lip service to this objective - it's current approach. Perhaps the calculation is that high inflation and the potential for a stock market collapse represent a bigger risk to social stability than a moderation of growth.
But if policies are introduced that cut growth by too much, every industry from petrochemicals to the overseas retail and auto giants that have staked so much on China will find their profits trimmed. Make sure you steer well clear of any passing bikes with elephants on board, therefore, the next time you are driving through Beijing.
All should become clearer in six weeks when the Communist Party Congress, which only takes place every five years, is held.

Maybe Singapore airlines has got the wrong end of the stick by trying to ban first class passengers in their new cabins in the sky from indulging in a little hanky panky.
Perhaps the answer is to equip the walls of these private cabins with super sound-absorbing polymers (polyurethanes, maybe?).
Any suggestions from polymer experts out there would be gratefully received and I'll pass them onto the airline.

Asian industry leaders are playing lip service to the environmental crisis the world confronts .
George Monbiot, the excellent author and journalist, argues that what the West needs is a recession to give the planet a breather.Asia also needs a substantial economic slowdown to give policymakers and technology developers more time.

Call me a bitter old cynic, but some of the talk in this ICIS news article about a government lending crackdown might be from a few traders taking positions.

But still, it does seem as if the government is taking some measures to restrict loan growth.

Earlier, it appeared unclear as to whether the restrictions would effect trade finance. Now it seems that quotas will set per quarter next year for total loan growth, whether it's trade credit or capital expenditure.

I sincerely hope not, but all the signs are there because of:

*A financial crisis which nobody again saw coming, this time with global implications

*What could prove to be too much spending on new equipment and capacity. This time high equity prices have paid for these investments rather than US dollar-denominated bank loans, as was the case in 1997.

The fundamentals are still strong, as today's article from ICIS news on share-price collapses points out. Asian demand is at much higher levels now than 11 years ago.

But the power of sentiment should not be underestimated.

It's too early to read the long-term effect on petrochemical pricing. More volatility seems certain with sentiment driving shifts in pricing on every piece of negative or positive economic and stock market news.

Lower feedstock costs on cheaper oil will also play a role, but as the extended article below points out, the impact on the real economy will take time to assess. It is this impact that will set the long-term direction and determine whether we the downturn has, finally, arrived.

.......I had heard a company saying it was moving up the value chain (or rather a Euro or a British pound these days), I wouldn't be writing this blog entry while smelling the wonderful aroma of pork sausages being cooked for my tea. Brown sauce and mash as well, of course.

Can Dow Chemical make a success of this often-mentioned strategy? See below for extended analysis.

If it cannot, the prospects for the US producer could be bleak in the long run

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.

"Bob, I think I we should give this up as I can't get a wireless connection and I couldn't be bothered to talk to anyone."
Source of Picture: Faculty.SMU.Edu

.
......and the effect on the quality of data and analysis is one of my big concerns - particularly at a time like this when petrochemical markets are becoming harder to fathom (many thanks to Andrew Keen and his excellent book, The Cult Of The Amateur).

The overwhelming volume of information on the Internet has led to the emergence of a new breed of journalist/company researcher/data gatherer.

No longer is it necessary to speak to people on the telephone and/or to interview them face-to-face.

Instead it is possible for the clever writer/researcher to compile an article from an Internet search. You can cobble together a convincing story (on the surface at least) by lifting data, analysis - and even quotes - without checking the accuracy for yourself.

The benefit of direct contact with multiple sources is that with experience and over time you get to work out who is reliable and who isn't from your assessment of character and motives etc; in other words, intuition.

There is no substitute for getting out of your comfy chair and travelling through the Chinese hinterland in search of the Holy Grail - real inventory levels (that's unless, of course, you are frightened of someone finding out that you are fraud with very little sincere knowledge of and interest in what you do).

Yahoo Messenger etc have further eroded the need for direct contact - again, taking away the human interaction which I believe is essential to get good quality information.

Now we have a generation of journalists/researchers who are spoilt - and I am sure overwhelmed also - by all the free information out there. Because you've never had to get off your proverbial rear end to tell a convincing story to your boss, you quite probably don't even know how to.

And more recently we have seen the emergence of an army of amateur and totally untrained citizen journalists, researchers and "experts" who can witness the riots in Burma from the comfort of their armchairs and nobody will be able to tell the difference (in other words, they make it up).

I was talking to a corporate relations officer of a certain International Oil Company the other week. He told me how one of his senior executives was so disgusted by the banality of the questions being asked that he gave the interviewer his business card back and said, "I think you should recycle this."

I once suggested to someone that while the Internet was of course essential (who would want to go back to parchment after William Caxton came along?), an experiment should be tried with young journalists/researchers/analysts etc.

I suggested that we should switch off the Internet, give them only a telephone, a travel budget and a list of contacts, along with some hard-copy resources, and assess whether they were able to assemble original and accurate information.

We could then offer training for those who fell below the mark. He accused me of being an "Old Fart".

But I am not sure how much of this was motivated by the fear of telling the Emperor he really had no clothes as opposed to a genuine belief that I was wrong.

Back from less-than-sunny Perth to discover that the prediction from my good friend and colleague Paul Hodges at International eChem has come true: Benzene has headed south because of:

1.) The rise in its pricing seems to have been out-of-kilter with what has happening downstream in styrene

2.) Traders credit might well have stampeded for the exit after building very high stocks in China in July

3.) Overall reformer economics appear to have been much-improved of late, perhaps encouraging over-production of benzene

See this slide from ICIS pricing which illustrates the point.

View image,

The conclusion has to be, again, that apparent chemicals demand is a long way from underlying demand, despite all the macro-economic confidence.

Expect many more mini disruptions like this - if not the dreaded overall collapse.

MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)

Source of Picture: www.autospies.com

The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.

But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.

Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).

So what might this mean for the polymer industry? Here are a few thoughts:

*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines

*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed

*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains

*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues

*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)

By John Richardson

We don't have the actual data yet (hopefully, we'll be able to give you the numbers later this week), but......

......China's commodity chemicals and polymer imports "continued to amaze" in September with monoethylene glycol (MEG) shipments hitting an all-time high, said Jean Sudol, president of US-based International Trader Publications Inc (ITP).

"Imports of most of the commodity polymers we follow continued heavy in September, with relatively small changes, most of them positive from August," added Sudol, whose company provides trade data and analysis on chemicals and polymers.

The commodity polymers ITP tracks showing increases were low-density polyethylene (LDPE), linear-low density PE (LLDPE), high-density PE (HDPE), polypropylene (PP), ethylene vinyl acetate (EVA) and propylene copolymers.

"Polyvinyl chloride (PVC) trended downwards for the third month in row with polystyrene (PS) mixed," she added.

Imports of the engineering polymers acrylonitrile butadiene styrene (ABS), polyacetals and styrene acrylonitrile (SAN) also rose, continuing an upward trend that has lasted several months.

"Among the major organics, imports of ethylene dichloride (EDC), vinyl chloride monomer (VCM), methanol, styrene and propylene were also up from August. MEG reached a new all-time high."

