Asian Chemical Connections

In my previous post, I talked about the collapse of the Doha round of trade negotiations and how this didn't auger well for a new global agreement for setting greenhouse gas-emission limits and a worldwide price on carbon.

The chemicals industry needs clarity. A global price for carbon would enable companies to plan R&D investments over the long term.

I also discussed how it seems more than likely that if no global agreement on carbon prices was reached, countries and regions with pricing mechanisms already in place would have to impose import tariffs based on carbon content. The tariffs would be levied on intermediate and finished goods from places where there were no carbon-pricing mechanisms.

But in this thoroughly globalised world, who should bear the blame for CO2 and other emissions?

Christopher L Weber from the Carnegie Mellon University in Pittsburg, Pennsylvania and his colleagues have concluded that one-third of China's CO2 emissions are the result of exports. This is up from only 12% in 1987 and 21% in 2002.

Could proof of collective blame for emissions made through the WTO or other international bodies result in icarbon mport tariffs becoming unworkable?

You could spend fruitless years and millions of dollars in lawyers' fees trying to determine what percentage of tariffs to levy on companies at different points of production and logistics chains.

Shouldn't anyone who exports to China - whether for re-export or domestic use - carry the can for the country's emissions?

Might unworkable import tariffs force the EU to scrap or limit its cap-and-trade system out of fear of an investment drift?

The next US president could also be deterred from introducing a price on carbon, especially if the economic crisis drags on. Protectionist sentiment has risen since the slump began.

Continuing my environmental theme, I've been musing over building a new training course around helping companies help their employees to think outside the box. This is a tough task in certain companies and cultures.

As Benjamin Franklin so wisely said, "insanity is doing the same things over and over, and expecting a different result."

So employees at every level in every chemicals company need to keep up-to-date with
the rapidly shifting environmental agenda from product development to legislation.

A starting point might be reading Doris de Guzman's excellent blog, Green Chemicals. This focuses on all the renewable, or maybe less unrenewable, products out there.

But navigating the mountain of information - and of course sorting the truth from the fiction - requires a special set of skills.

You then need to put this knowledge into practice by proactively redefining your job role to take advantage of the green revolution.

Whether you are a chemicals engineer, a sales and marketing, an IT or an admin expert- whatever - every aspect of every business will be reshaped by the environmental crisis. There is career-progression to be achieved by making yourself more useful.

And if you are a CEO you need to manage this knowledge effectively - e.g. by making sure it doesn't fly to the door when your top staff get headhunted.

You, of course, also need to have the right leadership qualities to make sure strategy is both developed and implemented. Victor Newman - the knowledge activist - gives some interesting ideas on these themes.

Ultimately - and I really feel there is no turning back - it might be a case of innovate or lose your job. The old ways of doing things won't keep companies in business for much longer.

Anybody in their late 40s or older might not need to worry as retirement, or a nice fat redundancy pay-off, could arrive before the unmentionable finally hits the revolving air-cooling device.

But for those who are younger, dramatic changes in legislation - and in the way the climate is behaving - seem inevitable during their working lives.

There is also the problem of depleting oil and gas reserves and rapidly rising and competiing sources of demand. An article from Joe Kamalick highlights these issues when he examines shale gas in the US.

Watch this space for more discussion on this new training programme - and on what companies are already doing to fill the environmnental knowledge and expertise void.

Only in America, surely.

If I had made this up you wouldn't have believed me. Rocky Twyman (see picture above), Founder of the Pray For The Pump Movement, and his pals have been touring the US asking the big guy in the sky to intervene and bring down the price of gasoline.

Watch Rocky and his fellow believers in action in Washington DC - where they apparently suceeded in reducing prices from $3.99/gallon to $3.91/gallon thanks to a rousing, if a little tuneless, rendition of "We shall overcome gas prices".

What's quite clearly needed is for some divine intervention, Old Testament Style, involving perhaps a little smiting of carbon molecules, to speed up the process of creating new and easily accessible crude oil reserves - by several hundred millions of years.

Maybe Mr Twyman is right and all that there is left for us to do is pray.

Either that or stop driving disgustingly huge gas-guzzling cars, cut back on the gargantuam-portioned meals that further waste precious hydrocarbon resources (and result in very large Americans who need those bigger cars and bigger clothes - again using yet more hydrocarbons).

Heaven forbid that Americans should change their lifestyles. It's far better, surely, to tell the developing that they can't have the things that America's got and continue believing that cheap and abundant gasoline in the States is a God-given right.

Grrrrrrrrrrrr..................

Believing what you want to believe (or pretending to believe in something because it's in your commercial interests) has always been a problem.

But the stakes have never been higher than in the case of climate change. To yet again refer to the excellent New Scientist magazine, their editorial from the 13 August issue says that predictions are for a modest cooling of the atmosphere over the next ten years because of natural oceanic oscillations.

Robert Watson, former head of the Intergovernmental Panel on Climate Change, observed earlier this year: "Let's say there wasn't much of a warming for the next ten years. How will the public and politicians play this out?"

Watson has warned that - regardless of what happens over the next decade - the earth could heat up by 4% before the century is over, with disastrous consequences.

He was right to worry that evidence of cooling would lead to a backlash against global warming. I did a quick Google news search today and found this link.

I am not a scientist but from what I've read and studied (and, of course, I might be believing what I want to believe!) I think global warming is a reality.

Regardless of who is right or wrong it would do no harm for the chemicals industry to plan for a future shaped by either the reality of significant man-made climate change or the perception that it will happen.

As I have said before further legislation on emissions, recycling etc seems inevitable whether its country-by-country, through big multilateral agreements or a combination of both.

In the history of the planet, ten years of cooling would be an immeasuraby small fraction of a second.

And in the history of oil, the last few weeks amount to almost as small a passage of time. Still, this hasn't stopped a groundswell of opinion developing that recent price falls have also exposed another bogus theory - that the fundamentals of oil supply and demand point to tight markets for at least the next five years.

I'll be blogging on this in more detail over the next few days (as I write, prices have actually rebounded to above $119 a barrel on the East-West crisis), but the comparision with global warming is worth making here: companies might stop making the necessary investments to secure their long-term future.

In the case of oil, this might result in less interest in accessing harder-to-get-at reserves and in renewable energy.

This article, by David Strahan, author of The Last Oil Shock, says that it would take three million coconuts to power one flight from London to Amsterdam on 100% biofuels.

Some of the comments posted at the end of this excellent article, first published in the New Scientists, agree with Strahan that we have reached "Peak Aviation" - no matter what the developments in second-generation biofuels.

The first generation nonsense of corn-based ethanol (as Andrew Liveris pointed in my post yesterday) and palm-based biodiesel have been thoroughly discredited.

But what the Strahan research also contends is that even the much-touted next wave of technologies will never realistically be able to 100% replace hydrocarbon-based fuels for aviation, transportation and power generation. The argument can also easily be extended to the chemicals industry, which, of course, is so tied into the production of transportation fuels.

Strahan supports this view with another startling calculation: an area bigger than China (10 million kilometres squared) would be needed to provide enough biomass to completely replace the world's current demand for fossil fuels for all forms of transportation.

Then you need to contemplate the likelihood that we have reached, or are very close to reaching, Peak Oil. The huge growth in crude demand from developing countries is pushing us much closer to Peak Oil, if it hasn't already arrived.

In The Last Oil Shock, Strahan quotes Dick Cheney in 2001 as characterising Republican energy policy thus: "Conservation may be a sign of personal virtue, but it cannot be the basis of sound energy policy."

But just a few years later, shortly after hurricanes Rita and Katrina had exposed the fine balance between crude supply, refinery capacity and demand, President Bush said: "We can all pitch in by being better conservers of energy."

Winston Churchill saved Britain, and the world, from the Nazis. He was, though, widely viewed as mad - even by many prominent Americans such as Joseph Kennedy - for sticking it out during the dark days of the Blitz.

The parellel here is that we need politicians and business leaders with the courage not just to react to temporary crises, as Bush did by telling people to conserve after the 2005 hurricanes.

We need the next president of the US to persuade the public to accept one-car ownership, greater use of public transport and recycling. A visionary leader has to emerge who will, in the long term, be willing to dismantle the whole structure of our current consumer economy through persuasion backed up by tough legislation.

The short election cycles in the US - when as soon as you are elected, virtually, you need to start worrying about the mid-terms and then your own re-election bid - might prevent any such leader emerging.

Equally, oil and chemical company CEOs don't last that long. Even the current generation of leaders might be well into comfortable retirement by the time our modern way of life collapses as energy runs out.

There's a marvellous line in Ian McEwan's great novel, Saturday, where the main character enjoys a shower after a game of squash and reflects that his could be last generation to enjoy luxuries such as limitless hot water.

Our supposed betters, the politicians and the business leaders, need to have the courage to tell us, to make us, consume less - and American has to take the lead (as it eventually did, albeit a little belatedly, in the Second World War). Only if America takes the lead on conversion, and on climate change, will the result of the world follow.

We need the CEO of a plastics company to, for example, to come out and say "please use less of our products, for the good of humanity". You can just imagine the reaction of his or her fellow Board members, however,

In this era of short attention spans fed by soundbites, spin, Google and YouTube - leading to erratic voters and equally erratic and fickle investors - visionaries of this nature are unlikely to emerge.

We are living on borrowed time

The good news on the radio as I came into work this morning was that Hurricane Gustav had weakened in intensity with forecasts that it might make landfall in the US with wind speeds of less than had been earlier feared.

But this is not the point. The point, as Jeffrey Rubin of CIBC World Capital Markets makes in his report - Supply Crunch - is that just as the US has come to rely more on US Gulf oil and gas production, the frequency of high grade storms (class 3 to 5) in the region has increased.

"With both crude and total oil production inventories running significantly lower than they were when either Katrina or Rital sidelined Gulf oil production, both oil and gasoline prices are more exposed to potential storm-related disruptions than they were three years ago," he writes.

This blog isn't about the short term. But the the short term tension in crude and crude-product markets created by this latest hurricane scare is the result of tightly balanced supply and demand that has long-term implications for the global economy and for our hydrocarbon-dependent way of life.

The Gulf region - now so much more important to US supply because of production problems elsewhere - has itself suffered from delays to new capacity coming on stream. The BP Thunder Horse project, for example, is behind schedule - meaning that new production has grown at a fraction of earlier predictions for the Gulf. This has compounded the crisis caused by depletion of offshore fields as existing oil wells run dry. For example "some one-and-a-quarter million barrels per day from Mexico is likely to vanish (over the next five years) as its giant Cantarell field continues to deplete at a 30% annual rate", Rubin adds in his report.

Without getting into the argument over whether the increased frequency of severe storms in the Gulf is the result of global warming (or whether a long-term pattern of more dangerous weather has established itself - a view dismissed by some in the three years since Katrina and Rita because the region has so far escaped major hurricanes), there seems to me no dispute that supply is very stretched in the Gulf and globally.

Talk of demand destruction in the US benefiting crude pricing over the long term was earlier dismissed by Rubin. He estimated that by 2010 there will be 12 million less motorists on the road in the US. The problem is that ten new motorists in countries such as Brazil and India are buying cars for the first time for every one that leaves the roads in the States, he said.