But benzene imports remained low, maintaining a trend that began in June, with ethylene shipments slowing moderately.

Domestic demand is still a relatively low proportion of GDP (gross domestic product) growth and so a lot of this stuff must be going into gains made in re-exports of finished goods.

Commodity chemicals pricing is more affordable than in H1 last year.

A depreciated Yuan versus the currencies of other developing countries, raw-material import tax cuts, increased export tax rebates and very flexible labour markets have also made China's exports more competitive.

There's also a mountain of cheap and plentiful bank lending to make life even easier for the Chinese re-exporter.

The end-result is that - as we discussed yesterday - China has seized market share in export sectors including textiles and garments and electronic goods.

Chemicals companies whose main business is with China might be benefiting, whereas exporters to other countries could be losing out as could chemicals industries in these other countries.

China's finished product exports might be down in value terms. But how much does this matter if you have such big competitive advantages and state-owned banks willing to bail you out if you get into trouble?

In some cases there could have even been export-volume improvements in 2009 over pre-crisis levels. This, along with the lower pricing, could help explain what seem like counter-intuitively high record-high shipments of chemicals and polymers to China.

There are winners and losers in other export-focused countries.

It's fine if you supply, for example, commodities or high-tech components to China to be assembled in to finished electronic goods.

But it's not so rosy if you compete head-on in industries such as textiles and garments and plastic toys.

Chinese manufacturers are likely to have the capacity to discount even deeper thanks to a supportive government. Further discounting might become essential if other areas of the economy falter.

Even with all this backing, margins are likely to become tighter - especially as the widespread perception is that oil prices are heading back to $100 a barrel. Perceptions make the price through the futures market.

This will leave the Middle East, with its increasing capacities, in a very strong position to take advantage of what could be an even longer bull-run in commodity chemical and polymer exports to China.

More of the cheap stuff?

Source of picture: www.thelocal.de

Some of the China import data for September is now available - showing record-high imports of monoethylene glycol (MEG), ethylene vinyl acetate (EVA), polyacetal, polycarbonate (PC).

"I have given up trying to figure this out. There is not sufficient accurate information anywhere to read a trend. Reality is that they continue to buy to put SOMEWHERE," said a senior polyolefin industry source last week.

"Physical and future markets are continuing to show strength, but export and domestic consumption data continues to be weak."

Now he is beginning to think, like this blog, that a lot of these extraordinary volumes have to do with China making gains in specific finished-goods export markets. A lot more data-crunching is needed to stand this up.

A note of caution and context - a lot of these September imports might have been booked in July/August before the recent price declines.

There could have also been some stock building ahead of the long October holidays (when we get the October figures any dips will also need to take into account the holidays).

If China is making big gains in finished-goods export markets thanks to all of its competitive advantages, you can read the latest US Conference Board confidence index results either way.

The failure of US consumers to respond to better equity and housing markets could indicate a deeper shift in the way Americans spend, said Ian Shepherdson, chief economist at High Frequency Economics - in this FT article on the last Conference index.

More thrift might give the Chinese the ability to cost-cut their way into bigger slices of export markets.

Such a weak level of confidence, though, points to a poor Christmas sales season. This would leave a lot of goods left stacked on US shop shelves, pointing to a big New Year dip in commodity chemical exports to China.

But again - this would have to be put in the context of the Chinese New Year in February!

.......and no trite Public Relations-speak answers, please!!!

This is not me, by the way, (my computer is an older model) but the expression about sums it up

www.scienceblogs.com

No matter where you seem to turn these days, whether it's to the refinery industry or to any chemicals production chain, the story is more or less the same: A wide gap between the expectation of recovery - already priced into crude and equity markets - and actual production and consumption.

The demand-growth numbers from China, taken in isolation and not placed into the context of declines elsewhere, continue to amaze.

Auto sales in China continued to boom in October, though at a slower pace than in previous months, according to data from the semi-official China Association of Automobile Manufacturers.

Sales rose 72.5% from a year earlier to 1.23 m vehicles, slower than September's 77.9% increase and August's rise of 81.7% - the year's peak growth rate so far.

Sales have been boosted by government stimulus measures that include rural subsidies and a purchase tax cut on vehicles with engine capacities of as much as 1.6 litres.

Demand for textiles used in cars has been so strong that workers have been forced to put in extra hours following mass lay-offs earlier this year.

But, turning to the styrenics chain, an industry sources said: "Downstream demand in all the big derivatives - acrylonitrile butadiene styrene (ABS), polystyrene (PS), expandable PS (EPS) and styrene butadiene rubber (SBR) is very weak.

"EPS had a good H1, but it's now the down season for construction because its winter. Even taking this into account, consumption is very poor."

Spot PS and ABS prices have been stagnant over the past few weeks while feedstock costs have increased, according to ICIS pricing.

"My worry is that it's all cost-push at the styrene end of the chain and so buyers run the risk of repeating the mistakes of H2 2008, but of course on a much smaller scale." the source added.

What on earth is really going on? This blog will dedicate a big chunk of the rest of its life to try and find out.

 Shelf-space to be in short supply again?

Source of picture: www.zrdata.com

ASIAN naphtha prices hit their highest level for more than a year yesterday - reaching $701/tonne CFR Japan for second-half December open-spec material on "improved market conditions".

Earlier this week we picked up more reports of bleak demand in styrenics and fibre intermediates that countered continued optimism in equities and crude markets.

This is also usually the quiet season as petrohemical production declines on weak seasonal demand.

Is the Asian petrochemicals industry ramping up production because it thinks crude is going to get stronger and the real economy is set to improve?

Oil fell to below $77 a barrel yesterday on evidence that US motorists and businesses were cutting back on energy use, according to this Associated Press report.

Have we returned to the demand destruction which caused the economic downturn in the first place?

Despite soaring auto sales in China, there are reports that gasoline consumption is being affected by higher crude, the impact of which is being more keenly felt this year as a result of fuel-price liberalisation.

The Energy Information Administration (EIA) said in its weekly report that US oil and gas supplies grew more than expected last week, even though many oil companies have shuttered refineries as fuel consumption slumps.

US refineries had slowed production to the lowest levels since September 2008 and they were importing nearly 15% less crude than last year, the report added.

This is worying when you think of the state of the economy this time last year. Most other comparative numbers are showing improvements.

What perhaps helps to explain the 15% decline is big new refinery capacities in India and China etc putting pressure the developed-world players.

With refinery runs reduced everywhere in the world except China (where the Chinese refineries are enjoying improved profitability as a result of the fuel-price liberalisation), reduced supply could be another factor behind the rise in naphtha.

But let's take it as read that better demand from petrochemicals is the main driver behind the increase in naphtha.

It would be a very risky business to build inventories right at this moment - given all these uncertainties and the big surge in new petrochemicals capacity.

Abu Dhabi ahead in the race?

Source of picture: www.gulftrackservices.com

By John Richardson

The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.

"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.

"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.

"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."

The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.

But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.

"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.

"But it is true that we have already seen transfer of very valuable polymer technologies."

SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.

The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.

These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.

But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."

IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.

It also has a 64% of Austria-based polyolefins group Borealis.