High oil prices might slow down the pace at which people in emerging markets switch from push bikes to motorcycles and from mortorcycles to cars.

But without a global recession of a severity we have never seen before, it's hard to see how the slowdown will be enough to result in a net reduction in global oil consumption sufficient to end the crude crisis.

Chemical prices have gone through the roof this year on higher feedstock costs, causing greater recycling, greater conservation and a slowdown in the rate of substitution of petroleum-based products for natural materials in emerging markets.

If Gustav causes severe damage to oil and gas production and any further severe hurricanes hit the region this year (Tropical Storm Hana is brewing off the coast of the US as I write this post), the chemicals industry could lose even more ground.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Click here for some positive thinking - Energy%20Carta%20Conference%20Executive%20Summary_general%20150808.pdf

The Asian Energy Youth Summit - organised by the non-profit organisation Energy Carta - is an example of doing something about the climate-change challenge.

Speakers at the event which takes place in Singapore on 30-31 October (please click the link at the top of this post for the full PDF) include Shai Agassi of Project Better Place and Stefan Mueller, Asia Pacific managing director of Conergy.

What's heartening is that a chemicals engineering undergraduate at the National University of Singapore is one of the founders of Energy Carta. The chemicals industry is part of the problem and can hugely reshape its image for the better by being part of the solution.

In what could be the world's first fat tax, the State Employees' Insurance Board of Alabama is to charge extra insurance premiums for employees with a body mass index over 35 from 2010.

The southern state enjoys the dubious status of being the most obese in the whole of the US, just pipping Mississippi for the top prize.

Now before you make any jokes about fat Americans, there is a serious point here.

We are consuming too much, whether its pizza with extra cheese injected into the crust - that great invention of the Americans, gasoline or plastic bags.

The world's metaphoric waistline is expanding beyond its means and maybe this type of tax is the way forward to make us consume less.

But, of course, being overweight can be genetic and is very often nothing at all to do with overeating.

The giant portions in American restaurants don't help, however. Americans must throw more food away than Africa eats each day.

Perhaps the fast-food companies should be ones penalised.

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

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

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

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

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

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

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

A very interesting report by McKinsey (you can sign up free for their online newsletter which only takes a minute) expands on the theme of reverse globalisation which I talked about last week.

The cost of shipping a standard 40-foot container has tripled since 2000 and labour cost increases have risen by average of 19% per year in China compared with just 3% in the US.

The consultancy makes the point that you have to do very thorough input-by-input calculations for each product and grade of product before making any decisions. And, of course, you need some reliable forecasts of where the economics of offshoring versus onshoring are heading - including predictions on crude-oil prices. Predicting crude, as I discussed earlier on today, is where I fall short.

You also need to take a view on the direction of environmental legislation - i.e. will there by carbon taxes and/or cap and trade systems introduced globally that penalise producers for extended global supply chains?

If history is anything to go by, McKinsey has worked out that manufacturing a "midrange" product in Asia will cost you an extra $16 today compared with the US when all landed costs are included. In 2003, Asia had a $46 advantage.

Add to this the likelihood that more petrochemical feedstock will become available in the US thanks to declining gasoline demand and perhaps, as again I talked about last week, the industry in the states might be set for a revival. It has been comparatively higher feedstock costs and the drift of downstrean customers overseas that has caused so much damage to the US industry.

For anyone who subscribes to ICIS news, you might find this artice of interest. Allen Kirkley of Shell discusses some of the new emerging feedstock options and converging economics between the West and the Middle East.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Apparently it's a fallacy - ostriches don't stick their heads in the sand.

Investment bankers frequently do, though, especially all the greedy ones who only cared about their end-of-year bonuses when they knew perfectly well that the credit crisis was on its way.

I am sitting here sipping a beer and thinking "Oh my goodness, this really could be as bad as the Great Depression" now that Lehman Bros has been forced to file for bankruptcy.

But the danger is that we'll all forget about the even bigger threat to the global economy which is yes, you've guessed it, Peak Oil and climate change.

We'll all be so grateful when the credit crisis is over that we'll rush out and buy more garbage we don't need, jet around the world once again, talk excitedly about emerging-market growth, and bang - the price of crude will be close to or above $150 a barrel again (not that current levels in the historical context are anything to cheer about).

Read the last chapter of David Strahan's The Last Oil Shock to put the credit crisis in perspective (read the whole book, but the last chapter provides some practical ideas).

The survivors of the energy crisis over the next 20 years will be those who are the most energy efficient. So start growing your own vegetables, invest in energy saving in your home and for goodness sake, sell your SUV you self-indulgent idiot.

The value of your home, your shares and your pension might rebound once the credit crisis is over but in the long run, any investment in the conventional hydrocarbon-based economy seems to be fundamentally flawed.

Back in the heady days of 2006, I asked a group of five like-minded nerds what their favourite business book was.

They unanimously voted for The World Is Flat: A Brief History of the 21st Century by Thomas Friedman.

I rushed out and bought a copy. It has sold by the truck load and was quoted by Mohamed Al-Mady of SABIC during his speech at the Asia Petrochemical Industry Conference in Thailand in 2006.

Back then everybody was talking about a new paradigm of growth, driven by the relentless rise of emerging market consumption. Nobody mentioned that other book, The Limits To Growth, published in 1972 by the Club of Rome, during those heady days of the economic boom.

I ploughed my way through most of The World Is Flat (it is overwritten - all the points worth making could have been made in considerably less than 488 pages) and was profoundly irritated by Friedman's relentless enthusiasm for globalisation.

At that time I must confess I hadn't heard of the Club of Rome book, nor did I give any consideration to the idea that Friedman might be dead wrong for any reason other than a gut reaction to his seemingly boundless optimism.

Now he has woken up to the fact, 36 years after The Limits To Growth was published, that indeed this might be the case with his new book Hot, Flat And Crowded.

In a review in the Financial Times, Rahul Jacob makes the point that we should have all seen the weaknesses behind Friedman's flat earth theory.

Friedman was entranced in his earlier tome by the rise of India, particularly the booming IT hub of Bangalore.

"I have lost count of the times friends or relatives in India have forwarded by email Mr Friedman's comment that, while his parents told him to finish his dinner because there were people starving in India and China, he told his daughters to finish their homework because there were people there eager and willing to take their jobs," writes Jacob in his review.

As Jacob points out, the very roads that Friedman travelled along to get to the headquarters of the IT giants point to the limits to India's particular form of middle class, elitist growth; they are pockmarked and hugely congested with ancient patched-up vehicles pumping all sorts of foul fumes into the air.

India suffers from a self-inflicted limit to how far it can grow without creating unsustainable social and environment pressures - because of a political system that has created virtual development paralysis.

How can a country with terrible infrastructure, poor irrigation and very low literacy rates ever hope to create sustainable economic growth?

According to the CIA Factbook, India's female literacy rate was only 47.8% in 2001. This compares with 86.5% in China, based on the country's 2000 census, adds the Factbook.

The speed limit on Indian and, of course, also global growth is resources - so presciently highlighted by the Club of Rome back in the 1970s.

I've only just woken up to this reality. Back in the dim and distant 2006, all I cared about was riding the global property and share boom while consuming immense amounts of carbon in pursuit of my career. This involved writing my own much-shorter tomes that encouraged others to do likewise.

Many of us became so enamoured by globalisation that we ignored the fact that there are simply not enough resources available to allow all of us to consume as much as the typical Texan, or more latterly a middle class Indian in Mumbai.

Friedman gets excited in his new book, according to Jacob, about China's potential to lead the way in solving the environment crisis.

I agree that China has potential, but some huge challenges lie ahead.

Idealistic enthusiasm (the ungenerous might use the phrase "gormless enthusiasm", which has applied to many of us over the last few years) might have its place in generating the individual energy to make a difference: Each of us need to find new ways of individual and corporate behaviour if we are to prosper in a world threatened by Peak Oil and catastrophic climate change.

This type of enthusiasm needs to result in more than just further consumption of trees through higher book sales (and when do we have the time to read books like The World is Flat? When we're flying, that well-known environmentally friendly form of travel).

We need to radically change the way we lead our lives.

As oil prices keep on falling, it might be tempting to forget the big picture. I had another frustrating conversation yesterday with a contact who believes that there's nothing to worry about on crude (it was all downs to speculators, he said) and so we could carry on as normal once the economic crisis is over.

Nonsense. If his views are prevalent in his company, his company will eventually be out of business.

Just as an example of how the nature of demand could change, see this article from the Economist about green buildings.

Formaldehyde demand could fall as could demand for the chemicals used in sealants ad adhesives.

But opportunities for increased sales of plastics could exist in "vacuum" windows.

A sustained spell of low oil prices might damage the push towards a sensible energy future.

The crisis will also make it harder to find the money for research and development of new products to provide for this future.

As delegates gather for this year's European Petrochemical Association meeting in the unreal world of Monaco (unreal for the 99.9 per cent recurring of us who don't own Ferraris), I thought it was worth summarising some of the issues discussed on this blog over the last few months.

We've dealt with:

*Oil-price volatility and the likelihood that high and volatile crude is here to stay. Crude at or around $100 a barrel seems to be a new long-term level with the strong possibility that geopolitical shocks could send costs much higher. Supply and demand balances remain tight and as soon as global economic growth recovers we will see much higher prices - meaning that the recovery could be nipped in the bud. Are we heading for a new economic climate where recoveries are constantly set back by rising energy costs? For every one barrel we are discovering, we are consuming three.

*The new credit environment that might well emerge from tougher banking regulations. No longer will it be possible for a truck driver from Iowa earning $20,000 a year to borrow at ridiculous multiples of his salary and at "teaser" interest rates. How these regulations will effect emerging markets his harder to read as Asian governments and consumers are in far better financial shape than those in the West. Many of the banks in Asia have been more prudent. But the events in the US will surely lower the appetite for risk globally - and there is no guarantee that the financial-rescue package will work. Ask your consultants or inhouse researchers you use whether their demand-growth predictions factor in the possiblility of lower growth because consumers no longer have access to as much credit.

*Innovation will be the key as the environment becomes a bigger and bigger issue for the chemicals industry. You need right technologies and the right kind of staff. As there is a possibility of a global carbon tax or carbon cap-and-trade system, do estimates of what this might cost need to be factored into feasibility studies? How feasible will it therefore be - given both high energy costs and the possibility of a price on emissions - to continue building plants long distances from major consumption markets?

*One of the big areas of innovation will be attempts to break the link between the refinery and petrochemical industries. BASF is claiming it could be as little as five years away from breakthroughs in catalyst technology that could change the industry forever, enabling highly competitive petchems to be produced from biogass, natural gas or coal.

And finally, other theme I haven't blogged on yet but will do are plant and energy efficiency. Some very interesting research projects are taking place at the National University of Singapore chemical engineering department into monitoring the exact output of plants in differennt climate conditions and a model that might enable producers to much more accurately predict changes in yields from switching feedstocks. Much more later...

Meanwhile, have a great meeting - and let's hope the economic conditions improve.

I've just returned from a wonderful few days in Perth, Western Australia, where the motorists don't as a rule try to kill you (unlike in most of Asia) and if you are a tourist at least, you can come away with the false impression that the cork-hatted people have got the balance between work and other things that matter more sorted out.