"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.

"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."

And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.

Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "

The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.

And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.

With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.

"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.

"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."

Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.

SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.

There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.

Source of picture: www.managingthedragon.com

By John Richardson

I love the phrase used by Andrew Peaple of the Wall Street Journal in this article on China's property "bubble": Getting a straight answer is like "nailing jelly to a wall", in other words xxxxxx impossible. I will be in Shanghai next week on a business trip so will attempt to do some first-hand nailing.

The World Bank, Peaple points out, says that income growth in China is keeping up with price rises. This is a view supported by the China Economic Quarterly, which also makes the point that there remains a lot of pent-up demand for housing.

Property prices rose by 3.9% in 70 of China's large and medium-sized cities, but there does seem to be the possibility that highly localised much bigger bubbles are being inflated. Housing affordability in Beijing looks to stretched and prices in October rose by 13.8% in Shenzhen.

Still, in three of the 70 cities surveyed property prices actually fell.

The again, though, Zhang Xin, chief executive of Soho China - one of the country's most successful privately owned property developers - was quoted in several media reports as saying that a big bubble was, indeed, being pumped up. She blamed this on the big increase in bank lending, the cornerstone of the government's economic stimulus.

"Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real-estate segment," she was quoted as saying.

Vacancy rates in the Pudong district of Shanghai are as high as 50% as more buildings keep going up, Zhang added.

"In Manhattan they have vacancy rates of 10-15% and they feel like the sky is falling."

The danger for chemicals consumption is that changes in government policy for the property sector could have a big detrimental effect.

Tax breaks, low interest rates and smaller down-payment requirements have fuelled this year's boom - along with the plentiful bank lending.

Another connected issue is assessing how much chemistry goes into China's construction sector.

In the US, for example, the American Chemistry Council (ACC) assesses that the construction sector purchases $8 of every $1,000 of chemicals output.

"A big problem in China is the huge variance on what people do to their homes, from very basic equipping of steel and concrete box-like apartments to, of course, the super-rich who are ripping out tiles and refitting kitchens almost as often they change their underwear," said a Shanghai-based office worker.

Nailing jelly to the wall would no doubt have been a fair description of getting reliable data out of the US economy during the early part of the last century.

But back then it mattered far less to the rest of the world.

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

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

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

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

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

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

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

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

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

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

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

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

A Ring of Truth?

Source of picture: http://web.pdx.edu/~nathanh/benzene/benzene2.gif

By John Richardson

TUMBLING Asian benzene prices are being blamed on weaker crude, itself a reflection of macro-economic worries over higher-than-expected US jobless figures, government debt problems in the Euro zone and tighter credit in China.

"It's not a question of whether, but when the secon dip in this duuble-dip recession occurs. We are going through a transition period of lower global growth but the financial markets don't reflect this," said a lawyer friend of mine this morning.

"So you have crude overvalued thanks to all the free government money being used for speculation, along with other unrealistic pricing of other commodities and equities."

Hear, hear.

But as we said on Wednesday, financial-market players have big incentives to feed gullible journalists with constantly shifting economic outlooks. 

The muddle in newspaper headlines is quite extraordinary at the moment as only on Tuesday of this week, crude rallied on strong manufacturing data and rising manufacturers' sentiment indices.

So benzene could be back up again by Monday lunchtime.

But while the benzene traders are blaming the collapse of C6s on crude, overproduction on over-confidence in downstream chemicals demand that might not be there post-Chinese New Year has to also be a factor.

This suggest that there is a lot more to do this can merely volatile crude.

The fantastic spreads between naphtha and benzene of late must have also been a factor in higher operating rates.(click on link below with data from ICIS pricing ). Spreads were boosted in late December and early January on naphtha-delivery issues and benzene plant operating problems which tightened supply.

Naphtha-benzenespreads.xls

A separate point is that the benzene traders might have been playing their usual games - a further reason for the price declines.

"One particular trader recently sold large quantities of benzene in order to drive down the price of paraxylene (PX), as it needed to cover short positions on PX," alleged a source earlier this week.

A benzene cargo can change hands as much as six times before it's even loaded, and so it's devilishly difficult to separate the underlying fundamentals from the speculative claims.

But this gets away from the main point: The recent declines in benzene might just be an indication of the begining of the double-dip in this recession.

Mind you, I have said this many times before over the last 12 months 

"Sorry, but there's more to life - I really don't want to do this anymore..."

Source of picture: China Daily

By John Richardson

The labour shortage crisis in southern China - which one trader had claimed would last exactly ten days beyond the end of a recent polyolefins conference - is proving to be a great deal more long term.

A major shift in lifestyle expectations appears to be taking place as younger workers - those who entered the workforce after 1990 - seem less willing to put up with the sometimes awful working conditions in Guangdong's sweat shops.

"In addition, job opportunities are mounting in the central and western regions, including infrastructure construction boosted by the national stimulus plan," writes the outsourcing blog, Perspectives in Responsible Sourcing.

"As a result, would-be migrant workers now choose to stay in their hometowns or move to other rural regions."

The willingness to remain in central and western China seems to have also been boosted by greater subsidies for farmers, and the more recent discounts off the prices of consumer goods - part of China's huge economic stimulus package.

Living conditions the further west you go can sometimes be better than Guangdong province, with more affordable housing and better schools, according to locals quoted in media reports.

Guangdong - where the shortage of workers is estimated to be anywhere between 900,000 (the official government figure) and 3m - has also been hit by wages being lower than the Shanghai, Zhejiang and Jiangsu provinces in the Yangtze River Delta region.

The Guangdong provincial government announced last week that minimum wages would rise by an average of more than 20% from 1 May. Major manufacturers such as LG, Panasonic, Volkswagen and BMW have reportedly already raised their salaries.

But the Yangtze River provinces have also raised minimum wages this year.

"If the re-export heartland provinces get stuck in wages spiral, they are in danger of losing competitiveness," said a Shenzhen-based director of tyre manufacturing company who I spoke to today - a US ex-pat.

"We would be hit even more if the government decides to raise the value of the Yuan, quite possible given all the international pressure."

But this particular tyre manufacturer faces the more immediate issue of being several hundred workers short of the number needed to meet an international order -a problem being reported by other manufacturers throughout Guangdong.

The consequences for chemicals have been seen in the styrene chain and last week in polyethylene (PE), where ICIS pricing assessed that prices for the polymer had fallen by as much as $70/tonne from a week earlier. These declines were partly the result of insufficient workers to run processing plants, in addition to mounting inventories and new PE supply.

This all seems like a classic case of unintended consequences as Beijing officials have long being using policy to encourage more job retention and more growth in central and western China.

A reversal of the overall direction of this policy seems unlikely, but more temporary help for exporters in Guangdong could happen.

But the risk here that any such help raises the anger of the protectionist lobby in the US.

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

Source of picture: edgsgonesouth.com

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

By Malini Hariharan

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

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

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

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

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

Source of picture: irantrip1wordpress.com

By John Richardson

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

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

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

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

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

Tougher sanctions mean trade finance is even harder to obtain when dealing with Iran, forcing the country to seek more difficult and innovative ways to bypass the sanctions or demand cash upfront.