Anyway, to the point after that ridiculously long sentence. I failed the Koala Bear test in the gift shop in Yanchep National Park .

On sale was a stuffed Koala Bear toy made in Australia at $11.80 in Australian dollars. You could also opt for an "Inspired in Australia" version (I tried to establish what this meant with the shopkeeper, but she hadn't a clue. What Koala Bear is not inspired by the Antipodese, for goodness sake?) at $5.50.

Or you could for the Chinese version at a staggeringly cheap - and no doubt nasty in some horribly chemically polluting and toxic way - $2.50.

We all might want to save the planet by lessening our carbon footprint (blah, blah, blah) but in these straitened times with my investments plummeting in value, I went for the Chinese version on the grounds that my 21-month-old son would very quicky lose the thing anyway (sorry, another long sentence).

Ten minutes out of the shop Mr Koala Bear ended up face down in a puddle.

This was the wisest investment decision I've made for the last two years.

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

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

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

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

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

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

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

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

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

The dinosaurs are back......

The new "green team" appointed by president-elect Barack Obama might, after all, turn out to be a dream team for the US chemicals industry. This is despite what some of the old disonaurs within the industry seem to think.

A US energy policy needs to place a genuine long-term cost on gasoline, thereby encouraging, belatedly, the kind of innovation that might just save the domestic auto industry and provide a huge boost to chemicals. Higher gasoline taxes need not be political suicide if they are accompanied by explanations of potential tax cuts, or even credits, for energy-positive steps such as, for example, installing solar panels.

Greater conservation - one that's not just driven by the economic crisis - might reduce a huge defence bill that's created global political instability, increased terrorism and created an untold number of deaths and misery for millions. A lower defence bill would mean huge tax savings.

It would be good if some of those in the oil and gas industry could move away from their long-term obsession with drilling. The obsession reached it's trivial low-point with Sarah Palin's campaign slogan, "Drill bay,drill".

Drilling alone will do little to reduce the US dependence on imported oil unless it goes along with greater conservation.

And anyway, you can make a strong argument that wrecking the Alaskan Wildlife Refuge will make very little long term difference to US energy vulnerablity, while creating a legacy of the loss of yet another beautiful wilderness for future generations.

There also needs to be a gradual movement away from conventional hydrocarbons to unconventional ones (provided the environnmental impact can be neutralised through heavy investment in carbon capture and storage, which will probably need big initial government backing to get the economics off the ground ) and to renewables.

Trendwatching.com, an Amsterdam-based consumer trends analysing service, has included something called Econcierge in its outlook for 2009.

This involves a new breed of less conspicuous consumers, straitened by the credit crisis or maybe feeling guilty for the wallops of cash that they made during the boom, who will now be searching for value - and for a conscience-salve in everything that they buy.

What will this mean for chemicals next year? People taking a closer look on the claims on the proverbial tin, expecting whatever they buy to last longer, to be cheaper, and to be made from recycled material - or from chemicals that are proven to be les harmful to the environment, perhaps.

This might be more of a phenomena in the developed rather than the developing world, where wealth affords the luxury of greater concern about the future.

How on earth do you measure this in losses per tonne of sales of good-old bulk commodity chemicals - assuming that these trendspotters are correct?

Do you have a plan, assuming you think you need one?

To quote Woody Allen, "More than any time in history mankind faces a crossroads. One path leads to despair and utter hopelessness, the other to total extinction. Let us pray that we have the wisdom to choose correctly."

It's refreshing that this was written by an American, given the widely held perception that most of the nation's citizens lack a sense of irony.

As we enter the New Year, gallows humour seems very appropriate as the bad news multiplies from the cancellation of the K-Dow deal to the possibility of LyondellBasell filing for Chapter 11.

My good friend and colleague Paul Hodges makes the following comment on his blog, Chemicals & the Economy: "Petrochemicals has always been a highly cyclical industry. A typical seven-year cycle involves two years of stunning profitability as demand recovers after a downturn, three years of average returns as supply and demand rebalance and two years of horrendous losses."

If you take the start of the upswing as 2003 therefore, the Lyondell and Basell merger in December 2007 was a big risk. Perhaps those who negotiated the $20bn deal believed that cyclicality was dead.

What has, of course, made highly leveraged companies very vulnerable in this downturn is the severity of the credit crisis.

The way forward? Bring in the restructuring consultants, cut, cut and make more cuts and focus on making chemicals as cheaply as possible. The difficulty will be balancing this need with retaining sufficient R&D investment to cope with the inevitable increase in environmental legislation.

Source of Picture: The Earth Institute at Columbia University

I was speaking to a Singapore-based trader this morning over the reasons behind the polyolefin price rally.

PPPEPrices2006-Aug09.ppt

Here are his views:

"A maor factor has been a lack of availability of recycled material. This is because people in the West are buying less durable consumer good, for example electronics, which arrive wrapped in plastic.

"Last year was also very good for selling fillers to make virgin polymer go further. For example, I was able to sell lots of calcium carbonate at $900-1,300/tonne. This year I haven't sold a single tonne."

Very interesting stuff - especially when you consider that in the last few years imports of scrap plastic have taken around 4-5 percentage points of China's polyolefin demand growth.

Ron Kirk faces a tough balancing act

Source of Picture: United States Mission - Geneva

"The rebuilt American economy must be export-oriented and less consumption-oriented," said Larry Summers, Director of the US President's National Economic Council, earlier this month.

But, as The Economist says in this article, this will be a little like turning a giant oil tanker in the opposite direction; meaning, it will take considerable time during which America will suffer sub-par growth, warns Mohamed El-Erian, CEO of Pimco - the world's largest bond investor.

So what's going to happen when the US has to start reining back its huge budget deficit through cuts in economic stimulus? Will the economy have been sufficiently transformed by then?

Or could the US be dragged into a wave of protectionist policies in order to protect domestic industry in the absence of a rise in exports sufficient to make up for all that lost government stimulus? Goodness, that sounded like a mouthful.

It might not be the protectionism we are all familiar with - for example, antidumping duties which are more favoured by the developing world.

Instead you might seen much greater scrutiny of imports from the developing world on the grounds of safety and carbon emissions (by this point, if the House of Representatives gets its way, there could be a carbon import tax in place anyway for countries that don't sign up to a US carbon trading scheme).

Closer attention might also be paid to the working condition, and pay of labourers in countries such as China. Ron Kirk, the US trade representative, recently gave a speech to steel workers in Pittsburgh in which he warned America's trading partners about violations in labour standards.

On the other side of the world, China - as we've written before on this blog - might have to also rein back government spending and order the banks to reduce loan growth.

And in order to repair the their balance sheets, the banks may be forced to raise deposit rates.

If rates rise by enough the real cost of borrowing (i.e. the rates minus inflation) will be positive again.

Real deposit rates becoming positive led to the last real-estate collapse in 2007 and a wider economic slowdown in China.

This could hamper the country's efforts to rebalance its economy in the opposite direction to the US - away from exports and more towards domestic consumption.

Thus in a desperate effort to protect growth, the Chinese government might be even less likely than at present to let the Yuan strengthen. A stronger Yuan would make it a lot easier for the US to raise its exports.

The chemicals industry might be well advised to plan for a very nasty trade war.

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)

....what do these environmental issues mean for Thailand as an investment destination?

The Map Ta Phut refinery-petrochemicals complex

Source of picture: Pattaya News

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

Here's yet another unexpected project delay that could prop up markets in the fourth quarter.

The Thai Central Administrative Court decided to halt construction of 76 projects at Map Ta Phut on environmental grounds last week.

The long list of projects includes new crackers and derivative projects by PTT and Siam Cement/Dow Chemical.

PTT was due to have started commissioning a new 1m tonne/year cracker complex in the fourth quarter, while Siam Cement and Dow Chemical's 900,000 tonne/year cracker and downstream plants were scheduled to commence operations next year.

Both of the Thai companies have issued statements that the projects are likely to be delayed, and PTT has even decided to delay a maintenance shutdown at one of its crackers from October to January 2010.

Thailand is already a net exporter of PE and PP and the new projects would have increased the country's export burden.

One local newspaper report said that projects could be delayed by a year, although the two companies have not yet declared revised start-up dates for their projects.

PTT issued a statement that it was working closely with government authorities to resolve the crisis and that it had submitted a petition to a higher court. The prime minister has already asked the industry ministry to appeal against the ruling.

The Bangkok Post reported that the appeal would be made in two parts.

The first section would ask for court permission to allow industrial projects that have no impact on the environment to continue, while the second would seek a temporary halt to projects that had problems with environmental impact assessment (EIA) studies. 

The story did not identify projects that had EIA problems.

There is no doubt that the government will have to act fast. But it faces a tough task of balancing public opinion and expectations while protecting the interests of local and foreign investors.

Public opinion - seen in some of the comments that the Bangkok Post report has drawn - will be difficult to ignore.

It might be even harder to address growing concerns about Map Ta Phut as an investment destination in Southeast Asia.

This latest crisis in Thailand is also a fresh reminder of the growing power of the people in many parts of Asia to influence chemical-project activity.

Protests against construction of mega projects on environmental grounds are getting louder and louder.

Money to be made, or saved, again?.....

Source of picture: www.evworld.com

After last week's estimates, a big producer (who wishes to remain anonymous) has given us his forecasts for the strength of 2009 growth in demand for polyolefins in China - see full details in the article below.

Interestingly, he saw the dip in recycling as a big factor in this year's extraordinary recovery. 

We all know about the strength of China's economic rebound - sustainable or otherwise - but it could be that keeping a much-closer track on the recycling industry will also be a key factor in 2010.

With the delta between recycled and virgin material recently close to the minimum $400/tonne and if this trend continues, it will be interesting to see whether next year sees some reverse substitution.

A lot will depend on government regulations that have made it harder to ship scrap to China, and how many traders are prepared to take the plunge again. As long as there is a danger of a sharp correction in crude, trading in scrap could remain too-risky a business for many. In Q4 last year, a lot of the traders in recycled plastic went bust during the big oil-price correction.

A lot will, of course, also depend on the outlook for new virgin-resin supply - which we covered earlier today.

By John Richardson

China's polyethylene (PE) and polypropylene (PP) virgin resin demand will rise by 20-35% in 2009 over last year on a lack of recycled material, strong domestic demand and speculation, estimates a leading exporter to China.

High-density polyethylene (HDPE) demand will grow by 35% to around 7m tonnes, linear-low density polyethylene (LLDPE) by 19-20% to 4.5m tonnes and low-density polyethylene (LDPE) by approximately 20% to 3.3m tonnes, said the exporter

PP demand would grow by 20% to 12m, he added.

This follows either dips in demand during 2008 or modest increases, depending on which grade of polyolefin. LDPE fell by 7% and PP by 1% with LDPE rising by 3%, he said.

"A factor behind the strong recovery is the lack of availability of scrap material, forcing converters to switch back to using virgin product," said a Shanghai-based markets observer.

A drop exports of finished goods - delivered wrapped in plastic film which is shipped back to China for recycling - was behind the reduced availability, he added.

"Some traders who had dealt in scrap have also switched to virgin resin, boosting the amount of trading activity in new material."