"It is getting an awful lot harder to justify doing any business with Iran," a senior executive with a major petrochemicals logistics provider told the blog earlier this week.

"If, say, I was to rent tank-storage space to an Iranian company and then a Western major also rented space off me, that Western company could face penalties because it had dealt with a third party that had done business with Iran."

So as trade dries up, Iran will have less money to fund oil, gas and petrochemicals growth. As we wrote last year, the previous sanctions regime was already making it extremely difficult for the country to get the technology and expertise it needed to better exploit its abundant resources.

Commenting on the Bloomberg article we linked to above, the New-York-based chemicals equity research firm Alembic Global Advisors said in a research note: "This is consistent with our view that we will see continued delays and lower utilisation rates from the Iranian crackers expected to come online during the next few years.

"As a reminder, consensus is forecasting that as much as 11% of all new capacity builds from 2010 through 2014 will be in Iran.

"Iran (has) had five large scale ethylene crackers start-ups since 2005, with an average delay of 18-24 months and average utilisation rates in the first two years of production of 50-60%."

This is good news for global supply and demand balances as the Iranian capacity wild card seems to have been removed from the pack.

But it is a crying shame for Iran and all the good people who work in its petrochemicals industry.

By John Richardson

ASIAN aromatics producers are struggling from an oversupply driven both by weak demand for their products and strong overall reformer economics, the blog has been told.

As this chart below illustrates for benzene, toluene and xylenes (BTX), the price declines for these base chemicals mirror those we have reported on extensively in the olefins chain.

The weaker demand outlook in China is impacting BTX and its derivatives after the strong growth seen in 2009.

Additionally, weaker naphtha pricing and higher octane differentials between the 92 and 97 grades of gasoline point to strong reformer operating rates over the next few weeks, says N Raviventatesh, Singapore based consultant with Purvin & Gertz in his latest Asian petrochemicals feedstock report.

This report from ICIS news points to a moribund naphtha market dogged by increased supply and weaker demand due to the Formosa Petrochemicals cracker outage, with crack spreads the weakest for all the refinery products.

China has also added a lot of refinery capacity of late and has become a more significant exporter of gasoline as it runs its refineries hard for what my fellow blogger Paul Hodges describes as "social stability and job-creation reasons".

BTX values could therefore suffer further, as has so often been the case in the past, from factors beyond the control of the chemicals industry.

But as Ravivenkatesh points out, his assumption of high reformer operating rates depends on no significant cutbacks in naphtha production.

And with cracker margins still on the decline in Asia, we seem to be getting close to the point of cracker rate cuts - by possibly as early as August. This would further help to rebalance BTX markets through less availability via pygas.

By John Richardson

SHELL Chemicals announcement that it has signed a memorandum of understanding (MOU) for a cracker and derivatives project in Qatar seems to have upped the ante in what could be a struggle for only one parcel of feedstock.

Graeme Burnett, Total Petrochemical's senior vice president for Asia and the Middle East, in November re-emphasised the French major's interest in a cracker project in Qatar.

He perhaps sounded the right note when he stressed Total's interest in adding to a particular country's product portfolio in the Middle East through building the styrene and polypropylene (PP) facilities. Qatar only has ethylene derivatives.

ExxonMobil also has a cracker project on its books in Qatar which has reportedly been delayed.

Source of picture: Qatar Living 

When we asked a source close to Shell whether there was enough feedstock for one, two or three new crackers in Qatar recently, he said: "That's a very good question you would need to address to Qatar. The position is not clear."

And last November Ben van Beurden, executive vice-president of Shell, told the blog:
"Ideally, we'd like to build two crackers and two OMEGA process monoethylene glycol (MEG) plants on the scale of this one here in Singapore, but at the moment there is simply not enough ethane.

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

Qatar's moratorium on new allocations of gas from its North Field and a keen awareness of alternative values for natural gas all seem to be factors in limiting feedstock supply for petrochemicals.

By John Richardson

ASIAN paraxylene (PX) and styrene markets look set to be the most affected by the loss of Japanese exports as the slide below from Bob Townsend at the UK-based consultancy, International eChem (Iec) illustrates. 

Japanese Exports.ppt

My fellow blogger Paul Hodges, also of IeC has analysed the data behind the charts to produce a breakdown of Japan's 2010 exports across the olefins, aromatics, fibre intermediates and polymers chains.

There are unconfirmed reports a 10% increased in Asian PX prioce as a result of the loss of production at JX Nippon Oil.

ICIS asessed pricing at around $1,740/tonne (€1,253/tonne) CFR (cost & freight) Taiwan and/or China Main Port (CMP) earlier today.

JX along with fellow Japanese producer Idemitsu Kosan and global major ExxonMobil are crucial to the Asian market as they nominate the monthly Asian Contract Price.

The nominations are then negotiated with the big five big buyers, two of which are Mitsubishi Chemical and Mitsui Chemicals.

The loss of Japanese PX production comes during a heavy turnaround period. Polyester producers in China are already complaining about squeezed margins and so it will be interesting to see whether the higher PX costs can be passed on down the chain.

A good article from my colleagues Peh Soo Hwee and Felicia Loo at ICIS news neatly summarises both the impact on naphtha of the loss of Japanese production and details of exactly which petrochemical plants are down across the major product chains. Our post from earlier today provides more detailsl these shutdowns.

The Kashima and Sendai ports have also been closed as a result of the disaster - meaning that even where chemicals plants are still operating, shipments may not be possible.

Again our sympathies go out to everybody caught up in this tragedy. We pray and hope that the rescue efforts go well and that Japan is soon able to focus on the rebuilding efforts.

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 John Richardson

SHELL Chemicals put an argument forward last week that polystyrene (PS) had regained ground from polypropylene (PP) as a result of expensive propylene.

And the petrochemicals major forecast a bright future for both PS and expandable polystyrene (EPS).

The blog pretty much always enjoys playing the devil's advocate and so later on in this post we will suggest some challenges to the Shell view.

First of all, though, here is a bit of background and some of the details of the case put forward by Shell.

From Feast to Famine

As we have discussed before on the blog, C3s have become very costly as a result of the switch to lighter cracker feeds in the US, the predominance of gas as a feedstock in recent steam-cracker capacity additions and above GDP demand-growth for PP.

So expensive has propylene become that since the global economic crisis, PS has regained its cost position against PP, said Alexander Farina, Shell's General Manager, Chemicals Strategy Development.

"Equally encouraging is that substitution of PS by PP seems to have reached a plateau, and estimates suggest global styrene demand will grow around 3% per annum to 2020," added Farina in a speech to the 5th ICIS Asian Aromatics and Derivatives Conference, which took place in Singapore last week.

"Reports from Asia confirm that further PS substitution is no longer an issue.

"There are ongoing challenges for PS in North America and Europe, where perhaps up to one-third of each market could be vulnerable to PP, but only with increased investment in production capacity for the latter."

"Substitution is not a threat to construction market-focused PS products - particularly insulation - where long-term demand outlook is good in both new build and refurbishment. There are other uses - such as snap-off multipacks for foods like yoghurts - where PS is clearly the material of choice."

Farina, however, earlier in his speech painted a challenging picture for benzene pricing.

Benzene went from a feast of oversupply in the 1990s to a famine of an over-tight markets in the 2000s, he recounted.

The last decade marked the introduction of tougher regulations on benzene content in gasoline, leading to the closure of on-purpose hydro de-alkylation (HDA) capacity.

"Before 2005, on-purpose swing capacity could add 20% to other (global) benzene production," he added

"Today, it is nominally about 4%, but practically non-existent.

"Back in 2005, a Shell colleague speculated on whether the severe reduction in swing capacity would - at some point - create the need for new, on-purpose benzene supply if incremental fatal supply remained unavailable.

"Well, to-date, it has not, and the jury is still out on if and when that may happen."

This had left benzene supply very-heavily dependent on how reformers and steam crackers run, he added. C6 pricing is therefore often driven by the demand for gasoline and olefins rather than the demand for benzene derivatives.

"In combination with high and fluctuating crude prices, the knock-on effect has been to make benzene prices much more volatile," he said.

And he added that current estimates were for benzene demand to grow by just over 3% per year with supply only increasing by about 2% per annum.

But despite these challenges, Farina said that the price of the feedstock would remain competitive.

His speech also pointed out the excellent insulating properties of EPS and how it could help reduce energy consumption. Better-insulated buildings had the potential to reduce global energy consumption by 20%, he said.

But just for sake of being miserable....

1.) What if new ethane-based crackers in the US 'crowd out" liquids-based cracker investments elsewhere? Might this sharply reduce the projected growth in benzene availability?
2.) What if the legal wrangle over styrene being declared a carcinogen by the US Department of Health and Human Services leads to consumer goods made from PS being banned?
3.) What if the propylene supply issues that have caused the surge in C3 costs are resolved? Unlike in benzene, on-purpose production of propylene is becoming ever-more popular. For example, several propane dehydrogenation (PDH)-to-propylene projects have recently been announced in the US and China
4.) And most importantly of all, what if crude oil pricing becomes even-more volatile, causing problems for more than just benzene? As we will argue in Chapter 3 of our e-book, 'Boom, gloom and the new normal - how Western baby boomers are changing global chemical demand patterns, again', oil markets have become dysfunctional and represent a major risk to the global economy.

By Malini Hariharan

Asian petrochemical markets continue to face downward pressure on concerns about the health of the global economy. Market sentiment for most products remains poor with buyers in no rush to resume purchases.

Polyolefin markets closed last week on a weak note. Prices of low-density polyethylene (LDPE) and polypropylene (PP) dropped $10-40/tonne last week across the region, reports ICIS pricing. Linear-low density PE (LLDPE) and high-density PE (HDPE) prices were stable but buying sentiment for the products was weak.

There was little support coming from ethylene and propylene markets. Propylene prices were assessed higher for the week on tight regional supply but buyers stepped back on Friday after a sharp fall in equities and crude oil. Ethylene dropped $10-40/tonne in Southeast Asia with buyers unwilling to enter markets at a time of great uncertainty.

Benzene and styrene markets were also similarly affected with prices of both proudcts sliding $20-40/tonne.

The only exceptions to the trend were paraxylene (PX) and purified terephthalic acid (PTA) as news of an impending shutdown of Fujia Dahua's 700,000 tonnes/year PX plant spread in the market. The company is at the centre of widespread public protests after a typhoon hit a wall at the plant site. This raised fears of a PX spill prompting local residents to demand closure and relocation of the plant.

However, the strength in the PX and PTA markets is under question given the global economic uncertainty. The news today from the Asian stocks markets is bleak with declines recorded at all major bourses today. Brent crude dropped by more than $3/bbl on news of Libyan rebels capturing Tripoli raising hopes of an end to the country's civil war and a resumption of Libyan oil exports.

If the trend continues, optimism will be a scarce commodity in petchem markets this week.

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

SEPTEMBER is going to be a cruel month when the West returns from the summer holiday period and the extent of damage to chemicals and polymer demand becomes more apparent.

In Asia, temporary supply constraints in polyolefins, paraxylene (PX) and styrene monomer (SM) have disguised the damage. These constraints will at some point ease, leading to a clearer picture of where the industry stands.

Gone will be the SuperCycle theory, for good we feel, and gone will be some if the projects announced to take advantage of this cycle (more diplomatically, they will be "shelved" but in reality investments will be cancelled).

Companies will then begin to deal with the New Normal, which we discuss in Chapter 4 of our e-book.

For the last three years, ever since the Lehman Bros crisis, we have been living on borrowed time.

The US Fed's quantitative easing programmes created lots of liquidity and the illusion that the global economy was back to normal. But as we discussed in Chapter 3 of our book, most of the Fed money was wasted at it ended up in the hands of speculators in oil and other commodities.

Ironically, the Fed's policies have caused further long-term damage to the economy by driving crude prices to unsustainable levels. This has placed additional pressure on hard-pressed Western consumers as they struggle with depressed employment prospects, high debt levels and reduced support from governments as sovereign debt is reduced.

In emerging markets, the Fed policy has contributed to inflation and interest rate hikes.

China's enormous economic stimulus package - introduced in late 2008 - is another reason why we have been living on borrowed time.

Hindsight is a wonderful thing, but it now seems obvious that the 53% increase in polyethylene (PE) demand in China in 2008-2010 had to be unsustainable.

A fall in demand growth was inevitable, but what few of us predicted (including the blog) was that PE growth would turn negative this year. The same is likely to apply to lots of other chemicals and polymers.

The reason for growth turning negative is the damage caused by China's stimulus package.

As with the Fed policy, China's economic stimulus has contributed to inflation through, for example, higher property prices.

The pace of new lending was so rapid in 2008-2010 that misallocation of capital would have been inevitable in any economic system. In China's system, bad lending is likely to have been on a scale that threatens its long-term financial stability - as a result of corruption and the cosy relationship between the state-owned banks and state-owned enterprises (SOEs).

Beijing is involved in a multi-year effort to redress the damage caused by government spending.

China's banks were under a lot of central government pressure to accelerate lending during 2008-2010. The easiest way to deal with this was for the banks to lend to their mates in the SOEs which then used the money to invest in lots of new industrial capacity (local government officials will have been motivated to support these investments as a means of achieving GDP growth targets set by Beijing).

Electricity consumption reached a new record high in July, according to fellow blogger Paul Hodges.

This suggests that industrial capacity continues to be commissioned as global demand weakens. The danger is that China will seek to export these surpluses at very competitive prices, resulting in a global trade war.

By John Richardson

A CAREFUL reading of all the major ICIS pricing reports covering olefins, polyolefins, aromatics and their derivatives over the last few weeks reveals very few mentions of the phrase "peak demand season".

This time last year, the reports were full of references to the seasonal surge in production of finished goods in China in time for the Thanksgiving and Christmas sales seasons in the West.

The reason is obvious: In comparative terms, this year's peak demand season has been exceptionally weak and therefore hardly worth discussing at all. 