Many traders in recycled material also went bust in Q4 last year when scrap prices fell below  the cost of virgin resin - placing further strain on the distribution network.

A further factor has been tougher government regulations restricting scrap imports on environmental reasons.

Virgin resin prices had also remained too low to justify converters using scrap material for most of this year, said a Shanghai-based source with a major polyolefin producer.

"In September, though, the delta or gap between recycled and virgin material - which has to be a minimum of $400/tonne to make recycling economic - was almost reached," he continued.

"This was the result of very tight supply of virgin product and the cost-push from higher crude oil."

Domestic polyolefin demand had surged on huge government economic stimulus, including a rise in bank lending, he said.

"This has led to a steep rise in automobile and real-estate sales with the resulting rise in property prices triggering a construction boom."

Government vouchers providing discounts of the price of white goods such as washing machines and refrigerators were also behind the recovery in polyolefins, he said.

The big rise in bank lending had also fuelled speculation, he added.

"Non-traditional traders entered the market who only wanted to get their hands on polyolefins in order to use the 90 days' credit for something else."

They would take the credit and use it to speculate on say equities. Sometimes they made such big profits out of the stock market that they were willing to sell PE and PP at a loss."

This is trend apparent across other chemicals and polymers, adding to price volatility.

A real head scratcher......

Source of picture: www/http://blogs.miaminewtimes.com

By John Richardson

Confused? Sorry, but so far we cannot be of much help bringing any precision to what the implications of Thailand's Supreme Court ruling will mean for the timing of petrochemical start-ups.

If you remember, last Friday we wrote about how the Supreme Court had backed the verdict of a lower court which had halted development of $12bn of petrochemical and power projects at the Map Ta Phut site (or should it be Mab Ta Phut?).

Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claimed that most of its 25 petrochemicals projects would be unaffected by the verdict.

The reason it gave was that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.

Media reports said that former prime minister Anand Panyarachun would review the court ruling and make recommendations in the first quarter of next year.

That seemed clear as watered-down mud can be.

But then later the same day - last Friday again - PTT provided us with a list of 65 projects formally under suspension.

These include more projects than we had earlier listed - for example, bisphenol-A (BPA),  and polycarbonate (PC) expansions by PTT and Bayer respectively and polyvinyl chloride (PVC) and vinyl chloride monomer (VCM) expansions by Thai Plastic and Chemicals.

What remained unanswered was whether progress on the Siam Cement/Dow Chemical complex had been halted.

The complex includes 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene).

Also at the site will be a big new metathesis unit downstream of which will be a polypropylene (PP) unit (currently checking the capacity).

In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects.

So we asked Dow to put the record straight.

Sadly, this was their statement today: "We are currently assessing the impact of the Court's decision. We are in full compliance with existing regulatory requirements and remain highly committed to ensuring that all of our projects fully comply with government regulations."

Perhaps nobody knows, in which case I am sure everyone would welcome a great deal more clarity.

Stop complaining - it's actually colder inside!

Source of picture: www.gulfnews.com

By John Richardson

As northern China shivers from the coldest temperatures in decades, one Western ex-pat based in the country vented his spleen on cultural impediments which cause huge energy wastage - and prevent everyone from keeping a little bit warmer.

"My colleagues keep their coats on while at their desks so they can open windows to circulate fresh air.

"Our cleaners and security guards do exactly the same - they open windows in corridors no matter how many times you tell them not to.

"For a long time there's been a lot of talk about 'American Exceptionalism', the concept of how we view our way of life as distinct and unique and one that shouldn't be messed with or criticised.

"I think this increasingly applies to China and the attitude towards energy conservation is one small example."

Also at the heart of the problem is very low electricity costs compared with the developed world, the ex-pat continues.

And buildings are 6-10 times less well-insulated than those in America, he adds, creating a huge demand-growth opportunity for the polymers used in the insulation - including polystyrene (PS), polyurethane (PU) and phenolic resins.

But, sadly, the nature of building construction in China seems to be holding back progress: Typical apartments are mass-manufactured as concrete and solid-walled boxes with therefore no cavities in which insulation material can be inserted, he says.

The other extreme is in summer where, if you have the misfortune to be wearing a suit and tie working in an office in China, it can be akin to a visit to the sauna - again because of insufficient use of insulating materials and poor ventilation.

So if you visit northern China while this cold spell continues make sure you pack a thick coat, scarves and gloves etc - to wear in as well as outside the office.

By John Richardson

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

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

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

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

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

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

                                                       Regional PVC Capacity Additions

.

Source of graph: ChemSystems

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

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

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

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

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

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

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

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

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

Deepwater disaster expected to impact shale gas 

Source of picture: Minnpost.com

By John Richardson

THE booming shale-gas industry could either benefit or suffer from the BP Gulf of Mexico oil-well disaster, with the end-result determined by the effect on energy prices of any long-term clampdown on deepwater and Arctic drilling.

Those for and against shale gas are lining-up to make their cases as to why the BP catastrophe will be a negative or a positive for what Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says is "the most significant energy innovation so far this century".

An executive with a Houston-based oil and gas services company told the blog: "Shale gas may well enjoy an easier regulatory ride in the US in light of the fact that deepwater and Arctic drilling is going to be a lot more problematic.

"If you can't get your energy from far out at sea or under the Arctic and the US still wants to improve its energy security, then shale gas is the obvious solution as it is onshore and therefore easier to deal if there is an incident. It's also inherently safer than going offshore."

And he pointed out that politicians will surely decide to pursue the path of least resistance.

"Once Deepwater Horizon has faded in the public imagination - i.e. when it drops out of the 24-hour news cycle - the focus of voters will return to the cost and availability of energy.

"The White House will face the choice of either seeing energy costs rise or letting the development of the perfectly-safe shale gas process continue."

Last month, in a supplement on the natural-gas industry, the Financial Times quoted Scott Van Bergh, an energy expert at Bank of America Merrill Lynch, as saying that higher deepwater hurdles might make shale-gas exploration and production (E&P) easier.

Negative publicity towards shale gas looked as if it had slowed, he added.

But his comments came before two incidents at the Marcellus shale -gas field in Pennsylvania earlier this month. One involved a gas leak and the other an explosion which injured seven workers.

And the hydraulic fracturing or "fracking" process used to extract the gas from the shale remains under scrutiny because of emissions and groundwater pollution claims.

Congress has, as a result, asked the US Environmental Protection Agency to complete a comprehensive study into fracking.

The US-based Natural Resources Defense Council argues that the oversight and insufficient regulations that have occurred offshore are an equal concern onshore.

The outcome of this whole debate could have big implications for petrochemicals.

In the US, the big oversupply in US gas has helped to make ethane cracking a lot more advantageous.

The other factors behind the fall in US natural-gas pricing is liquefied natural gas (LNG) oversupply and the drop in gas demand resulting from the economic crisis.

To date, the benefits delivered to US petrochemicals by the rise in shale-gas production have been indirect through its contribution to the drop in overall gas prices.

Continued E&P is seen as crucial to fulfilling the current forecast that US total gas reserves will last a further 100 years. Before the shale-gas technology breakthroughs, reserves were only expected to last 30 years.

Plus, there may be opportunities for direct feedstock supply from shale gas via any fields which prove to be rich in natural-gas liquids (NGLs).

And overseas, there's huge interest with feasibility studies taking pace in countries such as China, the UK, Austria, Germany and Poland.

The studies in Poland have indicated that shale-gas reserves could raise total European natural-gas reserves by 50%. But questions have been raised about the accuracy of these estimates and how quickly and effectively Polish and other reserves can be developed.

Still, though, the shale-gas revolution - provided it is not stymied by regulations - could benefit petrochemicals outside the US through advantaged feedstock.

This possibility has arisen as the Middle East gas advantage erodes, raising the chance of new places to build super-competitive crackers.

In the end, energy costs and energy security seem certain to set the future of shale gas globally, as well as in the US.

The unfeasible alternative is a radical change in consumer behaviour and lifestyle expectations.

Will he back raising fuel prices to European levels?

Source of picture: sociologycompass.wordpress.com

By John Richardson

IN the midst of the continuing BP oil-spill saga, here's an important question for our American readers: Once the story is forgotten, meaning when it drops out of the 24-hour-news cycle, will you be willing to back tougher legislation that could lead to gasoline once again rising to above $4 a gallon?

Maybe I am reading the wrong reports, but I have yet to see a serious debate about the tough lifestyle choices the world's biggest energy consumer might need to make.

Sure, BP appears to have made lots of mistakes, but even with the best safety standards, pushing the technology envelope hard to extract oil from difficult, remote places may become uneconomic if the wrong kind of regulations are introduced.

Or, perhaps, the alternative is to go for much-tougher deep-sea and arctic drilling rules while providing hell-for-leather support for the US ethanol industry, without having to sacrifrice all those lovely SUVs? As this excellent article from my colleague at ICIS in Houston, William Lemos, points out the US ethanol is sorely in need of more support.

But what will happen if there are no commercial breakthroughs in second-generation technology and the food-versus-fuel debate rears its head again?

And/or as we wrote about earlier this week, the US has huge potential to add more natural gas to its energy mix, but there are environmental concerns over shale gas.

"Most of the risks in shale gas relate to what happens above ground - i.e. accidents in handling the acid used to extract the gas," a senior chemicals industry source told the blog this week.

Presumably, these risks should be fairly easy to mitigate, as indeed they probably have been, by a Responsible Care-style approach.

"What happens underground isn't a problem because the depth of these shale-gas wells is way deeper than aquifers and so the only problem for groundwater pollution would be if there was a rupture. Ruptures shouldn't happen if the right drilling procedures are used," he added.

The debate about the right energy choices needs to be serious, and informed by good science, along with the President of the US being brave enough to stand up and say: "I am going to raise taxes on fuel to the same levels as Europe."

Dream on.....

A Velozzi plug-in hybrid

Source of picture: www.zerauto.nl.blog

By John Richardson

Doom-mongers are claiming the end is nigh with the world heading for a double-dip recession.

This is happening at the same as the optimists are talking of the world entering a new sunny upland of sustained exceptionally strong emerging-market growth, which will more-than compensate for lingering problems in the West.

At ground level in the chemicals industry the view is equally divided with specific commodity polymer markets showing significant stress, such as a polyolefins in China where the reasons behind price corrections point to problems with the sustainable-boom story.

You can contrast this with strong year-on-year and, more significantly, sequential improvements in financial results, and bullish statements about the medium and long-term outlook from companies such as Dow Chemical.

The truth might be between the two extremes with the confusing picture in the West reflecting a shift in the sources of demand-growth now that economies can no longer be driven by the credit-fuelled consumerism of most of the last decade.

Innovation seems to be the key for chemicals companies to prosper in this changed environment.

As for the emerging world, short-term bubbles aside, it is becoming harder to argue why the rise of China etc will not continue, leading to far greater consumption of both commodity and higher-value chemicals and polymers.

Patrick Thomas, CEO of Bayer Material Science (BMS), in an interview last week, described the nuanced nature of the moderate recovery in the US when he said: "There are two parts to the stimulus programme - the first paying-down debt in the financial system and getting the financial system working again through quantitative easing etc; the second investment in energy efficiency.

"While fiscal stimulus might have to be withdrawn from the financial system, energy-efficiency initiatives continue, which include better-insulating 400,000 government buildings. This is an opportunity for our methyl di-p-phenylene isocyanate (MDI)-based polyurethanes (PU) going into rigid-foam applications for insulation."

He accepted that the collapse in home starts - and negative equity that's preventing people from moving house - were significant problems for toluene diisocyanate (TDI)-based PU used for flexible foams in mattresses, furniture and chairs etc.

"We have seen somewhat of a recovery, though, thanks to people who are not moving home upgrading their existing properties.

"This has helped boost the sales of, for example, composite wood panels - using BMS PU adhesives - which are used to help build home extensions.

"On the polycarbonate (PC) side, we have benefited from an increase in sales in office automation machines.

"These machines, which are replacing people, combine functions such as photocopying, faxing and emailing into one unit - and the casing for these units is made from BMS acrylontrile butadiene styrene (ABS)/PC composite."

But he added that "people who are unemployed staying unemployed" would obviously hinder the recovery.

BMS is also working with Velozzi, the US, California-based new technology car company, which is developing a plug-in hybrid SUV-sized vehicle.

"In the US, people like to drive their giant SUVs and so one challenge is to make big all-electric cars with energy efficiency boosted by increasing use of light-weight plastics. The fuel-efficiency theory, through the use of these light-weight plastics, also applies to gasoline and diesel vehicles.

"The Velozzi car will use our PC glazing material and our open-cell carbon fibres with a PU skin which is moulded into body-work components."

As for China, he repeated the well-known, but still startling, statistic that China produced more cars in 2009 than the US.

"In the future, most of the new cars China produces will stay there as domestic growth accelerates - and these autos are of great value.

"I was picked up from Shanghai airport in a really good family car recently, that didn't rattle or anything, costing just 8,000 Euros."

China's auto manufacturers face far fewer regulations than their European counterparts, who have to comply with a plethora of rules governing, for example, the geometry of vehicles and minimum amounts of illumination, he added.

Lack of red tape is encouraging greater substitution of natural materials by plastics in China.

"The Chinese industry is also much more open to replacing steel and glass with plastics and composites made from plastics because there isn't the legacy issue of existing capacity you get in the US and Europe.

"In the West, a bigger amount of auto components are steel and glass-based as the attitude is "we have the production so we might as well make use of it' ".

But he qualified this by saying that higher EU emissions standards were encouraging greater use of PC glazing.

In China, too, he sees a big opportunity for use for rigid PU foams in insulation, where office buildings tend to heat the outdoors in winter and cool it down in summer as employees either shiver or sweat inside.

As with the other chemicals majors focusing on innovation, Thomas talked of the big global trends driving future growth. These include ageing populations, food and water.

BMS has developed PU-based lubricious coatings for use in catheters and other medical products.

"Globally, 50% of all the food produced is wasted and so there is a huge opportunity for rigid foams used in insulation for refrigeration in food transportation, storage in shops and finally in refrigerators in homes," he added.

"Thirty per cent of water in old cities leaks because of faulty piping. We have a PU material which you can spray inside a ruptured ceramic or metal pipe without having to dig the pipe up. This forms a whole new pipe within the old one."

It seems clear that the growth story is not straightforward - and not one that can be told only by looking at key economic indicators and relating these back to chemicals.

New sources of value for the chemicals industry will continue to develop, requiring a great deal of R&D investment, talent - and failures as well as successes.

BMS spent Euro207m on R&D in 2009, not including joint development activities with customers. This was from sales of Euro7,520m.

"Forty per cent of our products didn't exist five years ago. Some of this involves minor modifications along with new products," said Thomas.

In the final analysis, and in a nutshell: Anybody without overwhelming feedstock-cost advantages - or support from non-profit motivated state ownership - has little choice but to go down this route.

Source of picture: www.sierraclubgreenhome.com

By John Richardson

WHEN the bisphenol-A (BPA) health scare erupted a couple of years ago I rushed out and changed all my baby boy's milk bottles to ones made from polypropylene (PP).

"Did you know that there are concerns now being expressed in Europe about the plasticisers used in your PP bottles?" a senior industry source informed me the other week.

Oops, or as we say in Britain (please re-watch that old movie, Notting Hill to hear this phrase in action), oops-a-daisy.

There are also claims that epoxy resins used to coat cans of baby milk-powder - which you will obviously need to use whether you have stuck to polycarbonate bottles made via BPA or have switched to PP - leach a fair amount of BPA.

Environmentalists once characterised chlorine as the "Devil's Molecule", partly over concerns about the dioxin levels released during incineration of PVC waste.

"Crematoria are a bigger source of dioxin emissions," claimed the same industry source and so perhaps we should all make a big push for more burials.

Death rates would have been a great deal higher in the developing world if it had not been for PVC pipes providing uncontaminated water.

There are many other arguments over the benefits outweighing the risks of chemicals and plastics.

One should obviously be sceptical for any positive claims that come from a company producing a particular chemical or polymer.

Nevertheless, as a journalist who used to work for the tabloid (sensationalist) national press in the UK , I am well-aware of how some reporters rarely let the facts get in the way of a good story. These are complicated, important and serious issues and worthy of a serious debate that's unlikely to take place when the focus is on a good headline or sound bite.

And talking about a serious debate, what about the BP (or if you are American, "British Petroleum") Gulf of Mexico disaster?

Once this story has dropped out of the 24-hour news cycle - as we've said before on the blog - will the public be willing to support much more stringent regulations on energy exploration and production if it means gasoline at more than $4 a gallon?

The Indo-Pacific Humpback Dolphin

Source of picture: townsvilledolphins.org

By John Richardson

AS Singapore forges ahead with its petrochemicals-expansion ambitions (it would be unwise for us to share rumours about potential new investors in cracker complexes on Jurong Island), spare a thought for the embattled Taiwanese industry.

The environmental controversy surrounding the Formosa Plastics Group following two fires at its Mailiao complex in three weeks, has resulted in the government delaying issuing a permit for the company's planned refinery, ethylene and downstream expansions.

Even before the fires, Formosa was ordered to launch a second environmental impact assessment study into the proposed investments, delaying the start of construction by six months until the end of this year.

And the already-tormented Kuokuang Petrochemical Technology Co refinery and cracker project at Changhua could face even more scrutiny.

Chinese Petroleum Corp (CPC), one of the shareholders in Koukuang, aims to construct a new refinery and a 1.2m tonne/year cracker which would replace an old refinery and cracker at Kaohsiung.

The project is seen as vital for CPC and small downstream companies as they seek to boost their competitive position versus the all-powerful Formosa.

But even before the Formosa fires, more than 300 academics had opposed the project as they claimed it would endanger coastal wetlands.

It has already been relocated from Yunlin in Taiwan because of a row over water consumption.

The cost of the project has also risen due to the need to provide an eco-corridor around the site for the highly endangered Indo-Pacific Humpback Dolphin.

A rather confusing Bloomberg report says that the project will be scrapped if environmental approval is not granted by 17 November.

Petrochemical producers need to run ever-faster to stand still if they are to remain globally competitive - i.e. they need to be constantly examining new investments in order to maintain economies of scale.

The Taiwanese industry, which has long faced environmental pressures, may now find it virtually impossible to expand at home thanks to even greater public hostility.

Is this therefore the right time to intensify lobbying efforts aimed at persuading the government to lift the ban on building crackers on the mainland?

Patrick Thomas

Source of picture: Bayer Material Science

By John Richardson

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But the electronics industry is slightly different.

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

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

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

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

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

Davos 2011 

Source of picture: eacci.net

By John Richardson

THE edginess and nervousness of Asian polyolefin markets we talked about last week is likely to be part of the mindset of any chemicals company CEO right now.

As my colleague Nigel Davis wrote about last week, the industry's financial results for 2010 are set to exceed all expectations. INEOS, Lanxess and Clariant will see their profits double over 2009, according to S&P analysts. Profits at the world's biggest chemicals company by sales, BASF, are forecast to hit a new record high.

But to what extent will better results be due strong emerging markets while Western demand remains below pre-crisis levels?

To what degree will improved returns reflect inventory building down production chains after a de-stocking overreaction? A classic example and extreme example is the re-stocking which supported US chemicals and other industries throughout 2010 after the great 2008 collapse.

A further factor behind good results will be manufacturing-rate discipline. We saw this in the chemicals industry in 2009-2010 when it became much better at matching production to what, on a global basis, was depleted demand versus before the crisis.

This was the result of plant closures and constantly adjusted operating rates at facilities that continued to run.

All of this can be hard to calculate in the frenzy and noise of any reporting season. Even in quieter periods, numbers can be notoriously hard to analyse correctly.

If all of these factors turn out to be very significant in last year's stellar performances, it will not take the shine off what has been achieved. The industry has clearly been very smart in managing extremely volatile economic conditions.

However, talking about our first point, a lot of companies still depend on the West for a high percentage of their sales.

The blog, along with Paul Hodges at International eChem, believes that many of the policies adopted by Western governments have failed to address to the underlying causes of sub-par growth. This is the ageing of the Babyboomers.

Watch out for much more on this subject over the coming year as we prepare a book on this subject.

Persistently high US unemployment and the state of the country's housing market reflect policy failures.

To what degree has emerging-market growth depended on importing chemicals and polymers for re-export as finished goods to the West? Policy weaknesses of Western governments and a deliberate change of course by the Chinese government are threats to this growth.

And finally and most immediately, the threat of inflation must rank very high in any CEOs concerns.

As we shall discuss later this week there is an argument to be made that hidden inflationary pressures in China indicate that Beijing has lost control of the problem.

We also believe that the crude-oil market is dysfunctional and is firmly in the hands of speculators. Both short and long-term pricing do not reflect demand and supply fundamentals.

As a result, we could well be in the middle of a mini repeat of 2008. Crude seems to have risen to unsustainable levels due to the demand destruction it is causing the ultimate consumers - the motorists, the shoppers etc.

It is always very hard for chemicals-company purchasing managers to assess the extent of this demand destruction and inevitably, as crude continues on a bull run, they will have to buy forward.

"Even if raw-material purchases are only 10% more than normal in any one month, add all those ten per cents together in any product chain and this represents a big risk," said Paul Hodges.

Chemicals companies face inventory losses if there is a crude-oil price correction. We believe such a correction will happen in H2.

But the chemicals companies who innovate for the future can attempt to look well beyond any one set of financial results, provided their investors have patience.

Such innovation needs to be around products that deal with the consequences of demographic changes in the West and surging consumption in emerging markets.

All the above are the big issues confronting not only the chemicals industry, of course, but the world economy as a whole. They should be at the forefront of discussions at this week's World Economic Forum in Davos.

By John Richardson

THE blog held a fascinating discussion with a very well-placed industry observer last week, further underlining some of the key challenges facing the Middle East..

These include the well-documented feedstock shortages that will result in a dearth of new capacity post 2012 - and the difficulty in executing the few projects that are going ahead.

Social stability is a key concern right now across the Middle East as a result of the virtual civil war in Libya and major unrest in Bahrain and Syria.

Just a few weeks ago nobody really worried that much about the push for democratic change spreading to Saudi Arabia. But that was then and this is now.