"The container-shipping industry is contending with the longest stretch of near-zero rates in its half-century history on the Asia-to-Europe route, as a capacity glut combines with the slowest growth in trade since 2009," wrote Bloomberg in this article published last week.

"Commerce on the world's second-busiest container route rose 4.2 percent in the second quarter, the weakest since the end of 2009, Woking, England-based Container Trade Statistics Ltd. estimates."

It is a similar story on the Asia-US route, of course, due to all the macro-economic problems.

In polyolefins, what seems amazing at first glance is why pricing has held up so well.

Polyethylene (PE) and polypropylene (PP) were each, for example, only assessed $10-20/tonne lower last week. As the graph below shows (click on the link), pricing has remained pretty stable in the face of what is clearly a new global recession.

AsiaPEpricingSept52011.ppt

There are two reasons for this, which are:

1.) Olefin and polyolefin supply losses in Q3 have been huge - as this slide from our latest ICIS Worldwide Ethylene Plant Report illustrates - click here: AsiaEthyleneCapacityLossSept2011.ppt. Several scheduled turnarounds in Asia are now, however, coming to an end and some technical problems look as if they are close to being resolved. For instance, Formosa Petrochemical Corp hopes to restart its 700,000 tonne/year No1 cracker at Mailiao in Taiwan during the first half of this month

2.) The oil price has yet to free-fall. But the blog agrees with Paul Hodges, UK-based chemicals consultant, when says: "I used to think that prices would eventually stall and then re-stablise at around $60 a barrel, and this is still my base case. But I think the damage that has been done to demand by high oil prices may be so great - in combination with the other economic problems emerging around the world - that we may end up back at $25 a barrel."

We are heading for some very difficult times. 

Although the fourth quarter might be too soon for the major correction that we believe will eventually happen in crude oil, petrochemicals supply is set to lengthen not only in the olefins chain but also in paraxylene (PX) and styrene monomer.

Strong support from demand seems unlikely as the "peak demand season" is over, Q4 is traditionally a little quieter and the uncertain economic outlook is resulting in a lot of risk-aversion.

Another factor to consider when making your market-assessments for the rest of this year is  China's decision late last month to change how bank-reserve requirements are calculated.

"This is already making trade finance a lot harder to obtain," a Singapore-based polyolefins trader told us late last week.

The policy involves banks being forced to include "margin deposits", or collateral deposited by customers for letters of credit and other guarantees, in calculating the share of deposits they must put aside for reserves, according to the Wall Street Journal.

The move would "seriously cut off" traders' access to short-term credit, affecting 50-60 per cent of China's commodity traders, Henry Liu, head of commodities research at Mirae Asset Securities, was quoted as saying in the same newspaper.

Small and medium-sized enterprises were already struggling to obtain credit because of previous attempts by China to tackle inflation.

The West has looked to Asia to support growth since late 2008, but now the prospects for growth everywhere look bad.

A case in point is the PE market.

"The overriding sentiment in the European PE market this week is one of uncertainty over demand in the coming weeks," wrote our European polyolefins editor Linda Naylor in her latest report, published last Friday.

"Few doubt that Asia will continue to soak up volumes and many players look to Asia for direction in the mid-to-long term."

The Singapore-located trader we quoted above, however, also told us: "Traders are now looking to re-export Middle East from China to Europe because they have overestimated the strength of demand in China."

By John Richardson

SERIOUS structural problems with China's economy threaten another disappointing year for polymer demand following flat, or even negative, growth for many of the major synthetic resins during 2011.

Last week the blog visited Singapore and held discussions with several industry players and chemicals analysts. They agreed that polyethylene (PE), polypropylene (PP), polyvinyl chloride (PVC), polystyrene (PS) and acrylonitrile butadiene styrene (ABS) growth would on average be flat during this year.

"In some cases growth will be positive - for example, we expect PP to increase by 3-4 per cent, which will be offset by declines in demand for PVC and for PE," said one Singapore-based chemicals analyst.

"We think that PE will fall by 3-4 per cent, reflecting an extremely bad second half of the year as first-half growth was either flat or only slightly negative."

Reasons for the precipitous declines from double-digit growth during the credit binge of 2009-2010 include the battle against inflation, a consequence of which is greatly-reduced lending to the small and medium-sized enterprises (SMEs).

Sales and marketing executives of the major global polyolefin producers have written off the rest of this year while hoping that 2012 will see a strong rebound. The anxiety among these executives is particularly acute as they were set unrealistic sales targets in late 2010, which of course will not be achieved.

With the budget process now in full swing, the blog can see many reasons for caution in setting next year's targets.

These include a failure, as yet, to win the struggle to bring inflation below the government's target that had been set for 4 per cent for 2011, but was raised to 5 per cent.

We don't know what next year's annual target will be, but unless there is a drastic change in policy, the 6.1 per cent increase in the cost of living recorded for September suggests that the government has a long way to go. Although the September rate was lower than in July and August, food prices still rose by a worrying 13.4 per cent

The banking system is also in need of a major overhaul in order to provide cheaper, more reliable finance to the SMEs.

For a long time, the SMEs have struggled to source and afford financing - because the state-owned banks were set up primarily to lend to the state-owned enterprises (SOEs).

Credit tightening has made the problem worse, highlighting how few legitimate lending institutions there are in China - only about 100 licensed lenders, according to this article in China Briefing.

Private lenders are deeply ingrained in the Chinese financial system. More than per cent of people in the Chinese city of Wenzhou, for example, have invested in these lenders, reports the New York Times.

The government has announced plans to reform the banking system. But it is going to take considerable time to break the dependence on "loan sharks", as they are clearly an important source of income for many people.

Encouraging the state-owned banks to lend more to the smaller, private companies might also meet with stiff resistance from the banks themselves - and from the SOEs. Both have done extremely well out of China's current banking system, as we discuss in more detail in Chapter 6 of our e-book, Boom, Gloom & the New Normal, which is released later this month.

The positive news, which was released on Wednesday last week, was that the State Council has introduced short-term measures to ease the plight of the SMEs.

These are:

1.) Permitting low reserve requirements for smaller local banks lending to SMEs
2.)Permitting greater use of bonds and other financial instruments by SMEs to raise cash
3.) Raising VAT and business tax thresholds to SMEs
4.) Providing improved financial services to SMEs

But a new Credit Suisse report has raised the bank's estimates of China's non-performing loans (NPLs) from 4.5-5 per cent of total lending to 8-12 per cent.

The bank believes that as China struggles to deal with these NPLs (as it also, as we have said, tries to reform its entire banking system), lending conditions will not return to normal until 2015.

Providing short-term help to the SMEs - which make up the bulk of China's chemicals and polymer buyers and account for more than 50 per cent of overall economic activity - is all well and good.

But ensuring that new lending to the SMEs doesn't once again get misallocated, making the NPL crisis even worse, must surely be a major concern for Beijing.

Many of the smaller, private companies, including polymer producers and traders, have borrowed money to speculate in real estate - and are now bankrupt, or close to bankruptcy. Government policy appears to be targeted at reducing overall speculation through forcing speculative companies out of business.

And finally, of course, returning to our earlier point, as long as controlling inflation remains a priority, financing as a whole is likely to remain far harder to obtain than in 2009-2010.

Chemical companies, as we said, need to take all of this into account when planning their 2012 budgets.

They need to also come to terms with the fact that financial sector reform is just one part of major changes in China's economy that are likely to mean lower growth for several years to come.

By John Richardson

EARLIER this week we talked about the possibility that China might devalue the Yuan rather than allow it to further appreciate.

We have since been told by a senior chemicals industry source that this is exactly what the Chinese government is evaluating in case the worst of possible outcomes occurs - the break-up of the Eurozone.

Even if this is not being considered, the tone of this article from the China Daily, an official government mouthpiece, indicates that Western pressure for a rapid currency appreciation could easily backfire.

China has already seen the competitiveness of its manufacturing industry undermined by higher labour costs and now faces the threat of mass layoffs in the event of a Eurozone collapse.

Uncertainty over the direction of the Yuan is just one example of the difficulties chemicals companies face in planning their budget targets for 2012.

There are no guarantees anymore. Even continued strong GDP (gross domestic product) growth is no longer a certainty in China, according to this article from the Financial Times.

Last month, the government of the city of Guangzhou in southern China had to cancel or severely scale back its plans to auction land on four occasions. This was the result of lack of interest from private developers, who have been starved of capital as a result of a raft of measures introduced by Beijing to cool property prices.

The problem is that land sales account for 40 per cent of local authority revenues and without this income, city and provincial governments will struggle to fund the tried-and-tested route to boosting GDP growth: Building lots of bridges, roads, public buildings and airports etc - all of which generate chemicals demand.

A further difficulty is that local governments have used land to guarantee bank borrowing. If land values keep falling, these loans will turn bad, adding to China's non-performing loans problem.

The central government is caught between a rock and a hard place as it needs to reduce property prices in order to keep the "sandwich generation" happy. But by so doing it might, as we've just described, severely weaken the economy.

And so what are the odds of GDP growth falling to 6 per cent next year from the consensus view of 8-9 per cent? Chemical companies might be wise to build 6 per cent, or even lower, into their "worst case" scenarios.

Meanwhile, the extent of demand weakness became even more apparent to the blog during its visit to Singapore last week. Acrylontrile butadiene styrene (ABS) demand had fallen by a full 10 per cent in 2011 over 2010 as a result of credit tightening, a decline in shipment of finished goods to the West, we were told by our colleagues a Chemease.

The high cost of butadiene, and to a lesser extent acrylonitrile, had also eaten into volumes to the benefit of high-impact polystyrene (HIPS), which can be used for some of the same applications, they added.

The blog would be interested to hear convincing arguments as to why next year will be better for ABS - and for all the other polymers.

By Malini Hariharan

The last year has been rough for Indian polyvinyl chloride (PVC) and polystyrene (PS) producers with demand for their products showing almost no growth.

PVC consumption is likely to increase by only 1-2% year on year in the fiscal year ending on 31 March 2012, said S Gopal, managing director of Chemplast Sanmar at the PlastIndia exhibition and conference last week.

And if things don't go well in February-March, growth could slip in the negative zone, he cautioned. He expects demand to settle at around 1.9m tonnes for 2011-12

In polystyrene (PS), one producer expects demand to shrink by 3.5% to around 250,000 tonnes in 2011-12.

The economic slowdown, rising interest rates and depressed buying sentiment are some of the factors responsible for the slide in fortunes of both PS and PVC.

But producers are also blaming the unseasonal rains experienced in 2011.

"The low demand growth is mostly the result of an unusually heavy monsoon season," said Gopal.

The monsoon season in India is typically a time of low demand for PVC, as pipe-laying activity comes to a halt during this period. The pipes and fittings sector currently accounts for more than 70% of PVC demand in India, in contrast to the global situation, where this sector contributes only 40% to PVC consumption.

In PS, the rains affected the appliances segment, which accounts for about 40% of demand.

"It was a bad year for the industry. India had only 45 days of summer in 2011 as against the usual 145 days. Unseasonal rains affected demand for appliances such as coolers and refrigerators," explains a source from the local producer.

Another crucial factor for PVC was the fluctuation in the value of the Indian rupee. The rupee depreciated steeply against the US dollar in the last quarter of 2011, dampening buying interest, as imports became very expensive. India imports nearly 600,000 tonnes of PVC annually.

The setback for PVC and PS comes after a robust 2010-11 when demand growth was over 10%.

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 total value of export orders at the latest Canton Trade Fair, which finished this weekend, declined by 4.8% compared with the previous event in October last year.

This is the first decline in the value of orders at the bi-annual fair since May 2009, when the world was in the midst of the global financial crisis.

Orders from Europe and the US were down, although more transactions took place with buyers from India, Brazil and North Africa.

The export environment is clearly doing China no favours as it struggles with a major domestic economic adjustment.

European demand for China's exports looks likely to weaken even further as a result of the worsening Eurozone crisis.

Disappointing US jobs-growth numbers also suggest that America's recovery is, at best, anaemic. As Janet Yellen , vice chair of the US Federal Reserve, pointed out in a recent speech, job vacancy rates are worse than during the 1970s and 1980s downturns. Does this sound like an economy returning to good health?

Not surprisingly, therefore, there were few signs last week of the expected recovery in petrochemicals markets.

The story is very similar, no matter what product you examine.

For instance, in acrylonitrile butadiene styrene (ABS), ICIS pricing reported last Friday that "end-users are hesitant to commit to large volumes as they expect prices to slip further.

"The weak economic conditions in the US and eurozone and the slowdown in the Chinese economy dampened sellers' sentiment further."

As the chart below shows, pricing has declined this year.

The second half of the year is going to be very difficult for the petrochemicals industry in all regions.

               Mitt Romney would declare China a currency manipulator

               Source of picture: Wikimeda

By John Richardson

China's practice of providing value-added tax (VAT) rebates for importers of raw materials who then re-export finished goods is the subject of a new US Department of Commerce ruling.

And a leading international trade lawyer has warned that US companies are becoming increasingly impatient with Chinese trade practices in general.

We warned earlier this month that, as the global economy weakened, trade tensions between the two countries could build. 

The VAT rebates apply to chemicals, polymers, fibre intermediates and other raw materials that are imported to manufacture finished goods for re-export.

In other countries with VAT, exporters receive the full refund of VAT paid on inputs.

In China, however, exporters receive varying amounts of VAT refunds, depending on the products involved. Producers of value-added goods tend to get higher VAT rebates, encouraging exports, whereas producers of basic materials get lower VAT rebates, thus discouraging exports.

The selective rebates were reduced in 2007 as part of China's drive to lower dependence on exports while boosting domestic consumption.

But as the economic crisis worsened, China's rebates were increased for some products.

Simon Evenett, a professor at the University of St Gallen in Switzerland, estimates that 71% of Chinese exports were affected by a change in rebates in 2010, compared with just 4% in 2007.