The consequences for the global economy are almost too frightening to contemplate if the Kingdom, the world's most important "swing" oil producer, was to face significant political and social upheaval.

He told us that only one new cracker project would go ahead in Qatar by 2015 due to limited gas availability for petrochemicals. The three-way tussle between Shell, ExxonMobil and Total for this gas allocation therefore continued, he said.

"I also doubt that some of the other projects in the region - in Saudi Arabia and Abu Dhabi - will go ahead on schedule because financing is a long way from being secured."

Another theme we discussed was the increase in Saudi oil production, which he believes has been from 8.4m barrels a day to 9.4m barrels a day (we discussed this last week).

This will surely result in more pressure on Asian polyolefin markets already struggling with moribund Chinese demand.

But the big issue we kept returning to was Saudi Arabia and the possibility of unrest.

"It is now being seriously discussed because of what we have seen in Bahrain etc," he said.

This linked back to the gas shortages limiting new projects that we mentioned at the beginning of this post.

Soaring demand for gas for power generation is one of the reasons why petrochemicals is being short-changed on supply.

"For social stability reasons there is no way that electricity costs will now be increased in Saudi and elsewhere in the Middle East," he added.

This is a region where power is so cheap that air-conditioning units are left switched on when people go on holiday in order to keep houses cool for when they return.

Without conservation driven by price, and with new reserves of gas likely to be more expensive to extract, the cost and availability of the feedstock for petrochemicals seem certain to remain under great pressure.

By John Richardson

THE soaring confidence of the US petrochemicals industry over abundant ethane feedstock from shale gas could end up being colossally misplaced, as we have discussed before on the blog.

America is the most NIMBY (not in my backyard) of all societies and so it shouldn't come as a surprise to anybody that scrutiny is increasing over the environmental impact of the "fracking process". For example, several Senators said on Tuesday that the Environmental Protection Agency should step up regulations of shale gas because of concerns that toxic chemicals, such as barium and benzene used in fracking, could get into the water supply.

This followed another New York Times article on  Monday ahead of the release of a Cornell University study that will argue that as much as 7.9% of global methane emissions come from shale gas.

The gas is intentionally vented or flared from shale-gas wells or seeps out from loose pipe fittings along gas distribution lines, the study will claim.

This results in shale gas being worse for the environment than using coal for power generation.

But if the US wants to increase energy independence it is going to have to make some tough choices and with crude prices where they are right now, the natural gas industry might well find that its counter-arguments are well-received.

At the very least, though, this raises doubts over claims that the US is set to become the new Middle East of petrochemicals.

Chevron Phillips Chemicals has announced a feasibility study into a new cracker in the States and the blog has heard that that at least two more new facilities are under study.

Several expansions of existing plants are also under study amounting to a total of aorund 1m tonne/year of potential new capacity.

By Malini Hariharan

...is a debate that has starting moving out of the US. A desire for energy independence has seen countries like Poland to embrace shale gas with the government welcoming US companies to quickly develop the country's reserves, estimated at 5.3 trillion cubic metres.

This would be enough to meet Poland's annual gas consumption of 14 billion cubic metres for decades to come and put an end to its need to import 70% of its required gas from Russia, said the Polish economy ministry.

"Let's not be afraid, let's just do our own thing," said the country's foreign minister referring to the environmental issues related to shale gas.

"We just have to keep explaining to environmentalists and local people what it's about. From what I know, the technology keeps improving," he added.

Global majors have lined up to accept the government's open invitation. Total has signed up with ExxonMobil to acquire an interest in the exploration of shale gas while Chevron will be working on its own. And the Polish refining, chemicals and petrochemicals group PKN Orlen has plans to launch its own oil and gas extraction and energy production units in 2012.

But while Poland is moving aggressively France is likely to become the first country to ban development of shale gas.

The country's lower house of Parliament approved a bill earlier this month to ban drilling due to environmental concerns and cancelled exploration rights given to companies. The Senate will consider the bill in June.

A principal area of concern in France and also in the US is the fracking or fracturing process which involves blasting huge amounts of water, sand and chemicals to break shale rocks to release the gas trapped in them.

Environmentalists claim that the chemicals used in fracking cause contamination of ground water. They recently received a big boost in their campaign against shale gas after the Pennsylvania Department of Environmental Protection fined Chesapeake Energy $900,000 for contaminating water supplies in Bradford County, a busy drilling area in the Marcellus shale gas formation.

The agency concluded that contamination was caused by improper well casing and cementing, allowing seepage from non-shale shallow gas formations.

A second area of concern is methane leaks from drilling sites also contaminating drinking water.

Researchers at Duke University concluded after a recent study that methane contamination has taken place at sites in Pennsylvania and New York.

Methane was found in 85 percent of the samples, and at sites within a kilometer (0.6 mile) of active hydraulic-fracturing operations, levels were 17 times higher than in wells far from such operations, said the study.

Some residents have sounded an alarm about running faucets that ignite if a flame is placed nearby. These and other environmental issues have been superbly captured in this very hip rap song (special thanks to the blog's colleague Nel for discovering this).

Shale gas has given the US petrochemical industry a new life but with the green lobby getting stronger the industry may soon have to dance to a new tune. 

The blog is excited about its first New Normal seminar in Frankfurt, Germany this month.

It follows February's successful launch in Singapore, and is being held in association with International eChem on 16-17 June.

The Workshop aims to provide a comprehensive understanding of the factors that will impact the petrochemical market over the next few years:

• What is the New Normal and how will it change the petrochemical landscape?
• What will it mean for key feedstock and end-user markets?
• What will be the key margin drivers for the market?

The New Normal is being driven by the major demographic changes now underway in the Western world. The BabyBoomers born between 1946-70 led to massive gains in consumption, as they entered the 25 - 54 age group. This is when people typically marry, settle down and have children.

But now, they are entering the 55+ age group, when people normally save more and spend less. This is already having profound effects on demand patterns in autos and housing in the West. Whilst emerging countries now need to replace their export-driven economies with domestic consumption.

The seminar will place all of this in the context of what's happening at the moment in global olefins and polyolefins markets (as a good proxy for the chemicals industry as a whole). We We will also analyse chemical company strategy and give a long-term view of where we feel the industry is heading in the context of the New Normal.

Please click here if you would like further details of the course.

By John Richardson

"IF we build polymer capacity in India the demand will come," a very senior industry executive told the blog last year. He amplified this statement by explaining that greater availability of plastics would always stimulate strong demand growth for low-end packaging materials etc in emerging markets in general, as the poor became a little less poor.

Back in May 2010, when he made this statement, India, China and other developing countries such as Indonesia and Vietnam were enjoying soar-away growth. "Decoupling" from troubled Western economies was once again in fashion.

Confidence was high at last May's Asia Petrochemical Industry Conference (APIC) in Mumbai as many of the delegates talked about tight markets by 2014-15.

The search for new locations for new capacity was already on to serve this voracious emerging-market growth, given that Middle East ethane supply is so severely constrained.

The momentum continued into late 2010 as JP Morgan published its famous SuperCycle theory, claiming that it didn't matter what happened in the US and other Western markets. Incremental polyethylene (PE) demand growth would be so strong in China that a decline in US consumption wouldn't even matter on a global basis, the bank claimed.

Investors in commodities and equities etc quite often have very short-term perspectives and so don't really care whether theories, such as the one above, turn out to be true over a period of years. All that matters to these investors is that enough people believe a particular idea over a millisecond (in the case of the high-frequency traders), an hour, a day, a week, a month or a quarter.

But it is the job of senior chemicals industry planners to see through all of this.

Right up until this May's APIC, in Fukuoka, Japan, there was still talk of a peak in the cycle by 2014-15 and the need for lots of new polymer and other plants.

Denial continues in some quarters.

"Even though chemical and industrial stocks have been hammered, 2012 profit estimates still show 20%+ gains across the board for the group. Even second half 2011 estimates show double-digit earnings growth," said an industry observer yesterday.

Emerging markets cannot by themselves provide enough momentum to save the world from a new recession - and quite likely a new Great Depression.

As we highlighted on Wednesday, China faces a debt crisis that could destabilise its financial system and across the developing world, inflation threatens growth.

And as we also point out in Chapter 4 of our e-book, Boom Gloom and the New Normal, what it means to be "middle class" in China and India is radically different from the West.

Low-end packaging sales might benefit from the poor becoming slightly less poor in India and China and other emerging markets.

But average income levels are way below those in the West, meaning that "decoupling' was always a fallacy for manufacturers of mid-range and high-end consumer goods. It will take several decades for emerging-market average earnings to catch up with those in the US and Europe.

Even the alleviation of rural poverty is now under threat, putting into question the argument made by the senior executive we quoted at the beginning of this post - that if polymer capacity is built in countries such as India, demand will come.

The latest issue of the World Bank's Food Price Watch shows that global food prices in July were 33% higher than a year earlier.

Maize was up by 84%, wheat by 50% and live hog prices in China were 50% higher.

In India, the wholesale prices of rice and wheat were 9% higher in the first week of August from the same period last year, says the Australian Financial Review.

Food-price inflation is also a problem in Indonesia, Thailand and Malaysia.

In 2008, during the last big run-up in global food prices, the World Bank estimated that 105 million people were pushed into its definition of extreme poverty. A further 44 million people are now faced with being pushed into extreme poverty, it adds.

Fundamentals are thought to be mainly the cause of this latest rally in food prices, as opposed to the speculators who were blamed for what happened in 2008.

The fundamentals include poor harvests caused by bad weather - and changing diets in the developing world as the relatively small but super-rich upper-classes eat a lot more meat. This is taking land away from cereal production for food, as is the rise in the use of biofuels.

A further problem is that the supply of arable land in China has been reduced due to the surge in real-estate construction since 2008, enabled by the country's huge economic stimulus package.

In the longer-term, how does the world properly feed itself when you also take into account water shortages and climate change, if you believe that climate change is real?

Later chapters in the book will look at megatrends such as food and water. We will discuss the opportunities, as well as the challenges, that these megatrends represent for chemicals companies.

All the problems we now face are highly complex, global in nature and constantly evolving -and so this is very much work in constant and difficult progress.

But what is already crystal clear is that there is no going back to the old approach of simply building a plant on the assumption that demand will inevitably expand to consume its capacity.

By John Richardson

IT was interesting to read late last week about how certain chemicals analysts still believe that the big slump in the sector's share prices might merely be a rough patch, possibly just a correction.

In this same excellent piece from my colleague Nigel Davis, Citi US chemicals analyst PJ Jukevar talks about how "battled tested" chemicals companies" have learnt since 2008/2008 to put "value over volume". In other words, capacity will again be quickly shut down to bring markets back into balance if we do end up in a protracted downturn.

There is also a lot of discussion about two classes of chemicals companies. This comprises those more exposed to the cycle because they make highly commoditised stuff where there is lots of competition, against products where there are fewer players and so more of an ability to exercise market discipline (plus more "value-added" differentiation).

This latter group might get through the rough patch relatively unscathed, argue some chemicals analysts.

Regular readers of the blog will hardly be surprised to discover that we don't agree with any of this.

In our view it was Federal Reserve liquidity that was a substantial factor behind driving share prices, in general, higher during 2008/09. The chemicals sector rode on the back of this and also benefited from cost savings, the operating discipline Citi talks about - and China's economic stimulus package.

Fed liquidity did not mean that on a global basis demand was back where it was before the crisis during the 2009/2010 recovery, even though emerging markets were booming.

The rise in share prices was substantially because investors - faced with record-low interest rates in the US - were chasing higher returns in equities, oil prices and other commodities. The oil price remains in demand destruction territory thanks to the speculators.

The signs are that the Fed might not be able to extend its ultra-loose liquidity policy much beyond keeping interest rates very-low for the next two years - because of resistance within the Fed.

Plus, of course, there is global aversion to risk - benefiting government bonds, gold etc at the expense other commodities and equities. There will be mini-recoveries in the appetite for risk, sure, over the next weeks and months, but this will not mean a return to a bull market.

The reason is the macro-economic problems. No matter where you turn they are mounting, evolving and together represent a once-in-a-generation shift to a New Normal.

Take the Eurozone and the bitter divisions over how to solve the crisis as just one example.

Germany's Finance Minister Wolfgang Schauble has rejected International Monetary Fund (IMF) calls for a softening of the European austerity drive.

"Pursuit of debt reduction by deflation only - in a world whose savings rate is already at a record high - means the Euroland recession could well be prolonged and deepen into a recession next year," Charles Dumas from Lombard Street Research told yesterday's Australian Financial Review.

Two years on from the start of the Eurozone crisis, we still seem to be some way from broad agreement on how to solve the crisis. This does not bode well.

India has now raised interest rates 11 times since March of last year and food-price inflation has been above 9 per cent for five weeks in a row.

A new global food crisis - driven by fundamental changes in the demand and supply of food - threatens emerging-market growth in general. This raises questions about existing emerging-market growth models.

China continues to struggle with the harmful side effects of its stimulus package.

Attempts continue to cool inflation without preventing a collapse in property prices that would leave the country with a potentially destabilising non-performing loans crisis. As we discussed earlier this week, the latest attempt to rein in liquidity - a change in how bank-reserve requirements are calculated - has further reduced the ability of chemical traders and buyers to source credit.

China's 12th Five-Year Plan (2011-2015) involves perhaps the biggest overhaul in economic policy for a generation. This looks likely to set the economic direction for the next decade or more, not just the next five years.

Policy changes are going to have a big, disruptive effect on chemicals demand.

Take the auto sector as one example.

Government policymakers are leaning towards more limits on the rise in car ownership in order to address China's steeply rising dependence on imported oil, its traffic jams, air pollution and shortages of land in many areas for more road construction.

This is despite strong industry pressure to reinstate reduced sales taxes and subsidies for rural purchases. The incentives resulted in a 33% surge in sales in January-July 2010 over the same period in 2009. After the incentives were removed, January-July 2011 sales were up by just 5 per cent.

Individual cities, such as Beijing, have also introduced restrictions on new vehicle registrations in order to deal with chronic traffic congestion and dreadful air quality.

The government is considering raising minimum kilometres per litre, or miles per gallon, requirements for new vehicles - and introducing new subsidies to promote the production and sales of fuel-efficient and battery-powered cars.

For the numerous foreign and auto makers who are building-up capacity in China - perhaps on the assumption that the old growth model still applies - these are worrying times. Annual auto production capacity is expected to rise from 17 million vehicles in 2010 to 31 million vehicles by 2013, according to consultants JD Power & Associates.

All chemical companies fall into one category - those dependent on demand.

There are fewer producers of polyurethanes (PU) than say polyethylene (PE), and so the PU producers might be able to react more effectively in the short term to declines in demand.

But the scale of the global economic changes we are undergoing at the moment - as we enter the New Normal - are so great that nobody can possibly be immune.

And this is not merely a rough patch or a correction.

By John Richardson

THE big difference in the mood at the ground level of certain parts of the petrochemicals industry compared with that of company board members and investors was thrown into further stark relief earlier this week.

As we discussed on Tuesday, the big polyolefins sector of this industry continues to struggle in China. Growth forecasts for 2011 have proved way off-the-mark as it becomes more and more apparent that demand was, in effect, brought forward by China's huge economic stimulus package. Bringing demand forward amounted to speculation in lots of stuff - from polyethylene (PE) down to finished goods - which is sitting in warehouses unsold, dragging down fresh consumption.

Contrast this with a Credit Suisse client note released on Monday, based on presentations at the bank's Global Chemical and Agricultural Science Conference in New York last week.

"Demand is resilient across most markets; order books and activity levels are resilient, except in construction and southern Europe," wrote Credit Suisse.

Most companies were quietly confident that current demand levels would be sustained throughout the second half of this year - and customer inventories were reported to be lower than in 2008/2009, continued the bank.

My colleague Nigel Davis took this Credit Suisse note as evidence that companies focused on innovation are in a much better place than those which are in pure commodities.

"Time was when the innovation had more to do with process technology (hence costs) than product technology," he wrote in this Insight article. 

"The world has turned, however, and today a constant flow of product improvements, made alongside the process technology changes, are the true drivers of differentiated corporate growth."

Companies that fall into this innovation category include BASF, Dow Chemical, DuPont and Bayer Material Science.

These companies seem well-attuned to the megatrends that will shape global chemicals growth over the next few decades, which we discuss in our e-book Boom, Gloom & the New Normal. The trends include ageing populations in the West, climate change everywhere and water shortages and food security in emerging markets.

And maybe also the companies are well down the track in tailoring their product portfolios to meet the biggest change in China's economic direction in at least a generation.

The central government, as part of its 12th Five-Year-Plan (2011-2015), is focusing on energy efficiency, renewable technologies and environmental protection as it appears to have recognised that the quality of growth is as important as the quantity.

Whether these policies will be effectively implemented is the big question that we will examine in Chapter 6 of our book, which is released in early October. But evidence of Beijing's resolve has already emerged in the auto market, where calls for the re-instatement of the old subsidy system have so far been ignored. 

Further reasons for the dramatic difference in mood between those at ground level - and board members of and investors in these differentiated companies - might include:

1.) The fact that sales and marketing executives of pure commodity companies were probably set unrealistic targets in late 2010, as it wasn't fully understood that demand had been brought forward in China. One of these executives told us last week how he was receiving only one or two calls a day with orders from converters and traders. Last year, his phone virtually never stopped ringing
2.) Traders who made a lot of money during the great China credit binge in 2008-2010 are now either struggling or in bankruptcy

BUT even predominantly speciality chemical companies such as BASF, BMS etc cannot escape the fact that all chemical businesses depend on one very important factor: DEMAND.

Specialities might not feel the pain as immediately as commodities from a renewed global recession, but will eventually have to suffer.

And so the blog is still a bit confused by the confidence of companies, expressed during the Credit Suisse conference in New York last week.

Wouldn't it have been more prudent to fully own-up to the scale of the economic risks ahead?

MOST chemical companies now believe it is inevitable that China and India will reach developed economy status. Many even believe that their strong growth will mean "the end of economic cycles".

But as we discuss in Chapter 6 of 'Boom, Gloom and the New Normal', the new ICIS/ International eChem/ICIS eBook, there are three major risks to this rosy scenario, which are:

China's demographic timebomb. Its one-child policy was introduced in 1978 to counter fears of over-population and famine. By China's own accounting, about 400m births were prevented between 1979 and 2010.This has reduced today's 25-to-35-year-old age group by 75%. As demographer Kenneth Gronbach notes, "the 30-somethings will have to do the majority of China's production, consumption and taxpaying, and when you have a 75% reduction in the group that is chiefly responsible for those activities, you've got a real problem".

Lower incomes. China and India's "middle class" have incomes that are only a tenth of those in developed markets, as we discussed in Chapter 4. This has major implications for the nature of consumption in China and India - and for the type of products that companies will need to make to prosper.

The transition is not guaranteed. It takes 50 consecutive years of 7% annual growth for a country to boost per capita income from $500 to $20,000, says Nobel Prize-winning economist Michael Spence. China's per capita GDP was only $4382 at end-2010, and India's $1371, according to the International Monetary Fund. So both countries still have a long way to go.

Recent growth in China and India has also come at a price: Poor air quality, chronic water shortages and deforestation. Equally, China needs to rebalance its economy away from its over-reliance on exports.

India must improve its atrocious infrastructure, and reform the harmful government subsidies that are holding back the agricultural sector. It is also often forgotten that India is home to a third of the world's poor people, with 37% of its population (410 million) classified as poor by the World Bank. Its overall literacy rate is only 61% - and just 47.8% for women.

The new chapter therefore argues that China and India will require quite different products and services from those sold in the West. It also warns that their growth should not be taken for granted. Companies need to develop robust scenarios to manage the uncertainty this will create.

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The blog is taking a break for the festive season (we will back on Thursday next week before, of course, closing-down again over the New Year period). 

We would like to wish all of our readers a very happy holiday season and successful 2012. 

Before we take our leave, here are a few thoughts concerning this year and the outlook for 2012 and beyond. The opportunities are tremendous, but it is not going to be easy....

By John Richardson

THERE will be no return to the Old Normal of easy credit and comfortable demographics where the Babyboomers supported the golden economic period of the early 2000s, is the inescapable conclusion of events this year.

So is the painful reality that the "European project", in its current format at least, is bust. Politicians remain a long way from finding a solution to the Eurozone crisis. If they fail, which seems a strong possibility, we are into a new global recession, quite possibly a Depression.

US politics is a mess. None of the leading candidates for the 2012 presidential election, including the President, get it.

The country doesn't need smaller government and more tax cuts for the rich. What is required is nothing short of a New Deal - heavy investment in infrastructure, energy research, education etc - all of which have been on the decline as a share of total spending since the Reagan administration, according to The Price of Civilisation by American economist, Jeffrey Sachs.

The US political agenda has been taken over since the 1980s by Big Oil, Wall Street and the corporate lobbyists, argues Sachs. And he points out, as we do in Chapter 3 of our e-book Boom, Gloom & the New Normal, that successive waves of financial deregulation, including decisions taken by the Clinton administration, set the groundwork for the 2008 financial crisis.

This year has also proven that the economic rise of China and India will not be steady and easy.

China faces a systemic debt crisis. The cynicism and general pessimism in India over politics and corruption, as the country also wrestles with inflation, suggests a return to the "Hindu rate of growth".

Chemicals companies might still be hoping that we will return to the Old Normal in 2012. Mild bouts of re-stocking are likely to occur, leading to a revival in prices for chemicals and in share prices.

But there will be no sustained recovery until politicians recognise and adequately respond to the scale of the problem, and companies adjust their strategies to cope with the evolving New Normal.

There are some tremendous opportunities for the chemical companies with the right approach, beyond cutting costs and lowering operating rates in the hope that "pent-up demand" - i.e. the Old Normal - will return.

We think companies need to focus their R&D efforts, and in adjusting existing manufacturing, on the following:

1.) The increase in the number of people who are over-55 in the West.
2.) Young people in the West struggling with much-worse employment and earnings opportunities than those enjoyed by their parents during the economic Golden Era of the early 2000s.
3.) The "relative" poverty of the rapidly expanding middle classes in the developing world. This will not be a sudden army of hundreds of millions of BMW-owning foreign-holiday goers, but will instead involve a sharp rise in demand for extremely cost-competitive low-end consumer goods.
4.) The megatrends such as carbon footprint, changing demographics and water and food scarcity.