"Given that China's VAT rates vary between 13 percent and 17 percent, and that parts and component imports account for half the value added in many Chinese sectors, even small variations in these rebates can have a big impact on the profitability of exporting," wrote Evenett in an academic paper, which was quoted in this article in the Financial Times.

In 2010, Beijing paid out the equivalent of a fifth of total annual Chinese government spending in VAT rebates, added Evenett, who also runs the monitoring service, Global Trade Alert.

"What's more, all of this is World Trade Organisation (WTO) legal," he said.

In response to the VAT rebate scheme, the US Department of Commerce announced on June 19 that it had changed how it will calculate antidumping duties.

"The department will now deduct the un-refunded VAT from the export price to the US. This, of course, increases the dumping margin because the net export price is lower," said Edmund Sim, partner in the Singapore practice of law firm, Appleton Luff, and an expert in international trade legislation.

"And in anti-subsidy duty cases against China, the US claims that raw materials in China, when purchased from state-owned companies, are subsidised by the state, particularly in the case of some polymers and steel," he added.

"The US Department of Commerce will thus value the amount of subsidy by comparing the Chinese domestic price with the world price for the raw materials.

Dumping, under international trade law, is defined as when a manufacturer in one country exports a product to another country at a price which is either below the price it charges in its home market or below its cost of production.

Winning anti-subsidy, or countervailing, duties involves proving that an exporter has used a tax break, free land or another type of investment incentive intended to support domestic business.

Sim added that in all the cases he had seen, the calculated amount of subsidy was large because the Chinese domestic prices for raw materials were lower than international prices.

"This is the result of the VAT rebate policy discouraging exports of basic raw materials, which increases domestic supply and lowers domestic prices."

This applies to polyvinyl chloride (PVC), where, despite local capacity being well in excess of demand, end-users still import substantial volumes.

"This new US approach effectively targets the VAT refund policy both in dumping and anti-subsidy cases, which can be viewed as double counting," said Sim.

"At some point, therefore, the US will have to drop one of the approaches if the Chinese go to the WTO."

Sim added that he also got the sense that American companies were becoming less tolerant over long-running problems in China, including intellectual property rights protection and cyber attacks which sometimes result in intellectual property being stolen.

"In addition, US companies are complaining more strongly about being denied access to Chinese markets," he said.

"What the US is finding particularly frustrating is that, despite the tremendous improvement in its energy cost position thanks to shale gas, it still feels it cannot sufficiently penetrate Chinese markets."

A further source of tension is the fall in the value of the Yuan against the US dollar by around 1% in 2012, following several years of appreciation. The appreciation, which occurred between 2005 and the start of this year, is also viewed as insufficient by the US.

"We recently had an audience with Mitt Romney's trade adviser in Washington DC," said Sim.

"He confirmed that, yes, on day one of him being President, Romney would declare China as a currency manipulator.

"But this would be a strategy to get China to negotiate rather than a statement of policy. The Obama approach has been to instead ignore the issue," added Sim.

"How would China react? Pragmatically, it might ignore the rhetoric during the first few days of a Romney administration.

"It might then recognise that, despite the change in government, there was still continuity.

"Some of the officials in a Romney administration would likely have also worked for the second Bush administration. Governments like continuity when dealing with other governments," he said.

               LDPE margins in 2012     

By John Richardson

NORTHEAST Asian integrated low-density polyethylene (LDPE) margins keep plunging new depths.

The margins were at their most negative since ICIS records began in 2000, according to the ICIS Asian PE Margin Report for the week ending 10 August.

And the report for the week ending 17 August said that they had fallen even further - by $17/tonne.

Integrated high-density PE (HDPE) margins were also down, by $16/tonne - their lowest since early March of this year.

"The declines were on a 1.3 percent rise in naphtha feedstock costs as naphtha prices increased by $13/tonne, which outweighed a $15/tonne rise in PE prices," said the 17 August report.

LDPE has been under pressure from increased low-cost shipments to China from Iran. In January-June this year, Iran saw its exports surge by 40 percent compared with the same period in 2011, according to Global Trade Information Services (GTIS).

HDPE exports from Iran to China were also up - by 55 percent - when the same two six months periods are again compared using GTIS data.

Iran is reportedly being forced to produce more PE because tougher sanctions have made it much-harder for it to ship ethylene.

And, of course, with Iran facing an overall tougher sanctions regime, making it difficult for it sell just about anything to many countries in the world, Chinese PE buyers have the upper hand.

LDPE is also being affected by new capacity.

Qatar Petrochemical Co (QAPCO) brought its 300,000 tonne/year plant on-stream in June.

Saudi Kayan Petrochemical Co's 300,000 tonne/year LDPE plant is scheduled to start-up in Saudi Arabia in Q3, but some reports suggest that commissioning might be delayed until the fourth quarter.

But maybe we are overcomplicating things.

The overall story seems very simple. LDPE is merely the canary in the coalmine because of specific issues that have made its margin depletion the worst for Northeast Asia, which, because it is naphtha-based, is always going to suffer the most in a weak market.

What matters most for the polymer is that overall PE apparent demand in China fell by 1 percent in H1 2011 over the first half last year, and by 3 percent over H1 2010.

This compares with a 53 percent demand increase in 2008-2010 on a huge economic stimulus package by the Chinese government.

This brought demand forward as an army of new traders entered synthetic resins trading in general. They hoarded speculative volumes on the hope that the 53 percent growth in 2008-2010 would be sustained.

But it wasn't. Growth could never, realistically, be sustained at such a level.

Demand declined in 2011 as government stimulus was withdrawn.

And in an important report released by HSBC in June, the bank underlined what the blog has been hearing since early 2011 when it wrote: "Polyethylene, polypropylene (PP), polyvinyl chloride (PVC), polyethylene terephthate (PET) and acrylontrile butadiene styrene (ABS) demand growth has averaged just 2.7 percent since the first quarter of last year, compared with a 9.1 percent increase in GDP."

The reason is that inventories from polymers down to finished goods are still at high levels following the 2008-2010 increase in speculation.

Demand has also taken a big hit from the economic slowdown in China, the severity of which has taken many people by surprise.

By John Richardson

CHINA'S apparent demand for polyethylene (PE), which is a measure of local production plus imports, rose by 4% in January-September this year compared with the same periods in 2010 and 2011, according to Global Trade Information Services (see the above chart).

This is an improvement on the 1% growth seen in the January-August period and, thus, could be interpreted as a sign that the market is in recovery.

But the fact that this is apparent demand is important. As we discussed last month, August import volumes surged on traders speculating that China's political problems would be resolved by Q2 next year.

We worry that China's political problems will not be resolved by the second quarter and, indeed, possibly not for several years. China is also entering an extended period of lower growth for strucural reasons, we believe. The traders might, therefore, end up getting their fingers burnt.

Meanwhile, PE pricing continues to decline on a depressed demand outlook, according to ICIS. Asian pricing was assessed at $10-30/tonne lower for the week ending 26 October.

Pricing may further decline on a more bearish short-term outlook for crude oil as a result of Hurricane Sandy. The reason is that Hurricane Sandy has affected a big oil-consuming region of the US, as against the huge damage to production caused by Hurricane Katrina.