Some chemical companies already get this and have been talking about megatrends for years. They are well set to prosper in the New Normal.

Other companies that focus mainly, or entirely, on quarterly profit growth and the value of their share price are going to struggle.

THE global economy is moving into a difficult period, as it transitions to the New Normal. Debt levels are high, and incomes are under pressure, particularly for the large numbers of people moving into retirement.

Cost must be the key criteria when examining the opportunities for new product development and research. Chapter 8 of our free 'Boom, Gloom and the New Normal' ebook examines the application of this philosophy to the four megatrends that we have identified as being key to the future of the chemical industry, which are:

• Improving water availability
• Improving food production
• Increasing life expectancy
• Reducing carbon footprint

It suggests that the key need is to be practical. Companies should focus:

• In the fields of water/food, on reducing the amount of waste, and the output that is lost when product is moving to market
• In developing new products and services for the over 55s, on core needs such as food, water, health, shelter and mobility
•In turn, this will enable them to 'do more with less'. Carbon footprint will be reduced, and products will be more affordable

This philosophy is quite different from that seen during the 1982 - 2007 economic SuperCycle. Then, companies competed for the middle ground, as we saw in chapter 7. They added features, and pursued the concept of adding value in order to boost profits. Over time, they focused more and more on the wealthier parts of the global population, and became increasingly disinterested in those outside this privileged group.

Today, however, it is no longer viable to focus in this way.

The Western BabyBoomers are joining the New Old generation of those aged 55+, and they face the prospect of much lower incomes as they transition from salaries to pensions.

Similarly, incomes in emerging economies are dramatically lower than those in the West. It is wishful thinking to imagine that these regions can therefore somehow replace the demand for added value products that is disappearing in the West.

Doing more with less is therefore our motto for future success. The chapter contains, as always, a wide range of practical examples to help stimulate ideas within your own business. We are convinced that those who accept its challenges will benefit for many years to come.

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By John Richardson

Access to cheap feedstock, access to cheap feedstock and access to cheap feedstock might seem like the three most-important elements to any petrochemicals strategy.

Thus, for many in the US, adding capacity based on abundant and therefore low-cost ethane, thanks to the shale-gas revolution, adds up. US ethylene capacity could be increased by as much as 29 percent by 2017.

But, assuming that a fairly high percentage of ethylene derivatives capacity will have to be exported, another equally important consideration, next to low-cost raw material, has to be whether overseas markets will be able to absorb these volumes.

Petrochemicals capacity in emerging countries can be added for strategic and nation-building reasons, rather than for profit, and so proposed new US capacity has to also be evaluated on this basis.

Coal-to-chemicals is strategic in China, as it will boost the country's energy independence, even though the process is expensive and causes significant damage to the environment. Thus, many of the China coal-based projects detailed here, in this article from ICIS Chemical Business, could still go ahead even though they may not stack-up in terms of dollars and cents. Sinopec, the state-owned energy, refining and chemicals major, is now also involved in coal-to-chemicals, which suggests an acceleration in investment.

Further, we believe that the global economy, in its transition to the New Normal, is undergoing major changes. The type of growth we saw during the early 1990s to 2007 "golden era" can no longer be re-assured.

And turning our focus to the US economy, a multi-year plan is needed to revive US manufacturing in order to create the domestic demand sufficient to absorb all of these new local crackers and downstream plants.

But, as Jeffrey Sachs, in his excellent book, The Price of Civilisation, points out, the US is in the midst of a 30-year revolt against taxes and government. There is a great deal of pressure for lower taxes, especially for the rich, and for less government spending - in the belief that these measures will, by themselves, by sufficient to bring the budget deficit under control.

Where, however, are the jobs going to come from for America's working and middle classes - the 99 percent represented by the Occupy Wall Street movement - without more government involvement in the economy?

Manufacturing industry need to be reconfigured to supply "the products of the future" for the following three customer groups:

*The increasing size of the New Old 55+ generation in the West.
*The number of young Westerners struggling with higher unemployment.
*The increasing number of people moving out of poverty in the developing world.

Peter Spitz, who founded the consultancy ChemSystems, and who worked in the chemicals industry in research and engineering roles, warns, in this excellent blog post, that the US is falling behind on innovation.

Apart from shale gas and shale oil technologies, which have created a significant number of new jobs, Spitz warns that there are "no comparable 'breakthroughs' in other areas of domestic manufacture, as far as I can tell, and a lot of concern continues to be expressed about the loss of manufacturing jobs to countries in the developing world."

He uses as an example from history, where US innovation helped to create jobs, when he writes:

"Innovations in the application of car paints and finishes were made in the US, as well as in Europe, in response to the need to reduce or eliminate the smog-producing solvents used for spraying paint resins on cars.

This led to the development of powder coatings that could be applied electro-statically and then cured under heat to form a 'skin' that is tougher than conventional paint.

This technology is now used worldwide, undoubtedly including the manufacture of Buicks by General Motors in China and by VW in Mexico. But Honda, BMW, Volkswagen, Toyota and other 'foreign' firms are also using it to build cars in the U.S. That's how the system works."

Spitz stresses that the US still has huge potential in manufacturing because of its history of innovation and good intellectual property-right protection.

These are all themes we explore in more detail in chapter 8 of our e-book, Boom, Gloom & The New Normal, and the forthcoming chapters 9 and 10.

US petrochemical companies, as they eye all that abundant shale-gas based ethane, might well have a long-term outlook for US employment prospects that puts some of these doubts to rest. It would be fascinating to hear the details.....

The New Normal involves three major transformations in the nature of consumer markets, which are:

• The increasing size of the New Old 55+ age group in the West.

• Too many young people struggling with higher unemployment.

• Large number of people moving out of poverty in the developing world.

These are the great opportunities for future growth, if our economy can be adapted to serve their needs. Chapter 9 of our new 'Boom, Gloom and the New Normal' e-book looks at the implications for chemical manufacturing.

Today, and in the future, we need to focus on the megatrends which will drive future demand growth.

In the fields of water and food, we should focus on reducing the amount of waste, and the output that is lost when product is moving to market.

In developing new products and services for the over 55s, we should focus on core needs, such as food, water, health, shelter and mobility.

This will enable us to 'do more with less'. We will reduce carbon footprint, and enable output to be afforded by the maximum number of people.

These changes in market drivers will have a profound impact on how, and where, products are manufactured.

Manufacturing processes will need to change in many companies as we transition to the New Normal. Quality will matter more and more as we move away from the 'throwaway society' of the past couple of decades.

So will approaches such as Process Intensification. This involves reducing the size of chemical and plant equipment, and can often enable companies to lower capital and operating costs whilst reducing waste.

The chemical industry has long been an enthusiastic champion of the importance of Quality management. It was one of the first to appreciate the importance of the concept of the 'learning organisation' that was originally brought to the West from Japan.

But in the early 2000s, the Quality movement seemed to stall. Many of the people who had launched this revolution retired. More worryingly, some companies began to forget that Quality was a process, and had to be reinforced by senior management at every possible opportunity.

Now, we need to relearn that having the right corporate philosophy is the critical starting point. This includes a focus on benefiting wider society, good leadership, and on rooting out inefficiencies through getting everybody involved in processes and problem solving.

Chapter 9 will hopefully help companies to ensure that manufacturing delivers the competitive advantage that is required as we transition to the New Normal.

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By Malini Hariharan

Work on commercialising a green route to paraxylene (PX) purified terphthalic acid (PTA) and other aromatics is speeding up.

US companies are at the forefront of recent developments. Virent is looking to produce a sugar-based ­aromatics stream containing benzene, toluene and xylenes using traditional chemical ­catalytic processing, writes fellow blogger Doris de Guzman in the latest issue of ICIS Chemical Business.

The company expects to have its first ­commercial-scale bio-PX plant on line by 2015.

Gevo plans to produce bio-based PX by converting fermentation-derived isobutanol to PX and is targeting commercial production by 2014. The company has already tied-up with Coca-Cola and Toray Industries, which claimed in November last year that it was able to develop the world's first 100% bio-PET fiber in a laboratory scale using Gevo's bio-PX.

Another US company, Avantium, is developing a new sugar-based monomer called furan dicarboxylic acid (FDCA), which can be reacted with monoethylene glycol (MEG) to make polyethylene furanoate (PEF), an alternative to PET resin.

Even SABIC is not ignoring the green wave, and has filed a patent claiming PX production via use of terpenes such as limonene found in citrus fruits.

However, the new routes come with many disadvantages and work still needs to be done on oensuring commercial viability.

Eric Bober of Nexant ChemSystems points out that capital expenditures for the initial commercial plants will be high, as these are first-of-a-kind plants as opposed to the 'nth' plant status of petrochemical facilities. A world-scale conventional PX plant is now 1m tonnes/year and likely four times as large as a bio-PX line.

Bio-derived products will likely locate near the available renewable feedstocks, which could increase logistics costs relative to the conventional supply chain.

Despite these issues, the enthusiasm for these new routes is still strong given the support from consumer product companies that are willing to pay a premium for these 'green' products. But will this continue in the changing economic climate where the focus is clearly on cutting costs?

The new chapter of our free 'Boom, Gloom and the New Normal' ebook sets out a road map to success for companies in the New Normal. It also identifies 5 key areas where major change is already underway.

Demand-driven. Markets have essentially been supply-driven in recent decades, with growth being forecast on the basis of ratios to expected GDP growth. Companies have focused on increasing their efficiency via a 'one size fits all' business model. As we transition to the New Normal, they will need to refocus on being effective. Innovative strategies, flexible implementation planning, plus a commitment to local techno-commercial support and long-term R&D will be required

Market focus. New worldscale plants will still be needed during the transition. But companies operating in the West will also need to reposition their businesses to focus on the needs of the ageing 55+ New Old generation, if they wish to drive future growth. Those operating in the emerging countries will need to develop mechanisms to sustain growth in the domestic economy, particularly in the rural areas.

Affordability. Consumers have less money to spend, and so the highly profitable middle ground of the past couple of decades is disappearing. Instead, the focus will be on the megatrends of food, water, shelter, mobility and health. These products must be affordable, as they must meet basic 'needs' rather than supplying mere 'wants'.

Shared Value. Consumer values are changing quite dramatically, away from the materialism of the recent past. Concerns about sustainability and carbon footprint are rising up the agenda. Social stability is also becoming an important concern for governments. Companies who continue to operate on purely financial metrics will find the environment ever-harder to understand.

The VUCA environment. The transition to the New Normal is a sea-change for the global economy. Its full impact will take years, if not decades, to become clear. Meanwhile, the world will face much greater uncertainty, as conflicting views of the world play out on a day-to-day basis. Companies therefore need to plan for a VUCA environment: Volatility, Uncertainty, Complexity and Ambiguity will be the order of the day.

This VUCA landscape is creating winners and losers. No longer will the rising tide of affluent Boomers provide an effortless route to increased sales and revenues. Instead, companies need to create their own VUCA as they develop strategies and implementation plans. Vision, Understanding, Clarity and Agility will be their road map to success.

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